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Wednesday Watch

Late-Night Headlines
Bloomberg:

- The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.

- OPEC wants U.S. regulators to curtail oil trading by hedge funds and speculators who helped make last year the most volatile in crude oil trading. Abdalla el-Badri, secretary-general of the Organization of Petroleum Exporting Countries, is seeking rules to “limit the level of speculation” by investors who buy oil without planning to use it. Oil surged 46 percent in the first half of 2008 to a record $147.27 only to plunge by the end of the year, prompting OPEC to make its biggest ever supply cuts. “The move above $90 a barrel was driven by financial flows rather than fundamentals” of supply and demand, said Edward Morse, chief economist at Louis Capital Markets in New York. Selling by speculators “helped propel the commodities price downturn, but fundamentals have weighed heavily as well.” President Barack Obama has yet to comment on the need to rein in commodity traders. Interest from speculators has rebounded, with the number of barrels owned by active speculators, index funds and other investors only 13 percent lower than when it was when oil prices peaked in July, Goldman Sachs Group Inc. analyst Jeffrey Currie in London said in a report yesterday. World consumption will fall for a second year in 2009, the first back-to-back contraction in 25 years, according to the Paris-based International Energy Agency.

- The cost of protecting corporate bonds from default fell in Australia after Rio Tinto Group said it may sell shares to cut debt. Japan’s benchmark of credit- default swaps was unchanged in Tokyo.

- General Electric Co.(GE) and its finance arm may lose their top-level Aaa ratings as the global recession and credit crisis lessen the chance GE Capital can make a $5 billion profit goal this year, Moody’s Investors Service said. The potential downgrade affects long-term debt that isn’t insured by the Federal Deposit Insurance Corp., Moody’s analysts said in a statement today. The Markit iTraxx Australia index declined 5 basis points to 320 as of 11:45 a.m. in Sydney, ABN Amro Holding NV data show. The Markit iTraxx Japan index was unchanged at 325 basis points, Barclays Capital prices show.

- The U.S. House approved a measure to make it easier for U.S. workers to win pay-discrimination lawsuits, sending the legislation to President Barack Obama for his signature. The legislation would let employees sue on a claim they are being underpaid because of discrimination that occurred years earlier. The House vote was 250-177. The Senate passed the bill last week.

- Senator John Kerry, the chairman of the Foreign Relations Committee, said he will “do everything in my power” to pass climate-protection legislation this year. Former Vice President Al Gore is scheduled to testify to Kerry’s panel tomorrow on the environmental threat from greenhouse-gas emissions.

- When Wen Jiabao and Vladimir Putin were invited to speak to the World Economic Forum, China and Russia were supposed to be saviors of the global economy as the U.S. fell into recession. No more. Today, as the Chinese premier and Russian prime minister address the opening of the annual meeting in Davos, Switzerland, they’re disappointing those who bet their economies would help power the world through the slump and weakening their case for a greater say among global leaders. “The Chinese and Russians are no longer as cocky as they were about six months ago,” said Huang Jing, a political science professor at Singapore’s Lee Kuan Yew School of Public Policy. “They became prosperous because they were integrated into the international economic system, and now they realize there’s a price they have to pay.”

- Australian consumer prices declined by the most in 11 years last quarter, increasing scope for the central bank to cut interest rates as evidence mounts the economy is heading for its first recession since 1991.

Wall Street Journal:

- The U.S. economic stimulus package neared $900 billion in the Senate, as President Barack Obama wooed Republicans ahead of an expected House vote Wednesday. The rare trip by a president to Capitol Hill revealed the urgency in Congress and the White House over a cure for the souring economy. The day was marked by Democratic deal-making to win support from skeptical Republicans. The Obama administration indicated it would agree to a $69 billion Senate proposal to shield tens of millions of middle-income Americans from the so-called alternative minimum tax, a priority of Iowa Sen. Charles Grassley, the top-ranking Republican on the Senate Finance Committee. White House officials also spread the word that Mr. Obama was willing to drop a proposed expansion of contraceptive coverage under Medicaid that has become a symbol for Republican critics.

