BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- Google Inc.(GOOG), the owner of the most popular Internet search engine, had its share-price estimate increased 17 percent to $486 by Goldman Sachs Group Inc., which cited the company’s “fast query growth and improving coverage in emerging markets.” The brokerage boosted its per-share earnings forecast by 2 percent to $21.30 for this year, 8 percent to $23.36 for 2010, and 12 percent to $27.02 for 2011.

- Investors shouldn’t be allowed to block debt restructurings to profit from credit-default swap trades, said Eric Dinallo, who is stepping down as New York insurance superintendent. “Now you have a conflict of interest,” he said. “You’re now a debt holder who can block an infusion of capital, and you want to block an infusion of capital, because you’re very long credit-default swaps. This has been charged as potential manipulative conduct when you have someone who’s basically on both sides of the transaction.” A solution to potential conflicts would be to require investors to own an interest in the debt equal to the credit swap exposure before buying the derivatives, Dinallo said. In “the equity market we have lots of rules that stop abusive shorting. We don’t have any of that on the credit side,” said Dinallo.

- The cost of protecting Asia-Pacific corporate and government bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 8 basis points to 160.5 as of 8:54 am in Hong Kong, according to BNP Paribas SA prices. The Markit iTraxx Japan fell 2 basis points to 153 at 9:14 am in Tokyo, Barclays Plc prices show. The Markit iTraxx Australia index was quoted 8 basis points lower at 165.5 as of 10:52 am in Sydney, BNP data show.

- President Barack Obama said efforts to craft health-care legislation before August will “make or break” his plan to get a law passed by the end of the year. “This is the time where we’ve got to get this done,” Obama said today before meeting at the White House with Democratic senators including Christopher Dodd of Connecticut and Max Baucus of Montana. “This is a necessity.” Senator Charles Grassley of Iowa, the top Republican on the finance committee, said he was dismayed that Republicans weren’t invited to this afternoon’s White House meeting.

- Four men were charged in an indictment with plotting to set off explosives outside a New York City synagogue and shoot down military planes with Stinger anti-aircraft missiles, U.S. prosecutors said. The charges against the men, residents of Newburgh, New York, include conspiracy and attempt to use weapons of mass destruction within the U.S., conspiracy and attempt to acquire and use anti-aircraft missiles, and conspiracy and attempt to kill officers and employees of the U.S, according to the indictment.

- Aetna Inc.(AET), the third-largest U.S. health insurer, reduced its 2009 earnings forecast for operating profit to a range of $3.55 a share to $3.70 a share from the range of $3.85 to $3.95 it had projected. Continued high medical costs for enrolled health plan subscribers during the recession was the key reason for the revision, Joseph Zubretsky, chief financial officer for the Hartford, Connecticut-based company, said today in a conference call with analysts. Lower estimated revenue from Medicare, the U.S. government’s health program for the elderly, also contributed, he said. Aetna fell 7.6 percent to $25.20 at 6:14 p.m. in extended trading on the New York Stock Exchange after it released the new forecast.

- Google Inc.’s(GOOG) free mobile-phone operating system will begin running computers next quarter, entering a market dominated by Microsoft Corp.’s Windows and deepening the rivalry between the two companies. Acer Inc., the world’s second-largest laptop maker, will release a low-cost notebook featuring Android in the third quarter, Jim Wong, head of information-technology products at the Taipei-based company, said yesterday. Asustek Computer Inc., pioneer of the sub-$500 laptops known as netbooks, also developed a model that runs on Google’s software, Chairman Jonney Shih said. The development of Android netbooks indicates that the software is powerful enough to replace Windows, which runs about 90 percent of the world’s personal computers.

