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 Japan was quoted 7 basis points lower at 177.5 as of 9:11 am in Tokyo, Morgan Stanley prices show. The Markit iTraxx Australia index dropped 5.5 basis points to 201.5 as of 9:27 am in Sydney, according to Citigroup Inc.

- Japan’s industrial output rose the most in at least six years in April as companies replenished inventories amid evidence the global recession is easing. Factory production climbed 5.2 percent from March, when it gained 1.6 percent, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent expected by economists. Companies said they planned to increase output in May and June as well, the report showed.

- Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said endowments managed by Yale University and Harvard University may have to cut their investments in hedge funds and other hard-to-sell assets because their risks outweigh the possible rewards. “The Yale and Harvard portfolios, which have succeeded enormously over the past 10 or 20 years in terms of the emphasis on illiquidity and private investments and risk-taking -- you have to question that model,” Gross said today at an industry conference in Chicago.

- South Korea’s defense ministry confirmed a Yonhap News report that Chinese fishing boats are leaving the waters near the maritime border between North Korea and South Korea. More than half the boats have left, and South Korea’s military is closely monitoring troop movements in North Korea for signs of provocation, Won Tae Jae, defense ministry spokesman, told reporters.

- Dell Inc.(DELL), the world’s second-largest maker of personal computers, topped profit estimates after cost cuts helped overcome a steeper-than-anticipated slump in sales. Dell, based in Round Rock, Texas, rose as much as 27 cents, or 2.4 percent, in extended trading to $11.75.

- J.Crew Group Inc.(JCG), the U.S. clothing retailer run by a former Gap Inc. chief executive officer, rose 18 percent in late trading after first-quarter profit exceeded analysts’ estimates.

Wall Street Journal:

- The president of the Federal Reserve's Dallas branch rejected the idea that U.S. Treasurys would lose their triple-A credit rating due to the country's worsening fiscal outlook. The specter of a downgrade has been raised by some in the bond market, including Pacific Investment Management Co.'s bond guru Bill Gross. "I don't believe it will happen to the United States," Richard Fisher told reporters late Thursday after a speech in Washington. Fisher said he believed the steeper yield curve was due, in part, to the surge in issuance of Treasurys, but also to an uptick in confidence about the U.S. economy. "I think we've been pulled back from the abyss," he said.

- Free or low-priced online services have squeezed profits from many businesses. But John Riccitiello is placing a big bet that the practice can make money in videogames. Two years into his stint as chief executive of Electronic Arts Inc., the videogame publisher on Friday is unveiling plans for an online Tiger Woods golf game -- one of its first such offerings in the U.S. based on a popular game for consoles -- that could be subscription based. It will be available in the fall.

- Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say. At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal. Many of the ideas under consideration could trigger a turf war on Capitol Hill and among government agencies. People involved in the process said that as a result, the plan could still break in several different directions.

- The Obama administration plans to usher General Motors Corp. into bankruptcy court Monday and push through a restructuring that will cost taxpayers billions of dollars more than previously envisioned, turning what once was one of the most profitable companies in the world into a government ward.

- U.S. officials recently concluded that the Afghan Taliban may receive as much money from foreign donors as it does from opium sales, potentially hindering the Obama administration's strategy to rehabilitate Afghanistan by stopping the country's drug trade. Gen. David Petraeus, who oversees the wars in Iraq and Afghanistan, said in a recent interview that the Taliban has three main sources of funding: drug revenue; payments from legitimate businesses that are secretly owned by the armed group or that pay it kickbacks; and donations from foreign charitable foundations and individuals.

CNBC.com:
- The Obama administration estimates that a General Motors bankruptcy would take at least 60 to 90 days and perhaps longer to complete, a senior official said Thursday. The official, who spoke on the condition of anonymity because he was not authorized to discuss the matter publicly, would not confirm a specific bankruptcy scenario, but the government's deadline for any filing is on Monday.

IBD:

- Ameristar Casinos (ASCA) has weathered the storm that's dampened business at Las Vegas and Atlantic City casinos by operating in the right places at the right time — with the right team.

Business Week:
- For years pension funds, university endowments, and other big investors essentially wrote blank checks to hedge funds and private equity firms. They readily paid stiff fees and agreed to onerous restrictions. Investors had no choice if they wanted access to the money managers and outsize gains. All that is changing. With returns dismal and cash scarce, investors are demanding—and winning—concessions on everything from cost to oversight. "The balance of power has shifted," says a private equity executive.

Trader’s Narrative:

- Hedge funds and large institutional traders are, once again, returning to commodities in a big way. Below is a chart of the large speculators’ net long positions according to the US Commodity Futures Trading Commission:

Politico:

- Some Democrats and political analysts are urging the White House to shift course and concede that Supreme Court nominee Sonia Sotomayor made an error when she suggested in 2001 that Hispanic women would make better judges than white men.

