Stocks Substantially Lower into Final Hour on Profit-taking, Global Growth Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Computer longs and Internet 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 falling and volume is below average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 11.8% and is very elevated at 53.50. The ISE Sentiment Index is below average at 115.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running very high most of the day, hitting 2.98 at its intraday peak, and is currently 2.98. The Euro Financial Sector Credit Default Swap Index is rising 1.79% today to 95.0 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 3.36% to 181.03 basis points. The TED spread is falling another 5.33% to 211 basis points. The TED spread is now down 253 basis points in about three weeks. The 2-year swap spread is rising .72% to 105.50 basis points. The Libor-OIS spread is falling 9.01% to 193 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis points to .94%, which is down 169 basis points in about four months and at the lowest level since January 1999. Today’s action is very disappointing. Losses aren’t that surprising given how much we had rallied, but the magnitude of the losses is. Financials are especially weak, which is always a large negative. On the positive side, a very high NYSE Arms reading, combined with below average volume, usually indicates the bears are running low on firepower. As well, credit angst indicators continue their rapid improvement. Given how much Asia has rebounded of late, I suspect severe losses could occur there tonight, as well. Nikkei futures indicate a -300 open in Japan and DAX futures indicate a -106 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking and global growth worries.

Today's Headlines

Bloomberg:
- GLG Partners Inc. said it will suspend redemptions from two of its hedge funds because of ``adverse economic'' conditions after they lost about a third of their value this year. GLG will stop investors from making withdrawals from the GLG Market Neutral Fund and GLG Credit Fund, it said in a statement today. The Credit Fund dropped 35 percent and Market Neutral 29 percent through Sept. 30, and they suffered further losses in October as convertible bonds and loans slumped.

- The cost of borrowing dollars in London for three months fell to the lowest level in almost four years as central bank cash injections helped ease the global credit drought. The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 20 basis points to 2.51 percent today, the lowest level since December 2004, the British Bankers' Association said. The overnight rate slid about 6 basis points to 0.32 percent, a record low for a fifth day.

- Interest rates on U.S. commercial paper dropped to the lowest in about four and a half years as companies issued less of the debt to the Federal Reserve. Interest rates on the highest-ranked 30-day commercial paper fell 0.52 percentage point to 1.22 percent, the lowest since June 2004, according to yields offered by companies and compiled by Bloomberg. Yields on 90-day paper fell 0.41 percentage point to 2.21 percent, 0.34 percentage point below the Fed's rate.

- The cost of protecting Japanese and Australian corporate bonds from default declined as bank borrowing costs fell and shares advanced. The Markit iTraxx Japan index of credit-default swaps fell 15 basis points to 205 as of 12:56 p.m. in Tokyo, according to prices from Morgan Stanley. The iTraxx Australia declined 17.5 basis points to 212.5, Citigroup Inc. data show.

- Asia's leaders, led by an ascendant China, say they hope Barack Obama didn't really mean those campaign promises to protect American trade. And if he did, they are in better shape to object than ever before. To Asian ears, Obama's calls for tougher labor and environmental rules and steps to reduce the U.S. trade deficit sound like thinly veiled protectionism, just as a global financial crisis makes exports more crucial than ever.

- Funding Drought Slams Chinese Plans as Banks Shun Plea to Lend.

- Barack Obama's top priority will be appointing a Treasury secretary and White House chief of staff. The leading candidates: two Clinton administration stalwarts, Lawrence Summers and Representative Rahm Emanuel.

- Crude oil fell more than $4 a barrel after an Energy Department report showed an unexpected increase in gasoline inventories. Gasoline supplies rose 1.12 million barrels to 196.1 million barrels last week, the report showed. A 650,000-barrel drop was forecast, according to the median of 14 analysts surveyed by Bloomberg News. Stockpiles of crude oil and distillate fuel, a category that includes heating oil and diesel, also climbed. ``There is plenty of inventory, given how weak demand is,'' said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. ``The report was mildly bearish because of the product numbers.'' U.S. fuel demand during the past four weeks averaged 19.1 million barrels a day, down 6.7 percent from a year ago, the report showed. Gasoline consumption over the period was down 2.3 percent at 9 million barrels a day.

