BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- Federal Deposit Insurance Corp. Chairman Sheila Bair said credit markets are showing signs that liquidity is returning, and banks are starting to make money as government rescue programs begin working. “I’m starting to get more optimism,” Bair said today in an interview on Bloomberg Television. “I think we are seeing some signs of thawing, some signs of improvement. Many banks are making money.” U.S. efforts to end the worst financial crisis in more than seven decades, including $700 billion to rescue financial firms, are “starting to work,” Bair said. (video)

- Bets against U.S. stocks reached the highest since September, according to short-selling data released by the New York Stock Exchange. More than 16.1 billion shares were sold short on the NYSE as of March 13, the exchange said today. That’s the most since 17.1 billion on Sept. 15, the day Lehman Brothers Holdings Inc. filed for bankruptcy.

- The cost of protecting Japanese corporate4 bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 10 basis points to 380 at 9:44 am in Tokyo, BNP Paribas SA prices show. Contracts on the debt of Sony Corp., the world’s second-largest consumer electronics maker, fell 10 basis points to 185, according to BNP.

- Investment demand for gold will rise to an all-time high of 52.3 million ounces this year, NY-based commodity-researcher CPM said today in its annual outlook report. That compares with 43.3 million ounces in 2008. Demand for gold to maker jewelry will drop 7.1% to 56.5 million ounces as consumer spending weakens, the group said. Supplies of gold, including mine outputs and recycling, will rise 3.3% to 118.6 million ounces this year, CPM said. Mine production will advance 3.4% to 57.2 million ounces this year from 55.3 million in 2008, the company said.

- The Federal Reserve will start purchasing long-term Treasuries tomorrow, aiming to bring down borrowing costs by employing tools last used in the 1960s. The first operation in the $300 billion effort is aimed at notes maturing from February 2016 to February 2019, the New York Fed Bank said in a statement today. In the coming nine days, the central bank plans to buy debt maturing between March 2011 and February 2039, according to the tentative schedule. The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt, broadening efforts to unfreeze credit and end the recession after cutting the benchmark interest rate close to zero.

- Senator Arlen Specter, a Pennsylvania Republican, said he opposes the “card-check” union organizing measure, dealing a setback to U.S. labor’s top legislative goal. Specter said that he is likely to be the “decisive vote,” to block the Democratic-backed bill that would make it easier to form unions. “The problem with the recession makes this a particularly bad time,” Specter said on the Senate floor today. Employers fear the measure “will result in further job losses,” he said. Wal-Mart Stores Inc., Starbucks Corp., and Burger King Holdings Inc. are among companies that oppose the bill, which is backed by most Senate Democrats and President Barack Obama. Senate Majority Leader Harry Reid, a Nevada Democrat, held out hope for the measure, saying Specter “is not the only Republican who has indicated a willingness” to support it. Specter’s decision may doom the proposal, said William B. Gould, a former head of the National Labor Relations Board. “This is going to make it extremely difficult to get this bill passed,” Gould said. The bill would let workers chose to form a union when a majority of company employees sign a card requesting one, rather than permitting their employer to require a secret-ballot election run by the National Labor Relations Board.

- Billionaire Warren Buffett’s Berkshire Hathaway Inc. may lose its AAA credit rating from Standard & Poor’s because values have fallen in its equity portfolio and capital has shrunk at the insurance operations. The rating could be cut in the next 12 months, S&P said in a statement today about the Omaha, Nebraska-based insurance and investing firm. An S&P downgrade would be the second for Berkshire after Fitch Ratings stripped its AAA rating on March 12. S&P said any downgrade probably would be a one-notch cut.

- Japan’s exports plunged by a record in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics. Overseas shipments fell 49.4 percent from a year earlier, the sharpest decline since at least 1980, when the government started to keep comparable data, the Finance Ministry said today in Tokyo. Economists predicted a 47.6 percent drop.

- President Barack Obama said a proposed emissions-trading plan aimed at tackling climate change and moving the U.S. toward a new energy economy must take into account regional differences and “huge spikes” in costs. Obama, speaking in a White House news conference tonight, defended the “cap-and-trade” plan outlined in his federal budget. He has proposed auctioning all permits to raise at least $646 billion from 2012 to 2019. Some companies such as General Electric Co.(GE) that have supported a cap-and-trade system in the past and lawmakers from both parties say the plan would amount to a tax increase. The cost would fall most heavily on consumers whose power comes from coal, the most polluting power source.

- Senate Democrats are making a “major re-evaluation” of a proposal to heavily tax bonuses paid by American International Group Inc., in part because of President Barack Obama’s concerns, the Senate Finance Committee chairman said. Panel chairman Max Baucus said legislation he introduced last week is opposed by some senators who believe it is arbitrary and others who don’t like the idea of using taxation to force return of the bonuses. Obama said last weekend the U.S. shouldn’t “govern out of anger” on the issue. House Democratic Leader Steny Hoyer today said Congress may not need to act at all if AIG employees continue to return the payments. Republican opposition to the proposal in the Senate is more uniform than it was in the House, where party members split almost evenly in the vote on the chamber’s bonus-tax bill last week, said the party’s top Senate vote counter, Jon Kyl of Arizona. While Republicans are in the minority in the Senate, they can more easily block legislation with procedural hurdles. If Reid “wants this bill, he’s going to have significant opposition,” Kyl told reporters yesterday. He also said he was surprised to find calls from constituents running six to one against the measure.

- Pfizer Inc.(PFE), the world’s largest drugmaker, won approval from European regulators to sell a treatment for women with weak bones and said it will seek a partner to market the drug. The treatment, Fablyn, was approved by the European Commission for women who face a higher risk of fractures, said Pfizer and San Diego-based Ligand Pharmaceuticals Inc., which developed the therapy.

- Allergan Inc.(AGN), the wrinkle remedy company that surged the most in at least 20 years today on takeover speculation, is shopping for acquisitions of its own, Chief Executive Officer David Pyott said in an interview. Pyott declined to say whether another drugmaker had offered to buy Allergan, based in Irvine, California. He didn’t rule out a sale. “Somebody would have to come out with a very compelling proposition,” Pyott said in a telephone interview.

- A decline in the cost of protecting South Korea and Indonesian bonds from default probably won’t last as both countries face “short-term issues” in paying their debts, according to Fortis Investments. Credit-default swaps for South Korea, rated A2 by Moody’s Investors Service, cost almost the same as the Philippines, which has a non-investment grade rating of B1. Indonesia, rated one level higher at Ba3, trade at almost double the cost. “I don’t think the Korea credit-default swap is mispriced,” said Cian O’Carroll, global head of credit and hybrids in Paris at the unit of the Belgian financial services company, which oversees the equivalent of $261 billion of funds globally. “The rating is under pressure.”

- President Barack Obama said the dollar is “extraordinarily strong” because investors are confident in the ability of the U.S. to lead a worldwide recovery and rejected calls for a new global currency. “There is a great deal of confidence that ultimately, although we are going through a rough patch, that the prospects for the world economy are very, very strong.” Chinese central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to create a “super- sovereign reserve currency.” Obama said tonight he saw “no need” for a new global currency.

Wall Street Journal:

- President Obama used a prime-time news conference to defend his $3.6 trillion budget plan and beat back criticism of his program one day before the plan begins to move in Congress.

- FedEx Corp.(FDX) is threatening to cancel the purchase of billions of dollars worth of new Boeing Co. cargo planes if Congress passes a law that would make it easier for unions to organize at the package-delivery company. A company spokesman said Tuesday that FedEx may cancel plans to buy as many as 30 new Boeing planes should Congress pass a bill that would remove truck drivers, couriers and other employees at FedEx's Express unit from the jurisdiction of the federal Railway Labor Act of 1926, the law which today also governs labor organizing at U.S. airlines. FedEx's actions raise the stakes in an increasingly bitter battle involving chief rival, United Parcel Service Inc.(UPS), and the Teamsters union, which has been trying for years to organize FedEx. "It is exceedingly unlikely that we would purchase those airplanes" should Congress change the law, said FedEx spokesman Maury Lane. The legislation could cripple the company and eliminate the need for the extra planes, Mr. Lane said.

