BETWEEN THE HEDGES

Wednesday, October 24, 2007

Thursday Watch

Posted by Gary .....at 6:51 PM

Late-Night Headlines
Bloomberg:
- Record overseas purchases that have stoked a “bubble” in Indian stocks may slow under new rules planned by regulators, investors and analysts say.
- The Bank of Japan may have to cut its forecast for economic growth and inflation in its twice-yearly outlook report next week, economists say, making it harder to justify an interest-rate increase soon.
- China’s economy expanded more than 11% for a third straight quarter, adding pressure for a stronger currency and higher borrowing costs to prevent overheating.

Wall Street Journal:
- Microsoft Bets On Facebook Stake And Web Ad Boom.

MarketWatch.com:
- Insiders picked up buying in wake of past week’s market drop.
- Poker stars push Congress to ease Internet gambling strictures.
- Analysts betting higher on Amazon.com. Brokers lift price targets despite sell-off; median now above $100.
- Buffett urges caution on Chinese stocks.

CNNMoney.com:
- Wal-Mart(WMT) CEO excited about holidays.
- Countrywide(CFC) wins over critics. The company extends foreclosure-preventive assistance for almost all its hybrid ARM borrowers.

BusinessWeek.com:
- Federal commodity regulators on Wednesday asked Congress to give them greater oversight of electronic exchanges as a way to deter potential price distortion and manipulation, and to protect consumers.
- Has the Mortgage Crisis Finally Peaked?

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LM), target $108.
- Reiterated Buy on (NSC), target $62.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures +.17%.

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Earnings of Note
Company/EPS Estimate
- (BDK)/1.44
- (BMY)/.37
- (CELG)/.28
- (CNX)/.28
- (CMI)/1.95
- (CMCSA)/.18
- (DO)/1.48
- (DOW)/.91
- (EMC)/.17
- (EL)/.10
- (GR)/.90
- (ICE)/.89
- (LLL)/1.48
- (MBI)/1.59
- (NWL)/.49
- (HOT)/.65
- (TRV)/.150
- (XMSR)/-.43
- (AET)/.92
- (MOT)/.04
- (HET)/1.01
- (RTN)/.82
- (APA)/1.97
- (KLAC)/.76
- (BIDU)/4.78
- (GNW)/.77
- (IM)/.39
- (KCP)/.17
- (MFE)/.40
- (WFR)/.80
- (MSFT)/.39
- (SNCR)/.18
- (VSEA)/.67
- (WEN)/.33
- (DECK)/1.20
- (BEN)/1.86
- (IMCL)/.31
- (MSTR)/1.18

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for September are estimated to rise 1.5% versus a 4.9% decline in August.
- Durables Ex Transports for September are estimated to rise .7% versus a 1.8% decline in August.

8:30 am EST
- Initial Jobless Claims for last week are estimated to fall to 320K versus 337K the prior week.
- Continuing Claims are estimated to fall to 2528K versus 2534K prior.

10:00 am EST
- New Home Sales for September are estimated to fall to 770K versus 795K in August.

Other Potential Market Movers
- The weekly EIA natural gas inventory data and the Help Wanted Index could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Highs on Fed Rate Cut Speculation

Posted by Gary .....at 5:25 PM

Indices
S&P 500 1,515.88 -.24%
DJIA 13,675.25 -.01%
NASDAQ 2,774.76 -.88%
Russell 2000 810.85 -.94%
Wilshire 5000 15,266.57 -.29%
Russell 1000 Growth 623.84 -.18%
Russell 1000 Value 834.41 -.30%
Morgan Stanley Consumer 735.35 +.25%
Morgan Stanley Cyclical 1,046.32 +.07%
Morgan Stanley Technology 666.94 -2.54%

Transports 4,895.79 -.94%
Utilities 505.05 +.61%
MSCI Emerging Markets 155.68 -.43%

Sentiment/Internals
Total Put/Call .99 +2.06%
NYSE Arms .94 -1.75%
Volatility(VIX) 20.80 +1.91%
ISE Sentiment 125.0 -8.76%

Futures Spot Prices
Crude Oil $87.60 +2.73%
Reformulated Gasoline 215.51 +2.19%
Natural Gas 7.0 +3.61%
Heating Oil 234.90 +2.14%
Gold 767.80 +.62%
Base Metals 245.65 -1.95%
Copper 345.65 -1.62%

Economy
10-year US Treasury Yield 4.33% -7 basis points
US Dollar 77.50 -.10%
CRB Index 336.13 +.24%

Leading Sectors
Construction +1.07%
Defense +.97%
Oil Service +.86%

Lagging Sectors
Semis -2.41%
Networking -2.54%
HMOs -2.71%

Evening Review
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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- VMware Inc.(VMW), reporting its first results since making the year’s biggest technology IPO, said third-quarter profit more than tripled on demand for software that makes computers more efficient. The stock is surging 8% in after-hours trading.
- Monster Worldwide Inc.(MNST), owner of the largest network of job-hunting Web sites, reported a $33.3 million third-quarter profit as international sales jumped 57%. The stocks rose 4% in after-hours trading.
- Symantec Corp.(SYMC) said profit fell 60% and gave forecasts for this quarter that missed analysts’ estimates as orders from large companies slowed, driving down the shares 10% in extended trading.
- Corn and soybeans fell as supplies from the US harvest inundated grain elevators and storage facilities.

