Wednesday Watch

Late-Night Headlines
Bloomberg:
- Lehman’s(LEH) Hedge-Fund Clients Left in Cold as Assets Are Frozen. Lehman Brothers Holdings Inc.'s bankruptcy probably means the end of hedge-fund manager Oak Group Inc. after 22 years in business.

- European politicians are discovering what cometh after pride. A week after lambasting the U.S. for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe yesterday bailed out banks from Belgium, Germany and the U.K. Dexia SA today received aid from France and Belgium, while Ireland's government said it would guarantee bank deposits and debt for two years. ``The gods of the markets are punishing those who showed hubris,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ``Europe has been bashing the U.S., but it's realizing now it has its own problems.''

- American International Group Inc.(AIG) may benefit from a government plan to buy distressed mortgage assets, NY Insurance Superintendent Eric Dinallo said. “It is likely that it could help,” Dinallo said. Issuers of credit default swaps may have the chance to cancel the contracts if the underlying assets get bought by the government, Dinallo said.

- The euro traded near a two-week low against the dollar on speculation governments will bail out more European banks after France and Belgium led a state-backed rescue of Dexia SA. ``Selling the euro is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``It may take longer for Europe to solve its problems, because it's only just now getting started.''

- Mitsui O.S.K. Lines Ltd., Japan's largest operator of iron-ore ships, dropped in Tokyo trading along with domestic rivals, as rates for carrying commodities had their biggest monthly slump on record. The Baltic Dry Index, a measure of commodity-shipping rates, dropped 8.2 percent yesterday, bringing its slide in September to 53 percent, as raw-material demand from China's steelmakers weakened. China's urban housing demand has dropped since minimum down-payment requirements and some mortgage rates rose last year. Property prices climbed at the slowest pace in 18 months during August, the National Development and Reform Commission said Sept. 16.

- Japan's largest manufacturers turned pessimistic about their prospects for the first time in five years as the deepening U.S. financial crisis stifled demand in the country's export markets. The Tankan index of confidence among big makers of cars and electronics slid to minus 3 points in September from 5 in June, a fourth quarterly drop, the Bank of Japan said today in Tokyo. The first negative reading for the index since 2003 indicates pessimists outnumber optimists.

Wall Street Journal:
- Scrambling to hold on to investors, hedge-fund managers are taking drastic steps such as lowering their fees. U.K. hedge fund RAB Capital PLC on Tuesday said it had convinced steel magnate Lakshmi Mittal and other investors to lock in their money in a flagship fund for three years in exchange for lower fees. As part of the move, it halved its annual management fee. Increasingly, hedge funds are restructuring, changing their fees and altering how they hold investments, among other steps, in an effort to keep investors who have grown skittish at some of the funds' worst performances ever.

- Congress and the Bush administration are hashing out an agreement to raise the level of consumers' bank deposits guaranteed by the government, an idea they hope might bring enough support to revive President George W. Bush's planned rescue of financial markets. The Senate will vote on a new version of the rescue bill Wednesday if a compromise can be reached on this and other issues. Congressional leaders expect the vote could build momentum for passage of the bill in the House, which stunned Washington Monday by rejecting the $700 billion banking-rescue package. Congressional leaders were also considering changing an accounting rule known as "mark to market" that some lawmakers blame for the financial system's volatility.

- Public pension funds and other big investors have long squeezed out a few extra bucks by lending stock held in their portfolios -- for a fee -- to short sellers. Now those funds are starting to feel a squeeze of their own. The collapse of Lehman Brothers Holdings Inc. and Washington Mutual Inc. have set off new troubles in the securities-lending business, and the recent freeze in short-term debt markets has only compounded the problem.

