BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- U.S. Rating Under Pressure From Deficit, Moody's Says.

- PNC Financial Services Group Inc.(PNC) will repay $7.6 billion of federal bailout funds, following the lead of its four biggest rivals that announced or completed their exit from the Troubled Asset Relief Program. PNC expects to finance the deal by selling $3 billion of common stock, $1.5 billion to $2 billion of senior notes, and the bank’s investment servicing unit, according to a statement today from the Pittsburgh-based lender. The unit’s $2.31 billion sale to Bank of New York Mellon Corp. was announced separately.

- Sony Corp. may start selling Blu-ray discs showing 3-D versions of its archive of movies and videos as early as the 12 months starting April 1. “We’ll probably be able to start next fiscal year, if we can convert them into 3-D with good effects,” Joe Nakata, a deputy general manager for Sony’s 3-D strategy unit, said in an interview yesterday in Tokyo. “Companies specializing in conversion processes are starting up in India and the infrastructure is getting prepared.”

- Al-Qaeda is likely to attempt a terrorist attack in the U.S. within the next three to six months, U.S. intelligence officials told a Senate panel in Washington. National Intelligence Director Dennis Blair told the Senate Intelligence Committee today that an attempted attack is “certain” within that time frame. Blair was responding to a question from the panel’s chairwoman, California Democratic Senator Dianne Feinstein, during an annual assessment of threats to the U.S. The other four officials testifying before the panel agreed with Blair when questioned by Feinstein. “My greatest concern and what keeps me awake at night is that al-Qaeda and its terrorist allies and affiliates could very well attack the United States in our homeland,” Panetta testified. The U.K.’s international terrorism threat level was raised to “severe” from “substantial” on Jan. 23, indicating that authorities consider an attack there is highly likely.

- Quants' Risk-Free Ideas Sink Market, Cause Ruin: Susan Antilla. To become a potentially market- destroying “it” group on Wall Street, you need some arrogance, enough brains to justify making huge financial bets, utter cluelessness about lessons learned from finance’s booms and busts, and a sincere belief that your unique contributions to Wall Street will mean, ahem, that that this time it really is different, so old truths can be ignored. Such is the profile of Wall Street’s nerdy quants, the most recent contingent to reach stardom and then keel over on its pocket protectors when boom turned bust. I learned much about this geek gaggle by reading “The Quants,” a new book by Wall Street Journal reporter Scott Patterson. As the crisis was unfolding in the summer of 2007, a group at Deutsche Bank made a big win by betting against subprime mortgages. To celebrate, the author says, traders at the bank sported gray T- shirts that read, in bold black letters, “I Shorted Your House.”

- Throughout the financial crisis, Goldman Sachs Group Inc.(GS) extolled the use of market prices to value holdings, saying this instills needed discipline. The firm’s hard-line stance turned to mush, though, when it came time to end a market myth that fueled 2008’s meltdown. Goldman, along with the mutual-fund industry, argues that it is fine for money-market funds to use historical values, rather than market prices, to value holdings. This helps money- market funds maintain a stable price of $1 a share. The problem: the $1 share price gives investors the false impression that money-market funds are like bank accounts and so can’t lose money. That myth was shattered in 2008, and the resulting panic worsened the credit crunch, forcing the government to backstop these funds. In the face of opposition from the fund industry and from firms such as Goldman, the Securities and Exchange Commission so far has failed to force the $3.3 trillion money-market industry to face reality by requiring the funds to show that their shares rise and fall in value, even if by miniscule amounts. This inaction creates the possibility of future market runs and the need for more government bailouts. At a meeting last week, the SEC endorsed beefed-up disclosures for money-market funds, along with other technical changes such as requiring funds to boost cash holdings. It stopped short, though, of even proposing that funds be required to post values that wouldn’t always neatly show up as $1 a share.

- Jobs, jobs, jobs. Meet the new mantra, same as the old mantra. No longer will President Barack Obama be content to cite specious numbers about “jobs saved or created” as a result of last year’s $787 billion fiscal stimulus. Now he’s proposing $100 billion of new spending to “jumpstart job creation,” according to White House Budget Director Peter Orszag. It’s part of a $3.8 trillion budget for fiscal 2011, unveiled Monday, that projects a $1.3 trillion deficit next year, following a $1.6 trillion deficit this year. Spend money to save money. Spending dressed up as a jump- starter is still spending by another name. The only thing missing from the energy-cleansing, rural- community-assisting, climate-change-mitigating, health-food- promoting blueprint is money for pyramid building. In Chapter 10, Section VI of “The General Theory of Employment, Interest, and Money,” John Maynard Keynes advocated building pyramids as a cure for unemployment. In fact, “Two pyramids, two masses for the dead, are twice as good as one,” he wrote in his 1936 treatise. The point is, government can always put people to work. It can hire teams of men with shovels to labor for weeks doing the work one earth-moving machine and operator can accomplish in one day. The goal is to create permanent jobs, increase productivity and contribute to the wealth of the nation. Pyramids don’t cut it. But they’re a good place to bury dead theories.

- Bank of America Corp(BAC),the nation’s largest lender, will pay investment-banking employees bonuses of about $4.4 billion for last year, or an average of $400,000 each, a person close to the bank said.

Wall Street Journal:

- It's now official: In 2009 the number of unionized workers who work for the government surpassed those in the private economy for the first time. This milestone explains a lot about modern American politics, in particular the paradox that union clout with Democrats has increased even as fewer workers belong to unions overall. The Bureau of Labor Statistics reported recently that 51.4% of America's 15.4 million union members, or about 7.91 million workers, were employed by the government in 2009. As recently as 1980, there were more than twice as many private as public union members. But private union membership has continued to decline, even as unions have organized more public employees. The nearby chart shows the historical trend.

- How to Destroy American Jobs. Obama's proposals for increasing the tax burden on U.S.-based multinationals would harm our most dynamic companies.

- For the first time in more than a decade, the New York Stock Exchange will change the way it winds down trading during the close of the regular session. Beginning around Feb. 22, the targeted start date, the stock exchange will give traders five extra minutes to place unrestricted market-on-close and limit-on-close orders on any stock--until 3:45 p.m. EST. From then until the market closes at 4 p.m., the NYSE will publish every five seconds which stocks have buy or sell imbalances of 50,000 shares. Currently, the exchange only releases that information every five seconds during the last 10 minutes of trading and every 15 seconds between 3:40 and 3:50 p.m. And traders submitting orders to offset that imbalance -- purchasing shares of a company with a sell imbalance, for instance--have a new option. While previously traders could only submit orders to correct the imbalance as it was first published by the NYSE, they can now freely submit buy or sell orders on the stocks in focus until the close, with the NYSE accepting the orders that balance out trading. Because heavy trading can sometimes flip whether a stock is being more aggressively bought or sold at the end of the day, the new "closing offset order" allows traders to help correct that imbalance if it changes several times before the close. Additionally, traders will now have eight extra minutes--until 3:58 p.m.--to cancel any orders made in error.

- Former Federal Reserve chairman Paul Volcker might want to bone up on the differences between private equity and hedge funds after a Congressional hearing Tuesday. At the hearing before the Senate Committee on Banking, Housing and Urban Affairs, Volcker testified on proposed regulation bearing his name that would ban commercial banks from investing in private equity or hedge funds, as well as from engaging in proprietary trading. At one point, he made a general comment to the effect that private equity is just as risky an activity for banks to engage in as hedge fund investing or proprietary banking activity. The three are “substitutable,” he said. A large part of Volcker’s argument is that all three activities pose clear conflicts of interest for banks, and that is surely a good and crucial point at the heart of his proposals. But saying that PE investing is as risky as hedge fund investing ignores several key differences between the two asset classes.

- Federal prosecutors publicly identified a senior Wall Street trader who became a government mole and wore a body wire for more than a year and who is continuing to cooperate in a sprawling insider-trading case. David Slaine, a former hedge-fund manager, pleaded guilty to criminal charges that he engaged in insider trading several years ago based on tips about upcoming UBS AG analyst recommendations, generating more than $3 million in illicit profits for the hedge-fund where he worked.

- Trial Lawyers Contribute, Shareholder Suits Follow.

MarketWatch.com:

- The U.S. National Highway Traffic Safety Administration has received more than 100 complaints involving the brakes on Toyota Motor Corp.'s Prius hybrid, according to a Japanese news report Tuesday.

