BETWEEN THE HEDGES

Wednesday, November 28, 2007

Thursday Watch

Posted by Gary .....at 11:49 PM

Late-Night Headlines
Bloomberg:
- China Investment Corp., the nation’s $200 billion sovereign wealth fund, wants to stabilize financial markets, which have been rocked by subprime mortgage defaults. “CIC wants to be a stabilizing force in the international capital markets,” Chairman Lou Jiwei told a conference in Beijing today. He cited a “recent example” in which a sovereign wealth fund invested in a financial institution with subprime losses. China Investment plans to set up overseas branches in major financial centers and will mainly invest in publicly traded securities.
- National Australia Bank, the nation’s largest, agreed to buy US-based Great Western Bancorporation for $798 million, its biggest acquisition since the 1998 purchase of HomeSide Lending.
- Radiation from CT scans may be responsible for up to 2% of cancers in the US, a report in the New England Journal of Medicine found. “If a physician chooses not to order a CT scan on you today to save you the radiation exposure, the physician takes on the risk of missing something, and if something is missed, there is a good chance you’ll sue the physician for not finding it,” said Elaine Rabin, an emergency room physician at Mount Sinai Hospital in NYC. GE(GE) plans to begin selling a high-definition CT scanner next year that provides clearer images than conventional CT machines using half the radiation.
- EBay Inc.(EBAY) and Amazon.com(AMZN) may “exceed” Sanford C. Bernstein’s earnings estimates, the brokerage wrote.
- Zinc, the worst-performer on the London Metal Exchange this year, will drop another 11% in 2008 as the market returns to surplus, National Australia Bank Ltd. said.
- Crude oil prices aren’t fundamentally sustainable at $90 per barrel, said Thomas Petrie, vice chairman of Merrill Lynch(MER). Petrie, in an interview today, responded to comments made earlier by Saudi Arabian Oil Minister Ali al-Naimi, who said there is “no relationship” between today’s price and fundamental supply and demand.
- Kellogg(K) and chemical maker DuPont(DD) led 13 borrowers into the US bond market today.

Wall Street Journal:
- In a sign of continuing woes for hedge funds that use computer models to trade, GMN Capital closed shop, CEO and Managing Partner James Claus confirmed.

NY Times:
- For Toddlers, Toy of Choice Is Tech Device.
- Qualcomm Chief Welcomes iPhone’s Spread.

MarketWatch.com:
- Nine-to-one. Up volume swamped down volume in Wednesday’s trading.
- Trash Talk. Not convinced we are succumbing to fear-mongering? US consumers have taken $3-a-gallon gas and a drop in our home equity in stride. Yet the media seems hell-bent on convincing us multinational banks’ subprime mortgage losses and a weak dollar will torpedo the economy in a way the stock market’s collapse, mass layoffs and 9/11 scarcely did in 2001. Five signs we’re jawboning ourselves into a recession.

BusinessWeek:
- Clear Skies for Airline Stocks.

USA Today.com:
- Tech Holiday Gift Guide. Tips help navigate the tech-buying maze.
- Resale values for Detroit makers’ vehicles go up.
- Robots dazzle at Japanese exhibit.

Reuters:
- Freddie Mac(FRE) shares post biggest gain in 19 years.
- Hedge fund firm Pequot Capital Management, whose flagship fund gained 37% this year, will soon shut down three smaller portfolios due to “poor” performance and meager assets.

Financial Times:
- The four US television networks in a pay dispute with Hollywood television writers over online video advertising are in line to generate $120 million of revenues in 2007 from free web streaming of their content, according to a leading media buyer.

China Daily:
- A Hong Kong-based maker of bead toys that caused recalls in the US and Australia apologized for using a toxic chemical and for damaging the reputation of the made-in-China label, citing the company.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NRGY), target $39.
- Reiterated Buy on (VMW), target $134. VMW’s recently introduced ESX Server 3i, is a thin hypervisor, that six of the leading OEMs(Dell, Fujitsu, Fujitsu Siemens Computers, HP, IBM and NEC) will pre-install on servers. We believe this is a significant step towards enhancing VMW’s already dominant position in the virtualization industry and is a pre-emptive strike against future Microsoft and Citrix/Xen releases in the battle for control of the x86 server virtualization market.