CNNMoney.com:
- Merrill Lynch(MER) may sell Bloomberg stake.

globeandmail.com:
- It looks like Apple’s(AAPL) iPhone may soon be headed to Canada.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Retail longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was just mildly bearish given the sharp reversal from morning lows. Rumors of an imminent Fed discount rate cut seemed to have helped propel shares to session highs into the close. While I doubt the validity of these rumors, I think the heavy-volume reversal shows how easily stocks can lift and how much bull firepower is still on the sidelines. Energy, defense, software, construction and homebuilding shares actually finished in positive territory. Tech shares underperformed throughout the day, but cut losses in half from session lows. A number of leading growth tech stocks -- such as Apple (AAPL), Intuitive Surgical (ISRG) and Google (GOOG) -- only fell slightly, or actually rose, as well. My intraday gauge of investor angst finished at an above-average level. I want to see how stocks react tomorrow as imminent rate cut rumors subside and more negative housing data comes in. I still think the major averages will see another meaningful push higher into year-end. Thirty-day asset-backed commercial paper yields continue to plunge, falling another 9 basis points today. They are down 135 basis points since Sept. 7. As well, the average 30-year fixed rate jumbo mortgage rate is falling another 13 basis points today, to 6.78%, down from 7.34% on Sept. 5. Fed fund futures now imply an 86% chance for a 25-basis-point cut at the upcoming Fed meeting. The Fed's recent silence during rising expectations for another rate cut at the month-end meeting leads me to believe that one is coming. In addition to technology, financial shares were under pressure again. While I don't see these shares outperforming anytime soon, I wouldn't be shorting them at current levels either.

Stocks Mostly Lower into Final on Profit-taking, Earnings Worries

Posted by Gary .....at 3:14 PM

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Medical longs and Retail longs. I added to my (ILMN) and (BRCM) longs, put on (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is heavy. I have heard many pundits lately speak as though only a few stocks are rising and insinuate that a significant market decline is imminent as a result. As I have said many times over the last few weeks, I couldn't disagree more. In my opinion, investors have been spoiled over the last few years as they could almost throw darts at any sector and make money. That is a rare scenario, even in bull markets. Much of the 1990s bull run was propelled by just a handful of sectors at any given time. As well, breadth during the 1990s began to deteriorate rapidly in early 1998, however, the S&P 500 rose another 40% through the peak in 2000. The NYSE cumulative advance/decline line is currently just off record highs and still well above the very best levels seen in the 1990s. In my opinion, the major averages can still move much higher from current levels without the amazing breadth we have seen over the last few years. Moreover, breadth in the growth stock universe has been, and continues to be, outstanding. I am finding many growth stocks of all sizes with great prospects selling for reasonable valuations, and investors are still just in the early stages of paying a premium for those companies given the macro backdrop I see. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising fed rate cut odds and short-covering.

Today's Headlines

Posted by Gary .....at 3:13 PM

Bloomberg:
- Merrill Lynch(MER) credit-default swaps fell the most in two weeks as traders bet larger-than-forecast writedowns of $7.9 billion may draw a line under the NY-based firm’s subprime losses.
- Crude oil rose for the first time in four days after the EIA reported that US oil and gas inventories unexpectedly declined.

Wall Street Journal:
- Hybrid or All-Electric? Car Makers Take Sides.

NY Times:
- In Foray Into TV, Google Is to Track Ad Audiences.

NY Post:
- Google(GOOG) is threatening to once again beat rival Microsoft to the deal punch, this time in the white-hot Facebook investment sweepstakes.

Financial Times Deutschland:
- NYSE Euronext(NYX) plans to launch a new platform in the US in 2008 to trade all types of asset classes and is close to wining approval by the SEC, citing Executive Director Fraser Cowie.

Existing Home Sales Fall During Peak of Credit Crunch

Posted by Gary .....at 12:32 PM

- Existing Home Sales for September fell to 5.04M versus estimates of 5.25M and 5.48M in August.

BOTTOM LINE: Sales of previously owned US homes fell more than forecast in September, Bloomberg reported. The median existing home price fell 4.2% to $211,700, compared with September 2006. The number of homes for sale at the end of the month rose to 4.4 million or 10.5 months’ supply at the current sales pace, up from 9.6 months in August. I expect sales to improve a bit this month as the fears of the credit turmoil peaked in September. The odds of a 25 basis points rate cut at the upcoming Fed meeting are now 86% and a 50 basis point cut 14%, according to fed fund futures. Given the Fed’s recent silence, as expectations for a cut have soared, I now think another cut is likely at month’s end. I continue to believe the significant economic drag from housing, combined with booming global growth, will produce US economic growth of around 2-2.5% over the intermediate-term, which is perfect for many US growth stocks. Growth closer to 3% is likely for 3Q, which is released next week.