BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs, Retail longs and Technology longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, almost every sector is rising and volume is slightly below average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling -1.23% and is around average at 17.69. The ISE Sentiment Index is slightly below average at 131.0 and the total put/call is below average at .70. Finally, the NYSE Arms has been running around average most of the day, hitting 2.49 at its intraday peak, and is currently .66. The Euro Financial Sector Credit Default Swap Index is rising +5.92% to 69.74 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 +1.03% to 84.97 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 20 basis points. The TED spread is now down 443 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is rising +2.34% to 27.38 basis points. The Libor-OIS spread is unch. at 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +2 basis points to 2.38%, which is down -27 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .05%, which is unch. today. Today’s gains are broad-based and market leading stocks are outperforming. Cyclicals and small-caps are also outperforming. Gaming, REIT, HMO, Drug, Biotech, Paper, Steel and Oil Tanker shares are especially strong, rising 1.75%+. (IYR) has traded well throughout the day. Commodities are surging despite US dollar strength and some negative global economic data. The Baltic Dry Index is now up almost 5% over the last week. On the negative side, several important CDS indices are rising today and market volume is lackluster. The market’s very positive reaction to news that was already happening late last week and should have already been mostly priced into stocks is bullish. A commentator on CNBC just said everyone was already too bullish on Apple(AAPL), however short interest in the shares soared 34% to 15.6 million shares in the latest report. I continue to believe upside earnings surprises, short-covering, multiple expansion and new product announcements will drive the shares significantly higher than current levels over the intermediate/long-term. Nikkei futures indicate an +156 open in Japan and DAX futures indicate an +12 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, technical buying, less financial sector pessimism, diminishing political angst and declining economic fear.

Bloomberg:

- International demand for long-term U.S. stocks, bonds and financial assets rose in November as private investors purchased a record amount of government securities, a Treasury Department report showed. Net buying of long-term equities, notes and bonds totaled $126.8 billion for the month, compared with net buying of $19.3 billion in October, the Treasury said in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $26.6 billion in November, compared with net selling of $25.4 billion the previous month.

- U.S. companies are producing more cash than ever, making the Standard & Poor’s 500 Index cheaper than any time since credit markets froze just as investors say profits don’t justify higher prices. While the 68 percent rally since March drove price-earnings ratios to the highest level since 2002, when measured by cash flow the index is 37 percent below the 12-year average and half its valuation of 2007, data compiled by Bloomberg show. More investors are focusing on cash at a time when earnings are being skewed by $1.7 trillion in global bank losses and writedowns and nine straight quarters of declining profits. “The market is still fairly to cheaply valued and represents the opportunity for gains,” said Burt White, chief investment officer at Boston-based LPL Financial Corp., which manages $269 billion. “Valuations on a cash flow basis indicate a market that is poised for continuations on recent gains.”

- Optimism among stock investors is nowhere near levels that would signal the 10-month surge in share prices is peaking, according to Ian Scott, a global strategist at Nomura International. “Angst about extreme bullishness is not supported by the evidence,” Scott wrote. “Sentiment is still some way from levels which should generate anxiety for investors,” he wrote.

- Citigroup Inc.(C), the U.S. bank that is 27 percent owned by the Treasury Department, ended a three- quarter profit streak with a $7.6 billion loss on costs to exit the government’s bailout program. The fourth-quarter loss of 33 cents a share was narrower than the record loss of $17.3 billion, or $3.40 a share, a year earlier, New York-based Citigroup said today in a statement. The company was expected to lose 30 cents a share, the average estimate of 18 analysts surveyed by Bloomberg.

- Ten months ago in this space, I compared President Barack Obama’s economic agenda to that of a “Manchurian Candidate” whose designs were intentionally negative. The alignment of the two was eerie. Today, it looks even worse.

- The Federal Reserve Bank of New York was “very sensitive” about explaining that bailout payments fully reimbursed American International Group Inc.’s trading partners for bonds tied to subprime mortgages, according to an e-mail from one of the insurer’s executives to another. Elias Habayeb, former chief financial officer of the AIG division with the unit that sold bond protection to banks, wrote in a November 2008 e-mail to company executives that he wanted to clear up “a lot of confusion” about the price that the New York Fed would pay to retire $62.1 billion in derivatives. “The Fed offered all counterparties par,” Habayeb wrote. “I think we should be clear on that point. The total cost of terminating the credit-default swaps and buying the underlying super senior collateralized debt obligation bond held by the counterparty is par.” An explanation that the banks got 100 cents on the dollar was removed from a draft of an AIG regulatory filing, Bloomberg News reported on Jan. 7. The New York Fed, run by Timothy F. Geithner when the company was rescued in 2008, faces pressure to explain why banks including Goldman Sachs Group Inc.(GS) and Societe Generale SA were made whole on AIG guarantees and why the regulator asked the insurer to withhold information about the payments from filings.

- Wall Street firms are loosening terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said. Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime jumbo-home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.

- Deutsche Bank AG(DB), Germany’s largest bank, may raise salaries for employees by as much as 30 percent to increase the proportion of fixed pay to bonuses in overall compensation, a person with knowledge of the matter said.

Intrade.com:

- The odds of a Scott Brown(R) victory in the Massachusetts special election for Ted Kennedy's old Senate seat have risen to 84%. The odds for a Martha Coakley(D) victory have fallen to 16%.

Wall Street Journal:

- A woman who had been buried in her bed for six days under the rubble of her two-story home was pulled out alive Monday, illustrating one of the defining features of the Haitian quake: the remarkable number of people rescued from collapsed buildings.