CNBC.com:

- Dizzying drops like the Dow Jones industrial average's 7 percent plunge Monday may prompt U.S. securities regulators to extend a short selling ban beyond Thursday. "Certainly a lot of hedge funds would like the orders to expire, particularly the disclosure rule because that is what is keeping them from trading," said Laurel FitzPatrick, a partner who heads the hedge fund practice at law firm Ropes & Gray. Several managers said they have asked the Managed Funds Association, the industry lobby group, to appeal to regulators on their behalf, saying they want MFA lawyers to underscore just how debilitating the bans really are.

NY Times:
- Lee S. Ainslie, Louis M. Bacon and Daniel Loeb are some of the most successful hedge fund managers around. But even they lost big lately as the markets turned chaotic. Funds managed by the three money managers all lost at least 5 percent of their value in September, leaving them in an even deeper hole for the year.

AppleInsider:
- Adobe(ADBE) is nearly done with a version of its Flash Player for the iPhone that could be released 'in a very short time' if it passes Apple's(AAPL) App Store screening process, an Adobe official said this week.

Hartford Courant:

- When a Democratic takeover of Congress put Christopher Dodd in charge of the powerful Senate Banking Committee, Connecticut's senior senator eagerly met with reporters, outlining his generally pro-industry positions, but pledging to put consumers — and the long-term health of the economy — first. "At the end of my tenure on this committee," Dodd said in early 2007, "I want it to be said that the safety and soundness of our financial institutions was not weakened on my watch." Financial-sector firms — mortgage firms, insurance companies, accountants, brokerage houses, hedge funds — are among the most generous political donors in America, lavishing more than $1 billion on candidates this decade. And in Congress, few politicians have fared better than Dodd. some of Dodd's heartiest patrons have become the poster companies for the Wall Street implosion: AIG Insurance, Lehman Brothers, Merrill Lynch and Bear Stearns.

Reuters:

- President George W. Bush on Tuesday signed into law a mammoth spending bill to keep the government running until early March 2009 that includes a $25 billion loan package for troubled automakers.

- The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD,said its holdings rose 4.2 percent on Wednesday to a record 755.26 tons from 724.63 tons as of Sept. 30. The trust has seen its holdings rise more than 20 percent since Lehman Brothers filed for bankruptcy protection on Sept 15. XAUEXT-NYS-TT. Buying of gold for ETFs, which issue securities backed by physical stocks of a commodity, has been a major source of demand for the precious metal in recent years.

Financial Times:
- Hedge funds on Tuesday closed out one of their worst-ever quarters as US managers braced for an extension of the short-selling clampdown which has robbed them of one of their most popular strategies. The hedge fund business has been left reeling by the combined forces of greater regulation - including the banning of short selling on certain financial stocks by the US Securities and Exchange Commission and other regulators across the world - the threat of investor withdrawals, a flight from risk and a squeeze on leverage. According to latest figures from Hedge Fund Research, the industry data provider, the hedge fund market is on course for its worst year of performance since at least 1990, when its records began. The ban on short-selling of certain financial stocks, although only temporary, has led many in the hedge fund market to question the very basis of their business model. Funds that make money from short selling are also constrained on another front: stock lenders have been recalling their stock, and some, such as Vanguard, have suspended their stock lending programs altogether. This has made it harder to find stocks to borrow, or it means the fund must pay a higher price to borrow stock. Short sellers borrow their stocks from long-only investors such as mutual funds and pension funds, through stock lending programs.

- The pressure on regulators and accounting rulemakers to ease fair value accounting standards in an effort to help end the financial crisis has been intensified by politicians. Nicolas Sarkozy, French president, is to urge his European counterparts to back changes that would introduce more flexibility in the accounting rules. David Cameron, leader of the UK's opposition Conservative party, said the rules had made the crisis worse and needed to be addressed. Robert Rubin, former US Treasury secretary and currently a senior adviser to Citigroup, said fair value accounting worsened the financial sector's problems. He told a Financial Times conference that fair value "is not serving our system well" and urged regulators to change the rules.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (THO), boosted target to $30.

Night Trading
Asian Indices are +.25% to +2.25% on average.
S&P 500 futures -.48%.
NASDAQ 100 futures -.84%.

