U.S. Market Update

Dow -398 S&P -48 NASDAQ -80

The Thanksgiving stock rally is screeching to a halt this morning as US equity indices open down and head lower. Risk aversion has returned to prominence pushing Treasury yields to yet new historic lows in some cases. The euro and cable continue to suffer while the yen is being bid up. The US ISM Manufacturing data is weighing on trade, hitting fresh 26-year lows, with the prices paid component hitting lows last seen in 1949. Front-month crude and metals are weaker, with oil below $50 as funds head for cover in fixed income.

Before the NY open JNJ said it would acquire cosmetic surgery supplies company Mentor for $31/shr, in a deal valued at $1.12B. The boards of both companies have approved the transaction, which is expected to have a dilutive impact on JNJ's 2009 EPS by around $0.03-0.05. and close in Q109. Also before in the pre-market DOW confirmed a 50/50 joint venture deal with PIC of Kuwait to launch K-Dow Petrochemicals, noting that the total value of the Dow businesses going into K-Dow is approximately $17.4B and that it expects to receive $9B in pretax proceeds. The partners are getting things off the ground rapidly, with the new company scheduled to begin operations by Jan 1, 2009. K-Dow will concentrate of manufacturing and marketing petrochemicals and plastics worldwide, including polyethylene, ethyleneamines, ethanolamines, polypropylene and polycarbonate. In addition, DOW said that upon closing of the transaction, each shareholder plans to receive a $1.5B special cash distribution, paid by K-Dow.

The Big Three automakers are scheduled to return to Washington at the end of the week to plead their case to Congress. Before the open Ford announced it would re-evaluate strategic options for Volvo over the next several months, continuing work on its restructuring plan. Just last week Ford said it would trim its 2008 European production by 10%, to 15M units from 16.7M. On Sunday various press reports noted that GM spent the weekend jockeying for the best possible position ahead of CEO Wagoner's appearance on the Hill. The WSJ wrote overnight that GM board members are keeping the option of a bankruptcy filing open, while earlier yesterday the London Times wrote that Wagoner was holding last-ditch negotiations for a debt-equity swap deal with lenders over a multi-billion debt for equity scheme. In early New York trade shares of GM and F extended recent gains before retreating on reports the Swedish government is unwilling to provide aid to either the Saab or Volvo.

In other equity news, Alkermes announced it has cancelled its collaboration agreement with Cephalon and regained rights to Vivitrol. Thanks to recognizing deferred revenue of around $120M from the deal as net collaborative profit in Q309, ALKS substantially boosted its FY09 guidance. ALKS gained more than 5% before the open, and fell rapidly to around -2% after the bell. Merrill cut price targets on numerous managed care insurance names, leading to broad-based weakness in the sector. United Health is an exception, after it fine-tuned its guidance earlier this morning but essentially reaffirmed; Merrill raised the name to a neutral from sell. The Semicouductor Industry Association had more bad news for semi names, reporting that global sales in October declined 2.4% y/y, noting that 2009 PC shipments would decline by 5% and cell phone shipments are projected to be down 9%.

In currencies, traders are nervously noting the return of a risk aversion theme that looks a lot like last August. Equities are broadly lower, the USD and JPY pairs are exhibiting strength as funds flow to the safety of government paper in a week with several key central bank decisions scheduled. Growing speculation points to aggressive interest rate cuts by the BoE and ECB, with the consensus at this time looks for a 100 bps cut to 2.0% by the BoE and a 50 bps cut by the ECB. Earlier this morning, an ECB source indicated that a 75bps would be viewed as a “panic move,” bringing more harm than benefits. The Swedish Central Bank moved up its scheduled policy meeting to Dec 3 from Dec 16, sparking chatter about coordinated central bank moves.

A UK spokesperson denied speculation that the UK would consider a move into the euro, but the GBP was markedly weaker in the session against all major pairs. GBP/USD is down 450 pips at 1.4895, GBP/JPY is lower by 650 pips at 139.85 and the EUR/GBP cross is firmer by 225 pips at 0.8480. CAD rebounded from session lows following its GDP figures for Sept and Q3, but lower energy and metal prices offset any positive momentum from the data. USD/CAD is at 1.2440 and AUD/USD is probing the 0.64 handle. Emerging market currencies were softer on the risk aversion theme. Russian Central Bank has spent $2.0B in support of the ruble in today's session.

The risk aversion theme sent European equities lower by 4.8% and yield curves steeper. The Dec bund contract continued to make fresh contract highs above the 122.55 area. Dec Gilts +100 ticks at 118.50. Euro Stoxx 50 index -5.2% at 2,303; FTSE 100 Index -4.7% at 4,089; CAC 40 index -4.8% at 3,106 and DAX Index -5.7% at 4,405.

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