- Voters headed to the polls across Massachusetts Tuesday in a closely watched special election that threatened to tip the Senate's balance of power and undermine President Barack Obama's policy agenda.With much at stake, indications were that turnout was going to be high in Tuesday's balloting. Long lines were reported at polls across the state. Brian McNiff, spokesman for the secretary of commonwealth, said as many as 2.2 million voters were expected to go to the polls today, close to the number in 2006 when the state elected Democrat Deval Patrick as governor. As of noon, some 55,000 voters had cast ballots in Boston. By comparison, some 58,000 Boston voters had cast ballots by noon in 2006.Up for grabs was the seat left vacant by the death of Sen. Edward Kennedy, the liberal icon who represented the state for more than 40 years. Democrat Martha Coakley had been expected to easily win victory after securing her party's primary nomination in early December.

- Energy provider Williams Cos.(WMB) is restructuring its operations to merge two of its natural gas pipeline and energy-processing affiliates to create one of the largest natural-gas partnerships in the country, with operations across the Gulf Coast, Rocky Mountains and into the northeast, said people familiar with the matter.

CNBC:

- The tax on major banks that the government wants to introduce to recoup some of its TARP money forces banks to pay for the losses in the auto sector, which was also bailed out by the government, and at CIT and AIG, which are not banks, Bove pointed out. "If it does (become law), it's just pure expropriation Venezuelan-style," he said.

Washington Post:

- In a trend that researchers call "the rise of wives," women are increasingly better-educated than their husbands and have emerged as the dominant income-provider in one of five marriages, according to a new report released today.

The Business Insider:

- Jim Rogers is now saying that property prices in Shanghai and Hong Kong may be an inflating bubble set for a painful pop.

- Tea Party Leaders Might Draft Larry Kudlow To Run Against Chuck Schumer In November.

- At least his creditors can't take away his nickname: Nails. Lenny Dykstra, once at the pinnacle of the baseball world, is bankrupt and living in his offices.

- Yes, Apple(AAPL) Can Go To $1,000 A Share.

BusinessWeek:

- Chinese Premier Wen Jiabao will drop “ensuring growth” from the list of top economic tasks in the government work report meeting in March, Hong Kong Economic Times reported, citing “speculation from Beijing”.

- Iran will target Western warships in the Persian Gulf should the country come under attack from the U.S. and its allies, Defense Minister Ahmad Vahidi said.

Washington Times:

- Despite helping run the government's electronic database designed to weed out illegal-immigrant workers, Social Security failed to run E-Verify checks on its own employees nearly 20 percent of the time. An audit by the Social Security Administration's inspector general says the agency outright failed to check 19 percent of its hires in 2008 and 2009, and of the checks it did run, nearly half of them weren't performed in a timely manner. It's all the more embarrassing because the agency, along with U.S. Citizenship and Immigration Services, runs E-Verify, the tool the government expects to become mandatory for all U.S. businesses.

AppleInsider:

- A strong holiday quarter, higher than expected Mac sales, and hype leading up to Apple's(AAPL) expected tablet unveiling next week are all expected to drive the company's stock to new heights, one Wall Street analyst said Monday. Calling 2010 "The Year of the Mac," Gene Munster, senior research analyst with Piper Jaffray, said domestic Mac retail data from the NPD group for the December quarter shows 26 percent year-over-year growth. Wall Street expects Apple to see about 19 percent growth over the three-month frame.

LATimes:

- Democrats eye sneaky tactics to save ObamaCare.

Politico:

- House Majority Leader Steny Hoyer (D-Md.) offered a blunt assessment of the nation’s psyche Tuesday morning, saying he doesn’t need the Massachusetts Senate race to alert him that Americans are angry, fearful and concerned about the state of the nation. “We’re all pretty unpopular. Why? Because people don’t feel good, and we’re the leaders and we’re in office, and they expect us to do something about it,” Hoyer said. It was a frank, and somewhat startling, admission as Democratic leadership and the White House are looking to push a final health care overhaul bill through Congress, against the setting of a possible rebuke of the Obama administration’s agenda in the Senate special election in Massachusetts.

- As voters head to the polls in Massachusetts, nervous Democrats have already begun to blame one another for putting at risk the Senate seat Ted Kennedy held for more than 40 years. Many angry Democrats blame their candidate, state Attorney General Martha Coakley, for running a sluggish campaign that let Republican Scott Brown set the contours of the race. Some Democratic strategists lay the fault at the feet of President Barack Obama, saying he should have done more to sell the party’s agenda. And in private conversations, Hill sources say White House chief of staff Rahm Emanuel has blamed Coakley, the Democratic Senatorial Campaign Committee and Democratic pollster Celinda Lake for failing to see Brown’s surge in time to stop it. “With the legislative and political stakes so high, it’s unbelievable that the Senate committee and White House let this race get so out of hand,” said one senior Washington Democrat. “There’s a lot of blame to go around. Martha Coakley is only one of the problems here.”

Benzinga:

- In a research note released today, analysts at Cowen and Company said "improving trends at J.P. Morgan's credit card sales purchase volumes, merchant processing volume, total transactions processed, and credit cards issued bode well for Outperform rated MasterCard (MA) and Visa (V)."

The Hill:

- Congressional Democrats are considering passing healthcare reform before the winner of the Massachusetts special election is seated in the upper chamber, Democratic sources say. The expedited endgame would be necessary only if Republican state Sen. Scott Brown defeats state Attorney General Martha Coakley in Tuesday’s special election to fill the seat left vacant by the late Sen. Edward Kennedy (D-Mass.).

StreetInsider.com:

- Thomas Weisel raised its price target on shares of Google (GOOG) from $650 to $675. The firm maintained its Overweight rating.

Reuters: