BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Alternative Energy longs, Medical longs and Gaming longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.58% and is still above-average at 19.96. The ISE Sentiment Index is slightly below average at 139.0 and the total put/call is above average at 1.0. Finally, the NYSE Arms has been running about average most of the day and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 1.95% today to 82.33 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is falling .61% today to 130.67 basis points. The TED spread is rising 9.61% to 1.17. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 2 basis points to 2.23%, which is the lowest since May 1st and down 40 basis points in about a month. Growth stocks are especially strong today, with many leaders posting 2%+ gains. It is very good to see the broad market able to rally without the help of the financials or another substantial decline in oil. The Citi eurozone economic surprise index has fallen to -168.20, while the US index remains in positive territory at +22.6. The US Dollar Index continues to trade very well and is poised to close above its 200-day moving average for the first time since March 2006. The index is in a mild resistance zone right now, but should punch through this area easily over the coming months as US economic data continue to show mild improvement, while other major economies slow further. Even after falling 20% from its high, oil was unable to even bounce today, which bodes well for further declines in the much-loved commodity. As well, agricultural commodities remain very weak, falling another 1.94% today. The S&P Goldman Agriculture Commodity Spot Index is now down 22.9% in less than five months. Inflation gauges should show huge improvement over the coming months, as a result. Two of my longs, (PWR) and (WMS), reported earnings and are trading substantially higher today. I think both are still very attractive at current levels. Nikkei futures indicate an +66 open in Japan and DAX futures indicate an +69 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism, short-covering and lower commodity prices.

Bloomberg:
- Investors in commodity-tracking indexes withdrew $680 million from agricultural futures last week, a record sixth straight week of outflows, according to UBS AG.
- BP Plc, Europe's second-largest oil company, and the U.S.'s Verenium Corp. plan to collaborate on developing and selling cellulosic ethanol, a biofuel made from non-edible organic material such as woodchips and grass. The companies intend to create production facilities in the U.S. and potentially worldwide. ``Energy crops like sugar cane, miscanthus and energy cane are the best feedstocks to deliver economic, sustainable and scaleable biofuels to the world,'' Sue Ellerbusch, president of BP Biofuels North America, said in the statement. ``We now have the most advanced technology for transforming these energy grasses to biofuels, increasing our ability'' to meet U.S. demand for cellulosic ethanol. The U.S. Energy Independence and Security Act of 2007, known also as the Renewable Fuels Standard plan, mandates that the country use 15 billion gallons a year of ethanol and 1 billion gallons of biodiesel by 2015. It also calls for consumption of 16 billion gallons of cellulosic ethanol by 2022. So-called second-generation biofuels may account for as much as 23 percent of global transport fuels by 2030, according to Novozymes A/S, the biggest maker of enzymes for industrial and biofuel processes.
- Crude oil futures have tumbled more than 20 percent since touching a record $147.27 a barrel in New York on July 11, a threshold often seen as the start of a bear market. Oil fell as low as $117.14 a barrel amid signs of a global economic slowdown likely to curtail already weakening demand. The dollar today touched its highest in more than seven weeks against the euro, lessening the appeal of commodities as an inflation hedge. ``We've been warning about the oil bubble bursting after reaching $150 because of investors pulling money out of the markets and the negative demand reaction,'' said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. ``At the moment we expect a corrective move to continue.'' ``The bubble has burst,'' said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. ``As the dollar continues to stabilize, the excuse for buying commodities is ended. The dollar has been strengthening, and that is one big catalyst that is gone.'' ``It feels like there could be more downside, but we don't think there is more than $18 a barrel downside,'' David Pursell, an analyst at Tudor, Pickering, Holt & Co. in Houston, said in a telephone interview. U.S. fuel demand averaged 20.1 million barrels a day during the four weeks ended Aug. 1, down 2.6 percent from a year earlier, according to Energy Department data released today.
- Corn and soybeans fell for a fifth straight session on speculation warm, wet weather boosted prospects for crops in the U.S. and China, the biggest growers. Soybean output in China will rise 37 percent to 17.5 million metric tons from a year earlier, the China National Grain and Oils Information Center said today. That exceeded last month's forecast by 1 million tons. Corn production may gain 2.8 percent, the center said. Informa Economics Inc. said yesterday U.S. corn and soybean crops will top government estimates. Before today, corn dropped 32 percent from the record $7.9925 on June 27. Before today, soybeans dropped 22 percent from the all-time high of $16.3675 on July 3.
- The US dollar traded near a seven-week high against the euro as the price of a barrel of oil tumbled to the lowest level in three months. The U.S. currency was near its highest versus the yen in more than a month on optimism lower crude prices will bolster economic growth in the world's largest consumer of the fuel. Australia's dollar declined to a four-month low and Canada's traded near its weakest in almost a year as prices of commodities the nations export fell.
- Carrefour SA’s Chinese director, Eric Legros, said inflation in China is a concern for Europe’s largest retailer. Inflation in that country is a “real preoccupation,” Legros said.
- Ireland doesn’t plan to raise taxes as economic growth slows and the country’s budget deficit increase, according to Health Minister Mary Harney. “Clearly the last thing we need is a knee-jerk reaction,” Harney said. “The last thing we need in this economy is to increase taxes and to go on what I call a spending, borrowing and taxing spree.”
- HealthSouth Corp.(HLS), the largest U.S. provider of inpatient rehabilitation services, rose the most in almost five years in New York trading after the company increased its projected earnings for the year.
- Nasdaq OMX Group Inc.(NDAQ) rose the most in more than three years in New York trading after profit exceeded analysts' estimates and the exchange said the purchase of Sweden's OMX AB will add to profits sooner than expected.
- Microsoft Corp.(MSFT) Chief Executive Officer Steve Ballmer, whose botched bid for Yahoo! Inc. helped drive the stock down 20 percent since February, is about to make it up to shareholders with a buyback of as much as $20 billion, according to a top-rated software analyst. Investors should buy now, while Microsoft is trading at the lowest estimated price-earnings ratio since the world's largest software maker went public 22 years ago, said Heather Bellini of UBS AG, ranked the best software analyst by Institutional Investor magazine in 2007. She expects Microsoft to complete the repurchase -- at least five times larger than its average per quarter in the last fiscal year -- over the next three months.
- China’s biggest aluminum smelters, the largest in the world, have cut more than 10% of capacity because of a power shortage and weak export demand, said Wen Xianjun, deputy chairman of China Nonferrous Metal Industry Association. “The production cut will probably extend to the rest of the year,” Wen said.
- Taiwan's dollar fell for a seventh day, the longest losing streak in a year, on speculation the island's economic growth will slow, deterring the central bank from raising interest rates. Government bonds rose.
- Japan's government said the economy is ``deteriorating,'' acknowledging for the first time that the country's longest postwar expansion has probably ended. ``There is a high possibility the economy has entered a recession,'' Shigeru Sugihara, head of business statistics at the Cabinet Office said in Tokyo today.

NY Times:
- Blackstone(BX) Thinks Subprime Is Near a Bottom.

BusinessWeek.com:
- Even Hedge Funds Are Hurting. Even some superstar managers suffered, including Harbinger Capital Partners' Phil Falcone, whose flagship fund lost 16% in July when his buy oil/sell financials strategy suddenly fell apart midmonth (to be fair, Falcone is still up 23% on the year). "We should see a significant shrinkage in the number of funds out there." Relative-value funds, which exploit price differences between similar assets, suffered $3.6 billion in outflows during the first half of the year. During the first three months of 2008, 170 funds closed, an increase of roughly 30% over the year-earlier period. At the same time, investors closed their wallets, as inflows dropped 79% year-over-year, to a paltry $12.5 billion, with more than half going to the top-performing macro strategy. With markets gyrating wildly as they fall into bear-market territory, funds that short market drops one day and catch bounces the next are thriving. These types of funds—whether quantitative, with computer programs making trade decisions, or discretionary, with a manager choosing what trades to make—saw inflows of more than $11 billion during the first half of the year.