- The leading candidate to run the Treasury Department's $700 billion bailout program has withdrawn his name from consideration, according to people familiar with the matter. Frank Brosens, a hedge-fund manager and big Democratic donor, was considered the top contender to run the Treasury's Troubled Asset Relief Program. Treasury Secretary Timothy Geithner is now considering several other candidates, including Herb Allison, who currently heads mortgage titan Fannie Mae.

- Finance executives expressed anger and betrayal at Washington's latest anti-Wall Street rhetoric during Tuesday's sessions of the Future of Finance Initiative, a conference hosted by The Wall Street Journal. The conflict suggested that the lines of communication between government and the private sector remain limited just as government is hoping to expand cooperation with private investors. Those tensions flared over the last week, as the U.S. House passed a bill taxing bonuses by 90% for banks and other companies receiving large government capital injections. "Washington and Wall Street are the equivalent of Gettysburg and Antietam right now," said Glenn Hutchins, co-chief executive of private-equity firm Silver Lake. "To point the finger at one group means, No. 1, you're not understanding the problem, two, you're stretching our social fabric thinly, and you're throwing the baby out with the bathwater," Mr. Hutchins noted. "Trust goes both ways."

- In the marketing battle between telephone and cable companies, both sides have found a surprisingly simple weapon: local-television offerings such as community news, traffic alerts and weather. This summer, Verizon Communications Inc. plans to launch its own local TV channel in New York City, according to people familiar with the matter.

- The White House said it would launch a search for new tax revenues, as Congressional leaders moved to scale back proposed spending increases and tax cuts in President Barack Obama's ambitious budget. The Obama administration plans to create a task force to consider elimination of corporate loopholes and corporate welfare, tougher enforcement against tax avoidance and tax simplification, White House Budget Director Peter Orszag said late Tuesday. Mr. Obama's budget proposal began the process of addressing problems such as the tax gap, the difference between taxes owed and taxes collected. "The question is whether we can be even more aggressive" in those areas, Mr. Orszag said in an interview Tuesday. The task force will be run through a White House advisory board being headed by former Federal Reserve Chairman Paul Volcker, Mr. Orszag said.

MarketWatch.com:
- In the liquefied natural-gas industry, former Fed Chairman Alan Greenspan is a bit of a hero, since he helped highlight the need for more infrastructure to import the supercooled fuel. But as in any commodity business, the timing can be a bit tricky. That's certainly the case as LNG from around the world is poised to flood the United States through a batch of brand-new terminals, designed to turn the energy-rich liquid from minus-260 degrees Fahrenheit back into a gas and feed it into the nation's pipelines. "As the technology of LNG liquefaction and shipping has improved, and as safety considerations have lessened, a major expansion of U.S. import capability appears to be under way," Greenspan said in a 2003 speech amid rising energy prices. "These movements bode well for widespread natural-gas availability in North America in the years ahead." Fast-forward to 2009, and a massive amount of LNG from big overseas producers such as Algeria, Australia, Indonesia, Nigeria, Oman, Qatar and Russia, as well as Trinidad and Tobago may flood the United States as multiyear energy projects finally reach fruition. Just this past week, U.S. natural-gas supplies stood at 1,651 billion cubic feet, some 326 billion cubic feet higher than last year at this time and 228 billion cubic feet above the five-year average.

CNBC.com:
- Oil and cash are Saudi Arabia's two biggest exports. Now at a time when global coffers are strapped, the Kingdom is going on a spending spree, putting $400 billion dollars to work. Saudi Arabia's domestic development efforts could provide a much-needed financial boost to firms outside of the Kingdom, according to the Governor of Saudi Arabia General Investment Authority H.E. Amr al-Dabbagh. That's why al-Dabbagh is visiting the U.S. this week to meet with the chief executives of American firms who may be interested in bidding for some of that sizeable payout.

