JP Morgan downgraded Altria (NYSE:MO) from "overweight" to "neutral" according to Briefing.com. The news service also reports that Morgan Stanley downgraded SLM (NYSE:SLM) to "underweight" from "equal weight."

Lehman Bros. started coverage of NutriSystem (NASDAQ:NTRI) with an "underweight" rating, according to the AP.

Douglas A. McIntyre is an editor at 247wallst.com.

MOST NOTEWORTHY: Schering-Plough, Emergency Medical Services and SLM Corp were today's noteworthy upgrades:

• Banc of America upgraded shares of Schering-Plough (NYSE: SGP) to Buy from Neutral on valuation, as they believe current levels already reflect significant cuts to the company's cholesterol franchise from ENHANCE.
  
• JP Morgan upgraded shares of Emergency Medical Services (NYSE: EMS) to Overweight from Neutral following the company's Q4 results.
  
• Friedman Billings upgraded shares of SLM Corp. (NYSE: SLM) to Outperform from Market Perform and raised their target to $25 from $23 to reflect the company's strengthened capital position, diversified sources of income, and attractive valuation.

OTHER UPGRADES:

• JP Morgan added Molson Coors (NYSE: TAP) to its Focus List.
  
• Citigroup raised Dynegy (NYSE: DYN) to Buy from Hold.
  
• Societe Generale upgraded Credit Suisse (NYSE: CS) to Hold from Sell.

Oppenheimer downgraded Morgan Stanley (NYSE: MS) to "perform" from "outperform" and also knocked down Q1 estimates according to the AP.

Citigroup upgraded Dynergy (NYSE: DYN) from "hold" to "buy," according to Briefing.com. The news service also said that Bank of America upgraded Schering-Plough (NYSE: SGP) to "buy" from "neutral."

SLM (NYSE: SLM) was raised to "outperform" at FBR, according to 24/7 Wall St.

Undergrad and graduate students may soon be feeling the pinch of the subprime mortgage default-induced credit crunch.

Securities tied to student loans have failed to generate investors' interest, leaving roughly $3 billion in a sort of limbo, The Wall Street Journal reported Tuesday (subscription required).

Typically, the banks involved in the deal -- in this case Goldman Sachs (NYSE: GS), J. P. Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C) -- would step in to buy the securities when demand is weak. However, because the major banks are already flush with loans and bonds they're trying to get rid of, they have been allowing the auctions to fail, The Journal reported.

Student loan manager Sallie Mae (NYSE: SLM) fell 42 cents to $19.73 on the news in Tuesday morning trading.

Bond demand is weak

The auction process is similar to those held for municipal bonds, corporate debt and other debt securities. However, Wall Street is not obligated to step in and buy student loan-backed securities when demand is weak.

Judging by my latest emails, everybody wants to know "how should I play the financial sector right now?" Let me make it real simple for you: avoid this entire sector at all costs. Don't buy them and don't short them, at least not yet. I've been repeating the same thing over and over since December, so while I know this will leave many unsatisfied, nothing much has changed in two months. In fact, the recent downgrade concerns over bond insurers MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK), student lender Sallie Mae (NYSE: SLM) and more importantly, prime mortgage lender Fannie Mae (NYSE: FNM), means the situation has gone from bad to worse. Yes, we still risk economic disaster and that's when defaulting consumers could really hurt credit card companies American Express (NYSE: AXP) and Mastercard (NYSE: MA).

But thanks to the lack of transparency in this industry, there's simply no way to accurately judge how bad things really are and as I learned the hard way, accurately gaming disaster is next to impossible.

The good news is that if I had to guess, I'd say the chances of a true disaster are slim. Given that this seems to be an increasingly popular view, many of these financial stocks have been punished to the point of exhaustion. And just as I wouldn't buy them, I wouldn't short them here either. Despite the seemingly steady stream of negative news, the risk of further damage to shareholders and the overall market crashing all around them, broker stocks like Goldman Sachs (NYSE: GS), Bear Sterns (NYSE: BSC), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS) have basically stopped going down. They haven't bounced much either, but the nation's three largest banks Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan (NYSE: JPM) have managed that feat, with all three bouncing considerably off their lows.

