BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:
- The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system. The cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze global credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan.

- Default-protection costs on Japanese and Australian corporate bonds declined on anticipation the Bush administration will announce plans to invest in nine U.S. banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. The Markit iTraxx Japan index of credit-default swaps fell 45 basis points to 180 at 8:33 a.m. in Tokyo, according to prices from Morgan Stanley. The decline exceeds the 42-basis- point drop on March 21 after the rescue of Bear Stearns Cos., CMA data show. The iTraxx Australia declined 30 basis points to 185, Citigroup Inc. prices show.

- Honda Motor Co., the world’s largest motorcycle maker, and manufacturers of industrial goods and electronics in Brazil plan to trim output as demand slows and a plunge in the value of the local currency boosts costs, a union official said. “We expect other companies to make similar decisions,” Sena said. “I haven’t seen anything like this in at least seven years.” The Brazilian real has lost 27% against the US dollar since the start of August, the biggest loser among the 16 most-traded currencies tracked by Bloomberg. Consumer demand will probably cool in coming months as the weaker currency hurts confidence, said Roberto Padovani, chief economist at Banco WestLB do Brasil in Sao Paulo.

- Boeing Co.(BA) and its machinists union failed to settle a strike over job security and ended a new round of talks that began over the weekend, keeping aircraft factories idle for a fifth week. The work stoppage is costing Chicago-based Boeing more than $100 million in lost revenue a day since the company usually gets paid upon delivery, analysts say. The strike is also further delaying the new 787 Dreamliner, which is already at least 15 months behind schedule and was supposed to fly for the first time next month.

- North Korea will resume shutting down its Yongbyon nuclear reactor today and allow United Nations inspectors to monitor the process, the International Atomic Energy Agency said.

- Japan may halt sales of government- held shares to help protect financial markets from the global credit crisis, Finance Minister Shoichi Nakagawa said. Japan will also take steps to tighten restrictions on short- selling while relaxing regulations on share buybacks, Nakagawa said. The government will require exchanges to disclose short- sales on individual stocks and industries daily as opposed to monthly, according to the Financial Services Agency statement.

- U.K. home sales fell in September to the lowest level in at least three decades, led by London, as the financial crisis prompted price drops across the nation, the Royal Institution of Chartered Surveyors said.

Wall Street Journal:
- The Rich Support McCain, the Super-Rich Support Obama. More than three quarters of those worth $1 million to $10 million plan to vote for Sen. McCain. Only 15% plan to vote for Sen. Obama (the rest are undecided). Of those worth more than $30 million, two-thirds support Sen. Obama, while one third support Sen. McCain. The reason? Taxes. Some say the super-rich can afford to minimize taxes, since they have plenty of money even after the government takes its share. Others say the ultra-rich have better tax attorneys so they don’t care as much about tax rates.

- Steven Cohen, who heads hedge fund SAC Capital Advisors, is among other investors who have moved mostly out of stocks and into cash equivalents. Cohen has ended most of his fund’s bets on stocks by moving about $7 billion of his company’s $14 billion in capital into money-market and other short-term investments. Hedge funds have put as much as $400 billion into cash equivalents recently, citing David Kostin, an analyst at Goldman Sachs Group Inc.(GS). Goldman's Mr. Kostin says some hedge funds are being forced to sell to meet investor redemptions. For their part, Messrs. Cohen and Englander have moved to cash because of extreme market chaos and investor panic, according to people familiar with their thinking. An email from from Richard Fuld Jr., Lehman Brothers Holdings Inc.'s chief executive to Lehman General Counsel Thomas Russo on April 12, 2008, shows why hedge funds are so worried. In the email, Mr. Fuld, summarizing the points from a dinner with Treasury Secretary Henry Paulson, said Mr. Paulson wants to "kill the bad HFnds + heavily regulate the rest." A large part of the selling by some hedge-fund managers has come since the beginning of October, helping to fuel the sharp selloff in stocks this month. Mr. Cohen, for instance, sold near half of his stock holdings last week, closing out the positions of roughly 50 managers who work for him because he felt they "weren't seeing the ball," says a person familiar with the situation. Mr. Cohen could conceivably jump back into the market quickly. Managers in cash Monday missed out on the Dow's biggest one-day point gain ever.

- BYD Co. plans to start selling China’s first mass-produced electric car next month, citing Chairman Wang Chuanfu. The F3DM may be priced at about $22,000 each and capable of traveling as far as 68 miles on a fully charged battery, Wang said. BYD’s electric car was a key reason why billionaire Warren Buffett’s Berkshire Hathaway Inc. paid $230 million for a 10% stake in the company.

NY Times:
- Merger talks are continuing between General Motors(GM) and Chrysler as the companies study possible financial terms of a deal that would combine two of the traditional Big Three automakers.

- Both Sides of the Aisle Say More Regulation, and Not Just of Banks.

- The American Bankers Association asked the Securities and Exchange Commission on Monday to override accounting rule makers’ new guidelines on mark-to-market accounting, saying they still relied too heavily on distressed asset values.