- Interior Secretary Ken Salazar indicated Tuesday that the Obama administration could be open to expanded offshore drilling and is considering doing away with a controversial program that allows oil companies to pay in kind for oil and natural gas taken from public lands. Environmental groups want the Obama administration to re-impose a ban on expanded offshore drilling that President George W. Bush lifted last year. The Bush administration plan would open tracts off the Atlantic and Pacific coasts where drilling had been prohibited.

- A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel. The legislation, which is progressing quickly in Congress, would amount to the most aggressive step yet by the federal government to help strapped borrowers avoid foreclosure.

- While embattled Illinois Gov. Rod Blagojevich continued his whirlwind media tour in New York on Tuesday, state senators in his impeachment trial listened to a few of the conversations intercepted by federal agents that were used to bring conspiracy charges against him. Proponents contend it will act like a stick, spurring mortgage servicers to complete more loan modifications. Meanwhile, the banking industry warns that it will raise mortgage costs for all borrowers.

- The fence along the U.S.-Mexico border is mostly finished. Customs and Border Protection spokesman Lloyd Easterling says that 601 miles of the project had been completed as of a week ago. Mr. Easterling said 69 miles of the fence still must be built to meet the goal set during the Bush administration. In December, then President-elect Barack Obama said he wanted to evaluate border security operations before he considers whether to finish building the fence under his administration. Mr. Easterling said the Obama White House has not told Homeland Security to stop building the fence.

NY Times:

- As the commercial real estate market limps along in the midst of a global recession, some investors say they believe that at least one sector — medical office buildings — might serve as a crutch, as it has in past economic downturns.

- The economic stimulus plan that Congress has scheduled for a vote on Wednesday would shower the nation’s school districts, child care centers and university campuses with $150 billion in new federal spending, a vast two-year investment that would more than double the Department of Education’s current budget. The proposed emergency expenditures on nearly every realm of education, including school renovation, special education, Head Start and grants to needy college students, would amount to the largest increase in federal aid since Washington began to spend significantly on education after World War II. Critics and supporters alike said that by its sheer scope, the measure could profoundly change the federal government’s role in education, which has traditionally been the responsibility of state and local government.

BusinessWeek:

- Like oil? Need oil? If so, Jose S. Gabrielli de Azevedo, the president and CEO of Brazil's state-controlled oil company, Petrobras (PBR), may be your next melhor amigo (best friend). At a time when other big oil companies are barely managing to keep their production from declining, Petrobras on Jan. 23 announced an ambitious $174 billion plan to develop new oil and natural gas fields, mostly in deep waters off Brazil's coast. This investment—undertaken in spite of a global economic downturn that makes it hard to raise money—will help offset the shortfall in production from other oil fields around the world and restrain the likely increase in oil prices after the recession ends.

- Barack Obama made sophisticated use of technology during his run for the White House. And throughout his campaign, the BlackBerry (RIMM)-addicted candidate stressed the transformative power of technology, making a high-profile promise to provide high-speed Internet access to all Americans. But when the House unveiled a preliminary version of the economic stimulus plan, crafted with some input from President Obama's advisers, the amount of money allocated for broadband Internet development was much lower than experts had anticipated. In the $825 billion proposal, only $6 billion was aimed at broadband, far short of the $12 billion to $30 billion that industry experts estimate it would cost to wire the nation. The House bill allocated the same amount of money to weatherizing the homes of low- and moderate-income people.

CNNMoney.com:
- Citigroup CEO Vikram Pandit downplayed the notion that his bank, or any other major financial institution for that matter, would be taken over the by the U.S. government.

Forbes:

- Mobile TV Turns On.

IBD:

- Athenahealth (ATHN), the company Jonathan Bush co-founded in 1997 and currently leads, offers technology and services to help doctors manage billing and medical records. President Obama has emphasized this kind of medical IT to help save money in health care while expanding coverage.

Philly.com:

- Joseph S. Forte, who in September told investors he had grown their money to $154 million, but now stands accused of running a Ponzi scheme, appeared alone in federal court today because he has no money for a lawyer. "I'm trying to raise the money," Forte told Magistrate Judge Faith Angell. She granted him a one-week continuance, pushing the preliminary hearing back to Monday.

