BETWEEN THE HEDGES

Wednesday, October 10, 2007

Thursday Watch

Posted by Gary .....at 6:27 PM

Late-Night Headlines
Bloomberg:
- Legg Mason(LM) fund manager Bill Miller acquired a 13% stake in convertible preferred stock issued by Thornburg Mortgage to finance its issuance of jumbo mortgages.
- TXU Corp.(TXU) completed its $32 billion sale to a group led by KKR and TPG Inc. in a record buyout, setting up a possible breakup of Texas’s largest electricity supplier.
- The House Judiciary Committee approved a four-year extension on a ban on taxing Internet services, rejecting efforts by cable and telephone companies to make the prohibition permanent.
- Billionaire Warren Buffett’s Berkshire Hathaway(BRK/A) cut its stake in PetroChina to 3.1% of the publicly held shares as of Sept. 30, from 5.44% five days earlier.
- Australia’s unemployment rate fell to a 33-year low as companies hired extra workers for a 11^th consecutive month in September, adding to signs the economy’s 16-year expansion may be gathering pace.
- Chrysler LLC agreed to spend $11 billion to finance a union-run health fund and will pay beginning employees lower wages under a new contract with the United Auto Workers.

Wall Street Journal:
- Nine Wall Street firms have agreed to pay $280 million for a minority stake in bond-trading firm TradeWeb LLC, a move that could help unify disjointed markets.

MarketWatch.com:
- VMware, Microsoft headed for virtualization war.
- ‘Cubes’ ETF may get a littler sibling.

IBD:
- Medical Equipment And Systems Firms Enjoy Healthy Runs.

CNBC.com:
- Google’s(GOOG) share price should hit $750, Cramer said Wednesday on Mad Money, maybe even higher.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MON), target $95.
- Reiterated Buy on (KO), raised target to $67.

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 futures +.09%.
NASDAQ 100 futures +.03%.

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Earnings of Note
Company/EPS Estimate
- (MTB)/1.94
- (PEP)/.96
- (SWY)/.44
- (SLM)/.73
- (FAST)/.42
- (IDT)/-.37
- (PLL)/.56
- (WINN)/-.14
- (WGO)/.40

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for August is estimated to shrink to -$59.0 Billion versus -$59.2 Billion in July.
- The Import Price Index for September is estimated to rise 1.0% versus a -.3% decline in August.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 317K the prior week.
- Continuing Claims are estimated to rise to 2550K versus 2541K prior.

12:00 pm EST
- The 2007 US Budget Deficit is estimated to shrink to -$162.5 Billion versus -$247.7 Billion in 2006.
- The Monthly Budget surplus for September is estimated to rise to $100.0 billion versus $56.2 billion in August.

Other Potential Market Movers
- The Fed’s Kroszner speaking, ICSC Chain Store Sales report, weekly EIA natural gas inventory report, (HRL) analyst meeting, (IHS) investor day, (MSCS) analyst meeting and Biotechnology Industry Organization Investor Forum could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and shipping stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed on Healthy Consolidation of Recent Gains

Posted by Gary .....at 5:31 PM

Indices
S&P 500 1,562.47 -.17%
DJIA 14,078.69 -.61%
NASDAQ 2,811.61 +.27%
Russell 2000 845.19 -.06%
Wilshire 5000 15,730.40 -.10%
Russell 1000 Growth 636.09 +.16%
Russell 1000 Value 869.0 -.43%
Morgan Stanley Consumer 753.21 -.40%
Morgan Stanley Cyclical 1,085.75 -.30%
Morgan Stanley Technology 689.40 +.34%
Transports 4,933.53 -1.07%
Utilities 516.09 -.92%
MSCI Emerging Markets 157.44 +.63%

Sentiment/Internals
Total Put/Call .88 +.88%
NYSE Arms 1.15 +58.35%
Volatility(VIX) 16.67 +3.47%
ISE Sentiment 123.0 -29.71%

Futures Spot Prices
Crude Oil $81.27 +1.27%
Reformulated Gasoline 203.0 +.49%
Natural Gas 7.01 +2.14%
Heating Oil 221.77 +1.48%
Gold 746.50 +.46%
Base Metals 252.82 +1.89%
Copper 370.10 +2.31%

