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Wednesday Watch

Late-Night Headlines
Bloomberg:

- A UBS AG consultant served as a fund-raising committee director for New Mexico Governor Bill Richardson while the bank says he helped it win state bond work, records show. Phoenix lobbyist Fred DuVal’s activities provide more detail on Richardson’s ties to Wall Street firms as the Department of Justice investigates whether state officials traded bond work for political donations.

- Tumbling oil prices are forcing many of the richest Persian Gulf states to record budget deficits and limit a critical source of foreign investment for poorer Arab countries. Crude is now selling at below the budget break-even point for seven of the Arab world’s 10 top oil producers and Saudi Arabia, the world’s biggest exporter, is forecasting its first deficit in at least seven years. “The Gulf won’t be growing so fast, so there’ll be less of a trickle down,” John Sfakianakis, chief economist at Saudi British Bank said in a telephone interview from Riyadh. “The Gulf private sectors are filled by expatriates from other Arab countries. These will be the first people to go.”

- Hong Kong’s sales of new private homes fell to the lowest level since 1996 last year, as high prices and the slowing economy deterred potential buyers, according to Centaline Property Agency Ltd. The number of new non-government-built residential units changing hands last year fell 47% to 9,955, and their average value was $996,500.

Wall Street Journal:

- Our Workers Deserve Secret Ballots by Elaine Chao.

- The head of United Airlines said Tuesday that the U.S. industry has the financial strength to weather a recession this year, helped by its reaction to spiking oil prices in 2008.

- Physicist Steven Chu, President-elect Barack Obama's choice to run the Department of Energy, softened previously critical comments about coal and nuclear power, and distanced himself from earlier statements that U.S. gas taxes should be higher.

- Timothy Geithner didn't pay Social Security and Medicare taxes for several years while he worked for the International Monetary Fund, and he employed an immigrant housekeeper who briefly lacked proper work papers. Those issues, and a series of other tax matters, caused the postponement Tuesday of Mr. Geithner's confirmation hearing as Treasury secretary. They were instead the subject of a closed-door meeting between the nominee, currently president of the Federal Reserve Bank of New York, and members of the Senate Finance Committee, in whose hands his confirmation lies. Senate Finance Chairman Max Baucus (D., Mont.) called the issue serious, but not disqualifying.

MarketWatch.com:
- Hedge fund industry assets slumped by more than $1 trillion in 2008 as managers suffered record losses and many investors asked for their money back, according to HedgeFund.net. Outflows of $512 billion last year were driven by investor redemptions and hedge fund liquidations, while losses suffered by managers accounted for another $535 billion drop in assets. That left industry assets down $1.047 trillion, or 36%, to $1.84 trillion, for the whole year, HedgeFund.net said.

CNBC.com:
- Citigroup's(C) board may have said it is standing behind CEO Vikram Pandit, but the general consensus on Wall Street is that he is running out of time.

BusinessWeek:

- Focus Stock: Global Payments(GPN) Rings Up Growth.

CNNMoney.com:
- The Treasury Department said Tuesday it recently invested $14.8 billion in another 43 banks, $10 billion of which went to Bank of America(BAC), the nation's largest bank.

- The nation's trade deficit narrowed sharply in November, to the lowest level in 5 years, reflecting the sharp drop in the price of imported oil, according to a government report released Tuesday. The U.S. Department of Commerce reported that imports exceeded exports by $40.4 billion, down substantially from a revised $56.7 billion trade gap in October.

IBD:

- A new Congress and presidential administration may change defense-spending priorities. But the last Congress and the current president have already committed billions to defense spending for years to come. IT services firm ManTech International (MANT) expects to earn some of that.

Boston Herald:

- Three Boston cab associations have signed deals to put self-swipe credit card systems and interactive media screens in the back seats of their 1,266 member cabs. Boston Cab Dispatch, Metro Cab and the Independent Taxi Operators Association signed contracts with New York-based Creative Mobile Technologies as a city-imposed mandate for Boston cabs to start accepting credit card payments by April inspections looms.