AP:

- Former President Bill Clinton earned nearly $6 million in speaking fees last year, almost all of it from foreign companies, according to financial documents filed by his wife, Secretary of State Hillary Rodham Clinton. The documents obtained Tuesday by The Associated Press show that $4.6 million of the former president's reported $5.7 million in 2008 honoraria came from foreign sources, including Kuwait's national bank, other firms and groups in Canada, Germany, India, Malaysia, Mexico and Portugal and a Hong Kong-based company that spent $100,000 on federal lobbying last year.

Financial Times:
- Capital flows to emerging markets are in danger of collapsing this year as the financial crisis in advanced economies risks choking off the supply of credit to the developing world, an association of large banks warned on Tuesday. The IIF estimates emerging market institutions will need to refinance about $20bn a month in the first half of 2009, but that the current supply of credit covers only half that.

TimesOnline:
- Hedge fund four helpfully stick their heads in the noose.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ENR), target $85.

- Reiterated Buy on (CHRW), target $60.

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

- Reiterated Buy on (HSY), target $42.

- Reiterated Buy on (VZ), target $35.

- Reiterated Buy on (JAVA), target $6.70.

Night Trading
Asian Indices are -.25% to +1.75% on average.
S&P 500 futures +2.01%.
NASDAQ 100 futures +1.81%.

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Earnings of Note
Company/EPS Estimate
- (TDW)/1.92

- (PX)/.96

- (BHI)/1.26

- (WLP)/1.36

- (LM)/-.4.00

- (SO)/.25

- (BA)/.77

- (T)/.65

- (WFC)/.33

- (COP)/1.24

- (CVD)/.70

- (RHI)/.25

- (QCOM)/.47

- (ARG)/.75

- (ALL)/1.35

- (SYMC)/.32

- (RYL)/-1.18

- (SBUX)/.17

- (WDC)/.31

- (BSX)/.13

- (OI)/.39

- (DNB)/1.82

- (BXP)/1.35

- (CTXS)/.47

- (SY)/.61

- (HES)/.37

- (BDX)/1.15

- (SWK)/.59

- (MUR)/.79

- (GD)/1.59

- (PCU)/.21

- (LRCX)/-.04

- (AMG)/1.20

Economic Releases

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,800,000 barrels versus a +6,100,000 barrel increase the prior week. Gasoline supplies are estimated to rise by +1,750,000 barrels versus a +6,475,000 barrel increase the prior week. Distillate inventories are expected to fall by -1,125,000 barrels versus a +790,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to fall by -.50% versus a -1.98% decline the prior week.

2:15 pm EST

- The FOMC is expected to leave the benchmark fed funds rate at .25%.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Citi Financial Services Conference, World Economic Forum and (SQNM) analyst day could also impact trading today.

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

Stocks Finish Higher, Boosted by Rail, Insurance, HMO, Bank, Semi and Steel Shares

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In Play

Stocks Higher into Final Hour on Less Financial Sector Pessimism, Lower Energy Prices, Diminishing Credit Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Healthcare longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 7.59% and is very high at 42.23. The ISE Sentiment Index is below average at 106.0 and the total put/call is below average at .73. Finally, the NYSE Arms has been running around average most of the day, hitting 1.21 at its intraday peak, and is currently .88. The Euro Financial Sector Credit Default Swap Index is falling .90% today to 111.0 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 falling 2.49% to 199.0 basis points. The TED spread is falling 3.02% to 105 basis points. The TED spread is now down 361 basis points in over three months. The 2-year swap spread is falling 3.58% to 64.0 basis points. The Libor-OIS spread is rising 1.50% to 96 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .82%, which is down 188 basis points in over six months and near 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 .13%, which is up 3 basis points today. The 10-year T-note is trading as if it is forming another bottom around current levels. As well, the CRB Index appears to be rolling over again at its 50-day moving average. The (XLF) is trading much better now that the majority of earnings’ releases are out of the way. Healthcare-related stocks are top performers today. I continue to overweight these shares. Nikkei futures indicate an +60 open in Japan and DAX futures indicate an +26 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices, bargain-hunting and declining credit market angst.

