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Thursday Watch

Late-Night Headlines
Bloomberg:

- US stocks may rebound as much as 50% next year as lower valuations and the government’s fiscal stimulus plans spur a rally that could “make or break” money managers, wrote Myles Zyblock, RBC’s chief institutional strategist. He advised buying healthcare companies, software producers and chemical manufacturers for their “liquidity and balance sheet strength.” The rally “could happen spontaneously or it might occur on the back of stabilization in the economic outlook,” he said. For the first time since 1958, the dividend yield on the S&P 500 exceeds the yield on a 10-year Treasury note, even as the stock benchmark trades below its average price-to-normalized earnings ratio, according to RBC. Deutsche Bank Alex Brown’s US Chief Investment Strategist echoed RBC’s forecast for a rally next year. US stocks will beat international equities because of the nation’s “timelier, more aggressive and further-reaching economic stimulus” plans, Baltimore-based Larry Adam said to investors.

- The cost of protecting corporate bonds from default dropped to a one-month low in the U.S. following the Federal Reserve’s statement yesterday that it will use “all available tools” to revive the economy. Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada declined 21 basis points to 223 basis points at 4:30 p.m. in New York, according to broker Phoenix Partners Group. The index, which typically falls as investor sentiment improves, has tumbled 41 basis points the past two days. It reached a record 289 basis points on Dec. 5. Bond prices have dropped so much that “even under very extreme economic assumptions, you’ll make money if you’ve got staying power,” said Larry Kantor, Barclays’ head of research. In London, contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings fell 8 basis points to 187 basis points, a two-week low, according to JPMorgan Chase & Co.

- The cost of protecting investors in Asia-Pacific bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Australia index declined 22.5 basis points to 367.5 as of 11:22 a.m. in Sydney, Citigroup Inc. data show. The Markit iTraxx Japan index was quoted 22 basis points lower at 301.5 at 9:40 a.m. in Tokyo, according to Credit Suisse Group AG.

- Crude oil traded near the lowest in more than four years on skepticism that OPEC’s larger-than- expected supply cut will be enough to boost prices as fuel demand drops. Oil extended yesterday’s 8.1 percent decline after OPEC agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day. U.S. fuel consumption in November declined 7.4 percent from a year earlier to the lowest for the month since 1998, the American Petroleum Institute said yesterday. “Worldwide demand for fuels is falling more than expectations,” said Ken Hasegawa, a commodity derivatives sales manager at Newedge Group in Japan. “The OPEC cut was much bigger than expected but it won’t be supportive for this market. This market can go down to $30.” “I don’t think OPEC can keep this production cut at the level they decided,” said Newedge’s Hasegawa. “They have to make money. Cheating will begin and the market knows that.”

- The yen fell from near a 13-year high against the dollar after Japanese Finance Minister Shoichi Nakagawa signaled the nation is ready to sell the currency. The yen also declined against the euro after Nakagawa told reporters that “we will take necessary steps if needed” to limit the currency’s advance and protect the overseas earnings of Japanese exporters.

- Nike Inc.(NKE), the world’s largest athletic-shoe maker, said second-quarter profit rose, helped by sales in Europe and Asia. Net income climbed 8.8 percent to $391 million, or 80 cents a share, in the three months ended Nov. 30, beating analysts’ estimates, from $359.4 million, or 71 cents, a year earlier. Sales advanced 5.8 percent to $4.59 billion, the Beaverton, Oregon-based company said today in a statement.

- President-elect Barack Obama may request $850 billion or more in spending to boost the economy, an amount that far exceeds the total that Congress has been contemplating, an Obama adviser said.

- Increases in consumer confidence, reductions in credit spreads and a lower unemployment rate might indicate that the US retail sector is beginning to turn around, panelists said at a Bloomberg News retail forum. Optimism needs to return to inspire consumers to start spending again, Cathy Leonhardt, a managing director at Peter J. Solomon Co., said today during the “Outlook for Holiday Sales and Beyond” panel held at Bloomberg’s NY offices.

- Wal-Mart Stores Inc.(WMT), the world’s largest retailer, will begin selling Apple Inc.’s(AAPL) iPhone on Dec. 28, according to store representatives. The mobile-phone departments at three Wal-Mart stores in California, Nevada and Washington, contacted by Bloomberg today, confirmed the date and said they didn’t know pricing. Apple offers two models of the Web-surfing phone, for $199 and $299.

