BETWEEN THE HEDGES

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Retail longs and Emerging Market shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is lower, sector performance is mixed and volume is about average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is falling -1.07% and is high at 25.83. The ISE Sentiment Index is below average at 122.0 and the total put/call is high at .97. Finally, the NYSE Arms has been running above average most of the day, hitting 1.54 at its intraday peak, and is currently 1.33. The Euro Financial Sector Credit Default Swap Index is rising another +6.41% to 97.66 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 +2.45% to 103.24 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is -1 basis point 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 -.80% to 30.57 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 +1 basis point to 2.26%, which is down -39 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .09%, which is up +1 basis point today. Emerging market shares are underperforming again today. Coal, Gold, Ag, Bank, Insurance, REIT and Education shares are especially weak, falling 1.0%+. (XLF) has been heavy throughout the day. The Euro Financial Sector CDS is surging back to its highs seen on Friday morning, which is a large negative. Moreover, the Western Europe Sovereign CDS is jumping another +4.41% to a new record 110.8 bps. The US sovereign cds is also jumping 5.66% to 56.0 bps. On the positive side, Paper, Disk Drive, Homebuilding, Retail and Airline shares are rising .50%+. Tech sector leaders are continuing their recent trend of outperforming the broad market. Despite a weaker US dollar and rising Iran tensions crude oil and gold continue to trade poorly. Today’s overall market action is disappointing so far as there has been no follow through to Friday’s late session rally with DJIA 10,000 now resistance. Inflation fears in China appear to be intensifying, which is also a large negative. As well, until there is more clarity with regards to the Euro sovereign debt situation, US stocks are likely range-bound at best. Nikkei futures indicate a -26 open in Japan and DAX futures indicate a -40 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, rising Euro sovereign debt fears and technical selling.

Bloomberg:

- Corporate borrowing costs are rising at the fastest pace in more than two months on concern that worsening government finances will slow the global economy and make it harder for companies to meet debt payments. The extra yield investors demand to own corporate bonds instead of government securities widened 4 basis points last week to 169 basis points, the most since the period ended Nov. 27, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index. Spreads widened for three weeks, the longest stretch in about a year, while those for U.S. high- yield, high-risk companies expanded by the most since August.

- Greek Prime Minister George Papandreou, armed with European Union backing for a wage freeze and spending cuts, is bracing for a fight with his socialist party’s traditional ally: organized labor. In unions’ first major challenge since Papandreou’s Oct. 4 election, teachers, hospital workers and tax collectors will strike for 24 hours on Feb. 10 as 600,000 public workers oppose his plan to freeze wages and reduce benefits.

- The $2.8 trillion municipal bond market is a bubble about to burst, as housing and technology did in the past 10 years, said Michael Aronstein, the money manager whose Marketfield Fund returned 31 percent in 2009 by betting correctly on commodity-price swings. Lulled by ready access to low-cost credit, politicians have piled up unsustainable debt service that the public will soon demand they stop paying, he said. Bankers are selling municipal bonds based on unrealistic assumptions of population and revenue, and will be held accountable when they can’t be repaid, he said in an interview. Aronstein also saw weakness in emerging markets such as China and India, which have been saturated by years of investment and will be harmed as investors return funds to the U.S. to capitalize on a strengthening dollar. Aronstein, who manages the $102 million Marketfield Fund and is chief investment strategist at Oscar Gruss & Son Inc. in New York, recommended buying credit default swaps on debt issued by California, the U.S.’s lowest-rated state. He said investments in so-called BRIC Index funds, funds based on returns from Brazil, Russia, India and China, will prove costly because the opportunities for realizing gains in emerging markets has passed. The 56-year-old Aronstein predicted the collapse of commodity prices in 2008, then reversed course in the first quarter of last year, putting one-fourth of his fund’s assets in commodities such as palladium and zinc. By the end of the year, the metals had returned more than 50 percent. Municipal finance faces a collapse because the public sector is relying on “unlimited access” to credit, Aronstein said. That access will dry up as the cost of debt service begins to consume unmanageable shares of government budgets, prompting taxpayers to demand cuts in bond payments. “There’s always a feature in the economy that lives off its credit,” he said, citing the technology and housing sectors. “The next phase of it is government. They’re operating under the same kind of illusion of infallibility and unlimited access to credit.” To mitigate future public excesses, Aronstein said, legislation should be enacted that would hold elected officials to the same standards of fiduciary accountability and conflict of interest restrictions as money managers, he said.

