BETWEEN THE HEDGES

Tuesday, September 19, 2006

Wednesday Watch

Posted by Gary .....at 11:18 PM

Late-Night Headlines
Bloomberg:
- Moody’s Corp.(MCO) said it will pay rent of $37.70 a square foot after incentives, or $22.2 million a year, for its new headquarter at 7 World Trade Center, in lower Manhattan’s largest office lease since the Sept. 11 terrorist attacks.
- Marsh & McLennan Cos.(MMC), the world’s largest insurance brokerage, may sell Putnam Investments after managed assets at the mutual-fund unit dropped to their lowest level in more than nine years.
- Thailand’s currency and bonds slumped after the military yesterday seized control of Bangkok from Prime Minister Thaksin Shinawatra. The stock market was closed for the day.
- Crude oil traded near a six-month low in New York after plunging yesterday on signs rising fuel stockpiles and protracted negotiations over Iran’s nuclear program have prompted investment funds to cut their holdings.
- Broadcom Corp., which is restating results to reflect $1.5 billion in costs related to options irregularities, said CFO Ruehle quit, effective immediately.

Wall Street Journal:
- The University of Michigan overtook Dartmouth College as the top US business school, with Carnegie Mellon Univ. placing third, citing a Harris Interactive Poll.

San Francisco Chronicle:
- John Mark Karr, who claimed responsibility for the 1996 death of 6-year-old beauty queen JonBenet Ramsey, would be freed on probation under a plea deal offered today in California.

Financial Times:
- Russia’s threatened suspension of Royal Dutch Shell Plc’s $20 billion Sakhalin-2 natural gas project is causing a global backlash against President Putin’s tightening grip on the country’s energy industry.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FISV), target $53.
- Reiterated Buy on (AZO), target $124.

CSFB:
- Reiterated Outperform on (FDS), target $53.

Night Trading
Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated +.18%.

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Earnings of Note
Company/EPS Estimate
- (AIR)/.28
- (KMX)/.41
- (CTAS)/.51
- (CC)/.05
- (CMTL)/.32
- (MLHR)/.39
- (MS)/1.37

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 2,000,000 barrels. Gasoline supplies are expected to rise by 650,000 barrels. Distillate inventories are expected to increase by 1,800,000 barrels. Finally, refinery utilization is expected to fall .5%.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds rate unchanged at 5.25%.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and automaker shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Well Off Session Lows on Afternoon Rebound as Oil Falls Again and Rates Decline

Posted by Gary .....at 5:19 PM

Indices
S&P 1,318.31 -.22%
DJIA 11,540.91 -.12%
NASDAQ 2,222.37 -.60%
Russell 2000 725.45 -.47%
Wilshire 5000 13,170.14 -.26%
S&P Barra Growth 612.75 -.31%
S&P Barra Value 703.39 -.13%
Morgan Stanley Consumer 649.59 +.23%
Morgan Stanley Cyclical 812.73 -.72%
Morgan Stanley Technology 517.64 -.88%
Transports 4,406.82 -.54%
Utilities 426.11 +.21%
Put/Call 1.38 +40.82%
NYSE Arms 1.34 +77.58%
Volatility(VIX) 11.98 +1.70%
ISE Sentiment 113.0 +41.25%
US Dollar 85.93 +.14%
CRB 303.04 -1.74%

Futures Spot Prices
Crude Oil 61.59 -3.46%
Unleaded Gasoline 150.25 -4.88%
Natural Gas 5.07 +2.63%
Heating Oil 169.55 -1.75%
Gold 578.90 -.74%
Base Metals 223.05 +1.21%
Copper 336.00 -.46%
10-year US Treasury Yield 4.72% -1.57%

Leading Sectors
Airlines +3.31%
Computer Hardware +.79%
Retail +.73%

Lagging Sectors
Semis -2.20%
Coal -2.71%
Gold & Silver -4.24%

Evening Review
Detailed Market Summary
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Oil and gas fell to the lowest in almost six months after President Bush said he will give diplomacy a chance to end a dispute with Iran over the country’s nuclear program.
- Oracle Corp.(ORCL) said first-quarter profit rose more than analysts estimated, signaling $20 billion in acquisitions is paying off. The shares surged 9%.
- Medtronic’s(MDT) steel replacement for worn spinal disks in the neck should be approved for sale in the US if the device maker agrees to complete follow-up testing and safety reviews, US advisers said.
- The Thai baht fell the most in four years after the military seized control of Bangkok and Prime Minister Thaksin Shinawatra declared a state of emergency.