- Gary Gensler, a former U.S. treasury undersecretary and an ex-partner at Goldman Sachs Group Inc., will be named by President-elect Barack Obama to head the Commodity Futures Trading Commission, according to a Democratic official. Gensler, 51, served as undersecretary for finance at Treasury during President Bill Clinton’s administration. More recently he was an economic adviser to New York Senator Hillary Clinton in her failed effort to win the Democratic nomination.

Wall Street Journal:

- It's being sold as the new New Deal. As president, Barack Obama plans hundreds of billions of dollars in new spending and tax cuts. The economic recovery package will cost a minimum of $600 billion over two years. It could flirt with $1 trillion. He has said repeatedly that in crisis, he sees opportunity -- to rebuild a national infrastructure that has been neglected for decades and to make down payments on policy initiatives that would have taken years to negotiate. Mr. Obama has announced the five broad categories of the plan: transportation and traditional infrastructure; school construction; energy efficiency, especially in government buildings; broadband Internet access; and health care information technology.

- Chances that Illinois would swiftly oust its governor faded Wednesday. The combative new lawyer for Gov. Rod Blagojevich arrived at the state capitol with a host of objections to the impeachment process just getting under way. Committee members themselves at times seemed unsure about how to proceed. And the state Supreme Court declined to hear a motion by state Attorney General Lisa Madigan to rule that the governor was unfit to serve.

- General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.

CNBC.com:
- Short of the long list of shorts out there in Apple Inc.(AAPL) stock, I don't think anyone would argue about what seems to be a year's worth of heavy market manipulation surrounding this company.

- There may be a recession going on but don't look for signs of it in the toy aisle. There, you may still see mom-to-mom combat for the hottest toys — that is, if you can even find them. In fact, in raising its forecast for the holiday-shopping season, America's Research Group cited toys among the top-three selling items this season, along with kids' clothes and electronics.

- U.S. oil demand is expected to grow only 1 million barrels per day, or 0.2 percent, over the next two decades, as higher vehicle fuel standards and increased use of renewable fuels stifle petroleum consumption, the government's top energy forecasting agency said on Wednesday. In its annual long-term forecast, the Energy Information Administration said this is the first time in more than 20 years the agency has projected virtually no growth in U.S. oil consumption. "U.S. oil use remains near its present level through 2030 as modest growth in overall liquids demand is met by biofuels," the agency said.

NY Times:

- Another day brings more news of the downsizing taking place at the Citadel Investment Group, Kenneth C. Griffin’s giant hedge fund firm. Citadel, based in Chicago, shut down its special situations group last week after its strategy racked up big losses for the firm. People close to the group said that at one point several years ago its strategy covered as much as 15 percent of Citadel’s total assets under management, but it had recently been pared down to about 3 percent of the firm’s overall portfolio as several investments turned sour. Through November, the special situations portfolio had sustained losses of about 61 percent, according to a person briefed on the matter.

- The White House and the Treasury are deep into negotiations with General Motors and Chrysler over a reorganization plan that could result in freeing up more than $14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official. The Bush administration appears to want an agreement with the automakers before Dec. 25.

USA Today.com:

- Mortgage applications climbed last week, driven by refinancings, as borrowing costs fell, the Mortgage Bankers Assocation said Wednesday. Homeowners' push to cut expenses by refinancing will intensify after the Federal Reserve aggressively cut short-term interest rates to near zero Tuesday. That sliced the yield on 10-year Treasury notes, a peg for fixed mortgage rates, to its lowest level since 1951. Average 30-year fixed mortgage rates fell 0.26 percentage point during the week to 5.18%, lowest since June 2003, the MBA said.

