BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The presidents of two regional Federal Reserve banks voiced confidence the U.S. economy will show signs of recovery by year-end, responding to unprecedented monetary stimulus and a $787 billion fiscal package. “Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said today in a speech, while Richmond Fed President Jeffrey Lacker cited several “favorable signs” for the economy, including stabilization in retail sales and continued gains in wages and salaries. Recent gains in home sales and residential construction also suggest that the rate of decline in gross domestic product may be easing.

- Cars and light trucks will be required to meet a U.S. fuel-economy average of 27.3 miles per gallon for 2011 models, an increase of 2 mpg, an Obama administration official said. The standard for cars will average 30.2 mpg, up from 27.5 currently, and 24.1 for light trucks, up from 23.1 mpg for 2009 models, according to the official, who declined to be identified because the targets haven’t been announced publicly. The standard, being put in place as General Motors Corp. and Chrysler LLC face possible bankruptcy, isn’t as aggressive as the 27.8 mpg target that President George W. Bush proposed in April 2008.

- The cost of protecting investors in Asia-Pacific corporate and government bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Australia index was quoted 10 basis points lower at 340 as of 11:32 am in Sydney, Citigroup Inc. prices show. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan was down 10 basis points at 335 as of 9:09 am in Singapore, according to Barclays Capital.

- Steel futures started trading on the Shanghai Futures Exchange today after an eight-year preparation, helping steelmakers hedge against financial risks. Steel reinforcement bars opened at 3,550 yuan ($520) a metric ton and wire-rod contracts began at 3,400 yuan when trading opened at 9 a.m. in Shanghai. Commodity trading volumes in Shanghai, Dalian and Zhengzhou surged 87 percent last year as demand for raw materials and price volatility lured investors. Steel prices in China, the world’s largest producer and consumer, tumbled from a June record to a six-year low in November.

- Hog futures fell for the fourth time in five sessions as slumping U.S. pork prices signaled the recession is eroding demand for the meat. Cattle futures also dropped. Wholesale pork slid 4.1 percent yesterday, the biggest drop since Nov. 4, and ham prices plunged 9.6 percent, U.S. Department of Agriculture data show.

- President Barack Obama wants to send 4,000 more U.S. troops to Afghanistan, part of a new effort to stabilize and root out terrorist threats in the country as well as neighboring Pakistan, administration officials said. White House officials familiar with the plan said the goal is to disrupt, weaken and ultimately destroy havens and support for al-Qaeda, whose leaders, including Osama bin Laden, are now in Pakistan and plotting new attacks against the U.S., the officials said. The president’s strategy for turning the corner in the eight-year-old war, to be announced tomorrow, comes amid increased insurgent activity and before Afghanistan’s presidential and provincial elections scheduled for Aug. 20

- Japan’s Defense Minister Yasukazu Hamada said he ordered security forces to shoot down any North Korean missile that strays into its territory.

- Chinese industrial companies’ profits dropped for the first time on record as the global recession cut demand for exports from the world’s third-largest economy. Net income sank 37.3 percent in the first two months of 2009 from a year earlier to 219.1 billion yuan ($32 billion), the statistics bureau said today. Profits expanded 16.5 percent in the same period last year.

- Japan’s retail sales fell the most in seven years in February and the economy moved closer to deflation as pay cuts and the specter of job losses discouraged spending by consumers. Sales declined 5.8 percent from a year earlier, the Trade Ministry said today in Tokyo. Consumer prices excluding fresh food were unchanged from a year earlier, the statistics bureau said.

- New York Times Co.(NYT) and Washington Post Co.(WPO) are cutting jobs at their flagship newspapers to help cope with declining revenue.

- Secretary of State Hillary Clinton said drug violence in Mexico and border areas of the U.S. has reached an “intolerable” level that demands both countries join forces to fight back. “We need to worry about what’s coming north,” Clinton said today at a university in the northern industrial city of Monterrey. “But Mexican people are worried about what’s coming south -- assault weapons, bazookas, grenades. We’ve got to get together on this.” The U.S. has pledged stepped-up efforts to help prevent the drug war from weakening Mexico and pushing more violence into American communities.

- China’s shareholders will endure “pain” because the government’s 5 trillion yuan ($585 billion) stimulus package will fail to stem the slide in corporate earnings, Morgan Stanley said. Profits of companies on the CSI 300 Index, measuring so- called A shares listed in Shanghai and Shenzhen, will tumble an average 15.4 percent in 2009, Morgan Stanley analysts Jerry Lou, James Cao and Allen Gui wrote in a note today. Earnings for companies on Hong Kong’s Hang Seng China Enterprises Index will plunge 26.6 percent, they said. “The poor-quality GDP growth, driven by policy stimulus, won’t make much difference to the earnings recession path in 2009,” they said. “Sales and earnings quality are still low.”

