BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Internet longs and Gaming longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short this morning and covered some of these positions this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is sharply lower, most sectors are falling and volume is heavy. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX is rising 14.5% and is very high at 34.66. The ISE Sentiment Index is very low at 89.0 and the total put/call is very high at 1.42. Finally, the NYSE Arms has been running around average most of the day, after peaking at 3.96 this morning, and is currently .84. The Euro Financial Sector Credit Default Swap Index is +5.02% today to 150.17 basis points. This index is up from a low of 52.66 on May 5th and at a new high. The North American Investment Grade Credit Default Swap Index is +5.87% to 205.76 basis points. The TED spread is rising 38.3% to 3.02 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 2 basis point to 1.61%, which is down 101 basis points in about eight weeks and at the lowest level since January 2003, when deflation was the concern. The fact that credit angst is surging to records today, despite the AIG news, is a large negative. The (XLF) is breaking down through its recent trading range, which is also a negative. Many gauges of stock market angst are at levels normally associate with meaningful market bottoms, however the NYSE Arms has been unusually low after its initial opening spike. I am seeing many instances of "capitulation" selling in individual equities and I suspect some stocks are making their lows today. Nikkei futures indicate a -305 open in Japan and DAX futures indicate an +2 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, forced selling, higher commodity prices, rising financial sector pessimism and global growth worries.

Late-Night Headlines
Bloomberg:
- The cost of default protection on Australian corporate bonds fell from a record high, credit- default swaps show. It also fell in Japan. The Markit iTraxx Australia Series 9 Index was about 23 basis points lower at 185 at 9:54 a.m. in Sydney after earlier trading at 195 basis points, ABN Amro Holding NV prices show. The Markit iTraxx Japan index fell 21 basis points to 159 as of 9:05 a.m. in Tokyo, according to prices from Morgan Stanley.
- Samsung Electronics Co., the world's second-largest chipmaker, made a $5.85 billion hostile bid for SanDisk Corp.(SNDK) to widen its lead in the market for semiconductors that store pictures and music in cameras and mobile phones. Samsung offered $26 in cash for each SanDisk share, the Suwon, South Korea-based company said today in a statement. That's 73 percent more than SanDisk's latest closing price, leading the stock to jump 56 percent in after-hours trading.
- Morgan Stanley’s(MS) third-quarter profit fell less than estimated as revenue from stock trading and an asset sale cushioned a drop in the firm's investment banking and fixed-income businesses. ``We are very convinced and confident in the broker-dealer model,'' Morgan Stanley Chief Financial Officer Colm Kelleher said in a telephone interview. ``The market unfortunately is based on rumor and fear.'' On a conference call with analysts, he said Morgan Stanley's risk of losses from Lehman and AIG were ``not material.''
- Barclays Plc, the U.K.'s third- biggest bank, will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. for $1.75 billion, two days after abandoning plans to buy the entire firm. Barclays is paying $250 million in cash for the Lehman businesses and $1.5 billion for the securities firm's New York headquarters and two data centers, the London-based bank said in a statement on its Web site today. The operations employ about 10,000 people.
- Emerging-market stocks plunged the most in 11 years, currencies fell and the cost of insuring developing-nation bonds surged as rising lending rates and tumbling commodities prompted investors to sell riskier assets. The MSCI Emerging Markets Index fell 4.7 percent to 786.99 at 4:17 p.m. New York time, the lowest level since October 2006. The measure earlier tumbled 6.3 percent for the biggest drop since October 1997. The measure lost 34 percent in 2008 before today, compared with a 19 percent decline for the Standard & Poor's 500 Index.
- Gold fell as investors sold commodities to raise cash and cover losses in other markets. Silver fell to a two-year low and platinum dropped the most since at least 1986. Platinum futures for October delivery plummeted $107.70, or 9.2 percent, to $1,068.50 an ounce in New York.

Wall Street Journal:
- The U.S. government announced an emergency rescue of American International Group Inc.(AIG) -- one of the world's biggest insurers -- signaling the intensity of its concerns about the danger a collapse could pose to the financial system.

MarketWatch.com:
- Offshore oil and gas exploration gets newfound attention from both parties.

NY Times:
- There is a tiny shred of good news for Lehman Brothers(LEH), the beleaguered investment bank: one of the investments of its Healthcare Venture Capital arm, a biotech company called Fluidigm, is set to go public this week. That is, if the markets cooperate.

CNBC.com:
- Morgan Stanley(MS) officials are weighing whether the firm should remain independent or merge with a bank given the recent turbulence in the company's stock, CNBC has learned.

USA Today.com:
- Officials in North Carolina, Texas and Florida are investigating claims of price gouging as gasoline prices soared across large swaths of the nation in the wake of Hurricane Ike.

Daily Herald:
- Home Depot(HD) plans price cuts to bring back shoppers.

Reuters:
- The U.S. House of Representatives passed legislation on Tuesday lifting a longstanding congressional moratorium on offshore drilling.

Financial Times:
- Russia authorities halted trading on the country's stock exchange on Tuesday after it plunged 17 per cent in a broad-based sell-off. "This is a good old-fashioned panic", said Steven Dashevsky, head of research at Unicredit in Moscow. "It doesn't feel like there is anyone domestically that can put the brakes on." Margin calls on local investors who have used stocks as collateral for loans continued to drive sales, as emerging market funds faced growing redemptions.
- The growth prospects of the global hedge fund market – worth almost $2,000bn (£1,400bn) – are in doubt. Funds are being forced to de-lever and sit on large cash balances as the prime brokers they largely depend on for financing face severe pressure. The collapse of Bear Stearns and Lehman Brothers has forced hundreds of hedge funds that used the banks as their prime brokers to look elsewhere for their funding and support. It has also put pressure on funds to rein in the amount of leverage they employ, limiting their ability to outperform broader indices and causing investors to question the fees they charge. About 100 hedge funds that used Lehman as their prime broker had positions held via the bank frozen on Monday as administrators took charge of the London business and the US holding company filed for bankruptcy.

Guardian:
- Google(GOOG) shows first Android phone in London.

The Independent:
- Britain’s Alistair Darling stopped short of calling for an outright ban on shorting bank shares yesterday, as news emerged that the US government was preparing plans to crack down on the practice. This came on the day that the Liberal Democrat Treasury spokesman, Vince Cable, called for the regulators to outlaw the shorting of banks to stop hedge funds "betting against the taxpayer".

AFP:
- The US government approved $250 million in sales of food products and agricultural equipment to Cuba to help it recover from Hurricanes Ike and Gustav, bypassing an embargo on the country.

The West Australian:
- BHP Billiton(BHP) has warned that its profits are exposed to any economic slowdown in China. The warning was contained in the group’s US annual report and breaks with the habit of the past five years of talking up the strength of Chinese demand.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ADBE), target $50.

Piper Jaffray:
- Rated (CKEC) Buy, target $6.
- Rated (NCMI) Buy, target $14.

Night Trading
Asian Indices are -.25% to +2.0% on average.
S&P 500 futures +.57%.
NASDAQ 100 futures +.53%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
Commodity Movers
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Upgrades/Downgrades
Rasmussen Business/Economy Polling

Earnings of Note
Company/EPS Estimate
- (GIS)/.88
- (DBRN)/.29
- (CKR)/.19
- (MLHR)/.55

Economic Releases
8:30 am EST
- The Current Account Deficit for 2Q is estimated to widen to -$180.0 billion versus -$176.4 billion in 1Q.
- Housing starts for August are estimated to fall to 950K versus 965K in July.
- Building Permits for August are estimated to fall to 928K versus 937K in July.

10:35 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -3,500,000 barrels versus a -5,828,000 barrel decline the prior week. Gasoline inventories are expected to fall by -3,500,000 barrels versus a -6,462,000 barrel decrease the prior week. Distillate supplies are estimated to fall by -1,900,000 barrels versus a -1,252,000 barrel fall the prior week. Finally, Refinery Utilization is expected to fall by -2.0% versus a -10.41% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, (BRCD) analyst meeting, Goldman Sachs Communications Conference, UBS Global Paper/Forest Products Conference, Jeffries Shipping/Logistics/Offshore Services Conference, CSFB Chemical Conference, Bank of America Investment Conference, Merrill Lynch Global Real Estate Conference, RBC Financial Institutions Conference and the BMO Capital Markets Real Estate Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and financial shares in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.

BETWEEN THE HEDGES

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Wednesday, September 17, 2008

Stocks Sharply Lower into Final Hour on Rising Credit Angst, Financial Sector Pessimism, Higher Commodity Prices

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Tuesday, September 16, 2008

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Stocks Finish at Session Highs, Boosted by Airline, REIT, Financial and Commodity Shares