Wednesday Watch

Late-Night Headlines
Bloomberg:

- International Business Machines Corp.(IBM), the biggest computer-services provider, forecast full-year profit that beat analysts’ estimates, defying an industrywide slump that has curbed growth at other technology companies. The shares rose as much as 5.3 percent in extended trading after IBM said today that net income will rise to at least $9.20 a share in 2009, topping the $8.75 average of estimates compiled by Bloomberg. Fourth-quarter profit also exceeded projections as overhead costs declined 3.1 percent.

- Intel Corp.(INTC), the world’s largest chipmaker, raised the possibility of reporting a loss this quarter, ending its more than 21-year run of profitability. “We are not going to wake up in six months with everything rosy again,” Chief Executive Officer Paul Otellini told employees last week in an internal memo obtained by Bloomberg News. After 87 quarters of profit, the first quarter is “too close to call,” the memo said.

- Emerging-market bonds fell as concern the U.S. banking crisis is spreading to Europe led investors to avoid higher-yielding assets. The yield to the 2015 call date on Brazil’s 11 percent bond due in 2040, one of the most widely traded emerging-market securities, jumped 37 basis points, or 0.37 percentage point, to 6.42 percent at 4:10 p.m. in New York, according to JPMorgan Chase & Co.

- Bank of England Governor Mervyn King said officials may start buying assets within weeks to loosen credit markets as the lowest interest rates since 1694 fail to avert a “marked” recession. The U.K. central bank may acquire securities such as corporate bonds and commercial paper to bolster lending to companies and consumers as banks rebuild balance sheets damaged by the global financial crisis, King said yesterday.

- Iraq needs continuity not “change” from President Barack Obama’s administration as it holds elections this year and moves closer to taking over the security of all 18 provinces, its foreign minister said. “Nobody can afford in 2009 to contemplate any change in military policy,” Hoshyar Zebari said in an interview in Kuwait late yesterday after Obama’s inauguration. We can’t “give any impression that there will be draw-downs, reductions, redeployment because this year Iraq has three elections.” Obama, who campaigned with the slogan of “change” and stood for president as an opponent of the Iraq War, said repeatedly that he would withdraw all combat troops within 16 months, leaving behind a residual force. Since the Nov. 4 election, Obama has reaffirmed that goal, while saying he wants to draw down forces in a safe and responsible manner and will consult with military commanders before making any decisions. “We’ll begin to responsibly leave Iraq to its people and forge a hard-earned peace in Afghanistan,” Obama said in his inaugural speech yesterday. The U.S. won’t abandon Iraq, Zebari said. Even if Afghanistan gets more attention, Iraq is very important in the Middle East and the Persian Gulf for the balance of power, he said.

- Singapore said its economy may shrink an unprecedented 5 percent this year, fanning speculation the government will announce record spending in its budget tomorrow to help companies hurt by the global recession.

- Foreign direct investment in developing nations will drop by $180 billion, or 31 percent, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank. The decline will put renewed pressure on emerging-market currencies, even as asset sales by fund managers slow, according to Mansoor Dailami, manager of international finance in the global development prospects group. Rallies in the South Korean won, Brazil’s real and the Polish zloty have all faltered since the end of 2008 as companies including Rio Tinto Group and Honda Motor Co. put expansion plans on hold.

- Chinese stock valuations must fall further before they become “more attractive and defensive,” according to Frank Gong, JPMorgan’s China strategist.

Wall Street Journal:

- Amid a devastating period for most retailers, videogame seller GameStop Corp.(GME) has posted big sales gains, in part by aggressively marketing used products to cash-strapped consumers. GameStop this month reported a 22% jump in overall sales and a 10% increase in sales at stores open more than 12 months for the holiday sales period ended Jan. 3. It didn't hurt that videogame sales climbed 9% in December to a record $5.3 billion, according to market research firm NPD Group.

