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Friday Watch

Late-Night Headlines
Bloomberg:
- Deephaven Capital Management LLC, the hedge-fund unit of stockbroker Knight Capital Group Inc., froze a $1.6 billion fund after investors asked to get back 30 percent of their money. Withdrawals from the Deephaven Global Multistrategy Fund were suspended so managers wouldn't be forced to sell assets in falling stock and debt markets, the Minnetonka, Minnesota-based firm said today in a letter to investors. Lenders and trading partners also imposed stricter financing requirements, according to the letter. Deephaven Global, which trades a variety of securities including bonds and commodities, follows RAB Capital Plc, Ore Hill Partners LLC and Highland Capital Management LP in limiting withdrawals.

- The cost of protecting investors in Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Australia index quoted 20 basis points lower at 245 as of 10:34 am in Sydney, Citigroup Inc. data show.

- Crude oil fell in New York and is poised for its biggest monthly drop since trading began in 1983. Oil retreated, taking this month's decline to 36 percent. U.S. fuel demand in August fell 8.9 percent from a year earlier, the Energy Department said yesterday. Prices, which have tumbled 56 percent from a record $147.27 on July 11, are down 32 percent from a year ago. Monthly data for U.S. August fuel consumption, measured in terms of products supplied by refiners, dropped to 17.4 million barrels a day, the Petroleum Supply Month said. That was down from 19.1 million barrels in August 2007. U.S. fuel demand during the past four weeks averaged 18.9 million barrels a day, down 7.8 percent from a year ago, an Energy Department report showed Oct. 29. UBS AG cut its oil- price forecast for next year by 43 percent to $60 a barrel from $105 because the global economic slowdown may reduce demand. OPEC member countries seem to have ignored an agreement reached at a meeting in September to more closely adhere to its production quotas at the time. The Organization of Petroleum Exporting Countries increased oil supplies 0.5 percent this month because of higher exports from Iraq, according to provisional data from Geneva-based consultants PetroLogistics Ltd. Higher Iraqi output countered declines from Saudi Arabia, Kuwait and the United Arab Emirates.

- Law firms could get $5.2 billion in legal fees from the U.S. government's bank bailout bill, according to a survey by BTI Consulting Group.

- Wells Fargo & Co.(WFC), Bank of America Corp.(BAC) and Merrill Lynch & Co.(MER) agreed to sell a combined $50 billion in preferred and common shares to the U.S. Treasury under the government rescue plan.

- Investors pulled $9.2 billion from stock mutual funds in the past week, extending a streak of withdrawals that began in the last week of July, according to data compiles by TrimTabs Investment Research.

- Japan's consumer-price inflation slowed in September as oil prices fell, giving the central bank more scope to cut interest rates.

Wall Street Journal:
- John McCain's campaign believes it has been handed two winning arguments in the closing days of the presidential race, both courtesy of Democratic vice-presidential nominee Joe Biden. Unscripted comments by Sen. Biden -- one on taxes, the other on international affairs -- have given the Republican presidential nominee a new way to contend that Sen. Barack Obama, the Democratic presidential candidate, is a risk to voters' wallets and to national security.

- The U.S. government's latest plan to aid struggling homeowners could move as many as three million people into more-affordable mortgages, according to people familiar with the effort.

- The likelihood that Google Inc.(GOOG) and Yahoo Inc.(YHOO) will walk away from their planned search partnership has risen, say people familiar with the matter. The two Internet companies have so far failed to reach an agreement on their partnership with the Justice Department, which has been building a lawsuit to block the deal.

- In a sign that Wall Street is waking up to the political tempest over billions of dollars in year-end bonuses likely to be paid out at securities firms lining up for government infusions, top executives are in discussions to possibly cap their own compensation, according to people familiar with the situation.

- The world's largest investment banks are preparing to commit more capital to support the $55 trillion credit-default-swap market ahead of tighter regulation. Thursday, nine large credit-default-swap dealers expressed support for a central clearinghouse being developed by derivatives-exchange-operator IntercontinentalExchange Inc.(ICE).

CNBC.com:

- Warren Buffett's Berkshire Hathaway has added 825,000 more shares to its Burlington Northern Santa Fe(BNI) stake, bringing its total holdings to 64,610,418 shares.

Fox News.com:
- As the candidates make their closing arguments before the election, the race has tightened with Barack Obama now leading John McCain by 47 percent to 44 percent among likely voters, according to a FOX News poll released Thursday. Last week Obama led by 49-40 percent among likely voters.

