BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The cost of protecting Asia-Pacific bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 11 basis points to 182.5 as of 8:56 am in Hong Kong, according to ICAP Plc prices. The Markit iTraxx Japan was quoted 10 basis points lower at 170 as of 9:52 am in Tokyo, Morgan Stanley prices show. The Markit iTraxx Australia index dropped 6 basis points to 201.5 as of 9:28 am in Sydney, according to Citigroup.

- Consumers were more optimistic in May about economic outlook of the next six months than at any time since the recession began, a sign Americans are looking ahead to better days. The Conference Board’s expectations index rose in May to 72.3, the highest level since December 2007, when the recession started. “As you get toward the tail end of a recession, consumers begin to sense that the worst of the job market declines are behind us and that the economy is likely to improve,” said Dean Maki, co-head of US economic research at Barclays Capital Inc. in NY. “That’s were the expectations index jumps.” The headline consumer confidence number, issued yesterday, jumped this month by the most in six years to reach the highest level since September 2008. Recent jumps in the stock market, low mortgage rates and smaller job losses are boosting consumers’ outlooks and fueling forecasts that the economy will return to growth in the second half of the year. “As the financial markets heal and credit starts to flow again, the odds are good that the economy will enter full-recovery mode by the end of the year, and consumer are sensing this,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in NY.

- Fighting between Pakistani troops and Taliban insurgents in the Swat Valley and other northwestern areas is forcing almost 130,000 people a day to flee, the United Nations said while warning many others are unable to escape. After a month of clashes, civilians are still streaming from the conflict zone and the number of displaced has reached almost 2.4 million, the UN refugee agency said yesterday, citing the provincial government.

- North Korea fired another short-range missile off its eastern coast last night, South Korea’s Yonhap News reported, after the communist regime carried out a nuclear test and launched missiles earlier in the week. The latest missile firing occurred around 9:10 p.m. local time, the report said, citing a South Korean government official it didn’t identify. North Korea launched two short-range missiles hours after the May 25 nuclear detonation. It tested two more earlier yesterday before firing the third, according to Yonhap, which the South Korean military has yet to confirm.

Wall Street Journal:

- Citigroup Inc. (C) and Bank of America Corp. (BAC) are expected to soon raise base salaries for investment bankers to compensate for limits on annual bonuses, according to people familiar with the matter.

- Secured bank lenders to General Motors Corp. would get a full recovery on $6 billion in loans made to the auto maker, under the bankruptcy plan being finalized this week by the U.S. Treasury, two people familiar with the matter said. The Treasury plans to inject a fresh $50 billion in various financings to back a GM workout, these people said, most of which would take the form of company equity. GM's largest lenders include banks like J.P. Morgan Chase & Co. and Citigroup Inc. and Credit Suisse. GM has a $4.5 billion revolving line of credit that comes due in 2011 and a $1.5 billion term loan due in 2013. GM lenders will be getting much better treatment than did lenders to Chrysler LLC, which eventually received about 29 cents on the dollar for the $6.9 billion they were owed that automaker.

- General Motors Corp. and the United Auto Workers have agreed to a new restructuring plan that would give the union a significantly smaller stake in the company than previously envisioned, and leave the U.S. government owning as much as 70% of the car maker. The government's plan also calls for paying off in full GM's secured lenders, banks including Citigroup Inc. and J.P. Morgan Chase & Co. that are owed about $6 billion. That would remove one potential obstacle to a speedy bankruptcy reorganization. Under the new UAW terms, the union's health-care trust would own 17.5% of a reorganized GM, in exchange for retiree health-care concessions. An earlier revamping worked out by the Treasury Department and GM would have given the union 39% and the government 50%. The union -- concerned about the GMs prospects -- sought the lower stake in exchange for preferred shares that provide annual income as well as a $2.5 billion note from GM, said people familiar with the situation. The change leaves room for GM to sweeten its stock offer to bondholders to reduce the company's $27 billion in unsecured debt. A debt-for-equity swap is another measure required by the Treasury before Monday, or else the company will be forced to file for bankruptcy, a fate most participants in the talks believe is likely.

- Sen. Roland Burris offered to deliver a campaign check to then-Gov. Rod Blagojevich in a conversation taped by the Federal Bureau of Investigation last November, according to Mr. Burris's lawyer. The tape is being turned over to the Senate Ethics Committee, which has been probing Mr. Burris's appointment by Mr. Blagojevich, who faces a federal criminal trial and was removed from office this year.

MarketWatch.com:
- Japan reported Wednesday another sharp fall in exports for April, though the drop was smaller than the previous month's, showing signs of a possible bottoming, according to data from the nation's Finance Ministry.

CNBC.com:
- Chrysler could exit Chapter 11 bankruptcy protection soon, perhaps as early as next week, according a person familiar with discussions between the federal government and the auto maker.

NY Times:

- For decades, the big oil companies and the farm lobby have been fighting about ethanol, with the farmers pushing to produce more of it and the refiners arguing it was a boondoggle that would do little to solve the country’s energy problems. So why are technicians for BP, the giant oil company, now working at an experimental ethanol plant in this old Louisiana oil town, helping to make it more efficient? The erstwhile enemies, it turns out, are gradually learning to get along, as refiners increasingly see a need to get involved in ethanol production. Ethanol, made chiefly from corn, now represents about 9 percent of the country’s market for liquid fuels. And the percentage is growing year after year because of federal mandates. With the nation’s thirst for gasoline, and the ethanol that is blended into it, expected to revive when the economy does, the oil companies want to be in a position to take full advantage.The interest expressed by big oil companies is coming in the nick of time for small companies that desperately need capital and cannot find it these days in the private markets. Take the case of Verenium Corp. a small company based in Cambridge, Mass., that here in Jennings is testing new forms of biofuels in alliance with BP. Instead of ethanol made from food crops, the partners are devising a version from grasses in the sugar cane family. The experiments here are preparation for building a second, $250 million plant in Florida with the capacity to produce 36 million gallons a year of new biofuels — the first commercial plant of its type built with oil company money and expertise. Verenium scientists have already developed a secret sauce of enzymes and microbes that ferment and distill biomass into ethanol. Now BP is contributing technical expertise aimed at getting the temperatures and pressures in the vats just right. Commercial success is not assured, of course. But the fact that a major oil company has even made an alliance to go commercial with Verenium is considered a breakthrough by many ethanol executives. “Any time you get Big Oil into the game, that changes the paradigm because nobody can go large scale chemical engineering like Big Oil,” said Brent Erickson, an executive vice president of the Biotechnology Industry Organization, a trade group.

CNNMoney:

- Amazon’s(AMZN) next revolution.

The Advocate:

- Connecticut may become the first state to regulate hedge funds after the state Senate on Tuesday passed a bill that would require fund managers doing business in the state to disclose potential conflicts of interests to investors. The 24-12 party line vote came after Republicans -- particularly senators from the industry's home in lower Fairfield County -- spoke against the legislation, arguing it could scare away some managers. "It's an ideal industry. It doesn't pollute. It brings great minds to Connecticut. . . . It brings an abundance of capital," said freshman Sen. L. Scott Frantz, R-Greenwich, whose district is ground zero for the state's hedge fund industry. "We need to be very careful about the message we're sending out there."

Lloyd’s List:

- The world’s container lines could be heading for collective losses of $10bn this year, according to Mitsui OSK Lines president Akimitsu Ashida. He said first quarter results from the world’s biggest carriers showed they made total losses of around $2.6bn. Ashida predicts any upturn in cargo will be offset by new capacity and says ‘rate recovery is the only way’ to return to profitability.

Washington Post:

- With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax. Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

USA Today.com:

- New 34-mpg Lexus hybrid has wild looks, but mild performance.

Reuters:

- Despite the troubled economy, most advertisers are not drastically cutting their national TV ad budgets for next season, which might bode well for the broadcast networks -- if they don't take hard-line positions regarding rate increases. Although many analysts project "upfront" sales for the bulk of advertising slots next season could slide by 20 percent or more compared with last year, most media buyers said the slippage might fall in the 5 percent-8 percent range.

- The number of loans, leases and lines of credit written by lenders that finance half of the capital equipment investment in the United States shrank again in April as the economic downturn discouraged business borrowing. But the lenders' trade group, the Equipment Leasing and Finance Association, also told Reuters that delinquencies and charge-offs declined in April, suggesting the stress among customers "may have crested." The group said the percentage of borrowers delinquent 30 days or more on their capex financings fell to 4 percent in April, from a revised 4.9 percent in March. And charge-offs as a percentage of all receivables fell to 1.79 percent in April, from 2.21 percent in March. In another sign of a possible turnaround for the industry, employment at the companies that specialize in capex financings rose slightly in April, with total headcount up 2.9 percent.

- Spain rearranges furniture as economy sinks.

- New York state's pension fund has cut its so-called fund of funds investments to about $500 million from $5 billion since January 2008, after deciding direct investments were preferable, a spokesman said Tuesday. Fund of funds invest money in hedge funds on behalf of their investors, and they helped the state gain access to "blue chip" funds when former Comptroller Alan Hevesi began using them in 2005, said Robert Whalen, a spokesman for the current Comptroller Thomas DiNapoli. DiNapoli determined after a review that the strategy of investing in 184 funds through 7 fund of funds was "suboptimal" due to redundant investments, unwanted correlations between the funds' results and the stock market's performance, and costly fees, Whalen explained.