FINalternatives:
- Asia-focused hedge funds have taken a beating this year and investors are shying away from managers who not too long ago were seeing double-digit returns. Funds investing in India and China produced the worst performance of any specific hedge fund classification after leading all hedge funds for much of 2007, according to HedgeFund.net. The HFN India and China Averages were down 14.97% and 8.87% in June, respectively, leaving them down 36.88% and 18.77% in the first half of 2008. A lot of the gains generated by the India funds in the last few years came from sectors like real estate, power and construction, according to Vishwas founder Matt Mongia. “These sectors have seen a painful unwinding, in some cases 50%,” he told FINalternatives. In the small- and mid-cap arena, Mongia says trading volume and liquidity have dried up to a point where many managers couldn't sell their holdings even if they wanted to. “So many funds have ridden their portfolio names up and all the way back down,” he says. Investors are also pessimistic about Asian hedge funds, committing just $530 million in new capital in the second quarter, a figure offset by a performance-based decline of nearly $320 million, according to data from Hedge Fund Research. This inflow total represents a drop of nearly 50% from the approximately $1 billion in new assets added to Asian hedge funds in the first quarter.

Mondaq:
- A Short Summary Of Short Selling Regulations. The SEC is actively monitoring short selling activities and is seeking to reduce abusive short selling practices through a combination of regulations, enforcement actions, and, most recently, the emergency actions. In particular, the SEC is focused on addressing the issue of naked shorting. The emergency order will expire on August 12 and the SEC has stated that it will "proceed immediately to consideration of rulemaking" which would expand the scope of the prohibitions to the "broader market." Further, the SEC has indicated that it may require disclosure of substantial short positions. The SEC found that its existing regulations on short selling are unable to address market abuses in light of changing market dynamics and is poised to make additional changes to address the perceived abuses.

New York Post:
- John Paulson, the hedge fund manager who pocketed as much as $3 billion last year on bets against subprime mortgages, was shaken by a tough July - though not by much, according to performance data obtained by The Post. Of Paulson's six hedge funds, the hardest hit was one of two merger arbitrage funds, which dropped 3.7 percent for the month, The Post has learned. Paulson was likely hit by bets against financial stocks, but he was saved by having little or no exposure to energy, according to people familiar with his funds. Experts predict July will be the worst month for hedge funds since the tech bubble burst in 2000 as investors got pummeled as the markets reversed course, sending shares of beleaguered Wall Street firms higher and energy prices down.

Dow Jones:
- Nissan Motor Co., Japan’s third-largest automaker, has developed a new battery for fuel-cell cars that it will road test by the end of the year. The new battery is 35% cheaper, 75% smaller and 1.4 times more powerful than the carmaker’s previous-generation battery. Nissan has been working on a new lithium-ion battery to be used in hybrids, fuel-cell vehicles and electric cars that it plans to introduce after 2010. Honda Motor, Japan’s second-largest carmaker, said in June it will start mass production of its FCX Clarity fuel-cell car within 10 years.

Reuters:
- The German economy, Europe’s biggest, contracted between .75% and 1.5% in the second quarter, citing estimates by government experts. A shrinking economy in two consecutive quarter, defined as a recession, can’t be ruled out, the official said.

Interfax:
- Russian grain exports may more than double to 35 million metric tons by 2020 from 16.7 million tons last year, citing a draft forecast prepared by the Economy Ministry. Russia’s total grain harvest in 2020 may reach 125 million tons, up from 81.8 million tons in 2007, citing the forecast.

Kommersant:
- Russian Internet advertising grew 73% to $260 million in the first six months from a year earlier and may top $600 million this year, citing the MindShare Interaction research agency. Companies spent $161 million, or 83% more than last year, on contextual and search advertising, which is calculated separately, citing MindShare.

The Australian:
- Demand for new home loans in Australia suffers biggest hit since 1980s.

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Wednesday, August 06, 2008

Stocks Finish Near Session Highs, Boosted by Commodity, Technology and Construction Shares

Stocks Rising into Final Hour on Short-Covering, Less Economic Pessimism, Lower Commodity Prices

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