BOTTOM LINE: The Portfolio finished about even today as losses in my Internet and Semi longs offset gains in my Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was slightly negative as the major averages finished well off session lows, but still lower. The 10-year yield finished almost 8 basis points lower, to 4.72%. In my opinion, investors are still focusing too much on the possibility of economic growth slowing too much and not enough on the huge deceleration in inflation that is taking place. As I said a few weeks ago, nominal GDP has been booming. A significant deceleration in inflation will result in the GDP deflator subtracting less from growth, which should lead to moderate GDP growth and inflation readings. I expect to see stocks build on this afternoon's rebound tomorrow. As most, I believe the Fed will remain on hold tomorrow. Its ensuing policy statements, however, will likely be more dovish than most expect. Falling commodity prices, the continuing housing slowdown, decelerating inflation readings, a firm U.S. dollar and declining inflation expectations will prompt the more dovish comments that I anticipate.

Stocks Lower into Final Hour on Yahoo! Forecast and Thailand Worries

Posted by Gary .....at 3:28 PM

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet and Semi longs. I added to my Google(GOOG) long and took profits in another long today, thus leaving the Portfolio 100% net long. The tone of the market is negative today as the advance/decline line is lower, most sectors are lower and volume is above average. The Johnson Redbook same-store sales index rose 3.9% year over year last week vs. a 3.8% rise the prior week. The long-term average is a gain of around 2.8%. This is just more evidence that the anticipated collapse in consumer spending won't materialize anytime soon, even as investors continue to price this into stocks. A healthy labor market, falling energy prices, lower long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset housing over the intermediate term. The Morgan Stanley Retail Index (MVRX) has surged 14.1% in less than two months. I expect continued outperformance by the sector during the fourth quarter. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, declining interest rates and bargain hunting.

Today's Headlines

Posted by Gary .....at 3:07 PM

Bloomberg:
- Crude oil is falling below $62/bbl. and gasoline plunged after President Bush said he will give diplomacy a change to end a dispute with Iran over the country’s nuclear ambitions.
- The Thai baht fell the most in four years after the military seized control of Bangkok and Prime Minister Shinawatra declared a state of emergency.
- Yahoo!(YHOO) said profit and sales this quarter will be at the low end of its forecast on slower ad demand from automakers and financial services providers.
- According to comScore, Google(GOOG) gained .4 share points in August to capture 44.1% of US search engine market.
- Treasuries rose the most in a month after government reports showed producer prices increased less than forecast in August and housing construction fell, boosting expectations the Fed is done raising rates.
- Microsoft(MSFT) will begin testing a service that lets users share videos in a bid to compete with YouTube Inc.

Wall Street Journal:
- More oil firms will be drilling in deep waters for oil, following the production of oil from the 4.8 mile-deep Jack well this month in the Gulf of Mexico. Chevron(CVX), Devon Energy(DVN) and Statoil ASA said they had coaxed oil out of a rock formation about 280 kilometers south of Louisiana. New finds have been discovered in deep water off Brazil, Nigeria and Angola. Finally, companies are seeking oil in deep waters in the South China Sea, and off India, Pakistan, Mauritania, Egypt, Malaysia and Mexico.
- The US Senate and House of Representatives are close to an agreement on a domestic security budget that includes $1.82 billion in emergency funds.
- Walt Disney(DIS) plans to start marketing a portable video and audio player for children age 9 to 13, citing Chris Heatherly, global vp of Disney global electronics.
- Hedge-fund manager Edward Lampert, the chairman of Sears Holdings(SHLD), may be looking for acquisitions now that Sears is in better shape.
- Brian Hunter, a 32-year-old Canadian energy trader, lost $5 billion in a week for a Greenwich, Connecticut, hedge fund as he made the wrong best on natural gas prices.
- DaimlerChrysler’s(DCX) Chrysler Group will make “significant” production cuts in the rest of its fiscal year because of heavy inventories.