- Bank of China Ltd. has tightened lending to property developers by lifting the interest rates it charges on new loans to the sector, according to a report Tuesday.

- The world is starting to worry about China. It's about time. Share prices in Shanghai tumbled again Monday, following last week's hefty sell-off. That takes Chinese indexes down about 10% in just a few weeks.

CNBC:

- Chinese Attacks on Google(GOOG) a 'Wake-Up Call' for US: Blair.

NY Times:

- The chairman of the Senate Banking Committee warned on Tuesday that the Obama administration’s new proposals to rein in Wall Street firms ran the risk of derailing months of delicate negotiations over overhauling financial regulations. “It’s not a movable feast,” the chairman, Christopher J. Dodd, told Paul A. Volcker, the former Federal Reserve chairman who has become an influential outside adviser to President Obama. “It’s adding to the problems of trying to get a bill done,” he said at the end of a hearing on the proposals, after all the other committee members had already left. Mr. Dodd, Democrat of Connecticut, added that the administration was “getting precariously close” to excessive ambition for the legislation. “I don’t want to be in a position where we end up doing nothing because we tried to do too much,” he said.

Daily Finance:

- Keith Olbermann was already a renowned sportscaster when he rose to prominence as a political commentator. This was during the Bush Administration, when the left was badly in need of a forceful voice to rally around. Such was his popularity that MSNBC reoriented its entire primetime lineup around it. But now the Democrats control Congress and the White House, and there are creeping indications that the world may not have quite as much need of -- or patience for -- Olbermann and his shtick as it once did. Ratings for Olbermann's Countdown have been soft recently, and the 8 p.m. shows on CNN and HLN have narrowed the gap. In the important demographic of adults 25 to 54 -- the group advertisers are looking to reach -- Countdown was down 44% year-over-year in January. It averaged 268,000 viewers in that demo, only 3,000 more than Nancy Grace's show on HLN, and 12,000 more than CNN's Campbell Brown. Fox News's O'Reilly Factor dominated the hour with 964,000 viewers age 25 to 54, and was the only cable news show in the time period to increase its audience, by 55%.

CNNMoney.com:

- AIG(AIG) is planning another round of bonus payments worth a total of $100 million for current and former employees of its troubled financial products division, according to a news report. The bailed out insurer will start paying out the bonuses as early as this week. The Financial Products employees wrote insurance contracts, called credit default swaps on highly complex financial instruments like mortgage-backed securities. The value of the underlying assets fell dramatically during the housing slump that led to the company's near collapse and subsequent $181 billion taxpayer-subsidized bailout. The retention bonuses for the 400 employees of the Financial Products division were designed to keep the unit's staff on board to wind down the company's trillions of dollars in credit default swaps. AIG scheduled the retention payments in three installments: $69 million in December 2008, $168 million in March 2009 and $198 million had been set to be paid in March 2010. AIG asked the Treasury Department's "pay czar" Kenneth Feinberg to review the remaining retention payments due to the intense public scrutiny over them.

- The Copenhagen climate talks went nowhere. The Senate's attempt to pass a global warming bill appears stuck. But that's doesn't mean greenhouse gas laws aren't coming. The Environmental Protection Agency, spurred by a Supreme Court ruling, is racing to fill the void. As early as March, the EPA is planning to cap greenhouse gases from things like power plants and large factories, essentially doing what Senate Democrats want, without a messy vote. Some say it's a great idea. It could put a serious dent in greenhouse gas emissions and go a long way to cleaning up the environment. Others say it could jeopardize investment in industry and hurt job creation. So come March, EPA will begin regulating carbon dioxide from vehicles - largely through tighter fuel economy standards that have already been announced. Once that happens, the next step, legally, is to regulate it from everything else. Many believe using EPA, and specifically the Clean Air Act, to combat global warming is a bad idea. There are too many steps EPA needs to go through to perform the task - too many questions that need answering. Who is going to be regulated? What technologies will be used? What are the acceptable limits going to be? At each stage in the process, there's the possibility for lawsuits. "No one is going to be able to build any kind of industrial facility because they will be sued," said Max Williamson, head of the climate program at Andrews Kurth, a law firm that represents both renewable and fossil fuel energy companies. "You're going to see any industry that can go overseas, go overseas." "There will be lawsuits on each of these rules, and it's going to create a lot of uncertainty for quite some time," she said. "It increases the hurdles for new investment."

- Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system. A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

Business Insider:

- In a long, but very worthwhile lecture, Jim Chanos, lays out in full detail the case against China. Definitely worthwhile if you're interested in what is becoming the main economic debate right now. (video)

- CHART Of THE DAY: Banks Are Choking Off The Oxygen To Small Businesses, While Opening Up The Purse To Large Firms.

Politico:

- New York politicians were able to kick the Khalid Sheikh Mohammed trial out of Manhattan, but it’s becoming increasingly clear that not a single member of Congress wants the trial held in their home town either. A growing coalition of lawmakers are saying “not in my back yard” to the terrorism trial, as even the most loyal Democrats are moving to block funding for any civilian trials. The pushback may represent yet another congressional rebellion against a high profile Obama White House terrorism decision, proving that even a persuasive president can’t overcome the power of local politics. “We’re going to do everything we can to make sure they don’t point at western Pennsylvania as a possible venue,” said Rep. Jason Altmire (D-Pa.). “We are all united, going to voice our opinion, both at the state level and at the congressional level.”

Rasmussen Reports:

- Republican candidates lead Democrats by seven points in the latest edition of the Generic Congressional Ballot. The new national telephone survey shows that 45% would vote for their district’s Republican congressional candidate while 38% would opt for his or her Democratic opponent.

- For incumbent Democratic Senator Blanche Lambert Lincoln, the opponents are interchangeable at this point in her bid for reelection in Arkansas. New Rasmussen Reports polling in the state finds her stuck in the mid-30s against any of five Republican opponents. Her GOP rivals, including Congressman John Boozman who is expected to enter the race on Saturday, all earn roughly 50% of the vote against the two-term Democrat. But worse for Lincoln in the latest survey is that her numbers continue to fall.

Politics Daily:

- What Every American Should Know About the National Debt.

USAToday:

- A top Senate Democrat is asking 30 leading technology, Internet and communications companies to provide detailed descriptions of their operations and human rights practices in China. Senate Democratic Whip Dick Durbin sent letters on Tuesday to technology companies including Apple, Facebook and Twitter seeking information about their business in China and their plans for protecting human rights, free speech and privacy there. Other companies that received letters include Amazon.com, eBay, AT&T and Verizon Communications.

- The U.S. Tax Court ruled Tuesday that a Massachusetts woman should be allowed to deduct the costs of her sex-change operation, a decision that could have broad implications for transgender people. Rhiannon O'Donnabhain (oh-DON'-oh-vin), who was born a man, sued the IRS after the agency rejected a $5,000 deduction for approximately $25,000 in medical expenses associated with the sex-change surgery. The IRS said the surgery was cosmetic and not medically necessary. In its decision Tuesday, the tax court said the IRS position was "at best a superficial characterization of the circumstances" that is "thoroughly rebutted by the medical evidence." The legal group Gay & Lesbian Advocates & Defenders, which represented O'Donnabhain, said the ruling could potentially affect thousands of people a year in the U.S. who undergo similar operations.

Reuters:

- Bank of America Merrill Lynch (BAC) will add as many as 2,000 more people to its global wealth management division this year, according to a report in the Financial Times.

- News Corp's (NWSA) results beat expectations thanks to "Avatar" and improved advertising sales, and the company raised its outlook and dividend in a sign of confidence for the battered media sector. News Corp Chief Executive Rupert Murdoch was extremely bullish on a conference call with Wall Street analysts and journalists, saying the company's future would benefit from the willingness of customers to pay for quality content. "Content is not just king, it's the emperor of all things electronic," he said. News Corp shares, which have risen 21 percent in the last six months, gained another 5.7 percent after the rosy quarterly results. The company also raised its outlook, saying fiscal 2010 income should climb in the low 20 percent range.

- Third-party logistics provider C.H. Robinson Worldwide (CHRW) posted a lower-than-expected quarterly profit, weighed down by a weak freight market, and said margins will continue to take a hit in 2010. Shares of the company, which have not fallen more than 5 percent on a single day in the last one year, were trading down 10 percent at $51.90 after the bell.