- Timothy Geithner will call for a comprehensive and aggressive approach to tackling the U.S. financial crisis when he appears Wednesday at hearings on his confirmation as Treasury secretary, while also trying to assure lawmakers that he simply erred by failing to pay some payroll taxes earlier this decade. At the hearing, Mr. Geithner will likely be grilled over his tax missteps and his role in helping to craft the Bush administration's financial-sector rescue. But senators' seeming reluctance to derail his confirmation while the economy is sputtering and the lending freeze is worsening makes it likely he will be confirmed for the cabinet post.

MarketWatch.com:
- Health care saw a net gain of 419,000 jobs in 2008 and its growth outlook continues to be strong through 2016, according to the Bureau of Labor Statistics.

CNBC.com:
- Qualcomm Inc.(QCOM) CEO Paul Jacobs said “business continues to be strong” as people buy higher-end smart phones. Jacobs said handset shipment may rise 25%.

- If Warren Buffett liked Burlington Northern Santa Fe(BNI) in the high $70s, he must love it in the low $60s. Buffett's Berkshire Hathaway reports in an SEC filing tonight that it bought almost 4.4 million shares in the freight railroad over the last three trading days at prices between $61.65 and $63.43.

NY Times:

- Warning to rich New Yorkers: The tax man might be digging deeper into your pockets in the years ahead. There is a growing sense in the capital that legislators are likely to turn to an income tax increase on the wealthiest New Yorkers to help close the state’s $15 billion deficit, now that Democrats control the Senate, the Assembly and the governor’s office. The Assembly, where Democrats have an overwhelming majority, has long supported increasing taxes on the wealthy, and Sheldon Silver, the Assembly speaker, reiterated this month that there continued to be strong backing for the measure among his colleagues. Gov. David A. Paterson, a Democrat, did not propose any income tax increases in his budget proposal, but acknowledged in last month that “taxing the wealthy is probably going to be part of the solution if the deficit gets any worse, and all indications are that it probably will.” That could leave the matter in the hands of the Senate, where Democrats won a narrow majority in November. Senator Eric T. Schneiderman, a Manhattan Democrat, said that he planned to introduce a bill in the coming weeks that would increase taxes on the rich, and that he expected his colleagues to have an active debate about the issue.

Advertising Age:

- Walt Disney’s(DIS) ABC is seeking $1.4 million for 30-second ads during this year’s telecast of the Academy Awards. ABC initially sought $1.7 million for commercials during its “Oscar” broadcast on Feb. 22.

Reuters:

- Blackstone Group(BX) has invested more than $730 million in India since arriving three years ago, only to see much of it wiped out by the country's weakening economy and stock market plunge. Blackstone's tough start in India is a cautionary tale to other Western private equity firms such as Kohlberg Kravis Roberts & Co. and Permira that are opening offices in Mumbai. If newcomers weren't already wary of India's foreign investing rules, which forbid borrowing and set a purchase price range, certainly Blackstone's performance so far may give them pause. Entrenched firms, too, are likely to wait before pouncing. Shares of Nagarjuna Construction have fallen 71 percent since Blackstone agreed to invest $150 million in Aug. 2007. Garment maker Gokaldas Exports has also lost 71 percent of its value since Blackstone inked a deal that same month for $165 million.Last February, Blackstone said it would invest $60 million in transportation company Allcargo Global Logistics when its stock was at 735.4 rupees per share. Eight months later, the stock was worth less than half that amount.

- European Central Bank Executive Board member Juergen Stark said that there isn’t a general credit crunch in the euro zone and warned of aggressive monetary policy. “The European Central Bank has earned a lot of confidence in the last 10 years that we mustn’t gamble with,” Stark said.

Sueddeutsche Zeitung:

- Deutsche Bank’s US-based hedge funds CQ Capital and Distressed Opportunities will report a full-year loss of more than 40% for 2008, citing documents in an e-mailed preview of an article to be published tomorrow.

Sydney Morning Herald:

- Macquarie Airports has provided further evidence that the boom in Australians traveling overseas has ended, after reporting the sharpest fall in outbound passenger traffic through Sydney Airport since the SARS (viral pneumonia) crisis of 2003.