USA Today.com:

- The industrial chemical melamine is commonly added to animal feed in China to make it appear higher in protein, state media reported, in what appeared to be a tacit admission by the government that contamination is widespread in the country's food supply.

Reuters:

- Hailed as an American hero for his role in pulling Iraq back from the brink of all-out civil war, U.S. Army Gen. David Petraeus takes on an even more challenging job on Friday as the head of U.S. Central Command. The warrior-scholar with a doctorate in international relations from Princeton University takes responsibility for U.S. military operations in a volatile swathe of the world that includes Afghanistan, Pakistan, Iraq, Iran and the Gulf. As the top commander in Iraq, Petraeus presided over a surge of 30,000 extra U.S. troops into the country and implemented a strategy focused on protecting the Iraqi population, which contributed to a steep decline in violence.

- Fidelity Investments' flagship Magellan fund sharply raised its holdings of Bank of America Corp (BAC) and JPMorgan Chase & Co (JPM) in September, as it moved into bigger U.S. banks amid the worsening credit crisis.

Financial Times:
- Crisis-hit Russia must scale down its ambition.

- Iron ore miners face the prospect of the first price cut in seven years as steel production in China and elsewhere plunges amid the global downturn. After an informal meeting last week at a conference in the Chinese city of Quingdao, traders and bankers said a cut of 10-20 per cent was a likely outcome of the formal negotiations, due to begin in November, for annual contracts.

Securities Times:

- The combined third-quarter profit of 1,601 Chinese publicly traded companies fell 9.6% from a year earlier. Profit fell 19.5% from the second quarter.

The Economic Times:

- The global financial meltdown and the slowdown in Western economies has increased India’s threat perception from China. The government is apprehensive that shrinking markets in major developed countries could lead to China flooding India with a variety of goods.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CMC), target $20.

- Reiterated Buy on (IRM), target $31.

- Reiterated Buy on (KLAC), target $31.

- Reiterated Sell on (EK), target $9.

- Reiterated Buy on (ONNN), target $9.

Night Trading
Asian Indices are -1.5% to +.5% on average.
S&P 500 futures -.5%.
NASDAQ 100 futures -.52%.

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Earnings of Note
Company/EPS Estimate
- (B)/.54

- (CVX)/3.25

- (CLX)/.84

- (CMI)/1.19

- (KBR)/.43

- (QSII)/.42

- (WY)/-.06

- (GG)/.15

Economic Releases
8:30 am EST

- Personal Income for September is estimated to rise .1% versus a .5% gain in August.

- Personal Spending for September is estimated to fall .2% versus 0.0% in August.

- The PCE Core for September is estimated to rise .1% versus a .2% gain in August.

- The 3Q Employment Cost Index is estimated to rise .7% versus a .7% increase in 2Q.

9:45 am EST

- The Chicago Purchasing Manager for October is estimated to fall to 48.0 versus 56.7 in September.

10:00 am EST

- The Final Univ. of Mich. Consumer Confidence reading for October is estimated at 57.5 versus a prior estimate of 57.5.

Upcoming Splits
- None of note

Other Potential Market Movers
- The NAPM-Milwaukee and BIO Investor Forum could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher, Boosted By Airline, Construction, Hospital and Commodity Shares

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In Play

Stocks Higher into Final Hour on Bargain-Hunting, Diminishing Credit Market Angst and Lower Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Biotech longs and Retail longs. I added (IWM)/(QQQQ) hedges this morning and then covered them today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, most sectors are rising and volume is above average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 4.5% and is historically elevated at 66.83. The ISE Sentiment Index is low at 99.0 and the total put/call is below average at .79. Finally, the NYSE Arms has been running high most of the day, hitting 1.41 at its intraday peak, and is currently 1.21. The Euro Financial Sector Credit Default Swap Index is falling 6.2% today to 96.66 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 2.57% to 203.71 basis points. The TED spread is falling 1.57% to 280 basis points. The TED spread is now down 184 basis points in about three weeks. The 2-year swap spread is up 3.52% to 117.75 basis points. The Libor-OIS spread is falling 2.93% to 257 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 5 basis points to .90%, which is down 173 basis points in about four months and at the lowest level since February 1999. Many market leading stocks are posting another day of massive gains, substantially outperforming the broad market. The action in (GS)/(HIG) is a negative and likely holding back the broad market from even more substantial gains. Emerging markets are very overbought short-term and could come under pressure tonight which could lead to some weakness here tomorrow morning. However, I suspect we will see another round of meaningful short-covering before day’s end. I still expect the DJIA to test 10,000 over the coming days. Nikkei futures indicate a -70 open in Japan and DAX futures indicate an +20 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, lower credit market angst, diminishing forced selling, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- The cost of protecting corporate bonds from default fell to the lowest in seven days as money- market rates declined a 14th day and investors speculated U.S. regulators may enact a $500 billion plan to guarantee troubled mortgages. Benchmark credit-default swap indexes in the U.S. and Europe fell for a fourth day after the U.S. Federal Reserve yesterday cut its benchmark interest rate, fueling speculation the European Central Bank and the Bank of England will do the same next week. Contracts on banks including Morgan Stanley and Citigroup Inc. fell to the lowest in almost seven weeks. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada decreased 10.5 basis points to 197 as of 9:14 a.m. in New York, according to Phoenix Partners Group. Credit-default swaps on Morgan Stanley fell 18.5 basis points to a mid-price of 397.5 basis points, and Goldman Sachs declined 18 basis points to 299, according to CMA Datavision in London. Both are at the lowest since the week before Lehman Brothers Holdings Inc. filed for bankruptcy protection. Swaps on Citigroup fell 7 to 195 and JPMorgan Chase & Co. fell 6 to 106, CMA data show. Contracts on the financial arm of General Electric Co. declined 27 basis points to 522.5.

