BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Medical longs. I covered all of my (QQQQ)/(IWM) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is below average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 15.7% and is elevated at 47.72. The ISE Sentiment Index is low at 90.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running around average most of the day, hitting .93 at its intraday peak, and is currently .57. The Euro Financial Sector Credit Default Swap Index is rising 5.52% today to 120.33 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 1.88% to 224.84 basis points. The TED spread is falling .55% to 101 basis points. The TED spread is now down 365 basis points in just over three months. The 2-year swap spread is rising 2.04% to 68.63 basis points. The Libor-OIS spread is falling 1.40% to 92 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 2 basis points to .58%, which is down 212 basis points in just over 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 .11%, which is up 1 basis point today. Market-leading stocks are especially strong today. The sharp reversal higher in shares of (USB) and (BAC) were catalysts for the 12% surge in the (XLF) today. The surge in oil, sell-off in bonds and strengthening of the euro indicate economic fears are subsiding a bit. (AAPL) reports after the close today. I suspect they will exceed estimates and lower forward guidance. This should be priced into shares at current levels and any initial kneejerk sell-off will likely be short-lived. Nikkei futures indicate an +180 open in Japan and DAX futures indicate an +89 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing economic pessimism and declining financial sector worries.

Bloomberg:

- Almost 70 percent of Chinese readers rated U.S. President Barack Obama’s inaugural address “a masterpiece,” in an online poll by the country’s biggest Web portal. Make that a censored masterpiece. The Chinese version of Obama’s speech posted by Sina.com, with poll questions embedded at the top, did not contain a reference to fighting Communism nor a paragraph about leaders who keep power by silencing dissent.

- Hedge-fund investors withdrew a record $152 billion in the fourth quarter as the industry posted its worst returns in almost two decades, according to Hedge Fund Research Inc. Global assets dropped to $1.4 trillion at the end of the year, the same level as 2006 and $525 billion less than a peak of $1.93 trillion in June, the Chicago-based firm said in a statement today.

- A proposed change to bankruptcy law to allow judges to reduce homeowners’ mortgages may boost the capital needs of banks and insurers by hundreds of billions of dollars, First Pacific Advisors LLC’s Julian Mann said. The issue, identified by investors such as Mann and analysts at JPMorgan Chase & Co., stems from language buried in the more than one hundred pages of prospectuses for many “prime jumbo” and “Alt-A” home-loan securities. Some of the contracts state that bankruptcy-related losses greater than an amount sometimes as little as $100,000 get allocated equally among all investors in bonds backed by the loan pools, rather than lower-ranking debt first. Holders such as banks and insurers of senior classes may see their payments cut or interrupted, potentially forcing writedowns and ratings downgrades. That, in turn, could raise their capital needs.

- China’s economy faces an “extremely sharp” slowdown this year that will trail most economists’ growth forecasts, according to Balestra Capital’s Ryan Atkinson. Declining electricity output and tumbling exports are two signals China’s economic growth may slow to as low as 2% in 2009, said Atkinson, chief market analy6st at the NY-based hedge-fund manager. That compares with the 7.9% expansion forecast by economists in a Bloomberg survey.

- Brad Golding, manager of CRC Income Products Short Only Fund, more than doubled his investors’ money in 2008. They responded by pulling most of their cash from the Christofferson, Robb & Co. hedge fund in the final two months of the year. Assets in the Short Only fund declined to $35 million at year-end from as much as $145 million on Oct. 31, according to a letter to clients from Golding, 44. The drop reflects how the global credit crunch has buffeted even top-performing fund managers as potential clients shun risk-taking while current investors seek to raise cash.

NY Times:

- Police Departments Look for More Fuel-Cutting Cars.

Finextra.com:

- Continuing to provide index solutions that better meet the changing needs of the investing public, Standard & Poor's Index Services today announced the launch of the S&P CDS U.S. Indices. The Indices are designed to measure the performance of the approximately $29 trillion(1) (notional) Credit Derivatives Market.

Morningstar:

- The Morningstar 1000 Hedge Fund Index lost 10.3% in the fourth quarter of 2008 and 22.2% for the year, wiping out the last two years of gains. The index bounced back slightly after extreme market illiquidity and volatility in January and March, but since May, hedge funds have been on a steady decline. Massive losses in September and October of 7.9% and 9.8%, respectively, quashed any hope of salvaging the year, even though it ended on a positive note - December posted a 2.1% gain.

Journal Register:

- The new Obama administration circulated a draft executive order Wednesday that calls for closing the controversial detention center at Guantanamo Bay within a year and halting any war crimes trials in the meantime. While some of the detainees currently held at Guantanamo would be released, others would be transferred elsewhere and later put on trial under terms to be determined. There are an estimated 245 detainees currently held at Guantanamo, out of some 800 who were sent there during the Bush administration. The order circulated as the judge in one war crimes case agreed to Obama's request to suspend proceedings pending a 120-day review.

Boston Globe:

- Boston City Hall, the public library, and police headquarters are joining an energy-management network that will pay the city to reduce the buildings' electricity use during peak demand times, officials are expected to say today. Under the contract with EnerNOC Inc., a Boston-based company that helps customers manage electricity usage, the city also will have access to software that will allow it to analyze and streamline electricity use, potentially further reducing costs.

Crain’s NY Business: