BETWEEN THE HEDGES

Late-Night Headlines
Bloomberg:

- The Senate Finance Committee is discussing whether to apply Medicare taxes to capital gains and other non-wage income to help pay for an overhaul of the U.S. health-care system, two people familiar with the talks said. The move would potentially raise hundreds of billions of dollars in revenue over the next decade by boosting taxes by 1.45 percentage points on income from dividends, interest, partnerships and rentals, the people said. Dividends and long- term capital gains are now taxed at 15 percent. The proposal, modeled after a plan released this week by Citizens for Tax Justice, would force people living off investments to contribute taxes to the health-care system, said Steve Wamhoff, legislative director for the Washington research group. It was raised yesterday in a closed-door meeting of Finance Committee Democrats, according to people in the room. Senate and House lawmakers are struggling to find ways to finance the $1 trillion health-care overhaul, President Barack Obama’s top domestic priority. Meanwhile, a group of self-proclaimed fiscally conservative Democrats known as the “Blue Dogs” raised “strong reservations” about a draft of legislation being considered in the House of Representatives, saying it doesn’t reduce costs enough within the system. “We cannot simply ‘add’ new consumers to a broken system,” 40 members of the group wrote in a letter to House Speaker Nancy Pelosi of California and Majority Leader Steny Hoyer of Maryland. The Blue Dogs also urged caution in setting new requirements for small-business owners to participate in the system. They said hospitals and doctors should be paid market rates in any government-sponsored system; reforms must benefit rural areas; and Republican support should be sought.

- Federal Reserve Bank of St. Louis President James Bullard said he doesn’t expect a U.S. economic recovery to falter or central bankers to make errors in their policy on inflation. “We are going to have just the right policy to get the right inflation rate,” Bullard said today in a Bloomberg Television interview. “I do not buy into the stories about the Fed making a mistake one way or the other going forward.”

- The size of the Federal Reserve’s balance sheet shrank for a third straight week, falling below $2 trillion for the first time since March, as lending to banks in the U.S. and abroad declined.

- Shaw Group Inc.(SGR), the Baton Rouge, Louisiana-based builder of power plants, said 2009 profit will be lower than projected after third-quarter profit fell 85 percent. Shaw fell $1.47, or 5.6 percent, to $24.69 at 6:06 p.m. in electronic trading after the close of the New York Stock Exchange.

- North Korea’s pursuit of ballistic missile technology and weapons of mass destruction poses a “significant threat” that could spur a “limited” Asian arms race, the nominee for top U.S. Pacific commander said. North Korea’s neighbors might “seek to enhance their own deterrent and defense capabilities” to counter its moves, Admiral Robert Willard told the Senate Armed Services Committee today at his nomination hearing.

- Roland Burris, who was appointed to President Barack Obama’s U.S. Senate seat by Governor Rod Blagojevich before he was forced out of office under indictment, will announce tomorrow that he won’t run for election in November, a Democratic official said.

- Google Inc.(GOOG) Chief Executive Officer Eric Schmidt said Microsoft Corp.’s new Bing Internet search engine may lure more Web surfers in the future. While Google isn’t losing many users to Bing, Microsoft’s product shows that the search market is competitive, Schmidt said today at the annual Allen & Co. media conference in Sun Valley, Idaho.

- For Warren Buffett, freight-train traffic has the kind of importance that Alan Greenspan attached to scrap-steel prices as Federal Reserve chairman – and it isn’t going his way. Freight carload shipments at six of the largest US railroads tumbled 19.2% through last week from a year earlier, the Assoc. of American Railroads reported yesterday. Buffett follows this gauge more closely than any other index, Bianna Golodryga, a reporter for ABC’s “Good Morning America” program, said yesterday after she interviewed the billionaire investor. Its drop worries him, she reported.

- Emerging-market equity funds posted outflows for the second time in three weeks on growing doubts the global economy will recover soon, EPFR Global said. Investors withdrew $365 million from funds investing in Asia excluding Japan in the week ended July 8, the research firm said in a statement yesterday. They pulled $307 million from Latin America stock funds. “Fresh doubts about U.S. appetite for emerging markets exports and global demand for raw materials prompted investors to pull some money off the table in early July,” EPFR said in the statement. Benchmark indexes in Russia and India are among those that have entered a so-called correction after slumping more than 10 percent from their highs this year. China equity funds also lost $424 million in the week ended July 8, while Brazil outflows totaled $244 million, the research company also said.

Wall Street Journal:

- Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter. The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase & Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants. The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price. The disagreement between banks and the Treasury indicates that the banking sector, despite being pilloried for its role in the financial crisis, is becoming increasingly confident in its dealings with Washington. Some banks have begun pushing back against some government initiatives, a move fraught with political risk. It also is an indication of how tricky it is going to be for the government to extricate itself from its unprecedented investment in the financial sector.

- Even a long-term Treasury bear like bond-fund giant Pacific Investment Management Co. can make money buying U.S. government bonds if it gets its timing right. Steve Rodosky, head of Treasury and derivatives trading at Newport Beach, Calif.-based Pimco, said he bought Treasurys when the 10-year note's yield rose toward 4% in late May and early June as he believed the market had become too optimistic about the economic outlook.

- The Environmental Protection Agency plans to propose rules early next year to control power-plant emissions, a step that would give the industry certainty after an appeals court threw out similar rules last July.

- Exxon Mobil Corp.(XOM) said drilling results from its first wells in Canada's Horn River Basin shale-gas field indicate that it is likely to be a very big and productive source of natural gas.

- Most economists believe the U.S. doesn't need another round of stimulus now despite expectations of continued severe job losses.

- Television networks and other media companies are rushing to try to quash a plan to tax advertisements for prescription drugs as House lawmakers finalize health-care overhaul legislation. The four major broadcast networks - Walt Disney Co.'s (DIS) ABC, CBS Corp. (CBS), News Corp.'s (NWSA) Fox and General Electric Co.'s (GE) NBC Universal -- told House Ways and Means Chairman Charles Rangel, D-N.Y., in a Thursday letter that the plan would cost New York jobs and urged him to abandon it. "Across the U.S., advertising supports more than 21 million jobs. The current economic recession requires that we do everything we can to generate more sales and more jobs - not adopt policies that would reduce them," the networks wrote. News Corp. also owns Dow Jones & Co., publisher of this newswire.

- At least 42 nonfinancial companies and trade associations are lobbying Congress on derivatives, according to a Wall Street Journal analysis of lobbying disclosure forms filed through April.

- In February, President Barack Obama signed a $787 billion stimulus bill while making lavish promises about the results. He pledged that "a new wave of innovation, activity and construction will be unleashed all across America." He also said the stimulus would "save or create up to four million jobs." Vice President Joe Biden said the massive federal spending plan would "drop-kick" the economy out of the recession. But the unemployment rate today is 9.5% -- nearly 20% higher than the Obama White House said it would be with the stimulus in place. Keith Hennessey, who worked at the Bush White House on economic policy, has noted that unemployment is now higher than the administration said it would be if nothing was done to revive the economy. There are 2.6 million fewer Americans working than Mr. Obama promised.

CNBC.com:
- Warren Buffett tells CNBC that consumer sales by Berkshire Hathaway companies have remained "very, very soft" in recent weeks. In a taped interview with our Julia Boorstin today (Thursday) at Herb Allen's Sun Valley media conference, Buffett says he'll know when things pick up because he gets constant "contemporaneous" updates on sales from his companies.

- Software Giants Rush to Cash In on Carbon-Trading.

Business Week:
- Is there a federal bailout coming for U.S. airlines? For a long time, I’ve thought this idea was beyond far-fetched, with about as much basis in reality as Uncle Sam extending funds to the equally plagued news media.

Politico:

- Senate Finance Committee Chairman Max Baucus (D-Mont.) presented his members Thursday with more than a dozen ways to pay for health care legislation, ranging from new fees on industry to an income-tax hike on couples making more than $1 million a year. Faced with a $320 billion hole in his reform plan, Baucus revisited options that were considered in the past, but never emerged as top-tier options because he believed taxing employer-provided health benefits was the best way to provide that revenue.

Rasmussen:

- Voters now trust Republicans more than Democrats on eight out of 10 key electoral issues, including, for the second straight month, the top issue of the economy. They've also narrowed the gap on the remaining two issues, the traditionally Democratic strong suits of health care and education. The latest Rasmussen Reports national telephone survey finds that voters trust the GOP more on economic issues 46% to 41%, showing little change from the six-point lead the party held last month. Voters not affiliated with either party trust Republicans more to handle the economy by a 46% to 32% margin. Last week’s report of 9.5 percent unemployment, the highest since 1983, raised doubts about the economy and the president's handling of it. Consumer and investor confidence is now down to the lowest levels in three months. Just 39% now say President Obama is doing a good or an excellent job on the economy while 43% rate his performance as poor. Those are by far the weakest numbers yet for the president. The president's approval ratings also have fallen to new lows in the Rasmussen Reports daily Presidential Tracking Poll.