Chicago Sun-Times:

- President-elect Barack Obama's incoming chief of staff, Rahm Emanuel, was pushing for Obama's successor just days after the Nov. 4 election, sources told the Chicago Sun-Times. Emanuel privately urged Gov. Blagojevich's administration to appoint Obama confidante Valerie Jarrett, and the Sun-Times learned Tuesday that he also pressed that it be done by a certain deadline. Jarrett was initially interested in the U.S. Senate post before Obama tapped her to be a White House senior adviser, sources say. The disclosure comes days after Obama's camp downplayed Jarrett's interest in the post. At one point, an "emissary" who said he represented Jarrett had discussions with Blagojevich chief of staff John Harris and the governor about naming Jarrett to the post, according to a criminal complaint. Emanuel's discussions do not indicate he was involved in dealmaking with the governor. However, his deeper involvement creates a sticky political situation for Obama.

Reuters:

- KKR upbeat on portfolio at investor meeting. Private equity firm Kohlberg Kravis Roberts & Co told investors at a recent meeting that 70 percent of its private equity portfolio was performing on or above target, according to a source who attended the meeting. KKR executives made the comments at a meeting for investors at a New York hotel a week ago and also said the company had $16 billion not yet invested, the source said.

- The U.S. Agriculture Department said on Wednesday it would provide $212 million to buy and donate U.S. commodities to help feed 7.5 million people in 13 countries around the world. The department said the donation, made under USDA's Food For Progress program, will benefit people in Africa, Asia, Latin America and the Middle East.

- World iron ore contract prices will drop 15-20 percent next year, Australian iron ore prospector Centrex said on Thursday.

Financial Times:
- A provisional rescue package being drawn up for Britain’s beleaguered car manufacturers will have “very tough” conditions attached, in part to avoid setting too generous a precedent for other bail-outs, according to government insiders. The Treasury wants to ensure any taxpayer loans or credit guarantees offered to the motor companies are on terms at least as demanding as those a commercial lender would require. The Financial Times understands this could include taking shares as collateral, raising the prospect of a taxpayer stake in a manufacturer that defaulted on repayment.

TimesOnline:
- Barack Obama is today expected to announce his own choice for the new chairman of the Securities and Exchange Commission as the Wall Street watchdog comes under fire to explain how it failed to spot the world's biggest fraud. The US President Elect, who takes office on January 20, is to name Mary Schapiro, currently head of Wall Street's new self-regulator, the Financial Industry Regulatory Authority. The appointment of Ms Schapiro will trigger speculation that a merger between the SEC and America's commodities regulator - the Commodity Futures Trading Commission which she chaired during the Clinton Administration - may be on the cards. Ms Schapiro will also be under intense pressure from Mr Obama to help rewrite the Wall Street rule book which is structured around regulations that are seventy years old. That new rule book is expected to address sensitive issues such as whether hedge funds should come under close regulatory scrutiny and short-selling regulations.

Xinhua News Agency:

- Shanghai Port posted a 78% fall in container traffic for export in November, citing Shanghai Customs. Containerized exports from the Shanghai Port to the European Union fell 28% in the first 11 months, while exports to the US rose 28% from a year earlier.

South China Morning Post:

- General Electric’s(GE) GE Money arm will end offering new home loans and other lending in Hong Kong, citing the head of the unit in the city. The decision is in line with the company’s strategy to redeploy capital of the organization to areas that will generate higher returns.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CMC), target $17.

- Added (CAG) to Top Picks Live list, target $29.

Morgan Keegan:

- Rated (LLL) Outperform.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures +.03%.
NASDAQ 100 futures unch.

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Earnings of Note
Company/EPS Estimate
- (DFS)/.13

- (LEN)/-1.64

- (FDX)/1.58

- (ORCL)/.34

- (ZQK)/.25

- (WOR)/.39

Economic Releases
8:30 am EST

- Initial Jobless Claims for last week are estimated to fall to 558K versus 573K the prior week.

- Continuing Claims are estimated to fall to 4375K versus 4429K prior.

10:00 am EST

- Philly Fed for December is estimated to fall to -40.5 versus -39.3 in November.

- The Leading Indicators for November are estimated to fall .4% versus a .8% decline in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Fisher speaking, the Treasury’s Paulson speaking, weekly EIA natural gas inventory report, (BMNM) Analyst Meeting and (AG) Analyst Meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by airline and financial 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 Mostly Lower, Weighed Down by Utility, Tech, Bank and Energy Shares

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In Play

Stocks Lower into Final Hour on Profit-taking and More Shorting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly bullish as the advance/decline line is about even, most sectors are rising and volume is about average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 5.3% and is elevated at 49.60. The ISE Sentiment Index is slightly above average at 164.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running high most of the day, hitting 1.45 at its intraday peak, and is currently 1.11. The Euro Financial Sector Credit Default Swap Index is falling 4.68% today to 133.96 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 8.2% to 232.33 basis points. The TED spread is plunging 13.74% to 157 basis points. The TED spread is now down 309 basis points in just over two months. The 2-year swap spread is down 2.39% to 81.75 basis points. The Libor-OIS spread is plunging 14.5% to 137 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 19 basis points to .34%, which is down 227 basis points in about five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .01%, which is down 2 basis points today. 1-month US Dollar-based Libor is plunging another 30 basis points to .58% today. It has declined 402 basis points since October 10^th. The recent plunge in gauges of credit angst is a huge positive. As well, the financials are displaying more action indicative of a meaningful bottom on the reversal higher in (MS) shares despite a very poor earnings report. Considering the move lower in the US dollar, recent record economic stimuli, a record OPEC supply cut and the recent rise in gold, oil trades very heavy. This could have some to do with President-elect Obama’s recent cabinet picks. He named Tom Vilsack Agriculture Secretary today. Here is a summary of Vilsack’s energy plan when he was running for President. With the S&P 500 hovering right above its 50-day moving-average I suspect some large funds are taking profits and initiating new shorts here. I still expect another meanginful stock surge higher from current levels before year-end. Nikkei futures indicate an +253 open in Japan and DAX futures indicate an +54 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices, less financial sector pessimism and diminishing credit market angst.

Today's Headlines

Bloomberg:
- Mortgage applications in the U.S. increased 2.9 percent last week as more homeowners refinanced to take advantage of lower interest rates.

- BP Capital LLC, the money manager founded by billionaire T. Boone Pickens, said the redemption rate at its equity fund was 65 percent as the company waived the normal requirements for investors to withdraw cash. Pickens said Sept. 30 on CNBC that 15 percent of his hedge funds’ investors asked for the option to withdraw their money. His company lost $2 billion this year since July as oil and natural gas prices slid, according to an Oct. 26 edition of CBS Corp.’s “60 Minutes.” Next year “is going to be a pretty sick year for energy, but the first of the year 2010 you could work yourself back up,” Pickens said at the time.

- The cost of borrowing in dollars in London for three months tumbled after the Federal Reserve chopped its key interest-rate target to as low as zero and said it will flood the economy with cash. The London interbank offered rate, or Libor, that banks say they charge each other for such loans fell 27 basis points to 1.58 percent today, the lowest level since July 2004, according to British Bankers’ Association data. It was the largest decline since Oct. 22. The one-month and overnight dollar rates also dropped and rates in Asia slid. The Libor-OIS spread narrowed. “It’s all coming down, there’s significant easing in funding pressures,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, narrowed 28 basis points to 140 basis points today, the least since Sept. 23. The TED spread, the difference between what the U.S. government and banks pay to borrow for three months, declined 27 basis points to 155 basis points, the lowest level since Sept. 12, the last working day before Lehman Brothers Holdings Inc. collapsed.

- Investors seeking safety in Treasuries may be missing out on opportunities created by forced selling in credit markets, according to James Grant, editor of Grant’s Interest Rate Observer. Investment-grade corporate bonds are paying record yields relative to benchmark rates, “in this time of zero yield elsewhere,” Grant said today in a Bloomberg Television interview. Residential mortgage-backed securities and bank loans secured by assets are also attractive now because money managers forced to dump the securities to meet investor redemptions have made them artificially cheap, he said.

- The U.S. stock rally spurred yesterday by the Federal Reserve’s rate cut pushed the Standard & Poor’s 500 Index above its average level during the past 50 days, a signal to some traders that the advance will continue.

- GMAC LLC said more investors agreed to the sweetened terms of a debt swap, advancing the auto and home lender’s goal of transforming into a bank and getting a U.S. bailout. Investors holding about $16.6 billion of bonds tendered their notes, the Detroit-based company said in a statement sent by PR Newswire today. That’s more than the $10.5 billion that a lawyer representing a group of bondholders yesterday said was tendered. The offer was designed to help avert a collapse and pave the way for GMAC to convert to a bank holding company, giving it access to the Treasury’s $700 billion rescue fund and allowing it to sell bonds backed by the government.

