BETWEEN THE HEDGES

Monday, October 08, 2007

Stocks Finished Mixed as Falling Energy Prices Offset Profit-Taking

Posted by Gary .....at 5:44 PM

Indices
S&P 500 1,552.58 -.32%
DJIA 14,043.73 -.16%
NASDAQ 2,787.37 +.25%
Russell 2000 840.14 -.56%
Wilshire 5000 15,621.75 -.31%
Russell 1000 Growth 629.99 -.07%
Russell 1000 Value 865.52 -.57%
Morgan Stanley Consumer 753.06 -.21%
Morgan Stanley Cyclical 1,079.52 -.53%
Morgan Stanley Technology 682.94 +.56%
Transports 4,934.97 -1.24%
Utilities 513.93 -.20%
MSCI Emerging Markets 155.01 -.23%

Sentiment/Internals
Total Put/Call .74 unch.
NYSE Arms 1.33 +143.0%
Volatility(VIX) 17.46 +3.25%
ISE Sentiment 187.0 +32.62%

Futures Spot Prices
Crude Oil $79.03/bbl. -2.70%
Reformulated Gasoline 199.93 -2.44%
Natural Gas 6.88 -2.73%
Heating Oil 215.90 -2.90%
Gold 739.0 -1.10%
Base Metals 245.71 -2.36%
Copper 362.0 -2.83%

Economy
10-year US Treasury Yield 4.64% unch.
US Dollar 78.78 +.60%
CRB Index 323.39 -1.77%

Leading Sectors
Computer Hardware +1.92%
Gaming +1.22%
Restaurants +.96%

Lagging Sectors
Gold -1.43%
Oil Tankers -1.70%
Oil Service -2.02%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance
ETF Performance
Style Performance
Commodity Movers
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Commentary
After-hours Movers
After-hours Stock Quote
In Play

Afternoon Recommendations
Deutsche Bank:
- Rated (FISV), (SSS), (EXR) and (JKHY) Buy.

Bank of America:
- Rated (MF) Buy, target $37.

Citigroup:
- Rated (ERTS) Buy, target $75.
- Rated (ATVI) Buy, target $29.

Afternoon/Evening Headlines
Bloomberg:
- Greg Yurek, CEO of American Superconductor Corp.(AMSC) see wind-power growth.(video)
- Sprint Nextel(S) ousted CEO Gary Forsee after he failed to wrest customers from Verizon Wireless(VZ) and AT&T Inc.(T). The stock rose 3% in after-hours trading.
- Yum! Brands(YUM), the owner of the Pizza Hut, Taco Bell and KFC restaurant chains, said third-quarter profit rose 17%, exceeding analysts’ estimates. The stock rose 3.6% in extended trading.
- Crude oil dropped more than $2 a barrel for the first time in almost two months as the dollar rebounded against the euro, reducing the appeal of commodities as an investment and on speculation oil consumption will fall.

New Yorker:
- Victor Niederhoffer closed his main Matador hedge fund last month after losing more than 75% of assets, the second time he’s been forced to liquidate.

NY Post:
- Ellington Capital Management, a hedge fund with $5.2 billion in assets, suspected withdrawals from some accounts because of a decline of liquidity in markets back by mortgages.

CNNMoney.com:
- Ethanol Sales to Exceed Gasoline In Brazil By 2020, according to the CEO of Petrobras.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Semi longs, Internet longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was light. Measures of investor anxiety were slightly above average into the close. Today's overall market action was neutral. Many market-leading growth stocks once again posted huge relative gains. Tech was relatively strong, as well, with computer hardware jumping 1.9%. Commodities and housing-related equities were sources of weakness throughout the day. The Retail HOLDRs (RTH) fell 0.2% but finished well off session lows. I wouldn't be surprised to see retail stocks actually rise on upcoming September reports that will likely come in modestly below estimates. Investors may begin looking past near-term weakness and begin factoring in colder weather, lower energy prices, better consumer confidence and the positive effects of rising stocks at a time of record net worth and low unemployment. I suspect this holiday retail selling season will easily exceed dramatically lowered estimates as well. The NYSE Arms finished at a high 1.32 on low volume, which bodes well for the near term. I continue to see meaningful technical breakouts in all market-cap categories of growth stocks. The Financial Times has an interesting interview with Giles Conway-Gordon today, managing director of a hedge fund of funds and a 20-year industry veteran. He says that he expects hedge funds to see $500 billion in redemptions over the next 12 months. Quantitative black-box funds that use massive leverage are especially at risk and many won't survive, he said. His concerns echo comments I have made numerous times over the last year. Many of these "market-neutral" funds have very poor risk-adjusted returns in both up and down markets. As well, a large percentage of these funds were marketed as a way to generate 8% to 12% low-risk gains in what they said was a U.S. secular bear market. Their poor performance, combined with the dying belief in the U.S. secular bear case, will result in substantial outflows over the coming years, in my opinion. I still think a significant portion of this capital will flow into more positively-correlated U.S. stock strategies, which could provide the catalyst for the “mother of all short-covering rallies.”

Stocks Mixed into Final Hour as Profit-taking Offsets Falling Energy Prices

Posted by Gary .....at 3:23 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Medical longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly negative today as the advance/decline line is lower, sector performance is mixed and volume is below average. Fed fund futures now imply a 48% chance for a 25-basis-point cut at the upcoming meeting, down from 72% before Friday's jobs report and down from 84% a week ago. Given better economic data, a stock market at record highs, significant improvement in the credit markets, recent gains in commodities and a weaker dollar, I think the odds now favor the Fed remaining on hold at the upcoming meeting. I would expect to hear Fed speakers this week take on a more hawkish tone if they in fact plan to keep rates steady. This should boost the U.S. dollar and pressure many commodities further, including oil. Recent stock gains and less economic pessimism should help propel Friday's University of Michigan Consumer Confidence reading above estimates. However, September retail sales reports will likely come in modestly below estimates due to the fact that temperatures across the country remain significantly above normal for this time of the year. Google (GOOG) is hitting the $600 I predicted at the beginning of the year, however, as I said last week, I now think $650-$675 is likely before year-end. Broadcom (BRCM) is breaking out of the trading range it has been in since May 2006 on above-average volume as investors cheer the company's recent 3G inroads at Samsung. Broadcom also recently announced meaningfully positive developments with Nokia (NOK). These announcements are significant. Caris recently rated the shares a buy, with a $44 target, which I view as very conservative. As well, Lehman Brothers made positive comments on the stock this morning, saying third-quarter results will be "solid." Finally, Deutsche Bank also reiterated its buy today, saying Broadcom is poised to become a "major handset player" over the next few years. Citigroup, Piper Jaffray, CSFB, Goldman Sachs and Morgan Stanley, however, are still either negative or neutral on the shares. I expect some more upgrades soon. I went long Broadcom during the peak of option backdating fears around $25 per share in September 2006 and have added to the position on pullbacks. I plan to do the same going forward as I continue to see substantial upside in the stock from current levels. Broadcom's breakout also bodes well for the Nasdaq and other semis. I still see many signs that bulls remain underinvested and bears remain too short, notwithstanding the recent surge in equities to record highs. As I said on Friday, short interest actually rose during the last two weeks of September, with the S&P 500 tacking on another 3% during that time. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, investment manager performance anxiety and short-covering.

Today's Headlines

Posted by Gary .....at 2:31 PM

Bloomberg:
- Chile’s Karen Poniachik, mining minister in the world’s biggest copper producer, said about $17 billion will be spent on new projects to bolster output as prices for the metal head for a sixth consecutive annual gain.
- Wheat plunged 3.2%, the exchange limit, in Chicago and Kansas City after rains moistened dry ground in the southern Great Plains as US farmers plant the winter crop.
- Crude oil is dropping almost $3/bbl. to $78.70/bbl. on reduced speculation by investment funds as demand is seen waning and the US dollar rises.
- Corn is falling to a two-month low on speculation US farmers will harvest a larger crop than the US Dept. of Agriculture estimated last month.
- Vonage Holdings(VG) is having its biggest single-day advance since going public last year after it settled on of two-patent suits that threatened its survival.
- Cognos Inc.(COGN), the Canadian maker of business-management software, rose the most in more than five years in Nasdaq Stock Market trading after analysts said it may be an acquisition target.
- Garmin Ltd.(GRMN), the biggest US maker of car navigation devices, climbed as much as 5.1% on speculation the company may be bought by Microsoft Corp.(MSFT) and after an analyst raised his rating on the shares.
- Google Inc.(GOOG), owner of the world’s most popular Internet search engine, surpassed $600 in Nasdaq trading, joining Warren Buffett’s Berkshire Hathaway(BRK/A) among the six stocks that crack that mark.
- Warren Buffett’s Berkshire Hathaway(BRK/A) reported cutting its PetroChina(PTR) stake for the fifth time.

Wall Street Journal:
- Can Ailes Outfox CNBC? Invoking Stonewall Jackson, Fox Business Chief Prepares To Battle Entrenched Rival.
- The market for new issues of collateralized loan obligations, which repackage money lent to leveraged-buyout firms, returned almost to last year’s level in September, citing a Deutsche Bank AG study.

NY Times:
- For Google(GOOG), Advertising and Phones Go Together.
- Quick, name the competitors of US News & World Report. Time and Newsweek right? Would you believe Consumer Reports?
- Credit Crunch Shows Signs of Easing.

NY Post:
- Nintendo’s Wii May Be in Short Holiday Supply.

USAToday.com:
- Medicaid spending, which increased 10.7% in the first six months, may reach a record $330 billion this year.

Financial Times:
- Investors will withdraw $500 billion – a quarter of the asset base – from hedge funds in the next year, leading to the collapse of a “large number” of hedge funds. So predicts Giles Conway-Gordon, managing partner of Cogo Wolf, a San-Francisco-based fund of hedge funds, who believes investors are increasingly dissatisfied with industry performance, and that computer-driven quantitative hedge funds now simply run too much money to make healthy returns.

Straits Times:
- Clean energy quietly taking hold in China.