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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The Federal Reserve may need to consider dipping further into its toolbox as Congress tries to revive legislation aimed at rescuing banks. One of the main remaining options for Fed Chairman Ben S. Bernanke to cushion the economy and shore up confidence in financial markets is cutting the benchmark interest rate, economists said. A reduction may be coordinated with other central banks.

- The Reuters/Jefferies CRB Index of 19 commodities plunged 5.9 percent, the biggest drop since record-keeping began in 1956, on concern that a spreading financial crisis may slash demand for raw materials. The CRB has slumped 28 percent from a record on July 3 as tightening credit markets, failing financial institutions and slowing economic growth heightened demand concerns. The drop today was led by crude oil, gasoline and cocoa futures. Crude and gasoline both fell as much as 11 percent. Cocoa dropped as much as 8.3 percent.

- India's rupee may extend yesterday's drop to a five-year low as the trade deficit swells and overseas investors dump local shares, said treasurers at Larsen & Toubro Ltd., Hero Honda Motors Ltd. and Essar Group. Dwindling capital inflows, elevated oil prices and slowing economic growth will undermine the rupee, said Yeshwant M. Deosthalee, chief financial officer at Mumbai-based Larsen & Toubro, India's biggest engineering company. A weaker currency may also exacerbate an inflation rate near a 16-year high by increasing import costs, said Ravi Sud, chief financial officer at Hero Honda, the nation's largest motorcycle maker. ``The drop in the rupee is unprecedented and never have I seen such a move in my 28-year career, barring the devaluation in 1991,'' said N.S. Paramasivam, who trades an average $200 million a day as head of treasury in Mumbai at Essar, which has businesses in shipping, steel and oil.

- Rice Says US May Engage Syria as Middle East Tensions Ease.

- BHP Billiton Ltd.(BHP) fell the most in 21 years in Sydney trading, leading declines in raw material producers after commodities suffered the biggest drop in five decades on concern the credit crisis will reduce demand. BHP, the world's largest mining company, slumped as much as 9.9 percent to A$30.85, the biggest intraday decline since Oct. 23, 1987. ``You're seeing a general flight from commodity players around the world,'' said Sean Fenton, who manages the equivalent of $540 million at Tribeca Investment Partners in Sydney. ``We've had a huge boost to the economy from positive commodity prices. If that starts unwinding, we'll find ourselves with problems.''

- The pound tumbled against the US dollar by the most in 16 years after the U.K. government seized Bradford & Bingley Plc, Britain's biggest lender to landlords, as the credit crisis deepened in Europe.

- Platinum will swing from a deficit to the largest surplus in 10 years as demand declines amid an economic slowdown, said Paul Walker, CEO of London-based research company GFMS Ltd. “Supply has not fallen by as much as people expected,” he said. “Demand in auto catalysts and jewelry, especially in China, is really falling.”

- Bain Capital LLC and Hellman & Friedman LLC agreed to buy most of the asset-management unit of bankrupt Lehman Brothers Holdings Inc. in a deal that values the business at $2.15 billion, about half their initial bids.

- Japan's industrial production fell more than economists estimated in August as automakers cut output and exports to the U.S. declined the most on record.

Wall Street Journal:
- House Republicans blamed the failure of the $700 billion Wall Street rescue plan Monday on House Speaker Nancy Pelosi (D., Calif.), saying that Pelosi had been too partisan in a floor speech prior to the vote. House Minority Leader John Boehner (R., Ohio) said that Pelosi’s speech “poisoned” the Republican caucus and “caused a number of members we thought we could get to go south.” “I do believe that we could have gotten there today, had it not been for the partisan speech that the Speaker gave on the floor of the House,” Boehner said. (video)

- The House of Representatives defeated the White House's historic $700 billion financial-rescue package -- a stunning turn of events that sent the stock market into a tailspin and added to concerns that the U.S. faces a prolonged recession if the legislation isn't revived.

Business Week:

- Wachovia(WB): Just the Plum Citigroup(C) Needed.

Reuters:

- The White House said on Monday that President George W. Bush would make a statement on the financial bailout plan on Tuesday at 7:45 a.m. (1145 GMT).

- Federal Reserve monetary policy over the long run must be aimed at maintaining the U.S. dollar's value by focusing on keeping inflation low, Kansas City Fed President Thomas Hoenig said on Monday.

- India’s National Assoc. of Software and Service Companies may lower its growth forecast as the ongoing global financial crisis shrinks business, citing Som Mittal, the grouping’s president.

