BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The Euro may be set for a sudden slide if the European Central Bank announces plans to buy debt at today’s policy meeting, Citigroup says. The US dollar dropped after the Federal Reserve announced March 18 it would start buying Treasuries to hold down consumer borrowing costs. “The present Euro-dollar setup suggests a non-linear reaction,” analysts led by NY-based Tom Fitzpatrick wrote in a note yesterday. “A dovish surprise looks much more likely to illicit a sharp move to the down side while an as expected outcome may have little material effect.”

- The cost to protect against a default by banks including Citigroup Inc., Morgan Stanley, and Goldman Sachs Group Inc. dropped on reports suggesting that the biggest US lenders will have to raise less capital than investors. Contracts on Morgan Stanley dropped 78 basis points to 275 basis points, CMA data show. Swaps on Citigroup plunged 131 basis points to 423, Goldman Sachs fell 37 to 200, Wells Fargo declined 49 to 181, Bank of America fell 48 to 228 and JPMorgan dropped 28 to 128, according to CMA. Credit swaps on the Markit CDX North America Investment Grade Index Series 12 dropped 12 basis points to 144 basis points as of 5pm in NY, according to CMA DataVision. The index, which typically falls as investor confidence improves, has dropped 53 basis points since the end of March.

- The cost of protecting Japanese corporate bonds from default plunged, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 60 basis points to 260 as of 10:18 am in Tokyo, according to Morgan Stanley prices. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 21 basis points to 212.5 as of 9:05 am in Hong Kong, according to ICAP Plc. The Markit iTraxx Australia index was quoted 32.5 basis points lower at 240 as of 11:18 am in Sydney, Citigroup Inc. data show.

- President Barack Obama has no wish to “undermine” private health-insurance companies through his support of a government-backed alternative, his new Health and Human Services secretary told lawmakers. In her first congressional testimony since being confirmed to the post April 28, Kathleen Sebelius said private companies play a critical role in making sure all Americans have coverage and costs are held down. The administration is “willing to discuss” proposals in Congress to reduce the tax protection for employer-paid health benefits, she said.

- Platinum may decline toward $800 an ounce, reversing this year’s 23% gain, as the metal slumps into a “bear trend,” Standard Chartered Bank forecast, citing trading patterns. “Spot platinum is resuming the bear trend, with trendline support giving way and a slide below $1,002 and $999 to build,” David Barclay, the bank’s commodity strategist, wrote. “A break down towards $800 should follow.”

- Alumina Ltd., partner in the world’s biggest producer of the material used to make aluminum, said demand for the metal may contract further this year and expects more cuts to production. “Global demand for aluminum is expected to contract by a further seven percent in 2009,” CEO John Bevan said today. “We expect curtailments will continue during this year.”

- AU Optronics Corp.(AUO), the world’s third- largest maker of liquid-crystal displays, said its sales to Chinese television makers may rise more than 40 percent this year after a rural-subsidy program spurred demand.

Wall Street Journal:

- The Standard & Poor's 500 Index will probably be 20% to 30% higher by the end of the year, perhaps more, and U.S. financials will likely offer the greatest return over the next two years, Bill Miller, chairman and chief investment officer at Legg Mason Capital Management, said Wednesday.
- Qwest(Q) plans to announce a new wireless Internet offering that lets broadband customers access AT&T(T) hotspots around the country.

- Intel Corp.(INTC) and Novell Inc.(NOVL) are planning to collaborate to encourage hardware companies to adopt the Moblin operating system, Novell executives said.

- Foreign bidders are lining up to pick off parts of General Motors Corp. as the contraction of the U.S. auto industry sets the stage for a global reshuffling.French auto maker Renault SA has opened discussions about possibly supplying cars to be sold through GM's Saturn dealers, if GM lines up an owner for the Saturn network, people familiar with the matter said. Separately, China's Geely Automobile - Holdings Ltd. has submitted a bid to acquire GM's Saab unit, people familiar with the situation said.

- The Securities and Exchange Commission has put credit-derivatives traders on notice: Their once-inscrutable corner of Wall Street is now in regulators' cross hairs. The agency, which on Tuesday filed its first insider-trading case related to credit-default swaps, is pushing into areas where it once tread lightly. At least 50 investigations involving derivatives are under way. Overall, the agency is pursuing 150 cases that involve hedge funds. Under political attack itself, the SEC is branching out from public stock and accounting frauds into the private byways of the credit markets and investment funds.

IBD:

- St. Jude Medical (STJ) keeps meeting its projections despite a daunting economy and unfavorable currency exchange rates.

MarketWatch.com:
- Amazon.com(AMZN) debuted a new, large-screen version of its popular Kindle e-book reader Wednesday in an effort to broaden the appeal of the device to readers of newspapers, magazines and textbooks.

- The annual meeting of the mutual-fund industry's trade group kicked off on a bright note Wednesday, with a pair of notable investment strategists contending that the Standard & Poor's 500 Index will top 1000 by year-end.

