Lookback at the Markets (Are we having fun yet)

Overview:
· SPX plunges 61pts to 996 (breaking below Mon’s lows of ~1008 late in the session and below 1,000 for the first time in five years); DJIA falls 508pts to 9447 – stocks trended lower throughout the afternoon on more worrisome finc’l headlines (MS off >30% at one point today before confirming the Mitsubishi deal close as planned this weekend, RBS closed off 40% in London; credit concerns hitting the REITs and insurers re GGP dn 40%, MET dn 15%), somewhat disappointing comments from Bernanke speech w/ the thinking that investors were hoping for a more forceful message re coming rate reductions, and a sell-the-news move following the Fed’s expected announcement of a commercial paper facility. S&P Financials are down nearly 12% and Tech off 6%; our desk continues to see a dearth of buyers and persistent sell demand (sp500 off ~5% today, dn 13% in just Oct, dn 21% in Sept+Oct, and dn 30% YTD).

· Seems like we are anxiously waiting/hoping on a number of events to occur very shortly that would be very important for overall sentiment re a sweeping coordinated central bank rate cut, UK supposedly unveil a bank rescue package tonight (per BBC/WSJ), Bush expected to summon European leaders to an “emergency summit” (per Telegraph), and BAC pricing (expected to close @ 4pmET).. Beyond this, the market is staring down a nasty looking recession and a disappointing earnings season. The earnings outlook heading into Q3 earnings continues to deteriorate - this has been an earlier and more active preannouncement season than normal, giving investors pause into the official Q3 reporting period (AA after the close, real volume of reports kick off next week); just today we have seen TRW, BAC, WTNY, FFIV, ITW, SONS, AAP, and GLW all trim their outlooks..

· On the economic growth side, expectations continue to be ratcheted down for the world's major economies. Consumer credit in the US fell for the first time in 10 years during the month of Aug according to data out late Tues (hopes aren't high at all for this coming holiday shopping season - not only is unemployment moving higher, but store-provided credit will be non-existent this year). Also new data shows hedge funds’ losses fell 4.68% last month, the industry’s worst monthly performance (per Hedge Fund Research). On the positive side, certain segments of the credit market are easing very, very slightly, although nothing to get excited about.

· The “risk aversion” trade from the morning reversed in the afternoon as the market tanked – we saw big reversals in the VIX (off >10% at one point today, ended up 4%), the JPY (prodding six-month lows; the US$ dollar basket pulled back throughout the afternoon), and a reallocation to more “defensive” equity sectors like healthcare and utilities.. but interesting to note that as stocks slide, we are not seeing a flight to quality in treasuries, relatively speaking (2yr rates near lows of 1.45%, off morning highs of 1.58%; 10yr yielding 3.50% vs earlier 3.59%)..
· Plenty of withdrawn IPOs today: K-Sea Transportation, Fluidigm and Aldagen all withdrew their offerings due to “market conditions”

· From the Currency Desk – We went from a squeeze in the Euro earlier today back to a deleveraging trade at the end of the day. The USD much stronger against the emerging markets in the afternoon – particularly Brazil, Mexico. Overall we tend to see short-term corrections, but the deleveraging theme continues (no matter what the gov’t does) – which could continue to mean a stronger USD (ex-JPY) and a stronger JPY.

· From the Credit Desk – CDX IG-11 closing at 180-181 the widest of the day, and about 13bps wider from yesterday. Pressure as equities fell, but we didn’t widen out nearly as much, so credit did outperform slightly and volumes were good.

Upcoming Events
· UK bank rescue plan - the official rescue plan is due to be announced tonight in England to bail out that country's banking system; according to press reports (BBC, FT, WSJ), the government will inject £35-£50bn via preferred shares into the largest UK banks.

· BAC offering - CNBC said the books on this deal are due to close at the close Tues; CNBC said it could price under $25

· Any more earnings updates? the season has been busier and has started earlier than normal (esp for tech) – just today we have seen TRW, BAC, WTNY, FFIV, ITW, SONS, AAP, and GLW all trim their outlooks (GLW has the infamous distinction of being the only major company to lower guidance 2x already for this Q).

· Corporate Events: Wednesday Oct 8: Sainsbury trading update, HELE earnings, LNN earnings, COST earnings, MON earnings, RT earnings, NUHC earnings, IRM analyst meeting, TRI analyst meeting, LTXC analyst meeting, retail sales (PSUN, PLCE, KSS, BONT, JWN, LTD, BJ, JCP, HOTT, WMT, TGT, MW).

· Economics Events: Wednesday Oct 8th: US (Retail SSS, MBA Mortgage Applications, Pending Home Sales, Fed’s Plosser Speaks in NY on Fed Policies, Oil Inventories, Bank Reserve Settlement, 10yr TIPS auction); Eurozone (French Trade Balance, Eurozone GDP); Other (AUD - Westpac Consumer Confidence, BoJ Monthly Report, JPY Eco Watchers Survey, CAD – Housing Starts).

