BETWEEN THE HEDGES

Thursday, January 10, 2008

Friday Watch

Posted by Gary .....at 11:56 PM

Late-Night Headlines
Bloomberg:
- Bank of America(BAC) is in talks to acquire Countrywide Financial Corp.(CFC), the biggest US mortgage lender, a person with knowledge of the discussions said.
- Clients of James Siomon’s Renaissance Technologies Corp. withdrew $4 billion from the firm’s largest hedge fund in the past four months after returns trailed peers.
- The number of individual investors who are bearish on US equities exceeds those who are bullish by the most since November 1990, a signal to some investors that stocks may be poised to rebound. The percentage of AAII respondents who are bearish has exceeded those who are bullish by more than 33 percentage points only three other times since 1990 – in October 1992, February 2003 and July 2006. In the 12 months that followed those periods, the S&P 500 rose 14%, 35% and 24%, respectively. Assets in US money-market funds increased by $61.3 billion during the week ended Jan. 8, the sixth-largest increase on record, to an all-time high of $3.15 trillion, according to iMoneyNet.
- PIMCO’s Bill Gross, manager of the world’s biggest bond fund, reduced some of the pool’s cash and bought investment-grade corporate debt last month, pushing holdings to the highest since September 2003.
- Intel Corp.(INTC) former CEO Andy Grove plans to give as much as $40 million from his estate to the Michael J. Fox Foundation, a group devoted to Parkinson’s disease research.
- The yen fell against all 16 of the most-active currencies on speculation central banks will ease a credit crunch, giving traders confidence to resume buying higher-yielding investments funded in Japan.

Wall Street Journal:
- Kenneth Lewis’s move to buy hobbled mortgage lender Countrywide Financial Corp.(CFC) is a bullish bet on Bank of America’s own future and that of the battered financial system.
- Republicans Back Tax, Spending Cuts in Debate.
- Fed Chief Opens the Door To ‘Substantive’ Rate Cuts.

MarketWatch.com:
- Older adults eager to volunteer have their pick of a growing number of innovative new options, with many nonprofits trying to meet volunteers halfway by giving them flexibility, new challenges and, in some cases, a nominal paycheck in exchange for their skilled work.

NY Times:
- A huge underwater oil field discovered late last year has the potential to transform South America’s largest country, Brazil, into a sizable exporter and win it a seat at the table of the world’s oil cartel.
- Merrill Lynch(MER) is expected to suffer $15 billion in losses stemming from soured mortgage investments.

BusinessWeek.com:
- Marcial: Inside Wall Street. This week, Gene Marcial looks at DryShips, Microchip Technology, and Chicago Bridge & Iron.
- S&P Picks and Pans: Delta, UPS, Intel, Citi, Merrill, Tata.

CNNMoney.com:
- Tata unveils world’s cheapest car.
- Here come the hot IPOs of ’08.

DigiTimes:
- AU Optronics Corp.(AUO), Taiwan’s largest liquid-crystal display maker, and four rivals will earn a combined record profit of $6.2 billion this year as tight supplies prevent prices from falling.

USA Today.com:
- Tech, toy giants join discussion over kids’ cyber-centered lives.
- The average 30-year mortgage rate plunged 20 basis points to 5.87% this week, the lowest level in more than two years.

Reuters:
- Delta wants merger talks with UAL, Northwest: report.
- Third Avenue Mgmt. has 10.9% stake in MBIA Inc.(MBI).

Financial Times:
- Americans bought more Toyota Prius hybrid petrol-electric hatchbacks in 2007 than Ford Explorer sports utility vehicles, the top selling SUV for more than a decade.

Commercial Times:
- Taiwan Semiconductor Manufacturing may report record quarterly sales in the second half of 2008 because of increased demand for chips used in handsets with more advanced features.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (NUAN) to Buy, target $23.
- No Visible Warning Flags. We hosted 10 software co’s at Citi’s San Francisco office on Thursday 1/10. Key takeaways include: co’s are not seeing any weakness though we think there is still risk + we face seasonal headwinds in 1H; on-demand sector (CRM) sounded most confident; large diversified businesses are also relatively defensive (ADBE ADSK); (BEAS) may yet get acquired.
- We favor Hologic(HOLX) as our top pick in the Emerging Medtech sector followed by Spectranetics(SPNC) and Varian Medical(VAR). We expect strong upcoming quarters from all three companies and are increasing our price targets for (HOLX) to $81 from $74 and on (VAR) to $62 from $51.
- Reiterated Buy on (DPZ), target $20.

Night Trading
Asian Indices are -1.25% to +.50% on average.
S&P 500 futures -.54%.
NASDAQ 100 futures -.50%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for November is estimated to widen to -$59.5 billion versus -$57.8 billion in October.
- The Import Prices Index for December is estimated to rise .1% versus a 2.7% rise in November.

2:00 pm EST
- The Monthly Budget Surplus for December is estimated to rise to $50.0 billion versus $42.0 billion in November.

Other Potential Market Movers
- The Needham Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by mining and financial 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 Higher on Bernanke Comments, Lower Energy Prices, Buyout Speculation

Posted by Gary .....at 4:20 PM

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In Play

Stocks Soaring into Final Hour on Bernanke Comments, Buyout Speculation, Lower Energy Prices, Less Economic Pessimism

Posted by Gary .....at 3:25 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Software longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, sector performance is mostly positive and volume is heavy. Investor anxiety is high again, despite today’s gains. Today’s overall market action is bullish. The total put/call hit a high 1.23 again and the ISE Sentiment Index hit a depressed 82.0 this morning. The TED spread is dropping another 7 basis points today to 115 basis points, the lowest level since November 1. Moreover, the 30-day asset backed commercial paper yield is plunging another 18 basis points today to 4.34%, the lowest since December 2005. Given today’s news, I am surprised the major averages aren’t rising more than they are. Bear complacency is extraordinarily high. While I am not predicting it, I believe Bernanke set the stage for a rate cut before the January 29 meeting with the wording of his statements today. I suspect the Fed will no longer be perceived as being “behind the curve” over the coming weeks. As well, the acquisition of Countrywide(CFC) by Bank of America(BAC) would be a huge positive for the broad market. An eventual acquisition by another suitor of Washington Mutual(WM) is also likely, in my opinion. Today’s news and market action continues to be indicative of another meaningful stock market bottom. Illumina Inc.(ILMN) is jumping 16% today to another record high. I remain long the stock and still see further substantial upside from current levels. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, diminishing credit angst, less economic pessimism and bargain hunting.

Today's Headlines

Posted by Gary .....at 2:43 PM

Today’s Headlines
Bloomberg:
- US stocks are surging for a second day after Fed Chairman Bernanke said the Fed is ready to take “substantive additional action” in a “timely and decisive manner.”
- Bank of America(BAC) is in advanced talks to buy Countrywide Financial(CFC), the biggest US mortgage lender. Shares of Countrywide soared as much as 72% on the report.
- The US asset-backed commercial paper market expanded for a second straight week, bolstering optimism that the worst rout in short-term credit markets in more than seven years may be ending.
- Micron Technology(MU) said on its conference call today that nothing has changed since December call and demand looks pretty good.
- FTI Consulting Inc.(FCN), a provider of forensic accounting, and Comtech Telecom(CMTL) were recommended by Jason Votruba, portfolio manager at UMB Scout Small Cap Fund.
- Blackstone Group(BX), the world’s largest buyout firm, agreed to buy hedge fund manager GSO Capital Partners LP for $930 million in cash and stock, a sign it expects debt markets to rebound from subprime-loan losses.
- Despite Bernanke’s comments today, a weaker dollar and rising gold, crude oil is falling $2/bbl. on worries over slowing global demand and rising production. Global oil production reached 87.3 million barrels per day during the latest month, a new record high.
- Citigroup Inc.(C) rose in Germany and Japan after the Wall Street Journal reported that the biggest US bank is seeking as much as $10 billion from foreign investors.

Wall Street Journal:
- Iraq Surge Worked, McCain, Lieberman Write.
- Start-Up Can Cool Specific Parts of Chips That Get Too Hot.
- Verizon Communications’(VZ) software on the new Voyager mobile phone isn’t as capable as that on Apple’s iPhone, nor is it as well-designed, Walter Mossberg wrote.

NY Times:
- Murdoch Said to Offer $4.8 Billion for Monster(MNST).

NY Post:
- Time Warner(TWX) is joining media heavyweights like Disney, Viacom and Sony in making financial best on online virtual worlds.

MSNBC.com:
- Senator John Kerry of Massachusetts, the 2004 Democratic presidential nominee, endorsed Senator Barack Obama for the White House Thursday in a timely slap at Senator Hillary Rodham Clinton as well as his own vice presidential running mate.

USA Today:
- The number of slot machines is soaring as states seek more revenue and gamblers increasingly move from table games to the flashy electronic devices.

Jobless Claims Fall, Unemployment Falls, Wholesale Sales Surge Most Since 05, Inventories Hit New Record Low

Posted by Gary .....at 1:20 PM

- Initial Jobless Claims for this week fell to 322K versus estimates of 340K and 337K the prior week.

- Continuing Claims fell to 2702K versus estimates of 2730K and 2754K prior.

- Wholesale Inventories for November rose .6% versus estimates of a .4% gain and unch. in October.

BOTTOM LINE: The number of Americans filing first-time claims for jobless benefits unexpectedly fell 15,000 this week to a two-month low, Bloomberg reported. The four-week moving average of new claims fell to 341,000 from 344,000 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, fell to a historically low 2.0% from 2.1% the prior week. This is a very positive data point. As well, the National Retail Federation said that total sales for November and December combined rose 4% this past holiday season, which is better-than-expected and not the disaster that is being portrayed in the financial press today. A huge crack in the imminent recession thesis will develop should jobless claims stay around these levels over the next couple of weeks, as I suspect. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Inventories at US wholesalers rose more than forecast in November and sales jumped, Bloomberg reported. Sales rose 2.2%, the most since September 2005. The increase in sales brought the supply of goods on hand down to 1.07 months, the lowest in US history. The rise in stockpiles was led by a 2.6% jump in petroleum products and a 2.3% increase in autos. I continue to believe manufacturing will help boost US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as a result of booming exports.