Today's Headlines

Bloomberg:

- The worst U.S. housing recession since the Great Depression may end this year as the inventory of homes declines on a drop in new construction, said Karl Case, co-creator of the S&P Case/Shiller home price indexes. U.S. builders broke ground in December on 550,000 houses, the fewest in five decades of government statistics, the Commerce Department said last week.

- House Financial Services Committee Chairman Barney Frank said he would consider expanding the $700 billion financial-rescue fund, and expects the Obama administration will soon address banks’ toxic assets.

- The cost to protect North American corporate bonds from default fell as companies including Texas Instruments(TXN) and Verizon Communications(VZ) posted profit that exceeded or met analysts’ estimates. Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the US and Canada, which fall as sentiment improves, dropped 7 basis points to 199 basis points at 8:55 am in NY, according to broker Phoenix Partners Group.

- California mortgage defaults dropped 7.7% in the fourth quarter, MDA DataQuick said. Fourth-quarter defaults were down 20% form the previous three months.

- State Street Global Advisors (SSgA), the investment management arm of

State Street Corporation (NYSE: STT), today announced the launch of the

SPDR^® Barclays Capital Short Term International Treasury Bond ETF

(Symbol: BWZ) and the SPDR Barclays Capital Mortgage Backed Bond ETF

(Symbol: MBG)¹. Designed to provide investors with cost-efficient exposure

to precise segments of the fixed income market, the two new SPDR exchange

traded funds (ETFs) will begin trading on the NYSE Arca on January 27,

2009.

- Copper prices plunged, heading for the largest drop in almost eight weeks, as the slumping global economy slashed metal demand and led to surging warehouse inventories. Copper stockpiles in storage facilities monitored by the London Metal Exchange jumped 2.8 percent today to 451,800 metric tons, the most in five years. Since June 30, supplies have more than tripled, helping to drive prices down by 61 percent.

- Crude oil for March delivery fell $2.31, or 5.1 percent, to $43.42 a barrel at 1:19 p.m. on the New York Mercantile Exchange. It was the biggest decline since Jan. 12. Prices are down 2.6 percent this year and are 52 percent lower than a year ago. The industry-funded American Petroleum Institute is scheduled to release its weekly report on oil inventories at about 4:30 p.m. in Washington today.

- Brazilian loan defaults surged last month to the highest since September 2002 as Latin America’s largest economy slowed and the credit crisis increased borrowing costs, making it more difficult for consumers to repay debt.

- William Dudley, named president of the Federal Reserve Bank of New York today, kept up his stamina during last year’s all-night talks on the financial crisis by napping on the carpet of his office at the bank. For two years Dudley was a top lieutenant to former New York Fed chief Timothy Geithner, who was sworn in yesterday as U.S. Treasury secretary. Now, the central bank is relying on Dudley’s frontline crisis experience, financial expertise and capacity for long hours to guide the Fed’s biggest district bank and coordinate policies toward Wall Street firms including his former employer, Goldman Sachs Group Inc. Goldman Sachs, where Dudley worked for more than two decades and in 1995 became head U.S. economist, has long contributed top policy makers. Henry Paulson and Robert Rubin both headed the bank before becoming Treasury secretaries. While “too many from Goldman have their hand in this thing, on balance I like and trust Dudley,” said Robert Brusca, a former chief of the New York Fed’s international division and now president of Fact & Opinion Economics. Stephen Friedman, a former Goldman Sachs chairman who was also director of the National Economic Council from 2002 to 2004, headed the panel to find a successor to Geithner, 47.

- India’s central bank lowered its growth forecast and signaled further cuts in interest rates from record lows to encourage lending and spur economic expansion.

Wall Street Journal:

- The House version of the economic stimulus package includes more than $1 billion in spending for the Department of Homeland Security. The biggest single chunk of that is $500 million for the Transportation Security Administration to spend on what the bill calls “explosive detection systems and emerging checkpoint technologies.” A Senate source said that chamber’s plan is very similar. So what does that language mean?

- This week, GM(GM) leaders told Saturn dealers that funding has been allocated to build Saturn vehicles through 2012 and in some cases 2013. But they stopped short of saying Saturn would get new products and won’t be killed.

CNBC.com:
- Now On Sale: Once-Great Stocks For Less Than $10.

NY Times:

- Facing intense criticism for his handling of the appointment of a new United States senator, Gov. David A. Paterson tried to distance himself on Monday from the tarnishing of Caroline Kennedy, and abruptly canceled a trip to Switzerland he had planned for this week.

- President Obama is moving quickly to act on the environmental promises that were a centerpiece of his campaign. But tackling global warming will be far more difficult — and more costly — than the new emissions standards for automobiles he ordered with the stroke of a pen on Monday. Already, the Congressional Democrats Mr. Obama will need to carry out his mandate are feuding with one another. By coincidence or design, most of the policy makers on Capitol Hill and in the administration charged with shaping legislation to address global warming come from California or the East Coast, regions that lead the country in environmental regulation and the push for renewable energy sources. That is a problem, says a group of Democratic lawmakers from the Midwest and Plains States, which are heavily dependent on coal and manufacturing. The lawmakers have banded together to fight legislation they think might further damage their economies.

- Education is one area the Internet has not yet transformed, and a new crop of start-ups and venture capitalists are rushing to fill that void, creating Web tools that serve as home tutors for kids who need help outside the classroom. The latest entry is DreamBox Learning, which on Tuesday is unveiling a Web site to teach math to kids in kindergarten through second grade. The lessons are taught through video games. Kids pick a theme, such as an arcade or adventure park, and a character, such as a dinosaur or pirate, and play an online game with a hidden math lesson.

NY Post:

- Hedge-fund firm Tremont Group Holdings, which lost more than half of its assets to alleged scammer Bernard Madoff, is winding down operations and could shutter its doors by summer, sources tell The Post. The Rye, NY, fund, which is owned by life-insurance company MassMutual, has cut its staff by about 40 percent, The Post has learned, and people familiar with the situation said some remaining employees have been told they may be let go in June with severance packages. Tremont spokesman Montieth Illingworth declined to comment on the layoffs, but confirmed that the firm has closed its Rye Investment Management unit, which offered a line of single-manager funds, and which invested a whopping $3.1 billion with Madoff.

LA Times:

- The NFL is willing to consider a return to its Los Angeles roots. Evidently, so are the San Diego Chargers.

OrlandoSentinel:

- Existing-home sales nationwide showed surprising strength in December, as the thaw in sales heated up in Florida. Resales of single-family homes in the Sunshine State surged 27 percent last month compared with December 2007 -- the fourth straight year-over-year increase for monthly existing-home sales, the Florida Association of Realtors said Monday in its year-end report. Resales of condominiums statewide rose 12 percent from a year ago. Metropolitan Orlando's 34 percent increase in December single-family resales was the fifth-best showing statewide in percentage terms and second only to Tampa in number of sales.

TimesOnline:

- Hedge funds were accused today of gambling against the taxpayer when they bet that the share prices of British banks will fall. A powerful cross-party committee of MPs also told the UK's embattled hedge fund managers that they were "snubbing the public" by refusing to sign up to a basic set of standards for best-practice behavior. In a showdown appearance before the Treasury Select Committee, four leading hedge fund managers were forced to defend allegations that they were profiting from the country's economic misery. They also fought off calls for greater scrutiny from regulators. Just a day after it emerged that Paulson & Co, a renowned American hedge fund, had made an estimated £270 million in profits from betting against Royal Bank of Scotland, which is majority state-owned, some of the industry's best-known players were thrown onto the back foot over the controversial practice of short-selling.

Vedomosti:

- Russia may run a budget deficit this year equivalent to 7.6% of GDP, citing a government official.

recast to "

La Libre:

- European Central Bank Governing Council member Guy Quaden said the bank may lower borrowing costs further. “We are probably ready to go lower” with interest rates,

Bear Radar

Style Underperformer:
Large-cap Value (+.85%)

Sector Underperformers:
Airlines (-7.54%), Education (-2.48%) and Telecom (-1.82%)

Stocks Falling on Unusual Volume:
OLN, CAL, WLL, CNQR, MANT, NYB and AVY

Stocks With Unusual Put Option Activity:
1) LAMR 2) NFLX 3) VMW 4) FNM 5) IBN