BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The yen weakened against the euro and the dollar after Fitch Ratings reiterated its confidence in the U.S. and U.K.’s AAA ratings, damping demand for Japan’s currency as a refuge from the global financial crisis. The dollar gained for a second day versus the yen after Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability, suggesting the government will prevent the shortfall from widening further.

- General Motors Corp.(GM) and Chrysler LLC were “just plain wrong” to take taxpayer funds and leave local dealers and their customers to fend for themselves, Senator Jay Rockefeller said as lawmakers faulted the automakers today. Rockefeller, leading a hearing on dealership closings, said Chrysler is eliminating 40 percent of its retailers in his state of West Virginia, and GM is cutting more than 30 percent. “Chrysler gave its dealers less than one month’s notice prior to termination, which is truly unbelievable,” he said.

- The Boston Globe can’t survive in its current form and may impose pay cuts of at least 23 percent if its largest union doesn’t approve a cost-saving contract next week, the newspaper’s publisher said.

- Iranian President Mahmoud Ahmadinejad has hurt the nation by creating tensions with other countries, his main challenger in the June 12 presidential election said in a televised debate last night. “In your foreign policy, you have damaged the nation’s dignity,” former Prime Minister Mir Hossein Mousavi said during the debate in Tehran broadcast by state television. “Shame has been brought on Iran. You have created tension with other countries. Heavy costs have been brought on the nation in these four years.” Ahmadinejad’s management style has been “based on adventurism, instability, unlawfulness and radicalism,” Mousavi said, adding that he entered the race because he is “worried about Iran’s future.”

- China stocks were downgraded at BNP Paribas, which said investors should instead buy more Indian equities because valuations, fund flows and liquidity in the South Asian nation have become more favorable. Chinese shares were cut to “neutral” from “overweight,” analysts led by Clive McDonnell said in a report today, keeping India “overweight.”

- Japanese investors are buying Treasuries at the fastest pace since 2004 as the lowest hedging costs in 16 years let them earn about double the yields on local bonds without risking losses if the dollar weakens. The cost for Japanese buyers to protect US investments against exchange-rate shifts plunged this year along with the London Buying currency-hedged Treasuries is becoming “mainstream” for Japanese institutions, said Credit Suisse Group AG in Tokyo. interbank offered rate, used to set hedging fees for US dollar investments.

Wall Street Journal:

- Hedge fund managers, often seen as racy and risky gamblers who either turn in big returns or big losses, more recently seem to be making safe bets tailored for your grandparents' portfolio. A more conservative betting style may make sense in the current market and prevent the possibility of losses many hedge funds experienced in 2008. But it also may draw the ire of investors who could start to wonder why they're paying high fees for a "not-too-hot, not-too-cold," betting strategy. Additionally, if a trend toward safer bets by hedge funds persists, it may allow a somewhat new product - mutual funds that aim to replicate hedge fund performances but without the high fees - to gain a better foothold.

- Adobe Systems Inc.(ADBE), which makes the Flash software widely used on computers to play Internet videos, is trying to crack a new market: smart phones.

- Federal Reserve Chairman Ben Bernanke warned Congress and the White House that the U.S. economy will suffer if they don't move soon to rein in the federal budget deficit, which the Fed chief blamed for helping to push long-term interest rates higher.

- The president said correctly in an NPR interview on Monday that "part of being a good friend is being honest," and that we need to be honest with Israel about "the fact that the current direction, the current trajectory, in the region is profoundly negative, not only for Israeli interests but also U.S. interests." The president also needs to be honest with the Muslim world. That means addressing the causes of the poverty and tyranny which are so pervasive that they create a widespread belief the U.S. is at best indifferent -- and at worst actively complicit -- in maintaining those conditions in order to deny Muslims their rightful place in the world.

CNBC.com:
- A new report shows the five U.S. states poised to lead the nation out of recession.

- One senior banker recently told me he was advising all his corporate clients to “barrel through the opening” in the capital markets by raising as much money through debt and equity offerings as possible. Many companies seem to be taking that advice and each day the debt and equity markets remain receptive to such offerings is another day that companies once thought certain bankruptcies may be able to breathe new life into their future.

NY Times:

- The new chairman of the Commodity Futures Trading Commission will ask Congress on Thursday to impose substantial new costs and restrictions on large banks and other financial institutions that deal in the complex and largely unregulated financial instruments known as derivatives. If adopted, Mr. Gensler’s proposal would fundamentally alter the way that derivatives dealers do business by imposing requirements, for example, for capital reserves and collateral — assets that would be forfeited in a default. The rules would impose significant new expenses on derivatives dealers, and could reduce their profitability. Mr. Geithner said his proposal recognized the significant role that unregulated derivatives, particularly credit-default swaps, played in the financial crisis. Such swaps, a form of insurance against the default of a bond, played a central role in the near collapse of the American International Group last year. Rather than limiting risk as they are supposed to do, the swaps wound up spreading the crisis globally. “Gensler has to show that the C.F.T.C. will have teeth and we can implement some things right now,” said Senator Maria Cantwell, Democrat of Washington. She said she had asked Mr. Gensler in recent days to revoke exemptions given to some oil futures traders through what are called no-action letters that she said could permit the manipulation of prices to consumers. The proposal on swaps dealers would include antifraud and antimanipulation provisions as well as potential limits on market positions and holdings. It would apply regardless of whether a dealer issued standard derivatives or specially tailored ones to meet the needs of specific companies. One major criticism of the Geithner plan was that it would permit less regulation of some of the more complicated derivatives that are custom-written, rather than plain-vanilla instruments, and would open a loophole that would keep much of the market unsupervised and opaque. But Congressional officials said Mr. Gensler, in his testimony, would describe mechanisms to both supervise the marketplace of customized derivatives and impose standards that presume most derivatives are standard and subject to more rigorous oversight.

- As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt. Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the United States, Britain and Germany. Even a single percentage point increase could cost the Treasury an additional $50 billion annually over a few years — and, eventually, an additional $170 billion annually. This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, homeowners and consumers.

IBD:

- The Obama team has a list of defense programs it wants to cancel or tamp down. But spending on intelligence gathering, surveillance and reconnaissance — or ISR — and cybersecurity are not among them. Applied Signal Technology (APSG), a supplier of technology in both areas, reported after Tuesday's market close that its second-quarter profit more than doubled from the prior year to 31 cents a share. Revenue jumped 18% to $53.5 million.

Business Week:
- The days of home buying with little or no money down may be back—this time thanks to Uncle Sam. Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing.

- A new bill in Washington aimed at tightening the rules for companies in the U.S. that hire skilled workers from abroad could threaten the business model for outsourcing firms such as Wipro Technologies (WIT), Infosys Technologies (INFY), and Tata Consultancy Services (TCS). Top executives at those firms say the legislation could also escalate into a trade dispute between India and the U.S.

- A handful of upgrades from some of the biggest names in mobile software is set to upend the way smartphone users get and share apps. Apple's (AAPL) new iPhone 3.0 software includes features that, if activated by Apple, may let users share software with one another, according to a person familiar with the technology. Eventually, iPhone users may even get a commission when they've induced someone else to make a purchase, says Richard Doherty, director at consultant Envisioneering Group. Separately, a group of software developers led by Google (GOOG) is also considering enabling user-to-user gifting and recommendations through its mobile applications store, Android Market, a person familiar with the plans tells BusinessWeek.com.

Forbes:

- The 10 Hardest Jobs To Fill In America.

Politico:

- Plunging into his maiden mission to the Middle East, President Barack Obama was greeted in this desert kingdom Wednesday by a Royal Honor Guard with 21-gun salute — and the release of a threatening audio tape by Osama bin Laden. Aides say Obama's big message will be that he wants to build a bridge to the Arab and Muslim worlds so the U.S. can move forward in its relationships. But at the same time, he will raise tough issues like democracy, human rights and the challenges of negotiating Middle East peace.

Rasmussen:

- Support for health care reform has slipped slightly as more voters think President Obama should work harder on his promise to cut the federal deficit in half in the next four years. Thirty-six percent (36%) of U.S. voters say cutting the deficit is the most important of the four priorities the president cited in a speech to Congress in February, according to a new Rasmussen Reports national telephone survey. That’s up from 32% in March. At the same time, 24% rate health care reform as the most important of Obama’s priorities, down from 29% in the earlier survey. But a growing number of voters (63%) – up from 54% in March - also see cutting the deficit in half as the goal the president is least likely to achieve.

Reuters:

- The Obama administration plans to unveil on June 17 its sweeping plan to overhaul financial regulation, according to a source familiar with thinking at the U.S. Treasury Department. The proposal will serve as a framework for lawmakers as they embark on the thorny task of restructuring how banks, hedge funds, derivatives, and other financial firms and securities are policed.

- Morgan Stanley (MS) is likely to be part of the first wave of major banks to exit the U.S. government's bank bailout program after recently selling more than $2 billion of shares, research analysts said on Wednesday. Analysts at Goldman Sachs Group Inc (GS) and Bank of America Corp (BAC) wrote that Morgan Stanley has raised more equity than it needed to pass the government's capital tests last month, and now has capital levels similar to JPMorgan Chase & Co (JPM), which also sold shares this week.

- The European Central Bank is set to keep interest rates on hold on Thursday with markets keen to see the details of its covered bond purchase plan as well as clues on whether rates may yet be cut further. Analysts are also awaiting the ECB's new staff projections for economic growth and inflation for this year and next, which could show scope for further policy easing.

Financial Times:

- Some of Britain’s biggest hedge funds have warned the UK Treasury they will be forced to leave the country unless a draft European directive is radically changed. Some have already begun back-up preparations to move to Switzerland in case the rules – described by one manager as a “French plot against London” – are not rewritten. New York is also a possible destination, according to another. Ian Wace, co-founder of hedge fund manager Marshall Wace, told the Treasury this week it should modify tax rules to allow the thousands of Cayman Islands-based funds to move to be fully regulated in London, rather than have much of the industry abandon Europe. “If this directive goes through as drafted, large chunks of the industry will be leaving Europe, whereas we have the opportunity today to have large chunks of this industry coming to Europe,” he said. People present said the FSA officials accepted that the “killer” rules limiting borrowing – and defined to include the implicit borrowing built in to derivatives – would make popular strategies such as global macro, made famous by George Soros, impossible.

- The US made one of its strongest statements for years on human rights in China on Wednesday, as Beijing intensified efforts to quell dissent over the 20th anniversary of the Tiananmen massacre. Hillary Clinton, secretary of state, called on China to “provide a public accounting of those killed, detained or missing” after the 1989 crackdown, to “cease the harassment of participants in the demonstrations and begin dialogue with the family members of victims”. Her written statement to mark Thursday’s anniversary came after the square was closed, with entry blocked by armed police. Citing the “tragic loss of hundreds of innocent lives” in 1989 and describing the anniversary as an “opportunity” to free the remaining detainees, she said that Beijing should “give the rule of law, protection of internationally-recognised human rights, and democratic development the same priority as it has given to economic reform”. Her comments reflected the competing pressures on US policy towards Beijing, contrasting with the emollient message of Tim Geithner, US Treasury secretary, who travelled to China this week to call for closer ties and to issue reassurance about the country’s investments in the US. Mrs Clinton’s statement comes after a push within China to suppress dissent around the anniversary. CNN was added on Wednesday to the list of overseas information providers blocked by censors, including the BBC, Financial Times, the International Herald Tribune and even Twitter.

TimesOnline:

- One of Bernard Madoff's sons is obsessed with his father's crime and the other is still in shock over the $65 billion Ponzi scheme, according to a new exposé on the convicted fraudster. In the new edition of Vanity Fair, the magazine reveals the torment of Mark and Andrew Madoff, who both worked for their father's securities business but have not been accused of wrongdoing connected to his giant investment scam. Andrew, 43, described his father's crime as "a father-son betrayal of biblical proportions".

- Gordon Brown was confronted by an e-mail plot to ditch him and the threat of further ministerial resignations as Labour braced itself for a disastrous showing in today’s European and local elections. On a day of extraordinary drama it emerged that Labour MPs were being asked to sign a letter tomorrow calling on Mr Brown to go. There are high- level predictions that up to 75 may do so. Hours earlier, Hazel Blears had quit the Cabinet without offering any praise for Mr Brown’s leadership. The Prime Minister continued with plans to shake up his Government and was preparing to bring Ed Balls into the Treasury despite indications from friends of Alistair Darling, the Chancellor, that he was reluctant to move. In a sign of the febrile atmosphere, Downing Street was forced to deny claims that Mr Brown had asked John Reid, the former Home Secretary, whether he wanted the job back. Whips are braced for ministers to unleash fierce attacks on Mr Brown after the polls close tonight. They have been warned that a fifth minister may walk out over the coming days.

Economic Daily News:

- China plans to buy as many as 300 million mobile phones that use so-called third-generation technology in the next three years, citing China Unicom VP Zhang Junan. New subscribers and replacement demand will help boost demand for 3G phones, Zhang said.

Commercial Times:

- Micro-Star International Co. has developed a netbook computer that uses Google’s(GOOG) Android operating system, citing Chairman Hsu Hsiang. The company is ready to sell the computer under a client’s brand, he said, without identifying the client. Separately, Micro-Star expects shipments of its notebook computers to as much as double in the second half from the first half, Hsu said.

