Stocks Sharply Lower into Final Hour on Financial Sector and Economic Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Internet longs and Medical longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is declining and volume is below average. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 14.24% and is elevated at 49.46. The ISE Sentiment Index is below average at 114.0 and the total put/call is high at .91. Finally, the NYSE Arms has been running at an exceptionally high level most of the day, hitting 7.74 at its intraday peak, and is currently 2.72. The Euro Financial Sector Credit Default Swap Index is rising 2.98% today to 109.33 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 4.7% to 228.16 basis points. The TED spread is dropping another 1.2% to 98 basis points. The TED spread is now down 368 basis points in just over three months. The 2-year swap spread is rising 4.33% to 54.25 basis points. The Libor-OIS spread is falling 2.20% to 91 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 15 basis points to .48%, which is down 227 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 .10%, which is down 1 basis point today. Recent expected bad news is still impacting stock prices negatively on low volume with high investor angst. The US dollar is holding its recent trading range against the yen, which is a positive. The ECB should announce a 75+ basis point cut tomorrow. As well, tomorrow’s (JPM) earnings report should also remove some uncertainty, which could help lift stocks. Nikkei futures indicate a -313 open in Japan and DAX futures indicate an +5 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic and financial sector pessimism.

Today's Headlines

Bloomberg:

- President-elect Barack Obama, looking to get his administration off to a fast start when he takes office next week, is drawing fire from members of his own party on Capitol Hill. Democratic criticism of the stimulus package and the nomination of Leon Panetta as intelligence chief shows lawmakers intend to flex their muscle.

- Bets against shares of Caterpillar Inc.(CAT) reached their highest level since April on doubts that the world’s largest maker of construction equipment will get a boost from President-elect Barack Obama’s public-works spending plan. Short interest in Peoria, Illinois-based Caterpillar rose 25 percent to 27.5 million shares from April 30 through Dec. 31 2008, according to New York Stock Exchange data released this week and compiled by Bloomberg.

- Democrats in Congress may cut the share of the economic stimulus package dedicated to tax cuts below the $300 billion or more that President-elect Barack Obama is asking for, House Ways and Means Committee Chairman Charles Rangel said.

- Man Group Plc, the largest publicly traded hedge-fund manager, said assets under management fell 21 percent in the last three months of 2008, more than expected, as it reduced leverage and wrote down Bernard Madoff investments.

- The most detailed proposal yet by industry and environmentalists to reduce U.S. greenhouse-gas emissions will call for raising the costs of new coal plants and rewarding nations for protecting forests. Rio Tinto Group(RTP), General Electric Co.(GE) and U.S. electricity producers will present the proposal tomorrow to a Congressional committee and recommend “urgent” action, according to a copy of the report by the 32-member coalition obtained by Bloomberg News.

- Panera Bread Co.(PNRA), the chain of 1,250 bakery-cafes, plans to take advantage of its debt-free balance sheet and the U.S. real-estate slump to open as many as two locations a week in 2009, Chief Executive Ronald Shaich said.

- Illinois Governor Rod Blagojevich called into session today the state Senate that may remove him from office.

- Brazil’s real may fall 10% against the US dollar this year and the central bank will cut its benchmark interest rate by as much as 4 percentage points because the economy is in a recession, CM Capital Markets said. “Growth is in a nosedive and the central bank is going to have to react,” Tony Volpon, the chief economist and strategist at CM Capital in Sao Paulo, said. Volpon says a collapse in industrial production is the strongest signal Brazil’s economy is now contracting. Industrial production fell 6.2% in November from the year-earlier period.

- As many as half of publicly traded commodity shipping lines may breach their loan covenants by April after a record collapse in hire rates, according to Royal Bank of Scotland Group Plc, the third-largest lender to the industry.

- Crude oil fell after a U.S. government report showed that stockpiles climbed to a 16-month high as fuel demand tumbled. Inventories at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the highest since at least April 2004, when the department began keeping track of supplies there. “When you get a 6 million-barrel build in distillate during the dead of winter, you are looking at a grim demand picture,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York.

Wall Street Journal:

- State and local governments would benefit from more than $160 billion in federal aid under a plan pushed by House Democratic leaders in negotiations over the economic-recovery package taking shape on Capitol Hill. The House has taken the lead on the issue in closed-door discussions on the broader recovery package, which is sought by President-elect Barack Obama and is expected to have an overall price tag approaching $800 billion.

- Walgreen Co.(WAG) plans to announce on Wednesday a network of pharmacies, in-store clinics and company health centers it will market to corporate and government employers nationwide. Under the drugstore chain's "Complete Care and Well-Being" program, participating employees at work would be able to get checkups, preventive care and other services, such as dentistry and optometry. Walgreen's Take Care health clinics would be available for basic services outside of business hours, and the chain would offer discounted prescriptions at Walgreen pharmacies. Retirees and employees' family members also would be eligible for the services.

NY Times:

- President-elect Barack Obama spent Tuesday evening at a dinner party with several prominent conservative columnists, including William Kristol and David Brooks of The New York Times, according to an Obama transition pool report.

- Gulf Arab governments' funds are billions of dollars poorer despite record oil prices because of losses in stocks and other investments, a report due out Wednesday said. The Council on Foreign Relations' paper also suggests that the world's largest such fund is considerably smaller than some earlier estimates have claimed.

San Francisco Chronicle:

- President Obama will end the 15-year-old "don't ask, don't tell" policy that has prevented homosexual and bisexual men and women from serving openly within the U.S. military, a spokesman for the president-elect said.