- Gold has frustrated both the bulls and the bears over the last couple of weeks, as bullion has remained within a fairly narrow trading range. Tellingly, however, the bulls have not let this frustration get them down. On the contrary, in fact, the editors of gold timing newsletters are more bullish today than they were two weeks ago. And that's a problem, according to contrarian analysts, since the market likes to climb a wall of worry.

CNBC.com:
- Why is oil trading near a 6-month high—breaking into a new range—and rallying above $56 a barrel, when oil supplies are at the highest level we've seen since 1990 and demand is tanking? Oil remains technically strong today, despite rather bearish fundamentals, as traders continue to follow the equities market. Crude's broken into a new range and a settlement above $55 is significant. What's fueling the momentum? Nymex traders tell me they're seeing new money coming in from passive funds that are reallocating assets away from precious metals and into energy holdings. It's this money flow—rather than the fundamental supply/demand data—that's driving oil prices higher.

- There will be a “surprising rebound” in the U.S. economy in the second half of 2009, said Larry Kantor, head of research at Barclays Capital. “Most of our clients have missed this rally,” Kantor told CNBC. “[But] there’s plenty of scope for some more, as long as if the economic data goes from mixed—which is what we have right now—to decisively positive.”

NY Times:

- The sprawling investigation into New York’s pension investments hints at a much bigger problem than the handful of indictments so far would suggest. What started as an investigation by the New York attorney general, Andrew M. Cuomo, into the state comptroller’s office — where Mr. Cuomo says favors were being exchanged for contracts to invest pension money — has mushroomed into a broad look at more than 100 firms by attorneys general in at least 30 other states.

- As Stress Tests Are Revealed, Markets Sense a Turning Point.

The WashingtonPost:

- The Department of Homeland Security is dismantling a next-generation biological attack warning system in New York City subways because of technical problems, U.S. officials said. Robert Hooks, a deputy assistant secretary, said the department no longer believes it is necessary to expand the pilot program, as he told Congress in July, because of resource and technology limits. Hooks said a long-planned alternative sensor system, set for initial deployment late next year, also will not be available nationwide until 2012, to allow for more testing.

Business Week:
- Rather than risking jobs by tightening taxes on U.S.-based multinationals, the President should boldly slash corporate rates from 35% to 25%

CNNMoney:

-.Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing. This revelation was buried within Chrysler's bankruptcy filings last week and confirmed by the Obama administration Tuesday.

San Francisco Chronicle:

- Computer and home entertainment industry leaders, including Intel Corp., Microsoft Corp., Dell Inc. and Panasonic Corp., said Wednesday that they're forming a new association to create an even faster wireless technology for zipping large files around the home.

Politico:

- As the clock ticks on a self-imposed deadline, Rep. Henry Waxman is facing fire from all sides over his landmark measure to curb carbon emissions. After months of haggling, he still doesn’t have a deal that moderates will support. On Wednesday, he had to back offhis threat from a day earlier to skip a key subcommittee vote after members raised a ruckus. And, to top it all off, the president and others are breathing down his neck to wrap up work on climate change so that Waxman can turn his focus to the blockbuster fight of the summer over health care reform. “Henry has some decisions to make,” said Rep. Mike Doyle (D-Pa.), a key moderate voice in the negotiations. “Everyone has been very clear about where they need to be to get to ‘yes.’ ... The chairman has a very good read of the committee.” This is the first real test for House Democrats since Barack Obama moved into the White House. Failure to move this climate change measure through the chamber would be a body blow to the whole party — even if isn’t going anywhere in the Senate. And negotiations, to this point, have only highlighted the divisions Waxman must try to bridge.

USA Today.com:

- For the first time, the number of U.S. households opting for only cellphones outnumber those that just have traditional landlines in a high-tech shift accelerated by the recession.

Reuters:

- Regulators are ordering some of the largest U.S. banks to find tens of billions of dollars of capital to cushion themselves in the event of a deep economic downturn.About half of the 19 largest U.S. banks are expected to need more capital once the results of government "stress tests" of their ability to weather a deep recession are released Thursday at 5 p.m. EDT.

- News Corp(NWS/A) posted a 47 percent drop in operating income on Wednesday as advertising revenue declined, but Chairman Rupert Murdoch said the worst effects of the recession are behind the media company. "It is increasingly clear that the worst is over," he said, echoing executives at other media conglomerates such as Walt Disney Co and Viacom Inc. "There are emerging signs in some of our businesses that the days of precipitous decline are done," Murdoch said.

- Cisco Systems Inc (CSCO) posted stronger-than-expected quarterly results and Chief Executive John Chambers said his customers were seeing more stability, adding to hopes that business conditions would soon recover. His comments, which came a day after similarly optimistic remarks by U.S. Federal Reserve Board Chairman Ben Bernanke, helped shares of the network equipment maker rise 2.5 percent in after-hours trading on Wednesday as investors looked beyond the double-digit fall in sales in the last quarter. "They are seeing some stabilization, a leveling out, or in other words, they are finally beginning to have something reasonably solid underneath their feet," Chambers said of how Cisco customers are describing their current business. "I think you could make some fairly broadbased conclusion that the environment appears to be stabilizing and doesn't appear to be getting worse," said Morgan, Keegan & Co analyst Simon Leopold, adding that Cisco's report boded well for the overall market. Chambers was particularly upbeat about the company's long-term prospects, reiterating an annual revenue growth target of 12 percent to 17 percent -- one which many analysts say isn't possible for the foreseeable future. "I'm as comfortable or probably more comfortable than ever about that target," he told Reuters in an interview. In the third quarter, Cisco announced it would buy Pure Digital Technologies, the creator of the popular Flip Video mini camcorder, as well as management software maker Tidal Software Inc. Chambers said there was more to come. "We have a very large war chest and tend to use it over time," he said.