Wall Street Journal:

- Banks are having an easy time dialing for dollars. J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total value of shares sold by the 19 financial firms that were stress-tested by the government to at least $65 billion since the results were announced May 7. Nonguaranteed debt sales and the conversion of preferred shares to common stock have generated roughly another $20 billion, for a total of $85 billion or more, giving most of the banks considerably more capital than U.S. regulators have required them to amass as they ride out the recession. Money is pouring in so fast that surprised bankers can hardly believe it, especially since most investors didn't want to go near financial stocks just three months ago, even though they were nearly 40% cheaper. "It's easy to raise capital now," one executive at a bank that recently raised capital through a public stock offering said Tuesday. Investors are "happy to gobble it up." Some investors who participated in recent bank-stock sales said the logic is simple: The likelihood that the economy will veer off a cliff is dwindling, and many banks look cheap on a price-to-earnings basis. "The Armageddon trade is off the table," said David Tepper, president of Appaloosa Management LP, a Short Hills, N.J., hedge-fund firm that owns shares of Bank of America Corp., SunTrust Banks Inc. and Fifth Third Bancorp. Based on likely earnings in 2011 and 2012, the banking industry "may be the cheapest sector in the market," he added.

- Across the country, Americans can increasingly track crime trends block by block as more police departments contract with Internet-based crime-mapping services. Since 2007, more than 800 police departments have begun working with Web sites like CrimeMapping.com, CrimeReports.com and EveryBlock.com. The services take live feeds from police record-keeping systems and automatically post the data on their sites.

- Modern jetliners aren't supposed to disappear from the sky without warning, as Air France Flight 447 from Rio de Janeiro to Paris did Monday.

- California Gov. Arnold Schwarzenegger and the state's chief accountant Tuesday warned lawmakers that they have until June 15 to close the state's crippling budget deficit. If they miss the deadline, the state will run out of cash by the end of July, said state Controller John Chiang.

- Senate Finance Committee Chairman Max Baucus on Tuesday indicated that President Barack Obama may be warming to the idea of taxing employer-provided health-care benefits to pay for an overhaul of the nation's health system. But the White House, and a key Democratic senator, quickly shot down the idea that the president has had a change of heart.

- The State Department says it is significantly reducing the waiting period for thousands of foreign science students and scholars applying for visas to come to the U.S., a move likely to have a major impact in China. The aim is to reduce to two weeks a process that in some cases has dragged on for months, said State Department spokesman Andy Laine. Historically, visa applicants from China have accounted for more than half of those screened, records show.

MarketWatch.com:
- James Pallotta told investors Tuesday that he's shutting down the Raptor Global Funds, becoming the latest hedge fund veteran to step back from the industry. Pallotta, chairman of Raptor Capital Management, has suspended redemptions from the funds and stopped day-to-day investing for a few months, according to a letter Raptor sent to investors on Tuesday, a copy of which was obtained by MarketWatch. However, the former Tudor Investment Corp. equities trader is planning a comeback soon, possibly later this year. With that in mind, Pallotta is keeping his management company up and running, he said in the letter. "Once the process of returning capital is smoothly underway, I intend to step back from day-to-day investing for a few months to spend valuable time crafting an optimal investment strategy in order to capitalize fully on the next several years' developing investment opportunity set," Pallotta added. "Consistently, in recent years, I have conveyed my skepticism regarding the sustainability of certain aspects of the industry's structure and short term focus," Pallotta said on Tuesday. At their peak in 2007, Raptor Global funds oversaw roughly $9 billion. However, Pallotta lost money last year, and some investors redeemed. As 2009 began, Pallotta separated his business from Tudor. The funds currently manage about $1 billion.

- It would be "logical" to combine the Securities and Exchange Commission and the Commodities Futures Trading Commission, said the head of the SEC on Tuesday.

CNBC.com:
- A federal judge in Texas awarded set-top box maker TiVo an additional $103 million in damages plus interest on Tuesday in a long-running patent infringement dispute with DISH Network and EchoStar.

NY Times:

- Now both personal computer manufacturers and software makers hope to do more with touch on larger devices by giving people a 10-fingered go at their screens.

- The US government mistakenly made public a “highly confidential” report containing detailed information about hundreds of the nation’s civilian nuclear sites and programs, citing a newsletter devote to federal secrecy issues. The data included maps showing the locations of stockpiles of fuel for nuclear weapons.

IBD:

- After just 16 months in office, Valeant Pharmaceuticals (VRX) CEO Michael Pearson has racked up some accomplishments.

