BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs and Biotech longs. I have not traded today, 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 gaining and volume is heavy. Investor anxiety is still very elevated. Today’s overall market action is bullish. The VIX is falling 1.23% and is still historically elevated at 66.68. The ISE Sentiment Index is below average at 125.0 and the total put/call is very high at 1.19. Finally, the NYSE Arms has been running high most of the day, hitting 3.38 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is rising 2.1% today to 96.33 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 1.2% to 200.63 basis points. The TED spread is falling 11.03% to 363 basis points. The 2-year swap spread is falling 10.07% to 122.75 basis points. The Libor-OIS spread is dropping 3.79% to 327 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 12 basis points to 1.06%, which is down 157 basis points in just over three months and at the lowest level since February 1999. The meaningful decline in gauges of credit angst is a large positive. I am getting a clear technical sell signal on the TED spread for the first time since July. I am surprised US stocks aren’t up more given credit market improvement. Today’s muted upside reaction could be due to options expiration. I suspect the herd of professional and individual investors that panicked recently, selling near last week’s lows, are getting a bit worried. There is a historic mountain of cash on the sidelines right now. Nikkei futures indicate an +207 open in Japan and DAX futures indicate an +107 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst and bargain-hunting.

Bloomberg:
- U.S. stocks rose and the Standard & Poor's 500 Index extended its best weekly gain since 1982 as Warren Buffett's advice to buy shares and Google Inc.'s earnings offset a report showing the housing slump worsened. ``I've been buying American stocks,'' Buffett, the world's second-richest person, wrote in a New York Times column. ``A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread.''

- The cost of borrowing dollars in London fell, capping the first weekly decline since July, after central banks around the world pumped unprecedented amounts of cash into money markets and governments backed loans. The London interbank offered rate, or Libor, for three- month loans in dollars dropped for a fifth day, sliding 8 basis points to 4.42 percent, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67 percent, the lowest level since September 2004. Asian rates also fell.

- Rates for one-month commercial paper fell to a three-week low after central banks joined forces to pump cash into money markets and government backed loans. Average yields offered on the highest-rated commercial paper placed by dealers and due in 30 days fell 0.48 percentage point today to 3.45 percent, according to data compiled by Bloomberg. Rates fell 0.83 percentage point this week to the lowest since Sept. 26 from a nine-month high of 4.28 percent.

- Gold headed for the biggest weekly loss in two months in London as global equity markets rose and crude-oil prices declined, reducing demand for the metal as a haven and an inflation hedge. Palladium fell to a five-year low.

- Goldman Sachs Group Inc.(GS) lowered its growth forecasts for European emerging-market economies and South Africa because of falling commodity prices, slowing growth in western Europe and turmoil on global markets.

- The efforts of finance ministers and central banks worldwide may soon begin to restore investor confidence, said Bill Gross, who manages the world's biggest bond fund. ``We're talking weeks here,'' said Gross, in an interview on Bloomberg Radio.

NY Times:
- Buy American. I Am. By Warren Buffett. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

NY Post:

- Through the end of September, Tremblant's main hedge fund was down 27.9 percent for the year after losing 19 percent in September alone, according to data from investors. The smaller fund, Tremblant Concentrated, is down 40.1 percent following a steep 27 percent drop in September, investors told The Post.

- Mom-and-pop investors fled mutual funds in record numbers this month, yanking a whopping $58.9 billion from stock mutual funds in the first 10 days of October. The last time investors fled mutual funds on such a large scale was July 2002, when $52.6 billion was pulled, according to equity market research firm TrimTabs Investment Research. Typically, when small investors pull the plug on their investments, it's a sign that the worst is over. And stocks soared shortly after the withdrawals in 2002.

CNNMoney.com:
- Hawaii is dropping the only state universal child health care program in the country just seven months after it launched. Gov. Linda Lingle's administration cited budget shortfalls and other available health care options for eliminating funding for the program. A state official said families were dropping private coverage so their children would be eligible for the subsidized plan. "People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."

FINalternatives:

- Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by $210 billion in the third quarter, the industry’s largest-ever quarterly decline in assets.

Portfolio.com:

- Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse. Last month, he did the unthinkable -- he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his "goodbye" letter, a rollicking missive on everything from greed to economic philosophy. Enjoy.

Daily Telegraph:
- The UK’s Gordon Brown attacks plans to cut oil production. Brown, the Prime Minister, has said it is “absolutely scandalous” that oil-producing nations are considering cutting production as the global economy enters its worst downturn in decades.

- Gradient Capital Partners LLP, a London-based hedge fund that had $4.3 billion under management at its peak, shrank by 42% in September. That brings the decline so far this year to 63%.

BBC:
- The state-owned Cuban oil company says the country may have more than 20bn barrels of oil in its offshore fields - more than double the previous estimate.

Expansion:

- Telefonica SA is considering offering the iPhone to Spanish customers on a pre-pay basis in time for Christmas. At present, the iPhone is only available with a service contract.

RIA Novosti:

- Russia’s ruble will only weaken should the price of oil stay low for an extended period, citing a government official. The country should be ready for oil prices at $60 to $80 a barrel for the next few years, the official said.

BETWEEN THE HEDGES

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Friday, October 17, 2008

Stocks Finish Lower, Weighed Down by Bank, Gold and Semi Shares

Stocks High into the Final Hour on Diminishing Credit Market Angst, Bargain-Hunting and Short-Covering

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