- Yahoo! Inc.(YHOO) Chief Executive Officer Jerry Yang will probably have to go back to the negotiating table with Microsoft Corp.(MSFT) Yang's options are dwindling after Google Inc.(GOOG) scrapped an agreement today to place ads on Yahoo's Web pages. Yahoo's track record of declining market share and stagnant cash flow suggest Yang can't go it alone, said Mark Mahaney, an analyst at Citigroup Inc. in San Francisco.

- California, Arizona, Florida Move to Ban Gay Weddings.

MediaWeek:
- ABC led this Election Night Tuesday, with coverage of the Presidential race at an average 9.3 rating/13 share in the overnights from 8-11 p.m., according to Nielsen Media Research data. Election coverage finished second overall on NBC (8.5/12 from 8-11 p.m.), followed by CBS (4.7/ 7 from 8-11 p.m.), which took a significant hit minus its regularly scheduled Tuesday line-up (NCIS, in particular), and Fox (4.0/ 5 from 8-10 p.m.). Four years earlier, coverage of the 2004 Presidential election (on Tuesday, Nov. 2, 2004) totaled a 26.9 rating/37 share in the overnights in prime time, with NBC first (11.1/15), followed by ABC (9.5/13) and CBS (6.3/ 9). Comparably, last night’s results were down across the board as follows:

Big 3 Networks: -16 percent
ABC: - 2
CBS: -25
NBC: -24

Fox was actually up last night, with a 14 percent increase over the 3.5/ 5 in the overnights on Nov. 2, 2004.

Globe and Mail:
- Forget blaming the global recession on dubious mortgage practices in the United States - blame high oil instead, says Jeff Rubin, chief economist at CIBC World Markets. “The recent spike in oil prices doesn't seem to get any credit for what's happening to the world economy now,” he says in an analysis released Monday. “That's odd, because it should.” High oil prices, on the other hand, have been responsible for four of the last five global recessions, he points out. This time around, oil prices, in real terms, have risen more than 500 per cent – that's twice the climb seen in the recessions of 1974 and the early 1980s. “If oil shocks half the size of the recent one caused the worst recessions in the last 50 years, they're a pretty obvious explanation for the recessions in oil-dependent Japan and Euroland earlier in the year,” Mr. Rubin says. High oil prices have meant a massive transfer of income from U.S. consumers to oil-producing countries, where savings rates are typically high, he argues. In the last five years, Mr. Rubin says, the annual fuel bill in the advanced countries belonging to the Organization for Economic Cooperation and Development, has grown by $700-billion (U.S.), of which $400-billion a year goes to OPEC producers. “If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it,” he says.

Interfax:

- Russia will maintain an oil production policy that’s independence from OPEC, Deputy Prime Minister Igor Sechin said. Russia should not lose money on crude production and will “cooperate with all players in the oil and gas sphere in the world,” said Sechin.

Folha de S. Paulo

- Brazilian Planning Minister Paulo Bernardo said the government cut its forecast for gross domestic product expansion in 2009 to 3.7% from 4.5% because of the global financial crisis. The government expects revenue next year to be $7.2 billion less than previously forecast and 5% inflation, compared with the central bank’s 4.5% target, citing Bernardo.

Deseret News:

- Iraqi officials said Wednesday they don't expect Barack Obama to withdraw U.S. troops hastily from Iraq because he told them last summer that he wouldn't make a decision without consulting them and U.S. commanders on the ground. With violence down and the economy No. 1 on American voters' minds, the Iraqis said they believe the new president will take his time before fulfilling his promise to end the war in Iraq. Exit polls Tuesday showed that only one in 10 American voters considered Iraq their main concern in choosing a president, suggesting that Obama will focus more on the economy when he takes office Jan. 20.

Bear Radar

Style Underperformer:
Large-cap Value (-3.32%)

Sector Underperformers:
Coal (-8.54%), Alternative Energy (-6.33%) and Steel (-5.95%)

Stocks Falling on Unusual Volume:
ITWO, NILE, SPWRA, PZZA, FSLR, NSR, KRO, SAM, PWR, REV and PXD

Stocks With Unusual Put Option Activity:
1) KMP 2) XRX 3) PXD 4) PG 5) RL

Bull Radar

Style Underperformer:
Mid-cap Value (-.82%)

Sector Underperformers:
HMOs (+1.89%), Homebuilders (+.29%) and Networking (+.03%)

Stocks Falling on Unusual Volume:
MHS, HUM, HNT, HMC, TM, TDS, SPSS, QGEN, KNDL, AAON, OSIR, DRYS, ANDE, YHOO, AFAM, IACI, CLHB, KSWS, SNDK, CHSI, CBST, GB, RL, CAJ, CGX and WPC

Stocks With Unusual Put Option Activity:
1) VSEA 2) ADI 3) VRTX 4) BZH 5) RL

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting Japanese corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 15 basis points to 205 as of 8:59 a.m. in Tokyo, according to prices from Morgan Stanley.

- Yields on Fannie Mae(FNM), Freddie Mac(FRE) and Ginnie Mae mortgage bonds tumbled to the lowest in almost two weeks relative to US government notes, potentially lowering home-loan rates. The difference between yields on Washington-based Fannie’s current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries fell about 23 basis points to about 183 basis points as of 3:50 pm in New York.

- Scrap steel buyers in Asia are canceling purchases after prices tumbled more than 80% in the past four months as demand slumps, traders said. “There are buyers in China, India and Europe that are literally fighting for their survival,” said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc., a trade assoc. representing more than 1,600 companies. “Steel prices have fallen off a cliff, and they just don’t have the money to honor their contracts.” Prices fell to $120 a metric ton this month, from $730 a ton in July, said Jeff Allman, managing director of ferrous trading at St. Louis-based Kataman Metals Inc., which does more than $1 billion in scrap trades a year. There may be a global ferrous, or steel-rich, scrap oversupply of more than 5 million tons, he said. Surplus ferrous scrap is sitting in yards, ports and on ships as contracts are renegotiated, said Kataman Metals’ Allman. Profit margins have dropped to at most $20 a ton, from as much as $200 a ton previously, he said.

Wall Street Journal:
- New data from the Depository Trust & Clearing Corp. speak volumes about trading activity in the vast credit-default-swap market. On Tuesday, the DTCC began publishing weekly numbers on its Web site that detail how much of these insurance-like contracts are tied to individual companies and countries. The information -- previously unavailable to the public -- showed that 10 debt issuers most widely referenced by the swaps include Turkey and Russia and Wall Street firms Morgan Stanley(MS) and Goldman Sachs Group Inc.(GS).

- Key battleground wins in Ohio, Pennsylvania and Florida put Sen. Barack Obama over the top in a hard-fought presidential race, eliminating rival Sen. John McCain's path to the White House.

Reuters:

- Democrats appear certain to fall short in Tuesday's elections of obtaining a U.S. Senate majority big enough to clear Republican procedural hurdles that can kill legislation, senior party aides said. The aides said Democrats will likely gain at least six or seven seats, but not the nine needed to hit a "filibuster-proof majority" of 60 in the 100-member chamber.

- The fundamentals of the U.S. stock market have "improved radically" and declines in valuations to five-year lows are overblown, legendary investor and Vanguard Group founder John Bogle said on Tuesday. Bogle's comments, coming as U.S. stocks rose in their biggest Election Day rally, underlines an emerging streak of optimism on Wall Street over corporate earnings and the prospect of more measures to prevent the financial crisis from turning into a global recession. "It seems to me that people have lost sight of the fact that the fundamentals have improved radically," said Bogle. "The value of the U.S. stock market was $18 trillion a year ago. And now it's about $9.5 trillion or let's call it $10 trillion with today's rally. Anyone who believes that American business is worth $8 trillion less than it was a year ago I think is a fool," he told Reuters in a telephone interview.

