BETWEEN THE HEDGES

Tuesday, April 17, 2007

Core Inflation Decelerates, Housing Starts Rise, Industrial Production Fall, Capacity Utilization Declines

Posted by Gary .....at 1:00 PM

- The Consumer Price Index for March rose .6% versus estimates of a .6% gain and a .4% rise in February.
- The CPI Ex Food & Energy for March rose .1% versus estimates of a .2% gain and a .2% rise in February.
- Housing Starts for March rose to 1518K versus estimates of 1495K and a downwardly revised 1506K in February.
- Building Permits for March rose to 1544K versus estimates of 1510K and 1532K in February.
- Industrial Production for March fell -.2% versus estimates of unch. and a downwardly revised .8% increase in February.
- Capacity Utilization for March fell to 81.4% versus estimates of 81.9% and a downwardly revised 81.6% in February.

BOTTOM LINE: A measure of prices paid by US consumers rose less than forecast last month, supporting the Fed’s call that inflation will subside, Bloomberg reported. The .1% rise in core prices was the smallest gain this year. The CPI year-over-year for March rose 2.8% versus the 20-year average of 3.1%. Energy prices rose 5.9%, the largest increase since the months during the hurricanes in 2005. However, the cost of hotel stays fell 2.3%, the biggest drop since September 2005. As well, clothing prices fell 1%, the most since April 2001. I continue to believe inflation is not and will not become a problem. I also still expect a modest bout of deflation from Asia during the next meaningful global economic slowdown. This is why I believe long-term rates remain stubbornly low and gold falls on any signs of emerging market weakness.

Housing starts in the US unexpectedly rose for a second month in March, bolstering expectations the housing slump may be easing, Bloomberg reported. Historically warm temperatures in March prompted builders to increase starts, along with signs that demand is firming as prices stabilize. Starts soared 45% in the Midwest. Starts fell 7.7% in the West, 6.1% in the Northeast and 2.7% in the South. I continue to believe housing construction will not add to overall US economic growth this year as builders continue to reduce inventories.
Industrial Production in the US declined last month as warm weather reduced electricity demand, Bloomberg reported. Manufacturing production increased on higher demand for business equipment such as computers, while warm weather cut heating demand. Factory production, which comprises about four-fifths of the report, gained .7%, the highest this year. Utility production fell 7% after rising 7.6% in February. The decline in capacity utilization and downward revision for the prior month is a big positive on the inflation front. I suspect industrial production will surge next month on inventory rebuilding and increased utility production.

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Posted by Gary .....at 9:26 AM

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Monday, April 16, 2007

Tuesday Watch

Posted by Gary .....at 8:28 PM

Late-Night Headlines

Bloomberg:

- The world’s largest shopping center looks almost deserted on a recent afternoon. While schoolchildren ride the sidewinder and roller coaster, there are few shoppers and fewer tenants at South China Mall in central Dongguan, a city of 6 million north of Hong Kong. “They did this mall all wrong,” says Stephen Liu, a Hong Kong businessman visiting clients in Dongguan who came by to see the place for himself. “They never found out if there were enough people to fill it. All the Chinese in this town are factory workers, they can’t afford to shop here.”

- Australian investment funds, flush with record inflows of cash, are increasing their overseas stock holdings as local shares become costlier.

- Senator Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee, said the collapse of hedge fund Amaranth Advisors LLC suggests the need for more Congressional oversight of natural-gas markets regulation.

- The rising number of foreclosures among subprime mortgage borrowers would be slowed if banks postpone increases in interest rates written into adjustable-rate loans or offer fixed-rate loans, FDIC Chairman Sheila Bair said today.

- Obese teens who undergo stomach surgery to promote weight loss will be the focus of a government-funded study to determine whether the procedure is appropriate.

- Valero Energy(VLO), the largest US refiner, said it is gearing up to resume production at its “fire-damaged” refinery near Sunray, Texas. A crude unit and reformer are running again and the refinery is processing crude, Bill Day, a spokesman for the San Antonio-based company, said today. “We are still in the process of re-commissioning the refinery, and this process may take several days, but we still expect to achieve 85,000 barrels per day of throughput by the end of this month,” Day said. Unusually low refinery output across the country has been the main reason for the recent surge in gas prices.

- Crude oil was little changed in NY after stalling yesterday on signs increased refinery production will slow a decline in US fuel stockpiles.

Wall Street Journal:

- Intelsat Ltd., the world’s largest commercial satellite operator, may be sold by its private equity owners. Apollo Management, MDP Global Investors Ltd., Apax Partners and Permira Advisers may seek an equity value of up to $6 billion for the company they bought in August 2004 for $3 billion.

Financial Times:

- The number of foreign students applying to US graduate schools has increased for a second consecutive year, rising 8%, citing a survey by the Council of Graduate Schools. The current increase is mostly driven by a rise in applicants from India and China.

