Between the Hedges

Portfolio Manager's commentary on investing and trading in the U.S. financial markets

Late-Night Headlines
Bloomberg:

- Undeterred by Republican election triumphs in Virginia and New Jersey, Democratic leaders put the U.S. House on a path to vote as early as Saturday on the most sweeping overhaul of health-care policy in four decades. The election of Republican governors in New Jersey and Virginia won’t affect how the House proceeds on legislation to extend insurance to 36 million people and create a government- run program to compete with private insurers, lawmakers said. Party leaders signaled they’re ready for the House to begin debating the legislation and vote on its final passage by filing a 42-page amendment that made last-minute changes to the bill. The filing last night triggered a 72-hour waiting period that Democrats pledged to give Republicans before a vote. “We are on the verge of doing something great,” House Speaker Nancy Pelosi told reporters today after meeting with lawmakers in Washington. “From my perspective, we won last night,” she said, pointing to Democratic wins in two House races to fill vacancies in California and New York.

- Cisco Systems Inc.(CSCO), the biggest maker of networking equipment, topped analysts’ profit estimates after curtailing hiring, shuttering offices and cutting travel. Cisco also said it would expand its stock buyback plan by $10 billion. Cisco, based in San Jose, California, rose 87 cents, or 3.7 percent, to $24.16 in late trading after the results were released.

- News Corp.(NWS/A), owner of the Twentieth Century Fox film studio, raised its full-year forecast after reporting first-quarter profit gained 11 percent, driven by box- office gains from films including “Ice Age.” Net income increased to $571 million, or 22 cents a share, from $515 million, or 20 cents, a year earlier, the New York- based company said today in a statement. That beat the 18 cents projected by analysts, the average of 15 estimates compiled by Bloomberg. Fox News, the Big Ten Network and News Corp.’s regional sports networks on cable all took in higher affiliate fees. “The economies in which we do business are clearly in better shape than they were a year ago,” Murdoch said in the statement. “We have further positioned our operations to take advantage of the improvements we are seeing globally.”

- China should withdraw its monetary stimulus to correct “imbalances” in the economy and avoid bad loans from surging among the nation’s banks, said Aberdeen Asset Management Co., which manages $40 billion in Asian equities. “The government is stimulating the economy through the banks,” Nicholas Yeo, head of Hong Kong and China equities, said in an interview at Bloomberg headquarters in New York. “When the government exits its stimulus program, you may see more nonperforming loans. It may take three to five years. I think they should withdraw stimulus but they won’t because they need to keep the economy going.” The World Bank said yesterday China’s policy makers must avert stock and property market bubbles after lending swelled to a record $1.27 trillion this year. Aberdeen has a “strong underweight” in mainland stocks, Hong-Kong based Yeo said. “I’m uncomfortable with state-owned enterprises like the banks,” he said.

- New laws for the derivatives industry would cost the U.S. government $872 million to implement as regulators increase oversight as part of expanded powers to police the market, the Congressional Budget Office said. Legislation to create stricter rules for derivatives that is making its way through Congress would cost the Securities and Exchange Commission $581 million for fiscal 2010-2014, and the Commodity Futures Trading Commission $291 million, the CBO said in an estimate dated yesterday.

- Passengers on Boston subways, the oldest public transit system in the U.S., and regional commuter trains face the potential for serious injury because the state agency in charge lacks funds for repairs, a report today said. The Massachusetts Bay Transportation Authority, known as the T, operates “under a mountain of red ink,” with 51 separate safety projects unfunded, the report said. Those fixes, estimated at $543 million, are needed for problems that “demonstrate imminent danger to life or limb of passengers and/or employees,” the report said. In some places, track fasteners are corroding and the tracks are shifting out of alignment with “the possibility of train derailment,” said the report, written by a panel led by David F. D’Alessandro, former chief executive of John Hancock Financial Services. Along one stretch of the subway’s Red Line in Cambridge, water leaks damaged a system of slabs and disks used to absorb train vibrations. It requires replacement to prevent derailment, the report said. “Yes, people could die,” said Charles Chieppo, a Boston consultant not involved in the report who served on a state panel that studied overhauling MBTA funding in 2000.

