BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Financial longs. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling -7.03% and is above-average at 22.89. The ISE Sentiment Index is near average at 138.0 and the total put/call is below average at .76. Finally, the NYSE Arms has been running below average most of the day, hitting .79 at its intraday peak, and is currently .79. The Euro Financial Sector Credit Default Swap Index is rising +3.21% to 84.17 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising +.36% to 95.12 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is down -2 basis points to 16 basis points. The TED spread is now down 447 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is rising +5.30% to 28.16 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +5 basis points to 2.38%, which is down -27 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .08%, which is +2 basis points today. Small-caps are underperforming again today. Market leading stocks are also underperforming. Retail shares are flat on the day. CDS indices are mostly higher today, which is also a negative. On the positive side, Coal, Energy, Oil Service, Gold, Steel and Disk Drive shares are substantially outperforming, rising 3%+. The Citi US Economic Surprise Index is rising to 26.2 today, the best level since Dec. 14^th. Overall, today’s rebound is mediocre in quality. The hardest-hit commodity-oriented stocks are seeing the largest up moves today on only average volume, which is usually indicative of short-covering rather than vanilla buying. Moreover, I’m surprised that rumors of the likely demise of the “Volcker Rule” aren’t having a more positive impact on (XLF). Asia traded poorly again last night. While the market is oversold short-term, a test of recent lows is likely over the coming days. Nikkei futures indicate an +115 open in Japan and DAX futures indicate a -12 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, euro sovereign debt fears, china bubble worries and US political concerns.

Bloomberg:

- Euro Proving No Reserve Asset as Central Banks Shift. Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world’s reserve currency. Last year, policy makers loaded up on euros, while analysts at Barclays Plc in London and Aletti Gestielle SGR SpA in Milan predicted central bankers would make good on threats to reduce the greenback’s dominance. Now the euro is down 8.1 percent since Nov. 25 in its fastest slide in 10 months amid concern that cash-strapped countries like Greece won’t pay their debts. Billionaire investor George Soros said Jan. 28 that there’s “no attractive alternative” to the dollar. Traders have spurned European stocks in favor of shares elsewhere for a record 19 straight weeks, “clearly hurting” the currency by draining a net $13 billion from the market, said Geoffrey Yu, a UBS AG analyst. “The euro can fall further,” said Neil Mackinnon, a former U.K. Treasury official who is a London-based economist at VTB Capital Plc, the investment-banking unit of Russia’s second- biggest lender. “Sovereign-debt risk will continue to be a key theme,” he said. “The stresses created by the fiscal situation in Greece won’t go away quickly.”

- The Baltic Dry Index, a measure of shipping costs for commodities, retreated for a fifth session, led by a decline in larger iron-ore carriers. The index tracking transport costs on international trade routes fell 103 points, or 3.6%, to 2,745 points today, according to the Baltic Exchange. Rents for capsizes, the biggest tracked by the gauge, fell 6.4% to $30,123 a day. Rates were at $40,856 a week ago. “Steadily declining Chinese steel prices have been the primary driver, allowing charterers to drive down freight costs to China,” Omar Nokta, head of research at Dahlman Rose & Co. in New York, said in a report. “Given the direction of steel, we believe the freight market is unlikely to break out.” China is the world’s biggest consumer of iron ore. More of the steelmaking raw material is hauled at sea than any other dry-bulk commodity, accounting for one-third of ton-mile demand last year, estimates from Drewry Shipping Consultants Ltd. in London show.

- Manufacturing expanded in January at the fastest pace since August 2004, indicating production gains that are spearheading the U.S. recovery may soon encourage companies to hire. The Institute for Supply Management’s factory index rose to 58.4, exceeding the highest estimate in a Bloomberg News survey of economists, from December’s 54.9, figures from the Tempe, Arizona-based group showed.

- The Obama administration proposed to increase taxes on Americans earning more than $200,000 by close to $970 billion over the next decade and take in an additional $400 billion from businesses even as it retooled a proposed crackdown on international tax-avoidance techniques. The new budget released today would reinstate 10-year-old income tax rates of 36 percent and 39.6 percent for single Americans earning more than $200,000 and joint filers who make more than $250,000 as part of a broad $1.9 trillion tax increase proposal. It proposes to eliminate preferences for oil and gas companies, life-insurance products, executives of investment partnerships, and U.S.-based companies that operate overseas.