Late Buy/Sell Recommendations
Citigroup:

- We are reiterating our Buy on (GOOG) – our top Large Cap Internet stock pick – and increasing our price target from $450 to $580(23x ’10 PF EPS of $25.51, which is 10% discount to two-year avg. multiple) based on Three Key Updates: 1) Based on SEM checks, our participation in the Seattle SMX Advanced conference and our model sensitivity work, we believe June Quarter Street estimates are reasonable. This may not sound like a Bullish read, but after two quarters of negative intra-quarter Street revisions, we view this as a stable positive. 2) Street estimates assume little-to-no cyclical recovery in Google’s business model. We respectfully disagree. 3) In the Founders’ Letter, GOOG discloses that almost 1/3^rd of its Searches in Japan are coming from Mobile Our checks suggest these are largely incremental Searches. New comScore survey data shows that 35% of all US Mobile users and 48% of users with newer phones are using Mobile Internet services, with Search the #1 Mobile Browsing activity. Major Smartphone launches this Summer(Palm Pre, iPhone, Android versions) will further boost Mobile Internet. The So-What here is that the Mobile Internet is beginning to emerge as a material Secular Growth driver for GOOG. devices.

- Reiterated Buy on (CME), boosted target to $375.

CSFB:

- Reiterated Buy on (LOPE), raised estimates, target $21.

Oppenheimer:

- Rated (FL) Outperform, target $15.

- Rated (FINL) Outperform, target $9.

Night Trading
Asian Indices are -.75% to +.25% on average.
S&P 500 futures +.06%.
NASDAQ 100 futures +.05%.

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Company/EPS Estimate
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Economic Releases

8:30 am EST

- Final 1Q Non-farm Productivity is estimated to rise 1.2% versus a prior estimate of a .8% rise.

- Final 1Q Unit Labor Costs are estimated to rise 2.9% versus a prior estimate of a 3.3% gain.

- Initial Jobless Claims for last week are estimated to fall to 620K versus 623K the prior week.

- Continuing Claims are estimated to rise to 6855K versus 6788K prior.

- ICSC Chain Store Sales for May are estimated to rise .6% versus a .7% gain in April.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Pianalto speaking, Fed’s Dudley speaking, Bernanke speaking at Fed Conference, weekly EIA natural gas inventory report, Keefe Bruyette Financial Services Conference, CSFB Engineering/Construction Service Conference, (MCO) Investor Day, Goldman Basic Materials Conference, Lazard Alt Energy/Infrastructure Conference, Sandler O’Neil Electronic Trading Conference, Citi Power/Utility Conference, BofA-Merrill Tech Conference and the Raymond James Investors Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and consumer 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 slightly higher into the final hour on gains in my Technology longs, Medical longs, Biotech longs and Commodity/Emerging Market shorts. I added to a Commodity short and added to a Retail long today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, almost every sector is declining and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 6.48% and is very high at 31.55. The ISE Sentiment Index is low at 105.0 and the total put/call is above average at .95. Finally, the NYSE Arms has been running very high most of the day, hitting 2.98 at its intraday peak, and is currently 2.78. The Euro Financial Sector Credit Default Swap Index is rising 1.17% today to 104.0 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 rising 1.96% to 126.92 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.0% 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 plunging 7.73% to 41.06 basis points. The Libor-OIS spread is falling 3.25% to 43 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 7 basis points to 1.92%, which is down 72 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is unch. today. The most cyclical stocks are catching the brunt of the selling today. The US dollar has likely put in another tradable low, which is pressuring commodities. I also suspect economic data will not surprise as much on the upside this month due to the recent rise in gas prices, auto plant/dealer shutdowns and jump in interest rates. However, many market leaders are just slightly lower or even higher on the day. As well, investor angst is jumping, which is a positive. Considering the losses in the major averages and the (XHB), the (XLF) and (IYR) are holding up well. As well, education, biotech, software, medical and retail shares are holding firm. Nikkei futures indicate a -161 open in Japan and DAX futures indicate a -18 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and lower long-term rates.

BETWEEN THE HEDGES

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Thursday, June 04, 2009

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Wednesday, June 03, 2009

Thursday Watch

Stocks Finish Lower, Weighed Down by Commodity, Homebuilding and Construction Shares

Stocks Lower into Final Hour on Profit-Taking, Cyclical Sell-Off