For the private equity space, it's been a mixed bag this week. The good news is that the $17.1 billion acquisition of Harrah's Entertainment got done (the largest casino deal in history). The buyers included TPG and Apollo Global Management LP.

But there was some bad news too -- it looks like Blackstone (NYSE: BX)'s proposed buyout of Alliance Data Systems (NYSE: ADS) is on the rocks.

So, in this environment, it's understandable that Wall Street is jittery with buyout deals. Just look at the pending buyout of Clear Channel Communications (NYSE: CCU).

Sallie Mae (NYSE: SLM) is up 6% on news of a $31 billion financing supported by major banks.

Alliance Data (NYSE: ADS) is down 41% on news that its buy-out by Blackstone (NYSE: BX) could fall apart.

Shares in Restoration Hardware (NASDAQ: RSTO) are trading up 6% on news that a private equity offer for the company is likely to close.

Corning (NYSE: GLW) is up over 5% on better than expected earnings.

McDonald's (NYSE: MCD) is down almost 3% despite good 4th quarter earnings.

Stocks may trade differently in the pre-market than they do in the regular session.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• UBS AG (NYSE: UBS) is launching an initiative to reduce proprietary risk taking by its investment banking division, the Financial Times reported. In an internal memo, UBS CEO Marcel Rohner wrote that the bank would cut by 50% the number of its employees in its real estate and securitization division, and move its troubled mortgage investments into a separate unit.

OTHER PAPERS:

• The UK Times reported that British music company EMI Group PLC (OTC: EMIPY) has made a bid for Chrysalis, one of Britain's last big independent music companies.
• Student loan giant SLM Corporation (NYSE: SLM), also known as Sallie Mae, said it would lay off 350 employees, or about 3% of its workers, the Washington Post said.
• France Telecom (NYSE: FTE) CEO Didier Lombard said sales of Apple Inc's (NASDAQ: AAPL) iPhone device are going better than expected in France, the Associated Press reported.

If one thing stands out in the NYSE short interest for December 31, it is that short sellers are willing to continue their large bets against big U.S. financial stocks.

Short interest in Wachovia (NYSE: WB) rose 20 million shares to 66.3 million. Short interest in Wells Fargo (NYSE: WFC) was up 8.3 million to 76 million. Shares short also moved up sharply for MBIA (NYSE: MBI) and SLM (NYSE: SLM).

The numbers show that some portion of investors believe that stocks which are down 50% or more will continue to fall. A recession or continued rise in mortgage problems could make short sellers a great deal of money.

Going short, however, is risky business. One strong financing for a firm could move its shares up 10% in a day. There is news that Citigroup (NYSE: C) is about to raise more money. There are 97 million shares short in the company's stock, and some of those people are about to get hit.

Douglas A. McIntyre is an editor at 247wallst.com.

TheStreet.com's Jim Cramer says the sheer number of companies that need foreign capital will keep sovereign funds busy. By Jim Cramer

We need more sheiks!

We need some for Citigroup (NYSE: C) (Cramer's Take) and for Merrill (NYSE: MER) (Cramer's Take) and for Bear (NYSE: BSC) (Cramer's Take). And how do you like the fact that Bear says it needs no money and yet everyone else does? How about that for chutzpa?

We need more sheiks for Countrywide (NYSE: CFC) (Cramer's Take) and for Washington Mutual (NYSE: WM) (Cramer's Take). We need sheiks for National City (NYSE: NCC) (Cramer's Take) and Key (NYSE: KEY) (Cramer's Take) and Huntington Bancshares (NASDAQ: HBAN) (Cramer's Take). Any sheiks around for Corus (NASDAQ: CORS) (Cramer's Take) or Downey (NYSE: DSL) (Cramer's Take) or for the Gang of Four -- or do people really believe that Warren Buffett wants to buy one of them? (My sources indicate that what he does want to do is provide some extremely profitable reinsurance to the gang of four).