- Store rents in Manhattan fell in the third quarter in seven of 10 districts as unemployment and the recession cut spending. Fifth Avenue from 42nd to 49th streets in Midtown was the hardest hit with rents falling 30 percent from the second quarter to $441 a square foot, broker CB Richard Ellis Group Inc. the broker said today in a statement. Retail rents on Fifth Avenue from 49th Street to Central Park, among the world’s most expensive shopping areas, fell 4.1 percent to $1,643 a foot.

Wall Street Journal:

- Many hedge funds have bounced back from a rough 2008 and, for the most part, managers are projected to pay employees as if that troubled year never happened. According to a report conducted by executive search firm Glocap Search LLC, some portions of which were reviewed by Dow Jones Newswires, pay for hedge-fund employees who survived last year's hedge-fund culling is expected to rise slightly over compensation in 2008. Pay still remains lower than in 2007, when the average hedge fund was up double digits. "Our numbers show that [2009] is being treated in isolation," said Adam Zoia, chief executive of Glocap and head of the company's hedge-fund practice. Zoia said the estimates for 2009 are through Oct. 1, and will be correct as long as there's no "material" change in hedge-fund performance between now and the end of the year. The report is based on information gathered by Glocap recruiters, fund managers and industry professionals. The report, which breaks down hedge-fund firms by their 2009 performance, shows that total average compensation this year at funds that have performed well relative to their industry peers are projected to be about 2% higher than in 2008. More importantly, employees at those funds are expected to make only about 5.3% less in 2009 than they made in 2007, not that big a disparity considering the average hedge fund's performance was down about 20% last year and many other funds were closed. "What happened last year was the owners of the hedge funds - the partners - took a large paycut so employees would not have to take as large a paycut," Zoia said.

- Merck & Co.(MRK) Chief Executive Richard Clark said the drug maker is "actively looking" to buy biotechnology companies in the "single-digit" billions of dollars, but another major takeover of the size of Schering-Plough is "off the table right now." In an interview, Mr. Clark said Merck is interested in either acquiring outright biotech companies with promising therapies or technologies, or opportunities to partner with them or license rights from them.

- Incentive pay on Wall Street is set to rise by about 40% as stronger financial markets collide with the political backlash over bonuses, according to a closely watched survey set to be released Thursday. Johnson Associates, a compensation consulting firm in New York, projects that the biggest increases in year-end cash bonuses and equity awards will go to employees in rebounding businesses such as fixed income and equities. Those incentive-based payouts likely will surge by as much as 60% from last year, the survey found.

- TD Bank, a unit of Canadian banking giant TD Bank Financial Group, is facing accusations from customers that the bank allowed their accounts to be emptied without their approval. Investors allege the bank's actions may have helped Florida attorney Scott Rothstein carry out a possible fraud.

- Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money. “Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan. The letter was released on Wednesday, hours after FHA Commissioner David Stevens and Mr. Donovan abruptly postponed the public release of the FHA’s annual actuarial review. The release of the report, which will show that the projected value of the agency’s reserves have fallen below a federally mandated level, was delayed after the FHA raised questions about one of the report’s findings.

- This week, Verizon is rolling out a device that finally gives it a more credible alternative. This new $200 phone is the Motorola Droid and it's the first Verizon model to run Google's Android smart-phone operating system. I've been testing the Droid, and while it has some significant drawbacks, I regard it as a success overall. It's the best super-smart phone Verizon offers, the best Motorola phone I've tested and the best hardware so far to run Android. I can recommend the Droid to Verizon loyalists who have lusted for a better smart phone, but don't want to switch networks.