- OPEC, supplier of more than 40 percent of the world’s oil, agreed to cut production quotas by a larger-than-expected 9 percent to revive prices as a global recession reduces demand for crude. The Organization of Petroleum Exporting Countries agreed to a quota for 11 of its members of 24.845 million barrels a day, starting Jan. 1, from its current target of 27.308 million barrels a day, OPEC President Chakib Khelil said. The record 2.46 million barrel-a-day cut is larger than a 2 million barrel indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

- Oil fell to the lowest level in more than four years as OPEC failed to convince traders that the glut in crude will diminish and the U.S. government said supplies climbed for the 11th time in 12 weeks. “It’s less than meets the eye,” said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York. “This may stem the bloating in stocks but isn’t enough to get rid of the surplus.” “They are facing the distinct possibility of oil falling to $30 a barrel and even lower,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. Supplies at Cushing, Oklahoma, where oil that’s traded in New York is stored, climbed 21 percent to 27.5 million barrels, the highest since May 2007. “The big build at Cushing shows that in a contango market everyone who can is taking delivery, which makes it much more difficult for OPEC to hold it together,” Barakat said.

- Morgan Stanley(MS) reported a $2.2 billion fourth-quarter loss, wider than the most pessimistic analyst's estimate, as investment-banking fees slid and the value of fixed-income securities declined. The loss of $2.24 a share for the three months ended Nov. 30 compared with a $3.59 billion loss, or $3.61, in the same period a year earlier, the New York-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was for a 34-cent loss, with no estimates exceeding $1.15. The shares jumped 10.3% percent in New York trading despite the news.

Wall Street Journal:

- Low-Interest Mortgages Are the Answer. Stop the decline in home prices, stop the crisis.

- Winners of the Credit Crunch.

CrunchGear:

- A new program called Television for iPhone is now available and offers “50 shows from 30 channels” on demand. It’s not live TV - that would be hard - but it’s basically rehashed content from CNBC, CNN, CBS, and Comedy Central.

Reuters:
- An aggressive rate cut by the Federal Reserve on Tuesday did little to lower U.S. home loan costs, but the Fed's promise to expand a massive mortgage debt purchase program if needed should push rates down. The average 30-year fixed mortgage rate was 5.30 percent late Tuesday after the Fed sliced short-term lending rates to near zero, according to HSH Associates, a mortgage information provider. Rates should decline further as the Fed's sweeping debt purchase programs kick in, housing analysts said.

Telegraph:
- New York is turning on the financial community from which much of its wealth has been created, increasing taxes for hedge fund managers and on luxury goods in a move that will make the financial capital less attractive for the uber-rich. The state of New York, led by Governor David Paterson, is raising taxes in order to close a budget deficit that is expected to rise to $13.7bn (£8.8bn) next year. The news may help London retain its title as it battles to keep its status as the world's premier global financial capital, a crown London Mayor Boris Johnson has warned London could lose.

Borsen:

- The investment arm of the Novo Nordisk Foundation Novo A/S plans to double investments in smaller biotechnology companies as the financial crisis sends the cost of takeovers down, citing Ulrik Sprok, managing partner at Novo A/S.

Caijing Magazine:
- The unemployment rate among China’s 140 million migrant workers may have risen to 7% as a cooling economy forces companies to slash jobs, citing a labor ministry official. More than 10 million farmers who had moved to cities to work had lost their jobs by the end of November, the official said. About 4.85 million migrant workers returned to their hometowns in 10 provinces across the nation by the end of last month, citing a labor ministry survey.

Xinhua News:

- China had 290 million Internet users at the end of November, 14.6% more than it had at the end of June, citing the Ministry of Industry and Information Technology.

Bear Radar

Style Underperformer:
Large-cap Growth (+.05%)

Sector Underperformers:
Utilities (-1.79%), Defense (-.34%) and Drugs (-.23%)

Stocks Falling on Unusual Volume:
RIO, CEG, DB, HBC, CIG, HMC, AAPL, STRL, ROCK, SIVB and KNM

Stocks With Unusual Put Option Activity:
1) CX 2) MAS 3) ROH 4) IPAS 5) CEG