BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:
- Lehman’s(LEH) Hedge-Fund Clients Left in Cold as Assets Are Frozen. Lehman Brothers Holdings Inc.'s bankruptcy probably means the end of hedge-fund manager Oak Group Inc. after 22 years in business.

- European politicians are discovering what cometh after pride. A week after lambasting the U.S. for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe yesterday bailed out banks from Belgium, Germany and the U.K. Dexia SA today received aid from France and Belgium, while Ireland's government said it would guarantee bank deposits and debt for two years. ``The gods of the markets are punishing those who showed hubris,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ``Europe has been bashing the U.S., but it's realizing now it has its own problems.''

- American International Group Inc.(AIG) may benefit from a government plan to buy distressed mortgage assets, NY Insurance Superintendent Eric Dinallo said. “It is likely that it could help,” Dinallo said. Issuers of credit default swaps may have the chance to cancel the contracts if the underlying assets get bought by the government, Dinallo said.

- The euro traded near a two-week low against the dollar on speculation governments will bail out more European banks after France and Belgium led a state-backed rescue of Dexia SA. ``Selling the euro is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``It may take longer for Europe to solve its problems, because it's only just now getting started.''

- Mitsui O.S.K. Lines Ltd., Japan's largest operator of iron-ore ships, dropped in Tokyo trading along with domestic rivals, as rates for carrying commodities had their biggest monthly slump on record. The Baltic Dry Index, a measure of commodity-shipping rates, dropped 8.2 percent yesterday, bringing its slide in September to 53 percent, as raw-material demand from China's steelmakers weakened. China's urban housing demand has dropped since minimum down-payment requirements and some mortgage rates rose last year. Property prices climbed at the slowest pace in 18 months during August, the National Development and Reform Commission said Sept. 16.

- Japan's largest manufacturers turned pessimistic about their prospects for the first time in five years as the deepening U.S. financial crisis stifled demand in the country's export markets. The Tankan index of confidence among big makers of cars and electronics slid to minus 3 points in September from 5 in June, a fourth quarterly drop, the Bank of Japan said today in Tokyo. The first negative reading for the index since 2003 indicates pessimists outnumber optimists.

Wall Street Journal:
- Scrambling to hold on to investors, hedge-fund managers are taking drastic steps such as lowering their fees. U.K. hedge fund RAB Capital PLC on Tuesday said it had convinced steel magnate Lakshmi Mittal and other investors to lock in their money in a flagship fund for three years in exchange for lower fees. As part of the move, it halved its annual management fee. Increasingly, hedge funds are restructuring, changing their fees and altering how they hold investments, among other steps, in an effort to keep investors who have grown skittish at some of the funds' worst performances ever.

- Congress and the Bush administration are hashing out an agreement to raise the level of consumers' bank deposits guaranteed by the government, an idea they hope might bring enough support to revive President George W. Bush's planned rescue of financial markets. The Senate will vote on a new version of the rescue bill Wednesday if a compromise can be reached on this and other issues. Congressional leaders expect the vote could build momentum for passage of the bill in the House, which stunned Washington Monday by rejecting the $700 billion banking-rescue package. Congressional leaders were also considering changing an accounting rule known as "mark to market" that some lawmakers blame for the financial system's volatility.

- Public pension funds and other big investors have long squeezed out a few extra bucks by lending stock held in their portfolios -- for a fee -- to short sellers. Now those funds are starting to feel a squeeze of their own. The collapse of Lehman Brothers Holdings Inc. and Washington Mutual Inc. have set off new troubles in the securities-lending business, and the recent freeze in short-term debt markets has only compounded the problem.

CNBC.com:

- Dizzying drops like the Dow Jones industrial average's 7 percent plunge Monday may prompt U.S. securities regulators to extend a short selling ban beyond Thursday. "Certainly a lot of hedge funds would like the orders to expire, particularly the disclosure rule because that is what is keeping them from trading," said Laurel FitzPatrick, a partner who heads the hedge fund practice at law firm Ropes & Gray. Several managers said they have asked the Managed Funds Association, the industry lobby group, to appeal to regulators on their behalf, saying they want MFA lawyers to underscore just how debilitating the bans really are.

NY Times:
- Lee S. Ainslie, Louis M. Bacon and Daniel Loeb are some of the most successful hedge fund managers around. But even they lost big lately as the markets turned chaotic. Funds managed by the three money managers all lost at least 5 percent of their value in September, leaving them in an even deeper hole for the year.

AppleInsider:
- Adobe(ADBE) is nearly done with a version of its Flash Player for the iPhone that could be released 'in a very short time' if it passes Apple's(AAPL) App Store screening process, an Adobe official said this week.

Hartford Courant:

- When a Democratic takeover of Congress put Christopher Dodd in charge of the powerful Senate Banking Committee, Connecticut's senior senator eagerly met with reporters, outlining his generally pro-industry positions, but pledging to put consumers — and the long-term health of the economy — first. "At the end of my tenure on this committee," Dodd said in early 2007, "I want it to be said that the safety and soundness of our financial institutions was not weakened on my watch." Financial-sector firms — mortgage firms, insurance companies, accountants, brokerage houses, hedge funds — are among the most generous political donors in America, lavishing more than $1 billion on candidates this decade. And in Congress, few politicians have fared better than Dodd. some of Dodd's heartiest patrons have become the poster companies for the Wall Street implosion: AIG Insurance, Lehman Brothers, Merrill Lynch and Bear Stearns.