CNN:

- On the eve of President Obama's highly anticipated speech to the Muslim world, al Qaeda's second-in-command issued an audio statement saying the president of the United States is not welcome in Egypt. Obama is traveling to the Middle East in an effort to repair a damaged U.S. image and reset relations with the Islamic world. But the terrorist network's deputy leader, Ayman al-Zawahiri, said those relations cannot be mended as long as the administration maintains its alliance with Israel. In a message called "Tyrants of Egypt and America's agents welcome Obama" that was posted on Islamist Web sites, al-Zawahiri once again lashed out at the United States. Obama's message to the Muslim world, he said, has already been delivered with his support for "Zionist aggression."

Reuters:

- The fund that supports U.S. highway repairs and construction is set to run out of money before August, the highest ranking Republican on the Senate Environment & Public Works committee said on Tuesday. "We recently learned that the Highway Trust Fund will run out of money some time before August of this year, and will require an infusion of $5 to $7 billion to get through the rest of fiscal year 2009," said Oklahoma's James Inhofe at a confirmation hearing for the next federal highway administrator. Even though the fund has a constant revenue source from the gas tax, it is in constant danger of depletion. Last summer, the U.S. government had to pump in emergency cash to prevent the fund from being emptied. Not only will the government have to do that again this summer, but it may have to pour in an additional $8 billion to $10 billion in 2010, Inhofe said.

- During its finest hour in World War II, the retooled Willow Run car factory here could make an operational B-24 heavy bomber in just 59 minutes. Sixty-four years later the plant has reached its nadir, as General Motors Corp (GM) has announced that it is one of 11 plants slated to close as part of the struggling automaker's efforts to restructure its business.

- China Investment Corp, the country's sovereign wealth fund, said it is buying into a $2.2 billion common stock offering by Morgan Stanley (MS) because it is confident in the Wall Street bank's prospects. CIC is buying 44.7 million shares of the 80.2 million shares being offered for $1.2 billion, raising its stake in Morgan Stanley back to about 9.86 percent.

- Venezuela's President Hugo Chavez said on Tuesday that he and Cuban ally Fidel Castro risk being more conservative than U.S. President Barack Obama as Washington prepares to take control of General Motors Corp. During one of Chavez's customary lectures on the "curse" of capitalism and the bonanzas of socialism, the Venezuelan leader made reference to GM's bankruptcy filing, which is expected to give the U.S. government a 60 percent stake in the 100-year-old former symbol of American might. "Hey, Obama has just nationalized nothing more and nothing less than General Motors. Comrade Obama! Fidel, careful or we are going to end up to his right," Chavez joked on a live television broadcast. During a decade in government, Chavez has nationalized most of Venezuela's key economic sectors, including multibillion dollar oil projects, often via joint ventures with the private sector that give the state a 60 percent controlling stake.

- Prudential Financial Inc (PRU), the No. 2 U.S. life insurer, priced its common stock issue on Tuesday at $39 per share, a source close to the deal said. That price represents a 6.5 percent discount below Prudential's closing stock price of $41.70 on the New York Stock Exchange Tuesday. Prudential sold 32 million shares, yielding $1.25 billion in the offering, the source said.

Financial Times:

- European chief financial officers are far more pessimistic than their American and Asian counterparts about economic prospects, according to a survey published on Wednesday by CFO magazine. Sentiment among finance directors rose worldwide in the second quarter. But the number of pessimists still outnumbered the ranks of optimists in Europe while there was a huge swing towards optimism in Asia and the US, the CFO survey found. A separate survey by RSM International, the world’s seventh-largest accounting firm, found that 90 per cent of top European business leaders thought a recovery would not come this year with two in ten thinking it would be in 2011 or the year after. In Asia and the US the number of optimists on the prospects for the regional economy outnumbered the pessimists for the first time since 2007. About six in 10 Asian and American CFOs were upbeat against only two in 10 who were gloomy. That contrasted with the continued negativity in Europe where, for the eighth successive quarter more finance directors were pessimistic (31 per cent) than optimistic (30 per cent). The survey suggests pain among companies could continue for some time. Four in 10 European CFOs have seen credit conditions worsen this year and on average their companies have drawn down nearly half of their lines of credit. Close to 70 per cent of European finance directors have tried to renegotiate terms with suppliers, a move much criticized by supply chain experts for providing short-term relief but long-term pain.

