Stocks Lower into Final Hour on Financial Sector Pessimism, More Forced Selling, Rising Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs and Internet longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are falling and volume is light. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 10.3% and is very elevated at 61.89. The ISE Sentiment Index is low at 104.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running above average most of the day, hitting 1.35 at its intraday peak, and is currently 1.34. The Euro Financial Sector Credit Default Swap Index is falling 4.85% today to 102.0 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 2.3% to 186.25 basis points. The TED spread is rising 1.3% to 203 basis points. The TED spread is now down 261 basis points in about four weeks. The 2-year swap spread is falling 2.76% to 105.50 basis points. The Libor-OIS spread is falling 1.68% to 173 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 3 basis points to .95%, which is down 167 basis points in about four months and at the lowest level since January 1999. It is a big negative that US stocks are unable to mount a rally given recent losses, the Chinese stimulus plan and gains in overseas markets. Financials, REITs, Homebuilders and a number of market leaders are especially weak today. If a strong US stock rally doesn’t materialize over the next week as I expect, I would become concerned over the likelihood of a test of the lows before year-end. Nikkei futures indicate a -200 open in Japan and DAX futures indicate a -110 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more forced selling, shorting, financial sector pessimism and rising energy prices.

Today's Headlines

Bloomberg:
- Hedge funds run by Jeffrey Gendell and John Burbank III posted their worst monthly losses in October. Peter Thiel gave back gains made earlier in the year. Nobel-prize winner Myron Scholes froze his biggest fund.

- The cost of protecting corporate bonds from default fell to the lowest in three weeks after China pledged an economic stimulus package to counter the credit crunch that's dragging down growth from New York to Tokyo. Credit-default swaps on the Markit iTraxx Europe index of 125 companies with investment-grade ratings dropped 6.5 basis points to 128.5, the lowest since Oct. 17, according to JPMorgan Chase & Co. prices at 10 a.m. in London. In Tokyo, Japan's benchmark index declined 20 to 220, Morgan Stanley prices show. The Markit iTraxx Crossover index of credit-default swaps on 50 companies with mostly junk ratings dropped 21 basis points to 743, according to JPMorgan.

- The cost of protecting against a default by American International Group Inc.(AIG) dropped after the government expanded the insurer's rescue package. Credit-default swaps linked to AIG bonds fell to an upfront price of 20.5 percentage points from 45 percentage points, according to CMA Datavision in London.

- Fannie Mae(FNM) posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider's assets by at least $21.4 billion and said it may need to tap federal funds next year. In its first report since being seized by the U.S. government in September, Washington-based Fannie said its third- quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.

- Circuit City Stores Inc.(CC), the 59-year- old seller of televisions and computers, filed for bankruptcy protection, becoming the biggest retail casualty of the slowing U.S. economy and frozen credit markets.

- Goldman Sachs Group Inc.(GS), the Wall Street bank that cut 3,200 jobs last week, identified six equity analysts fired by the firm, including William Tanona, who covered companies such as JPMorgan Chase & Co., and Deane Dray, who followed General Electric Co. Charles Chon, Ajay Kejriwal, Lawrence Keusch and Peter Wahlstrom also left, according to a note the New York-based firm sent to clients.

- The cost of borrowing dollars for three months in London fell after China announced a $586 billion stimulus package and the Group of 20 nations urged central banks to counter the global credit freeze by cutting interest rates. The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 5 basis points to 2.24 percent today, the lowest level since November 2004, the British Bankers' Association said.

Wall Street Journal:

- President-elect Barack Obama will likely use his executive powers after taking office to block new oil drilling leases on environmentally sensitive land in Utah and to allow federal funding of stem-cell research, putting a quick mark on policy making. Mr. Podesta said Mr. Obama is "a transformational figure" and that the support he received among voters in some Republican states and conservative counties gives him a mandate to pursue his agenda aggressively. Ms. Jarrett, appearing on NBC's "Meet the Press," dismissed criticism from some Republicans that the appointment of Mr. Emanuel, a brash, Democratic street fighter who had served for years in the U.S. House, marked a break from Mr. Obama's pledge to move beyond partisan battles in Washington.

