BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is very light. Investor anxiety is very high. Today’s overall market action is mildly bearish. The VIX is rising +1.0% and is above average at 20.21. The ISE Sentiment Index is below average at 119.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running very high most of the day, hitting 3.07 at its intraday peak, and is currently 1.38. The Euro Financial Sector Credit Default Swap Index is falling -4.94% to 61.91 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 83.83 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising +5 basis points to 21 basis points. The TED spread is now down 444 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling -1.78% to 28.65 basis points. The Libor-OIS spread is unch. at 8 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 2.40%, which is down -25 basis points since July 7th. The 3-month T-Bill is yielding .04%, which is up -5 basis points today. Homebuilding, Semi, Computer and Steel stocks are outperforming today, rising .5%+. Gauges of investor angst are high again today given just mild market weakness, which is a positive. I suspect terrorism jitters are holding stocks back a bit ahead of tomorrow night’s festivities. (GS), which has been a drag on financials for a couple of months, is beginning to turn higher again. As well, the euro financial sector cds index hit a new 52-week low today, which is a large positive. On the negative side, small-caps are relatively weak and the market mostly ignored today’s positive economic report. Nikkei futures indicate an +114 open in Japan and DAX futures indicate an +2 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic fear, technical buying, tech sector optimism, lower long-term rates and seasonal strength.

Bloomberg:

- Companies in the U.S. expanded in December at the fastest pace in almost four years, signaling the economic recovery is gaining speed heading into 2010. The Institute for Supply Management-Chicago Inc. said today its barometer rose to 60, exceeding the most optimistic estimate of economists surveyed by Bloomberg News and the highest level since January 2006. Economists projected the Chicago index would drop to 55.1 from 56.1 in November, based on the median estimate of 53 projections in the Bloomberg survey. The group’s gauge of orders climbed to the highest level in more than two years and its measure of employment showed growth for the first time since November 2007, the month before the recession began. Indexes of production and order backlogs also improved.

- U.S. Senate staff members arriving at work by subway this month were greeted by signs proclaiming that “98,000 patients may die” through medical malpractice. On a single day in October, lawmakers received visits from more than 70 victims of doctors’ errors and the attorneys who represented them. And the trial lawyers’ political action committee gave members of the Democratic congressional majority more money than all but two other PACs. Such efforts helped trial lawyers avoid any of the concessions that other groups were forced to make to advance the cause of overhauling health care, despite polls showing strong support for curbs such as award caps on medical-malpractice lawsuits. Even organized labor, also among the Democrats’ most loyal supporters, faced a tax on high-end health-care plans. “Every single other group is being asked to put some skin in the game,” said Lisa Rickard, president of the Washington- based U.S. Chamber of Commerce’s Institute for Legal Reform, which has run ads supporting award caps. “There’s hesitancy within both the administration and the Congress to do anything that’s really going to upset the apple cart when it comes to the trial lawyers.”

- Wall Street Waits as SEC Fails to Bring Madoff-Inspired Reforms. Schapiro joined four other commissioners in approving a rule that requires about 1,600 U.S. fund managers to submit to unannounced audits, 83 percent fewer than seven months ago. The revision came after lobbying by fund companies, including executives from T. Rowe Price Group Inc., who met with Schapiro, and Legg Mason Inc., who met with another commissioner, SEC records show. The diminished inspections rule is one of at least four Schapiro announced as a way to protect investors and boost confidence, then later scaled back or delayed. In August, she bought herself more time on a rule to rein in short-sellers, after lobbying by hedge funds. In October, Schapiro put off plans to give investors more power to decide who sits on corporate boards after the U.S. Chamber of Commerce questioned the SEC’s jurisdiction.