· Short restrictions expire Wed night at 11:59pmET (Thurs will be the first day when short sales can resume on that list of restricted stocks).

· Short interest data will be released Thurs night
· The BOE will meet Thursday and we anticipate a 50bp cut.
· Retail same store sales for the month of Sept will be released Wed and Thurs.
· Merrill will host a major European financial services conf, providing an opportunity for many companies to speak to investors (in the wake of this week’s bailouts – see Fortis – the Merrill conf will be a focus).

· Yom Kippur is on Thurs.
· The presidential candidates meet for their second televised debate Tuesday night.
· The G7 finance ministers will meet next Friday Oct 10 in Washington
· More details on the TARP/asset purchases - the Fed/Treasury is working on plans and is expected to issue guidance in the coming days/weeks re the logistics of the TARP; there has been some speculation that the TARP may make a large symbolic purchase of assets as soon as this week (NY Post)

· CP stats get published every Thurs morning - recall last week's reading saw among the largest declines on record

· Discount Window stats get published every Thurs night - recall the release last Thurs showed a massive expansion in the size of the Fed's balance sheet

MOVERS
· BAC - cnbc is now saying price indications around $23 (CNBC said earlier this afternoon that was tracking "under $25"); cnbc says book about 3/4 full
· PJC - Piper Jaffray says will consolidate an off-balance sheet vehicle b/c of decline in asset values....bringing $258MM of munis onto its balance sheet...will realize $21MM Q3 loss; CC 5pm
· YRCW shrs up 16% afterhours - reaffirms that it expects to have positive free cash flow in 3Q/4Q08 w/ signif debt reduction; expects to remain in full compliance w/ all terms of its credit agreement
· YUM - Q looks like a beat helped by tax (2-3c benefit), SSS in line, Reit guidance
· CPKI - Shares trading up 2% after hours, Preannouncing 3Q in line

EQUITY SECTOR HIGHLIGHTS:
Technology
Tech/telecom - tech is the second weakest group today after financials; concerns about the coming earnings season and '09 outlooks are hurting the space (SAP's warning and commentary on Q linearity really weighing on tech thinking into earnings). Computer hardware stocks still bear the brunt of the selling pressure, although into the bell most major groups are being hit.
The "horseman" all down big today - RIMM, AAPL, GOOG all off ~5-6% (these were some of the first tech stocks to slip into the red today). An interview w/AAPL co-founder Steve Wozniak getting attention (neg. on iPod, Apple, etc)

Earnings - INFY this Thurs night (early Fri morning ET) is the only major release of the week; next week there will be a slew of reports (INTC, LLTC, IBM, GOOG, EBAY, ALTR, XLNX, etc).
Memory - some green on back of capacity cut backs (Hynix is the latest today) and M&A optimism (SPNS+Toshiba), although a lot of the gains have been given up; SPSN up 13% on the Toshiba talk (on Reuters).

AMD up 11% and def the best acting major tech stock today - that said, gains are nearly halved from the open (was up 20%+ at one point); co finally announced the spin of its foundry ops; earnings come next Thurs night
NOK a big standout - up 2% in a sea of red today; most of the rest in wireless for sale across the board
Computer hardware stocks are being crushed - AAPL -7%, DELL -6%, IBM -4%, PLT -6%, LOGI -8%, NTAP -12%, PALM -7%, RIMM -7%, JAVA -9%, etc. This group has been weakest in tech for wks and selling pressure continues.
Drives/drive-related all crunched - STX -7%, WDC -7%, MRVL -7%, XRTX -9%, HTCH -7%, LSI -6%
Telco equipment stocsk weak - ADCT -2%, CTV -6%, JNPR -8%, NT -11%, BCG -10%, ERIC -8%. TLAB, NOK, ADTN among the better performers.

Financials
Financials – The Dow down a gut wrenching 500pts, the SPX dn 60 as it breaks through the ~1000 point mark at the end of the day to close at 997.88 (the first time since October 2003) and it seems no matter what steps are taken the market appears to be broken. The government has taken a number of steps and through a number of policies, facilities, a stimulus package, a TARP,etc has tried to keep the economy and the broader markets afloat. Today, the equity market’s reaction to the most recent Fed scheme the “Commercial Paper Funding Facility” is clearly not what they or the other markets wanted to see. However we would note that market pressures appear to be becoming resoundingly louder – global economic slow-down, de-leveraging, de-risking, commercial paper issues, hedgefund liquidations/redemptions, BAC having an issue pricing their common stock (CNBC reporting that it could be done at $23 after the close), credit angst continues. Pay your money take your choice – the market has several reasons to be nervous – and in this time we are reminded that the Chinese characters for crisis are danger and opportunity.

