BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- BHP Billiton Ltd.(BHP) and Rio Tinto Group(RTP), the world’s largest and third-largest mining companies, had their earnings estimates cut by Merrill Lynch & Co. by as much as 45 percent because of declining metal prices.

- The cost of protecting Australian corporate bonds from default climbed to a record on rising unemployment data from the US and concern banks and insurance companies will face steeper losses. The Markit iTraxx AustraliaSydney, according to Citigroup Inc. The benchmark has jumped more than 75 basis points this year. The Markit iTraxx Japan index jumped 25 basis points to 530 at 10:12 am in Tokyo, Barclays Capital prices show. index of credit-default swaps on the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd., rose 15 basis points to 435 at 10:54 am in

- Lockheed Martin Corp.’s presidential helicopter program is now projected to cost $13 billion, more than twice its original estimate, according to the Pentagon. This latest estimate, prepared for congressional defense committees, is more bad news for a program President Barack Obama last month called “an example of the procurement process gone amok.” The Pentagon, in a 15-page update on the program, blames the increased cost on delays and “unanticipated” work.

- Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt. By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase. Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year to the worst level since the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets. “Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

- Mortgage ‘Cram-Down’ Bankruptcy Bill Approved by US House. The so-called cram-down bill, approved 234-191, lets federal bankruptcy judges lengthen terms, cut interest rates and reduce the balance on mortgages. It also would permanently increase the Federal Deposit Insurance Corp.’s coverage of bank deposits to $250,000. The measure now goes to the U.S. Senate. The bankruptcy provision is opposed by the banking industry and most Republicans, who said it would further destabilize home prices.

- The Dow Jones Industrial Average fell 20% since Inauguration Day, the fastest drop under a new president ever, as investors speculated Barack Obama’s stimulus measures won’t revive the economy anytime soon. “We don’t know what the rules are in so many different areas the government is touching,” said Dan Veru, who helps oversee $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. The S&P 500 is down 41% since Sept. 17^th of last year, which was the day that President Obama pulled ahead of Republican Senator John McCain for good in the presidential tracking polls and two days after the US government let Lehman Brothers fail.

- Cisco Systems Inc.(CSCO), seeking to build new businesses that support network-equipment sales, is looking for acquisitions to expand its media and Web unit. Providers of online advertising and analytics technology are possible targets, Daniel Scheinman, general manager of Cisco Media Solutions, said today in an interview in New York.

- The yen will fall to 102 against the U.S. dollar as risk sentiment improves and a weakening domestic economy prompts investors to buy assets outside Japan, Barclays Capital said. The currency has lost 8.8 percent since strengthening to 87.12 per dollar on Jan. 21, the highest since 1995, as investors sold higher-yielding assets to repay low-cost borrowings in Japan. The yen will weaken 4 percent against the greenback over the next three months, Barclays Capital said, revising last month’s forecast for it to strengthen to 86.

- The idea that China can grow strongly as the world unravels is a fantasy. Ditto for the view that China is going to save the global economy. China is already slowing, of course. The third-biggest economy grew 6.8 percent in the last quarter of 2008. Such growth sounds like heaven just about everywhere else. Yet for an economy at China’s level of development, one that zoomed along at a 13 percent pace in 2007, it’s hell. Premier Wen Jiabao was wrong to err on the side of caution yesterday when he delivered the Chinese equivalent of the U.S. State of the Union address. He said the country’s 8 percent growth target is within reach, indicating an additional stimulus package isn’t needed. It’s a bad call, and Wen is likely to regret it as 2009 unfolds. Here are five reasons a Chinese rebound in 2009 may not pan out:

- Earnings estimates for Asian stocks outside Japan have the most room to fall globally, even after analysts lowered their estimates for a third of all companies covered last month, JPMorgan Chase said. Profit forecasts in the region will need to decline by 24% before reaching the so-called bottom trend line in previous cycles, JPMorgan’s quantitative analysts led by Robert Smith wrote. Europe and global emerging markets are the only other regions where downgrades haven’t reached the lower limit, the report said.

Wall Street Journal:

- Obama’s Radicalism Is Killing the Dow. It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis. The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown. Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

- Vice President Joe Biden embraced union leaders and their legislative agenda Thursday at the AFL-CIO's winter meeting, underscoring a relationship with organized labor that is the closest of any administration's in several decades. In a free-flowing address that lasted roughly an hour, Mr. Biden strongly endorsed a bill that would ease union organizing that labor and the business community are battling over, linking the legislation to the need to reframe a "social contract" between workers and employers. Mr. Biden argued that since the 1970s employers had taken a harsher stance toward unions. As a result, he said, unions had gotten weaker and workers' pay had failed to rise in tandem with productivity gains, which in turn has contributed to the economic crisis the country now faces. "One of the most difficult things will be to reinstitute that basic bargain," Mr. Biden said. "I think the way to do that is the Employee Free Choice Act."

- Goldman Sachs(GS) standout media banker Joseph Ravitch is retiring from the firm, according to people familiar with the matter. The departure is a blow to Goldman’s media group, which has grown into a ubiquitous player in the world of media, telecommunications and sports deals.

- Top General Motors Corp.(GM) executives are more open to a speedy bankruptcy reorganization financed by the government, pushing aside earlier concern that such a move would scare away so many customers the company wouldn't survive, said a person familiar with the matter. While the company still wants to avoid bankruptcy, the new view represents a reversal from GM's position late last year, when it sought a federal bailout. The change in thinking, combined with the disclosure Thursday that GM's auditor has raised "substantial doubt" about the car maker's ability to keep going, appears to move GM closer to the possibility it will file for reorganization.