- Consumer backlash and cost concerns may cause delays in the nationwide rollout of “smart” utility meters at the center of the Obama administration’s $8 billion push to update the U.S. electricity grid. PG&E Corp., owner of California’s largest utility, halted meter installations in Bakersfield, north of Los Angeles, after hundreds of customers complained that readings weren’t accurate. The meters, part of a so-called smart-grid initiative billed as clearing the way for more renewable-energy use, are designed to help consumers conserve power during periods of peak demand. Martha Johnson, pastor of a church in Bakersfield, said her utility bill almost doubled from a year earlier to $874 in July after her new meter was installed. “That caught my eye because I’ve never had a bill that high,” said Johnson, 64. San Francisco-based PG&E, which faces a lawsuit from a Bakersfield customer who’s seeking class-action status, says its meters are accurate and hot weather and increased rates led to higher bills than consumers expected. Whether PG&E’s complaints stem from perception or defects, they may slow U.S. installations of the meters, a cornerstone of President Barack Obama’s plan to spur grid upgrades with $8 billion in public-private funding. Consumer groups question whether benefits of the meters justify costs passed on when regulators allow utilities to increase rates to pay for them. “If customers lose confidence in smart meters, I would expect regulators would be more reluctant to grant rate increases to install new meters across the system,” said Travis Miller, a utility analyst at Morningstar Inc. in Chicago. “Any kind of adverse impact from these projects could impact long- term growth of the meters.” The devices allow utilities to check energy use remotely, eliminating the need for employing meter readers. They can be connected to equipment that shows customers when rates are highest, allowing households and other consumers to shift power use to less costly periods. Smart meters also give utilities more control of demand, helping them match usage with renewable electricity flows, such as from wind and solar power. There are about 8 million smart electric meters in the U.S., and that count will jump sevenfold by 2019, according to the Institute for Electric Efficiency in Washington. “Other states are looking very closely at what is happening in California,” said Mindy Spatt, a spokeswoman for the Utility Reform Network, a consumer group in San Francisco. “What we know for sure about the meters is they are job killers and they are very expensive. The rest is just pie in the sky.”

- In a holiday season when retailers crawled back from last year’s record decline, three U.S. clothing chains stood out as winners. Aeropostale Inc.(ARO),Nordstrom Inc.(JWN) and Kohl’s Corp.(KSS) promoted lower prices on specific merchandise and managed inventory to outpace industry sales in November. They will probably say next week those gains continued in December, according to Liz Dunn, an analyst at Thomas Weisel Partners LLC in New York. “They all did execute pretty well in response to the slowing consumer,” said David Abella, a portfolio manager with Rochdale Investment Management LLC in New York who holds shares of Aeropostale and Nordstrom. “If retail sales pick up broadly, they should get outsized gains at the expense of competitors.”

- Crude oil rose for a sixth day, extending its longest rally since October, as heating oil prices climbed on forecasts for colder weather in the U.S. Oil increased amid outlooks that the South and East will be “predominantly cold” for the next two weeks, boosting heating fuel use, according to MDA Federal Inc.’s EarthSat Energy Weather of Rockville, Maryland. Ample supplies of distillates, including heating oil and diesel, tempered the gain. “You’re going to have to be attuned to the weather forecast, how long this cold is going to last, and, by association, the stockpile levels that are higher than normal,” said Michael Fitzpatrick, vice president of energy with MF Global in New York. U.S. distillate stockpiles were 19 percent higher than a year earlier in the week ended Dec. 18. Temperatures in New York City are forecast to be as much as 9 degrees below average by Jan. 3, according to MDA Federal. U.S. distillate fuel supplies were 17 percent above the five-year average last week, the Energy Department reported today in Washington.

- Orange-juice prices fell the most in a week as AccuWeather Inc. said Florida’s citrus crops won’t be harmed by a freeze forecast to settle on other parts of the U.S.

- Investors locking in gains from the biggest stocks rally in seven decades pushed options trading in the U.S. to a seventh straight annual record. The number of options on stocks, indexes and exchange- traded funds that changed hands in 2009 reached 3.59 billion contracts, topping the previous high of 3.58 billion set in 2008, Chicago-based Options Clearing Corp. said yesterday.

- The U.K. government’s plan to tax bankers’ 2009 bonuses may drive financial firms overseas, causing a decline in the industry similar to the deterioration in shipbuilding, the British Bankers’ Association said. “The U.K. has a record of building up great industries such as in steel, shipbuilding, engineering,” Chief Executive Officer Angela Knight said in an e-mailed statement today. “It would be the height of irresponsibility to lose this industry as we have done with others so many times before.”

