BETWEEN THE HEDGES

Monday, July 16, 2007

Tuesday Watch

Posted by Gary .....at 8:14 PM

Late-Night Headlines
Bloomberg:
- President Bush said Palestinians have arrived at a “moment of choice” between accepting the violent path Hamas has charted against Israel or a more peaceful route to a Palestinian state.
- Demand for services in Japan unexpectedly fell in May, suggesting waning consumer spending is slowing growth in the world’s second-largest economy.

Wall Street Journal:
- Google Inc.(GOOG) is working on a new service to let mobile-phone users find and buy items such as ringtones. Under the new system, users will get a list of companies that provide the content they’re seeking and links to allow them to purchase the material.
- News Corp(NWS/A) reached a tentative agreement for the purchase of Dow Jones & Co.(DJ) at its original $5 billion offer price. The deal will be put to the full Dow Jones board tomorrow evening for its approval, said people familiar with the situation.
- The leading Republican presidential candidates have received more campaign donations from private-equity firms than Democrats, a shift from past fund-raising patterns as Democrats view the industry as a source of new taxes.

Crain’s Chicago Business:
- The Chicago Tribune will begin selling ads on its front page and the first page of two other sections.

Daily Telegraph:
- Democratic Representative Keith Ellison, the first Muslim congressman in the US, compared President Bush to Adolf Hitler. The Democratic congressman, who addressed a gathering of atheists in his hometown of Minnesota, also suggested Bush may have been responsible for the Sept. 11 attacks.

21^st Century Business Herald:
- China’s state investment company that is being set up to manage the nation’s foreign-exchange reserves, will book profits in US dollars, citing a financial researcher.

Late Buy/Sell Recommendations
Keybanc:
- Rated (PWR), (EME) and (JEC) Buy.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 futures unch.
NASDAQ 100 futures -.02%.

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Earnings of Note
Company/EPS Estimate
- (ADTN)/.29
- (CHB)/.08
- (SCHW)/.23
- (KO)/.82
- (CCK)/.45
- (CSX)/.64
- (FRX)/.77
- (INTC)/.19
- (JEF)/.39
- (JNJ)/1.00
- (KEY)/.70
- (MER)/2.02
- (PPDI)/.36
- (RF)/.69
- (SLM)/.73
- (STT)/1.01
- (USB)/.67
- (WFC)/.67
- (YHOO)/.11

Upcoming Splits
- (IOSP) 2-for-1

Economic Releases
8:30 am EST
- The Producer Price Index for June is estimated to rise .2% versus a .9% gain in May.
- The PPI Ex Food & Energy for June is estimated to rise .2% versus a .2% gain in May.

9:00 am EST
- Net Long-term TIC Flows for May are estimated to fall to $70.0B versus $84.1B in April.

9:15 am EST
- Industrial Production for June is estimated to rise by .5% versus unch. in May.
- Capacity Utilization for June is estimated to rise to 81.6% versus 81.3% in May.

1:00 pm EST
- The NAHB Housing Market Index for July is estimated to rise to 27 versus a reading of 26 in June.

Other Potential Market Movers
- The Fed’s Hoenig speaking, weekly retail sales reports, (AMAT) Analyst Meeting, AG Edwards E&P Conference and SEMICON West could also impact trading today.

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

Stocks Finish Mostly Lower on Lingering Sub-prime Concerns and Profit-taking

Posted by Gary .....at 5:22 PM

Indices
S&P 500 1,549.52 -.19%
DJIA 13,950.98 +.31%
NASDAQ 2,697.33 -.36%
Russell 2000 848.47 -.85%
Wilshire 5000 15,609.34 -.28%
Russell 1000 Growth 617.24 -.16%
Russell 1000 Value 880.35 -.30%
Morgan Stanley Consumer 742.34 -.32%
Morgan Stanley Cyclical 1,125.11 +.01%
Morgan Stanley Technology 649.21 -.04%
Transports 5,378.68 +.17%
Utilities 507.43 -1.57%
MSCI Emerging Markets 141.46 -.54%