Wall Street Journal:

- Commerce Secretary Gary Locke and Jane Lubchenco, head of the National Oceanic and Atmospheric Administration, announced NOAA will set up the new Climate Change Service to operate in tandem with NOAA's National Weather Service and National Ocean Service. "Whether we like it or not, climate change represents a real threat," Mr. Locke said Monday at a news conference.

Barron’s:

- Google (GOOG) shares are trading higher after Bank of America/Merrill Lynch analyst Justin Post added the stock to the firm’s “U.S. 1″ high conviction list. “Despite recent concerns on the strength of the recovery, which has helped pressure the stock, we believe Google remains an attractive macro-economic recovery plan and funds wanting increasing exposure to a recovery will be incremental buyers,” he writes. Post says the stock ex cash trades for 14x 2011 estimated free cash flow, “attractive for a 15% grower.”

NY Times:

- If the Democratic Party has a stronghold on Wall Street, it is JPMorgan Chase(JPM). Its chief executive, Jamie Dimon, is a friend of President Obama’s from Chicago, a frequent White House guest and a big Democratic donor. Its vice chairman, William M. Daley, a former Clinton administration cabinet official and Obama transition adviser, comes from Chicago’s Democratic dynasty. But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Just two years after Mr. Obama helped his party pull in record Wall Street contributions — $89 million from the securities and investment business, according to the nonpartisan Center for Responsive Politics — some of his biggest supporters, like Mr. Dimon, have become the industry’s chief lobbyists against his regulatory agenda. Industry executives and lobbyists are warning Democrats that if Mr. Obama keeps attacking Wall Street “fat cats,” they may fight back by withholding their cash. “The expectation in Washington is that ‘We can kick you around, and you are still going to give us money,’ ” said a top official at a major Wall Street firm, speaking on the condition of anonymity for fear of alienating the White House. “We are not going to play that game anymore.” Wall Street fund-raisers for the Democrats say they are feeling under attack from all sides. “I am a big fan of the president,” said Thomas R. Nides, a prominent Democrat who is also a Morgan Stanley executive and chairman of a major Wall Street trade group, the Securities and Financial Markets Association. “But even if you are a big fan, when you are the piñata at the party, it doesn’t really feel good.” Though Wall Street has long been a major source of Democratic campaign money (alongside Hollywood and Silicon Valley), Mr. Obama built unusually direct ties to his contributors there. He is the first president since Richard M. Nixon whose campaign relied solely on private donations, not public financing. Wall Street lobbyists say the financial industry’s big Democratic donors help ensure that their arguments reach the ears of the president and Congress. White House visitors’ logs show dozens of meetings with big Wall Street fund-raisers, including Gary D. Cohn, a president of Goldman Sachs; Mr. Dimon of JPMorgan Chase; and Robert Wolf, the chief of the American division of the Swiss bank UBS, who has also played golf, had lunch and watched July 4 fireworks with the president. Lobbyists say they routinely brief top executives on policy talking points before they meet with the president or others in the administration. Mr. Wolf, in particular, also serves on the Presidential Economic Recovery Advisory Board led by the former Federal Reserve Chairman Paul A. Volcker. Mr. Wolf was the only Wall Street executive on the panel and became the board’s leading opponent of what became known as the Volcker rule against so-called proprietary trading, according to participants. Mr. Wolf and Mr. Dimon, who was in Washington last week for meetings on Capitol Hill and lunch with the president, have both pressed the industry’s arguments against other proposed regulations and the bank tax as well — saying the rules could cramp needed lending and send business abroad, according to lobbyists.

- After Buying Spree, China Owns Stakes in Top US Firms.

The Business Insider:

- Barclays: Here’s Why Gold Is Just Begging To Be Shorted At These Levels.

BusinessWeek:

- As analysts say rising demand for Internet display ads will begin paying off for Google in 2010, one asks: "Is this a $10 billion business?"

- U.S. prime jumbo mortgages at least 60 days late backing securities reached 9.6 percent in January from 9.2 percent in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings. “The trend line for delinquencies indicates the 10 percent level could be reached as early as next month,” Vincent Barberio, a Fitch managing director in New York, said today in a statement. The rate almost tripled in 2009, Fitch said.

Seeking Alpha:

- Unregulated, Credit Default Swaps Are Merely Gambling. Now do you see the outrage in these so-called "protection devices"? They aren't. They were raw bets. Very highly-leveraged gambling instruments that had a very low cost at origination - a cost all out of proportion to their eventual potential return. We do not let "just anyone" buy insurance. You must have an insurable interest. That is, I can't buy fire insurance on your house. If I could, I might - and so might 20 of my best friends. We might even target those homes we think might have fires. We could even bribe the folks doing a controlled burn nearby to be a little less careful than they ordinarily would. Or, in the extreme case, one of us might just set a fire on purpose! None of this is allowed in the insurance marketplace because it creates too many incentives for people to set fires and otherwise cause calamities, whether through outright unlawful conduct or helping along "a series of unfortunate events."