CNNMoney.com:
- What the MacBook means to Apple(AAPL). In terms of future growth, the MacBooks are particularly well positioned. The Macintosh’s domestic market share, by contrast, is still only 8.4%, according to Gartner, despite recent gains. Its worldwide market share is even smaller: about 3.4%. The upside potential is huge. And the best thing about Apple’s market share is that it’s mostly in the high end, where the profit margins are sweetest. Consider the following chart, issued Monday in a report to clients by Sanford Bernstein’s Toni Sacconaghi:

WealthBulletin:

- It may be premature to write the epitaph for funds of hedge funds, but industry practitioners are giving them a less than glowing prognosis after losing 11% this year. Fund of hedge funds managers have historically decided who gets 40% of the industry’s $1.9 trillion assets to manage, ideally differentiating between good hedge funds and also-rans.

Reuters:

- U.S. President George W. Bush signed into law on Monday a bill that would stiffen penalties on movie and music piracy at the federal level. The law creates an intellectual property czar who will report directly to the president on how to better protect copyrights both domestically and internationally.

- Saudi Basic Industries Corp's 2010.SE metals group said on Monday it will more than triple steel production capacity to 17 million tons by 2020 through acquisitions and the building of new plants.

- Union Bancaire Privee has cut its exposure to hedge funds and industry performance has disappointed, while other assets look more attractively-priced, a top executive said. Christophe Bernard, the Swiss-based firm's head of asset management, also told the Reuters Wealth Management Summit that the industry, estimated at $2.6 trillion, could shrink by one-third over the coming quarters as investors withdraw assets.

Financial Times:
- Investor fears over the risk of many emerging market countries' defaulting on their debt has risen sharply as Iceland's financial collapse has hit sentiment, discouraging funds from investing in these economies. The market is pricing the risk of default for countries such as Pakistan, Argentina, Ukraine and Iceland at 80 per cent or higher as the banking systems of these countries come under increasing pressure due to the credit crisis.

Handelsblatt:

- Abu Dhabi continues to be interested in investing in Europe and the US in spite of the current financial crisis, citing Khaldoon Al Mubarak, head of Mubadala, an investment arm of Abu Dhabi. Abu Dhabi is also still interested in possibly investing in the banks of the regions, citing Mubarak.

China Daily:

- China’s luxury goods market has not been spared the financial crisis, a consumer fair has shown. Spending patterns at a luxury goods fair in Shanghai this year have shown that buyers are tightening purse strings and not paying for astronomically priced luxury items as readily as before, vendors have said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ATVI), target $22.50.

Night Trading
Asian Indices are +3.0% to +6.0% on average.
S&P 500 futures +2.44%.
NASDAQ 100 futures +2.02%.

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Earnings of Note
Company/EPS Estimate
- (SVU)/.69

- (PEP)/1.08

- (PII)/1.09

- (GWW)/1.53

- (JNJ)/1.11

- (ALTR)/.30

- (INTC)/.34

- (CSX)/.93

- (LLTC)/.45

- (DNA)/.88

- (ADTN)/.35

- (DPZ)/.21

Economic Releases
2:00 pm EST

- The Monthly Budget Surplus for September is estimated to fall to $45.0 billion versus $112.9 billion in August.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, Lazard Alternative Energy Conference, Wachovia Consumer Growth Conference, IBD/TIPP economic optimism index and (JCI) analyst presentation could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted 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 100% net long heading into the day.

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Internet longs, Computer longs and Medical longs. I took some profits in a few technically extended trading longs and added to some laggard longs today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is still very elevated. Today’s overall market action is very bullish. The VIX is falling 18.43%, but is still historically elevated at 57.48. The ISE Sentiment Index is low at 99.0 and the total put/call is around average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 1.5 at its intraday peak, and is currently 1.16. The Euro Financial Sector Credit Default Swap Index is falling 10.15% today to 95.24 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 3.8% to 186.0 basis points. The TED spread is falling 1.43% to 4.57 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 11 basis points to 1.04%, which is down 159 basis points in just over three months and at the lowest level since February 1999. Many growth stock leaders are up 12-20% today, significantly outperforming the broad market. The best growth stocks that can grow at a relatively high rate even during a recession have very likely already seen their lows and will be substantially higher over the next year. I also suspect the major averages have at the very least bottomed for this year. How quickly credit markets improve will likely determine if a retest of the broad market lows occurs at some point next year. As of now, I see a full retest as an unlikely scenario. We are getting very extended short-term, but another surge is likely deeper into earnings season as investors buy the bad news. Forward earnings guidance will be very poor, but an extreme amount of bad news has already been factored into most stock prices at current levels, in my opinion. Given extreme economic fears of late and so much talk of “re-inflating” the economy, gold trades very poorly. As credit markets return to more normal behavior and fear subsides, I expect gold to see a meaningful decline in gold over the intermediate-term as the US dollar continues to firm, demand falls and the secular trend of disinflation remains firmly in tact. Nikkei futures indicate an +725 open in Japan and DAX futures indicate an +157 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, bargain-hunting and technical buying.

BETWEEN THE HEDGES

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Tuesday, October 14, 2008

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Monday, October 13, 2008

Tuesday Watch

Stocks Finish Sharply Higher, Boosted by Airline, Gaming, Construction, Insurance, Commodity, HMO, Biotech, Utility, Medical and Technology Shares

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