Wall Street Journal:

- Treasury Secretary Timothy Geithner called on lawmakers Thursday to enact the most comprehensive changes to financial-market regulation since the New Deal, prompting hedge funds and others in the cross hairs to start hunting for ways to preserve as much of their autonomy as possible. The proposal, which offers limited details, will likely take months to work its way through Congress, where numerous hurdles await. Some lawmakers immediately argued that the administration is seeking too much power, while some investors -- especially in the hedge-fund world -- were quick to announce their opposition. But in a sign of how the financial crisis has scrambled the political calculus, most hedge-fund managers, investors, lawyers and lobbyists said the industry is resigned to working under new constraints. Rather than fight the proposal outright, they will aim to limit provisions they consider too intrusive, such as making their trading records public.

- China Slowdown Stunts Entrepreneurs.

- As more Americans lose their jobs, the U.S. government is actively discouraging the recruitment of foreign workers, from dude ranchers and fruit pickers to lifeguards and computer programmers. At least three avenues of legal immigration have seen roadblocks erected.

- The seismic shifts now remaking the financial world are sending tremors through the corridors of business schools. The sectors at the heart of the crisis for years have been the most popular areas of study at many top B-schools, luring future M.B.A.s with the promise of high-paying careers. The schools are having to rethink their approaches to finance and investment banking, updating lesson plans on the fly while they overhaul curricula for the long term. Adding to the pressure for change is a debate about whether business schools bear some responsibility for the crisis. Critics see an arrogance in the schools' culture, and accuse them of focusing too much on short-term gain and shareholder returns. They also cast blame on B-school researchers who helped design many of the models discredited by the financial meltdown.

- Google Inc.(GOOG) is developing technology to connect its TV-ad brokering business to video site YouTube and eventually other video sites, as it struggles to lure bigger advertisers to both services. Google's director of TV ads Michael Steib said in an interview that the company is working on technology that allows advertisers to buy ads across Google TV, which sells on-air-commercials, YouTube and video on other Web sites through the same interface. Google is testing the service, called Google TV Ads Online, with a small group of advertisers, he said. People familiar with the matter say the service – which would leverage Google TV's targeting technology -- is likely to be launched in the coming months.

- Toxic assets nearly sank U.S. banks, until taxpayers bailed them out. Soon, some taxpayers can buy some of those toxic assets themselves. At least three mutual-fund providers are aiming to launch closed-end funds to take advantage of various parts of the Obama administration's toxic-asset program -- BlackRock Inc., Allianz SE's Pacific Investment Management Co. and Legg Mason Inc. Individual investors, whose portfolios took a beating in the financial crisis and whose tax dollars propped up 512 banks, would be able to get in on the action by buying shares in the planned closed-end funds.

- General Motors Corp.(GM) has been chipping away at the massive restructuring plan it submitted to the U.S. government last month, but it is unlikely to meet a March 31 deadline for gaining concessions from its main union and bondholders.

- Prices of natural gas fell sharply following the release of U.S. government data showing a surprise build in the level of gas in storage last week. The U.S. Energy Information Administration said the amount of natural gas in storage rose by three billion cubic feet in the week ended March 20, bringing the total amount of gas in U.S. storage to 1.654 trillion cubic feet. That is 29% higher than at the same time last year and 20% higher than the five-year average.

MarketWatch.com:
- Led by hedge funds, U.S. clients of UBS are now buying more stocks than they are selling, breaking six straight weeks of net outflows, the global investment bank and brokerage said. Increased buying by large institutional investors that move slowly in and out of markets, such as mutual funds and insurance companies, would bolster the outlook for a lasting recovery in stocks. These investors are still trimming their stocks portfolios, UBS data found. But their pace of net outflows has slowed: Long-only funds sold, on net, $71 million in stocks every week for the four weeks ended March 20. That's down from net outflows of $114 million a week for the four weeks ended March 13. The UBS report coincides with rebounds in both tech and financials - as well as data that show investors have increased their bets that financials and technology would falter in the coming weeks. The financial sector in the S&P 500 has gained about 53% since the close of trading March 6. The Nasdaq Composite (COMP), one of the main barometers for the tech sector, has rallied 23% and turned positive year-to-date on Thursday. Meanwhile, short sellers have increased their positions in both sectors, a report from data research TrimTabs said.

