BETWEEN THE HEDGES

Wednesday, January 03, 2007

Thursday Watch

Posted by Gary .....at 11:29 PM

Late-Night Headlines
Bloomberg:
- Homes in Unterhaching, a German town of 22,000 south of Munich, will be warmed by hot water piped from 3,300 meters underground starting in May. They’re at the leading edge of a shift toward geothermal power generation that may swell Germany’s capacity 1,000-fold within a decade.
- Crude oil is falling another .14/bbl. in NY after yesterday plunging the most in 20 months as mild US weather curbed near-record speculation by investment funds.
- US Senator Charles Grassley said a balanced US budget by 2012 is “very possible.”
- Copper futures in Shanghai fell the maximum daily limit of 4% to a six-month low on diminishing speculation by investment funds as stockpiles rise.

Wall Street Journal:
- Gains in the yuan are eroding profit margins at an increasing number of Chinese exporters, citing local business executives.

Financial Times:
- Tribune Co.(TRB) bidders interested in buying the company, which owns media outlets and the Chicago Cubs, face a deadline of mid-January to make final offers.

Financial Express:
- Verizon Communications(VZ) may enter the race to acquire Indian wireless operator Hutchison Essar Ltd.

Night Trading
Asian Indices are -.75% to +.75% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (AYI)/.64
- (ARRO)/.34
- (STZ)/.60
- (LI)/.57
- (MON)/.10
- (TXI)/.55
- (GPN)/.44
- (RI)/.28
- (SGR)/.19

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 320K versus 317K the prior week.
- Continuing Claims for last week are estimated to fall to 2500K versus 2530K prior.

10:00 am EST
- Factory Orders for November are estimated to rise 1.3% versus a -4.7% decline in October.
- ISM Non-Manufacturing for December is estimated to fall to 57.0 versus a reading of 58.9 in November.
- Pending Home Sales for November are estimated to rise .8% versus a -1.7% decline in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,000,000 barrels versus an -8,132,000 barrel decline the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 2,938,000 barrel rise the prior week. Distillate inventories are estimated to rise by 850,000 barrels versus a 472,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise .2% versus a .23% increase the prior week.

BOTTOM LINE: Asian indices are mixed as gains in automakers are offsetting losses in commodity shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Higher as Commodities Drop

Posted by Gary .....at 5:55 PM

Indices
S&P 500 1,416.60 -.12%
DJIA 12,474.52 +.09%
NASDAQ 2,423.16 +.33%
Russell 2000 787.42 -.03%
Wilshire 5000 n/a
S&P Barra Growth 651.23 -.20%
S&P Barra Value 763.93 -.04%
Morgan Stanley Consumer 696.91 +.20%
Morgan Stanley Cyclical 895.36 +.21%
Morgan Stanley Technology 568.79 +.10%
Transports 4,650.66 +1.98%
Utilities 457.68 +.20%
Put/Call .85 -3.41%
NYSE Arms 1.20 -23.31%
Volatility(VIX) 12.04 +4.15%
ISE Sentiment 124.0 -24.85%
US Dollar 83.96 +.83%
CRB 298.49 -2.80%

Futures Spot Prices
Crude Oil 58.14 -4.77%
Reformulated Gasoline 154.50 -4.41%
Natural Gas 6.15 -2.22%
Heating Oil 158.33 -3.94%
Gold 629.50 -1.33%
Base Metals 222.26 -4.83%
Copper 266.0 -7.35%
10-year US Treasury Yield 4.66% -.47%

Leading Sectors
Airlines +3.88%
I-Banks +1.46%
Networking +1.44%

Lagging Sectors
Gold & Silver -3.73%
Energy -3.78%
Oil Service -4.36%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Crude oil in NY plunged the most in 20 months as mild US weather curbed record speculation by investment funds.
- Blockbuster Inc.(BBI) reached its goal of 2 million paying subscribers for its online service by the end of 2006. The shares touched a 14-month high.
- Manhattan apartment prices rose another 3.2% in the fourth quarter from a year earlier.
- The UN is investigating a report that its peacekeeping troops in Sudan raped and sexually abused children as young as 12.
- About 750,000 US port workers must get criminal background checks and carry federal identification cards for access to secure areas, the Homeland Security Dept. said.
- General Motors(GM) and Ford Motors’(F) December US sales each fell 13% as consumers bought fewer gas guzzling pick-up trucks and sport-utility vehicles. Toyota Motors’ rose 12%.
- The S&P 500 will exceed 1,600 this year because profits will grow more than 10%, said Byron Wien, chief market strategist of Pequot Capital Management.
- The US Dollar rose the most since July against the euro and reached a two-month high versus the yen after a report showed manufacturing in the US expanded in December.
- Copper prices in NY plunged 7.7% to a seven-month low as record speculation by investment funds continues to subside as inventories rise.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Medical longs, Biotech longs and Semi longs more than offset gains in my Internet longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly higher into the close. Today's overall market action was slightly bearish. Last year, oil rose $2.05/bbl. on the first trading day of the year and $7.40/bbl. through the first three weeks of trading as commodity funds, flush with new capital, drove futures prices higher. I suspect, given the average commodity hedge fund fell around double-digits last year as the CRB Index dropped 7.4%, that many energy-related funds saw outflows at year-end. Today, oil fell $2.84/bbl. I continue to believe the many U.S. stock market bears and many bulls raised cash in December in anticipation of a pullback this month. Considering the overwhelming majority of funds failed to meet the S&P 500's 15.8% return last year, I suspect most managers have a very low threshold of pain this year for falling substantially behind their benchmark once again. There is still massive bull firepower available on the sidelines as short interest remains near record highs, the herd remains bearish on U.S. stocks, money market funds are flush with cash and buyout firms remain active. U.S. stocks remain cheap and p/e multiple expansion should accelerate this year. I still expect US stocks, with the exception of commodity-related shares, to post strong January gains notwithstanding today’s intraday volatility.

