BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The cost to protect against a default by the finance division of General Electric Co. jumped to distressed levels as its shares plunged to a 16-year low and UBS AG said it may have to raise additional capital.

- The cost of protecting investors in Asia-Pacific bonds from default rose, climbing to a record in Australia after the economy unexpectedly shrank in the fourth quarter for the first time in eight years. The Markit iTraxx Australia index rose 13 basis points to 418 as of 1 p.m. in Sydney, according to Citigroup Inc. prices. Contracts on the senior debt of Macquarie Group Ltd., Australia’s largest investment bank, widened 50 basis points to 725, according to Citigroup.

- The cheapest oil in five years, a sign of the global recession, may deliver the biggest boost in purchasing power since at least 1980, Longview Economics said. oil spending will be about 2 percent of worldwide gross domestic production in 2009, down from 4.9 percent in 2008, Longview Chief Executive Officer Chris Watling said in March 2 report. Assuming an average price of $41.90 this year, the world is poised to save $1.72 trillion on oil compared with last year, Watling estimates. “It’s a savings which is approximately three times larger than the entire announced 2009 fiscal stimulus of China and the western economies combined,” Watling said. “The savings from the fall in the price of oil will go straight into consumers’ and businesses’ pockets, will not be impeded by bureaucracy and will happen, unlike parts of the fiscal stimulus, which are likely to be delayed.”

- A glut of steel at ports in China, the world’s biggest maker of the alloy, shows mills were to quick to boost output on expectations the government’s $585 billion economic stimulus package unveiled in November would spur demand, according to Bank of Nova Scotia. Steel stockpiles at Shanghai’s main port have jumped 44% this year to 2.1 million metric tons on Feb. 27, the highest since Bloomberg began compiling the data in June 2006. Prices for iron ore, the raw material used to make steel, had the biggest weekly drop since October, falling 8.5% to $75 a ton, according to Metal Bulletin. The number of ships waiting to unload imported iron ore at ports in China surged 50% in February from a month earlier due to lower demand from steel mills, Liu wrote. A total of 75 ships were at anchor on Feb. 28, compared with 21 at the start of the year, Macquarie Group Ltd. said yesterday. “This strong increase in the ships waiting to unload cargo is clearly a negative sign for the Chinese iron ore market,” Macquarie analysts led by Shanghai-based Bonnie Liu said. Iron ore prices may drop 30%, the first decline in seven years, from April, according to the median estimate of eight analysts surveyed by Bloomberg.

- Mortgage “cram-down” legislation that stalled in Congress last week will require homeowners to exhaust all options before they could use bankruptcy to reduce their loan payments, according to a summary of the revamped bill. The House of Representatives may vote as early as March 5 on the amended legislation, which would let federal judges lengthen loan terms, cut principal payments and reduce interest rates for borrowers in Chapter 13 bankruptcy protection, House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today.

- The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for companies that bundle loans accepted under a new $1 trillion program, indicating the rules may have hampered efforts to start the plan. The rules won’t apply to the Term Asset-Backed Securities Loan Facility out of “desire to encourage market participants to stimulate credit formation and utilize the facility,” the New York Fed said in a document on its Web site today. The government separately said it will expand the TALF to support vehicle-fleet leases and loans for business, construction and farm equipment.

- China’s parliament convenes its annual meeting tomorrow, seeking solutions to an economic slump that is fueling pockets of social unrest after 20 million workers lost their jobs.

- The US dollar rose to the highest level in almost four months against the euro after a government report showed Australia’s economy unexpectedly shrank last quarter, boosting demand for the U.S. currency as a refuge. The greenback climbed versus all 16 most-active currencies as Australia’s gross domestic product contracted 0.5 percent in the fourth quarter from the previous three months, compared with economists’ estimates for 0.2 percent growth. The Dollar Index rose to the strongest since April 2006 on speculation Federal Reserve officials today will reiterate the need to expand aid to the banking system.

- Chinese Premier Wen Jiabao will announce a new stimulus package at the opening of the annual meeting of lawmakers tomorrow, former statistics bureau head Li Deshui said.