- The tech sector advanced Thursday on a broad rally by key industry players and on ripples of optimism that the worst of the downturn may be over. The Nasdaq Composite Index (COMP) erased its year-to-date losses. The index gained 58 points, or 3.8%, to close at 1,587. The tech-heavy benchmark is now up 0.6% since Jan. 1.

- Japan's ruling coalition is considering plans to establish an investment fund designed to use money raised from the public and private sectors to acquire properties held by real-estate investment trusts, according to a published report.

CNBC.com:
- The worst may be over. At least according to market maven Ed Yardeni who appears to be growing cautiously optimistic. "This is starting to feel like a powerful bull market that's quite broad based," he says on Fast Money. "I'm very relieved to see economic indicators actually surprise us on the upside."

NY Times:

- Officials of the Federal Reserve and the Treasury have said they believed A.I.G.’s financial obligations had to be honored to prevent a domino effect. Had A.I.G. suddenly disappeared, banks and other financial institutions around the world would have suffered losses, bad enough in some cases to cause additional failures. But in their letter, the representatives said that while they were aware of “systemic risk,” they still wanted to know who had decided that the way to contain such risk would be to completely insulate the banks from losses. “We would like to know if assessments were made of the health and total exposure risks of counterparties, such as Goldman Sachs(GS),” they wrote, pointing out that Goldman Sachs had claimed it had no material exposure to A.I.G., but turned out to have received almost $13 billion during the rescue. “If such assessments were made, by whom were they made and what were the criteria guiding the assessments? Further, was any attempt made to renegotiate and close out these contracts with ‘haircuts?’ If not, why not?” A person briefed on Mr. Cuomo’s investigation said that A.I.G.’s list of its counterparties gave information only through the end of 2008, and the company was still winding down a vast portfolio of derivatives, including more swaps. He said the attorney general wanted to see whether the termination of the derivatives contracts was being done as efficiently as possible, given the federal resources available to A.I.G. “Credit-default swap contracts were at the heart of A.I.G.’s meltdown,” Mr. Cuomo said in a statement. “The question is whether the contracts are being wound down properly and efficiently, or whether they have become a vehicle for funneling billions in taxpayers’ dollars to capitalize banks all over the world.”

- After agreeing to bury their differences and unite forces, Taliban leaders based in Pakistan have closed ranks with their Afghan comrades to ready a new offensive in Afghanistan as the United States prepares to send 17,000 more troops there this year.

BusinessWeek:

- Major Oil Companies Are Circling Iraq. With stability returning, Oil Minister al-Shahristani has big plans to make his country the fourth-largest oil producer.

Seeking Alpha:
- Dear Mr. Geithner: Do Start-Ups and VCs Really Need More Regulation? In the late 1990’s, in response to the obvious financial shenanigans of large companies like Enron, Tyco, and WorldCom, Washington handed us the Sarbanes-Oxley Act. I have no idea how effective Sarbanes has been at reducing fraud (it obviously did not prevent our current economic malaise), but I do know one thing, Sarbox created a significant burden and tax on small companies that desired to tap into America’s public capital markets, and one that could have long-lasting negative impact on the long-term success of startups and innovation in America. It’s pretty simple: Sarbanes-Oxley costs $2-3mm to implement, and is also a huge burden on a company's IT and development staff (taking away from feature expansion and product improvement). For a company doing $50mm in revenue with a 10% pre-tax operating margin, you only have say $6mm in after-tax earnings to report. These new Sarbox costs effectively cut your total profitability in half, which has a huge impact on valuation. Of course, what this in fact causes is companies to feel the need to be much, much larger before they even try to go public. Notably, IPOs have been systematically reduced post-Sarbox, and we are still significantly below 1991-1992 pre-bubble levels. As David Weild notes for PEHub, “I submit that there is no question that accounting costs and Sarbanes-Oxley costs are a primary (maybe not the only) factor in the diminution of initial public offerings in the United States.”

IBD:

- Education and technology are two favored pets of the Obama Administration. That's just fine with Blackboard (BBBB), an online education software provider that should benefit smartly from the Administration's stimulus program.

IndexUniverse.com:

- A Look Inside The Hedge Fund ETF.

Forbes.com:

- Did Goldman(GS) Goose Oil? When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation's crude oil inventories. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup filed for bankruptcy on July 22. But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup's collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup's accounts. "What transpired at Semgroup was no less than a $500 billion fraud on the people of the world," says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days. Numerous people familiar with the events insist that Citibank, Merrill Lynch and especially Goldman Sachs had knowledge about Semgroup's trading positions from their vetting of an ill-fated $1.5 billion private placement deal last spring. "Nothing's been proven, but if somebody has your book and knows every trade, it would not be difficult to bet against that book and put the company into a tremendous liquidity squeeze," says John Tucker, who is representing Kivisto. What's known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data--and profited handsomely from Semgroup's fall. J. Aron was Semgroup's biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures. When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses. Some answers may emerge in late March when former FBI director Louis Freeh releases a report on the trading surrounding Semgroup's demise. He was hired by Semgroup and given subpoena power by the bankruptcy court judge in Delaware. Meanwhile the Securities & Exchange Commission is investigating, and lawyers involved in the bankruptcy say that Manhattan District Attorney Robert Morgenthau's office is looking into the actions of New York firms in the collapse.

USA Today.com:

- Some Americans are beginning to see light at the end of a long tunnel. For the past two weeks, the percentage of respondents in The Gallup Poll who say the economy is getting better has been steadily ticking up. Monday through Wednesday, 29% took the optimistic view — the highest number since July 2007.

Reuters:

- Planned U.S. regulatory reforms may strain profits at the biggest banks during good times, but will likely boost profits during difficult times, which could ultimately help stock valuations in the sector, experts said.

- For years, U.S. hedge fund managers have worried that their loosely regulated and secretive industry would one day face tougher regulations. Now that day seems to be here. All agreed that putting hedge funds on a tighter leash will add new nervousness to an industry already facing poor returns, struggling with redemptions and being blamed for a financial crisis its managers say they did not cause. Specifically, many hedge fund managers and their lawyers fear that public outrage over enormous bonuses paid to executives at nearly failed American International Group Inc (AIG) plus news of hefty paychecks at hedge fund firms could prompt lawmakers to try to impose unduly harsh rules. Managers are especially fearful they may have to publicly disclose short positions. Short-selling is a tool that is off-limits at most funds but helps hedge funds make money in declining markets. Similarly, they worry that regulators may favor certain players -- for example, proprietary traders at banks -- while imposing new rules on hedge funds. And they worry that a new regulatory regime, particularly with someone charged with overseeing systemic risk, might be murky and possibly even redundant. Already state lawmakers and regulators, including some in Connecticut where thousands of hedge funds operate, are pursuing their own forms of regulation.

Financial Times:
- American International Group(AIG), the stricken US insurer, should not have paid out bonuses to staff at its troubled financial products unit, Maurice “Hank” Greenberg, its former chief executive, said on Thursday. Mr Greenberg also questioned why the company’s counterparties were paid out in full and argued that AIG should have been placed in Chapter 11 bankruptcy protection instead of being rescued by the US government. “There’s no reason to pay them bonuses,” Mr Greenberg told a business function in Hong Kong. “Compensation did get out of hand in financial services.” The US government decided to rescue AIG last September after credit-default swap losses brought the company to the verge of collapse. AIG last week published a list of counterparties to its financial derivatives contracts after weeks of political pressure to disclose the data. The leading recipients included Goldman Sachs(GS), Société Générale, Deutsche Bank and Barclays. Mr Greenberg said AIG should have been placed in Chapter 11 protection because that would have allowed the insurer to renegotiate its positions with counterparties, which would have been reclassified as general creditors. “Why did Goldman Sachs get $12.9bn as a counterparty? If that question has been answered, I haven’t seen it,” he said. “Why was so much money allowed to pass through and go out the back door? Were we bailing out foreign banks? Was that the intention? Someone knows [why].” Mr Greenberg said the government’s rescue package, which totals about $180bn, was a “failed strategy”, adding that “right now AIG is going no place, just downhill, and that doesn’t make any sense”. Mr Greenberg called on the government to convert as much of the debt into guarantees for AIG collaterals, extend loan repayment terms to 15 years from five years and cut interest rates on the loans. He urged the government to reduce its stake from 79.9 per cent to 15 per cent, freeing AIG to raise private capital and called the government to halt asset sales until markets recovered.