Calgary Herald:

- A $353.2 million biodiesel plant backed by buyout firms the Carlyle Group and Riverstone Holdings LLC will be built near Innisfail, Alberta.

Late Buy/Sell Recommendations

Citigroup:

- Reiterated Buy on (UNM), raised target to $30.

- Google(GOOG) continued to gain query share in March. Share increased 20 basis points month-over-month to a record high 48.3% of the US market. This market share gain continues a very consistent trend for Google(GOOG) and highlights a potential gating factor to Yahoo!’s(YHOO) attempts to gain search revenue share.

- Reiterated Buy on (MCO), raised target to $80.

Night Trading

Asian Indices are -.25% to +.25% on average.

S&P 500 indicated -.08%.

NASDAQ 100 indicated -.05%.

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Stocks Finish Sharply Higher, Led by Financials, on Strong Earnings and Buyout Activity

Posted by Gary .....at 5:27 PM

Indices
S&P 500 1,468.47 +1.08%
DJIA 12,720.46 +.86%
NASDAQ 2,518.33 +1.06%
Russell 2000 831.44 +1.47%
Wilshire 5000 14,838.65 +1.06%
Russell 1000 Growth 579.05 +1.39%
Russell 1000 Value 847.46 +1.09%
Morgan Stanley Consumer 723.50 +.78%
Morgan Stanley Cyclical 987.88 +1.06%
Morgan Stanley Technology 582.59 +1.07%
Transports 5,104.10 +1.37%
Utilities 512.63 +.47%
MSCI Emerging Markets 123.51 +1.10%

Sentiment/Internals
Total Put/Call .82 -13.68%
NYSE Arms .64 -20.28%
Volatility(VIX) 11.98 -1.80%
ISE Sentiment 103.0 -15.57%

Futures Spot Prices
Crude Oil 63.62 -.02%
Reformulated Gasoline 212.71 -2.41%
Natural Gas 7.47 -4.24%
Heating Oil 185.95 -2.18%
Gold 694.50 +.67%
Base Metals 271.35 +1.10%
Copper 355.50 +.54%

Economy
10-year US Treasury Yield 4.73% -3 basis points
US Dollar 82.11 -.01%
CRB Index 314.76 -1.0%

Leading Sectors
I-Banks +3.30%
Banks +1.96%
Alternative Energy +1.70%

Lagging Sectors
REITs +.24%
Hospitals +.16%
Gaming -.08%

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Afternoon Recommendations
CIBC:
- Rated (GRMN) Sector Outperformer.
- Rated (ITRN) Sector Outperformer.

Afternoon/Evening Headlines
Bloomberg:
- A gunman carried out the deadliest shooting rampage in US history today, killed at least 32 students and faculty at Virginia Tech University before turning the gun on himself. Another 28 people were hospitalized with gunshot wounds and other injuries. Neither the gunman’s identity or motive have been determined.
- The S&P 500 surged to its highest in more than six years, catapulted by higher-than-expected bank and drug company earnings and the $25 billion takeover of student-loan provider SLM Corp.(SLM).
- The yen may extend its decline against the euro and the dollar before a government report that economists forecast will show Japanese consumer confidence fell last month.
- Bear Stearns’(BSC) private equity unit agreed to buy Universal Hospital Services for $712 million. The company helps hospitals manage medical equipment and improve productivity of nurses.
- Pat Vredevoogd Combs, president of the National Association of Realtors, says the “worst is over” for the US housing market.
- The US may ease ethanol import duties by the end of next year, helping Brazilian producers gain access to markets in the world’s largest consumer of the fuel, Brazil’s top ethanol official said today.
- Natural gas fell 3.5%, the most in two months, as forecasters said a trend of below-average temperatures would ease later this week, while supplies remain almost 30% above the five-year average for this time of the year.
- Great Plains Energy’s(GXP) Kansas City utility is seeking bids for up to 400 megawatts of electricity generated from by wind by 2012 to increase supplies from renewable energy sources.
- Exxon Mobil’s(XOM) refinery in Torrance, California, is restarting units after completing two months of “maintenance.”
- Former Florida Governor Jeb Bush called on the US to end a tariff on Brazilian ethanol to help boost distribution of the crop-based fuel and foster a world market for it.
- Black & Decker(BDK), the biggest US maker of power tools, said first quarter profit exceeded its forecast on an increase in orders. The stock surged 7% after-hours.

Women’s Wear Daily:
- Neiman Marcus Group(NM/G) is considering an IPO of shares as early as the summer.

Reuters:
- Nigeria plans to resume oil production from the Forcados oil fields in the western Niger delta by the end of this month. Nigeria has scheduled 5 million barrels of oil for export in June.

Frankfurter Allgemeine Zeitung:
- Magna International, Canada’s largest autoparts maker, may be in advanced talks with DaimlerChrysler AG(DCX) about the potential acquisition of its Chrysler unit.

BOTTOM LINE: The Portfolio finished higher today on gains in my Telecom longs, Medical longs, Biotech longs and Retail longs. I didn’t 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, almost every sector rose and volume was about average. Measures of investor anxiety were about average into the close. Today's overall market action was very bullish. The S&P 500 is now near a seven-year high. I-banks were today's outstanding performers, with the Broker/Dealer Index(XBD) rising 3.3%. Despite the market's strong showing, the airwaves were once again filled with gloom and doom about housing today. Meanwhile, the August housing price futures rose again to $214,800. Gasoline futures fell almost 3% today and the crack spread, while still extraordinarily elevated, fell 10%. I continue to believe gasoline has been propping up the whole energy complex. While today's headline gains were impressive, the sharp gains in heavily shorted stocks are especially noteworthy. I suspect stocks will open modestly lower on a knee-jerk reaction to tomorrow morning's economic data; however, losses will likely proved short-lived as record shorts and underinvested bulls will likely use any near-term weakness to cover and buy.

Stocks Higher into Final Hour on Positive Earnings Reports, Buyout Activity

Posted by Gary .....at 3:31 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Biotech longs and Retail longs. I added Goldman Sachs(GS) long and added to a few shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Google (GOOG) is rising 1.9% on its DoubleClick acquisition announcement. I like this deal and think it will further widen the gap between GOOG and the competition if approved. Google remains my largest long position. Stocks have flat-lined higher over the last couple of hours as I sense many are still in disbelief at the market and economy's resiliency. Performance anxiety is likely coming back into play in a big way. Mid-cap stocks continue to trounce the S&P 500 as they sport 8%+ gains already this year. As I have said many times of late, the current environment has been very good for stockpickers and now the major averages seem to be kicking into gear. The underlying tone of the broad market remains very constructive despite so many bears and a large number of bulls who have recently raised cash ahead of earnings reports and the "sell in May” strategy. It is a big positive, as well, to see the financials participate today. The ISE Sentiment Index is plunging 19% to a depressed 99.0 as retail options traders remain very bearish into market strength. This is a market positive. I expect US stocks to trade mixed-to-higher into the close on short-covering, buyout speculation, rising earnings optimism, lower long-term rates and bargain-hunting.

Retail Sales Strong, NY Manufacturing Still Muted, Net Long-Term TIC Flows Decelerate, Business Inventories Rise

Posted by Gary .....at 3:30 PM

- Advance Retail Sales for March rose .7% versus estimates of a .6% gain and an upwardly revised .5% rise in February.
- Retail Sales Less Autos for March rose .8% versus estimates of a .9% gain and an upwardly revised .4% increase in February.
- Empire Manufacturing for April fell to 3.8 versus estimates of 7.5 and a reading of 1.9 in March.
- Net Long-term TIC Flows for February fell to $58.1 billion versus estimates of $75.0 billion and $98.8 billion in January.
- Business Inventories for February rose .3% versus estimates of a .3% gain and a .2% rise in January.

BOTTOM LINE: Retail Sales in the US rose in March by the most in three months as rising incomes and better weather ensured consumers would continue to drive economic growth, Bloomberg reported. “Concerns about the consumer’s staying power have been greatly exaggerated,” said Richard DeKaser, chief economist at National City Corp. The economy has created about 2 million jobs in the last year, the unemployment rate is a historically low 4.4% and Americans’ net worth is at record highs despite the housing slowdown. I expect retail sales to moderate a bit in April before another strong showing in May.

Manufacturing growth in NY remain subdued in April. The New Orders component of the index rose to 3.9 from 3.1 in March. The Inventories component rose to 7.1 versus 4.7 in March, which was the first rise this year. The Prices Paid component rose to 40.5 versus 30.2 in March. I continue to believe manufacturing activity is improving overall modestly as inventory de-stocking runs it course.

Net international buying of US long-term securities slowed in February, Bloomberg reported. Including short-term securities, foreign investors purchased a net $94.5 billion versus $79.6 billion the prior month. International purchases of US stocks fell to a net $13.5 billion, compared with net purchases of $22.8 billion the previous month. The DJIA fell 3.3% on Feb. 27 on worries over the housing market. Many economists point to the difference between the US trade gap and securities purchased by international investors as evidence of how easily the US can finance its external obligations. I expect international investors’ demand for US assets to remain strong as the dollar firms, the twin deficits shrink further and economic growth remains healthy compared to other industrialized economies.

Business Inventories rose less than sales in February, a positive sign for factory production, Bloomberg reported. At the current sales pace, the amount of goods on hand is 1.29 months. I continue to believe substantial inventory de-stocking led to substantially below trend growth in 1Q, however inventory rebuilding should begin adding to overall economic growth this quarter.

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