Financial Times:

- With all this reflationary work by the central banks and governments, don’t you wonder what the new cash is buying? Know anyone who’s getting a new Porsche? Suezmax tanker? Damien Hirst pickled shark? Semiconductor test equipment? Didn’t think so. Neither do I. But the cash is going somewhere, such as into credit and credit derivative speculation. Credit hedge fund managers, and even the banks’ own desks, have uncoiled themselves from their fetal positions, and are back taking advantage of what are either risk-free arbitrages or value traps, depending on how the next few months go. If I were them, I might be taking the money made in the past two and a half months off the table. But then I don’t have to be reaching to get past a high-water mark. Even after they’ve been reviled by talking heads and politicians from here to Ulan Bator, credit default swaps are still a very low-cost way of putting on speculative positions, as long as they still trade. And so, thanks to the Geithner Treasury’s policy of reform, rather than dissolution, CDS trading has regained a vampiric strength the real economy still lacks. A couple of years ago, someone might have said there was a risk that a CDS counterparty, such as, hypothetically, AIG, might get into trouble, and you would be unable to count on that leg of the trade. Then a risk-free arbitrage could turn into a money trap.But thanks to Hank Paulson, Tim Geithner, and the rest of Team USA, that risk is no longer seen to be a problem. So you can now collect a couple of hundred basis points of risk-free money, as long as you have a line of credit with a dealer.

- Lebanon’s Hizbollah has held talks with the International Monetary Fund and the European Union as it seeks to secure continued financial support for Lebanon if the alliance it leads was to win next month’s parliamentary elections. The discussions between the Shia militant group and donors take place amid intensifying concern in Beirut that a politically fragile, heavily indebted economy could come under severe strain if the current pro-western parliamentary majority was to lose the June 7 elections. A victory by Hizbollah and its allies would be seen as a boost to Syria and Iran, the group’s backers. It could lead the US and other supporters of the current parliamentary majority to reconsider economic support for Lebanon. Washington considers Hizbollah a terrorist organisation but the group is seen by much of the Arab world as a resistance movement against Israel.

- Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up. Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years. The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.

- President Nicolas Sarkozy's desire to appoint an outspoken climate-change sceptic to a new French super-ministry of industry and innovation has drawn strong protests from party colleagues and environmentalists. Claude Allègre argues that global warming is not necessarily caused by human activity. Putting him in charge of scientific research would be tantamount to "giving the finger to scientists", said Nicolas Hulot, France's best-known environmental activist. Mr Allègre hit back at his critics and their "lies and distortions" about his record and beliefs. The climate was certainly changing, he said, but not all the reasons for it were known. "As a scientist and citizen, I, unlike others, do not want environmentalism to accentuate the crisis or make the least well-off suffer more," he said.

Economic Daily News:

- Apple Inc.(AAPL) will launch three new models of iPhones in China on June 9 before starting sales in the country at the end of the month or in early July, citing Chinese media. Taiwan companies such as Cheng Uei Precision Co., Advanced Connectek Inc. and Simula Technology Inc. have received orders to make connectors for the new next-generation iphones.

NHK:

- Toyota Motor Corp. will resume overtime work next month at a plant in central Japan to boost the output of the Prius hybrid.

Yonhap:

- Nouriel Roubini, the NYU economics professor, said the US economic slump may end around the end of the year.

- North Korea probably already restarted its nuclear reprocessing facility in Yongbyon, citing a diplomatic source in Seoul.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (BAC) bonds to Buy/Overweight.

Night Trading
Asian Indices are +.75% to +2.0% on average.
S&P 500 futures -.08%.
NASDAQ 100 futures -.07%.

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Economic Releases

10:00 am EST

- The House Price Index for March is estimated to rise .2% versus a .7% gain in February.

- Existing Home Sales for April are estimated to rise to 4.66M versus 4.57M in March.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Treasury’s Geithner speaking, weekly MBA mortgage applications report, weekly retail sales reports, Cowen Tech/Media/Telecom Conference, Barclay’s Capital Wireline/Wireless Conference, (ESRX) shareholders meeting, (MCD) shareholders meeting, (XOM) shareholders meeting, Deutsche Bank Energy/Utilities Conference, (CVX) shareholders meeting and the (HIG) shareholders meeting could also impact trading today.

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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Financial longs, Retail longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is slightly below average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.24% and is very high at 30.92. The ISE Sentiment Index is slightly above average at 155.0 and the total put/call is slightly below average at .73. Finally, the NYSE Arms has been running above average most of the day, hitting 1.55 at its intraday peak, and is currently 1.04. The Euro Financial Sector Credit Default Swap Index is falling .09% today to 116.67 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 falling 1.76% to 143.82 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 2.44% to 50 basis points. The TED spread is now down 413 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 11.32% to 44.25 basis points. The Libor-OIS spread is falling .50% to 45 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 4 basis points to 1.82%, which is down 82 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is down 3 basis points today. Market-leading stocks are substantially outperforming the broad market today. Small-caps are also especially strong with the Russell 2000 jumping 4.11%. Most gauges of credit market angst have imploded over the last 6 weeks, which is a major positive. I suspect stocks will build on today’s gains later this week after a brief period of consolidating action. Nikkei futures indicate an +175 open in Japan and DAX futures indicate an +21 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit market angst, investment manager performance anxiety, a stabilizing US dollar, less economic fear and bargain-hunting.

BETWEEN THE HEDGES

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Wednesday, May 27, 2009

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Tuesday, May 26, 2009

Wednesday Watch

Stocks Finish Sharply Higher, Boosted by REIT, Alt Energy, Steel, Bank, Construction, Homebuilding. Rail and Technology Shares

Stocks Sharply High into Final Hour on Less Economic Pessimism, Short-Covering, Stabilizing US Dollar