Reuters:

- President George W. Bush on Tuesday signed into law a mammoth spending bill to keep the government running until early March 2009 that includes a $25 billion loan package for troubled automakers.

- The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD,said its holdings rose 4.2 percent on Wednesday to a record 755.26 tons from 724.63 tons as of Sept. 30. The trust has seen its holdings rise more than 20 percent since Lehman Brothers filed for bankruptcy protection on Sept 15. XAUEXT-NYS-TT. Buying of gold for ETFs, which issue securities backed by physical stocks of a commodity, has been a major source of demand for the precious metal in recent years.

Financial Times:
- Hedge funds on Tuesday closed out one of their worst-ever quarters as US managers braced for an extension of the short-selling clampdown which has robbed them of one of their most popular strategies. The hedge fund business has been left reeling by the combined forces of greater regulation - including the banning of short selling on certain financial stocks by the US Securities and Exchange Commission and other regulators across the world - the threat of investor withdrawals, a flight from risk and a squeeze on leverage. According to latest figures from Hedge Fund Research, the industry data provider, the hedge fund market is on course for its worst year of performance since at least 1990, when its records began. The ban on short-selling of certain financial stocks, although only temporary, has led many in the hedge fund market to question the very basis of their business model. Funds that make money from short selling are also constrained on another front: stock lenders have been recalling their stock, and some, such as Vanguard, have suspended their stock lending programs altogether. This has made it harder to find stocks to borrow, or it means the fund must pay a higher price to borrow stock. Short sellers borrow their stocks from long-only investors such as mutual funds and pension funds, through stock lending programs.

- The pressure on regulators and accounting rulemakers to ease fair value accounting standards in an effort to help end the financial crisis has been intensified by politicians. Nicolas Sarkozy, French president, is to urge his European counterparts to back changes that would introduce more flexibility in the accounting rules. David Cameron, leader of the UK's opposition Conservative party, said the rules had made the crisis worse and needed to be addressed. Robert Rubin, former US Treasury secretary and currently a senior adviser to Citigroup, said fair value accounting worsened the financial sector's problems. He told a Financial Times conference that fair value "is not serving our system well" and urged regulators to change the rules.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (THO), boosted target to $30.

Night Trading
Asian Indices are +.25% to +2.25% on average.
S&P 500 futures -.48%.
NASDAQ 100 futures -.84%.

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Earnings of Note
Company/EPS Estimate
- (ATU)/.54

- (WWW)/.59

- (SMSC)/.25

- (MU)/-.23

- (BLUD)/.24

Economic Releases
8:15 am EST

- The ADP Employment Change for September is estimated at -50K versus -33K in August.

10:00 am EST

- ISM Manufacturing for September is estimated at 49.5 versus 49.9 in August.

- ISM Prices Paid for September is estimated at 73.0 versus 77.0 in August.

- Construction Spending for August is estimated to fall .5% versus a .6% decline in July.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil build of 2,750,000 barrels versus a -1,520,000 barrel drawdown the prior week. Gasoline supplies are estimated to fall by -2,050,000 barrels versus a -5,895,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -4,176,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by 5.5% versus a -10.7% decline the prior week.

Afternoon:

- Total Vehicle Sales for September are estimated to fall to 13.5M versus 13.7M in August.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Challenger Job Cuts report, Merrill Lynch Global Energy Conference, (ENER) Investor Day, (OKS) Analyst Meeting, (SFE) Analyst Day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and commodity 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.

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Gaming longs, Computer longs and Internet longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is elevated. Today’s overall market action is bullish. The VIX is falling 15.3% and is elevated at 39.71. The ISE Sentiment Index is below average at 117.0 and the total put/call is high at 1.25. Finally, the NYSE Arms has been running low most of the day and is currently .54. The Euro Financial Sector Credit Default Swap Index is falling 11% today to 117.33 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 2.0% to 171.50 basis points. The TED spread is falling 11.3% to 3.14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 7 basis points to 1.56%, which is down 106 basis points in less than three months and at the lowest level since January 2003, when deflation was the concern. The Goldman Sachs Hedge Fund VIP Index(favorite longs of the hedge fund community) is rising 3.9% today after yesterday’s steep decline. This index is now down 18.7% for the quarter. I think much of yesterday’s decline was related to hedge fund redemption selling. I am hearing more and more chatter of coordinated global rate cuts, which would be a large positive. As well, Reuters reported over the last hour that the SEC will say the results of disorderly transactions are not determinative when measuring fair value. This should have been done a long time ago, but nonetheless would be another large positive. The US dollar continues to trade very well and I suspect this will again begin to weigh on most commodities over the coming weeks. Weekly retail sales rose 1.4% this week versus a 1.5% gain the prior week. The four-week average of weekly retail sales is a gain of 1.6%, which is below the long-term average, but well above the .6% gain during February of this year. The main negatives I see today are that breadth isn’t that great and some key gauges of credit angst continue to rise. These gauges need to begin to meaningfully reverse to ensure a sustainable stock rally. Nikkei futures indicate a +450 open in Japan and DAX futures indicate an +106 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, less financial sector pessimism and short-covering.

BETWEEN THE HEDGES

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Wednesday Watch

Stocks Finish at Session Highs, Boosted by Financial, Technology, Construction, Gaming and REIT Shares

Stocks Soaring into Final Hour on Bargain-Hunting, Short-Covering and Less Financial Sector Pessimism