BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Biotech longs, Internet longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are falling and volume is slightly above average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 1.88% and is very high at 43.86. The ISE Sentiment Index is low at 93.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running above average most of the day, hitting 1.18 at its intraday peak, and is currently 1.0. The Euro Financial Sector Credit Default Swap Index is falling 3.10% today to 114.67 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 3.10% to 192.0 basis points. The TED spread is rising 2.07% to 94 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is rising .73% to 68.75 basis points. The Libor-OIS spread is falling .67% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis points to 1.15%, which is down 155 basis points in under seven months. 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 .29%, which is down 3 basis points today. Nikkei futures indicate a +22 open in Japan and DAX futures indicate a -49 open in Germany tomorrow. Considering the ongoing decline in shares of (BAC), the (XLF) is holding up well today. Market leading “growth” stocks are again substantially outperforming “value” shares. Many stocks are rising today, despite losses in the major averages. Large-cap “growth” stocks are just 2.79% lower ytd, while small-cap “value” shares have dropped another 13.72% so far this year. As well, tech stocks continue to substantially outperform with the MS Tech Index up 2.78% ytd. One of my longs, (ILMN), is 21% higher on very heavy volume after another stellar earnings report. I expect the shares to test their record high of $47.87 before year-end. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing credit market angst and lower energy prices.

Bloomberg:

- A “bubble” in crude oil, natural gas and other commodity prices cost the US more than $110 billion last year and helped drive the nation into economic crisis, according to a report by hedge fund president Michael Masters. “The effect was to take an already weak and frail economy and push it down the stairs,” Masters, head of Masters Capital Management, and Adam White, director of research for White Knight Research & Trading, say in a report at a hearing this morning of the House Agriculture Committee, which is reviewing derivatives legislation proposed by its chairman, Democratic Representative Collin Peterson of Minnesota. If there were rules in place to limit speculative positions in the commodity markets, “there never would have been a commodities bubble in 2008,” Masters and White conclude.

- SPDR Gold Trust, the largest exchange-traded fund backed by bullion, increased its outstanding shares by 39% since Lehman Brothers collapsed, more than double the gain in gold, as investors sought a quick way to safety. “History shows at times of pronounced financial and economic stress, investors disregard traditional pointers such as gold’s price relationship with currencies and physical bullion flows and focus on a safe place to park assets,” analysts including Melbourne-based Malcolm Southwood wrote. “This assertion is well supported by the latest surge in interest in gold ETFs.” Though gold remains one of the few notable beneficiaries of heightened anxiety in financial markets, its attraction may not last as the precious metal “has rarely sustained a rally during periods of deflation,” the report said. The Intl. Energy Agency’s forecast that oil could decline to just above $30 per barrel “could be viewed as an early warning for perpetual gold bulls,” the report said.

- President Barack Obama, who has wavered on his pledge to block lobbyists from working in his administration, is finding his Cabinet nominees’ violations of tax laws more difficult to overlook. The withdrawals yesterday of former Senate Majority Leader Tom Daschle to be Health and Human Services Secretary and Nancy Killefer to be his chief oversight officer, were Obama’s biggest setbacks as president. In both cases, the nominations were scuttled after the candidates admitted tax mistakes.

- Mexico’s central bank is buying pesos in the foreign-exchange market after the currency plunged to a record low today, the bank’s press office said. A joint central bank and finance ministry committee decided Banco de Mexico would “inject liquidity,” according to an e-mail sent by the central bank’s press office. The intervention is an “extraordinary” measure beyond the bank’s normal offer to buy $400 million worth of pesos a day, the press office said.

- Harry Markopolos, a former money manager who sought to convince regulators for nine years that Bernard Madoff was a fraud, said the U.S. Securities and Exchange Commission suffers from “investigative ineptitude.” Markopolos told Congress today that he contacted the SEC in 2000 after examining Madoff’s investment strategy and determining in four hours that returns exceeding 10 percent weren’t possible. Markopolos, in almost a decade of communication, said only one SEC staff member understood Madoff’s scheme and “the threat it posed to the public.”

- Bank of American’s(BAC) Lewis said January performance was ‘encouraging.”

Wall Street Journal:

- Google’s(GOOG) Latitude, Useful Addition to Maps Applications. (video)

- Goldman Sachs(GS) called off its big Miami hedge-fund conference scheduled for the first week of March, telling clients that going ahead with the normally posh event there could cause image problems for the firm at a time of intense scrutiny over banks' spending habits. "In light of the current environment, Goldman decided to reschedule the hedge-fund managers' conference. We plan to hold the conference in the next few months in New York," Goldman spokesman Ed Canaday said.

MarketWatch:
- The US dollar got a lift against the euro Wednesday, after credit-ratings agency Fitch Ratings downgraded Russia's long-term foreign and local currency ratings.

The dollar index (DXY) , which measures the U.S. unit against a trade-weighted basket of six major currencies, was at 85.588, up from 84.795 in North American activity late Tuesday. The euro extended losses versus the greenback, recently buying $1.2865, down from $1.3044 on Tuesday. The downgrade was "lighting a fire under the U.S. dollar," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.

Politico:

- Former Vice President Dick Cheney warned that there is a “high probability” that terrorists will attempt a catastrophic nuclear or biological attack in coming years, and said he fears the Obama administration’s policies will make it more likely the attempt will succeed. In an interview Tuesday with Politico, Cheney unyieldingly defended the Bush administration’s support for the Guantanamo Bay prison and coercive interrogation of terrorism suspects. And he asserted that President Obama will either backtrack on his stated intentions to end those policies or put the country at risk in ways more severe than most Americans — and, he charged, many members of Obama’s own team — understand.

- General Wes Clark has signed on as a front man for the ethanol industry , a source familiar with his plans said, putting him in the trenches of a high-stakes, if somewhat obscure, Washington lobbying battle. He'll announce at a Marriott Wardman Park press conference tomorrow that he'll be the co-chair of Growth Energy, an ethanol industry group that's been engaged in a fascinating fight with the Grocery Manufacturers Association over, more or less, the price of corn. The grocery stores hired the Glover Park Group to discredit ethanol as an environmental plus; the ethanol producers countered by demanding that the food industry lower its prices as commodity prices dropped last year. Newt Gingrich is with Clark on the pro-ethanol side.