- Less than a month after walking away from Wachovia Corp., Citigroup Inc. is in discussions to acquire another U.S. bank, according to people familiar with the situation.

- Intel Corp.(INTC) is taking its next step in building a business in health care, introducing technology to help homebound patients with chronic medical problems. The Silicon Valley company, at a medical conference in New Orleans, announced a series of trials with health-care organizations of specialized hardware and software developed by the chip maker. The tests are designed to show whether the new tools bring improved results in treating conditions such as diabetes, hypertension and heart disease.

Washington Post:
- Howard Dean To Step Down as DNC Chair.

Wealth Bulletin:

- The decline in the hedge fund industry will wipe out tens of billions of dollars in fees they pay to investment banks next year, forcing banks to make further staff cuts and shift their focus to less lucrative customers. The closure of hedge funds, withdrawals by investors and deleveraging in the hedge fund industry, which has gathered pace over the past six weeks, has started to have an impact on sales and trading and prime brokerage revenues, the two major areas where hedge funds pay fees and commissions to banks.

Reuters:
- China's industrial production growth slowed to about 8 percent in the year to October, the first time it has been in single digits since the end of 2001, according to an official who is familiar with the data. In a sign of the anxiety behind China's spending push, attending officials were told to make "urgently implementing the central government's investment increase and other tasks to expand domestic demand the most important task in economic work," the report said.

- CVS Caremark Corp(CVS) said on Monday it is offering discounts of about 30 percent on fertility treatments to couples struggling with infertility and high medication costs.

Financial Times:
- For a man who used “Joe the hedge fund manager” as a spur against his opponent, Barack Obama’s first major political appointment is certainly perplexing. Emmanuel was popular among alternative investment firm employees: According to the Center for Responsive Politics, Emmanuel was the largest recipient of donations from workers at hedge fund and private equity firms this election cycle. While he backed the effort to close the deferred compensation loophole, Emmanuel was not as gung-ho as some of his colleagues when it came to raising taxes on the alternatives industry. He opposed closing the so-called ‘carried interest’ loophole, even writing a memo offering several options to keep it. And Emanuel worked at Wasserstein Perella (now part of Dresdner), earning some $16.2m in his three years as managing director. He also, err, served as a director of Freddie Mac - the troubled US mortgager and recipient of about $100bn in government-sponsored bailout largesse. Guess those hedge fund donations are paying off - no matter what the campaign slogans were.

Globe and Mail:
- As the controversy continues to simmer over the role of short selling in the stock market swoon, Canada's single biggest pension fund has quietly stopped providing short sellers with critical ammunition. The Canadian Pension Plan Investment Board said it stopped its securities-lending program for short-sellers in September because of increasing risk in the credit markets. Lending programs are profitable sidelines for many large pension plans and help short-sellers obtain stock.

Leader-Post:

- The wealth in Canada's oilsands, even taking into account the recent plunge in world oil prices, is nearly $1.5 trillion, more than four times the $342 billion officially estimated by Statistics Canada, argues a Canadian think-tank in a report released today. "The coming-of-age of the oilsands has transformed the Canadian economic landscape," it said. "With Canada now claiming the second largest oil reserves in the world, the importance of the oilsands to the rest of the world and its potential impact on the lives of Canadians cannot be underestimated."

Interfax:

- Russia should develop mechanisms to influence the price of oil, Prime Minister Vladimir Putin said today in Moscow. Russia must produce a “full set of measures” allowing the country to influence the market, Putin said.

Bear Radar

Style Underperformer:
Mid-cap Value (-2.50%)

Sector Underperformers:
I-Banks (-5.41%), REITs (-4.26%) and Utilities (-3.94%)

Stocks Falling on Unusual Volume:
XNPT, KCE, BKE, UNF, GS, RJF and BT

Stocks With Unusual Put Option Activity:
1) HMY 2) HOT 3) TYC 4) USG 5) MO

Bull Radar

Style Outperformer:
Mid-cap Growth (+1.05%)

Sector Outperformers:
Construction (+2.42%), Telecom (+1.96%) and Oil Service (+1.92%)

Stocks Rising on Unusual Volume:
ABB, ITG, GXDX, SRDX, PBCT, DRYS, EGLE, AAON, AFAM, LUFK, STST, FDRY, ATHN, APEI, SSRI, ISIS, AXYS, DWSN, IART, RAVN, XSD, SUR, PIV, RFG, PTE, AZN, HEP, NRT, PSJ, NC and DCO

Stocks With Unusual Call Option Activity:
1) ACAS 2) BP 3) CAM 4) AMAT 5) N/A

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Monday Watch

Weekend Headlines
Bloomberg:

- The Group of 20 nations is prepared to act ``urgently'' to bolster growth and called on governments to cut interest rates and raise spending as the world's leading industrialized economies battle the threat of a recession.