Banks – The BKX is off by over 6.5% this morning and BAC continues to be catching the attention of investors. The pre-announcement yesterday clearly not the only thing to blame, the company’s hope to price $10B in common equity appears to be going worse than originally envisioned. Shares are now trading below $25 and much of the price talk was for $25-$26, CNBC reported that the deal was 2/3rds prescribed which could also be a concern as they continue to try to place the shares – after hours CNBC reporting that the deal might price at $23. Most of the large names are lower today – even the processing names like STT which had been positive earlier on the Commercial Paper Facility. The regional banks continue to outperform, but not nearly by as much as they had earlier today – they are off by ~5.5%.

Brokers – Traditional names continue to get hit at the end of the day. Shares of MER and MS are off by more than 20% at the end of the day. There was speculation that MS could possibly take a hit on exposure to HBOS and that MUFG could possibly pull their investment from the bank. MS dispelled both of these thoughts by saying that MUFG is on track and expected to close imminently while they had hedged and exited their HBOS exposure profitably. Shares of MER are off as BAC continues to attempt to price their $10B secondary offering. Concerns are emerging around pricing as CNBC reports that the deal is only subscribed around 2/3. Shares of GS are holding up the best as they are only lower by 7% - closing right at $115 which happens to be Warren Buffet’s warrant level. In terms of the overseas names – CS is lower by 10%, DB is off by 12%, and UBS is lower by 8%.
Homebuilders – the HBM is lower by more than 8% on the day, we are close to our worst levels. The positives continue to be few and far between for the homebuilders and although we have seen rather large short-covering rallies in the group, we give back the gains as investors realize they may be too early. The HBM continues to move closer to its July year low of ~13.8. Several of the large builders continue to get sell-off, shares of TYL, PHM, HOV, CTX are all off by more than 10%.
Insurance – The KIX is off by more than 5% at the end of the day with the P&C names exhibiting more weakness than their Life counterparts today. As we pointed out in the midday, the life names did underperform yesterday, but both groups are under a decent amount of pressure in the afternoon as the broader market sells off. Shares of GNW continue to be hammered – off by more than 16% on the day – the company did announce that they would be looking into all alternatives with their financial guarantor business. Most of the other life names are lower as well with MET off by more than 10%. There continue to be concerns around the industry – this morning Congressman Souder stated that he has met with an insurer that is “in danger of going under” (Bberg) due to investment losses. This sounds eerily similar to comments Senate Majority Leader Reid made about a week ago.
Mortgage/Specialty Finance – The MFX is off by more than 6% at the end of the day and the entire group is weaker. The credit card names all fall out of bed – even AXP which was higher at the midday is now lower by more than 7% as it sells-off at the end of the day. All of the credit card names are getting hammered now – DFS is lower by more than 9% and COF is lower by more than 6%. Certainly a turbulent day for the market, and it feels like we are on a nutty roller-coaster ride. Financial guarantors are also all hit – MTG, RDN, ABK are all off by more than 10% at the end of the day.

Industrials/Materials/Energy
Machinery – ITW trading down ~7%, underperforming peers; the co released restatements to reflect two businesses prev announced for sale as discontinued ops (this was expected); the co also took this oppty to lower 3Q and FY guidance well below consensus (this was not expected).. North America was cited for the lower guidance, but important to note that the co has ~30% rev exposure to Europe.. equip rental names also extremely weak tdoay re URI/RRR off 7% and 16%, respectively..
Conglomerates / Multi-Industry – TXT traded sharply lower off the open, settling dn 13%, some citing the fact that the Fed’s commercial paper facility announcement this morning does not stretch to Textron as they will only be buying top tire A1/P1 paper vs TXT’s A2/P2 (IR/TYC in the same boat here).. Co’s that fall into the top category include DE/CAT, larger finc’l co’s and foreign banks.. other laggers in the space today include TYC, ROK, SPW (shrs dn 20%!) and GDI..
E&Cs – the group struggled, especially considering the frontmonth crude contract settled up over two bucks back above the $90/bbl.. CBI is the worst performer, plunging nearly 20% on the day..
Rails, Freight – UNP held the $60/shr level, outperforming all Class I’s and pretty much every stock in the transports index.. UPS also acted well – some jaw dropping losses in the LTLs re YRCW dn 30%, SAIA dn 8%, VTNC dn 6%..

Airlines – legacies all off 20% to 25%, seems that the sector continues to spiral lower whether oil drops (ie. Mon’s session) or when oil bounces (ie. today’s session).

Metals – the group is much stronger on higher gold prices (spot gold up $28 to $888/oz), positive sell-side sentiment (FCX competitor upgrade) and ahead of AA earnings after the close (AA dn 8%, CENX dn 1%) .. Steels are all weak and very volatile (MT dn 15%, NUE dn 8%, X dn 14%), note there are reports of China steelmakers agreeing to cut production by ~20%, also reports of a potential steel output cut by ThyssenKrupp..