Since the early 1970s, the Apollo Group (NASDAQ: APOL) has transformed the private education business. The company not only has a broad network of campuses called the University of Phoenix, but also a thriving online education system.

As seen with yesterday's fiscal Q1 results, Apollo is continuing to grow at a nice clip. Net income increased 23% to $139.9 million, or $0.83 per share. Revenues were up 17% to $780.7 million.

Apollo got a boost from enrollments, which increased 11% to 325,000. But the company has also made important strides with student retention as well as the quality of the curriculum.

True, there are worries about the credit crunch. Just take a look at school loan provider Sallie Mae (NYSE: SLM), which plans to pull back somewhat. Yet, Apollo has anticipated some of this and has tried to reduce its reliance on private student lending.

Having recently returned to the CEO's role in the wake of a failed leveraged buyout, Sallie Mae (NYSE: SLM) Chairman and CEO Albert Lord will give up the chairman's.

According (subscription required) to the Wall Street Journal, "Anthony P. Terracciano, 68 years old, with a history of finding capital for troubled companies -- and a reputation for helping to sell them -- will serve as chairman of SLM, also known as Sallie Mae, as he seeks to bolster its credit rating and investor confidence."

Additionally, former executive Jack Remondi is returning to the company as vice chairman and CFO.

Part of the reason for Lord's departure from the Chairman's role may be his exceptionally poor handling of a recent conference call that culminated in his rejoicing that they could "get the (expletive) outta here" because there were no more questions.

But questions still surround Mr. Lord. Why was he so eager to sell the company? Was he aware of troubles on the horizon and sought to dump the mess on someone else?

Investor perception of the company would probably strengthen considerable if Mr. Lord left entirely. But for now, separating the chairman and CEO jobs is always a good move for corporate governance.

Investors liked the news, sending the stock up more than 8%.

SLM Corp. (NYSE: SLM) shares are trading higher this morning after the company announced that banking veteran Anthony Terracciano will serve as chairman, and former Sallie Mae executive John Remondi as chief financial officer. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SLM.

After hitting a one-year high of $58.00 in August, the stock hit a one-year low of $16.35 on Friday. SLM opened this morning at $18.12. So far today the stock has hit a low of $17.55 and a high of $19.20. As of 11:00, SLM is trading at $18.95, up $2.28 (13.7%). The chart for SLM looks bearish and steady. while S&P gives the stock it a positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in just six weeks as long as SLM is above $15 at February expiration. Sallie Mae would have to fall by more than 20% before we would start to lose money.

SLM hasn't been below $16 at all in the past year and has shown support around $16.50 recently. This trade could be risky if the stock continues its recent precipitous fall, but even if that happens, this position might be protected by bargain hunters who think this stock has fallen too far.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in SLM.

SLM (NYSE: SLM) closed $16.67 Friday, a seven-year low.

SLM disclosed last week it will decrease the production on loan origination and purchases because of a new federal law that reduces subsidies to commercial lenders to distribute federal loans to students.

SLM January option implied volatility is 101; February is at 95; above its 26-week average of 49 according to Track Data, suggesting larger price movements.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

The American consumer is not the only part of the US economy that's holding off on spending. So are institutional bond investors.Based on a report from Bloomberg, it looks like Wall Street's premier investment banks -- such as Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS) and JPMorgan Chase (NYSE: JPM) -- are slashing prices on their buyout debt backlog. In fact, some of the discounts are as much as 10% of the face values. Given that Wall Street is going to report horrendous financial results, it makes sense to deal with the problems now, right?

Interestingly enough, Wall Street had some help from failed deals, such as with SLM (NYSE: SLM). Actually, this trend has wiped out $51 billion in obligations.

Yet, there is still much to finance, such as Clear Channel, Harrah's, BCE and Alltel. So, we might also see some post-Christmas buyout bond slashing, as well.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.