Wall Street Journal:

- Republicans opened a new front in their attack on the Obama administration's budget, charging that its ambitious climate-change plan would impose hefty costs on consumers and businesses. Despite the Obama administration's claim that its budget wouldn't raise taxes on families earning less than $250,000 a year, "the budget before us assumes large amounts of money" from the climate-change legislation, Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee, said at a hearing Tuesday. "And that means higher prices for Americans for food, for gas, for electricity, and in a state like Michigan for home heating -- pretty much anything that they buy."

- In a sign that pension funds and other institutional investors are about to get clobbered by losses in commercial real estate, Morgan Stanley(MS) told investors to expect up to a 60% fourth-quarter write-down on the equity in a marquee $8.8 billion real-estate fund, according to a letter to investors. Morgan Stanley hailed the commercial-property MSREF VI International fund as "the largest-ever real-estate fund" when it announced its debut in June 2007. The Wall Street firm projected a 22.4% overall average annual return for the vehicle, which made big, highly leveraged investments on commercial properties scattered in Japan, Germany, China and ...

- Layoffs at Apple(AAPL)? Unlikely.

- Lockheed Martin Corp.(LMT) won a 10-year contract worth up to $5 billion to supply U.S. military commandos with logistics support, unseating L-3 Communications Holdings Inc.(LLL), which previously held the contract.

Washington Post:

- Health Care, Technology and Even Espionage Jobs Still Plentiful Amid the Gloom.

Seeking Alpha:

- Jim Chanos’s Kynikos Suffers Withdrawals and Perry Cuts Performance Fee. Short seller Jim Chanos has undoubtedly had a solid year given that the market has declined so much. Yet, despite his performance, he is still seeing clients redeem almost 20% of their investment in his Kynikos Associates hedge funds. Chanos cited that, "We were like an ATM machine."

AP:

- Roland Burris seems to have weathered the storm. Fellow Democrats are no longer demanding his resignation. The new Illinois governor has stopped calling for a special election to replace him. And party leaders who control the Senate and Illinois Legislature are reluctant to risk losing his seat to Republicans. "He's not going to go anywhere. I'm convinced of that," said congressman Phil Hare, one of the first Illinois Democrats to call for Burris to step down. Burris has been under intense scrutiny because of the circumstances of his appointment by disgraced former Gov. Rod Blagojevich and for changing his story about it multiple times.

Reuters:

- The Senate's majority leader signaled on Tuesday that provisions to ease limits on trade and travel to Cuba were likely to be approved because they were attached to a larger bill that he did not want to stall. "I'm not wild about some of the Cuba provisions in this bill myself," Senator Harry Reid, a Democrat, told reporters. "There are a couple of those that I don't like very much, but it's not enough to bring the bill down, in my opinion." With Congress facing a deadline on Friday to pass the massive $410 billion bill to fund many government operations, an aide to Reid told reporters it did not appear that foes of loosening sanctions on the communist-run island had enough votes to strip the provisions.

Financial Times:
- AIG, the insurer controlled by the US government, still faces billions of dollars in potential losses on credit guarantees it provided for complex subprime mortgage securities, in spite of its $62bn fourth-quarter loss and regulatory efforts to unwind its holdings, company filings show. AIG filings this week show that the company retains $12bn in exposure to credit insurance on positions mostly involving subprime mortgages. As of February 18, AIG could have to pay counterparties up to $8bn on these positions, the filing showed.

- When Iceland’s banking system collapsed in October, even the most independent-minded islanders gazed across the North Atlantic to Europe for salvation. If only Iceland had been a member of the European Union and eurozone, the argument went, it would have escaped the crisis and humiliation. Four months later, as crisis-hit European countries such as Poland and Hungary consider joining the eurozone as quickly as possible, Icelanders are no longer looking overseas so rapturously. The latest polls reveal less than 40 per cent now back an application to join the bloc, compared with a mid-crisis high of nearly 80 per cent. The reasons for the fall-off are mixed. Fissures inside the eurozone between large members, such as Germany and France, and small ones, such as Greece and Ireland, are undermining the zone’s attractiveness to a tiny country. Icelanders see little point in enduring one currency crisis only to get embroiled in another.