NY Times:
- US antiwar protesters who criticized Washington Democrat Senator Maria Cantwell for voting in favor of the war in Iraq are dampening their vitriol rather than undermine her re-election bid.
- American International Group(AIG) may have skirted NY state law that bars companies from contributing more than $5,000 annually to candidates for state office by using dozens of subsidiaries to donate money. The donations included $50,000 to Democratic Attorney General Eliot Spitzer.
- Virgin Group founder Richard Branson has extended his company’s charity in the US to combine social outreach with philanthropy.

LA Times:
- The Los Angeles Airport Commission awarded a contract valued at $503 million for repairs on the Tom Bradley International Terminal, the largest single city contract ever.

Financial Times:
- Greenhill & Co., an independent NYC-based investment bank, has parlayed its job as lead adviser for German truckmaker MAN AG to become one of Germany’s biggest mergers and acquisitions advisors so far this year.
- TIAA-CREF, a US retirement fund manager, will invest $100 million in micro-lending projects, including small loans to mostly women entrepreneurs in developing countries.

Londond-based Times:
- Amaranth Advisors LLC, a hedge-fund manager that said its main funds fell about 50% this month, is selling European syndicated loan investments, including some made to Manchester United Plc, to raise cash.

Gulf News:
- About 9 million people in Arab countries used the Internet for the first time last year as penetration rates more than doubled in some nations, citing a report from Madar Research.

Interfax:
- Russia producers will ship 11 million tons of oil to China this year, less than the forecast of 15 million tons, citing Alexei Vorotilkin, the head of an OAO Russian Railway division in Irkutsk.

AFP:
- The genocide trial of Saddam Hussein began its ninth session today with a Kurdish witness describing a chemical weapons attack on his village and the stillbirth of this child in a detention cell. Prosecutors say 182,000 Kurds were murdered after their villages were bombed or burned down by Saddam’s forces during the Anfal campaign.

Inflation Falls, Housing Starts Slow Further

Posted by Gary .....at 1:37 PM

- The Producer Price Index for August rose .1% versus estimates of a .3% increase and a .1% gain in July.
- The PPI Ex Food & Energy for August fell .4% versus estimates of a .2% increase and a .3% decline in July.
- Housing Starts for August fell to 1665K versus estimates of 1746K and 1772K in July.
- Building Permits for August fell to 17223K versus estimates of 1739K and 1763K in July.

BOTTOM LINE: Prices paid to US producers rose less than forecast in August, and costs excluding food and energy fell by the most in three years, adding to evidence of receding inflationary pressures, Bloomberg reported. Energy prices rose .3% in August versus a 1.3% gain in July. The core ppi fell by the most since April 2003. It has risen only .9% over the last 12 months. Plunging energy prices will likely lead to a decline in the ppi next month. As I predicted several months ago, inflation is decelerating as commodities fall and growth moderates. Inflation has likely peaked for this cycle.

Housing construction in the US declined more than forecast last month to the lowest level in three years. Housing starts fell 12% in the Midwest, 6.1% in the South and 5.5% in the West. Starts rose 5.4% in the Northeast. Declining housing starts are a positive at this point as it will eventually lead to lower inventories and stabilizing prices. The Case-Shiller housing futures ticked up recently and are now forecasting a 4.9% decline in the average home price over the next 9 months. Considering the 50% rise in the average home price over the last few years, this would be considered a “soft-landing.” I continue to believe the overall negative effects housing has on the US economy are being exaggerated.