Stocks Slightly Slower into Final Hour on Substantial Decline in Commodities

Posted by Gary .....at 3:28 PM

BOTTOM LINE: The Portfolio is slightly lower into the final hour as looses in my Medical longs, Semi longs and Biotech longs more than offset gains in my Commodity shorts. I added (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. "High School Dropout" copper is plunging another 7% today and is down 34.6% from its May 11, 2006, all-time high. Freeport-McMoRan Copper & Gold (FCX) is now down almost 10% since it announced its acquisition of Phelps Dodge (PD) and I said it made an excellent short. I continue to believe that this deal won't be accretive for years as FCX vastly overpaid for PD. At $4.07 per pound, copper was priced at absurd levels. Even as U.S. housing construction slowed dramatically and Chinese consumption decelerated meaningfully, copper bulls tried to justify ever higher prices. Copper quit trading on fundamentals quite some time ago as psychology and record speculation by investment funds, spurred by a massive historic influx of capital, drove the metal to astronomical levels. With most commodity funds posting double-digit losses last year, I suspect this flood of capital is receding significantly. Copper's demise is a function of the ending of a mania and does not indicate a substantial slowdown in global economic activity. In my opinion, the recent dramatic decline in copper even as the U.S. dollar weakened, inventories remained low by historic levels and economic data exceeded estimates unmasked the true fluff that had been propping up the commodity. I believe one of the big stories of 2007 will be the continuation of the stunning declines in many commodities as the CRB Index breaks down into bear market territory, which will have meaningful negative consequences for many commodity-dependent emerging market economies and stock markets. The CRB Index is already down 18.2% from record highs. Many of the same investment funds that had been speculating on ever higher commodity prices will likely switch sides and jump on the downside bandwagon, thus driving prices even lower than would otherwise be the case. I suspect energy and then gold will follow copper substantially lower over the coming months. I suspect many funds that came into the new year overweight commodity stocks, especially energy, are now hunkering down to re-evaluate strategy. This could last a few more days, but I still expect January to be a good month for U.S. stocks, excluding commodities. Overseas markets, especially emerging, will likely come under pressure tonight on the commodity drop and U.S. stock reversal. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates and lower energy prices.

Today's Headlines

Posted by Gary .....at 3:17 PM

Bloomberg:
- Crude oil in NY plunged the most in 20 months as mild US weather curbed demand and record speculation by investment funds continues to subside.
- Copper prices in NY plunged 7.7% to a seven-month low as rising global inventories cut record speculation by investment funds. Copper is now down 35% from May 06 highs.
- The US Dollar is rising the most since July against the euro and reached a two-month high versus the yen after a report showed manufacturing in the US expanded in December.
- Fed Reserve officials concluded that the risk inflation would fail to slow was “the predominant concern” last month while acknowledging that chances for slower economic growth increased.
- Home Depot(HD) ousted CEO Nardelli after investors criticized him for earning $225 million while the company’s stock fell during his six-year tenure.
- The northeastern US may start to see winter-like temperatures by the middle of January, countering a warmer-than-average December, forecasters said.

NY Times:
- Makers of air fresheners are focusing on teenagers as younger consumers are becoming big users of the product.
- Education is the single social factor researchers agree is consistently linked to a longer life.

AP:
- US military helicopters and the National Guard are delivering food to people stranded by blizzards in Colorado, Kansas, Nebraska, and Oklahoma.

Multichannel News:
- News Corp.(NWS) has reached a distribution commitment agreement for its planned business-news network with Time Warner(TWX) as part of a broader accord. Time Warner’s large subscriber base and strong presence in Manhattan is critical to the success of the proposed News Corp. channel against rivals including CNBC.

Washington Post:
- US shopping malls, which have become modern day town centers, starting this month will train their 20,000 security guards to fight terrorism.

Financial Times:
- Investments in clean and renewable energy rose 43% to $70 billion last year, citing research company New Energy Finanace.

Construction Falls Less Than Estimates, ISM Manufacturing Expands, ISM Prices Paid Declines Again

Posted by Gary .....at 12:18 PM

- Construction Spending for November fell -.2% versus estimates of a -.5% decline and an upwardly revised -.3% decline in October.
- ISM Manufacturing for December rose to 51.4 versus estimates of 50.0 and a reading of 49.5 in November.
- ISM Prices Paid for December fell to 47.5 versus estimates of 54.0 and a reading of 53.5 in November.

BOTTOM LINE: Construction spending in the US fell for a third straight month in November, but less than analysts had expected and the prior month was revised higher. Spending on private residential building fell 1.6%. Construction of offices, warehouses, hospitals and schools is cushioning the slowdown in homebuilding. Total non-residential construction rose 14.7% from year-ago levels. While the worst of the housing slowdown is very likely over, homebuilders will continue to pare down inventories which will mute overall construction spending through at least the first half of this year.

Manufacturing in the US unexpectedly expanded in December, Bloomberg reported. A reading above 50.0 signifies expansion. Resilient consumer spending and continued growth in exports has resulted in lower inventories, helping stabilize factory production. The Employment Component of the index rose to 49.7 versus 49.2 the prior month. The New Orders Component of the index rose to 52.1 versus 48.7 the prior month. The Inventory Component fell to 48.4 versus 49.7 the prior month. Manufacturing will likely improve slowly during the first half of the year as auto production cutbacks and housing inventories continue to subside.