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Earnings of Note
Company/EPS Estimate
- (ATU)/.54

- (WWW)/.59

- (SMSC)/.25

- (MU)/-.23

- (BLUD)/.24

Economic Releases
8:15 am EST

- The ADP Employment Change for September is estimated at -50K versus -33K in August.

10:00 am EST

- ISM Manufacturing for September is estimated at 49.5 versus 49.9 in August.

- ISM Prices Paid for September is estimated at 73.0 versus 77.0 in August.

- Construction Spending for August is estimated to fall .5% versus a .6% decline in July.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil build of 2,750,000 barrels versus a -1,520,000 barrel drawdown the prior week. Gasoline supplies are estimated to fall by -2,050,000 barrels versus a -5,895,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -4,176,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by 5.5% versus a -10.7% decline the prior week.

Afternoon:

- Total Vehicle Sales for September are estimated to fall to 13.5M versus 13.7M in August.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Challenger Job Cuts report, Merrill Lynch Global Energy Conference, (ENER) Investor Day, (OKS) Analyst Meeting, (SFE) Analyst Day could also impact trading today.

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

Stocks Finish at Session Highs, Boosted by Financial, Technology, Construction, Gaming and REIT Shares

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In Play

Stocks Soaring into Final Hour on Bargain-Hunting, Short-Covering and Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Gaming longs, Computer longs and Internet longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is elevated. Today’s overall market action is bullish. The VIX is falling 15.3% and is elevated at 39.71. The ISE Sentiment Index is below average at 117.0 and the total put/call is high at 1.25. Finally, the NYSE Arms has been running low most of the day and is currently .54. The Euro Financial Sector Credit Default Swap Index is falling 11% 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 falling 2.0% to 171.50 basis points. The TED spread is falling 11.3% to 3.14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 7 basis points to 1.56%, which is down 106 basis points in less than three months and at the lowest level since January 2003, when deflation was the concern. The Goldman Sachs Hedge Fund VIP Index(favorite longs of the hedge fund community) is rising 3.9% today after yesterday’s steep decline. This index is now down 18.7% for the quarter. I think much of yesterday’s decline was related to hedge fund redemption selling. I am hearing more and more chatter of coordinated global rate cuts, which would be a large positive. As well, Reuters reported over the last hour that the SEC will say the results of disorderly transactions are not determinative when measuring fair value. This should have been done a long time ago, but nonetheless would be another large positive. The US dollar continues to trade very well and I suspect this will again begin to weigh on most commodities over the coming weeks. Weekly retail sales rose 1.4% this week versus a 1.5% gain the prior week. The four-week average of weekly retail sales is a gain of 1.6%, which is below the long-term average, but well above the .6% gain during February of this year. The main negatives I see today are that breadth isn’t that great and some key gauges of credit angst continue to rise. These gauges need to begin to meaningfully reverse to ensure a sustainable stock rally. Nikkei futures indicate a +450 open in Japan and DAX futures indicate an +106 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, less financial sector pessimism and short-covering.

Today's Headlines

Bloomberg:
- The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe. The 15-nation currency also weakened against the British pound after Belgian Prime Minister Yves Leterme said Dexia, the world's biggest lender to local governments, will receive about $9.2 billion to shore up its capital. The dollar rose against the yen on speculation the U.S. Senate will salvage a $700 billion bank-bailout plan as early as tomorrow after Congress rejected it yesterday.

- The ruble fell against the dollar and was headed for its biggest monthly drop versus Russia's currency basket since its introduction in 2005, as stocks slid after U.S. lawmakers rejected a $700 billion bank bailout. The currency dropped as Russia's benchmark Micex stock index declined 2.7 percent, after trading was halted for two hours. ``There has been a change in the mood among investors toward Russia and all these people have unwound their long ruble positions,'' said Gaelle Blanchard, an emerging-markets currency strategist in London at Societe Generale SA. ``We're in the worst-case scenario for Russia now, from everything being OK to a very, very black picture.''