NY Times:

- The financial crisis may have turned much of Wall Street’s wealth into dross, but a select group of hedge fund managers has managed to maintain a golden touch that might make King Midas blush. As major markets and economies careened downward last year, 25 top managers reaped a total of $11.6 billion in pay by trading above the pain in the markets, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday. James H. Simons, a former math professor who has made billions year after year for the hedge fund Renaissance Technologies, earned $2.5 billion running computer-driven trading strategies. John A. Paulson, who rode to riches by betting against the housing market, came in second with reported gains of $2 billion. And George Soros, also a perennial name on the rich list of secretive moneymakers, pulled in $1.1 billion.

- As its peers in the United States, Britain and Japan crank up monetary printing presses in a bid to prop up their economies, the European bank is resisting the rush to adopt those banking policies. The European approach, to many outsiders and even some politicians like Nicolas Sarkozy, the president of France, is hopelessly myopic and likely to leave Europe struggling long after others have resumed growth.

BusinessWeek:

- Google(GOOG) just announced two new refinements to its search engine today, continuing to leave little room for competitors to get a foothold. The tweaks, announced in a Google blog post this morning, generally aim to produce better results for search queries with lots of keywords in them:

IBD:

- For active duty soldiers, the price can't be beat. American Public Education's (APEI) courses are free to military personnel, thanks to government tuition benefits.

Upstream:

- BHP Billiton Ltd.(BHP) began production at its Shenzi oil and gas field in the deep waters of the Gulf of Mexico, citing Michael Yeager, CEO of the company’s petroleum business. The project, estimated to cost about $4.4 billion through 2015, will have a capacity to produce as much as 100,000 barrels a day of oil and 50 million cubic feet a day of gas, the newsletter said.

Forbes.com:

- China is turning away from capitalism just when it needs it most, China scholar Yasheng Huang of MIT said Monday. Halfway around the world from Wall Street, there is an unfortunate side effect of the current global economic crisis: Communist Party leaders have begun to question capitalism.

Reuters:

- News that Goldman Sachs Group Inc (GS) might quickly pay back taxpayer money could pressure able rivals to do the same. The Treasury Department's $700 billion Troubled Asset Relief Program was intended to provide lenders with more capital to spur lending and improve the economy. Hundreds of companies have taken TARP money, ranging from $45 billion accepted by both Citigroup Inc (C) and Bank of America Corp (BAC) to $541,000 by The Victory Bank of Limerick, Pennsylvania. But with TARP now seen more as an albatross, expectations are growing that more banks will repay their money as soon as they can. That would also free banks from dividend payouts, typically 5 percent a year. as well as Congress' demonstrated willingness to change the rules of engagement.

- U.S. financial services firms and business groups want even more guidance and leeway from accounting rulemakers on a controversial mark-to-market accounting standard blamed for billions of dollars in bank writedowns, the groups said on Tuesday. Under threat from Congress, the Financial Accounting Standards Board (FASB) issued two proposals giving financial services firms more flexibility to account for toxic assets. FASB members are due to meet April 2 to discuss the proposals. If the board approves the proposals, the guidance would be effective for interim and annual periods ending after March 15. Although groups such as the U.S. Chamber of Commerce and the American Council of Life Insurers voiced support for FASB's actions, they said "more work needs to be done."

- Short interest on the New York Stock Exchange rose 10.8 percent in mid-March, the exchange said on Tuesday, suggesting an increase in bearish sentiment in the stock market. Biggest changes in NYSE short interest:

- Biggest changes in Nasdaq short interest.

- More hedge funds and private equity firms are likely to trim or shut their Asian operations as the widening financial crisis forces a retreat to core Western markets, two industry experts said on Tuesday. Both hedge funds and private equity firms rushed into Asia in recent years to cash in on the region's booming economies and surging stock markets. But the global financial crisis has sapped demand for deals and appetite for risk. "This is just the beginning," Wang said, adding that many firms could end up with a "token presence" in the region. "Asia became very stylish and I'd say even fashionable starting in 2005," Timothee Bousser, managing director at Societe Generale in Hong Kong, told the Reuters Summit. "Today we are suffering from this excess."

