BETWEEN THE HEDGES

Thursday, August 23, 2007

Friday Watch

Posted by Gary .....at 7:51 PM

Late-Night Headlines
Bloomberg:
- Bill Gross, manager of the world’s largest bond fund, said he’s buying debt of financial companies including Goldman Sachs(GS) and Merrill Lynch(MER).
- Thomas Evans, CEO of Bankrate Inc. said he sees expansion in ‘prime’ mortgage market and that the recent credit crisis “hasn’t had any impact” on business.
- China’s stocks are rising, heading for the biggest weekly gain since the benchmark index was introduced in April 2005.
- Sunscreens should be required to carry new ratings letting consumers compare for the first time how well the products guard against a form of skin-damaging ultraviolet rays, US regulators said.
- Whole Foods(WFMI) may proceed with its $565 million takeover of rival Wild Oats(OATS) after an appeals court rejected federal regulators’ attempt to block the transactions.
- Nintendo Co. extended the lead of its Wii video-game console over Sony Corp.’s(SNE) PlayStation 3 and Microsoft’s Xbox 360, with stores selling 425,000 players in the US in July.

Wall Street Journal:
- A number of quant funds, which use statistical models to find winning trading strategies, reported heavy losses this month. In many cases, the managers pointed their fingers at other quantitative hedge funds, essentially saying they all owned many of the same stocks and their models told them all to sell at the same time, driving down the share prices, hurting everyone in the process.

MarketWatch.com:
- Contrarian-minded fund manager taps eBay(EBAY), Yahoo!(YHOO), Genzyme(GENZ).
- Global sales of wireless phones increased more than 17% in the second quarter, fueled primarily by demand in developing markets, according to a widely followed industry report.

Briefing.com:
- Bank of America(BAC) can’t convert its $2 billion investment in Countrywide Financial(CFC) into common stock, the Office of the Comptroller of the Currency said in its letter approving the investment. According to credit default swap traders, the cost of credit protection on CFC fell to $200,000 from $330,000 on the news. That brings the credit default swap close to levels last seen at the start of the month, before CFC ran into trouble securing short-term funding.

NY Times:
- Subprime Fallout Could Help Venture Capitalists.
- The Congressional Budget Office said today that key signals on the severity of a crisis in the mortgage debt markets had so far been “quite muted,” but forecast short-term market turbulence.

CNNMoney.com:
- Apple’s surprise weapon: Computers.

USA Today:
- Mortgage rates drop amid recent Fed action.

Financial Times:
- China’s exports of aluminum, steel soar.

Reuters:
- The record earnings bonanza US refiners enjoyed in the first half of 2007 may be winding down as weaker margins hit profits this quarter and next.
- Wal-Mart Stores(WMT) said on Thursday it was asking suppliers to resubmit testing documentation for the toys its sells after Mattel’s(MAT) recall this month of millions of Chinese-made toys.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GME), target raised to $57.50.
- Reiterated Buy on (HUM), target $88.

Business Week:
- Arena Pharmaceuticals’(ARNA) review of its new obesity drug is showing positive results, which could double the company’s share price in the next year, according to Patrick Moriarty of Fortis Securities.

CSFB:
- Gartner released final 2Q PC results yesterday, showing worldwide PC units growing a robust 13% y/y, above the 12% indicated in its preliminary release, with both notebook and desktop unit growth accelerating from last quarter’s levels to 31% and 5% from 29% and 1%, respectively. More importantly, Gartner provided PC revenues for 2Q, which showed PC ASPs actually posting a slightly y/y gain of .2% in the quarter and worldwide revenues growing a solid 14% y/y. The improving PC revenue environment is among the least followed stores in technology this year, but its implications are far reaching, likely driving improved revenue growth and margin expansion across the PC supply chain. It is easy to dismiss the recently improved profitability at PC OEMs to one time component related benefits, but in reality, the improvement goes beyond this, with a positive mix driven by Vista and improving demand in mature geographies, and in particular, corporations, which should have legs over the next 2 years. We believe both DELL and HPQ will be significant beneficiaries of these dynamics and we would be buyers of both stocks at current levels.

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

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
- (ANN)/.48
- (BKC)/.27
- (HNZ)/.55
- (HPOL)/.04

Upcoming Splits
- (NE) 2-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for July are estimated to rise 1.0% versus a 1.3% gain in June.
- Durables Ex Transports for July are estimated to rise .6% versus a -1.0% decline inn June.

10:00 am EST
- New Home Sales for July are estimated to fall to 820K versus 834K in June.

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are lower, weighed down by commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Lower on Healthy Profit-taking

Posted by Gary .....at 4:23 PM

Evening Review

Market Performance Summary
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In Play

Stocks Lower into Final Hour on Profit-taking

Posted by Gary .....at 3:13 PM

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Medical longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is below average. My intraday gauge of investor angst is still above average. The NYSE reported that short interest on the exchange, from mid-July through mid-August, fell from an all-time high of 12.95 billion shares to 12.49 billion shares. The 3.5% decrease still leaves NYSE short interest up an astounding 30.2% since mid-February, the largest six-month percentage jump since at least 1991, when Bloomberg began tracking.