The Australian:

- Australia’s banks were yesterday sucked into the international crisis of confidence in banking stocks. This came amid renewed pressure on regulators to extend the stock shorting ban to ensure system stability. The corporate regulator, ASIC, is likely to make a decision this week, as fears grow that banks and financial stocks will be savaged by hedge funds. The ban is in place until next Tuesday, but ASIC is understood to be "monitoring closely" the overseas crisis that forced the British government to launch a secondary emergency package for the banking industry.

Late Buy/Sell Recommendations

Jefferies:

- Raised (CHKP) to Buy, target $27.

Night Trading
Asian Indices are -1.75% to unch. on average.
S&P 500 futures +.82%.
NASDAQ 100 futures +.31%.

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Earnings of Note
Company/EPS Estimate
- (BLK)/1.02

- (PGR)/.35

- (MMR)/-.27

- (COH)/.67

- (USB)/.26

- (ABT)/1.06

- (HCBK)/.27

- (NTRS)/.93

- (APD)/.98

- (UTX)/1.22

- (BNI)/1.74

- (FFIV)/.40

- (PLCM)/.40

- (EBAY).39

- (AB)/.21

- (SLM)/.19

- (NE)/1.48

- (AAPL)/1.40

- (KMP)/.54

- (ADTN)/.28

- (AMR)/-.70

- (ATI)/.89

- (MTH)/-1.01

- (RJF)/.35

- (UAUA)/-4.41

Economic Releases

8:30 am EST

- The NAHB Housing Market Index for January is estimated at 9.0 versus 9.0 in December.

Upcoming Splits
- None of note

Other Potential Market Movers
- None of note.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Lows, Weighed Down by REIT, Financial, Homebuilding, Energy and Construction Shares

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In Play

Stocks Sharply Lower into Final Hour on More Short-Selling, Rising Financial Sector Pessimism, Increasing Global Economic Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Technology longs and Medical longs. I was stopped out of a trading long, added (QQQQ)/(IWM) 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 above average. Today’s overall market action is very bearish. The VIX is rising 22.1% and is very elevated at 56.18. The ISE Sentiment Index is below average at 125.0 and the total put/call is above average at .95. Finally, the NYSE Arms has been running at a high level most of the day, hitting 2.78 at its intraday peak, and is currently 2.37. The Euro Financial Sector Credit Default Swap Index is rising 8.97% today to 117.33 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 4.39% to 220.69 basis points. The TED spread is rising .01% to 102 basis points. The TED spread is now down 364 basis points in just over three months. The 2-year swap spread is rising 6.83% to 61.75 basis points. The Libor-OIS spread is falling .90% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 8 basis points to .56%, which is down 214 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. The US dollar is soaring 1.76% today. The US Economic Surprise Index has risen to -80.70, while the European Economic Surprise Index has declined to -152.0. I suspect the US currency will take out its recent highs versus the euro over the coming weeks. Recent eurozone economic data, European bank developments and ECB comments/actions are greatly impacting global stock markets in a negative way, in my opinion. Nikkei futures indicate a -210 open in Japan and DAX futures indicate a -51 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, increasing economic pessimism and rising financial sector worries.

Today's Headlines

Bloomberg:

- The Dow Jones Industrial Average fell 14 percent between Barack Obama’s election and Inauguration Day, the biggest decline ever. The second-biggest drop gave way to a 75 percent rally in 1933.

- U.S. bank stocks plunged, led by Bank of America Corp.(BAC), on concern that mounting losses will force companies to slash dividends, raise more money and face further government oversight.

- Kingdom Holding Co., the investment company controlled by Prince Alwaleed bin Talal, reported a fourth-quarter loss of almost 31 billion riyals ($8.26 billion) after Citigroup Inc. shares plunged in the credit crisis. Kingdom Holding fell 6.8 percent in Riyadh. The company reported its latest results on the Saudi bourse Web site today after the market closed. “The loss is phenomenal,” John Sfakianakis, chief economist at Saudi British Bank, said in an interview today by telephone from Riyadh. “This is the biggest corporate story for Saudi Arabia in many years.”

