BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- Hong Kong property developers are cutting prices to boost sales of unsold apartments, the South China Morning reported today. Asia Standard International Group has cut asking prices at its Jadewater project in the city’s Aberdeen district by 46 percent, the Hong Kong-based newspaper said, citing executive director Phileas Kwan. New World Development Co. said it would lower prices at its Prince Ritz and Harbour Place projects by up to 20 percent, the newspaper said, citing the company. Chinese Estates Holdings Ltd. may also slash prices at its York Place project in the Wanchai district on Hong Kong island by about 30 percent, the Morning Post said, citing people it didn’t identify.

- More than 80 percent of Asian hedge funds won’t be able to charge their investors performance fees after finishing 2008 below their peak net asset values, according to data provider Eurekahedge Pte. About a third of the 1,000 regional hedge funds tracked by Eurekahedge had positive returns last year, compared with 82 percent in 2007, the data provider said, citing figures from Jan. 30 when about 90 percent of funds had disclosed December returns. “When you are down 40, 50 percent, it’s hard to get back,” said Richard Johnston, Hong Kong-based Asia head of hedge fund consulting firm Albourne Partners Ltd. “A lot of managers are not going to see performance fees for a couple of years.”

- The cost of protecting Japanese corporate bonds from default rose to a record as the world’s second-largest economy battles a worsening economic recession. The Markit iTraxx Japan index of credit-default swaps on the debt of 50 investment-grade borrowers rose 25 basis points from Feb. 10 to 455.0 at 9:52 am in Tokyo, BNP Paribas SA prices show.

- U.S. congressional negotiators may drop $7.7 billion that had been planned for renewable-energy grants in the economic stimulus legislation they’ll send to President Barack Obama. Democrats are likely to accept the Senate’s removal of aid for wind and solar energy investments from the final bill to be delivered to Obama, said Kevin Book, a senior analyst for Friedman Billings Ramsey & Co. in Arlington, Virginia. The House legislation included the grants.

- Former presidents of Brazil, Mexico and Colombia said the U.S.-led war on drugs has failed and urged President Barack Obama to consider new policies, including decriminalizing marijuana, and to treat drug use as a public health problem. The recommendations by former Brazilian President Fernando Henrique Cardoso, along with Ernesto Zedillo of Mexico and Cesar Gaviria of Colombia, were made in a report today by the Latin American Commission on Drugs and Democracy. Among the group’s proposals ahead of a special United Nations ministerial meeting in Vienna to evaluate global drug policy is a call to decriminalize the possession of cannabis for personal use.

- House and Senate negotiators all but eliminated the biggest tax cut for businesses in the compromise agreement on an economic stimulus bill, Senator Max Baucus of Montana said. The provision, a top priority of business groups including the National Association of Manufacturers and the U.S. Chamber of Commerce, would let companies convert losses into tax refunds. Baucus said today that the provision, under which companies could have claimed an estimated $67.5 billion in tax refunds this year and next, was sacrificed to help keep the final package under $800 billion.

- European Central Bank Vice President Lucas Papademos said officials will probably cut interest rates to a record low next month and indicated he would support the use of unconventional tools at any time.

- The Bank of Korea cut its benchmark interest rate to a record-low 2 percent to revive an economy headed for the first recession in more than a decade as exports and spending cool. Governor Lee Seong Tae and his board pared the seven-day repurchase rate by a half point in Seoul today, the sixth reduction since early October. The decision was expected by six of nine economists surveyed by Bloomberg.

- Aluminum Corp. of China plans to invest $19.5 billion in Rio Tinto Group, gaining access to copper and iron ore resources in the nation’s largest overseas acquisition, according to two people involved in the transaction. Chinalco, as the state-owned company is known, will buy $7.2 billion of bonds that can be converted into Rio shares and acquire stakes in at least eight projects for $12.3 billion, said the people who declined to be identified before an announcement scheduled for today. Chinalco will own 18 percent of London-based Rio should it convert the debt.

- Chipotle Mexican Grill Inc.(CMG), the burrito chain spun off from McDonald’s Corp. in 2006, reported fourth-quarter profit that fell less than analysts estimated as menu price increases tempered higher food costs. Shares climbed 11 percent to $52.47 at 4:18 p.m. in trading after U.S. markets closed.

Wall Street Journal:

- General Motors Corp.(GM) is offering retirement incentives to 22,000 of its 62,000 United Auto Workers union members as part of a turnaround plan it must present to the U.S. government by Tuesday. The company would be pleased to see half of them take the offer, said a person familiar with GM's thinking.

- Congress and the White House reached accord on a $789.5 billion economic-recovery package that would shower hundreds of billions of dollars in tax relief on individuals and businesses and spark an infrastructure building boom from the nation's ports and waterways to its schools and military bases. The deal all but clinches passage of one of the largest economic rescues since Franklin Roosevelt launched the New Deal. President Barack Obama, speaking at a Northern Virginia construction site, hailed an "endeavor of enormous scope and scale." The cost of the package dwarfs the nation's military budget and exceeds the cost of the entire Iraq war since the invasion of 2003. Ending two decades of mostly Republican-led efforts to diminish federal authority and focus on lifting the economy through tax cuts, the legislation would expand unemployment insurance, tilt federal assistance to the poor, launch major efforts to streamline health care delivery, and give Washington a larger hand in local education spending. Both Mr. Obama and Democratic leaders lowered their work-creation expectation Wednesday night. They had originally said their goal was to create, or save, 4 million jobs. Last night, they cut that to 3.5 million. The final package includes a controversial provision that has spurred criticism from trading partners around the world, requiring funds used under the bill to purchase materials to be U.S.-made. But the measure has been softened from the original versions, and now includes a requirement that the provision be implemented consistent with U.S. international trade obligations, according to individuals familiar with the bill.

BusinessWeek:

- India-China Trade Tensions Rise. China threatens to bring its opposition to India’s toy import ban to the WTO, while India seems poised to restrict other Chinese producuts.

Washington Post:

- Members of an influential Washington think tank today recommended major changes in the nation's immigration policy, including freezing construction of a security fence along the U.S.- Mexican border and suspending "zero-tolerance" prosecution programs against all people caught crossing segments of the border. The Migration Policy Institute, a non-partisan group whose presenters included former U.S. immigration chiefs under both parties, recommended 36 steps the Obama administration can take without congressional approval to alter policies developed during the Bush administration. The policy experts also urged withdrawing a plan to pressure employers to fire workers with suspect Social Security numbers.

Politico:

- House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid played a little high-stakes chicken with each other at the tail end of Wednesday’s shotgun stimulus talks. It’s not clear who won – or who blinked. According to a half dozen Congressional aides and members, Reid went before the cameras Wednesday to announce a stimulus deal before Pelosi had agreed on all the details of school construction financing. “It’s ruffled feathers, big time,” said a House Democrat speaking on condition of anonymity. “The speaker went through the roof.” Added one House Democratic aide: “He tried to roll her and she knew it.”

AppleInsider:

- Apple(AAPL) is believed to be wrapping up a new feature in iTunes 8 that will allow users to stream their iTunes video purchases directly from the company's servers for playback anywhere, anytime without eating up local storage. Dubbed iTunes Replay, the service would allow iTunes shoppers to build out their digital video collection without worrying about the space needed to store the often hefty media files. It's unclear whether Apple plans to charge for the service, which is said to support both iTunes Movie and TV show purchases.

Dow Jones:

- Repsol YPF SA, Spain’s largest oil company, said the Santos Basin BM-S-9 oil block in Brazil may hold recoverable reserves of between 2 billion and 6 billion barrels of oil equivalent, citing Nemesio Fernandez-Cuesta, Repsol’s head of exploration and production.

- China Banking Regulatory Commission official Luo Ping sees few real alternatives to holding US Treasury securities, citing comments he made in NY. US government debt is the “safe haven for investment,” the news agency cited Luo as saying. “Except for US Treasuries, what else can you hold?,” he said.

Reuters:

- Global credit markets are unlikely to revive as long as the U.S. government continues to dangle the vague prospect of a toxic asset purchase plan in front of distressed banks, some lawmakers warned on Wednesday. The chance that taxpayers could be made to overpay for underperforming assets is making bankers, whose balance sheets are saddled with them, reluctant to sell to lower bidders, suggested Texas Republican Rep. Randy Neugebauer. "People are afraid to buy and afraid to sell because they're afraid the government is going to sweeten the deal," he told Reuters in an interview. "The markets are just waiting to see when we're going to be done."

La Tribune:

- UK Chancellor of the Exchequer Alistair Darling said the government doesn’t plan to drop the pound to adopt the euro, citing an interview with the British finance chief.

Munhwa Ilbo:

- North Korea may test its longest-range missile as early as next eek, citing experts. Vehicles carrying equipment for the launch are converging on the Musudan-ri base, citing a South Korean official.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ATVI), target $14.

- Reiterated Buy on (AZO), target $146.

- Reiterated Buy on (GOOG), target $450.

Night Trading
Asian Indices are -2.50% to +.75% on average.
S&P 500 futures -.23%.
NASDAQ 100 futures -.31%.

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Earnings of Note
Company/EPS Estimate
- (PTEN)/.55

- (MAR)/.40

- (MLM)/.83

- (ALXN)/.15

- (LH)/1.09

- (FCL)/.56

- (KO)/.61

- (STRA)/1.70

- (AET)/.94

- (BWA)/-.09

- (VIA/B)/.79

- (CEPH)/1.37

- (PNRA)/.83

- (MFE)/.53

Economic Releases

8:30 am EST

- Advance Retail Sales for January are estimated to fall .8% versus a 2.7% decline in December.

- Retail Sales Less Autos for January are estimated to fall .4% versus a 3.1% decline in December.

- Initial Jobless Claims for last week are estimated to fall to 610K versus 626K the prior week.

- Continuing Claims are estimated to rise to 4800K versus 4788K prior.

10:00 am EST

- Business Inventories for December are estimated to fall .9% versus a .7% decline in November.

Upcoming Splits
- (LPHI) 5-for-4

Other Potential Market Movers
- The (ATW) annual meeting, (ISIL) analyst day, (QGEN) analyst day, Deutsche Bank Growth Conference, BB&T Transports Conference and the Goldman Sachs Consumer Leveraged Finance Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by consumer and financial stocks in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Education longs and Commodity shorts. I covered some of my (IWM/QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are gaining and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 3.81% and is very high at 44.85. The ISE Sentiment Index is below average at 119.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running around average most of the day, hitting .97 at its intraday peak, and is currently .71. The Euro Financial Sector Credit Default Swap Index is rising .59% today to 111.67 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 rising .64% to 192.73 basis points. The TED spread is rising 2.27% to 93 basis points. The TED spread is now down 374 basis points in under four months. The 2-year swap spread is falling 1.17% to 63.25 basis points. The Libor-OIS spread is rising .72% to 96 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 12 basis points to 1.12%, which is down 158 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 .30%, which is down 1 basis point today. The bears are unable to gain any traction today and the financial sector is recouping some of yesterday’s steep losses. Last night, Senator Dodd said that adjusting mark-to-market accounting rules eventually 'may be' part of the Obama administration's plan to stabilize financial markets. I think this would help financials a great deal and would be a large broad market positive. The most heavily shorted sectors are up the most. Tech, Commodity and Transportation shares are lower on the day. While I am not long (RIMM), investor reaction to its lowered guidance appears overdone and is a broad market negative. Any market rally without tech participating is likely unsustainable. Nikkei futures indicate a -120 open in Japan and DAX futures indicate a -3 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices and less financial sector pessimism.

BETWEEN THE HEDGES

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Thursday, February 12, 2009

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Wednesday, February 11, 2009

Thursday Watch

Stocks Finish Slightly Higher, Boosted by Financial, REIT and Homebuilding Shares

Stocks Higher into Final Hour on Less Financial Sector Pessimism, Short-Covering, Lower Energy Prices