BETWEEN THE HEDGES

Wednesday, October 04, 2006

Thursday Watch

Posted by Gary .....at 11:59 PM

Late-Night Headlines
Bloomberg:
- Stocks with above-average sales and profit increases rose more last quarter than those with low prices relative to earnings. “There is a shift to growth stocks, and it’s likely to last several years,” said Daniel Boone, who helps oversee $8 billion as managing partner at Atlanta Capital Management LLC in Atlanta.
- Airbus SAS may take more than a decade to catch-up with Boeing’s(BA) product development, citing an interview with CEO Christian Streiff.
- Genentech’s(DNA) Lucentis was seven times more effective in a study than Novartis AG’s Visudyne at improving sight in patients with age-related macular degeneration, the main cause of blindness in the elderly.
- Harvard University’s faculty will meet on Nov. 14 to consider whether the undergraduate curriculum should be changed to emphasize science, religion and history.
- Federal Reserve Vice Chairman Kohn said he’s more concerned about persistent inflation than slowing growth in an economy that’s likely to avoid a recession.
- Apple Computer(AAPL) CEO Jobs knew the company backdated stock-option grants to executives in a few cases, though he didn’t personally benefit or know of the accounting implications of the practice.
- Crude oil rose from a seven-month low after a report that OPEC may cut output to halt a decline in prices.
- Saudi Aramco, the world’s largest state-owned oil company by output, made the deepest price cut in a year for three types of crude it will export to Asia in November because of lower demand from refineries.

Financial Times:
- OPEC may cut production by 1 million barrels a day, or 4%, citing an unidentified OPEC official. Nigeria and Venezuela last week said they will cut production by a combined 170,000 barrels a day, while Saudi Arabia has cut its production by 200,000 barrels a day over the past 2 months.

Guardian:
- Online advertising spending in the UK rose over 40% in the first half of 2006 to just under $1.89 billion, citing the Internet Ad Bureau.

Economic Times:
- The NYSE(NYX) is in talks to buy a 26% stake in the Bombay Stock Exchange.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (EL), target $42.

Night Trading
Asian Indices are +1.0% to +1.5% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.24%.

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Earnings of Note
Company/EPS Estimate
- (AYI)/.85
- (STZ)/.43
- (MU)/.14
- (SLR)/.05
- (SMSC)/.35

Upcoming Splits
- (DRQ) 2-for-1

Economic Releases
8:30 am EST:
- Initial Jobless Claims for last week are estimated to fall to 315K versus 316K the prior week.
- Continuing Claims are estimated to rise to 2450K versus 2444K prior.

BOTTOM LINE: Asian indices are higher, boosted by automaker and financial 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.

Dow Jones Industrial Average Surges to Another All-Time High as Interest Rates Drop and Optimism Rises

Posted by Gary .....at 4:55 PM

Indices
S&P 500 1,350.22 +1.21%
DJIA 11,850.61 +1.05%
NASDAQ 2,290.95 +2.11%
Russell 2000 733.47 +2.10%
Wilshire 5000 13,450.92 +1.27%
S&P Barra Growth 626.42 +1.40%
S&P Barra Value 721.72 +1.01%
Morgan Stanley Consumer 658.07 +.68%
Morgan Stanley Cyclical 827.19 +1.06%
Morgan Stanley Technology 539.67 +2.11%
Transports 4,569.78 +2.24%
Utilities 432.95 +.38%
Put/Call .88 -24.79%
NYSE Arms .72 -37.0%
Volatility(VIX) 11.86 -3.10%
ISE Sentiment 113.0 -8.87%
US Dollar 85.81 +.12%
CRB 297.11 +.67%

Futures Spot Prices
Crude Oil 59.54 +1.47%
Unleaded Gasoline 149.80 +2.84%
Natural Gas 6.02 +4.64%
Heating Oil 167.70 +1.40%
Gold 571.30 +.79%
Base Metals 230.66 +.66%
Copper 322.95 +.75%
10-year US Treasury Yield 4.55% -1.32%

Leading Sectors
Restaurants +2.89%
Internet +2.46%
Biotech +2.40%

Lagging Sectors
Coal +.31%
Drugs +.19%
Papers +.14%

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Afternoon Recommendations
Prudential:
- Upgraded (PSUN) to Overweight.
- Downgraded (AEOS) to Underweight.

Afternoon/Evening Headlines
Bloomberg:
- The DJIA posted another new all-time high today, led by growth stocks, as interest rates fell further on comments by Fed Chairman Bernanke.
- Conservative activist Paul Weyrich, president of the Free Congress Foundation, reversed his call for House Speaker Dennis Hastert to resign over the Mark Foley sex scandal after getting a personal call from him today. Weyrich said Hastert insisted that he didn’t receive clear warnings from other leaders or aides about Foley’s inappropriate e-mails.
- Starbucks(SBUX) said September same-store sales rose 6% on demand for pumpkin-spice lattes, and lunch and breakfast sandwiches. The shares surged 5% more in after-hours trading.
- Gold futures fell to the lowest since June on speculation a 16-month low in commodity prices will reduce the metal’s appeal as a hedge against inflation.

NY Times:
- Bono, the lead singer of the rock band U2, and Bobby Shriver have enlisted Gap(GPS), Armani Exchange, Motorola(MOT), Converse and American Express(AXP) to fight AIDS in Africa with a new line of products.

Crain’s NY Business:
- Office vacancies in Manhattan fell almost 30% in the third quarter and are at their lowest in five years.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Computer longs, Retail longs, Internet longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was very bullish. Over the past few years, P/E multiples on the major averages, and more specifically growth stocks, have contracted relentlessly. Growth stocks are the cheapest vs. value stocks in at least 30 years, according to several recent studies. In my opinion, the main reasons for this valuation contraction during a time of record corporate profits and a booming economy were lack of confidence in the future and inflation fears. This is why many of the record number of bears that inhabit the current negativity bubble spend so much time trying to undermine everything that is remotely positive for the country, economy or stock market and aim to keep investors scared out of their collective minds. Whatever happened to the bird flu? This is also why there is so much time spent in the bearish camp harping about inflation and trying to boost inflation expectations, which are a large component of inflation. Most stock market bears are commodity bulls for this very reason, in my opinion. As I have said before, P/E multiple expansion is a bear's worst nightmare. Confidence is returning to U.S. stocks, and inflation fears are plunging with the collapse in commodities and moderating global growth. I sense U.S. stock multiple expansion is finally beginning in earnest.

DJIA Surges to Another All-time High as Interest Rates Fall Further and Optimism Increases

Posted by Gary .....at 3:36 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Retail longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, most sectors are rising and volume is above average. The action in P.F. Chang's (PFCB) stock today bodes well for further gains in consumer cyclicals. Chang's had rallied 14% from July lows before today. The company pre-announced a slightly below expectations third quarter, yet the stock is surging another 8.3% today on huge volume. The collapse in energy prices and lower long-term rates are trumping near-term concerns. I also suspect that when oil does finally temporarily stabilize it will help the major averages, not hurt them, as commodity stocks have been a major drag. Prices are down so much that even a bounce higher shouldn't hurt the broad market. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates and bargain-hunting.

Today's Headlines

Posted by Gary .....at 2:58 PM

Bloomberg:
- OPEC should hold an emergency meeting ahead of its December summit to consider cutting production if oil prices, down almost 25% over the last 2 months, continues to “fall further,” Kuwait’s oil minister said.
- Shares of oil-tanker companies, which fell the most in more than five months yesterday, may extend their decline after the cost of hiring vessels fell due to crude-oil production cuts.
- US Treasuries gained, pushing 10-year yields toward a seven-month low, as Federal Reserve Chairman Ben S. Bernanke said housing is slowing and inflation will recede.
- General Motors(GM) ended talks aimed at forming an alliance with Carlos Ghosn’s Renault SA and Nissan Motor.
- Mortgage applications in the US surged to the most in 15 months as borrowing costs close to an eight-month low spurred home sales and refinancing.
- US researcher Roger Kornberg won the Nobel Prize in chemistry for showing how genes are copied at the molecular level, enabling the human body to make use of information stored in DNA.
- The Australian dollar dropped to the lowest in almost 11 weeks as prices of commodities the nation sells abroad such as copper slumped.