Countrywide Financial (CFC) saw its short interest jump from 51.42 million shares to 83.63 million shares during the month, making it the third-most heavily shorted security on the NYSE.

Short interest on the Amex, from mid-July through mid-August, jumped 10.8%, to another record, from 1.09 billion shares to 1.22 billion shares. The Financial Select Sector SPDR (XLF) saw short interest rocket 103.7% during the month, from 66.84 million shares to 136.17 million shares, leaving it the second-most heavily shorted security on the Amex. Over the past six months, Amex short interest is up a mind-boggling 62.1%, by far the largest increase on record.

I continue to believe the recent parabolic rise in short interest is mainly the result of the avalanche of capital that has flowed into global market neutral funds, which help to pump air into the current U.S. Past performance and recent events have likely ensured that a significant portion of the capital allocated to these funds will flow back into more positively correlated U.S. stock strategies going forward. It is also noteworthy that public short sales just exploded to record highs during the recent correction. "negativity bubble."

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-July through mid-August:

1. Novastar Financial (NFI, +25.2%)
2. Beazer Homes USA (BZH, +16.2%)
3. RAIT Financial Trust (RAS, +14.0%)
4. ACA Capital Holdings (ACA, +12.2%)
5. Goodrich Petroleum (GDP, +11.4%)
6. Radian Group (RDN, +10.7%)
7. Redwood Trust (RWT, +10.4%)
8. Alesco Financial (AFN, +10.3%)
9. MGIC Investment (MTG, +10.2%)
10. FirstFed Financial (FED, +9.9%)
11. Capital Trust (CT, +9.7%)
12. Primus Guaranty (PRS, +9.3%)
13. McMoRan Exploration (MMR, +8.9%)
14. IndyMac Bancorp (IMB, +7.3%)
15. WCI Communities (WCI, +7.0%)
16. Federal Agricultural Mortgage (AGM, +6.6%)
17. Resource Capital (RSO, +6.4%)
18. Bluegreen (BXG, +6.1%)
19. Countrywide Financial (CFC, +5.9%)
20. Newcastle Investment (NCT, +5.8%)
21. iStar Financial (SFI, +5.8%)
22. Gramercy Capital (GKK, +5.7%)
23. Best Buy (BBY, +5.7%)
24. Fortress Investment Group (FIG, +5.6%)
25. Mueller Water Products (MWA, +5.4%)

I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears and bargain hunting.

Today's Headlines

Posted by Gary .....at 3:03 PM

Bloomberg:
- The risk of owning corporate bonds fell to the lowest in a month after Bank of America(BAC) invested $2 billion in Countrywide Financial(CFC), credit default swaps show.
- Crude oil is rising for a second day on reduced concern that subprime-mortgage losses in the US will spread, slowing the global economy and cutting energy demand.
- Most ABX indexes rose today, suggesting a drop in the perceived risk of defaults on subprime mortgage bonds.
- Argentina and Ecuador led emerging market-bonds higher as concern about the subprime mortgage crisis abated, prompting investors to buy riskier assets.
- Kenneth Heebner, the top-ranked US money manager, abandoned his bet against Amazon.com(AMZN) in the second quarter after the online retailer posted the biggest gain among stocks in the benchmark S&P 500.
- The yen headed for its biggest two-day decline against the euro since 2004 as investors resumed the so-called carry trade.
- GameStop Corp.(GME) rose as much as 8.3% in NY trading after the company boosted profit and revenue forecast for the year.

Wall Street Journal:
- The US plans changes in state and federal laws to make it easier for European service companies to do business in the US, citing American officials.
- While many traders are licking their wounds from a drubbing in the bond market, some veteran mutual-fund managers are finding buying opportunities.
- Franklin Income Fund’s Edward Perks and Legg Mason’s(LM) Bill Miller are among fund managers who are seeking bargains among junk bonds or real-estate investment trusts that have been hammered in the current market turmoil.
- Wachovia Corp.(WB), which added to its adjustable-rate mortgage business by buying Golden West Financial last year, has seen its shares punished during the subprime crisis, although it may well have the last laugh.

NY Times:
- AT&T(T) is moving to shrink its mobile-phone bills, which can run up to 300 double-sided pages for the Apple(AAPL) iPhone, after customers expressed both annoyance and amusement at their size.

Kuwait News Agency:
- Iraqi stocks rose .4% yesterday after international investors bought into the Baghdad market. Foreign investors accounted for almost 10% of the transactions.

Job Market Still Healthy

Posted by Gary .....at 11:49 AM

- Initial Jobless Claims rose to 322K last week versus estimates of 320K and 324K the prior week.

- Continuing Claims rose to 2572K versus estimates of 2555K and 2556K prior.

BOTTOM LINE: First-time applications for jobless benefits fell last week, evidence that the US job market is still healthy, Bloomberg reported. The four-week moving-average of claims rose to 317,750 from 313,000. US business investment and strong economies overseas are supporting demand, thus keeping unemployment low. Claims are averaging 317,600 this year, little changed from last year’s average of 313,000. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I expect the job market to remain healthy over the intermediate-term without generating substantial unit labor cost increases.