BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Internet longs and Financial longs. I added to some of my commodity shorts, to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is falling and volume is about average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 12.8% and is elevated at 43.55. The ISE Sentiment Index is below average at 115.0 and the total put/call is high at 1.17. Finally, the NYSE Arms has been running very high most of the day, hitting 2.14 at its intraday peak, and is currently 1.66. The Euro Financial Sector Credit Default Swap Index is falling 3.11% today to 93.77 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 .80% to 197.0 basis points. The TED spread is up 2.7% to 131 basis points. The TED spread is now down 335 basis points in about three months. The 2-year swap spread is plunging another 11.36% to 63.38 basis points. The Libor-OIS spread is rising .06% to 122 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 25 basis points to .50%, which is down 225 basis points in about six months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .09%, which is down 4 basis points today. Cyclical shares, which had been soaring, are today’s worst-performers. The news from Satyam Computer Services(SAY) is weighing heavily on emerging market shares today. I suspect financial fraud is far more pervasive throughout the emerging markets than is generally perceived and it is one of the many reasons I expect developed markets to outperform these shares for several more years. Volume is only around average on today’s sell-off, combined with a high NYSE Arms reading, which is a positive. It is noteworthy that the US sovereign debt credit default swap is dropping 14.2% today to 54.6 basis points, which is down from a high of 69.4 on January 2^nd. I suspect Asian shares will come under meaningful pressure tonight, which could lead to further weakness in the US in the morning. Nikkei futures indicate a -234 open in Japan and DAX futures indicate a -16 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as bargain-hunting, diminishing credit market angst and short-covering offsets more economic pessimism.

Bloomberg:

- The cost of protecting corporate bonds from default fell to the lowest in seven weeks in Europe on investor speculation governments and central banks will succeed in averting further turmoil in credit markets. “There is a slow realization that credit has priced in Armageddon,” said Jim Reid, head of fundamental credit strategy in London at Deutsche Bank AG, Germany’s largest lender. “I think the landscape has changed after the serious intervention from governments and central banks.” Credit-default swaps on the benchmark Markit iTraxx Europe index of 125 companies with investment-grade ratings tumbled 13.5 basis points to 154, the lowest since Nov. 14, according to JPMorgan Chase & Co. prices at 10:28 a.m. in London. The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 52 basis points to a five-week low of 932, JPMorgan prices show. Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the US and Canada declined 4.5 basis points to 191.5 basis points as of 8:17 am in NY, according to broker Phoenix Partners Group.

- The cost of protecting against a default by the world’s biggest banks dropped to the lowest in two months after government efforts to bolster financial company capital and unlock credit markets. The CDR Counterparty Risk Index, tied to 14 banks including Morgan Stanley, Goldman Sachs and UBS AG, fell to 142.6 basis points today, down from more than 300 basis points on Sept. 17, according to Credit Derivatives Research LLC.

- The recent gains in commodity prices may not be sustainable in the first quarter, Morgan Stanley said. “Much of the movement is short-term technical buying and probably will not sustain throughout Q1,” Morgan Stanley wrote.

- Hedge funds have damaged their ability to attract capital by limiting investor withdrawals, according to Karsten Schroeder, CEO of Amplitude Capital LLP, a London-based hedge fund. Hundreds of hedge funds have established limits on the return of investors’ money. As of October, 18% of hedge fund assets were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge fund consulting firm GFIA Pte.

- Indian stocks fell the most in more than two months after Satyam Computer Services Ltd. said profits had been inflated for years, heightening concern about corporate governance in the South Asian nation. Satyam, the nation’s fourth-largest software developer, plunged 78 percent, the most since listing in 1992. Reliance Industries Ltd., the country’s largest publicly traded company, slumped 12 percent after the disclosure by Satyam Chairman Ramalinga Raju. “It’s a shocker,” said Jayesh Shroff, who helps manage about $4.7 billion at SBI Asset Management Co. in Mumbai. “People will no longer be willing to take income statements at face value. This has also raised questions about cash holdings of other companies.” The Bombay Stock Exchange’s Sensitive Index, or Sensex, tumbled 749.05, or 7.3 percent, to 9,586.88, the most since Oct. 24. Five stocks fell for each that rose on the benchmark index.

- Frontline Ltd.(FRO), the world’s biggest owner of supertankers, said oil traders want to charter as many as 10 vessels to stockpile crude to take advantage of higher prices later in the year. About 25 supertankers were already hired for storage and there are enquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today. The traders would buy crude now and sell it for delivery later, profiting from a futures market situation called contango where prices are higher as the year progresses. The vessels could handle as much as 20 million barrels, or about what is produced by OPEC member Algeria in 15 days. They would add to as much as 50 million barrels already hoarded at sea, for a combined amount equal to almost five days of European Union demand. “I’ve never before seen storage demand on this scale,” said Didier Labat, a Paris-based shipbroker at Barry Rogliano Salles who has worked in tanker markets for about 20 years.

- Oil futures tumbled after a U.S. government report showed a bigger-than-expected increase in supplies of crude oil, gasoline and distillate fuel. Inventories of crude oil rose 6.68 million barrels to 325.4 million barrels last week, the highest since May, the Energy Department said today in a weekly report. Supplies were forecast to increase by 800,000 barrels, according to the median of forecasts by 14 analysts in a Bloomberg News survey. “It’s difficult to find anything in this report that would give the bulls solace,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. Inventories at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 14 percent to 32.2 million barrels last week, the highest since at least April 2004, when the department began keeping track of supplies there. Imports of crude oil increased 13 percent to 10.5 million barrels a day last week, the biggest one-week gain since the week ended Oct. 3, when the Gulf Coast was recovering from hurricanes Gustav and Ike.

- Intel Corp.(INTC), the world’s largest chipmaker, said fourth-quarter sales dropped 23 percent, missing a forecast that it cut by $1 billion less than two months ago.

- European producer prices fell the most in 27 years in November as oil prices declined, an indication inflation will slow further and give the European Central Bank more scope to cut interest rates. Prices of goods leaving euro-area factories plunged 1.9 percent from the previous month, the sharpest decline since the data were first compiled in 1981, the European Union statistics office in Luxembourg said today.

- China issued licenses for high-speed mobile-phone services today, clearing the way for as much as $41 billion of spending on so-called third-generation networks as the government seeks to bolster the slowing economy.

Wall Street Journal:

- The financial company under federal investigation in the sale of state-issued bonds in New Mexico has a history of making campaign contributions in the states and localities where it has worked in a largely unregulated corner of municipal finance. Federal authorities are investigating whether CDR Financial Products contributed to two political-action committees belonging to New Mexico Gov. Bill Richardson in exchange for more than $1.5 million in work advising the state's bond operations.

- Feeder funds appear to explain the Ponzi longevity of money manager Bernie Madoff. To pay off early investors, mostly family and business connections in New York, he stuck his siphon into the moneyed worlds of Western Europe, Palm Beach and Hollywood.

- Businesses are turning to outside companies to run their data centers faster than most of those companies can build additional facilities. Now demand is outpacing supply, and that could potentially drive up prices of data-center services. Amid the recession, companies that provide data centers -- the warehouses of computers that do corporate tasks such as running Web sites and backing up information -- are having a hard time coming up with the funding for new sites.

- Premium Chocolate Holds Steady in Tough Economy.

- Merck & Co.'s (MRK) leader said the drug maker has the resources to make significant acquisitions, but if the company doesn't make big purchases it will return cash to shareholders through dividends or share buybacks. "I think we're in a very good position to make whatever investments are needed," Chief Executive Richard Clark told a Goldman Sachs investor conference in New York.

TechCrunch:

- Interest in troubled Internet giant Yahoo has not waned, it just took a break for the holidays. A group of well known Silicon Valley executives and top investment bankers are putting together a Yahoo takeover deal that would be financed largely from debt supplied by Microsoft, we’ve learned from sources with knowledge of the proposed transaction. Under the terms of the proposed deal, the investment group would make a takeover bid for Yahoo at a relatively low premium of around 20% to its current price of around $13 per share, valuing the company at just over $20 billion.

Forbes:

- Foreign Automakers Transform Southern US Towns.

Portfolio.com:

- Quants: What Are They Doing These Days? The problem with quant funds is that they can't help but conceive of the world as it transpired -- and basing your trading strategy on black-swan events which happen only very rarely is not a way to make lots of money.

The Detroit News:

- Great Lakes water levels are on the rise again after a decade of losses, giving hope to property owners with shrinking beaches, charter fishing operators wanting more room to roam and shipping companies eager to load up their freighters. Officials with the U.S. Army Corps of Engineers predict levels in the Great Lakes will be higher in the first half of 2009 than they were in 2008 -- the second year in a row the water will have risen, if estimates prove true.

USA Today:

- A majority of Americans say Roland Burris should be blocked from taking a U.S. Senate seat he was appointed to by embattled Illinois Gov. Rod Blagojevich, a USA TODAY/Gallup Poll finds. Most say the state should hold a special election to fill the vacancy. Even so, Burris' effort to claim the seat that was held by President-elect Barack Obama got a boost from a key Democratic senator, Dianne Feinstein of California. The outgoing Rules Committee chairwoman said the governor had the power to make the appointment.

Miami Herald:

- Florida stimulus plan aims to create jobs. Florida Gov. Charlie Crist on Tuesday launched a new economic stimulus plan for small businesses, geared to give companies resources and incentives to expand and create new jobs despite the economic downturn.

Valor Economico:

- The value of Brazil’s farm exports, which have sustained trade surpluses for a decade, may drop 20% this year as commodity prices fall and global demand wanes, citing a government study.

21^st Century Business Herald:

- Guangdong and Jiangsu provinces, China’s two biggest export regions, expect no growth in overseas shipments this year as the global recession cuts demand, citing local officials. Guangdong exporters forecast their orders in 2009 will be 30% lower than last year, citing Zhu Zenan, the deputy head of the province’s foreign trade bureau.

BETWEEN THE HEDGES

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Wednesday, January 07, 2009

Stocks Finish Sharply Lower, Weighed Down by Commodity, Financial, Construction, Rail and Homebuilding Shares

Stocks Sharply Lower into Final Hour on More Economic Pessimism, Shorting, Profit-Taking

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