BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:
- Hedge-fund assets may fall to about $1 trillion by the middle of next year, a decline of almost 50 percent from their peak in June, because of market losses and client withdrawals, Citigroup Inc.(C) said in a report. Managers are likely to see investors, led by funds of funds, pull 20 percent of their money, Tobias Levkovich, an analyst at the New York-based bank, wrote yesterday. Funds of funds are middlemen who select hedge funds for their clients. ``The so-called `Swiss hot money' wants out and funds are responding,'' Levkovich wrote, referring to Swiss investors who have a shorter investing period than pension funds. ``Citi's credit analysts estimate that hedge funds have raised cash to roughly 40% of assets already in anticipation of known redemptions and possibly unanticipated demands from investors.''

- Cliffs Natural Resources Inc.(CLF) and Alpha Natural Resources Inc.(ANR) terminated their $2.88 billion merger agreement because of global financial turmoil and ``uncertainty'' in the steel market.

- BHP Billiton Ltd.(BHP), the world's largest mining company, had its 2009 profit forecast reduced 31 percent by Macquarie Group Ltd. because of declines in commodity prices and cuts to production.

- Aluminum fell to a three-year low and copper declined in London on speculation more metal will be shipped out of China, adding to global supplies as demand falters. Zinc also fell. China will lower export tariffs on some aluminum to 5 percent from 15 percent as of Dec. 1, the Ministry of Finance said Nov. 14. ``Latest indicators point to a huge fall in metals demand in the final quarter,'' London-based analyst Jim Lennon wrote in a report e-mailed today.

- Goldman Sachs Group Inc.(GS), Morgan Stanley(MS) and investment banks in Europe are using the early success of new trading platforms they have backed to push exchange fees lower.

- Yahoo! Inc.(YHOO) Chief Executive Officer Jerry Yang will step down amid mounting pressure from investors after he botched takeover talks with Microsoft Corp. and failed to broker an online advertising agreement with Google Inc.

- Office rents in Mayfair and St. James’s, the London districts with Europe’s biggest concentration of hedge funds, are falling for the first time since 2005 as the alternative investment industry has its worst year in two decades.

- Volkswagen AG, the biggest overseas carmaker in China, expects a ``difficult'' period in the country in 2009 as a slowing economy and rising job concerns damp demand in the world's second-largest auto market.

- Bank of America Corp.(BAC) will pay $7 billion to almost double its stake in China Construction Bank Corp., adding to the purchase of Merrill Lynch & Co. even as it cuts jobs and gets government bailout funds. The biggest U.S. bank by market value will boost the three- year-old holding in China's No. 2 lender to 19.13 percent from 10.8 percent by buying shares from the government.

Wall Street Journal:
- BNP Paribas SA, Deutsche Bank AG and Natixis SA are among lenders that may suffer losses from equity derivatives, citing analysts and market participants. The three European banks collectively posted trading losses of 300 million to 500 million euros in October.

- Mexican billionaire Ricardo Salinas Pliego owns a 13% stake in Circuit City Stores Inc., which is under Chapter 11 bankruptcy protection, citing a regulatory filing. Pliego bought 5.3 million shares at an average price of 22 cents each two days after Circuit City filed for bankruptcy.

- Hedge funds significantly lowered their holdings of stocks in the quarter ended Sept. 30, a cautionary move that didn't fully inoculate them from the sharp market drop in October. Institutions managing more than $100 million, including hedge funds, get 45 days from the end of a quarter to file what is called a 13F form to the Securities and Exchange Commission. Most top hedge funds wait until the last minute - in this case Nov. 14 - to make the filing.

- Atheists Reach Out – Just Don’t Call It Proselytizing. Nonbelievers Think the Time Is Right to Better Organize Their Nonreligion and Swell the Membership; ‘Reason’s Greetings’

MarketWatch.com:
- Bringing work home. Outsourced call-center options offer legitimate work-at-home opportunities. You've heard of off-shoring. What about home-shoring? That's a term some use to describe companies tapping U.S. workers to answer tech-support and customer-service calls -- from home. These at-home workers handle hotel and airline reservations, roadside assistance, tech support and sales calls. Retirees and near-retirees watching their retirement accounts shrink may find these legitimate work-at-home opportunities a way to earn extra cash.

CNBC.com:
- U.S. Treasury Secretary Henry Paulson said on Monday that solid progress has been made in stabilizing the U.S. financial system but it will take considerable time to restore it to health.

CNNMoney.com:
- The Treasury Department said Monday that it has dispersed $33.56 billion to 21 banks in a second round of payments as part of the $700 billion bailout program designed to boost the nation's banking system.

- Gas prices continued to march toward $2 a gallon Monday, falling for the 61st consecutive day.

Forbes.com:

- Chinese search engine Baidu(BIDU) loses a quarter of its value on report that shady medical outfits paid for top positions.

IBD:

- CardioNet(BEAT): Smaller, Longer-Lasting Heart Monitor Gets Medicare Approval.

Reuters:

- Prices for cancer drugs are likely to fall as much as 40 percent over the next few years as competition in the space heats up, according to Bain & Co. partner Tim van Biesen.