Washington Post:

- Regular mobile phone use does not appear to increase a person's risk of getting a type of cancer called melanoma of the eye, German researchers said on Tuesday. The study involving about 1,600 people detected no link between the time a person spent using a cell phone over about a decade and their chances of developing melanoma of the eye, they wrote in the Journal of the National Cancer Institute. The findings contradicted an earlier, smaller study by the same researchers that had raised concern about such a link.

Delta Farm Press:

- U.S. farmers and their commodity organizations won’t have to spend as much time defending farm programs from claims they’re no longer needed because of high grain prices this year. That’s about the only good news to come out of a crop outlook seminar held in conjunction with the American Farm Bureau Federation’s 90th annual meeting, which kicked off Sunday in San Antonio. After enjoying record high farm income in 2008 due, in part, to unheard of prices for corn, soybeans and wheat, farmers will probably see lower receipts for those commodities and for cotton, according to economists speaking at the seminar.

LA Times:

- As Barack Obama builds his administration and prepares to take office next week, his political team is quietly planning for a nationwide hiring binge that would marshal an army of full-time organizers to press the new president's agenda and lay the foundation for his reelection. The organization, known internally as "Barack Obama 2.0," is being designed to sustain a grass-roots network of millions that was mobilized last year to elect Obama and now is widely considered the country's most potent political machine. Organizers and even Republicans say the scope of this permanent campaign structure is unprecedented for a president. People familiar with the plan say Obama's team would use the network in part to pressure lawmakers -- particularly wavering Democrats -- to help him pass complex legislation on the economy, healthcare and energy. The plan could prompt tensions with members of Congress, who are unlikely to welcome the idea of Obama's political network targeting them from within their own districts. Already, Democratic Party officials on the state level worry that it could become a competing political force that revolves around the president's ambitions while diminishing the needs of down-ballot Democrats. Though the plan still is emerging, one source with knowledge of the internal discussion said the organization could have an annual budget of $75 million in privately raised funds. As described by one source knowledgeable with the discussions, the nonprofit arm would be used to help victims of natural disasters, but would do so under the Obama umbrella while continuing to build the overall network's massive e-mail database. Democratic lawmakers in Republican-leaning districts might resist voting for an Obama-backed global warming bill. In that case, the White House or DNC could use the new network for phone campaigns, demonstrations or lobbying trips to push lawmakers to stick with Obama. "You can pretty much target the list to people who haven't always voted with Democrats," said a House Democratic leadership aide familiar with the plan.

Boston Globe:

- Google Inc.(GOOG) is offering financial incentives to expand the sales network for the software it sells to businesses while restricting the use of a free alternative in its quest to make money on something besides Internet advertising. Under a new program to be unveiled Wednesday, Google will sell a package of e-mail, word processing and other office applications to third-party software resellers at a 20 percent discount in the United States. It will be up to the participating merchants whether the savings are passed along to their corporate customers, said Dave Girouard, who runs Google's business software division.

- Massachusetts Governor Deval Patrick announced yesterday a goal of building enough wind turbines in the state by 2020 to supply energy to 800,000 homes.

Reuters:
- Former Iowa Gov. Tom Vilsack said Wednesday he will promote renewable energy like biofuels and work for "more nutritious food produced in a sustainable way" if confirmed as U.S. agriculture secretary.

Financial Times:
- Oil companies and traders are storing enough oil in supertankers to supply the world for one day, in one of the most striking signs of supply outstripping demand as the impact of the economic crisis overshadows a string of Opec production cuts, the FT reported. According to Deutsche Bank’s oil trading desk “over 80m barrels of oil is now on floating storage”, double the industry assessment of about 40m-50m last month. Investment banks are joining oil companies and traders and entering into floating storage deals.

- Iran on Wednesday signed a $1.7bn worth of oil contract with China bypassing international sanctions over the country’s nuclear program. Jiang Jiemin, the president of CNPC, China’s largest oil and gas company, and the head of National Iranian Oil Company, Seifollah Jashnsaz, signed the contract to develop part of North Azadegan oil field.

TimesOnline:

- A tidal wave of discontent threatens China. The most famous Chinese dissident predicts the Government will be trapped between the angry poor and the powerful rich. China has a $2 trillion foreign currency reserve but it also suffers from a huge disparity between the rich and poor: while 0.4 per cent of the people hold 70 per cent of the wealth of the country, a fifth of the population - more than 300 million Chinese - have daily incomes of less than one dollar. This extreme concentration of wealth is a serious problem for the Chinese Government and threatens its grip on power.

Vedomosti:

- Russia may base their 2009 budget on $32 oil.

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Estado:

- Sao Paulo industrial output fell 14% in December.

Bear Radar

Style Underperformer:
Mid-cap Value (-4.26%)

Sector Underperformers:
Coal (-9.2%), Oil Service (-6.63%) and Steel (-6.39%)

Stocks Falling on Unusual Volume:
CLF, SI, RTP, PHG, DB, HBC, APA, ADTN, DECK, BG, ITG, RHB, KWR and CPO

Stocks With Unusual Put Option Activity:
1) BJ 2) ADM 3) HK 4) BG 5) TEX

Bull Radar

Style Outperformer:
Large-cap Growth (-3.18%)

Sector Outperformers:
Medical Equipment (-1.50%), Biotech (-1.79%) and Retail (-2.59%)

Stocks Rising on Unusual Volume:
ESI, APOL, NTLS, RTN and RATE

Stocks With Unusual Call Option Activity:
1) HBC 2) LM 3) CI 4) BG 5) NSM

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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.