Ferts/Seeds – the space was seeing some interest from vanillas and deep value buyers early this morning, ahead of MON earnings on Weds and WASDE nums on Fri..

S&P Energy extends its decline. Crude settled up a little more than 2 bucks back above $90/bbl while natgas is dn 4c to $6.79MM/btu right around lows of the day and at its lowest level since June 10th, 2005. Energy names are incurring heavy losses across the board, weighed down by financials, as the Fed did little to spur confidence. XOM, up 1.3%, continues to be the only positive name in the complex. HES continues to be hit hard as its dn 12% on the day. SLB, dn 3.6%, outperforming the OSX as HAL dn 10% and BHI dn 6.2%. Coal names reverse their gains from mid day…JRCC is dn 3.45% after being up 9% earlier. Solar stocks getting absolutely crushed….FSLR dn 19%, SPWRA dn 21% after a competitor downgrade with negative sell side sentiment.

Consumer
Retail - Consumer is split around the broader market with discretionary underperforming and staples holding in slightly better than the tape. Retail’s decline was broad based and while the move lower was primarily due to the broader tape, there were a number of factors weighing on retail, mainly negative data points for consumer spending: BAC comments Monday night, SpendingPulse data, signs of banks implicitly tightening credit through higher rates and weak sales from FRED/AAP. These concerns are especially important ahead of September same store sales which will be released Wednesday and Thursday (w\broadlines Weds and specialty on Thurs). Other negatives were crude's ~$2/bbl gain to over $90/bbl and negative read through from tech cos such as GLW which lowered its glass volume guidance that might have hurt BBY (dn 6%) and the weakness in tech that came from the consumer focused '4 horsemen' - AAPL, RIMM, GOOG and AMZN. Flows in the group were relatively quiet with most activity by vanilla funds, selling into weakness with shorts pressing dollar stores (following FRED) and buyers covering shorts. COST is reporting earnings Wednesday AMC/Thursday BMO.
Discretionary - Restaurants sold off with retail ahead of YUM earnings after the close although most of the news for discretionary stocks were in autos. Manufacturers were hit over renewed concerns of GM (dn 8%) and F (dn 18%) liquidity (re BusinessWeek), Auto parts suppliers were hit by TRW withdrawing guidance while tire makers got a boost with GT rallying 4% on news it received a long-term contract from the New York City transit dept. AAP preannounced negatively, hurting auto retailers and sending shares down 16%.

Staples - Staples held in better than the rest of the market on a flight to safety bid. Food saw relative outperformers: KFT down just 3% with GIS, K, CBY, CPB, etc. down less. Note short interest will be released Thursday night.

Healthcare
Healthcare stocks activity was back at it today…some buyers in the morning, sellers in the afternoon. All of the major HC sector indexes were positive up until around lunch time (HMO, BTK, DRG, RXH), but broader selling pulled everything lower once again. Managed care – The group was very close to testing 52wk lows on the HMO index (it was dn >40pts to ~1150). HUM and WCG were the only majors to end higher. Pharma – Many of the names are near their lows or made new ones. The euro names have joined the selling party as well as the credit crisis has recently struck the hearts of those oversees. The DRG fell >5pts to ~273. Biotech – Saw some investors trying to pick away a little bit here even as stocks declined. Risk arb selling seems to be in full force as DNA falls another 1% below $80 (came close to testing its 200day just above $79). Hospitals/Labs/Life Science tools – These names have been moving, in tandem, over the past couple of weeks as sell-side commentary and media coverage has picked up significantly due to the amount of credit exposure the facilities have…they are supplied by life-science names so this explains the weakness here too. The RXH index fell >3% (clearly underperforming other HC sectors).

I'm looking for some bargains, but the stocks that I'm familiar with (MSFT, IBM, ORCL, SAP) aren't doing too well, and I'm not sure if they're at their lows yet-or whether there will be M&A activity soon.

They have $200B of commercial paper coming due in the next 12 months.

SAP just preannounced some shit earnings which whacked tech and ORCL in particular. Pretty scary. I have been 100% cash for a while now.

Hedge funds and banks are delevering in a major way so a lot of stocks will come under such heavy pressure that will send them to levels way below where their fundamentals suggest they should be...Market could easily drop another 15%....I will start buying around that time...could go lower though....and I could also miss the boat, but I woul rather miss the boat than lose money at this stage.

They're still too expensive for me. I will probably wait for the bottom...probably later this year/early next year.

ORCL isn't doing too well. Their revenue stream comes mostly from maintenance renewals rather than new license sales, which is never a good position for a software company. SAP used to be a stable company, MSFT also but yeah, tech is in the toilet.