- Mark Cuban, owner of the Dallas Mavericks basketball team, was charged with insider trading in the shares of search engine company Mamma.com, the Securities and Exchange Commission said Monday. Cuban, one of the five finalists to buy the Chicago Cubs baseball team, faces civil charges by acting on nonpublic information and selling his entire stake in Mamma.com to avoid more than $750,000 in losses, the SEC alleged. Cuban, listed by Forbes magazine as one of the 400 richest Americans with an estimated net worth of $2.6 billion, said he intends to contest the allegations. On his blog, Cuban said the matter has no merit and is the result of gross abuse of prosecutorial discretion.

- Kansas City Federal Reserve President Thomas Hoenig said on Monday the U.S. central bank has done what it can to buffer the economy through a downturn, and a painful process of readjustment is likely ahead. "The Fed has done about as much as it can do," he said in an interview on PBS's Nightly Business Report.

- California committed to getting a third of its electricity from renewable sources by 2020 in a Monday executive order by Gov. Arnold Schwarzenegger.

Financial Times:
- John Paulson, the hedge fund manager who was called before Congress last week to discuss the big profits he made by foreseeing the collapse of the subprime mortgage market, has started to buy securities backed by residential mortgages. Mr Paulson's move marks the latest example of a famously bearish investor shifting gears to profit from depressed prices in the global credit markets. Mr. Paulson's plans come at a time when other leading investors, including Jeff Aronson at Centerbridge Partners and Bruce Karsh at Oaktree Capital, are wading into the market for discounted leveraged buyout loans.

Xinhua News:

- As mass layoffs and labor disputes become more frequent when global economic slowdown wipes out more companies from business, Chinese government has urged local authorities to make best efforts to properly respond. The top priority should be given to ensuring stable employment, said China's Ministry of Human Resources and Social Security (MOHRSS) in a notice issued on Monday.

Late Buy/Sell Recommendations
Citigroup:

- NPD today reported better than expected US retail PC sell through during October. Combined desktop and notebook unit sell through grew 10% yoy in October, down just slightly from 12% growth YTD through September. The 31% sequential decline in sell through in October was also consistent with the -30% average for the previous ten years(excluding 2001). These results are surprisingly solid, although we note that October is one of the two weakest months of the year for US consumer PC sales.

Night Trading
Asian Indices are -3.50% to -1.25% on average.
S&P 500 futures -.53%.
NASDAQ 100 futures -.47%.

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Earnings of Note
Company/EPS Estimate
- (HD)/.38

- (SKS)/-.03

- (MDT)/.71

- (PSUN)/.00

- (PVH)/1.06

- (JBX)/.43

Economic Releases
8:30 am EST

- The Producer Price Index for October is estimated to fall 1.9% versus a .4% decline in September.

- The PPI Ex Food & Energy for October is estimated to rise .1% versus a .4% gain in September.

9:00 am EST

- Net Long-term TIC Flows for September are estimated to rise to $27.2 billion versus $14.0 billion in August.

1:00 pm EST

- The NAHB Housing Market Index for November is estimated at 14 versus 14 in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, (ALGT) Institutional Investor Day, (FLEX) Investor Meeting, (XIDE) Investor Day, (CF) Investor Day, (HNT) Annual Investor Conference, (SXCI) Analyst Event, (SXL) Analyst Meeting, (PDE) Analyst Day, (OCR) Analyst Day, (ESS) Analyst Day, (BBX) Investor Luncheon, (NFG) Analyst Presentation, (VARI) Investor Luncheon, Bank of America Health Care Conference, Citigroup Transportation Conference, CanaccordAdams Energy Conference, Raymond James IT Supply Chain Conference, Morgan Stanley Retail Conference, CSFB Insurance Conference and Oppenheimer Small-cap Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and real estate stocks in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is rising 1.4% and is very elevated at 67.24. The ISE Sentiment Index is below average at 110.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running above average most of the day, hitting 1.49 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is up 5.0% today to 111.83 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is up 3.6% to 209.0 basis points. The TED spread is rising 2.0% to 215 basis points. The TED spread is now down 249 basis points in about five weeks. The 2-year swap spread is falling 4.4% to 107.75 basis points. The Libor-OIS spread is rising 1.47% to 176 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 2 basis points to .76%, which is down 186 basis points in under five months and at the lowest level since December 1998. Trading is very sloppy today with a lot of conflicting market indicators. The bears are likely disappointed they are unable to gain real traction with another meaningful decline in the (XLF) and weakness in European bourses. However, bulls are likely frustrated by the fact that the major averages are unable to even bounce after steep losses and better action in some Asian indices overnight. It is noteworthy that breadth isn’t too bad and the Russell 20000 is significantly outperforming. Oil continues to trade very poorly, notwithstanding recent potential upside catalysts. Nikkei futures indicate an +48 open in Japan and DAX futures indicate an +73 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, financial sector pessimism and global growth worries.

BETWEEN THE HEDGES

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Tuesday, November 18, 2008

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