Financial Times:
- The administration of Barack Obama on Tuesday stepped up efforts to crack down on guns and money flowing to Mexican drugs cartels in the latest sign that the relationship with Mexico is rocketing up the US political agenda. As two separate crises – drugs-related violence that has claimed more than 7,000 lives in Mexico since the start of 2008 and a $2.4bn trade dispute – threaten to spiral out of control, the administration said it would send more personnel and equipment to the border. Janet Napolitano, homeland security secretary, announced deployments to the south-west border totaling more than 360 agents and involving the doubling of specialized security forces from 95 to 190, together with 100 customs officers to inspect goods leaving the US. Separately, the Bureau of Alcohol, Tobacco, Firearms and Explosives is sending 100 more agents to the border in the next 45 days. “I haven’t seen this big of a mess in the bilateral relationship in at least 25 years, said Jorge Castañeda, Mexico’s foreign minister under the previous administration of Vicente Fox. As a former governor of Texas, George W. Bush was more familiar with Mexico than is his successor as president, who has never yet visited Latin America. Mr Bush came into office promising a new understanding with Mexico, built around immigration reform. Although he failed to achieve these ambitions, he left office having established a modus vivendi between the two countries. That included the Merida Initiative, an agreement that provides military support for Mexico’s battle against the drugs cartels and a compromise on long-standing Mexican demands for access to the US trucking market. Under Mr Obama, the US is shifting position in both areas.

TimesOnline:

- We are ready to lead. Are you ready to join us? By Barack Obama.

The Guardian:
- The biggest "outrage" of the AIG bailout is not the $165m payout to the pseudo-hedge fund's executives. It is the multi-billion-dollar payout to hedge fund managers who used credit default swaps to bet against the subprime mortgage market. AIG took the other end of the wager, figuring that the subprime market would stay strong. We all know who won this bet. Actually, the hedge funds wagered wrong in one respect. When they entered into credit default swaps with AIG, they were not just betting against the mortgage market. They were also betting that AIG would remain solvent so that the insurance giant could make good on its end of the bargain. By all rights, AIG should be bankrupt. But the federal government has intervened to keep it afloat. In doing so, the federal government is making sure that the hedge funds are repaid – even though they miscalculated their counterparty risk. One of these hedge funds, Citadel Investment Group of Chicago, has received $200m in bailout funds that flowed through AIG. Paloma Securities, a branch of a Connecticut hedge fund, has reeled in $200m as well. Total all the bailout payments to these and other hedge funds, and suddenly the $165m to AIG executives looks like chump change.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (OI), target $24.

- Reiterated Buy on (PLCE), target $31.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 futures +.37%.
NASDAQ 100 futures +.22%.

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Earnings of Note
Company/EPS Estimate
- (PAYX)/.36

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Economic Releases

8:30 am EST

- Durable Goods Orders for February are estimated to fall 2.5% versus a 4.5% decline in January.

- Durables Ex Transports for February are estimated to fall 2.0% versus a 3.0% fall in January.

10:00 am EST

- New Home Sales for February are estimated at 300K versus 309K in January.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,100,000 barrels versus a +1,942,000 barrel increase the prior week. Gasoline supplies are expected to fall by -650,000 versus a +3,195,000 barrel increase the prior week. Distillate inventories are estimated to fall by -100,000 barrels versus a +112,000 barrel gain the prior week. Finally, Refinery Utilization is expected unch. versus a -.57% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Pianalto speaking, Fed’s Yellen speaking, weekly MBA mortgage applications report, (ADP) analyst meeting, Howard Weil Energy Conference, (MKC) shareholders meeting, (GLW) investor luncheon, Think Equity ThinkGreen Conference, Lazard Medical Device Tech Conference, (BIIB) R&D Day, (CIEN) shareholders meetingcould also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

BETWEEN THE HEDGES

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Wednesday, March 25, 2009

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Tuesday, March 24, 2009

Wednesday Watch

Stocks Finish Lower, Weighed Down by Financial, REIT, Oil Tanker, HMO Shares