Stocks Mostly Lower into Final Hour on Rising Credit Market Angst, Rescue Package Worries, Global Growth Concerns

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Medical longs, Biotech longs, Computer longs and Commodity/Emerging Market shorts. I haven’t traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is falling .95% and is very high at 35.40. The ISE Sentiment Index is very low at 86.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running above average most of the day and is currently .94. The Euro Financial Sector Credit Default Swap Index is rising +7.03% today to 115.67 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 +2.03% to 161.75 basis points. The TED spread is rising 21.1% to 3.03 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 11 basis point to 1.75%, which is down 87 basis points in about 10 weeks and at the lowest level since July 2003, when deflation was the concern. The rise in the US dollar is a positive, given recent worries over the rescue plan and rising expectations for a Fed rate cut in October. Fed fund futures now imply a 78.0% chance for a 25 basis point cut on Oct. 29, up from 58.0% yesterday. The continuing rise in gauges of credit market angst is a large negative. If these don’t reverse over the next few days, equities will likely come under pressure again. Nikkei futures indicate a -195 open in Japan and DAX futures indicate an +45 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower commodity prices and bargain-hunting.

Today's Headlines

Bloomberg:

- Crude oil fell .76/bbl. after a government report showed that US fuel consumption fell. Fuel demand averaged 19.5 million barrels a day during the past four weeks, down 5.3% from a year earlier, the Energy Dept. said today. Oil and gasoline supplies fell as refiners slashed operating rates to 66.71%, the lowest since record keeping began 19 years ago, the dept. said. Gasoline supplies fell 5.9 million barrels to 178.7 million barrels, the lowest since 1967.

- Goldman Sachs Group Inc. led a decline in the cost of protecting bank bonds from default after the Wall Street firm won the backing of billionaire investor Warren Buffett. Credit-default swaps on Goldman tumbled 54 basis points to 320, according to CMA Datavision prices at 7 a.m. in New York. Contracts on Merrill Lynch & Co. dropped 37 basis points to 281 and Morgan Stanley fell 25 to 487. Citigroup Inc. decreased 12 basis points to 210 and Bank of America Corp. fell 11 to 132, CMA prices show.

- The Canadian housing market is headed for a meltdown because household finances are in even worse shape than in the US or the UK, said David Wolf, chief strategist at Merrill Lynch Canada.

- Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending. ``Economic activity appears to have decelerated broadly,'' Bernanke said today to a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16.

- Morgan Stanley(MS), the second-largest bank in commodities trading, will seek U.S. regulatory approval to retain its oil tankers, metals dealing and raw-materials businesses after becoming a commercial bank this week.

- Goldman Sachs Group Inc.(GS), Wall Street's most profitable firm, is paying a ``steep'' price to gain investors' confidence in its earnings prospects.

Reuters:
- Texas oil magnate T. Boone Pickens' hedge funds have lost around $1 billion this year, including $270 million of personal losses, The Wall Street Journal said. One fund focused on energy stocks was down almost 30 percent through August, the paper said adding that a smaller commodity-focused fund is down 84 percent.

Manager-Magazin:

- Allianz SE doesn’t expect economic growth in Germany in the second half of this year, CEO Diekmann said. Declining commodity prices could lead to a recovery of domestic demand in 2009, Diekmann said.

Bursa:
- Romanian real estate sales declined an annual 43% in the first half as foreigners invested less amid growing financial turmoil. The volume of sales dropped to $1.3 billion in the first half and the decline will continue over the next year, citing a study by real estate broker Jones Lang LaSalle Inc.

The Economic Times:

- Rising delinquencies have taken their toll on the Inida’s consumer finance companies. A majority of non-banking finance companies (NBFCs), with a foreign parentage, are moving aggressively to close down their branch networks. GE Money Financial Services, the consumer finance arm of General Electric(GE), is said to have slashed its branch network by more than half, while Standard Chartered Bank-promoted NBFC, Prime Financials now left with barely six branches from a peak of over 50, according to bank officials. Defaults have been on the rise, primarily due to a bout of interest rate hikes and a crackdown on collections. It is not just in consumer finance that companies are taking a hit. For instance, banks are now facing the heat on the retail business front also. HSBC, which has suffered a huge loss in its credit card operations because of rising defaults, is now going slow on credit cards and personal loans.

Valor Economico:

- Brazilian farmers bought 29% less fertilizer in August compared with a year earlier. The decline follows early orders this year ahead of the 2008-2009 grains season and the weakening of the Brazilian real, which made fertilizer imports more expensive.

Bear Radar

Style Underperformer:
Small-cap Value (-.33%)

Sector Underperformers:
Airlines (-2.95%), Insurance (-1.15%) and Road&Rail (-1.05%)

Stocks Falling on Unusual Volume:
HEES, OTEX, FFIV and AAUK

Stocks With Unusual Put Option Activity:
1) SVNT 2) YUM 3) CVS 4) HNT 5) CRDN

Bull Radar

Style Outperformer:
Large-cap Growth (+.71%)

Sector Outperformers:
Semis (+1.94%), Homebuilders (+1.63%) and I-Banks (+1.39%)

Stocks Rising on Unusual Volume:
SPWR, TSL, PXD, STP, ENER, VRTX, FSLR, IPCS, CTXS, FMCN, JASO, CMTL, NTLS, AAPL, CRDN, HR, AITP, WFR, GS, EBS and KEX

Stocks With Unusual Call Option Activity:
1) CTXS 2) TIF 3) SIL 4) PWAV 5) SQNM

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- A 26-year ban on offshore oil drilling will be dropped as part of a year-end spending bill, said House Appropriations Committee Chairman David Obey. Eliminating the ban will allow the measure, which funds government operations through March 6, to get through Congress and be signed into law by President George W. Bush, Obey said. ``At least temporarily, the moratorium is lifted,'' Obey told reporters. ``This next election will decide what our drilling policy is going to be.''

- Goldman Sachs Group Inc.(GS) won the backing of Warren Buffett, the world's preeminent stock-picker, as the Wall Street firm seeks to raise cash from investors whose faith in the investment-banking business model has been shaken.

- J. Christopher Flowers, founder of private-equity firm J.C. Flowers & Co., was approved by U.S. regulators to acquire the First National Bank of Cainesville in Missouri, a move that may allow him to buy other lenders.

- The U.S. Commodity Futures Trading Commission has subpoenaed dozens of traders as it probes why a Nymex oil contract rose the most ever yesterday, two people briefed about the legal proceedings said. Subpoenas were sent to New York Mercantile Exchange oil traders who were active yesterday and on Sept. 19, said the people, who didn't identify the traders and asked not to be named because the process is private. ``I know for a fact that some members of Congress are working to include speculation legislation in the financial markets legislation,'' CFTC Commissioner Bart Chilton said yesterday in an e-mail. ``Those efforts, I think, may get fueled by the large spike in oil prices.''

- Senate Passes Energy Tax Bill Offering Solar Industry a Boost.

- Iranian President Mahmoud Ahmadinejad told reporters at the United Nations that every question about his nation's nuclear development program has been resolved and all that remains is U.S. ``propaganda.''

- Confidence among Japanese manufacturers held near a four-year low as the global financial crisis threatens to smother demand in the country's export markets and higher raw-material costs erode profits.

Wall Street Journal:
- City officials in Beijing are considering new measures to keep the Chinese capital's air clean after two months of successful emergency steps around the Olympics raised public hopes for a permanent improvement in the city's smoggy air. Some of the measures being mulled include increasing parking fees to discourage driving; charging people to drive in congested downtown areas, as London and some other cities do now; and auctioning automobile license plates to reduce the number of cars added to the roads.

- Despite having authored two autobiographies, Barack Obama has never written about his most important executive experience. From 1995 to 1999, he led an education foundation called the Chicago Annenberg Challenge (CAC), and remained on the board until 2001. The group poured more than $100 million into the hands of community organizers and radical education activists.

- Some hedge funds are starting to see increasing value in asset-backed securities as some investors believe financial markets are now nearing or have past their low point, even though depressed prices are still leaving some credit instruments offering twice the yield they would in bull markets.

MarketWatch.com:
- Markets’ problems haven’t deterred corporate insiders.

Business Week:

- With the collapse or conversion of big banks, smaller competitors stand to scoop up talent and M&A business. Some of their stocks are up sharply.

Fox News:
- The Delaware Senator took issue with an attack ad from his own side in an interview with CBS, telling Katie Couric that the Obama hit on McCain’s ignorance of computers and technology was “terrible.” The ad paints McCain as out of touch — and all but calls him ancient — but doesn’t mention that the Arizona Senator’s war injuries actually prevent him from using computers for an extended period.

NY Post:

- As the Securities and Exchange Commission continues its assault on short sellers, hedge funds are discussing legal action to challenge Chairman Chris Cox's recent moves - just as funds in the UK are considering lawsuits against their government regulator. Since Friday, Cox has enacted a hodgepodge of emergency rules in an effort to give struggling Wall Street firms time to recover from their recent battering, including a widespread ban on shorting of financial stocks, and requiring hedge funds to disclose what they short. That has prompted debate in the hedge fund world about what, if anything, might be done to temper efforts they say hurts good players along with the bad.