- In the run-up to the 20th anniversary of the Tiananmen Square massacre, China is censoring foreign media and the internet to an extent not seen since the crackdown that preceded the Beijing Olympics. Government agencies are banning delivery of foreign newspapers, disrupting satellite news broadcasts and blocking internet sites including Twitter and Hotmail in a campaign apparently aimed at extinguishing every reference to the 1989 pro-democracy student movement, which the People’s Liberation Army suppressed on June 4 of that year.

Handelsblatt:

- German businesses warned about a finance shortage among companies in the coming months unless the government acts to east access to credit, citing a letter to Chancellor Angela Merkel. Banks are demanding more for loans; companies must wait too long for credit clearance; and too few insurance options are available, the DIHK, BDI, ZDH and BDA business associations said in the letter.

Mainichi:

- Toyota Motor plans to make a new gasoline-electric car the cheapest model under its Lexus luxury brand. The HS250h will cost $41,000 and the model will go on sale in July.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (UNFI), boosted estimates, raised target to $32.

- Reiterated Buy on (TEL), target $25.

- Raised (IVZ) to Buy, target $20.

- Raised (TROW) to Buy, target $48.

- Reiterated Buy on (BLK), raised target to $190.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures -.11%.
NASDAQ 100 futures -.05%.

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Earnings of Note
Company/EPS Estimate
- (TOL)/-.42

- (JOYG)/.88

- (WSM)/-.21

- (ADCT)/.02

- (MATK)/.29

- (CMTL)/.22

- (CPRT)/.48

Economic Releases

8:15 am EST

- The ADP Employment Change for May is estimated at -525K versus -491K in April.

10:00 am EST

- The ISM Non-Manufacturing Composite for May is estimated to rise to 45.0 versus 43.7 in April.

- Factory Orders for April are estimated to rise .9% versus a .9% decline in March.

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -5,413,000 barrel decline the prior week. Gasoline supplies are expected to rise by +650,000 barrels versus a -537,000 decline the prior week. Distillate inventories are estimated to rise by +900,000 barrels versus a +248,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus a +3.3% gain the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Bernanke testimony before the House Budget Committee, Fed’s Hoenig speaking, weekly MBA mortgage applications report, Challenger Job Cuts, BofA-Merrill Tech Conference, Goldman Basic Materials Conference, Keefe/Bruyette/Woods Financial Services Conference, (FE) analyst meeting, Stephens Investment Conference, KeyBanc Industrial/Auto/Transport Conference, (ERTS) analyst meeting and the Lazard Alt Energy/Infrastructure Conference 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.

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Medical longs, Biotech longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 2.06% and is very high at 29.42. The ISE Sentiment Index is below average at 123.0 and the total put/call is about average at .83. Finally, the NYSE Arms has been running high most of the day, hitting 1.68 at its intraday peak, and is currently 1.36. The Euro Financial Sector Credit Default Swap Index is falling another 6.33% today to 104.67 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 dropping another 3.65% to 124.49 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is plunging 7.93% to 51 basis points. The TED spread is now down 412 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 10.42% to 43.0 basis points. The Libor-OIS spread is rising .06% to 45 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 4 basis points to 1.99%, which is down 65 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is up 4 basis points today. The Euro Financial Sector Credit Default Swap Index is now at the lowest level since early January, which is a large positive. Given the capital raising news, the (XLF) trades pretty well today and is near session highs. The (XLF) has been consolidating gains over the last three weeks. I suspect another surge up through its 200-day moving average will occur very soon. The NYSE Arms is high again today, despite gains in the major averages, which is also a positive. One of my longs, (ISRG), is breaking above its 200-day moving average on decent volume today for the first time since July 2008. I still see substantial upside in the shares over the intermediate/long-term. Nikkei futures indicate an +76 open in Japan and DAX futures indicate a +16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, declining credit market angst, investment manager performance anxiety, technical buying, lower long-term rates and less economic fear.

BETWEEN THE HEDGES

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Wednesday, June 03, 2009

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Tuesday, June 02, 2009

Wednesday Watch

Stocks Finish Slightly Higher, Boosted by Airline, Education, Medical and Biotech Shares

Stocks Higher into Final Hour on Falling Credit Market Angst, Lower Long-Term Rates, Less Economic Fear