- The Senate on Wednesday passed legislation that would give tax breaks to big companies hit by the recession and expand a credit for homebuyers, while raising other corporate levies, particularly for multinationals. The proposed tax increases are aimed at offsetting the cost to the government of the breaks, making the exact impact on individual businesses and industries difficult to judge. But business leaders worry that the measure could be a sign of more taxes to come, as lawmakers seek ways to pay for new measures without adding to the gaping federal deficit. "We clearly are going to have tax increases going forward," said Bruce Josten, executive vice president of the U.S. Chamber of Commerce. The latest changes to business taxes are contained in a measure that would extend unemployment benefits by as much as 20 weeks from the current 79 weeks.

- A key Senate lawmaker is readying legislation that would dramatically redraw how the financial system is regulated, setting the chamber on a collision course with both the House of Representatives and the Obama administration, which have championed markedly different approaches. The bill, which is being readied by Senate Banking Committee Chairman Christopher Dodd (D., Conn.), would strip almost all bank-supervision powers from the Federal Reserve and Federal Deposit Insurance Corp., according to people familiar with the matter. In their place, the bill would create a new agency in charge of supervising all banks and bank-holding companies, even the country's largest and most complex institutions. Mr. Dodd's proposal also would create a powerful council of regulators, overseen by an independent White House appointee, charged with monitoring risks to the financial system.

- Pending legislation aimed at tightening regulation of financial services would give state authorities significant clout in overseeing hedge funds, a move some regulators fear could undermine Congress's goal. The House Financial Services Committee passed a bill Wednesday that gives states power to regulate all investment advisers, including hedge funds, that manage less than $100 million. The Securities and Exchange Commission would oversee larger advisers.

- Elections this week left Democrats scrambling to renew the coalition that elected President Barack Obama after independent voters, whose power to determine U.S. elections is rising with their numbers, broke heavily toward Republicans.

- The departing director of the United Nations' nuclear watchdog agency declared Wednesday that efforts to curb nuclear proliferation were in "tatters," but he held out hope that current talks over Iran's nuclear program could open "a new era" between the West and Tehran.Mohamed ElBaradei, who leaves Dec. 1 after 12 years as director of the International Atomic Energy Agency, told the Council on Foreign Relations that 50 years of mistrust threatens the proposed deal for Iran to ship most of its low-enriched uranium to Russia and France for processing into medical isotopes.

- Tuesday's elections should put a scare into red state Democrats—and a few blue state ones, too.

CNBC.com:

- Hyatt Hotels priced its initial public offering of 38 million shares at $25 per share on Wednesday, within its expected range.

- Wireless chip supplier Qualcomm(QCOM) on Wednesday forecast weaker than expected full- year results, but its extension of a key deal with Korea's Samsung Electronics helped offset the disappointment for some investors.

IBD:

- Supplement manufacturer and retailer NBTY (NTY) is acting as industry consolidator. It has made 28 acquisitions in the last 20 years. This has added a large portfolio of brands to its core Nature's Bounty line, including Rexall, Good 'N Natural, Met-Rx, Flex-a-min and Ester-C.

Business Week:
- A trio of senators with differing political views is working behind-the-scenes to rescue troubled climate legislation. Sen. John Kerry, D-Mass., together with Sen. Lindsey Graham, R-S.C., and Sen. Joe Lieberman, I-Conn., said Wednesday they would work in conjunction with the White House to patch together a bill that could pass the U.S. Senate. The three senators met individually with Energy Secretary Steven Chu, Interior Secretary Ken Salazar and Carol Browner, the president's assistant for energy and climate change. "Our effort is to try to reach out to broaden the base of support ... ," Kerry said at an afternoon news conference. "The key here is to really negotiate once, in a sense." Graham, who has come under fire in his home state for his support of action on climate change, said working on legislation was a "once in a lifetime opportunity" to solve two problems: heat-trapping carbon dioxide pollution and the country's dependence on foreign sources of fuel.

Lloyd’s List:

- MAERSK Line chief executive Eivind Kolding has warned that state bailouts of shipping lines could delay a very necessary restructuring of the container shipping industry. Mr Kolding told Lloyd’s List that opposition to state bailouts for shipping lines was a matter of principle.