Reuters:

- Rewarding employees for hard work, and not just for showing up, has become a key tenet of good corporate compensation policy. So why are some Wall Street firms sending a very different message? Wall Street has long showered lucrative annual bonuses on bankers and traders who delivered big profits. But the dozens of big banks that accepted bailout funds from the $700 billion Troubled Asset Relief Program must now rethink how they reward top performers, as the government caps what they can dole out, and taxpayers and politicians demand greater accountability. "It's kind of ironic in a way, because over the last 10 years everybody has been pushing for pay for performance," said Michael Melbinger, who runs the employment benefits and executive compensation practice at Chicago law firm Winston & Strawn LLP. "Now, with TARP, it is 180 degrees the other way."

- U.S. President Barack Obama said on Thursday he would discuss oil costs when he meets with Saudi Arabia's King Abdullah next week and plans to say that big price rises are not in Riyadh's interests. Saudi Oil Minister Ali al-Naimi said on Wednesday he believed the global economy had strengthened enough to cope with oil at $75-$80 a barrel. He attributed the recent rises in oil prices to economic optimism. White House spokesman Robert Gibbs, asked for reaction to Naimi's comment, said Obama was "concerned about anything that raises the cost of living in a fragile economic time."

Financial Times:

- International oil companies will be invited to bid for concessions in Brazil’s enormous “pre-salt” oil fields as early as next year, Edson Lobão, mines and energy minister, has told the Financial Times. Brazil stopped selling concessions in the offshore pre-salt area, which oil industry executives say will rival the North Sea in size and importance, soon after their discovery in 2007.

NHK:

- Toshiba Corp. plans to increase output of flash memory chips at its plant in Mie, central Japan, in July because of recovering demand. The increase will reverse a 30% production cut by the Tokyo-based electronics company in January.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (GLW), raised estimates, boosted target to $20.

- Reiterated Buy on (IR), target $26.

- Reiterated Buy on (EXPE), target $19.

- Reiterated Buy on (ONN), raised estimates, boosted target to $12.

Night Trading
Asian Indices are +.25 to +1.25% on average.
S&P 500 futures -.12%.
NASDAQ 100 futures -.09%.

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Earnings of Note
Company/EPS Estimate
- (QSII)/.47

- (TIF)/.20

Economic Releases

8:30 am EST

- Preliminary 1Q GDP is estimated to fall -5.5% versus a prior estimate of a -6.1% decline.

- Preliminary 1Q Personal Consumption is estimated to rise 2.0% versus a prior estimate of a 2.2% gain.

- Preliminary 1Q GDP Price Index is estimated to rise 2.9% versus a prior estimate of a 2.9% increase.

- Preliminary 1Q Core PCE is estimated to rise 1.5% versus a prior estimate of a 1.5% gain.

9:45 am EST

- The Chicago Purchasing Manger report for May is estimated to rise to 42.0 versus 40.1 in April.

10:00 am EST

- Final Univ. of Mich. Consumer Confidence for May is estimated to rise to 68.0 versus a prior estimate of 67.9.

Upcoming Splits
- None of note

Other Potential Market Movers
- The NAPM-Milwaukee report, (LOW) shareholders meeting and the ASCO annual meeting could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and mining stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. 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, Financial longs and Biotech Longs. I covered all my (IWM)/(QQQQ) hedges and added to my (QSII) long today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is around average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 1.58% and is very high at 31.85. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running above average most of the day, hitting 2.62 at its intraday peak, and is currently .85. The Euro Financial Sector Credit Default Swap Index is rising 1.37% today to 120.67 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 rising 1.64% to 145.61 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 2.32% to 53 basis points. The TED spread is now down 410 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 1.18% to 42.0 basis points. The Libor-OIS spread is falling 2.88% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .14%, which is down 2 basis points today. Breadth is disappointing today, despite headline gains. Commodity stocks are especially strong today with more US dollar weakness. However, I suspect the recent interest rate rise, euro strength and gas price surge will slow Europe’s recovery, which should boost the US dollar from current levels over the coming months. As well, I believe the 10-Year T-Note made a tradable low today, which is a positive for stocks. The AAII % Bulls rose to 40.4% this week, while the % Bears rose to 48.6%. Overall, sentiment remains a broad market positive. I expect stocks to build on today’s gains tomorrow. Nikkei futures indicate an +94 open in Japan and DAX futures indicate an +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism and lower long-term rates.

BETWEEN THE HEDGES

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Friday, May 29, 2009

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Thursday, May 28, 2009

Friday Watch

Stocks Finish Higher, Boosted by Commodity, REIT, Insurance, Financial and Technology Shares

Stocks Higher into Final Hour on Lower Long-Term Rates, Short-Covering, Less Financial Sector Pessimism