Washington Post:

- American International Group is preparing to pay millions of dollars more in bonuses to several dozen top corporate executives after an earlier round of payments four months ago set off a national furor. The troubled insurance giant has been pressing the federal government to bless the payments in hopes of shielding itself from renewed public outrage. The request puts the administration's new compensation czar on the spot by seeking his opinion about bonuses that were promised long before he took his post. AIG doesn't actually need the permission of Kenneth R. Feinberg, who President Obama appointed last month to oversee the compensation of top executives at seven firms that have received large federal bailouts. But officials at AIG, whose federal rescue package stands at $180 billion, have been reluctant to move forward without political cover from the government. The payments coming due next week include $2.4 million in bonuses for about 40 high-ranking executives at AIG, according to administration documents from earlier this year. No development in the government's bailout of financial firms has angered lawmakers and ordinary Americans more than the disclosure in mid-March that the global insurer was paying more than $165 million in retention bonuses. They were aimed at retaining 400 employees at AIG Financial Products, the troubled unit whose complex derivative contracts nearly wrecked the global insurance giant. Separately this week, a Citigroup analyst warned that AIG might be worthless to shareholders if or when it ever pays back the billions it owes the U.S. government. "Our valuation includes a 70 percent chance that the equity at AIG is zero," Joshua Shanker of Citigroup wrote in a note to investors. He cites the continuing risks posed by the company's exotic derivative contracts, called credit-default swaps, and its sale of assets at low prices.

The Business Insider:

- Merrill Lynch, frightened by the unending flood of people out of its doors, is planning on setting 2009 compensation levels back up to 2007 levels, according to a person familiar with the matter. Executives at the investment bank have been in talks with senior people at Bank of America, warning that the entire franchise could fall apart if compensation levels don't match those offered by, say, Citigroup. Last week, Citigroup revealed it would be paying 2007 compensation by raising salaries to make up for lower bonuses.

USA Today.com:

- Owners of shopping malls, hotels and offices are defaulting on their loans at an alarming rate, and the commercial real estate market is not expected to hit bottom for three more years, industry experts warned Thursday. "The commercial real estate time bomb is ticking," said Rep. Carolyn Mallory, D-N.Y., who heads the congressional Joint Economic Committee. Delinquency rates on commercial loans have doubled in the past year to 7% as more companies downsize and retailers close their doors, according to the Federal Reserve. Small and regional banks face the greatest risk of severe losses from commercial real estate loans. The commercial real estate market's fortunes are tied closely to the economy, especially unemployment, which hit 9.5% in June. As people lose their jobs, or have their hours reduced, they cut back on spending, which hurts retailers, and take fewer trips, which hits hotels.

MercuryNews.com:

- Scientists have detected an increase in mysterious underground tremors along a stretch of the San Andreas Fault, signaling stress that could boost the likelihood of a major earthquake. Seismic tools buried in deep holes near the town of Parkfield, 175 miles south of San Jose, have found that the number of tremors along the fault has increased up to 80 percent over four years, according to University of California-Berkeley seismologist Robert Nadeau and graduate student Aurélie Guilhem.

Reuters:

- Yang Rong, a Chinese automobile tycoon who fled the country after being accused of economic crimes, is preparing to launch an ambitious plan to make clean-tech cars in the United States, said a source. The former chairman of Brilliance China Automotive Holdings Ltd, ranked by Forbes as China's third-richest man in 2001, will announce a plan later this month to set up a company in the southern U.S. state of Alabama, said the source with direct knowledge of the plan.

- Chevron Corp (CVX) warned that second-quarter earnings would be hit by a sharp decline in U.S. refining margins and that any benefits from higher oil prices were largely offset by a weaker dollar, sending its shares down 1.8 percent. The outlook from the second-largest U.S. oil company only contributed to the gloom surrounding the country's refiners in the face of toughening regulation and a depressed fuel market.

- The Federal Reserve on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy. Fed Vice Chairman Donald Kohn said opening up some of the U.S. central bank's most sensitive decisions to political scrutiny could result in higher long-term interest rates and hurt the United States' credit rating.

- Chicago-based Citadel, founded by 40-year-old billionaire Kenneth Griffin, said in a lawsuit filed on Thursday that Mikhail Malyshev, 40, and two other former employees had violated their non-compete clauses by starting their own firm, Teza Technologies LLC. The lawsuit was filed in the circuit court of Cook County, Illinois.

- U.S. M-2 money supply fell by $36.2 billion in the June 29 week to $8,349.2 billion, the Federal Reserve said on Thursday. The Fed said the four-week moving average of M-2 was $8,372.5 billion vs. $8,376.5 billion in the previous week.

- A U.S. Senate panel on Thursday approved a $46.4 billion bill to fund the Treasury Department and pressed the agency to obtain more details about how recipients of the government's $700 billion financial bailout are using the funds. The Senate Appropriations Committee approved the spending bill for 2010 as the Treasury Department, along with the Federal Reserve, have been trying to rescue ailing lenders struggling under the weight of the financial crisis. The Troubled Asset Relief Program (TARP) has come under blistering criticism about the lack of transparency and for being used to pour billions of dollars into troubled lenders rather than helping individuals facing home foreclosures. Scores of major U.S. banks received money from the program amid a global credit freeze, but many declined to detail how they used the funds, drawing criticism from lawmakers who were concerned that they were not using it to thaw the credit markets.

- A crack in the fragile coalition crafting a U.S. healthcare reform bill emerged on Thursday when fiscally conservative Democrats balked at the cost and direction of the House of Representatives' plan. Lawmakers in Congress, controlled by Democrats, are working on draft proposals to revamp the bureaucratic U.S. healthcare system at a cost of about $1 trillion over a decade. Healthcare reform is a key part of the Obama administration's agenda. But in a letter to Democratic House Speaker Nancy Pelosi and Senate Republican Leader Mitch McConnell, about 50 House Democrats said the House should "pare back some of the cost-drivers to produce a bill that we can afford." The so-called Democratic Blue Dog Coalition, an influential faction within the majority party, also said they had "strong reservations about the process and direction" of the proposed legislation.

Financial Times:

- John Meriwether’s decision to shutter his flagship Relative Value Opportunity II hedge fund, even as many other groups with a similar approach are flourishing, underscores how conditions in the hedge fund world have changed. Mr Meriwether’s approach for his latest fund was a relative value strategy that sought to identify small price discrepancies across a range of securities, whether currencies or fixed income, for the leading economies and to take positions on the expectation that those anomalies would disappear. But because the price moves can be so slight, the strategy relies on much borrowed money to produce adequate profits at the best of times. Mr Meriwether, and other hedge fund managers, found that the desks of the Wall Street firms that financed them were no longer willing to do so, forcing them to sell securities in a market where demand vanished. “To try to take advantage of relative mispricings turned out to be a crappy business,” said one consultant, a former colleague of Mr Meriwether’s. “Whenever liquidity becomes an issue, you are exposed.” “The funds that have done well are those that have actually stopped doing traditional relative value trades and put on directional trades instead,” said a managing director at a firm investing in a variety of hedge funds on behalf of institutions and wealthy families in New York. “Traditional relative value is dead.”

CTV.ca:
- The fur is really starting to fly, now that the first pet-only airline in the U.S. is taking to the skies. Pet Airways, which will fly from airports in five American cities starting next week -- with plans to expand into Canada next year -- is focused entirely on pet "pawsengers." In fact, human passengers aren't even allowed on the planes, said CTV's travel expert Loren Christie. "It's actually an airline only for pets," Christie told CTV's Canada AM.

Late Buy/Sell Recommendations

- None of Note

Night Trading
Asian Indices are -.75% to +.25% on average.

Asia Ex-Japan Inv Grade CDS Index -.86%.
S&P 500 futures -.32%.
NASDAQ 100 futures -.30%.

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Earnings of Note
Company/EPS Estimate
- (PSMT)/.33

- (PGR)/.36

Economic Releases

8:30 am EST

- The Trade Deficit for May is estimated to widen to -$30.0B versus -$29.2B in April.

- The Import Price Index for June is estimated to rise 2.0% versus a 1.3% increase in May.

10:00 am EST

- The Preliminary Univ. of Mich. Consumer Confidence reading for July is estimated to fall to 70.0 versus 70.8 in June.

Upcoming Splits
- None of note

Other Potential Market Movers
- The (MRVL) shareholders meeting could also impact trading today.

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

BETWEEN THE HEDGES

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Friday, July 10, 2009

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Thursday, July 09, 2009

Friday Watch

Stocks Finish Slightly Higher, Boosted by Construction, Homebuilding, Semi, Gaming, Bank and Oil Service Shares