BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 2.67% and is very high at 42.34. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running above average most of the day, hitting 2.01 at its intraday peak, and is currently 1.15. The Euro Financial Sector Credit Default Swap Index is rising 2.75% today to 119.38 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 1.25% to 199.84 basis points. The TED spread is rising .33% to 95 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is rising 1.17% to 66.25 basis points. The Libor-OIS spread is down .71% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 8 basis points to 1.25%, which is down 145 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 1 basis point today. The bears are unable to gain any traction today despite weakness in the bank and reit sectors. A number of sectors are gaining today. Homebuilding, education, hospital, semi, steel, oil service and alternative energy stocks are especially strong. “Growth” stocks continue to dramatically outperform “value” shares. This year’s best performing style is mid-cap growth(-.90% ytd), while this year’s worst performing style is small-cap value(-14.29% ytd). I still expect this trend to continue through year-end. One of my longs, (QSII), is 2.2% higher today and should be a big beneficiary of the coming digitization of US medical records. I still think the stock is very attractive at current levels. It appears the financials are holding the broad market back from a significant surge higher. A potential change in the mark-to-market rule could provide a substantial upside catalyst for the group over the coming weeks, which would push the broad market meaningfully higher. Nikkei futures indicate an +11 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and less extreme economic pessimism.

Bloomberg:

- Carlyle Group LP, the world’s second- largest buyout firm, has lined up about $1 billion to invest in banks as the Obama administration seeks to attract private capital to troubled financial institutions, according to two people familiar with the matter. Carlyle, based in Washington, plans to raise as much as $3 billion for the new fund this year after initially gathering $600 million in October, said the people, who asked not to be named because the fund is private. Firms including Carlyle and J.C. Flowers & Co. are increasing investments in financial assets as loans for leveraged buyouts of companies remain scarce. Treasury Secretary Timothy Geithner is trying to coax private investors into the effort to bail out the U.S. financial system. Regulators have eased some rules to promote private takeovers of banks.

- High-yield, high-risk bond sales almost tripled to $2.38 billion this week, the most in seven months, as borrowers took advantage of a rally in corporate debt to increase cash reserves and pay down credit lines. Forest Oil Corp. of Denver raised $600 million in the largest junk bond offering this week, while Nashville, Tennessee- based hospital chain HCA Inc. sold $310 million of notes, according to data compiled by Bloomberg. Both came to the bond market to repay bank debt.

- Warren Buffett’s Berkshire Hathaway Inc. agreed to buy $250 million of debt in Tiffany & Co., the world’s second-largest luxury-jewelry retailer. The bonds will pay 10 percent annually, the New York-based retailer said today in a regulatory filing.

- Investors’ confidence in a sustained rebound in commodity shipping has evaporated in three days, derivatives tied to future shipping rates indicate. Rates have gained on demand to haul iron ore to China, where stockpiles have dropped from all-time highs in September. “While the front-end of the freight forward curve remains supported, there are certainly signs of selling calendar years in the back,” Joel Crrane, a strategist at Deutsche Banks AG in NY, wrote. “Upward momentum remains in the Baltic Dry Index, but given spot iron-ore prices have flattened and Chinese steel prices are easing, we would expect a slowdown in the growth rate of the index in the coming weeks,” Crane wrote.

- Citadel Investment Group LLC, the $13 billion hedge-fund firm run by Kenneth Griffin, plans to allow clients to make withdrawals from its two largest funds after freezing them last year. Citadel will decide each quarter whether to make payments from its Wellington and Kensington funds, Griffin, 40, said in an investor letter yesterday. Clients will be notified of any amounts available for redemption. “We believe that this plan will allow us to maximize the value of our portfolio holdings and capitalize on opportunities in the marketplace,” Griffin said in the letter, a copy of which was obtained by Bloomberg News. He said the firm had “significantly” cut its holdings in hard-to-sell assets.

- OPEC’s crude sells for a record premium to New York oil as the group’s biggest supply cut fails to draw down brimming U.S. stockpiles. Crude inventories in the U.S. are at their highest since July 2007, even after OPEC announced a record production cut, as the recession curbs consumer demand. Stockpiles at Cushing, Oklahoma, where the blend traded on Nymex is delivered, swelled to an all-time high last week. “What this says most is that Cushing is awash with oil,” said Gareth Lewis-Davies, an analyst at Dresdner Kleinwort in London. “Evidence that the OPEC cuts are sufficient hasn’t yet shown up in inventories, and it could be because demand is even worse than people thought.”

- Germany’s economy contracted for the third successive quarter and by the most in 22 years in the final three months of 2008 as the global financial crisis sapped export demand and companies cut investment. Gross domestic product dropped a seasonally adjusted 2.1 percent from the third quarter, when it fell 0.5 percent, the Federal Statistics Office in Wiesbaden said today. That’s the biggest decline since the first quarter of 1987. Economists expected a 1.8 percent contraction, the median of 34 forecasts in a Bloomberg News survey showed.

- Mexican stocks, Latin America’s worst performers this year, are pricier than their emerging-market peers by the widest gap in a decade, a sign they may drop more. Mexico’s Bolsa index has tumbled 13 percent this year while benchmark gauges in Brazil, Argentina and Chile climbed. Even after the declines, Mexican shares fetch about 52 percent more than all emerging-market stocks, the biggest premium since 1998, based on monthly price-to-earnings ratios for MSCI indexes as of the end of January.

