BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs and Biotech longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is mildly bullish as the advance/decline line is higher, most sectors are rising and volume is slightly below average. Investor anxiety is very high. Today’s overall market action is mildly bullish. The VIX is falling 8.4% and is very high at 58.33. The ISE Sentiment Index is low at 115.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running around average most of the day, hitting 1.59 at its intraday peak, and is currently .77. Nikkei futures indicate an +180 open in Japan and DAX futures indicate an +30 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less forced selling and diminishing credit market angst.

Bloomberg:
- Ambac Financial Group Inc. has a stable business model, is ``extremely solvent'' and is unlikely to need direct help from the federal government, Chief Executive Officer David Wallis said.

- The cost of borrowing dollars for three months in London fell to a four-year low after central banks around the world cut benchmark borrowing costs and kept the financial system flooded with cash to restore lending. The London interbank offered rate, or Libor, that banks say they charge one another for loans fell 10 basis points to 2.29 percent today, the lowest level since November 2004, the British Bankers' Association said. The overnight rate held at a record low of 0.33 percent and the TED spread, a gauge of bank cash availability, dropped under 200 basis points for the first time since the day before Lehman Brothers Holdings Inc. collapsed.

- At least 20 percent of the vessels most commonly hired to haul coal and ore are sitting empty as steelmakers cut output and dwindling trade credit halts deliveries, Lorentzen & Stemoco A/S shipbroker Kjetil Sjuve said.

- Goldman Sachs Group Inc.(GS) and Morgan Stanley, the U.S. investment banks that converted to bank holding companies in September, had their fourth-quarter and 2009 earnings estimates cut by JPMorgan Chase & Co.(JPM).

- Business schools should teach empirical analysis and drop risk-management models that failed to foresee the worst market declines since the Great Depression, according to “Black Swan” author Nassim Taleb. Universities teach mathematical theories such as the Black- Scholes model of pricing options that don’t express risk properly, Taleb said in a Bloomberg Radio interview. Options are derivatives that give the right but not the obligation to buy an underlying security at a set price and date. “Recent events have proved that all risk management was wrong,” Taleb, a former options trader, said. “We need to do something drastic immediately to stop quantitative risk managers from inflicting more damage.” Academic teaching resists change because tenured professors aren’t forced to adapt or subject to the same standards that the market imposes on Wall Street, Taleb said.

- General Motors Corp.(GM), seeking federal aid to avoid collapse, said it may not have enough cash to keep operating this year and will fall ``significantly short'' of the amount needed by the end of June unless the auto market improves or it raises more capital. The largest U.S. automaker reported a $4.2 billion third- quarter operating loss today and said its available cash fell to $16.2 billion on Sept. 30 from $21 billion at the end of June. Merger talks with Chrysler LLC were suspended.

- Qualcomm Inc.(QCOM), the biggest maker of mobile-phone chips, rose as much as 10 percent in Nasdaq trading after investors predicted earnings growth can't get any worse.

Wall Street Journal:

- After October's massive equities sell-off, intrepid investors are picking over the investment landscape, figuring there must be some bargains amid the rubble. If it seems like a buying opportunity for stocks, it's shaping up to be an even better one for high-yield bonds and leveraged loans. Risk premiums in both asset classes have surged past previous all-time highs, even as default rates remain below historic norms.

NY Observer:
- YouTube is trying to make nice with major studios so they can offer feature films on their site. CNet announced the news yesterday that the Google-owned company is in negotiations to launch an ad-supported, streaming movie service.

NY Post:

- Citadel Investment Group founder Ken Griffin continues to be haunted by the Wall Street meltdown horror show, as October proved to be more challenging than September. The Chicago-based hedge fund lost about 22 percent last month, which followed a 16 percent loss in September. October's loss was Griffin's biggest setback since he launched the now $18 billion fund nearly 20 years ago with $1 million in capital. Year to date, Griffin's Wellington and Kensington flagship multi-strategy hedge-fund vehicles are down 38 percent, according to people familiar with Citadel's performance.

Bespoke Investment Group:

- Table: Country Default Risk As Measured By CDS Prices.

Reuters:
- Apple Inc's(AAPL) new iPhone, already racking up blockbuster sales with consumers, appears to be making small but steady inroads into the coveted U.S. corporate market dominated by Research in Motion Ltd's BlackBerry.

Folha Online:
- Brazil may have as many as 100 billion barrels of oil in the country’s so-called pre-salt fields, citing Haroldo Lima, director general of Brazil’s National Petroleum Agency. Brazil has at least 50 billion barrels of oil and as many as 80 billion barrels in blocks that have been auctioned, Lima said. The country’s oil reserves may top 100 billion barrels including blocks that haven’t been auctioned.

El Nacional:
- Venezuela’s annual inflation rate will end 2008 at about 28%, missing the government’s target of 27%, citing comments by Finance Minister Ali Rodriguez.

BETWEEN THE HEDGES

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Friday, November 07, 2008

Stocks Rising into Final Hour on Short-Covering, Bargain-Hunting, Falling Credit Angst

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