Wall Street Journal:

- Royal Dutch Shell PLC has roughly doubled its financial support for biofuels start-up Codexis Inc. in the past year, the latest sign that oil companies are slowly and selectively increasing their interest in plants-to-fuels research. Shell is on pace to spend $60 million in 2009 to fund research at Codexis, nearly twice the amount as the year before, according to regulatory filings. Codexis filed paperwork this week for a $100 initial public offering. The start-up is developing microbes to speed up the chemical reactions that turn inedible plants, such as grasses or stalks, into ethanol and diesel. Other crude-oil companies also have increased spending on biofuels . Exxon Mobil Corp. said this summer it would spend $600 million over five or six years on a partnership with Synthetic Genomics Inc. to develop a way to turn algae into motor fuels. Chevron Corp. entered into a relationship in October with Mascoma Corp. to investigate plant-based fuel. And BP PLC created a venture with Verenium Corp. this year to build a fuel plant in central Florida next year.

- Sociedade Nacional de Combustiveis de Angola, better known as Sonangol, signed Wednesday in Baghdad two initial deals to develop Qaiyarah and Najmah oil fields in northern Iraq, officials said.

- The U.S. Treasury Department's surprise Christmas Eve move to uncap the potential aid to Fannie Mae (FNM) and Freddie Mac (FRE) should be investigated, lawmakers from both major political parties said Wednesday. Rep. Dennis Kucinich (D., Ohio) said his congressional subcommittee plans to investigate Treasury's decision to lift the existing $400 billion cap on government cash available to the two firms. Separately, Reps. Scott Garrett (R., N.J.) and Spencer Bachus (R., Ala.) called for the House Financial Services Committee to hold a hearing on the matter.

- Eight Americans were killed in an explosion at a U.S. compound in Afghanistan on Wednesday, officials said. Afghan officials said a suicide bomber had entered a U.S. facility. A U.S. official in Afghanistan would not confirm the report of a suicide bombing, saying an investigation is under way. The official said the attack occurred at a U.S. military base in southeastern Afghanistan's Khost province and that all of those killed were Americans.

- Supporters of President Mahmoud Ahmadinejad's regime encouraged Iranians to turn out for a series of pro-government rallies Wednesday in Tehran and across Iran, going as far as offering free travel on the capital's metro for the day. Throngs of government supporters coursed through the streets of Tehran in images broadcast live by Iranian state TV. Large crowds waved banners and colorful flags, some with pictures of Supreme Leader Ayatollah Ali Khamenei. The planned rallies follow several days of increasingly stark warnings by government and security-service officials against opposition protests after bloody clashes between demonstrators and authorities Sunday.

MarketWatch.com:

- One of the most brutal years in the history of the automotive industry is mercifully drawing to a close, and a relatively strong December of U.S. sales could very well set the stage for a recovery in 2010.

- "Go anywhere" typically describes mutual funds that roam the world's stock markets and buy wherever they see value. For Brian McMahon, co-manager of Thornburg Global Opportunities Fund(THOAX) with Vinson Walden, many of the best stock values nowadays are here at home. Six of the fund's 10-largest recent holdings were based in the U.S., including three in the financial sector.

CNBC:

- The US Treasury completed a solid week of debt auctions as investors stepped in to snap up $32 billion in seven-week notes.

Washington Times

- The Nigerian accused of trying to blow up a Detroit-bound airliner had his suicide mission personally blessed in Yemen by Anwar al-Awlaki, the same Muslim imam suspected of radicalizing the Fort Hood shooting suspect, a U.S. intelligence source has told The Washington Times. The intelligence official, who is familiar with the FBI's interrogation of Umar Farouk Abdulmutallab, said the bombing suspect has boasted of his jihad training during interrogation by the FBI and has said it included final exhortations by Mr. al-Awlaki. "It was Awlaki who indoctrinated him," the official said. "He was told, 'You are going to be the tip of the spear of the Muslim nation.'"

The Business Insider:

- OPEC Has Way Too Much Oil For 2010.

- And Just Like That, The US Amps Up The Trade War Against China.

Denverpost.com:

- The E-Mail Trail Behind the AIG Scandal. The probing e-mails came from every direction inside insurance giant American International Group during the summer and fall of 2007, all with the same underlying question: Could Joe Cassano back up his assurances — to auditors, rating companies, colleagues and shareholders — that his Financial Products unit wasn't in trouble?

Washington Post:

- The Obama administration is readying sanctions against discrete elements of the Iranian government, including those involved in the deadly crackdown on Iranian protesters, marking a shift to a more aggressive U.S. posture toward the Islamic republic, U.S. officials said. Ten months after President Obama set a year-end deadline for Iran to engage with world powers on its nuclear program, the government in Tehran has failed to respond in kind, other than an abortive gesture in the fall. Now, in what may be a difficult balancing act, officials say the administration wants to carefully target sanctions to avoid alienating the Iranian public -- while keeping the door ajar to a resolution of the struggle over Iran's nuclear program. The aim of any sanctions is to force the Tehran government to the negotiating table, rather than to punish it for either its apparent push to develop a nuclear weapon or its treatment of its people.

TheDeal.com:

- Hedge Fund Outlook 2010.

Rassmussen:

- Many have questioned whether those who favor or oppose the health care plan in Congress really know what’s in it. A new Rasmussen Reports national telephone survey suggests that they have a decent understanding of the bill and that voter attitudes towards the legislation have hardened. While several individual components of the plan are popular, reminding voters of what’s included in the plan has virtually no impact on support for the overall legislation. This suggests that there are not major surprises in the legislation that will cause people to change their opinion of it. Thirty-nine percent (39%) of voters nationwide support the heath care plan, and 58% are opposed.

- The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-one percent (41%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -16 (see trends).

Politico:

- House Minority Leader John Boehner on Wednesday echoed a Republican chorus of criticism directed at the Obama administration’s response to the Christmas terror plot, saying Obama should not close the prison at Guantanamo Bay. “It’s time for the president to halt terrorist transfers to other countries, including Yemen, and to re-evaluate his decision to close the prison at Guantanamo,” he said in a statement to be released Wednesday. Boehner added: “The administration’s response following this attempted attack is consistent with its dangerous decision to close the terrorist prison at Guantanamo Bay and bring Khalid Sheikh Mohammed and other 9/11 terrorists to trial in the United States through civilian courts, rather than the military commissions already in place. We know the decision to close this prison has not stopped Al Qaeda from plotting attacks on Americans, turning these terrorists over to other countries is not working, and we shouldn’t import them into the United States.”

- With their poll numbers dipping, a handful of their senior House members retiring and one freshman abruptly changing parties, majority-party Democrats are once again grappling with all-too-familiar questions about the way forward. Chief among them: how to reconcile an ambitious policy agenda that party loyalists expect to see fulfilled at a time when concerns about government spending are on the rise.

NetworkWorld:

- 10 IDC tech predictions 2010.

SeekingAlpha:

- Kaufman boosts its Apple (AAPL) target to $253 from $235, saying it expects a "blowout" FQ1, despite continued difficult macroeconomic conditions and ever-rising investor expectations. Firm says Apple could ship 9.5M iPhones, topping its prior quarterly record of 7.4M.

- My 10 Picks for 2010’s Tech Revolution.

- AIG(AIG) Bailout: A Wasteful Moral Hazard. The AIG bailout will go down as one of the most wasteful use of taxpayer dollars and the largest representation of moral hazard in government interventionist history. Despite the seemingly strong recovery from the financial brink of doom, the silent risk that was introduced into the economic gears was the absolute financial backing and bailouts. Moral hazard describes the way firms act differently under the knowledge that when they get in trouble, daddy (the taxpayer) will step in to save the day. Imagine how you would gamble your life savings in Vegas if you knew that if you lost every dime, someone would step in and give you back your money?

SchaeffersResearch:

- Stocks Advancing Amid Heavy Short Interest: