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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting investors in Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Australia index was quoted 5 basis points lower at 230 points as of 9:22 am in Sydney, Citigroup Inc. data show.

- Fannie Mae(FNM), Freddie Mac(FRE) and housing industry officials plan a new mortgage modification program designed to cut payments for hundreds of thousands of homeowners facing foreclosure, according to people briefed on the matter. Under the proposal, mortgage servicers will work with borrowers to reduce monthly payments to 38 percent of their income, a level considered a threshold for affordability, using a combination of lower principals, interest-rate reductions and extensions, the people said.

- China may have more work ahead to revive investors' confidence in the world's worst-performing major stock market after unveiling a 4 trillion yuan ($586 billion) stimulus plan. ``You really need the retail investors to be jumping in with both feet in order to get the market hopping,'' Chamie said. ``I just don't see that materializing over the next year or so as we get increasing reports of jobs losses, factories shutting down and slower growth and export activity.''

- Australia's economy, which cruised through the 1997 Asian financial crisis and the dot-com bust, is facing the prospect of its first recession in almost two decades. Waning global demand for commodities threatens to staunch a five-year flood of export earnings that helped boost Australian incomes by the most in more than 30 years.

- Fannie Mae(FNM) may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

- The International Energy Agency may cut its 2009 oil demand forecast for a third month as the threat of the worst recession since World War II saps fuel consumption, former IEA analysts said. The Paris-based adviser to 28 oil consuming nations will reduce the estimated growth in global demand from 700,000 barrels a day, or 0.8 percent, in its next monthly report on Nov. 13, said four analysts who used to work at the IEA and are now at banks. ``Given the downward revisions to the IMF data, it is highly likely they will revise demand down,'' said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York, who expects demand to shrink 0.4 percent, or 320,000 barrels a day in 2009. ``Anything above zero demand growth now is an optimistic forecast.'' Eagles joined JPMorgan in September after five years at the IEA, where he was editor of the monthly report. ``They have been overly optimistic about demand for the last few years,'' said David Knapp, senior editor of Energy Intelligence Group and a former director of the IEA's Oil Markets Division. Gasoline demand from U.S. motorists declined for 28 consecutive weeks and is 3.9 percent lower than a year ago, according to spending data released by MasterCard Inc. on Nov. 4. Ian Taylor, chief executive officer of closely held commodity trader Vitol Group, said Oct. 28 that crude consumption may decline by 1 million barrels a day next year. U.S. fuel demand in the four weeks ended Oct. 10 sank to 18.6 million barrels a day, the lowest since June 1999, according to the Energy Department. China's gross domestic product may advance 7.5 percent or less next year, the weakest since 1990, according to estimates by Credit Suisse AG, UBS AG and Deutsche Bank AG.

- American Express Co.(AXP) won Federal Reserve approval to convert to a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet.

- Las Vegas Sands Corp.(LVS), the casino company controlled by billionaire Sheldon Adelson, is suspending construction in Macau to conserve cash as it works to raise $2.14 billion in capital following a loss in the third quarter.

- Sparx Group Co., Asia's biggest hedge-fund manager with $8.5 billion in assets, posted a first- half loss as slumping stock markets and investor redemptions shrank assets under management by more than a third from a year earlier.

Wall Street Journal:
- In an aggressive move targeting the root cause of the global financial crisis, Citigroup Inc. plans to announce Tuesday that it is offering to modify the terms of as much as $20 billion in mortgages for borrowers who are current on their loan payments but at risk of falling behind.

- President-elect Barack Obama risks a political backlash and legal battles if he tries to reverse moves by President George W. Bush to expand natural-gas drilling in Utah. Mr. Obama must walk a tightrope as he tries to balance the expectations of his environmentalist supporters against broader public concerns over energy prices and his campaign promises to promote energy independence, said Denise Bode, chief executive of the American Clean Skies Foundation, a nonprofit advocacy group backed by the natural-gas industry. Ms. Bode noted that Mr. Obama has talked about the need to develop the nation's natural-gas resources.

CNBC.com:
- Layoffs have dominated the news this past few months, but there are some companies and sectors that are still hiring during this down turn said Monster Worldwide(MWW)CEO Salvatore Iannuzzi.

USA Today.com:

- Gasoline prices fell another 17.6 cents the past week, with average prices in three states dipping below $2 a gallon.

Reuters:

- Some $2.1 trillion of European company and bank debt matures in the next three years, raising "substantial refinancing risk", Standard & Poor's said on Tuesday. With new bond issues at a virtual standstill after the bankruptcy of Lehman Brothers, fears have intensified that companies will be unable to raise fresh debt to pay off maturing bonds, potentially pushing them into default. "Funding pressures in Europe have escalated sharply since September as stress in the global financial system accelerated," S&P analysts said in a note.

- U.S. banking regulators plan to release an interagency statement in the next few days encouraging well-capitalized banks to keep lending to credit-worthy borrowers, the director of the Office of Thrift Supervision said. "There is a concern that healthy institutions are sitting idle and not responding to the needs of credit-worthy borrowers," OTS Director John Reich told Reuters in an interview on Monday.

Financial Times:
- Mexico is taking steps to protect itself from the oil price remaining below $70 a barrel in the clearest sign yet of the concerns of producer countries at the impact of the global economic slowdown on their revenues. The world's sixth biggest oil producer hedged almost all of next years oil exports at prices ranging from $70 to $100 at a cost of about $1.5bn through derivatives contracts, according to bankers familiar with the deal. The cover is far higher than the country - which relies on oil for up to 40 per cent of government revenue - usually seeks. Last year, Mexico hedged 20-30 per cent of its exports.

- China needs a true change of course. The country’s problem is more than a mere global downturn. Its development model is no longer sustainable. China's growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. The time for change is now.

Taiwan’s United Daily:

- Chinese commercial airfares have dropped by as much as 80% on some domestic routes because of a slump in travel demand.

Investor Daily Indonesia:

- Indonesia’s carmakers plan to cut their output as demand slows and new car inventories climb, citing officials at PT Honda Prospect Motor and PT Krama Yudha Tiga Berlian.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DISH), target $32.

- Rated (NPSP) Buy, target $11.

Night Trading
Asian Indices are -1.75% to -.25% on average.
S&P 500 futures +.42%.
NASDAQ 100 futures +.34%.

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Earnings of Note
Company/EPS Estimate
- (FOSL)/.51

- (TJX)/.55

- (BOBE)/.44

- (CNQR)/.14

- (IPI)/.73

Economic Releases
- None of note

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, IDB/TIPP Economic Optimism Index, (PCL) Analyst Day, (BBX) Reception, (STR) Analyst Meeting, (SPWRA) Analyst Day, (FISV) Investor Conference, (UNM) Analyst Meeting, (VMED) Analyst Meeting, (SNS) Analyst Meeting, Rodman & Renshaw Investment Conference, Robert W. Baird Industrial Conference, DB-Biotech Boston Confab, Merrill Banking/Financial Services Conference, UBS Building Conference and Piper Internet Summit could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and automaker stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower, Weighed Down by REIT, Homebuilding, I-Banking, Airline and Alternative Energy Shares

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In Play

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