The Guardian:

- The Obama administration says it is inching closer to a deal that would send an estimated 100 Yemeni detainees at Guantanamo Bay to Saudi terrorist rehabilitation centers and speed the closing of the Navy prison.

Globe and Mail:
- British oil explorer Heritage Oil Corp. [HOC-T] said on Wednesday it has discovered up to 4.2 billion barrels of oil in the Kurdish area of Iraq, adding to pressure on Baghdad and the autonomous region to unblock a legal impasse stalling oil projects. Toronto-listed Heritage said in a statement following the results of its first drilling on the Miran West field that it could contain 2.3 billion to 4.2 billion barrels of oil-in-place and have recoverable reserves of up to 3 billion barrels. In time, the company hopes to link into Iraq's export pipelines. A field of this size could normally sustain production of hundreds of thousands of barrels a day when fully developed.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (EQ), target $48.

- Reiterated Buy on (MGA), target $45.

- Reiterated Buy on (AMZN), target $100.

- Reiterated Buy on (RIG), target $102.

Night Trading
Asian Indices are +.50% to +1.75% on average.
S&P 500 futures -.36%.
NASDAQ 100 futures -.66%.

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Earnings of Note
Company/EPS Estimate
- (RDC)/.94

- (SLE)/.17

- (RGLD)/.11

- (STE)/.41

- (DTV)/.32

- (ATK)/2.09

- (WEN)/.02

- (CVC)/.14

- (DYN)/-.03

- (GM)/-10.97

- (ALL)/1.25

- (IRF)/-.34

- (VRSN)/.28

- (CBS)/.07

- (AIG)/-.13

- (IPI)/.25

- (RATE)/.33

- (PSA)/1.21

- (NVDA)/-.09

- (MCHP)/.12

- (FTO)/.34

Economic Releases

8:30 am EST

- Preliminary 1Q Non-farm Productivity is estimated to rise .6% versus a .4% decline in 4Q.

- Preliminary 1Q Unit Labor Costs are estimated to rise 2.7% versus a 5.7% gain in 4Q.

- Initial Jobless Claims for last week are estimated to rise to 635K versus 631K the prior week.

- Continuing Claims are estimated to rise to 6350K versus 6271K prior.

- ICSC Chain Store Sales for April are estimated to fall 1.0% versus a 2.1% decline in March.

3:00 pm EST

- Consumer Credit for March is estimated at -$4.0B versus -$7.5B in February.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Evans speaking, Fed’s Bernanke speaking, weekly EIA natural gas inventory report, (POT) shareholders meeting, (VZ) shareholders meeting and the (BTU) shareholders meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and financial 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.

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 2.46% and is very high at 32.54. The ISE Sentiment Index is around average at 149.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running around average most of the day, hitting .94 at its intraday peak, and is currently .75. The Euro Financial Sector Credit Default Swap Index is falling another 4.15% today to 136.33 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is dropping 3.15% to 151.75 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 1.30% to 80 basis points. The TED spread is now down 383 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging another 11.0% to 46.50 basis points. The Libor-OIS spread is falling 1.60% to 77 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis point to 1.47%, which is down 117 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 .18%, which is down 1 basis point today. The (XLF) is jumping another 5.4% today. The most heavily-shorted financials are seeing the largest gains on the stress test results. Gauges of credit market angst continue to meaningfully improve. The 2-year swap spread is breaking down to the lowest level since June 2007, which is a major positive. The US sovereign debt credit default swap is plunging 18.0% today to 41.0 basis points, which is also a big positive. Cisco Systems(CSCO) reports after the close today. Short interest is a near-record 75.1 million shares. The put/call open interest ratio for (CSCO) is .84, which is at the high-end of its 2-year range. While they may only meet or slightly miss 3Q revenue estimates, I wouldn’t be surprised to see a slightly more optimistic outlook from the company, which could help boost tech shares tomorrow. As well, economic data could slightly exceed estimates tomorrow. Nikkei futures indicate an +483 open in Japan and DAX futures indicate an +57 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on less economic fear, short-covering, technical buying, declining financial sector pessimism, investment manager performance anxiety and diminishing credit market angst.

BETWEEN THE HEDGES

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Thursday, May 07, 2009

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Wednesday, May 06, 2009

Thursday Watch

Stocks Finish Higher, Boosted by Financial, Commodity, Insurance, REIT and Rail Shares

Stocks Mostly Higher into Final Hour on Bank Stress Test Results, Less Economic Fear, Short-Covering, Declining Credit Market Angst