Economy
10-year US Treasury Yield 4.65% unch.
US Dollar 78.32 -.27%
CRB Index 329.33 +1.06%

Leading Sectors
Oil Service +2.89%
Biotech +1.10%
Retail +1.05%

Lagging Sectors
Insurance -1.0%
Banks -1.12%
Oil Tankers -2.01%

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In Play

Afternoon Recommendations
Piper Jaffray:
- Rated (QGEN) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- New Jersey’s loss of residents to other US states more than tripled between 2002 and 2006, draining $10 billion in personal income from the economy and reducing tax revenue by $680 million, according to a Rutgers University report.
- Medtronic’s(MDT) experimental stent, Endeavor, appears to safely and effectively prop open clogged heart arteries, advisers to US regulators said today while deliberating whether to recommend approval of the device. The stock is rising 3.2% in after-hours trading.
- Morgan Stanley(MS) said its quantitative strategy traders lost $390 million during a single day in August as their computer models failed to account for “widespread” investor selling.
- The United Auto Workers union said it reached a tentative agreement with Chrysler LLC, ending a strike that began at 11 am NY time this morning.
- Lexmark Intl.(LXK) surged 6.7%, the most since January 2006, on speculation the second-biggest US printer maker will be bought.
- Zumiez(ZUMZ) said September sales rose 13.9%. The stock is rising 5% in extended trading.
- US power producers will install more than 4,000 megawatts of wind generation this year as turbine-makers ramp up output, easing a shortage that’s hampered growth for more than a year.
- Crude oil rose for a second day on speculation that Turkish forces may attack rebel camps in northern Iraq, curtailing oil shipments.

Financial Times:
- Paulson in drive to ease subprime ‘pain.’

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, Semi longs, Internet longs, Biotech longs, Retail longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was about average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was neutral. Many market-leading growth stocks once again posted huge relative gains. Every market-cap size of growth stocks rose today, as outperformance was again significant. As well, a number of sectors posted meaningful gains. Retail, construction, biotech, computer hardware, Internet and energy shares all posted nice gains. The Nasdaq is now 17.1% higher year-to-date. Investors are in love with emerging stocks, but I am finding many U.S. stocks across all market caps that have just as much or more growth than emerging market stocks with much less risk and greater transparency. As I said at the beginning of the week, I think retail sales for September will come in modestly below estimates, however, this is mostly factored into the stocks at current levels, in my opinion. I wouldn't be surprised to see stocks open modestly lower in the morning before gaining later in the afternoon.

Stocks Mixed into Final Hour as "Growth" Stock Surge Offsets Weakness in Financials

Posted by Gary .....at 3:32 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. Google (GOOG) is rising another $9 today as Merrill upped its target to $740. As well, antitrust experts say the DoubleClick deal will go through. Moreover, ComScore is saying today that Google had 37.1 billion searches worldwide in August vs. 8.5 billion for Yahoo! (YHOO) and 3.2 billion for Baidu (BIDU). Google remains my largest equity long position, and I still see substantial upside from current levels. It is interesting to note that investment research downgrades have been running ahead of upgrades by about a 4-to-1 margin over the last week, yet stocks are higher. As well, despite yesterday's dovish Fed commentary, fed fund futures now imply a 34% chance for a 25-basis-point cut at the upcoming meeting, down from 70% one week ago and stocks are still mostly rising. The underlying tone of the market remains very positive. I still think too many bulls are underinvested and many bears are too short. While I do pay attention to the Investors Intelligence survey, I do not view it as a good contrary indicator. According to Investors Intelligence, optimism on U.S. stocks rose to the highest this week since December 2005. Many are insinuating that this reading points to an imminent drop in stocks. Over the ensuing five months, however, from January 2006-May 2006, the S&P 500 rose 7%. Just look at the Investors Intelligence chart carefully, and you can see that bullish sentiment has been around current levels many other times since the bear market lows of 2002. The S&P 500 is up 115% since then. On the other hand, according to Greenwich Alternative Investments, hedge fund managers that are bullish on U.S. stocks are at a historical low this month. Only 8% are bullish, while 92% are either neutral or bearish. This also corresponds with the gigantic rise in short interest this year and S&P 500 futures traders that remain positioned near historically net short levels. As well, an overwhelming majority of those surveyed believe the dollar will continue to decline and that the 10-year will fall in price. Here is a summary of Greenwich's October survey:


U.S. Equities (S&P 500)
Expectation	August	September	October
Bullish	36%	25%	8%
Neutral	28%	17%	50%
Bearish	36%	58%	42%
U.S. Dollar
Bullish	43%	33%	25%
Neutral	14%	25%	17%
Bearish	43%	42%	58%
U.S. Treasury 10-year Note (price)
Bullish	21%	33%	25%
Neutral	29%	17%	25%
Bearish	50%	50%	50%

Source: Greenwich Alternative Investments

I expect all three of these consensus beliefs to be proven wrong over the intermediate-term. These findings provide more evidence of the current

U.S.

"negativity bubble," in my opinion. I expect US stocks to trade modestly higher into the close from current levels on investment manager performance anxiety, strong “growth” stock outperformance and short-covering.

Today's Headlines

Posted by Gary .....at 2:55 PM

Bloomberg:
- The risk of owning the debt of European financial companies fell to the lowest level since July as credit-default swap traders bet that the worst losses from subprime mortgages are known.
- Mortgage applications in the US rose 2.4% last week, as purchases gained for the first time in three weeks and refinancing rebounded.
- The US economy will skirt recession even as the housing slump takes a bigger bite from growth, according to a survey of economists.
- A group called DraftGore.com placed an open letter in the NY Times urging former vice president and 2000 Democratic presidential nominee Al Gore to run again for the White House.
- Chrysler’s US factory workers went on strike today after the UAW union failed to reach a new contract agreement with the third-largest US-based automaker.
- Akamai Technologies(AKAM) and Limelight Networks(LLNW), makers of software that increases data-delivery speed on the Internet, rose in Nasdaq trading after an analyst rated the stocks “buy” in new coverage.
- Costco Wholesale Corp.(COST), the largest US warehouse club, reported fourth-quarter profit that exceeded analysts’ estimates as customers bought more fresh food and consumer electronics. The stock had its biggest gain in five years, rising 9%.
- Hovnanian Enterprises(HOV) climbed as much as 6.6% on speculation it may be bought by Toll Brothers(TOL), the largest US luxury homebuiler.

Wall Street Journal:
- The US economy will continue to expand at a moderate pace because export growth will counteract the housing slump and households won’t stop spending, said Mickey D. Levy, the chief economist at Bank of America(BAC).
- MGM Mirage(MGM) will build a new casino resort in Atlantic City.

NY Times:
- President Bush’s administration is developing new rules to allow more foreign guest workers into the country for farm labor.
- Marking a new form of collaboration between the entertainment industry and corporations seeking to highlight a social or political agenda, Electronic Arts(ERTS), the No. 1 video game publisher, plans to announce today that it has collaborated with BP Plc(BP), the energy company, in developing the latest installment of the hit SimCity computer game series.
- Intel Pushes Partners to Spend More on Online Ads.

Seeking Alpha:
- Goldman(GS) Boosts Cisco(CSCO) Target: Significant Upside Will Follow.

AP:
- EBay Inc.(EBAY) plans to start a social-networking service and will introduce other “customer-friendly” features to revive sales.

Wholesale Inventories Rise Less Than Estimates, Sales Rise

Posted by Gary .....at 12:18 PM

- Wholesale Inventories for August rose .1% versus estimates of a .3% increase and a .2% gain in July.

BOTTOM LINE: Sales at US wholesalers outpaced inventories in August, a sign manufacturers may be spurred to expand production, Bloomberg reported. Sales at wholesalers climbed .4% versus a .2% gain the prior month. The inventory-to-sales ratio remains at a low 1.11. Factory inventories fell .1%, the first decline since February 2006. Sales of petroleum products also fell .1%. I continue to believe inventory rebuilding will help boost overall US growth as companies gain confidence in the sustainability of the current expansion.