Caijing:

- Overseas companies reduced their 2009 investment budget in southern China by 40% because of the global financial crisis, citing a report from the American Chamber of Commerce in the region. The budget for the next three years is about $11 billion. The report was based on a survey of 551 foreign companies, mainly from the US, between December 2008 and February 2009.

Economic Daily News:

- Corning Inc.(GLW) expects utilization of South Korean and Taiwanese display panel plants to rise as sales of liquid-crystal display televisions increase, citing President Peter Volanakis. The company expects global sales of LCD televisions will rise 9% this year.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (BMRN) to Buy, target $17.

- Reiterated Buy on (SUNH), target $14.

Night Trading
Asian Indices are -.50% to +2.25% on average.
S&P 500 futures +.93%.
NASDAQ 100 futures +.68%.

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Earnings of Note
Company/EPS Estimate
- (JOYG)/.75

- (LIZ)/-.10

- (BJ)/.86

- (PETM)/.59

- (CPRT)/.36

- (FL)/.17

- (BIG)/.93

- (TOL)/-.48

Economic Releases

8:15 am EST

- The ADP Employment Change for February is estimated at -630K versus -522K in January.

10:00 am EST:

- ISM Non-Manufacturing for February is estimated to fall to 41.0 versus 42.9 in January.

10:30 am EST:

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus a +717,000 barrel increase the prior week. Gasoline supplies are estimated to decline by -800,000 barrels versus a -3,322,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,000,000 versus a +882,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise .04% versus a -.89% decline the prior week.

2:00 pm EST

- Fed’s Beige Book

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Fisher speaking, Fed’s Lockhart speaking, weekly MBA mortgage applications report, Challenger Job Cuts report, (ICGE) investor meeting, (TAP) analyst meeting, Morgan Stanley Tech Conference, UBS Nat Gas/Electric/Coal Conference, Citi Global Property Conference, Deutsche Bank Media/Telecom Conference and the Keefe Bruyette Woods Regional Bank Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the day.

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Computer longs and Biotech longs. I covered some of my (IWM)/(QQQQ) hedges and then added them back today, thus leaving the Portfolio 50% net long. The tone of the market is slightly positive as the advance/decline line is modestly lower, sector performance is mostly positive and volume is above average. Investor anxiety is also above average. Today’s overall market action is neutral. The VIX is falling 6.67% and is elevated at 49.14. The ISE Sentiment Index is below average at 113.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running low most of the day, hitting .22 at its intraday trough, and is currently .51. The Euro Financial Sector Credit Default Swap Index is rising 4.38% today to 162.0 basis points. This index is still below its all-time high of 164.0 on Feb. 24^th. The North American Investment Grade Credit Default Swap Index is rising 4.99% to 240.74 basis points. This index is still well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.76% to 100 basis points. The TED spread is now down 363 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising .54% to 69.63 basis points. The Libor-OIS spread is rising .93% to 103.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to .93%, which is down 171 basis points since July 7th. 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 .27%, which is up 4 basis points today. Today’s action is more disappointing given recent market losses. The low NYSE Arms reading is a negative. As well, some other gauges of investor angst are not at levels normally associated with meaningful broad market lows. Furthermore, credit default swaps continue to rise across the board. On the positive side, technology shares are trading very well today with the MS Tech Index up 1.66%. Many market leading stocks are substantially outperforming the major averages today. Finally, the major indices remain extremely oversold and could mount a vigorous rally at any time on any mildly bullish catalyst. Nikkei futures indicate a -89 open in Japan and DAX futures indicate a +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic worries, more shorting, increasing financial sector pessimism, higher energy prices and tax hike worries.

BETWEEN THE HEDGES

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Tuesday, March 03, 2009

Wednesday Watch

Stocks Finish Lower, Weighed Down by Insurance, Airline, Retail, Homebuilding, Utility, Oil Tanker and Paper Shares

Stocks Slightly Lower into Final Hour on Rising Financial Sector Pessimism, More Economic Worries, Higher Energy Prices

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