- The cost of protecting Asia-Pacific bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan Index fell 19 basis points to 221 as of 9:32 am in Tokyo, according to prices from Morgan Stanley. The iTraxx Australia was quoted 15 basis points lower at 240 in Sydney, Citigroup Inc. data show. Asia’s index of 50 investment-grade borrowers outside Japan, including the Thai government and Hong Kong’s Hutchinson Whampoa Ltd., declined 20 basis points to 320, according to ICAP Plc.

- Organized labor spent more than $100 million in support of Barack Obama and Democratic congressional candidates. It might not have been enough to deliver unions' top legislative priority. Democrats are short of the 60 Senate votes they need to overcome attempts to stall legislation. That doesn't bode well for a measure to require that companies recognize unions once a majority of their workers sign cards requesting a union rather than only after employees vote. Without the 60 votes, the bill may be in trouble. ``The bill will likely be subject to a filibuster,'' said Robert Lian, a labor lawyer in the Washington office of Akin Gump Strauss Hauer & Feld LLP. To pass the measure, Democrats will have to compromise, he said.

- It was bound to happen. And it should surprise no one that the French were the ones to initiate it. French President Nicolas Sarkozy last month proposed that European countries establish sovereign wealth funds to purchase stakes in key companies in the region to foil overseas ``predators'' seeking control at knockdown prices.

- China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world's fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.

- President-elect Barack Obama has no plans to cancel part of a US missile-defense system to be located in Poland, President Lech Kaczynski said on his Web site. Obama gave the Polish president his reassurance in a telephone conversation yesterday.

- Barack Obama’s office said the president-elect has made “no commitment” to a planned US missile-defense system, after remarks on the Polish president’s Web site suggested that Obama will press ahead with the shield.

- China’s steel production, the largest in the world, will rise at least 5% next year on the government’s $586 billion stimulus plan, according to Daiwa Securities Group Inc. The broker will revise its forecast of a 5% drop in 2009 steel production, analyst Helen Lau said.

- Commodity exchange-traded products had their worst-ever month in October, with outflows totaling $2 billion, Barclays Capital said. Energy products posted $750 million in withdrawals and those linked to agriculture and commodity indexes shrank by $500 million to $550 million each, the bank said. Overall assets under management declined 20% from September, Barclays said. “Retail investors are also now going through a phase of risk reduction in their commodity exposure,” Barclays said. “This is evident as even short ETPs across all sectors are seeing substantial outflows, with short energy ETPs seeing big falls at a tie when oil prices have been falling.” The S&P GSCI Index of 24 commodities plunged 28% last month, the worst performance since at least 1970.

- Billionaire Warren Buffett's Berkshire Hathaway Inc.(BRK/A) posted a fourth straight profit drop, the longest streak of quarterly declines in more than a decade, as hurricanes hurt returns at insurance operations and investments lost value.

- Russia, the world’s second-largest oil producer, will defy calls from Venezuelan President Hugo Chavez to join OPEC in cutting output and pursue an “independent” strategy, Finance Minister Alexei Kudrin said. ``The government isn't planning any restrictions of oil production in the near future,'' Kudrin, who also serves as deputy prime minister, said in an interview in Sao Paulo today. ``Of course we expect decline of oil prices'' through next year as economies of the biggest oil consumers, such as the U.S. and European Union countries, may contract, Kudrin said. Russia cut its forecast for the price of Urals, the country's major blend of oil, to $50 a barrel in 2009 on average, from $95 a barrel previously, Kudrin said. Urals crude traded at $55.71 a barrel on Nov. 7, 61% below its high of $142.50 in July.