Wall Street Journal:
- Rick Wagoner, the CEO of GM(GM), was expected to tell the board that the company is recovering and wouldn’t gain much from a partnership with Renault SA and Nissan Motor.
- Israeli entrepreneurs, the children of the Holocaust in WWII Romania, are helping modernize Romania.
- Yahoo!(YHOO), seeking to expand its mobile-advertising outside Japan, will start testing keyword-based advertisements on mobile phones in the US and UK.
- Sales of office buildings in Chicago may set a record this year, spurred by low prices and attractive properties.
- US stock mutual funds had a strong third quarter, led by large-company stocks, as worries about interest rates and inflation lessoned.
- The hedge-fund business may be heading for its first significant consolidation, citing Jamie Dimon, the CEO of JPMorgan Chase(JPM). A total of 2,622 hedge funds have been started since the start of last year but 1,071 have closed in the same period as returns have been squeezed by intensifying competition, citing Hedge Fund Research. The latest hedge-fund firm to stumble is Madrid-based Vega Asset Management, which has been hurt by an unfortunate bet against US bonds and now has $3 billion of assets, down from $12 billion two years ago.

NY Times:
- DaimlerChrysler AG(DCX) and China’s Chery Automobile have reached a broad understanding in their venture to export subcompact cars to the US.

Washington Times:
- UN Secretary General Kofi Annan won’t publicly release the financial disclosure form he filed last month, citing UN officials. Annan began requiring that all UN senior officials file such forms 10 months ago in an effort to reform the world body following the $64 billion Saddam/UN oil-for-food program scandal. Officials questioned the involvement of Annan’s son, Kojo, in the program as he had worked for a company that received an oil-for-food contract.

NY Daily News:
- The average price of an apartment in Manhattan fell 7% to $1.29 million in the third quarter, citing the appraisal firm Miller Samuel. Prices are still 12% above year ago levels and the report suggests a soft landing for the housing market in the area, citing the CEO of Miller Samuel.

AP:
- Venezuelan President Hugo Chavez ordered a cut in the country’s oil production to help keep oil prices above $60 a barrel, which he said is a “fair price.”

Financial Times:
- Google(GOOG) CEO Schmidt said that voters will one day be able to use “truth predictor” software to judge the probability that statements by politicians are true.

Bahrain Tribune:
- BlackBerry, the portable communications device from Research In Motion(RIMM), was introduced yesterday into Bahrain, its first Gulf market.

Argumenty I Fakty:
- Russia is investigating 2,500 officials from different levels of government for corruption, citing the director of the Federal Security Service.

Facts:
- A merger of General Motors(GM) and Ford Motor(F) would bring “phenomenally large” savings and create the world’s largest carmaker, GM Vice Chairman Bob Lutz said.

Factory Orders Above Estimates, ISM Non-Manufacturing Below Estimates, Prices Paid Plunges

Posted by Gary .....at 12:54 PM

- Factory Orders for August were unchanged versus estimates of a .2% decline and a 1.0% decline in July.
- ISM Non-Manufacturing for September fell to 52.9 versus estimates of 56.0 and a reading of 57.0 in August.

BOTTOM LINE: Orders placed with US manufacturers were unchanged in August, Bloomberg reported. Volatile civilian aircraft orders fell 22%, while orders for automobile rose .7%. US automakers are cutting production through year-end and adding incentives to further clear out inventories. Orders for capital goods excluding aircraft and defense, a gauge of future business investment, rose .4% versus a .6% gain the prior month. The inventory-to-shipments ratio is 1.17 months, slightly above all-time lows of 1.15 months in May. I continue to expect near-term pressure on manufacturing related to auto production cutbacks before more strength near year-end.

Service industries in the US expanded at a slower pace in September, Bloomberg reported. The new orders component of the index rose to 57.2 from 52.1 in August. The prices paid component of the index plunged to 56.7 versus a reading of 72.4 the prior month. The employment component of the index rose to 53.6 versus a reading of 51.4 the prior month. The average price of gas fell to $2.33 at the end of September versus $2.84 on Aug. 28. I expect the ISM Non-manufacturing Index to bounce-back strongly next month on falling gas prices, more optimism, lower interest rates, a healthy job market and surging stock market.