- An estimated record $83 billion in Treasury note and bond sales next week will approach the peak at which the government will begin to reduce the size of its auctions, according to Wrightson ICAP. “We think Treasury note and bond offerings are close to a turning point,” analysts at Wrightson, a research unit of ICAP Plc, the world’s largest inter-dealer broker, wrote in a research note today. “There is a chance that the Treasury will announce one last round of increases in its 10- and 30-year issues this month, but the rest of its nominal offerings have probably already reached their peaks.”

- Hedge-fund managers and other large speculators cut their combined net-long position across 20 U.S. commodity futures to the lowest since October amid a three-week decline in prices. The speculators’ combined net-long position fell 13% in the week ended Jan. 26, extending the previous week’s 10% decline, the data show. Money has flowed out of funds investing in commodities for four weeks, totaling $676 million, according to Chicago-based researcher EPFR Global.

- MetLife Inc.(MET), the largest U.S. life insurer, was downgraded by Fitch Ratings on the prospect of losses tied to investments including commercial real estate holdings. The issuer default rating was lowered to A from A+ on “concerns regarding the fragile nature of the economic recovery and continued deterioration in the commercial real estate market,” the ratings firm said today in a statement on the New York-based insurer.

- Exxon Mobil Corp.(XOM), the largest U.S. company, posted a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline. Net income fell 23 percent to $6.05 billion, or $1.27 a share, from $7.82 billion, or $1.54, a year earlier, Irving, Texas-based Exxon said today in a statement. Per-share profit was 8 cents higher than the average of 16 analyst estimates compiled by Bloomberg. Oil and natural-gas production climbed 1.6 percent to the equivalent of 4.18 million barrels of crude a day, helping Exxon take advantage of the biggest yearly gain in oil prices since 1999.

- Amazon.com Inc.(AMZN) removed print and electronic versions of books from Macmillan after a dispute over pricing of titles for the Kindle digital reader, the publisher said.

- CME Group Inc.(CME), the world’s largest futures market, is in talks to buy the News Corp. stock-index business that owns the Dow Jones Industrial Average for as much as $700 million, two people familiar with the matter said. A deal may be announced as early as tomorrow, said one of the people, who asked not to be identified because the talks are private.

- The Commodity Futures Trading Commission would receive a boost of as much as 55 percent in funding under President Barack Obama’s budget proposal for the next fiscal year as the U.S. strengthens financial-industry regulations. The CFTC, which oversees $5 trillion in daily trading on futures such as oil and currencies, would get an increase of as much as $93 million, to $261 million, for the year starting Oct. 1, the Obama administration said in its fiscal 2011 budget proposal today.

- President Barack Obama’s budget would boost U.S. Securities and Exchange Commission funding 11 percent to $1.23 billion to help the agency improve technology and hire staff with expertise in financial products.

- Hong Kong faces the threat of bubbles forming in its asset markets as low interest rates and high liquidity drive up prices, the Hong Kong Monetary Authority said. The “potential risk” is “huge,” the Chief Executive Norman Chan told lawmakers today. The city also faces potential instability from future “capital reversal,” once governments begin raising borrowing costs and funds flow elsewhere, he said. China’s “real worry” is asset bubbles as capital flows into an economy awash with money and the nation emerges from the crisis into a “boom time,” central bank adviser Fan Gang told a forum in Beijing today. Excess liquidity is a “problem” as low interest rates and slower growth in the U.S. and Europe encourage money to flow into China, Fan said.

Wall Street Journal:

- Are Greek Bonds the New Subprime? Greek officials have blamed “market speculation” for the plummeting price of Greek bonds in recent days. That — along with mounting investor concern — may well be true. But it’s not the whole story. Many investors, especially banks, which are big buyers of government debt, are not betting on Greece’s financial prospects so much as trimming their bond holdings and defending the value of what’s left, observers say. These banks have realized that their Greek and other European government bond holdings are much riskier than they previously assumed. To cover themselves, they’re either selling bonds outright or scrambling to buy credit-default swaps, a kind of insurance, driving the price of such insurance higher.

CNBC:

- Make no mistake—the carbon cops are coming and the SEC is simply pointing out how to stay one step ahead of them.

The Business Insider:

- Morgan Stanley(MS): Asian Economic Momentum Has Stalled, Markets Soon To Follow. Why are Asian markets suddenly looking a bit wobbly? Morgan Stanley macro strategy analyst Rashique Rahman discusses some of what's going on. The bottom line: the big economic we comeback is slowing down:

- Last Friday's lights-out GDP report has revived hopes among bulls that we still might get the V-shaped recovery everyone was predicting last summer. After a string of disappointing jobs and housing numbers in the fall, it seemed the chance of that had been fading. But Goldman Sachs(GS) economist Jan Hatzius has a grim message: It's not happening.