- ABC News reported on Tuesday that its weekly measure of U.S. consumer confidence weakened in the latest week, largely due to growing pessimism on the current buying climate. The ABC Consumer Comfort Index fell to -49 for the week ended Jan. 31 from the prior week's reading of -48, ABC said. The gauge now sits five points away from its record low of -54, which it first hit in the week to Dec. 1, 2008, and again

in the week to Jan. 25, 2009.

- U.S. Federal Reserve Board Governor Kevin Warsh said on Tuesday that financial reform efforts that focus narrowly on expanding regulation could stifle the economy.

- Rowan Companies Inc (RDC), seeking a lower tax rate like its rivals, would try to rebase outside the United States as part of any deal to expand its oil and gas rig fleet, its chief executive said on Tuesday.

Evening Recommendations

Citigroup:

- Reiterated Buy on (MAN), target $69.

- Reiterated Buy on (ADP), target $46.

- Reiterated Buy on (CMI), target $58.

Night Trading
Asian indices are unch. to +1.25% on avg.

Asia Ex-Japan Inv Grade CDS Index 110.50 -1.0 basis point.
S&P 500 futures +.05%.
NASDAQ 100 futures unch.

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Earnings of Note
Company/Estimate
- (IP)/.23

- (TWX)/.51

- (DBD)/.41

- (AOL)/1.03

- (CMCSA)/.27

- (ITT)/.93

- (R)/.46

- (RL)/1.02

- (CSCO)/.35

- (MWW)/.00

- (YUM)/.48

- (CBG)/.18

- (V)/.91

- (DLB)/.51

- (BRCM)/.44

- (NVLS)/.33

- (PFE)/.51

- (BDK)/.76

- (AKAM)/.43

Economic Releases

8:15 am EST

- The ADP Employment Change for January is estimated at -30K versus -84K in December.

10:00 am EST

- The ISM Non-Manufacturing Composite for January is estimated to rise to 51.0 versus a reading of 50.1 in December.

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +400,000 barrels versus a -3,888,000 barrel decline the prior week. Gasoline inventories are expected to rise by +1,400,000 barrels versus a +1,985,000 barrel gain the prior week. Distillate inventories are estimated to fall by -1,150,000 barrels versus a +385,000 barrel gain the prior week. Finally, Refinery Utilization is estimated unch. versus a +.07% gain the prior week.

Upcoming Splits

- None of note

Other Potential Market Movers
- The Fed's Warsh speaking, Challenger Job Cuts for January, European Commission decision on Greek stability and development program, Treasury's Quarterly Funding Announcement, Geithner's testimony to House on budget, weekly MBA mortgage applications report, January retail same-store-sales results after close, (AXP) semi-annual financial community meeting, CSFB Energy Summit and the Morgan Stanley Financials Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology stocks in the region. I expect US stocks to open modestly higher and to weaken 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, Retail longs and Financial longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is about average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling -5.09% and is above-average at 21.43. The ISE Sentiment Index is below average at 119.0 and the total put/call is around average at .86. Finally, the NYSE Arms has been running around average most of the day, hitting 1.07 at its intraday peak, and is currently .73. The Euro Financial Sector Credit Default Swap Index is falling -.46% to 81.92 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 -1.63% to 93.56 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 16 basis points. The TED spread is now down 447 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is rising +3.63% to 28.56 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +1 basis point to 2.39%, which is down -26 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .09%, which is +1 basis point today. Small-caps are underperforming again today. Many market leading stocks are also underperforming. The US sovereign debt cds is rising 4.88% to 43.0 basis points, which is at the high end of its 7-month trading range. On the positive side, Homebuilding, Airline, Computer, Steel and Disk Drive shares are especially strong, rising 2.0%+. The market is rising in spite of some pretty negative headlines of late, which is always a big positive. However, I would like to see an improvement in market breadth/volume, less bearish action in Asian equities and better technical action in market leading US stocks. I will be quick to increase my hedges on any signs that the current bounce is faltering. Nikkei futures indicate an +120 open in Japan and DAX futures indicate a +26 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, technical buying, bargain-hunting and less economic fear.

BETWEEN THE HEDGES

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Wednesday, February 03, 2010

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Tuesday, February 02, 2010

Wednesday Watch

Stocks Finish at Session Highs, Boosted by Homebuilding, Airline, Computer and Steel Shares

Stocks Rising into Final Hour on Less Economic Fear, Short-Covering, Technical Buying