Politico:

- Fox News was the clear winner in the cable ratings last night, averaging 4.04 million total viewers during prime-time, with 1.13 million in the 25-54 demo alone. Fox beat the other three networks combined. MSNBC came in second (974K, 308K), according to Nielsen, with HLN taking third (842K, 341K). CNN, which won the 2008 election night, continues to struggle in prime-time. The network placed fourth for the month of October, and claimed the same spot last night, with 826,000 total viewers and 227,000 in the demo. Amidst falling numbers, CNN executives have long maintained that the network is still the go-to choice for major events. But on this off-year election night, it clearly wasn't.

- On much of Obama’s presidency, there is a surprising bipartisan consensus on what has worked well and what has not. POLITICO spoke to a dozen political insiders and pulled together this list of Obama's ten best, and ten worst, moves of the year.

Rasmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 28% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-one percent (41%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -13. That’s just one point above the lowest Approval Index rating yet recorded for this President (see trends).

The Business Insider:

- It's time for BlackBerry maker Research In Motion (RIMM) to find a buyer -- before it's too late.

USA Today.com:

- The federal government and some states are plugging into the future of electric cars with subsidies to develop charging stations. But their plans are generating opposition. The U.S. Department of Energy awarded $2.4 billion in stimulus money in August to build electric vehicles and support them with charging stations. The goal is to promote clean energy and reduce U.S. dependence on oil, says David Sandalow, assistant secretary of Energy for policy and international affairs.

- Used car prices are up 16% from a year ago, better than three times the usual 4.6% annual increase, Edmunds.com reports. The reason is simple supply and demand. With fewer new cars being sold, dealers are getting fewer trade-ins. Also, rental car and government fleets have dramatically reduced their new car purchases, a prime source of fresh used cars when they are cast out after a year or two of service. But it appears that cash for clunkers may also have played a role in boosting prices out of reach of many Americans who need cheap, reliable transportation to weather high unemployment and a weak economy. The government cash-for-clunkers program's provision that all the 678,024 gas guzzlers brought in to be traded for new vehicles be destroyed could be another key factor. Edmunds notes that the highest used car price appreciation has come in some of the cars that were the biggest targets of the clunkers program -- pickups, up 26.2%, and midsize SUVs, up 25.4%. Even the prices of used minivans -- a segment that many believe is out of fashion now that there are so many crossover choices -- were up 27.1%. It already has been an expensive outing for taxpayers: The program, which cost nearly $3 billion in taxpayer funds, gave incentives of up to $4,500 for people who traded in old, inefficient vehicles for gas-thrifty new ones. Used car dealers predicted just this scenario when they were griping over the summer about the provision of the law that required cars turned in to be destroyed, many with relatively low miles on the odometer. "It's going to drive prices up of some of the most affordable vehicles we have on the road," said Kelley Blue Book analyst Alec Gutierrez at the time. And that hurts the families most desperate for cheap, reliable transportation. "Those are the cars that lower-income families need," says Geoff Smartt, owner of Smartt Cars in Caldwell, Idaho, when we interviewed him in August.

Reuters:

- The Federal Reserve will continue to foster a U.S. dollar-funded carry trade with its near-zero interest rate policy, Mohamed El-Erian, chief executive of Pacific Investment Management Inc., said on Wednesday. The so-called carry trade refers to borrowing at low short-term rates -- in this case, in the U.S. dollar -- to buy high-yielding, long-dated securities in other markets. The intention is to profit from the rate differential, although rising short-term rates make this strategy riskier and less profitable. Investors worldwide will keep borrowing dollars to buy assets including equities and commodities, fueling the risk of huge bubbles, given the Fed's stance, El-Erian told Reuters.

- The U.S. Securities and Exchange Commission is exploring reforms that could provide companies with more information about the identity of their shareholders, a top agency official said on Wednesday. Companies usually have little information about stockholders due to long-standing practices about shareholder anonymity, and many would like better ways to contact them.Brett Breheny, deputy director of legal and regulatory policy in the SEC's Division of Corporation Finance, said on Wednesday that the SEC has been discussing changes.