- Chrysler LLC, rescued last month with $4 billion in federal loans, is trading a 35 percent stake to Italy’s Fiat SpA as the two companies work to create viable carmaking operations. Cerberus Capital Management LP’s Chrysler, the third- largest U.S. automaker, would get access to Fiat’s small-car lineup and global sales network to wean itself from dependence on trucks and the North American market, while Fiat would expand a U.S. foothold now limited to its luxury brands.

- At least one-quarter of House Democrats’ proposed $825 billion economic stimulus plan wouldn’t be spent until at least 2011, according to a report that suggests the package may take longer than expected to boost the economy. A Congressional Budget Office analysis said most of the plan’s $355 billion in appropriations for programs such as highway construction wouldn’t be spent until after 2010. The government would spend about $26 billion of that money this year and $110 billion more next year, the report estimated.

- The Bank of New York Mellon(BK) has rescheduled its fourth-quarter 2008 financial results conference call to 5 p.m. EST today (Tuesday, January 20, 2009).

- The Bank of Canada slashed its key interest rate to the lowest since the institution was founded in 1934 and signaled that more cuts may be needed to jolt the economy out of recession and stabilize credit markets. Governor Mark Carney cut the target rate on overnight loans between commercial banks by half a point to 1 percent, lower than the previous record of 1.12 percent in 1958 when the rate was based on treasury-bill yields.

- Greenwich, Connecticut, home prices dropped the most in three decades last year and the number of houses sold plunged by more than a third as cutbacks in the financial industry spurred declines in residential real estate. The median home price in America’s hedge-fund capital dropped 7 percent to $1.95 million in 2007, and the number of single-family houses sold fell to 460 from 726 a year earlier, broker Prudential Connecticut Realty said.

- Options traders increased bets that General Electric Co.(GE), which reports quarterly results this week, will tumble by half before next month’s contracts expire. About 56,000 GE puts traded when an investor used a “butterfly” spread strategy to wager that the stock will fall to $7.50 by Feb. 20, according to Andrew Wilkinson, the senior market analyst at Greenwich, Connecticut-based Interactive Brokers Group Inc. GE, the finance and industrial company that’s fallen 61 percent in the past year on the New York Stock Exchange, lost 5.3 percent to $13.23 at 1:07 p.m. in New York.

Wall Street Journal:

- Barack Obama was sworn in Tuesday as the 44th president under sunny skies and before an ocean of humanity, calling on the nation to put aside greed, irresponsibility and "our collective failure to make hard choices" -- and turn back the "raging storms" of war and recession. In an ambitious, 20-minute address, Mr. Obama sought to obliterate the divisions of conservatism and liberalism and remake American politics. "Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations," Mr. Obama said.

NY Times:

- A new national report on childbirth suggests that some long-term trends may be reversing themselves. The report, published Jan. 7 by the National Center for Health Statistics, found that more babies were born in 2006 than in any year since 1961.

- They also put him in rare concert with his campaign opponent, Gov. Sarah Palin of Alaska, who just announced her own wind, geothermal, tidal and wave energy push. Momentarily parting ways with “drill, baby, drill,” the pro-oil refrain made popular during the Republican presidential campaign, the oil- and gas-producing state will endeavor to get half its electricity from renewables by 2025, Governor Palin said last week, as she unveiled a state energy plan.

FINalternatives:

- Today’s inauguration of Barack Obama as the 44th president of the United States will be the most expensive in history. And despite their troubles, hedge fund managers and employees are helping to foot the bill. The bill for Obama’s swearing-in may hit $150 million—more than $100 million of which is for security costs. And among those giving the maximum $50,000 per individual are Soros Fund Management’s George Soros and D.E. Shaw Group’s David Shaw, leading a large number of hedge fund industry professionals to pay for the inauguration. The Presidential Inauguration Committee has raised more than $27 million, of which $7.1 million came from those involved in finance, according to the Centre for Responsive Politics. The Soros family alone gave $200,000. Other hedgies (or former hedgies) giving the max include Grosvenor Capital Management’s Stephen Malkin and Michael Sacks (and Sacks’ wife, Cari), Paloma Partners CEO Donald Sussman and Oaktree Capital Management Chairman Howard Marks. Also giving $50,000 was CNBC personality Ron Insana, who recently shuttered his hedge fund, Insana Capital Partners, and Howard Kagan, late of activist shop Harbinger Capital Partners. Howard Gottlieb, a retired partner at Glenwood Financial Group, now owned by Man Group, gave $50,000, as did his wife, Anne. Marsha Laufer, the wife of Renaissance Technologies chief scientist Henry Laufer, also gave as much as she could, along with Naomi Aberly, the wife of HBK Capital Management’s Lawrence Lebowitz. Chess Capital Partners founder Shonda Warner, Fletcher Asset Management deputy CEO Denis Kiely, GEM Investors senior managing partner Barry Malkin, McGarr Capital’s Cappy McGarr, Seminole Capital Partners founder Michael Messner, Taconic Capital Advisors founder Frank Brosens, and Willow Creek Capital Management founder Aaron Braun each gave the maximum. The CRP said that 118 people with Wall Street ties gave a total of $3.6 million to fund the festivities, followed by lawyers ($2.5 million) and people with ties to the entertainment business ($1.7 million).

Politico:

- Allies of House Speaker Nancy Pelosi call her a grand master at “three-level chess” — a skilled politician who games out her complex relationships with the White House, the Senate and her own fractious, heterodox House Democratic Caucus. Two days before Barack Obama’s Inauguration, the speaker showed off a new move — using the media to keep even a Democratic president from wandering onto her turf. Pelosi used a Fox News appearance Sunday to break with the president-elect on two key issues: the fate of President George W. Bush’s tax cuts for families earning $250,000 or more and the possibility of congressional investigations into the actions of Bush administration officials. While Pelosi’s words showed that she and Obama don’t always agree on matters of policy, the signal they sent was more important: Yes, you can use the media to speak straight to the public. But so can I — and I will when you’re invading my turf.

Reuters:
- Barclays on Tuesday upgraded the U.S. real estate investment trust (REIT)sector to positive from neutral, saying the group will report better quarterly results than what is priced into current valuation, "as they should be relatively less impacted than private players" by the economic environment. The firm added that the group's sell-off from September 2008 through November "was overdone, resulting in attractive valuation levels, even after the subsequent recovery."

Financial Times:
- Any attempt by Barack Obama to get European Union members of Nato to send more troops to Afghanistan will be strongly rebuffed by EU voters, according to a new opinion poll for the Financial Times. As Mr Obama prepares to be sworn in as US president on Tuesday, a Harris poll for the FT shows that clear majorities of people in the UK, France, Italy and Germany believe that their governments must not send more forces to Afghanistan, irrespective of demands that the new American head of state might make.

El Nacional:
- Venezuela received $175 million in foreign investment last year, 56% less than the previous year.

Sarmayeh:
- Iran’s oil revenue will decline by more than 50% to about $30 billion in the fiscal year starting March 21, citing former Economy Minister Davoud Danesh-Ja’fari.

Etemade Meli:

- Iran’s economy has been caught by the global financial turmoil and faces a “vast crisis,” citing head of Tehran’s chamber of commerce Yahya Ale Eshagh.

Bear Radar

Style Underperformer:
Small-cap Value (-5.10%)

Sector Underperformers:
Banks (-13.5%), Oil Tankers (-6.57%) and I-Banks (-6.56%)

Stocks Falling on Unusual Volume:
STT, PNC, BK, WFC, CS, SU, MBT, PCZ, WAG, FWRD, NTRS, IWOV, LOGI, ZION, MELI, SINA, BMRN, PETS, SIVB, CATY, HBC, SLF, WF and BLK

Stocks With Unusual Put Option Activity:
1) BUCY 2) LUK 3) JASO 4) LDK 5) ADP

Bull Radar

Style Outperformer:
Large-cap Value (-1.94%)

Sector Outperformers:
Telecom (+.18%), Drugs (-.48%) and Education (-.53%)

Stocks Rising on Unusual Volume:
KGC, NEM, HMC, MO, BCO, RAI, HES, PTNR, DT and NBL

Stocks With Unusual Call Option Activity:
1) STT 2) RYL 3) PNC 4) SLM 5) HBC