- Russia's ruble may be devalued by as much as 30 percent as the drop in oil prices threatens to wipe out the $91.2 billion current-account surplus, according to Troika Dialog, the nation's oldest investment bank. ``Without an increase in oil prices or an improvement in the capital account of the balance of payments, the central bank will eventually have to devalue the ruble,'' Evgeny Gavrilenkov, Troika's Moscow-based chief economist, wrote in a note today. An average price for Urals crude, Russia's main oil-export blend, of $60 a barrel ``would imply a devaluation of the ruble against the bi-currency basket by 25 to 30 percent,'' he said.

- China will boost research into alternative-energy automobiles after investments totaling more than 200 billion yuan ($29 billion) failed to create a brand capable of rivaling Toyota Motor Corp. and Volkswagen AG. ``We should speed up the development of alternative-energy technologies,'' Wan Gang, China's science and technology minister, said at a conference in Tianjin on Nov. 8.

Wall Street Journal:

- Tuesday's election transformed John Rogers from an obscure money manager who eats at McDonald's every day into a confidant of the world's most-powerful man, come January.

- It is hedge funds' turn on Capitol Hill. The congressional committee that made headlines last month grilling former Lehman Brothers Holdings Inc. Chief Executive Richard Fuld and former executives of American International Group Inc. has summoned a handful of top hedge-fund managers to answer questions on topics ranging from their pay to influence on the markets.

Barron’s:

- Yale University’s strategy of investing heavily in illiquid assets may have hurt endowments that copied the allocation without the resources and talents of the Ivy Leaguer. David Swensen, chief investment officer of Yale, has led the university to invest 70% of its endowment in hedge funds, private equity and “real” assets such as timber, real estate and oil-and-gas properties. It's tough to gauge precisely the extent of the woes because most big universities haven't released information on their endowment returns since June 30, the traditional end of the academic fiscal year. Based on anecdotal evidence, however, and the turmoil in financial markets, the numbers aren't pretty.

MarketWatch.com:

- As the market evolves during the financial crisis, the Community Reinvestment Act may achieve new prominence among consumers, regulators and institutions.

The law, which encourages federally regulated banks and thrifts to provide credit to low- and moderate-income communities, has come under pressure from conservative critics who claim it fostered irresponsible lending and led, at least in part, to the subprime mortgage meltdown.

NY Times:

- Google(GOOG) at 10: Searching Its Own Soul.

- Google(GOOG) Signs a Deal to e-Publish Out-of-Print Books.

- It was a good campaign, and a historic victory. As the president-elect gets ready for new responsibilities, here are four ways to become a reliable steward of the economy:

- Wal-Mart(WMT) and McDonald’s(MCD) are using energy-saving appliances and recycled materials to build “green” locations to cut their operating costs and appeal to customers.

- Former Political Radicals See Rebirth of Activism.

CNNMoney.com:

- Gas prices near $2.25. AAA survey shows gas prices have fallen for 53 straight days. Lundberg survey finds that prices dropped a little more than 48 cents in the last two weeks.

- A snapshot of the global smartphone market issued Thursday by Canalys shows just how big a dent Apple’s iPhone made in the cellphone universe last quarter. With a surge of nearly 6.9 million shipments in calendar Q3, the iPhone leapfrogged past RIM (RIMM) and Motorola (MOT) to grab 17.3% of the smartphone market. That put Apple (AAPL) in second place after Nokia, and helped cut the market-leader’s share from 51.4% to 38.9%.

EE Times:

- Qualcomm Inc.(QCOM) used a 27 percent year-over-year growth rate to jump to ninth among the largest semiconductor suppliers through the first three quarters of 2008, while DRAM-supplier Qimonda dropped 12 positions from 18 to 30 overall, according to market research firm IC Insights Inc.

Reuters:

- Iraqi security forces supported by U.S. firepower killed a senior al Qaeda leader who made car bombs and ran Islamist militant cells throughout northern Iraq, the U.S. military said on Friday.

- There were fresh calls on Sunday for the Bush administration to help stalled U.S. automakers, but Democratic and Republican officials said taxpayers cannot repeatedly support business rescues.

Financial Times:

- AIG(AIG) is closing in on a new government bail-out that will allow the troubled insurer to reduce interest payments and give it more time to sell assets and save itself from collapse.