Chicago Tribune:

- Barack Obama's support from backers of Hillary Rodham Clinton is stuck smack where it was in June, a poll showed Tuesday, a stunning lack of progress that is weakening him with fellow Democrats in the close presidential race. The share of Clinton supporters saying they'll vote for McCain edged up from 21 percent to 28 percent, with the number of undecided staying constant, according to the survey, conducted by Knowledge Networks.

AP:

- The Federal Bureau of Investigation is investigating bankrupt investment bank Lehman Brothers(LEH), insurer American Intl. Group(AIG) and mortgage companies Fannie Mae(FNM) and Freddie Mac(FRE). The FBI is looking at potential fraud at the companies.

Financial Times:
- Man Group has asked to be added to the list of stocks in which short selling is banned, following fears that rival hedge funds unable to short banks, and insurers, are picking on it. Man, the biggest listed hedge fund, saw its shares tumble 35½p, or 8 per cent, on Tuesday to 398p, following a 6 per cent fall on Monday, which people close to the company said was partly due to bets against it as the biggest listed financial stock available for shorting. Hedge funds in private denied that there was any irony in having short selling - a key hedge fund strategy - banned in their own stock. The power of the short restriction was demonstrated last week when Man shares soared to 548p before plunging when investors realized the group was not on the restricted list.

- Hedge funds have started the first of what is expected to be a series of legal actions against administrators of the main European arm of Lehman Brothers (LEH) in an effort to recover $40bn of assets frozen when the business collapsed last week.

- Corporate America waded into the darkest days of the credit crisis with more cash than ever before, a sign many of the US's biggest companies have been bracing for signs that Wall Street's problems will infiltrate the rest of the economy. Excluding utilities and financial institutions, members of the Standard & Poor's 500 Index ended June with a record $648bn in cash and short-term securities.

- Investors in gold-backed exchange-traded funds (ETFs) have amassed a record 1,039.68 tons of bullion, becoming the largest holders of gold after the reserves of the US, Germany, the International Monetary Fund, Italy, France and Switzerland. Investors' bullion assets have risen by 31 per cent in the past 12 months and have almost doubled since September 2006, according to statistics compiled by the industry-backed World Gold Council. The world's largest bullion-backed ETF, the New York-listed SPDR Gold Trust, saw a 30.2 tonnes inflow on Monday, bringing its holdings to an all-time high of 709.2 tons.

Frankfurter Allgemeine Zeitung:

- Bert Ruerup, head of the council of economic advisers to the German government, expects economic growth in Germany to fall below 1% next year, citing Ruerup.

The Standard:

- Asia's hedge fund industry, one of the world's worst performers even before the latest surge in volatility, will see a major shake-out as the global financial turmoil shuts down a huge swath of managers.

Kyodo:

- Sumitomo Mitsui Financial Group Inc. will invest several hundred billion yen in Goldman Sachs Group Inc.(GS).

Xinhua News Agency:

- China pulled 7,074 metric tons of tainted dairy products from retail-store shelves, citing the State Administration of Industry and Commerce.

- Chinese Premier Wen Jiabao said Tuesday that China and the United States are not rivals but partners in cooperation and they should work together to further strengthen bilateral relations.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GILD), target $59. Our analysis suggests that Gilead will post upside to 3Q sales and EPS estimates driven by solid HIV sales. Our analysis suggest that domestic trends are more robust than expected, suggesting that the -21% sell-off from Aug. 12^th due to concerns about weak Q3 results are unfounded.

Night Trading
Asian Indices are -1.0% to +1.0% on average.
S&P 500 futures +1.31%.
NASDAQ 100 futures +1.32%.

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Earnings of Note
Company/EPS Estimate
- (NKE)/.93

- (PAYX)/.41

- (BBBY)/.46

- (RHT)/.18

- (CPRT)/.47

Economic Releases
10:00 am EST

- Existing Home Sales for August are estimated to fall to 4.94M versus 5.00M in July.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,500,000 barrels versus a -6,328,000 decline the prior week. Gasoline supplies are expected to fall by -3,600,000 barrels versus a -3,308,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -835,000 barrel drawdown the prior week. Finally, Refinery Utilization is expected to rise by +1.25% versus a -.86% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, (INTU) investor day, (LOW) analyst conference, (STL) investor day, Merrill Lynch Global Power/Gas Conference, UBS Global Life Sciences Conference, Deutsche Bank Leverage Finance Conference and CSFB Global Steel/Mining Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in financial shares offset losses in commodity stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.