Night Trading
Asian Indices are +1.5% to +3.0% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.18%.

Morning Preview
US AM Market Call
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Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
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Today in IBD
In Play
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CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (SFD)/.23
- (GRB)/.13
- (DLM)/.17
- (WMG)/.04
- (SHLD)/.53
- (AMWD)/.37
- (LULU)/.08
- (BF/B)/1.00
- (JCG)/.36
- (OVTI)/.32
- (BRCD)/.13
- (MENT)/-.02
- (HNZ)/.67
- (VIP)/.42
- (GCO)/.57
- (ZOLT)/.23
- (DELL)/.35
- (FRED)/.14
- (MIK)/.30
- (ZUMZ)/.28

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 3Q GDP is estimated to rise 4.9% versus prior estimates of a 3.9% increase.
- Preliminary 3Q Personal Consumption is estimated to rise 2.9% versus a prior estimate of a 3.0% gain.
- Preliminary 3Q GDP Price Index is estimated to rise .8% versus prior estimates of a .8% gain.
- Preliminary 3Q Core PCE is estimated to rise 1.8% versus prior estimates of a 1.8% gain.
- Initial Jobless Claims for this week are estimated at 330K versus 330K the prior week.
- Continuing Claims are estimated to rise to 2575K versus 2566K prior.

10:00 am EST
- New Home Sales for October are estimated to fall to 750K versus 770K in September.

Other Potential Market Movers
- The Fed’s Bernanke speaking, 3Q House Price Index, weekly EIA natural gas inventories report, (SAF) analyst day, (GPRO) analyst day, (STEC) analyst day, Bear Stearns Commodities & Capital Goods Conference, UBS Global Real Estate Conference, CSFB Tech Conference and the CSFB Aviation Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by gains in automaker and technology 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 Post Largest 2-day Gain Since Near Major Bear Market Low in 2002

Posted by Gary .....at 5:32 PM

Indices
S&P 500 1,469.02 +2.86%
DJIA 13,289.45 +2.55%
NASDAQ 2,662.91 +3.18%
Russell 2000 770.04 +3.60%
Wilshire 5000 14,753.22 +2.86%
Russell 1000 Growth 612.01 +2.80%
Russell 1000 Value 795.60 +2.91%
Morgan Stanley Consumer 751.65 +1.80%
Morgan Stanley Cyclical 983.23 +3.76%
Morgan Stanley Technology 622.85 +3.45%
Transports 4,625.43 +3.55%
Utilities 529.67 +1.21%
MSCI Emerging Markets 150.87 +2.98%

Sentiment/Internals
Total Put/Call .89 +9.88%
NYSE Arms .29 -56.7%
Volatility(VIX) 24.11 -8.26%
ISE Sentiment 96.0 -27.27%

Futures Spot Prices
Crude Oil $91.47 -3.13%
Reformulated Gasoline 229.33 -3.36%
Natural Gas 7.20 -4.68%
Heating Oil 260.0 -2.01%
Gold 812.0 -1.12%
Base Metals 218.24 -1.0%
Copper 303.70 +1.49%

Economy
10-year US Treasury Yield 4.02% +8 basis points
US Dollar 75.18 +.12%
CRB Index 343.78 -1.15%

Leading Sectors
I-Banks +5.95%
Homebuilders +5.78%
Computer Hardware +4.57%

Lagging Sectors
Energy +1.66%
Utilities +1.21%
HMOs +.74%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance
ETF Performance
Style Performance
Commodity Movers
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Commentary
After-hours Movers
After-hours Stock Quote
In Play

Afternoon Recommendations
Oppenheimer:
- Rated (ARG) Sector Outperformer.

Citigroup:
- Rated (CBEY) Buy, target $33.
- Rated (GLBC) Buy, target $25.
- Rated (TWTC) Buy.