- Global intelligence firm Stratfor has a video analysis explaining the risks of a Chinese economic slow-down: "Both investors and countries whose economies are dependent on China start February increasingly worried about the direction of the Chinese economy. Monetary tightening and allocations of resources mean that present growth expectations are unsustainable," says Stratfor. Major points of the report:

The Orange County Register:

- Meg Whitman: California’s flawed welfare system.

Rassmussen:

- The Obama administration is moving a planned terrorist trial out of New York City because of growing public opposition, and 44% of U.S. voters say the trials of all suspected terrorists linked to 9/11 should be held at Guantanamo Bay. A new Rasmussen Reports national telephone survey finds that 33% oppose holding those trials at the naval base in Cuba where many suspected terrorists have been imprisoned for the past several years.

Politico:

- Twelve Democratic Senators spent last weekend in Miami Beach raising money from top lobbyists for oil, drug, and other corporate interests that they often decry, according to a guest list for the event obtained by POLITICO. The guest list for the Democratic Senatorial Campaign Committee's "winter retreat" at the Ritz Carlton South Beach Resort doesn't include the price tag for attendance, but the maximum contribution to the committee, typical for such events, is $30,000. There, to participate in "informal conversations" and other meetings Saturday, were senators including DSCC Chairman Robert Menendez; Michigan's Carl Levin and Debbie Stabenow; Bob Casey of Pennsylvania; Claire McCaskill of Missouri; freshmen Kay Hagan of North Carolina and Mark Begich of Alaska; and even left-leaning Bernie Sanders of Vermont.

- The U.S. attorney general recently announced that the Justice Department is beefing up its efforts to fight financial fraud such as Ponzi schemes. Good. The agency should start by reviewing the spending habits of the federal government, which is running the largest Ponzi scheme our country has ever seen. In a Ponzi scheme, organizers create the illusion of profit for early investors by siphoning money from later participants. It works until there is not enough income to pay the promised dividends, exposing the fraud and leaving everyone broke. That is essentially what the federal government is doing, as it continues to spend and promise far more than can ever be paid for by current and future revenues. Last week, the U.S. Senate increased the nation’s debt ceiling by an additional $1.9 trillion. That vote was necessary to further the Ponzi scheme. It should serve as a wake-up call that this level of spending is unsustainable. The debate is no longer between competing political philosophies — it is a matter of basic mathematics. Here is a sampling of the facts:

- Democrats from the president on down say jobs are their No. 1 priority, and Senate Majority Leader Harry Reid expects to announce details of a bill this week. But a squabble among Senate Democrats is complicating early efforts to bring a bill to the floor.

Fox Business:

- Crude oil production from Iraq's giant Rumaila oil field in southern Iraq is expected to increase by 110,000 barrels a day either in July or August, a senior Iraqi oil official said Monday. Rumaila, Iraq's largest producing oil field, is currently producing an average of 1.066 million barrels a day, Abdul Mahdy al-Ameedi, head of the oil ministry's petroleum contracts and licensing directorate, told Dow Jones Newswires.

zerohedge:

- Before I get started, I want all to realize that this is not Goldman(GS) bashing piece. I think it is a [relatively] well run company, but its PR machine appears to be from Kindergarten land, and the aura of invincibility that it enjoys(ed?) is highly undeserved, as a consequence its historical "aura-based" premium is absolutely unjustified. Case in point...On December 8th of last year, I penned "Reggie Middleton vs Goldman Sachs, Round 1" wherein I challenged all to take a critical look at exactly how much money was lost by Goldman Sachs' clients. Well, here comes round 2, which is directed at Goldman (over)valuation.

TheAtlantic:

- Barney Frank: The Poor Should Rent, Not Own. In its final installment of the Big Think's "Went Went Wrong" Series on the financial crisis, they interviewed Financial Services Committee Chairman Barney Frank (D-MA). Much of the interview was predictable: Frank mostly explained what anyone closely following the financial regulation push in Congress already knew. But there was one fascinating gem in discussing where Fannie and Freddie went wrong. Frank views ushering the poor to own homes as a mistake and believes they should rent instead.

Reuters:

- China might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25 percent, a prominent government adviser said on Monday. Ba Shusong, a senior research fellow at the Development Research Center, a think-tank under China's cabinet, said Beijing could raise interest rates ahead of the U.S. Federal Reserve to dampen inflationary expectations at home. "But it still not known whether China will just raise deposit rates or both deposit and lending interest rates," Ba told Reuters in an interview. China's consumer price index rose 1.9 percent in the year to December.