- The perceived risk of a bond default by Ireland surged to a record after the government said it will guarantee the deposits and borrowings of six lenders. Credit-default swaps on Ireland's government bonds jumped 27 basis points to 60, according to CMA Datavision prices at 6:10 p.m. in London, after earlier reaching an all-time high.

- Copper will average $5,000 a metric ton in the first quarter, about a fifth less than today, and betting against the metal is one of the lowest-risk trades in commodities right now, Barclays Capital said.

- Corn dropped for a fourth day and is set for a record quarterly loss. Before today, corn had lost 32 percent in the quarter, soybeans had the worst slide since June 2004 and wheat marked the largest quarterly decline since March 1986.

- There is a “decent chance” that European central banks will enact “emergency” interest-rate cuts as soon as this week to calm financial markets and spur economic growth, Citigroup Inc. economists said.

- South Korea, Taiwan and Indonesia placed bans on short selling as declines in global stock markets deepened.

- The U.K.'s securities markets regulator will investigate short-selling of British banks and financial-services companies to determine whether any illegal market abuse occurred, a person close to the planned probe said. The Financial Services Authority will examine whether false rumors or leaks were spread in the weeks before the London agency temporarily banned short-selling of U.K. financial institutions on Sept. 18, the person said.

- President George W. Bush and Senate leaders vowed today to revive a $700 billion financial rescue plan amid evidence voters and lawmakers regretted yesterday's U.S. House vote to kill the bailout.

- Crude oil futures are heading for their biggest quarterly decline since 1991 amid concern that slowing economic growth will curtail global demand and as the dollar advanced. ``Had you told me July 11 that we've got two hurricanes coming, one that will hit Louisiana and one that will hit Texas, we've got an OPEC cut coming, we've got Russia going into Georgia and a number of attacks into Nigeria, I would have said without a second's hesitation that we would have been over $200, no question,'' he said. U.S. gasoline stockpiles fell to an 18-year low in the week ended Sept. 12 after the hurricanes struck Texas and Louisiana, according to the U.S. Energy Department. U.S. refiners operated at 66.7 percent of capacity in the week ended Sept. 19, the lowest since at least 1989, because of storm damage.

- The Federal Deposit Insurance Corp. will ask Congress for permission to increase deposit insurance limits, House Financial Services Committee Chairman Barney Frank said in a memorandum to members of his panel.

Wall Street Journal:

- Don't Panic. By throwing out a deeply flawed bailout plan, the House may have created an opportunity to craft a more effective response to the financial crisis.

- Hedge Funds May See Key Employees Walk.

- It seems Friday is a bad day to hold a debate. Last week’s presidential debate between John McCain and Barack Obama was the least watched televised debate in modern history, according to Nielsen Media Research. Just 52.4 million people tuned in to watch the first presidential debate. The second lowest was the 1976 debate between Gerald Ford and Jimmy Carter—and even they nabbed 62.7 million viewers. The highest was the 1980 debate between Ronald Reagan and Jimmy Carter with 80.6 million viewers. There were no televised debates in 1972, 1968, and 1964.

Lloyd’s List:

- Ships that were scheduled to be demolished because of their age are being “pressed” to continue hauling cargoes as falling prices for scrap metal cut margins for companies that break up such vessels. Indian and Bangladeshi buyers are prepared to pay $570 per lightweight ton for ships for demolition, down from a record $750 a ton previously, the report said.

LA Times:
- No more wondering where your hamburger came from, or where your lettuce and tomatoes were grown: Starting this week, shoppers will see lots more foods labeled with the country of origin. It's a federal law years in the making but timely, as China's milk scandal and the recent salmonella-tainted Mexican peppers have prompted concern over the safety of imported foods.

MSNBC.com:

- After making the rounds of the morning cable news shows, McCain held an economic roundtable this morning and reiterated his call on the Bush administration for immediate action. “Inaction is not an option,” McCain said. “In light of the House’s failure to act, this morning, I spoke to the president about two things that the administration has not done, but should do following the inaction of Congress.”

Reuters:
- Gold held by New York's SPDR Gold Trust GLD, the world's largest gold-backed exchange-traded fund, jumped by nearly 30 tonnes on Monday, the World Gold Council confirmed on Tuesday. Total holdings jumped to a new record high of 752.2 tonnes -- about one third of global gold mine output -- and have climbed around 130 tonnes since mid-month as investors flock to bullion for security as the financial crisis threatens to worsen.

- Investments betting that commodity futures prices will move higher have drastically diminished over the past two months due to the global credit crisis, according to data released on Monday. The amount of so-called long-only money has shrunk by as much as $50 billion, with the sharpest drops in agricultural futures and oil markets. "The tidal wave of investment into commodities which occurred in the first quarter has collapsed," CitiGroup said in a research note on Monday. It said that since July, the net long position has collapsed from $58 billion to $8 billion. While investor interest in U.S. crude oil has hit its lowest level in more than two years, Swiss bank UBS noted that some of the sharpest fund outflows have thus far been money invested in agricultural futures through commodity indexes. "Large outflows from agricultural index investments continue, this past week amounting to $1.44 billion," UBS said, basing its estimate on data released by the U.S. Commodity Futures Trading Commission, or CFTC. "Over the past quarter, index investors have sold $9.1 billion worth of agricultural index positions, reversing the inflows of 2007 and 2008," UBS said. The CFTC had estimated at the end of June that there was a total of $200 billion tied to index-related commodity investments. CitiGroup estimated on Monday that total positions on commodities indexes had dropped to around $100 billion. Not all commodities saw an exodus in long money, however. Gold, regarded a safe-haven investment in times of trouble, saw a jump of 38,361 net long contracts held by speculators, who include those with index exposure, over the last two weeks. That accounted for a 46 percent rise since September 16.

- The Financial Accounting Standards Board, which sets U.S. accounting rules, is in discussions with the U.S. Securities and Exchange Commission about whether more guidance on fair value accounting rules is needed, a person familiar with the matter said.

TimesOnline:
- "The credit crisis is definitely kicking in for the hedge fund industry now," said Andrew Shrimpton, the former head of hedge fund regulation at the Financial Services Authority (FSA), who now runs a consultancy, Kinetic. "We are being approached by hedge funds considering voluntary fund liquidations on a weekly basis," he said. "The number of funds that are worried about redemptions is higher than it's ever been." Several hedge fund managers reported that companies running funds of hedge funds were particularly vulnerable as nervous high net worth individual investors move to invest their capital in areas such as cash or gold that are perceived to be less risky. One manager at a London hedge fund, one of the most successful in its field last year, said: "Investors are scared, they want cash. We are not going to be immune from that."

Bear Radar

Style Underperformer:
Small-cap Growth (+.95%)

Sector Underperformers:
Alternative Energy (-1.81%), Airlines (-.78%) and Biotech (-.08%)

Stocks Falling on Unusual Volume:
RCRC, TEN, CLWR, ISRG and HIG

Stocks With Unusual Put Option Activity:
1) SBAC 2) FWLT 3) FITB 4) OMX 5) MAS

Bull Radar

Style Outperformer:
Large-cap Value (+4.94%)

Sector Outperformers:
Banks (+10.7%), I-Banks (+6.17%) and Wireless (+4.03%)

Stocks Rising on Unusual Volume:
BK, RIO, RTP, VIP, STO, PTRY, ESC, PANL, AAPL, ASML, GOOG, AMZN, RIMM, MATW, OTTR, NGPC, DMND, INFY, CELG, MGRC, ICON, ARBA, CMCSA, EZPW, CMCSK, BIDU and FWLT

Stocks With Unusual Call Option Activity:
1) AMT 2) MAS 3) SOV 4) JBL 5) ERTS