Afternoon/Evening Headlines
Bloomberg:
- US stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.
- Natural gas in NY plunged 4.2% today on an outlook that above-average supplies are ample for winter.
- Crude oil fell another $3.03/bbl, reaching its largest 2-day drop since January, as a US government report showed that supplies declined less than expected and the US dollar rose further.
- SunPower Corp.(SPWR), the largest US supplier of solar panels, surged after it said Morgan Stanley(MS) will provide up to $190 million in financing for future projects.
- Treasury two-year notes had their biggest two-day decline since 2004 as a stock rally pared demand for the relative safety of government debt.
- Sigma Designs said net revenues for the third quarter rose 56% from the prior quarter and 164% from the same quarter last year. The stock is jumping 12% in after-hours trading.

CNNMoney.com:
- This bonus season, investment banks are doling out golden handcuffs.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Biotech longs, Semi longs, Computer longs, Internet longs, Software longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was exceptionally positive today as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were above average into the close, despite today’s sharp gains. Today's overall market action was very bullish. As is usually the case in the current “US negativity bubble”, pundits spent most of their time today trying to scare investors and consumers with much talk of recession and bear markets, while stocks were in the midst of their best 2-day advance since near the major bear market bottom in 2002. Market leading growth stocks gained significant traction into the afternoon with many rising 6-9% on the day. Despite the recent pullback, the Nasdaq is still 11% higher year-to-date and large-cap growth stocks are 12% higher so far this year. The 10-year swap spread fell another 1.7 basis points today to 67.0 basis points over Treasuries. This is down from 87.5 basis points over Treasuries just six days ago, which is a big positive. The yen remained weak throughout the day again, which is also a positive. As well, the G-7 currency volatility index fell another 2% today. Nikkei futures are indicating a +400 open in Japan. Today's rally was of much higher quality than other recent advances that have failed. While some healthy consolidation days are likely in the near-term, I suspect a significant year-end rally is now underway.

Stocks Soaring into Final Hour on Another Plunge in Oil, Financial Sector Strength, Short-Covering, Bargain-Hunting

Posted by Gary .....at 3:26 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs, Retail longs, Computer longs, Internet longs and Software longs. I took profits in some of my (TLT) long and added to my (ILMN) long this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is exceptionally positive today as the advance/decline line is substantially higher, every sector is rising and volume is heavy. Investor anxiety is above average despite today’s sharp gains. The 10-year TIPS spread, one of the best indicators of inflation expectations, is falling another 4 basis points today and is down 14 basis points in two days. This is mainly the result of the breakdown in energy prices. Pundits are saying that today’s rally is mainly the result of fed rate cut expectations. However, fed fund futures have implied a near 100% chance for another cut at the upcoming meeting for several weeks. In my opinion, the huge move in the broad market the last couple of days is directly related to the sharp decline in oil and firming of the US dollar. As I have said many times, record oil prices have had a much greater negative impact on the broad market than is commonly perceived. Moreover, despite the spin from the media, retail sales over the weekend, both online and offline, were much better than expected. There remains little evidence of the imminent recession that has been predicted for several years. There is much evidence that the US housing slowdown, combined with booming exports, is leading to modestly below average growth over the intermediate-term. The current macro backdrop remains exceptional for true “growth” stocks. Growth stock leaders are significantly outperforming the broad market during both weak markets and strong ones like today. For the most part, the stocks that I have disclosed that I am long are performing spectacularly year-to-date. These include GOOG +50%, AAPL +113%, ISRG +238%, ILMN +42%, GILD +41%, AMSC +138%, NUAN +80%, BRCM -12%, UA -4%, PWR +39% and TLT +11%. I now believe the broad market and US dollar have bottomed for the intermediate-term and that oil has put in at the very least an intermediate-term top. I expect US stocks to trade mixed-to-higher into the close from current levels on financial sector strength, a firmer US dollar, short-covering, bargain-hunting and lower energy prices.

Today's Headlines

Posted by Gary .....at 2:49 PM

Bloomberg:
- The yen had the steepest two-day decline in three years versus the dollar as rallying global stocks persuaded investors to buy high-yielding assets funded by loans in Japan’s currency.
- William Ackman, whose hedge fund has short positions on bond insurers, said he will make “hundreds of millions of dollars” on his bets and plans to donate the proceeds to charity.
- Analog Devices(ADI) rose the most in nine months after analysts said the company will become more profitable.
- Freddie Mac(FRE) and Fannie Mae(FNM) rose the most in about two decades on optimism the mortgage-finance companies will raise enough capital to weather the housing slump.
- Chinese stocks are poised for their steepest monthly decline since at least 1995 as the government deflates a bubble that caused prices to quadruple in a year. The Shanghai Composite fell 19% so far in November.
- After 25 years of increases, US obesity rates were unchanged at about 34% in 2005-2006 compared with the previous two years, according to a survey by US health officials.
- Comcast, Time Warner and Charter Communications advanced after US regulators dropped for now a push to expand their oversight of the cable-tv industry.
- The US dollar gained the most in two weeks against the euro on speculation traders were scaling back bets on further declines in the US currency as stocks rallied.
- The Iraqi government has approved a plan to build an oil refinery with a capacity of 300,000 barrels a day in the southern city of Nasiriyah, Iraq’s oil minister said.
- Venezuela’s President Hugo Chavez alleged Time Warner’s(TWX) CNN is seeking to incite his assassination and called for an investigation of the cable-television news channel.
- The perceived risk of companies defaulting on their debt fell for a second day on optimism that financial companies will be able to shore up capital that was eroded by losses tied to subprime mortgages, according to credit default swap traders. Credit-default swaps tied to Citigroup(C) fell 8 basis points to 75 basis points. The contracts, used to speculate on a company’s ability to repay its debt or hedge against the risk it won’t, have dropped 17 basis points the past two days after reaching the highest in a least five years recently.
- Gold and silver fell for the second straight day after the dollar rebounded against the euro, reducing the appeal of the precious metals as alternative investments.
- US emissions of greenhouse gases fell 1.5% in 2006, the first annual reduction since 2001.
- Crude oil is falling another $3.30/bbl. in NY after a government report showed that US supplies declined less than expected and refineries increased fuel output.
- Nickel fell to its lowest in more than 2 months as stockpiles advanced for a 16^th straight day.

Wall Street Journal:
- ‘Value’ Stock Funds Take a Beating in Subprime Crisis. Name a big-company stock you didn’t want to own this year, and there’s a good chance it’s in the portfolio of your large-cap value fund.

CNNMoney.com:
- LinkedIn Sale Would Cost More Than $1 Billion.

Nikkei English News:
- Apple’s(AAPL) Japanese unit and Nippon Telegraph and Telephone Corp. will offer free wireless Internet access to users of Apple’s iPod Touch media player.

Durable Goods Orders Decline, Existing Home Sales Fall Slightly

Posted by Gary .....at 12:56 PM

- Durable Goods for October fell .4% versus estimates of a .1% decline and a 1.4% fall in September.

- Durables Ex Transports for October fell .7% versus estimates of a .3% gain and an upwardly revised 1.1% gain in September.

- Existing Home Sales for October fell to 4.97M versus estimates of 5.0M and 5.03M in September.

BOTTOM LINE: Orders for US durable goods fell more than forecast in October, Bloomberg reported. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, fell 2.3%, the most since February, after a 1.2% increase in September that was larger than previously thought. Boeing(BA) had orders for 56 aircraft in October versus 132 the prior month. However, demand this year so far for their planes reached a record 1,047. I expect durable goods order to bounce back next month on inventory rebuilding and better-than-expected demand.

Sales for previously owned homes fell slightly more than forecast last month, Bloomberg reported. The median home price is now $207,800. The number of homes for sale at the current sales pace is 10.8 months’ worth. Existing home sales fell 1.7% in the Midwest and 4.4% in the West. Sales were unchanged in the Northeast and the South. I expect sales to bounce higher next month as the average 30-year mortgage rate has declined 54 basis points since June and there is likely some pent-up demand at this point. Fed fund futures now imply a 94% chance for a 25 basis point rate cut at the upcoming December 11^th meeting and a 6% chance of a 50 basis point cut.