- Hundreds of Russian banks are likely to go under by the end of the year as the amount of bad loans surges, potentially hitting as much as 20 per cent of credit portfolios, a senior Russian banker has warned. Pyotr Aven, president of Alfa Bank, one of Russia’s largest private banks, called on the government to move swiftly to recapitalize the top 30 banks and name the institutions that will receive assistance to help kick-start the flow of credit, which has almost dried up amid growing fears over bad loans. Alexei Kudrin, finance minister, warned on Thursday that the level of overdue loans had already reached 10 per cent even though banks were trying to hide it. Mr Aven said the Russian central bank was making a mistake in keeping refinancing rates high at 15 to 19 per cent as commercial banks then had to lend on at even higher rates of 25 per cent, making loans expensive. He said bankruptcies could start hitting the banking system in the third quarter when the majority of loans start to fall due. Mr Aven said the crisis in Russia was starting to look more like the one that hit the Soviet economy in 1985-1986 rather than the 1998 financial crisis from which the economy quickly rebounded. “The reason is the same: the collapse in export prices, the collapse of expectations,” he said. “We don’t know how it will go now. But for Gorbachev it was a catastrophe.”

- The complicated and potentially costly process of switching the largest part of the $28,000bn credit derivatives market into a format that can be cleared is expected to start next month. To reduce the risks to the financial system of a failure of one of the large derivatives dealers is an important priority for regulators. By forming a central clearing counterparty for credit default swaps (CDS), the most common credit derivative, such “counterparty risks” can be reduced. T-zero, owned by ICE – which runs ICE Trust together with some of the biggest CDS dealers – is to roll out a new platform next month designed to convert old trades into new streamlined positions for dealers and their clients. While the industry has agreed on the new streamlined contract for future trades on individual entities as part of the “Big Bang Protocol”, which begins on April 8, the new measures do not apply to outstanding contracts.

- Felipe Calderón has called on the new US administration to contribute potentially tens of billons of dollars in additional funds to help Mexico fight its war on drugs. In an interview with the Financial Times, the Mexican president said that neither the financial aid offered so far by Washington, nor US efforts to curb illegal activity along its 2,000-mile border had proved sufficient. “The help should be equivalent to the flow of money that American consumers give to the criminals,” he said in reference to US citizens’ consumption of narcotics supplied by Mexico’s drug cartels. When asked to estimate that sum, Mr Calderón replied: “Between $10bn and $35bn (€30bn, £24bn) – the truth is that nobody knows.”

TimesOnline:

- Gordon Brown’s efforts to smooth a path to international agreement at next week’s G20 summit in London hit a bump in Brazil yesterday when he was told that the financial crisis was the fault of the “white and blue-eyed”. President Lula da Silva of Brazil warned that there would be spicy discussions and “tough confrontation” next Wednesday as world leaders faced up to who should pay the costs of the banking crisis. As Mr Brown looked on during a press conference, Mr Lula da Silva said that action was urgent since it would be intolerable for the poor — who were blameless for the collapse of financial markets — to suffer the most from its effects. “This was a crisis that was fostered and boosted by the irrational behaviour of people who were white and blue-eyed, who before the crisis they looked like they knew everything about economics, but now have demonstrated they know nothing about economics,” he said, mocking the “gods of wisdom” who had had to be bailed out. “The part of humanity that is responsible should be the part that pays for the crisis,” he added.

China Securities Journal:

- China’s economy may grow 6% in the first quarter, citing Yu Bin, an economist at the State Council’s research center.

Daily Yomiuri:

- The US has deployed at least five destroyers equipped with missile interceptors to prepare for an expected rocket launch by North Korea. The US destroyers will be deployed in waters around Japan.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (LXK), target $32.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 futures -.47%.
NASDAQ 100 futures -.43%.

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Company/EPS Estimate
- (KBH)/-.98

- (FINL)/.30

Economic Releases

8:30 am EST

- Personal Income for February is estimated to fall .1% versus a .4% gain in January.

- Personal Spending for February is estimated to rise .2% versus a .6% gain in January.

- The PCE Core for February is estimated to rise to .2% versus a .1% gain in January.

10:00 am EST

- The Final Univ. of Mich. Consumer Confidence reading for March is estimated to rise to 56.8 versus a prior estimate of 56.6.

Upcoming Splits
- None of note

Other Potential Market Movers
- The (POM) analyst meeting could 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 mixed. The Portfolio is 100% net long heading into the day.

BETWEEN THE HEDGES

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Friday, March 27, 2009

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Thursday, March 26, 2009

Friday Watch

Stocks Finish Sharply Higher, Boosted by Alternative Energy, Transportation, Homebuilding, Construction, Hospital, Defense and Technology Shares