- China has accused the United States of straining their vast economic relationship through a slew of anti-dumping measures, adding to growing tensions between the two global powers. The spokesman for China's Ministry of Commerce, Yao Jian, made the comments on Monday, responding to a U.S. trade panel's recent decisions to set preliminary anti-dumping duties on electric blankets and wire decking from China. Yao's warning came while Beijing is also at loggerheads with Washington over U.S. arms sales to Taiwan, the self-ruled island that China deems a breakaway province.

- President Barack Obama insisted on Monday he still has strong hopes to push through a healthcare overhaul soon, despite legislative obstacles he faces.

- A maiden U.S. attempt to shoot down a ballistic missile mimicking an attack from Iran failed after a malfunction in a radar built by Raytheon Co (RTN), the Defense Department said.

- White House economic adviser Christina Romer said on Monday that forecasts for relatively strong economic growth in the government's new budget reflect past history of recovery from recessions.

Financial Times:

- A dozen terrorist suspects are to remain under virtual house arrest without trial after the UK’s chief terror law watchdog said their release would “have a damaging effect on national security”.

- A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter.

SpiegelOnline:

- As details from the deadly Sept. 4 bombing in Kunduz, Afghanistan continue to emerge, it has become more apparent that German commanders both disregarded NATO rules of engagement and misled the US pilots who carried out the attack. One pilot says he would have refused to attack had he been told the truth. In the immediate aftermath of the Sept. 4, 2009 bombing in Kunduz, Afghanistan -- which saw a German-ordered attack result in the deaths of up to 142 people, many of them civilians -- it quickly became clear that NATO rules of engagement may have been flouted. Now, SPIEGEL has learned that German commanders on the ground withheld important information from the US pilots above Kunduz -- information which, had it been available, might have led to the pilots' refusing to drop their payload.

- Greece's debt problems are attracting hedge funds which are betting that the country will default. Meanwhile a leading German economist has argued that the European Central Bank should allow inflation to rise in a bid to avoid a costly and unpopular bailout for Greece. Greece's ailing state finances are increasingly attracting speculators. "The hedge funds are operating very aggressively," Hans Redeker, chief currency strategist at French bank BNP Paribas, told SPIEGEL. In recent weeks the funds have been dealing in so-called credit default swaps (CDS) on a large scale. Fears of a debt default by Greece and other EU countries that have been hit hard by the financial crisis have caused the euro single currency to depreciate sharply in recent weeks. The euro member states now face a dilemma, according to Thomas Straubhaar, president of the Hamburg-based HWWI economic institute. "If they help Greece, they will spark a speculation race. There will be a domino effect in which other indebted states will also have to be bailed out. That will cost all euro countries -- including the relatively stability-oriented ones such as Germany -- a lot of money," Straubhaar wrote in an article published on SPIEGEL ONLINE. Bailing out Greece with taxpayers' money would be deeply unpopular and difficult to sell to voters, but if euro zone countries abandon Greece, economic imbalances within the euro area would grow, and hopes for closer European integration would be dashed.

Caing.com:

- Pumped With Cash – And Ready to Crash? By Andy Xie. Domestic and foreign money is pouring into Chinese real estate, not productive assets, as inflation risks rise and a new crisis brews.

The Korea Times:
- Bank loans have grown at a much faster pace than the nation’s gross domestic product (GDP) over the past decade, raising concerns that the economy is exposed to growing credit risks, according to the Bank of Korea (BOK), Monday. In its report, the central bank said that the outstanding balance of credit extended by local lenders is 3.5 times the size of the GDP which was valued at 1,023.9 trillion won in September last year. This is compared with the 1.7 times greater recorded in September 1999, suggesting that the ratio of bank loans to the GDP has more than doubled over the last 10 years. The ratio was less than 1.5 before the 1997-98 Asian financial crisis, but has risen drastically since 2000. It rose to two in 2000, and was at 2.5 two years later. The ratio jumped to 2.7 times greater in 2004 and to 3.5 in 2008. Korea saw the ratio increase 55 percent between 1998 and 2006, while the comparable figures for the United States, Australia, and U.K. rose by 15 percent, 37 percent, and 40 percent, respectively.

Al-Watan:

- Kuwait’s budget for the fiscal year starting April 1 will be based on an oil price of $45 per barrel.

BETWEEN THE HEDGES

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