BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Biotech longs and Medical 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 mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is very heavy. Investor anxiety is very elevated. Today’s overall market action is bullish. The VIX is rising 1.32% and is historically elevated at 54.39. The ISE Sentiment Index is low at 102.0 and the total put/call is high at 1.23. Finally, the NYSE Arms has been running low most of the day, after hitting 3.68 at its morning peak, and is currently .35. The Euro Financial Sector Credit Default Swap Index is falling 6.44% today to 109.0 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 rising 2.6% to 179.70 basis points. The TED spread is rising 8.9% to 3.87 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 19 basis points to .98%, which is down 165 basis points in about three months and at the lowest level since January 1999. I said last week that we needed to see a significant global central bank response to the current crisis and we got that today. I am surprised by the market’s muted upside reaction thus far. However, given that the ban on short-selling financials expires tonight and ongoing forced hedge fund selling, a delayed more vigorous upside reaction is likely. Nikkei futures indicate an +227 open in Japan and DAX futures indicate an +137 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting and global growth worries.

Late-Night Headlines
Bloomberg:
- Crude oil fell after U.S. equities slumped on speculation banks and real-estate companies are running short of money because of a worsening credit crisis that may curb economic growth and energy demand. Oil futures have declined 39 percent from the record $147.27/bbl. reached July 11. Arjun Murti, the Goldman Sachs Group Inc. analyst who predicted a crude ``super spike'' in March 2005, said there is a ``downside'' risk to his forecast that oil may rise to $120 in the fourth-quarter. ``Oil prices increasingly appear unlikely to sustain a rally until global GDP expectations bottom,'' Goldman said in a note. ``While we believe oil supply/demand fundamentals are not as bearish as is sentiment, we recognize that concern continues to mount towards global oil demand growth.''

- Corn fell to a 10-month low on speculation demand will slow as global livestock producers use more wheat as a cheaper alternative in feed rations. Wheat prices are down 55 percent from a record in February, and the U.S. Department of Agriculture forecasts a record global harvest in the year that ends in June. Export sales of corn from the U.S., the world's largest producer and shipper, are down 37 percent in the current marketing year, USDA data show. ``Export demand is miserable'' for corn, said Charlie Sernatinger, a market analyst for Fortis Clearing Americas LLC in Chicago.

- Texas billionaire T. Boone Pickens, whose hedge fund has lost about $1 billion this year, sued a unit of defunct investment bank Lehman Brothers Holdings Inc. for $59.9 million over claims it broke a default agreement.

- The Bank of England should cut the benchmark interest rate by a half point tomorrow after the economy tumbled into a recession in the third quarter, the National Institute for Economic and Social Research said.

- Alcoa Inc.(AA), the largest U.S. aluminum producer, said third-quarter profit fell 52 percent, trailing analyst estimates, as prices dropped and slowing economic growth hurt demand in North America.

Wall Street Journal:
- Barack Obama and John McCain clashed repeatedly over the causes and cures for the worst economic crisis in 80 years Tuesday night, with the Republican presidential nominee calling for a sweeping new program to keep homeowners from foreclosure. Sen. McCain pledged in the latest campaign debate to require the federal government to renegotiate the mortgages of individual homeowners and make them more affordable, a sweeping proposal that goes considerably beyond the $700 billion bailout that recently cleared Congress."Is it expensive? Yes," Sen. McCain said at the second presidential debate in Nashville, Tenn. "But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy."

- Europe is poised to relax restrictions preventing drug companies from reaching out to consumers.

- Burger King Holdings Inc.(BKC) will open its first Whopper Bar in Orlando, Fla., in February as it lays plans to put the bars across the globe.

- World steelmakers, gathering at a meeting in Washington, are scrambling to determine how far to cut output before prices fall below the break-even cost of making steel.

- Was Lehman Brothers Holdings CEO Dick Fuld driven to distraction by short-sellers as the company’s stock price plunged this year? Fuld didn’t let up on his hatred for short-sellers–primarily David Einhorn–even after his company filed for bankruptcy last month, and he believed the shorts were part of a cabal driven by Goldman Sachs Group(GS). In July, a former Lehman executive named Jarret Wait stopped by Lehman’s offices and said, according to an email by Lehman executive Thomas Humphrey, “that in just a few weeks on the ‘buy’ side,…it is very clear that GS is driving the bus with the hedge fund kabal& greatly influencing downside momentum,Leh & others!”

- Seeking to gain the upper hand in the fight for Wachovia Corp., Citigroup Inc. is reaching out to potential partners to join its bid for the Charlotte, N.C., bank, according to people familiar with the matter.

- Dozens of real-estate funds and other investors hoping to buy into the $700 billion bailout may need to take on the government as a partner.

- Looking to capitalize on the credit-market shutdown, Goldman Sachs Group Inc. has closed a $10.5 billion fund that will make senior secured loans to companies.

Reuters:

- Wells Fargo & Co(WFC) is likely to get about 75 to 80 percent of Wachovia Corp's(WB) deposits, while Citigroup Inc(C) would get the remainder, a person briefed on the matter said on Tuesday. The situation is in flux and the outcome is still unclear, the person cautioned, adding Wells Fargo may end up with 100 percent of Wachovia's deposits, and Citigroup with none.

- YouTube, the world's most popular video-sharing site, will start to sell music and video games and experiment with new advertising formats to grow revenue, executives said on Tuesday. The Google-owned (GOOG) business is taking the first steps toward building an e-commerce service through which it will sell music, films, TV shows, video games, books, concert tickets and other media-related products featured on the millions of videos on YouTube.

Australian Financial Review:

- Australia’s corporate regulator and its US counterpart agreed to cooperate in investigations into undisclosed short selling in the Australian share market. Under the agreement signed last month the Australian Securities and Investments Commission may ask the SEC to track trades in Australian-listed stocks by US-based hedge funds that may not have disclosed they are short selling.

China Daily:

- China’s small banks are being encouraged to raise their capital adequacy ratios to 10% by year-end amid the global financial meltdown. The China Banking Regulatory Commission urged medium-sized listed banks to raise the ratio to 12% by the end of next year. The current ratio requirement is more than 8%, it said.

Late Buy/Sell Recommendations

Oppenheimer:

- Rated (MYGN) Outperform, target $92.

Edward Jones:
- Raised (DELL) to Buy.

Night Trading
Asian Indices are -4.50% to -2.25% on average.
S&P 500 futures +.22%.
NASDAQ 100 futures +.45%.

Morning Preview
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Today in IBD
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Earnings of Note
Company/EPS Estimate
- (COST)/.92

- (MON)/-.10

- (RT)/.11

- (SGR)/.71

Economic Releases
10:00 am EST

- Pending Home Sales for August are estimated to fall 1.3% versus a 3.2% decline in July.

10:35 am EST

- Bloomberg consensus calls for a weekly crude oil inventory build of +2,200,000 barrels versus a +4,278,000 barrel increase the prior week. Gasoline supplies are expected to rise by +1,500,000 barrels versus a +901,000 barrel increase the prior week. Distillate supplies are estimated to fall by -900,000 barrels versus a -2,359,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise +6.0% versus a +5.56% gain the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and commodity stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

BETWEEN THE HEDGES

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Wednesday, October 08, 2008

Stocks Mixed into Final Hour as Less Financial Sector Pessimism Offsets Global Growth Concerns

Today's Headlines

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Tuesday, October 07, 2008

Wednesday Watch

Stocks Finish at Session Lows, Weighed Down by Airline, Financial, Gaming, Construction and Commodity Shares