- When hedge funds were riding high, investors lined up to get in and swallowed steep fees. Now a small public pension fund in Utah is seizing on last year's disappointing returns to try to change all that. Larry Powell, deputy chief investment officer for the $16 billion Utah Retirement System, is trying to galvanize other institutional investors to exert more pressure on hedge funds to get a better deal. Among the changes he has outlined: Performance fees should be spread over two or three years. Management and performance fees should come down as investors increase their allocation to the fund.

CNBC.com:
- Despite the recession and almost daily layoff announcements from major companies, many employers across the country are actually hiring.

CNNMoney.com:
- Dr. Sanjay Gupta, CNN's chief medical correspondent, has withdrawn his name from consideration as surgeon general of the United States, an administration official said Thursday. "Sanjay Gupta was under serious consideration for the job of surgeon general," the official said in an e-mail. "He has removed himself from consideration to focus more on his medical career and his family. We know he will continue to serve and educate the public through his work with media and in the medical arena."

Reuters:

- A senior Democratic lawmaker said on Thursday he would push to pass legislation to repeal a three-year-old U.S. ban on Internet gambling that has hurt trade ties with European Union. "I'm going to be pushing it," House of Representatives Financial Services Committee Chairman Barney Frank told reporters at a press conference to lay out his agenda for reforming U.S. financial regulation.

- U.S. Democrats on Thursday moved to reverse a U.S. Supreme Court decision that limited the ability of patients to sue medical devices manufacturers over harm from their products. The device industry group Advanced Medical Technology Association (AdvaMed) attacked the measure, saying the FDA should determine if a product was too risky rather than state courts. "This bill does not in any way improve patient safety," AdvaMed President Stephen Ubl said in a statement. "It will, however, restrict patient access to essential medical technologies, produce a chilling effect on medical innovation, create more lawsuits and ultimately result in higher health-care costs for all Americans," Ubl said.

- South Korea told the North on Friday to immediately withdraw a threat it made against the South's commercial airliners, which has forced them to stop flying near the airspace of the communist neighbor. North Korea, which is preparing to test its longest-range missile, said on Thursday it could not guarantee the safety of the South's commercial flights off the east coast of the peninsula where the missile base is located.

TimesOnline:

- Are life insurance companies the new banks? They seem to think so. Aviva, the largest British insurer, was blaming bear raids by short-sellers yesterday for the astonishing 33 per cent plunge in its share price. Investors seem inclined to agree, for other reasons, predicting that some of the big household name insurers, including Aviva, Legal & General and Prudential, will have to raise bucketloads of money from their shareholders. They brush aside the assurances from executives that big investment losses are not on the cards and rights issues not in the plans. The market continues to predict the worst is yet to come. Some of the big guns of the hedge fund world, including Odey Asset Management and Lansdowne Partners, are known to have targeted insurance companies as likely to be at the centre of the next credit markets blow-up. Having had good sport with the banks, they smell new blood.

21^st Century Business Herald:

- China’s exports may have fallen 20% in February from a year earlier, citing a trade official. Imports may have also fallen 20% in January, it said. China’s trade surplus for February may be $7 billion.

Late Buy/Sell Recommendations

- None of note

Night Trading
Asian Indices are -1.50% to -.25% on average.
S&P 500 futures -.25%.
NASDAQ 100 futures -.23%.

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Earnings of Note
Company/EPS Estimate
- (ANN)/-.55

- (HRB)/.10

Economic Releases

8:30 am EST

- The Change in Non-farm Payrolls for February is estimated at -650K versus -598K in January.

- The Unemployment Rate for February is estimated at 7.9% versus 7.6% in January.

- Average Hourly Earnings for February are estimated to rise .2% versus a .3% gain in January.

3:00 pm EST:

- Consumer Credit for January is estimated at -$5.0B versus -$6.6B in December.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Dudley speaking, Fed’s Plosser speaking, (FWLT) investors meeting and the (PNY) shareholders meeting could also impact trading today.

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

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Retail longs and Biotech longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short and exited by (GME) long this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 6.0% and is elevated at 50.39. The ISE Sentiment Index is below average at 107.0 and the total put/call is above average at 1.00. Finally, the NYSE Arms has been running low most of the day, hitting .49 at its intraday trough, and is currently .63. The Euro Financial Sector Credit Default Swap Index is soaring 17.25% today to 187.33 basis points. This index is making a new record high at 187.33. The North American Investment Grade Credit Default Swap Index is rising 3.44% to 251.35 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising 5.14% to 108 basis points. The TED spread is now down 355 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.18% to 74.75 basis points. The Libor-OIS spread is rising .79% to 104.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 7 basis points to .88%, which is down 176 basis points since July 7th. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .20%, which is down 5 basis points today. Many gauges of investor angst still remain stubbornly low given the carnage that is taking place. The 10-year TIPS spread is rolling over again. I suspect another meaningful surge higher in long-term US govt. treasuries is underway given how bearish the crowd is on these securities. Barney Frank reiterated again today that Congress shouldn’t do away with the market-to-market rule. Asia will likely come under significant pressure tonight. On the positive side, the AAII % Bulls fell to 18.92% and the % Bears jumped to 70.27% this week. The % Bears is now at a new record high, eclipsing the 67.1% seen the week of Oct. 18^th 1990. Some market leading stocks are holding up relatively well today. Nikkei futures indicate a -260 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, more shorting, rising financial sector pessimism and tax hike worries.

BETWEEN THE HEDGES

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Friday, March 06, 2009

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Thursday, March 05, 2009

Friday Watch

Stocks Finish at Session Lows, Weighed Down by Financial, Airline, REIT, HMO and Commodity Shares

Stocks Sharply Lower into Final Hour on Rising Financial Sector Worries, Increasing Economic Pessimism, Surging Credit Market Angst, More Shorting