Sentiment/Internals
Total Put/Call .83 -10.75%
NYSE Arms .90 +26.82%
Volatility(VIX) 15.59 +2.90%
ISE Sentiment 169.0 -6.63%

Futures Spot Prices
Crude Oil 74.20 +.37%
Reformulated Gasoline 214.32 -3.67%
Natural Gas 6.40 -4.01%
Heating Oil 206.05 -2.37%
Gold 665.90 -.21%
Base Metals 258.84 257.26 +.20%
Copper 356.0 -.92%

Economy
10-year US Treasury Yield 5.04% -5 basis points
US Dollar 80.56 -.01%
CRB Index 320.64 -1.37%

Leading Sectors
Telecom +.54%
Wireless +.43%
Semis +.34%

Lagging Sectors
Utilities -1.57%
Oil Tankers -2.71%
Coal -3.25%

Evening Review
Market Performance Summary
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In Play

Afternoon Recommendations
Deutsche Bank:
- Rated (WNR) Sell, target $48.

Afternoon/Evening Headlines
Bloomberg:
- US Energy Secretary Samuel Bodman sees alternative fuel “breakthroughs” in the next few years.
- Gasoline futures fell 4.4%, the biggest drop in more than eight months, on forecasts a government report this week will show a rise in US inventories with oil inventories near decade highs.
- IBM(IBM) shares reached a five-year high after the company announced a $1.4 billion contract to manage information technology for AstraZeneca Plc, the UK’s second-biggest drugmaker.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs and (TLT) long. 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, most sectors fell and volume was below average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bearish. Despite weakness in the major averages, many market-leading growth stocks traded very well again today. The 10-year yield finished at session lows, which is a positive. Commodity prices fell today, with natural gas(-3.6%), gasoline (-4.0%) and corn (-5.6%) especially weak. As well, the Shanghai composite came under renewed pressure overnight, falling 2.4% on talk from government officials that inflation in the country is accelerating. Some well known bears today were pointing to the CNBC Trillion Dollar Survey and suggesting it is evidence of investor complacency. However, that survey says 80% think the DJIA will close "around 14,000 or higher" at year-end. We are already "around 14,000," so theoretically, 100% of the respondents could believe that stocks will trade "around 14,000 or lower" by year-end. I would hardly call this one survey evidence of investor complacency. I continue to believe the herd has never been more bearish in US history given the recent run we have had and records in the major averages.

Stocks Mixed into Final Hour as Lower Rates, Buyout Activity, Positive Economic Data Offset by Subprime Concerns, Profit-taking

Posted by Gary .....at 3:33 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in Retail longs, Internet longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative today as the advance/decline line is lower, most sectors are declining and volume is below average. It is interesting to note the recent uptick in “bull-mocking” by the “permabears.” I would expect to see this near a major market bottom, not anywhere near a top. This is just further evidence of the “U.S. negativity bubble”, in my opinion. It appears the bears' strategy is to take investors' focus off of their own numerous failed calls as the major averages surge once again to records. By chastising the bulls, however, the "fearleaders" are just drawing more attention to their own analysis. Investors would be well-served to perform historical searches on the bears' dire commentary to remind themselves of what they have been told since the major bear market lows of October 2002. The bears' scary predictions during periods of high market stress have been especially telling. The S&P 500 is up 111.5% since the 2002 low, averaging a 17% return on an annualized basis. It is also notable, considering the view by most that oil can only go higher, that the gasoline crack spread has collapsed 40% in five days and is down 17% just today. Moreover, the spread has plunged 57% from the highs seen in mid-May, around when gasoline futures peaked for the year. As well, gasoline futures are dropping another 3.5% today and convincingly breaking down through the uptrend that has been in place since December of last year. The contango in the oil futures market, which encouraged hoarding, is also beginning to reverse meaningfully for the first time in years. This is also occurring when crude oil large speculative traders have never been more net long oil futures and commercial hedgers, historically the “smart money,” have never been more net short oil. I suspect we are within six weeks of another major tradable top in oil, similar to the one seen last year before the commodity plunged $28 per barrel in less than six months. Like last year, this decline should provide another huge upside catalyst for the broad market. I plan to meaningfully increase my energy-related short exposure again over the next six weeks. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates, buyout speculation and lower commodity prices.

