BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Computer longs and Biotech longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short and added to some commodity shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is still very elevated. Today’s overall market action is mildly bearish. The VIX is rising 3.51% and is still historically elevated at 56.82. The ISE Sentiment Index is low at 100.0 and the total put/call is slightly below average at .82. Finally, the NYSE Arms has been running high most of the day, hitting 1.78 at its intraday peak, and is currently 1.37. The Euro Financial Sector Credit Default Swap Index is falling 7.25% today to 88.33 basis points. This index is up from a low of 52.66 on May 5^th, but down significantly from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 5.4% to 176.0 basis points. The TED spread is falling 4.57% to 436 basis points. The 2-year swap spread is falling 12.3% to 130.75 basis points. The Libor-OIS spread is dropping 3.6% to 343 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.03%, which is down 160 basis points in just over three months and at the lowest level since February 1999. Considering market gains from the lows on Friday, today’s sell-off isn’t too bad. As well, the action in the (XLF) is a big broad market positive. Today’s meaningful declines in gauges of credit market angst are the first real signs that recent global initiatives are making a significant impact on the problem. If these gauges continue to improve another strong stock surge is very likely. Intel(INTC) reports after the close. I suspect their guidance will be weak. However, I wouldn’t be surprised to see the stock rebound tomorrow after an initial negative reaction, considering how much bad news is likely already priced into the shares around current levels. Nikkei futures indicate a -12 open in Japan and DAX futures indicate an +24 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism, diminished forced selling and declining credit market angst.

Bloomberg:
- Bond investors from Tokyo to New York are pushing 30-year Treasury yields to record lows in a bet that the financial market meltdown will turn inflation into deflation. Frankfurt-Trust Investment GmbH's global debt fund is buying so-called long bonds. Mizuho Asset Management Co., part of Japan's second-largest bank, sold shorter-maturity notes and purchased longer-term debt last week. BlackRock Inc.(BLK), which oversees $1.4 trillion, says the trade may be a winner next year.

- Money-market rates in London fell after the U.S. joined the U.K., Germany and France in offering to buy stakes in banks to restore confidence in the global financial system. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64 percent today, the biggest drop since March 17, according to the British Bankers' Association. It was at 4.82 percent on Oct. 10, the highest level since December. The three- month euro rate fell 7 basis points to 5.23 percent, the largest decline since Dec. 28.

- Lord West, a U.K. lawmaker and former head of the Royal Navy, said British authorities are investigating a serious terror plot, Sky News reported. ``There is another great plot building up again and we are monitoring this,'' he said today in a debate on the Counter Terrorism Bill in the House of Lords, the broadcaster reported.

- Hedge fund managers, after enduring the industry's worst month in a decade, are seeking to explain to investors what went wrong and what they are doing about it. ``We clearly underestimated several things, most importantly the tsunami of redemptions that are being delivered to hedge funds as investors line up to get out of these funds as well as record outflows from equity mutual funds,'' Jeffrey Gendell, who runs Greenwich, Connecticut-based Tontine Associates LLC, wrote in an Oct. 1 letter to clients.

- Bank bonds soared and the cost of protecting their debt against default plunged as the U.S. government prepared to invest about $125 billion into financial companies and guarantee their newly issued debt. Credit-default swaps protecting against a Morgan Stanley default plunged to the lowest in four weeks and its bonds rose from distressed levels. Credit-swaps on Goldman Sachs Group Inc. and Citigroup Inc. also declined, indicating an improvement in investor confidence. Credit-default swaps on Morgan Stanley plunged 414 basis points to 403 basis points, and have dropped the equivalent of 898 basis points since Oct. 10, according to CMA Datavision. Contracts on Goldman fell 192 basis points to 195 basis points. Citigroup dropped 85 basis points to 137 basis points, the lowest since July. The Markit CDX North America Investment Grade index, a benchmark gauge of credit risk linked to the bonds of 125 companies in the U.S. and Canada, fell 42 basis points from Oct. 10 to 178, according to broker Phoenix Partners Group, as of 11:46 a.m. in New York.

- Energy companies, banks and hedge funds are turning to exchanges instead of over-the-counter markets to minimize risks in energy trading, speakers at an energy derivatives conference in London said. Traders are opting for exchanges where settlement is guaranteed on concern over completion and payment for trades after Lehman Brothers Holdings Inc. filed for bankruptcy last month and Fortis was rescued by Belgium, the Netherlands and Luxembourg. Some smaller energy and commodity companies will struggle to survive if banks continue to restrict credit, which also affects funds that invest in those companies, he said. ``Some exploration and production companies can't get funding, it's game over,'' he said. ``Some funds in Canada are closing shop. It's the same with junior mining companies.''