FINalternatives:

- The United Nations Joint Staff Pension Fund has gotten the okay from the UN Secretary General to begin investing in funds of hedge funds and private equity funds. The pension, which covers UN staffers and employees of other international intergovernmental organizations, has issued a “request for an expression of interest” on the UN’s procurement Web site. “The fund now seeks experienced consultants for the analysis, selection, placement and monitoring of hedge fund of funds and private equity placements,” it said.

Reuters:

- Chrysler is in talks to sell key assets to Nissan-Renault and auto supplier Magna as it rushes to restructure after taking $4 billion U.S. government loans, according to people with knowledge of the discussions. The string of potential deals would deepen ties between Chrysler LLC and two of its key current partners but could also mark the end of the struggling No. 3 U.S. automaker as an independent venture.

- Yahoo Inc's(YHOO) new CEO is a straight-shooting, tough-talking technology veteran but she is seen lacking two qualifications investors hoped for most: deal-making savvy and Web business know-how.

- Japan's Toshiba Corp. said it in talks to buy Fujitsu Ltd's hard-disk drive business, a deal that would create the world's largest maker of small hard drives and is reportedly worth $340-450 million. Shares in both Toshiba and Fujitsu surged more than 5 percent on the news.

- The U.S. Securities and Exchange Commission has sued a managing director at private equity firm Blackstone Group (BX) for an insider trading scheme involving shares of supermarket chain Albertsons, the Dow Jones news wire said on Tuesday.

Financial Times:
- China is pushing its state media to create credible, appealing news for an international audience, in an attempt to spread a more favorable image of the country in the west. The plan, backed by at least Rmb30bn ($4.4bn, €3.3bn, £3bn) in government funds, comes as Beijing looks back on a year of public relations disasters. The first step would be the launch of a second national English-language newspaper by Global Times, an affiliate of the Communist party’s mouthpiece People’s Daily, in April, observers said. Xinhua, the official Chinese news agency, is preparing to enter the television business. A person close to Xinhua in Europe said that Xinhua, along with bureaus in other news centers abroad, was expected to be expanded to accommodate television. A similar global push is under way at China Central Television (CCTV), the main state broadcaster. Beijing is said to be giving Xinhua and People’s Daily cash injections of Rmb15bn each to pursue the projects.

- Citigroup(C) is to break itself up by separating higher risk US consumer finance and securities businesses from its global commercial banking operations in an attempt to ensure its survival. People close to the situation said Citi would place unwanted assets and businesses worth more than $600bn – a third of its balance sheet – into a “non-core” unit to isolate them from healthier parts of the company.

- GoldenTree Asset Management, a credit hedge fund, is offering in­vestors who want to withdraw money securities instead of cash, triggering protests from those who in many cases lack means to dispose of such instruments. Hedge funds such as GoldenTree warn investors in offering documents that they have the right to pay investors back “in kind” not cash. However, such payments in kind have been highly unusual until the current credit crisis, which has led hedge funds to place a variety of restrictions on investors trying to pull out their money. GoldenTree, which specializes in investing in complex debt ins­truments, had about $10bn under management last year. But losses and redemptions could leave it with half as much if investors made good on withdrawal requests, said a person with direct knowledge of the matter.

TimesOnline:
- India plans to break off business, transport and tourist links with Pakistan and isolate it from the rest of the world if it fails to help to investigate the Mumbai terrorist attacks, the country's Home Minister told The Times today.

South China Morning Post:

- The financial turmoil could spark political crises in Hong Kong and Macau, the mainland’s central bank chief said in a rare warning.

China Market Intelligence Center:

- Apple(AAPL) Poised to Take 40% of the Smartphone Market. Analysis carried out by Generator Research claims that Apple's embryonic mobile business could knock Nokia from the top spot in the smartphone market, and transform the mobile services market.

Late Buy/Sell Recommendations
Citigroup:
- US Financials – First Half 2009 Outlook. We recommend a Buy on JPM, BAC, GS and MS. We recommend a Sell on CIT. Legacy Wachovia and Merrill Lynch bonds also look attractive.

- Reiterated Buy on (FORM), target $24.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.52%.
NASDAQ 100 futures +.39%.

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Earnings of Note
Company/EPS Estimate
- (XLNX)/.31

Economic Releases

8:30 am EST

- The Import Price Index for December is estimated to fall 5.3% versus a 6.7% decline in November.

- Advance Retail Sales for December are estimated to fall 1.2% versus a 1.8% decline in November.

- Retail Sales Less Autos for December are estimated to fall 1.4% versus a 1.6% decline in November.

10:00 am EST

- Business Inventories for November are estimated to fall .5% versus a .6% decline in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Yellen speaking, Fed’s Plosser speaking, Fed’s Stern speaking, weekly MBA mortgage applications report, (WAG) Shareholders Meeting, (MON) Shareholders Meeting, (MNKD) Analyst Meeting, CSFB Homebuilding Conference, Deutsche Bank Auto Analysts Conference, Goldman Sachs Energy Conference and JPMorgan Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are modestly higher, boosted by technology and commodity stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher Boosted by REIT, Energy, Construction, Biotech and I-Banking Shares

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In Play

Stocks Slightly Higher into Final Hour on Diminishing Credit Market Angst, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is falling 1.16% and is elevated at 45.31. The ISE Sentiment Index is low at 105.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running high most of the day, hitting 1.94 at its intraday peak, and is currently .90. The Euro Financial Sector Credit Default Swap Index is rising 3.4% today to 105.0 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 5.4% to 217.92 basis points. The TED spread is plunging another 10.3% to 99 basis points. The TED spread is now down 367 basis points in just over three months. The 2-year swap spread is falling another 6.11% to 51.88 basis points. The Libor-OIS spread is falling 5.45% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .63%, which is down 212 basis points in just over six months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .11%, which is up 5 basis points today. The US dollar continues to trade very well and is getting extended short-term. I wouldn’t be surprised to see some temporary weakness in the currency, after the ECB rate decision, before another move higher. The major averages are being held back today by a few large-caps. Cyclicals are relatively weak again. The broad market is performing better, with small-caps taking the lead. I expect the Russell 2000 to outperform the S&P 500 for the year. The 2-year swap spread is now near long-term average levels of 43.10, which is a big positive. Nikkei futures indicate an +37 open in Japan and DAX futures indicate an +14 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing credit market angst, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:

- The premium that banks pay to borrow money compared with the U.S. Treasury narrowed to the least in five months, signaling the freeze in credit markets that began 18 months ago is starting to thaw. The difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill, fell 12 basis points to 98 basis points today. The so-called TED spread last closed below 100 basis points Aug. 15. Dollar Libor dropped to 1.09 percent today, the lowest level since June 2003.

- Options traders are betting stock swings in the Standard & Poor’s 500 Index will decrease at the fastest rate since the aftermath of the market crash in 1987, a sign that equities may keep rallying. The difference between the benchmark index’s historic volatility and a gauge of so-called implied volatility based on expected swings rose to the highest in 21 years, according to data compiled by Credit Suisse Group AG and Bloomberg.

- Saudi Arabia, the world’s largest oil exporter, said it will take the lead among OPEC oil producers in trying to halt a six-month slide in prices.

- Barack Obama will order the Treasury Department to limit executive compensation and dividend payments by financial institutions that get “exceptional assistance” from the financial rescue fund, Larry Summers, a top economic adviser to the president-elect, told Congress.

- Kia Motors Corp., South Korea’s second-biggest carmaker, will slash production at domestic factories by 24% from a year earlier as demand slows.

- Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said in a speech today at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

- Vikram Pandit may split Citigroup Inc.’s investment bank from commercial banking in an attempt to assure the company’s survival, the Financial Times reported, citing people close to the situation. Pandit, the bank’s 51-year-old chief executive officer, may abandon his support for the “financial-supermarket” business model pursued over the past decade, the newspaper said.

Wall Street Journal:

- Investors are abandoning riskier stock strategies in favor of the relative calm and lower costs of plain-vanilla exchange-traded funds.

- There may have been a silver lining for the economy in the horrific December job losses reported Friday by the Labor Department. Companies are cutting back so aggressively that they actually might be increasing their productivity even in the face of a wrenching economic shock. The contraction in the number of hours worked might have been greater than the contraction in overall economic output for the quarter, which will be reported later this month. In other words, businesses appear to have squeezed more out of the workers they kept on staff, increasing business productivity.

- With investment bankers desperate for deals and traders disgraced by losses, everyday stockbrokers suddenly are back in vogue on Wall Street.

CNBC.com:
- US automakers “may not need access to more than what they applied for and got in December” in direct financial help from the federal government, Michigan Governor Jennifer Granholm said.

- 10 Reasons for Hope…Really.

NY Times:

- A new book defending vaccines, written by a doctor infuriated at the claim that they cause autism, is galvanizing a backlash against the antivaccine movement in the United States. But there will be no book tour for the doctor, Paul A. Offit, author of “Autism’s False Prophets.” He has had too many death threats.

- Using the human hand as a model, scientists at Johns Hopkins University and its medical school have developed a microscopic tool that might one day be used inside the body. The tool, a clawlike gripper less than a millimeter in diameter, could grab cells from tissue for a biopsy, for example.

- As analysts peg the price of the upcoming battery-powered Chevrolet Volt at roughly $40,000, the high cost of its lithium-ion batteries is widely viewed as a key obstacle to mass adoption by consumers. But at a G.M. press conference offering details on its battery-powered future, Prabhakar Patil, a leader in electric propulsion, offered this surprising assessment: Lithium-ion batteries have become cost competitive with the more-primitive nickel-metal hydride batteries that power the Toyota Prius and other current hybrids.

- Hedge funds lost $350 billion worldwide in 2008, the most on record, as the global financial crisis crippled returns and caused investors to pull money out, according to an industry report. About 90 percent of the money was lost in the three months to the end of November, according to a preliminary report published Tuesday by the Singapore-based data provider Eurekahedge Pte, Bloomberg News reports.

NY Post:

- Morgan Stanley(MS) and Citigroup(C) are looking at setting aside between $2 billion and $3 billion to keep top brokers at the wealth-management shop the two banking giants are close to combining, The Post has learned.

Washington Post:

- Bowing to widespread Democratic skepticism, President-elect Barack Obama will drop his bid to include a business tax break he once touted in the economic stimulus bill now taking shape on Capitol Hill, aides said last night. Obama suggested the $3,000-per-job credit last week as one of five individual and business tax incentives aimed at winning Republican support.

IBD:

- A thaw may be under way in frozen credit markets. Mortgage rates are falling to record lows, key credit measures have improved, and corporate bond sales have started off strong in the new year.

Lloyd’s List:

- Container lines are offering spot rates as low as zero dollars, before surcharges, on Asia-Europe routes because of slumping demand, citing people in the industry. Zero rates are widespread.

Reuters:
- Boeing Co (BA) won a contract on Monday valued at $1.1 billion to support the U.S. Air Force's fleet of C-17 transport planes, more good news for one of Boeing's biggest aircraft programs.

- When the MBA students at India's top business schools began their studies their future was full of promise as companies tripped over each other to lure graduates. But 24 months of study and a financial meltdown later, prospects are glum for the estimated 120,000 business school graduates who will enter the job market in March after their final exams.

Folha de S. Paulo:

- BG Group Plc plans to invest $4 billion in Brazil’s so-called pre-salt oil fields, citing Chairman Robert Wilson. The majority of that amount will go toward prospecting for oil in the reserves around the Tupi field in Brazil’s Santos Basin, Wilson said.

Rheinische Post:

- Germany’s public-sector deficit will jump above 6% of gross domestic product this year as new borrowing surges to $79.6 billion, Steffen Kampeter, budget spokesman for Chancellor Angela Merkel’s Christian Democrats, said.

Bear Radar

Style Underperformer:
Mid-cap Value (-.40%)

Sector Underperformers:
Road & Rail (-3.53%), Computer Hardware (-3.50%) and HMOs (-2.40%)

Stocks Falling on Unusual Volume:
ADBE, CGV, BAS, IX, UBS, BAC, GE, APOL, ALGT, CSGS, AFG, WLP, LXK and SVU

Stocks With Unusual Put Option Activity:
1) LAMR 2) INFY 3) CIT 4) SAY 5) TEVA