- Option traders on Wednesday appeared to be betting that the dollar will recover as they aggressively scooped up call options in an exchange-traded fund tied to the U.S. dollar index.

Financial Times:

- Less than a fortnight ago, Christophe de Margerie, the chief executive of Total, beseeched politicians to discuss energy security, not only the environment, at the Copenhagen climate-change summit in December. One of the industry’s most plain-spoken ambassadors, he said: “Don’t go to Copenhagen only with your concern about the environment. We also have a concern over energy access. If you take only one [concern with you], we are dead and we don’t want to die.” His linking of the two issues has been underscored by the findings of the International Energy Agency, the rich countries’ watchdog. In an unauthorized draft of the World Energy Outlook, its annual report, it concludes that the world’s dependence on natural gas would drop dramatically if environmental policies were enacted to limit carbon emissions. The IEA would not comment on the findings before the report’s launch next Tuesday. If environmental policies are put in place to stabilize greenhouse gases at levels that scientists believe will give the world a good chance of avoiding a sharp rise in temperatures, they will have a significant effect on gas demand, the IEA believes. Increases in energy efficiency and faster growth in renewables such as windpower and nuclear energy would reduce gas consumption by 5 per cent by 2015 and 17 per cent by 2030 compared with the business-as-usual scenario. Russia holds a quarter of the world’s gas reserves, but before 2015 no significant increases are expected from any regions except for the Yamal peninsula. In the US, the situation is slightly different, says the IEA, largely because of its large reserves of natural gas trapped in shale rocks. New technology that allows companies to break the rock and drill horizontally has opened up vast new areas of supply, helping to nearly eradicate the need for liquefied natural gas imports from abroad. “The looming glut in gas-export capacity essentially results from factors on the supply and demand sides: an ongoing surge in LNG capacity coming on line and a dramatic improvement in the prospects for unconventional production in North America . . . and the unexpected slump in demand,” the IEA said. “In the short term at least, trade will not grow as quickly as most investors in new LNG and pipeline capacity originally expected.” North America has 12 LNG terminals with a capacity of 145bcm a year and five more under construction, plus one being extended. This will bring its import capacity to 214bcm.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (ADP), target $45.

Night Trading
Asian Indices are -1.25% to unch. on average.

Asia Ex-Japan Inv Grade CDS Index 116.50 -4.0 basis points.
S&P 500 futures -.40%.
NASDAQ 100 futures -.41%.

Morning Preview

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Earnings of Note
Company/EPS Estimate
- (WEN)/.06

- (SMG)/-.33

- (CVS)/.64

- (MGM)/-.07

- (CAH)/.43

- (DPS)/.49

- (CI)/1.03

- (IRF)/-.37

- (NVDA)/.10

- (CSTR)/.25

- (ASEI)/.87

- (IPI)/.15

- (SBUX)/.21

- (ENOC)/.77

- (CBS)/.22

- (IGT)/.16

- (SLE)/.18

- (DTV)/.39

- (PSA)/1.24

Economic Releases

8:30 am EST

- Preliminary 3Q Non-Farm Productivity is estimated to rise +6.5% versus a +6.6% gain in 2Q.

- Preliminary 3Q Unit Labor Costs are estimated to fall -4.2% versus a -5.9% decline in 2Q.

- Initial Jobless Claims for last week are estimated to fall to 522K versus 530K the prior week.

- Continuing Claims are estimated to fall to 5750K versus 5797K prior.

Upcoming Splits
- None of Note

Other Potential Market Movers
- The BoE rate decision, ECB rate decision, weekly EIA natural gas inventory report, ICSC retail monthly same-store-sales, (ATHR) analyst day, (SCHW) business update, (EHTH) analyst day, SunTrust Robinson Humphrey Business/Government Services Conference, Goldman Sachs Industrial Conference, Keefe Bruyette Woods Brokerage & Market Structure Conference and the Lazard Tech/Media Day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and retail shares in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

Posted by: Gary / 4:29 PM

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Wednesday, November 04, 2009

Thursday Watch