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Watch-o is "just an outburst of vocalization" like "sitcow / sitgow" and "ya hey".
Jay: "During the recording of Suffer, we were in a strange phase of ending words with 'ow'... ie; 'hey Brett, what's up?' would be 'heow Breow, what's ow?' [...] Watch out was truly meant to be watch out, but because of this phase of ours became watch ow (watch-o), among other things."
In March 2001 someone asked Greg to write Watch Out on his T-shirt and Greg wrote Watch O. He said it was watch o, not watch out.
Greg: "'Sitow' means 'SIT DOWN', because all of our audiences are always standing."