- U.S. securities regulators will help speed efforts to create a central counterparty for the $55 trillion credit default swap market by temporarily exempting exchanges, dealers and other applicants from lengthy registration requirements, according to a document obtained by Reuters on Tuesday.

- The Treasury Department is exploring how best to expand its capital injection program to provide more liquidity to credit markets and is considering specialty finance firms in the process, a source familiar with the government's thinking said on Tuesday.

- Investment bank UBS(UBS)has slashed its commodities outlook for the second time in just a few weeks, predicting a slowdown in global growth in 2009 will eat deep into industrial raw material demand. The bank cut forecasts for commodity prices in 2009 by an average of 37 percent after its economists trimmed their forecasts for global growth next year to 1.3 percent from an earlier forecast of 2.2 percent. "This has a meaningful impact on commodity markets, pushing surpluses up further and, over the medium term, negating the positive effects of continued poor supply growth," the bank said in a note. "Key benchmark commodities oil and copper are forecast to average $60 a barrel and $1.30/lb ($2,866 a ton) respectively in 2009 and iron ore faces a 40 percent price decline for the next year's contract."

Financial Times:
- The lucrative fees charged by hedge funds will have to fall in the wake of the dire returns posted by the $2,000bn industry this year, according to the industry's own trade body. Alexander Ineichen, a member of the investor steering committee of the Alternative Investment Management Association, said he also feared that 80 per cent of hedge funds with less than $100m under management would fold as a result of the current woes, with 30-40 per cent of mid-sized funds disappearing, although the biggest names could benefit from industry consolidation. Mr Ineichen said the standard "two and 20" model of a 2 per cent flat fee and a 20 per cent performance fee would not survive the bloodletting. The average fund has lost 21.6 per cent over the past 12 months, according to data from Hedge Fund Research.

Financial Times Deutschland:

- European Central Bank Executive Board member Juergen Stark said the bank is ready to fight the deepening financial crisis and its effects on the economy, citing an interview. “We’re ready to use all instruments at our disposal and the main instrument is interest rate policy as long as our mandate” to contain inflation “allows it,” Stark said. The inflation environment “dramatically changed” as “economic dynamics slowed so much that we hardly will see second-round effects in the coming quarters,” he said. Economic growth in the euro region will be “very low well into 2009” and the recovery will be sluggish, Stark said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (EXPD), target $44.

- Reiterated Buy on (MGA), target $55.

Night Trading
Asian Indices are +1.0% to +4.50% on average.
S&P 500 futures -.11%.
NASDAQ 100 futures +.07%.

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Earnings of Note
Company/EPS Estimate
- (CTSH)/.37

- (PWR)/.28

- (COCO)/.07

- (FWLT)/.90

- (TWX)/.27

- (MHS)/.62

- (MMC)/.32

- (CKP)/.36

- (IACI)/.16

- (GGC)/-.39

- (DUK)/.44

- (RL)/1.25

- (RIG)/3.48

- (NWS/A)/.22

- (CSCO)/.39

- (CCI)/-.05

- (THQI)/-.38

- (AVB)/1.26

- (CNO)/.28

- (FCN)/.61

- (CUZ)/.25

- (VMC)/.84

- (DVN)/3.06

- (XTO)/1.00

- (WFMI)/.13

- (MDR)/.69

- (SLE)/.18

- (BDX)/1.11

Economic Releases
8:15 am EST

- The ADP Employment Change for October is estimated at -100K versus -8K in September.

10:00 am EST

- ISM Non-Manufacturing for October is estimated to fall to 47.0 versus 50.2 in September.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus a +493,000 barrel build the prior week. Gasoline supplies are estimated to fall by -650,000 barrels versus a -1,507,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,550,000 barrels a +2,325,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .2% versus a .59% increase the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Challenger Job Cuts report, (L) investor meeting, (SLE) analyst meeting, (CEPH) analyst day, Goldman Sachs Industrials Conference, Keefe Bruyette Woods Brokerage Conference and Goldman Sachs Software Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by automaker and financial stocks in the region. I expect US equities to open higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.