- Copper and zinc fell on the London Metal Exchange as an expansion of stockpiles monitored by the bourse increased speculation that supplies are outpacing demand. Copper inventories jumped 6,575 metric tons, or 3 percent, to 223,875 tons, the biggest jump in three weeks. Zinc stockpiles are the biggest since 2006.

- Crude oil fell on concern that the biggest decline in the U.S. economy since 2001 will further curb fuel demand in the world's biggest energy consuming country. U.S. fuel demand during the past four weeks averaged 18.9 million barrels a day, down 7.8 percent from a year ago, an Energy Department report showed yesterday.

- Money-market rates fell after the Federal Reserve lowered borrowing costs and agreed to pump $120 billion into Brazil, Mexico, South Korea and Singapore to help alleviate demand for dollar-based funding. The swap agreements with central banks, which also followed rate cuts from China to Norway, led to a drop in three-month rates in Asia. The London interbank offered rate, or Libor, for three-month loans in dollars slid 23 basis points to 3.19 percent today, its 14th consecutive drop, according to the British Bankers' Association. The overnight dollar rate tumbled 41 basis points to 0.73 percent, an all-time low, the BBA said.

- Corporate borrowing in the commercial paper market soared the most on record after the Federal Reserve began buying the debt directly from issuers. U.S. commercial paper outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, the Fed said today in Washington. It was the first gain in seven weeks, reversing a 20 percent decline during the previous six weeks. Financial paper led this week's gain, rising $69.4 billion, or 12.4 percent, to $628.8 billion. ``The introduction of the commercial paper program is an enormous jolt of not just liquidity but stimulus to the economy,'' Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, said in a Bloomberg Television interview. Clearbrook manages about $20 billion.

- MetLife Inc.(MET), the biggest US life insurer, is scaling back investments in hedge funds after a loss on the holding in the third quarter. MetLife reported a 38% drop in quarterly profit yesterday as hedge funds, private equity investments and other partnerships returned $120 million less than forecast.

NY Times:
- Starbucks Corp.(SBUX) will add outlets in urban areas and focus on serving drinks to satisfy local preferences, citing an interview with Arthur Rubinfeld, president of global development. The company also plans to redecorate store interiors to emphasize its roots in premium coffee and eliminate generic art, citing Rubinfeld.

Pension & Investments:

- Citadel Alternative Asset Management is closing Fusion, its $1 billion hedge fund of funds, said a source with knowledge of the firm. About 95% of the assets are internal, and that money will be moved to two CAAM seeding and incubation funds, Discovery and Pioneer. The 5% from external investors will be returned.

Reuters:
- Angola has cut the estimated benchmark oil price in its draft 2009 budget to $55 per barrel from $65, state-owned news agency Angop reported on Wednesday, citing a draft document.

Bear Radar

Style Underperformer:
Mid-cap Value (+.37%)

Sector Underperformers:
Insurance (-2.94%), HMOs (-1.40%) and Papers (-1.35%)

Stocks Falling on Unusual Volume:
RE, IRIS, LKQX, BBBB, SONO, LMDIA, BABY, SYMC, AVP, CI, AIZ and CTL

Stocks With Unusual Put Option Activity:
1) BIIB 2) WFR 3) HUM 4) RSH 5) PG