- US President-elect Barack Obama intends to push a comprehensive programme of social and economic reform beyond an immediate emergency stimulus package, Rahm Emanuel, the next White House chief of staff, indicated on Sunday. Mr Emanuel brushed aside concerns that an Obama administration would risk taking on too much when it takes office in January. He said Mr Obama saw the financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years. Tackling the meltdown would not entail delays in plans for far-reaching energy, healthcare and education reforms when all three were also in crisis, he said. “These are crises you can no longer afford to postpone [addressing].” Economists have estimated the US budget deficit could more than double next year to almost $1,000bn, raising concerns about whether Mr Obama could deliver on expensive campaign promises including $150bn in investments in alternative energy over the next decade and a $60bn-$110bn plan to provide universal health insurance for Americans. In contrast to 1992, when Mr Clinton postponed longer-term investments in favour of urgent budget deficit reduction, advisers to Mr Obama, including Mr Summers, who is tipped by some as his first Treasury secretary, are tilting towards investments.

Telegraph:

- UK Families and small businesses to receive billions in tax cuts.

Tages-Anzeiger:

- Credit Suisse Group has closed six funds that aimed to make money for investors even if markets fell. The funds were worth 1.1 billion francs at the end of September, compared with a peak value of 7 billion Swiss francs.

Interfax:

- Russian oil exports have dropped 25% below “normal” levels, OAO Transneft CEO Tokarev said.

IMF:

- The IMF is urging countries to stimulate their economies in the face of a bigger-than-expected slowdown in the global economy triggered by recent financial turmoil.

Globe and Mail:

- If you're the right sort of investor, beaten-down blue-chip companies are starting to look like a smart buying opportunity. Not the shares of these companies. That's a story well told already. Today, we're talking about bonds.

- It’s been 10 years since the birth of the euro zone, and the dream of global economic clout. But now the blanket is tearing, threatening a disastrous derailment of the monetary union.

Globo TV:

- European Central Bank President Jean-Claude Trichet said he can’t rule out a further cut in interest rates in December, citing an interview. While tensions in money markets persist, they are “progressively alleviating,” Trichet said.

The Economic Times:

- The numbers are shocking. Something that no sector has witnessed in India so far. The textile sector which was reeling under rupee pressure and rising cotton prices since the beginning of this year has lost close to 700,000 jobs in the past six months.

South China Morning Post:

- Chinese shipyard orders fell 11% in the first nine months of 2008 as demand slowed from the US and Europe, citing the China Assoc. of the National Shipbuilding Industry. It’s the first drop in orders since the first half of 2005 and the trend is expected to continue. The association also warned of a further drop in vessel prices next year because deliveries will be double this year’s figure.

Haaretz:

- The Hamas leader in Gaza, Ismail Haniyeh, said on Saturday his government was willing to accept a Palestinian state within the 1967 borders.

Etemaad:

- Iranian Parliamentary Speaker Ali Larijani said US President-elect Barack Obama’s comments on Iran’s nuclear program are a step down “the wrong path.” Obama’s Nov. 7 comment, when he said Iran’s potential development of nuclear weapons is unacceptable, “is the daily talk of previous US leaders” Larijani said.

Weekend Recommendations
Barron's:
- Made positive comments on (WBSN), (STR) and (HLS).

- Made negative comments on (BX) and (RJF).

Citigroup:

- Rated (KMB) Buy, target $65.

Morgan Stanley:

- Reiterated Overweight on (AMAT), target $17.

Night Trading
Asian indices are unch. to +4.0% on avg.
S&P 500 futures +1.62%.
NASDAQ 100 futures +1.38%.

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Earnings of Note
Company/Estimate
- (LNY)/.32

- (ENER)/.26

- (AIG)/-.80

- (CKEC)/.02

- (SBUX)/.13

- (ROK)/.97

- (MWY)/.38

- (SATS)/.07

- (TSN)/.18

- (DISH)/.58

- (PPC)/-2.02

- (SIRI)/-.08

Upcoming Splits

- None of note

Economic Releases

- None of note

Other Potential Market Movers
- The (HLS) Investor Day, (MVSN) Investor Day, Rodman & Renshaw Investment Conference could also impact trading today.

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