- The US government’s plan to inject cash into financial institutions, coupled with similar actions by countries around the world, may jumpstart a stalled global financial system, Blackstone Group LP(BX) CEO Schwarzman said. “We’re looking today at an absolute sea change in the global financial system in terms of liquidity,” Schwarzman said. “This could be the time that breaks the back of the credit crisis.”

- Codelco, the world's biggest copper producer, will invest $1.8 billion next year, maintaining record spending even as weaker U.S. and European economies lead to the first global surplus of the metal since 2003.

- China Loss Is Alabama Gain as Sleeping-Bag Firm Adds US Jobs.

- Aisling's $2 billion Merchant Commodity Fund, run by Michael Coleman and Doug King, former Cargill Inc. traders, trounced hedge funds in September. The fund gained 12 percent as energy and agricultural prices slumped, according to two people with knowledge of its performance. ``Is this the end of the commodities bull super-cycle? It doesn't look good: there's no light at the end of the tunnel'' in the next year, O'Malley told an audience of cotton traders and textile producers.

- Iceland's benchmark stock index plunged 77 percent, the biggest decline on record, as trading resumed after a three-day suspension and the nationalization of the country's largest banks. Investors demanded a higher premium to hold Icelandic government bonds, while the price of the country's currency remained ``undetermined,'' according to TD Securities.

- President George W. Bush talked with three European leaders about the importance of ``not letting up'' in the drive to revive global financial markets.

- Apple Inc.(AAPL) plans to offer its first Macintosh notebook priced at less than $1,000 this holiday shopping season in a bid to attract budget-conscious consumers stung by the global economic crisis. Chief Executive Officer Steve Jobs cut the price on the current MacBook models to $999 today at Apple's headquarters in Cupertino, California. He also introduced an aluminum-clad version with a glass display that will sell for $1,299 and updated the MacBook Pro line with thinner models.

- European Central Bank President Jean- Claude Trichet called for a global approach to solve the financial market crisis.

- Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market. ``Leaving businesses and consumers without access to financing is totally unacceptable,'' Paulson said in Washington.

- Investors willing to buy stocks at their current depressed prices stand to make a lot of money, according to Tim Bond, Head of global asset allocation at Barclays Capital in London. “Global equity markets are starting to offer a long-term buying opportunity that is typically only seen once in a generation,” Bond wrote. “Returns from equities purchased during this interval may very well be extremely high over the next 12 months and could, if history is any guide, average double-digit long-run returns over the next decade.”

Wall Street Journal:

- US mutual funds are facing a sharp drop in fee income as investors sell stocks and switch to cash and other investments. Stock funds have been hit by investors pulling $92 billion since Sept. 1, with almost $50 billion of the withdrawals taking place in the first 10 days of October, citing data from TrimTabs Investment Research. As of Friday, the market decline had shaved $2 trillion in assets from U.S. and international stock mutual funds since Sept. 1 -- almost 36% of total assets under management, according to TrimTabs Investment Research. The loss is on pace to smash the largest two-month asset decline in percentage terms of 18%, set in June-July 2002, TrimTabs said.

- We’re Laying the Groundwork for Recovery by Fed Chairman Bernanke.

- After being severely constricted for weeks, the commercial paper market showed tentative signs of recovery on Tuesday after global leaders aimed a number of initiatives at stabilizing financial markets.

Financial Times:
- Hedge funds investing in Russia are having trouble valuing their assets, with surprise market closures and a lack of liquidity prompting some to suspend valuations - and withdrawals - altogether.

Valor Economico:

- Brazilian companies may have lost a combined $24 billion in the derivatives market after the local currency tumbled, Banco Itau Holding Financeira SA Executive Director Sergio Werlang said.

Les Echos:
- Shipping companies will go bankrupt because of the global economic slowdown which has led to falling freight transport prices, citing Philippe Louis-Dreyfus, CEO of Louis Dreyfus Group. Overcapacity in the shipping industry will also be a problem in the coming months and will lead to the cancellation of a third of all orders to shipyards, he said.

Tehran Times:

- Iran seeks to complete energy agreements with Russian gas monopoly OAO Gazprom during a visit by National Iranian Oil Co.’s Managing Director Seifollah Jashnsaz to Russia today. Iran expects to reach an agreement to form a joint venture to develop energy projects and build a pipeline to transport oil from the Caspian Sea to the Sea of Oman, citing the Oil Ministry.

Etemaad:

- Iran will face a budget deficit if crude oil prices decline to $70 a barrel, citing a former Iranian oil minister. “Previous governments sought to decrease Iran’s dependence on oil revenue but these efforts were not pursued by the current government,” said Bijan Namdar Zanganeh. Iran “cannot live with oil at $70 a barrel,” said Namdar Zanganeh, who was oil minister for eight years until 2005.

BETWEEN THE HEDGES

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