Today's Headlines

Posted by Gary .....at 1:36 PM

Bloomberg:
- Ihop Corp.(IHP), the largest US pancake-house chain, agreed to buy Applebee’s Intl.(APPB) for $1.9 billion and sell securities backed by franchisee fees to finance the purchase.
- Lear Corp.(LEA) shareholders turned down Carl Icahn’s $2.9 billion buyout offer, handing a victory to a group of investors who led a five-month battle against the sale of the automotive-seat maker.
- ReAble Therapeutics Inc., an orthopedic device maker controlled by the private equity company Blackstone Group, agreed to purchase DJO Inc.(DJO) for $1.6 billion to add leg braces and post-surgery pain therapies.
- Natural gas futures are plunging 4.5% in NY, heading towards their biggest decline in five months, on forecasts for below-normal temperatures and lower demand in the key consuming markets of the Midwest and Northeast.
- Gasoline futures are dropping another 4.3% a breaking down convincingly through the uptrend that has been in place since mid-December.
- Corn is plunging 5.4%, the maximum daily limit, and soybeans are falling on speculation rains will help to replenish Midwest soils after two months of dry weather.
- US Treasuries are rising for a second day on speculation mounting losses in securities backed by subprime mortgage loans will fuel demand for US government debt.

Wall Street Journal:
- Sony Corp.’s(SNE) Sony Pictures Entertainment has revamped its Grouper video-sharing Web site, now known as “Crackle,” to help new filmmakers.
- Charles Schwab(SCHW), E*Trade(ET) and TD Ameritrade(AMTD) may be boosting their business by adding services such as asset management.
- US real-estate investment trusts with strong management records may be good bets following a sell-off of REITs amid concern that rising interest rates may hurt future returns.

NY Times:
- Casinos in the US Gulf Coast are performing better than before Hurricane Katrina struck the region in 2005. Harrah’s Entertainment(HET) casino in New Orleans, the largest in the city, is heading for its best year, with gambling revenue up 13.6% during the first five months of the year compared with the same period in 2005 prior to the storm.

NY Post:
- TiVo Inc.(TIVO) will start a ratings service today that ranks television commercials from 15 networks on a second-by-second basis compared with Nielsen’s minute-by-minute system.

Tuoi Tre:
- Merrill Lynch(MER) has warned investors that liquidity in Vietnamese equities may be low after the central bank reduced money in the system, citing a research report.

Etemaad:
- Iranian police in the capital Tehran will arrest men with “Western-inspired” haircuts and clothing, citing a top policing official.

Empire Manufacturing Strong, Inventories Plunge to Lowest Since July 2002

Posted by Gary .....at 11:51 AM

- Empire Manufacturing for July rose to 26.5 versus estimates of 18.0 and a reading of 25.8 in June.

BOTTOM LINE: Manufacturing in NY state unexpectedly expanded this month at the fastest rate in a year as orders climbed and employment rose, Bloomberg said. The New Orders component of the index rose to 26.5, the highest in 16 months, versus 17.2 the prior month. The Inventories component fell to -19.8, the lowest since July 2002, versus 3.2 the prior month. The Prices Paid component fell to 34.6 versus 42.6 the prior month. The Expectations component, that gauges the outlook for the next six months, surged to 48.2 versus 44.1 the prior month. I continue to believe inventory rebuilding will help spur trend growth mostly through year-end.