- Lego A/S, Europe’s biggest toymaker, said U.S. consumer sales climbed a record 38 percent last year, as parents sought cheaper, more durable toys for their children in the sputtering economy. Sales in 2009 may continue to grow, Soren Torp Laursen, head of the company’s Americas unit said yesterday in a telephone interview.

Wall Street Journal:

- J.P. Morgan Chase and Citigroup Inc. have formally committed to weeks-long moratoriums on foreclosures as the government works on a financial stability plan slated to include billions of dollars aimed at keeping people in their homes."We will not add to the foreclosure process any new owner-occupied residential loans that are owned and serviced by JPMorgan Chase," the company's chief executive, Jamie Dimon, said in a Feb. 12 letter to Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee. The moratorium on new foreclosure actions would remain in effect through March 6 and is similar to a 90-day foreclosure freeze J.P. Morgan announced Oct. 31.

CNBC.com:
- Confidence in US economy systems must be restored, Christopher Galvin, a former chairman of Motorola Corp. and member of the Business Council, said today. The council, which included the heads of Fortune 500 companies, will meet today with President Barack Obama. “At this stage, you simply have to do everything one can to get people to believe they should buy a car, get on an airplane and take that trip,” said Galvin.

- The stimulus package approved by congressional negotiators spends money too late and on the wrong things, Representative Paul Ryan of Wisconsin told CNBC. “It’s a laundry list of special interest spending,” said Ryan, a Republican, who said Democratic lawmakers who wrote the bill ignored Republican proposals. The stimulus spends 7.13% this year, 37% in 2010 and the rest afterward, Ryan said.

- Why Are Gas Prices Going Up While Oil Keeps Falling?

NY Post:

- After suffering embarrassing flops on more than 130 tech ventures he has backed, for a total of about $9 billion, Paul Allen is now looking to banking for his new fortunes. His Vulcan Ventures fund is considering rolling the dice for up to $15 billion with a proven winner, celebrated banking analyst Richard Bove, in a venture to buy up banks wrecked in the recession.

LA Times:

- Wall Street optimists think stocks may be near bottom. Many Wall Street professionals note that the S&P and other broad indexes have largely moved sideways since hitting their 2008 lows in late November, despite a continuing barrage of ugly economic data and horrid earnings reports. "The longer [the S&P] stays in a trading range like this, the more bullish it becomes," said Gail Dudack, head of Dudack Research Group in New York. "Sideways works in the long run. It's a base-building period for something better down the road." Under the surface, there are other positive signs for the market, said Anthony Dwyer, market strategist at FTN Midwest Securities Corp. "Most stocks have not broken their lows, the new-low list is not expanding like it had been, the advance-decline line is holding up well and volatility is well below where it was," Dwyer said.

Loyd’s List:

- The number of container ships idling because of declining cargo demand climbed 500% since October, citing data from BRS-Alphaliner. Vessels able to haul 800,000 twenty-foot-equivalent boxes are inactive, compared with an amount equal to 150,000 containers in October. Four hundred and twenty-seven vessels are seeking cargoes, citing data from Llyod’s Marine Intelligence Unit. That’s equal to 6.8% of the fleet by capacity.

Reuters:
- Bank of America Corp.(BAC) Chief Financial Officer Joe Price assured employees Friday the company has enough cash to finance operations for more than two years. Price went on to say Bank of America believes it has the best deposit franchise in the world, which is a "very cost-effective funding source," and that the company's liquidity "continues to be strong despite the difficult market environment." The company's Tier-1 ratio — the measure commonly used to rate a bank's strength — was 9.15 percent at Dec. 31, well in excess of what regulators regard as well-capitalized.

- As the crisis in the biotech sector deepens, opportunities abound for companies looking to acquire cheap assets. But it will likely be mid-cap companies with cash that profit most from the bonanza, not the drug giants.

- Google(GOOG) will allow developers to sell applications for its Android cell phone operating system beginning next week in the United States. The move is a further step by the search giant into the mobile phone market, where Apple Inc has encountered success with its iPhone. Developers such as Electronic Arts Inc have been anxious to expand sales of their mobile phone games to the Android Market, which has been limited to free applications until now. Google said in a statement on Friday that consumers will have to pay for the applications via its Google Checkout payment product. Google's Android Market will initially carry paid applications from developers in the United States and Britain, with plans to allow developers in Germany, Austria, the Netherlands, France and Spain to participate later this quarter.

Interfax:

- US Open to Working With Russia on Missile Shield.

Xinhua:
- China’s toy exports may have declined 18% in January from a year earlier. Toy exports in the southern Guangdong province plunged 18% to $340 million last month, citing local customs statistics. Guangdong accou nts for 70% of China’s production and export of toys and is representative of the total country’s trade in the products. Lower demand from the US and Europe during a financial crisis and more stringent quality and safety controls on toys in the importing countries were the main reasons for the decline.

BETWEEN THE HEDGES

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Friday, February 13, 2009

Stocks Finish Lower, Weighed Down by Bank, Gaming, Insurance, Retail, REIT and Oil Tanker Shares

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