Financial Times:
- Hedge funds are braced for massive withdrawals by wealthy clients as the sector's worst year prompts a flight to the safety of cash, according to investors and managers. Even hedge funds that have ridden out the crises are facing redemptions, several managers said, as big investors in the sector tried to raise cash to meet withdrawals from their clients. "The whole industry is bracing itself," said one hedge fund executive. "No one is going to be immune to fund of fund redemptions." Today is the final day for investors in many hedge funds to file requests to get their money back by the end of December. According to one large London hedge fund, the restrictions on short selling are adding to the flight of money, as investors worry that temporary bans could become permanent - killing the business model. "A lot of the underlying funds are already cashed up," said the head of investing at a large fund of hedge funds. According to managers and investors, withdrawals are coming mainly from wealthy individuals, who had put money with funds of hedge funds, often in Switzerland. These fund of funds have this year been demanding cash from the underlying hedge funds in which they invested, forcing many to limit withdrawals or even close down. Institutional investors such as pension funds and university endowments have proven more stable so far, managers said, but many question how loyal these investors will remain.

- Indian iron ore exporters on Monday warned that demand from steel mills in China had fallen sharply over the past month and that Chinese buyers were defaulting on contracts with suppliers. With coal reportedly piling up in China's eastern ports, the news of steel defaults will fuel concerns about the likely impact on global commodity prices of a slowing Chinese economy. Analysts say smaller Chinese steel mills are losing money on their output because of weak steel demand and the hefty prices they paid for ore and coal ahead of the Beijing Olympics in August. China's status as a pivotal source of demand for many commodities means even a mild slowing of its economy - which has been growing at double-digit rates for years - has serious implications for global prices. Michael Lewis, head of commodities research at Deutsche Bank, said that China was expected to account for more than 40 per cent of global demand growth for nickel, oil, copper, steel, iron ore and aluminum during 2009."Any downturn in Chinese growth, industrial production and fixed asset investment growth will therefore have important implications for underlying commodity demand," Mr Lewis said. Xu Zhongbo, head of Beijing Metal Consulting, said that steel production was falling in response to weak exports of products that use the metal and declining orders from domestic sectors such as the previously apparently unstoppable motor industry. Car sales could be further hit if would-be buyers take fright at plans by Beijing to launch a six-month trial of restrictions on car use, under which most vehicles would be banned from the roads every fifth day. The Reuters-Jefferies CRB index, a global benchmark of commodities prices, was ­on Monday heading for its worst quarterly fall in more than 50 years on concerns that a global slowdown would cut raw materials ­consumption. The index has fallen 21.2 per cent since the end of June, its worst fall in any quarter since 1956, when the index was first published.

- Freddie Mac(FRE) and Fannie Mae (FNM) , the US mortgage financiers seized by the government, have received subpoenas from federal prosecutors for documents related to accounting and disclosure, the companies said on Monday.

Telegraph:

- The global credit crisis has slammed into Europe with stunning violence over the last two days, triggering five major bank rescues and a near total shut-down of the region’s credit markets. Analysts say German finance minister Peer Steinbrueck may have spoken too soon when he crowed last week that the US would lose its status as a superpower as a result of this crisis. Germany - over-leveraged to Asian demand for machine tools, and Mid-East and Russian demand for luxury cars - is perhaps in equally deep trouble, though of a different kind. Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too," he said. Data from the IMF shows that European banks hold 75pc as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US. Bond traders warn that the spreads are starting to reflect a serious risk of EMU break-up and could spiral out of control in a self-feeding effect. As the eurozone slides into recession, the ECB is coming under intense criticism for keeping monetary policy too tight. The decision to raise rates into the teeth of the crisis in July has been slammed as overkill by the political leaders in France, Spain, and Italy.

Ming Pao Daily:

- Hong Kong property prices will decline faster-than-expected and may fall 35% more in the primary market before the end of 2009, citing research by Goldman Sachs Group Inc.(GS). Secondary home prices are also expected to fall about 25% in the same period, citing Goldman research.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -4.0% to -1.75% on average.
S&P 500 futures +.96%.
NASDAQ 100 futures +1.01%.

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Company/EPS Estimate
- (PBG)/1.04

Economic Releases
9:45 am EST

- The Chicago Purchasing Manager Index for September is estimated to fall to 53.0 from 57.9 in August.

10:00 am EST

- Consumer Confidence for September is estimated at 55.0 versus 56.9 in August.

Upcoming Splits
- None of note

Other Potential Market Movers
- The S&P/CaseShiller Home Price Index, Chicago Purchasing Manager report, Consumer Confidence, NAPM-Milwaukee and weekly retail sales reports could also impact trading today.

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

Stocks Finish at Session Lows, Weighed Down by Financial, Commodity and Construction Shares

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In Play

Stocks Sharply Lower into Final Hour on Defeat of Financial Rescue Package, Global Growth Worries, Rising Credit Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Gaming longs, Computer longs and Internet longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short substantially and then covered some of these positions today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is sharply lower, every sector is declining and volume is heavy. Investor anxiety is extraordinarily elevated. Today’s overall market action is very bearish. The VIX is soaring 38.0% and is extraordinarily elevated at 47.85. The ISE Sentiment Index is low at 109.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running below average most of the day and is currently .73. The Euro Financial Sector Credit Default Swap Index is rising 13.2% today to 122.0 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 rising 4.1% to 181.0 basis points. The TED spread is rising 22.9% to 3.59 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 13 basis points to 1.63%, which is down 99 basis points in less than three months and at the lowest level since January 2003, when deflation was the concern. The Goldman Sachs Hedge Fund VIP Index(favorite longs of the hedge fund community) is falling another 10.3% today. Emerging markets will likely see further declines tonight. I would not be surprised to finally see more constructive commentary from central bankers in Europe tomorrow. A coordinated global response is likely at this point. Nikkei futures indicate a -500 open in Japan and DAX futures indicate a -180 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on global growth worries, rising credit angst, financial sector pessimism and more shorting.

Today's Headlines

Bloomberg:
- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash.

- Citigroup Inc.(C), the biggest U.S. bank by assets, will acquire banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.

Wall Street Journal:

- A bipartisan group of U.S. House lawmakers defeated a $700 billion rescue plan for Wall Street on Monday, rejecting pleas from the Bush administration and congressional leaders from both parties of the potential dire consequences of policymakers not acting to help financial markets. The 205-228 vote against the plan sent stocks plummeting. Supporters were unable to convince enough members of either party to switch their votes against the proposal.

- Steelmakers in the U.S. are experiencing a sharp pullback from buyers who are spooked by the credit crisis and a slowdown in automobile and construction markets, causing inventories to rise and prices on some key products to drop 10%. Although weakening demand and prices are being partially offset by falling raw-material costs, particularly of scrap, some steelmakers already are cautioning that robust earnings from earlier in the year won't be sustained in the year's second half.

- TiVo Inc.(TIVO) and Nero AG of Germany on Monday unveiled a package that turns a Windows PC into a TV recorder, just like a TiVo set-top box. The kit will cost $199 when it goes on sale Oct. 15, and includes a remote and a TV tuner that plugs into the PC. The interface on the computer screen looks just like the one on a TV equipped with a TiVo box.

- H.J. Heinz Co. will no longer use milk made in China for the baby food it sells on the mainland and in Hong Kong, a company spokesman said on Monday.

- Hedge-fund managers face a basic problem: Many won't get paid much this year and will have trouble retaining key employees. The reason: Few funds have made positive returns, so they can't dole out "performance fees," hefty cuts of trading profits. Some hedgies will tap piles of accumulated cash to keep traders. Others will lose them to the few firms holding up. That will force struggling funds to consider closing.

MarketWatch.com:
- James Terry, Chief Public Advocate for the Consumers Rights League (CRL), released the following statement today expressing disappointment that the compromise bill before Congress does not protect taxpayers by repealing the previous bailout provision that ensures hundreds of millions of dollars for organizations like the Association of Community Organizations for Reform Now (ACORN) which is engaged in questionable practices and the potential misuse of public funds.

Lloyd’s List:

- Venezuelan crude oil supplies to China fell 9.7% in the first eight months of the year, citing an analysis of shipping data from Lloyd’s Marine Intelligence Unit.

Boston Globe:
- Boston's Bain Capital and Bank of New York Mellon, along with major investment firms around the country, want to add a new wrinkle to the $700 billion federal bailout proposal: a chance to buy the same distressed, mortgage-related assets the government is preparing to purchase from troubled financial companies.

CBSNews:

- When House Republican leadership framed its opposition to the bailout bill as it currently stands, a principal objection focused on the group ACORN. They're referring to the Association of Community Organizations for Reform Now, a group generally allied with Democrats and derided by the GOP as corrupt, inefficient and a front-group for Democratic efforts on the ground.

USA Today.com:

- A storm-related gas shortage in the Southeast that has left some places bone-dry and others with two-hour gas lines is expected to continue for at least another two weeks, energy experts and industry officials say. The shortage began two weeks after Hurricane Gustav hit the oil-refining regions of the Gulf Coast on Sept. 1. Operations that shut down before that storm were just coming back online when Hurricane Ike hit, forcing another shutdown. The gas shortage, now in its third week, is particularly acute here in sprawling Atlanta, in Nashville in parts of the Carolinas and in Anniston, Ala.

Financial Times:
- UK residential development land has dropped by a third in value over the past year, and by up to 15 per cent in the past quarter, as problems among housebuilders have accelerated the devaluation of increasingly fallow land banks. The losses in land values around the country are worse than many had feared, according to Knight Frank's first annual development land index. The property consultancy expects values to continue to fall, predicting that 10 per cent could be further wiped off prices over the next 12 months.

Bull Radar

Style Outperformer:
Small-cap Value (-3.38%)

Sector Outperformers:
Defense (-1.21%), Restaurants (-1.29%) and Medical Equipment (-1.52%)

Stocks Rising on Unusual Volume:
ABX, KGC, C, MSFG, FPFC and CPLA

Stocks With Unusual Call Option Activity:
1) APC 2) EGO 3) COG 4) DSL 5) NCC