Pensions & Investments:

- Portable alpha strategy continues slide, but fans stay optimistic. Assets in portable alpha fall nearly 45% after nasty market turns.

The Hill:

- Obama struggles with independent voters. President Barack Obama and congressional Democrats are suffering with independent voters, a new, independent poll found Monday. The latest edition of the Marist Poll found that independent voters had soured on the president in recent months, and wish to use this fall's midterm elections to send a message to the president and congressional Democrats. A 47-44 plurality of voters said they disapproved of the job Obama is doing, according to a nationwide poll, that also showed nine percent undecided. But the most noted shift may be among independents, of whom 57 percent said they disapprove of Obama's job performance and 29 percent say they approve. Those numbers are virtually the inverse of independents' view of the president in Marist's April 8, 2009 poll, which found independents approving of Obama, 53-28. Obama, according to the latest poll, also faces woes with independent voters: 53 percent say he's fallen below their expectations as president. 45 percent said he's changed the U.S. for the worst; 24 percent say he's affected no change. 52 percent have an unfavorable impression of the president.

Miami Herald:

- Despite four decades of slogging through Everglades marshes and mangroves, wildlife ecologist Frank Mazzotti had never experienced anything like the aftermath of frigid January. The confirmed casualty count so far: • At least 70 dead crocodiles. • More than 60 manatee carcasses. • A bright-side observance of multiple frozen-stiff Burmese pythons, the scourge of the Everglades. And also, perhaps the biggest fish kill in modern Florida history. ``What we witnessed was a major ecological disturbance event equal to a fire or a hurricane,'' said Mazzotti, a University of Florida associate professor. ``A lot of things have happened that nobody has seen before in Florida.'' The cold was simply brutal on many tropical plants and animals. While scientists are still surveying losses, it's already clear that the record chill wiped out shallow corals in the Keys and devastated manatees.

Politico:

- Defying conventional wisdom that a hardened partisan divide and looming midterm elections will prevent the type of compromises necessary for big reforms, business leaders and environmentalists are redoubling their efforts to advance an energy and climate bill in the Senate.

- Three-quarters of the nation’s voters are “angry” at the federal government’s policies, according to a new Rasmussen Reports survey out Monday. Of the 1,000 likely voters surveyed Feb. 5-6, 75 percent said they were either “very” or “somewhat” angry with the “current policies of the federal government.” Forty-five percent said they were “very” angry. Only 19 percent said they were “not very” or “not at all” angry with the government.

Real Clear Politics:

- America is Not Ungovernable. Recently, some analysts have suggested that the lack of major policy breakthroughs in the last year is due to the fact that America has become ungovernable. Ezra Klein argued that it was time to reform the filibuster because the government cannot function with it intact anymore. Tom Friedman suggested that America's "political instability" was making people abroad nervous. And Michael Cohen of Newsweek blamed "obstructionist Republicans," "spineless Democrats," and an "incoherent public" for the problem. Nonsense.

Philadelphia Inquirer:

- If the atmosphere could be checked for performance-enhancing substances, no one around here would be surprised if it tested positive this winter. Something wild is going on. Two-foot snowstorms are rare around Philadelphia; two of them in one season, unprecedented. And even before the workweek grime has a chance to settle on that magnificent snow pack, private and government meteorologists are warning of another major storm late tomorrow into Wednesday. No one is guessing accumulations yet, but the computer models were showing scary-looking precipitation amounts, bulls-eyed right over our area, the National Weather Service said. In short, it's at least possible that the all-time seasonal snow record, 65.5 inches, set in the winter of 1995-96, might not survive the week. With the official 28.5 from the weekend storm, Philadelphia sits at 56.3. It's crazy, said Dean Iovino, a meteorologist at the weather service office in Mount Holly.

zerohedge:

- Two Hedge Funds One Bank? Is There A Concerted Effort To “Destroy” Greece? In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we "wonder" just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS "attacks" on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds' anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure. Thanks to near-infinite leverage courtesy of nominal margin requirements on CDS holdings, the spillover has started to impact the FX market as well. Certiainly, if this is indeed a premediated attack, this could have been coupled with the "two funds" pushing for a lower euro, in an attempt to start the dollar carry unwind, further depressing euro levels, and creating further panic on Greek (and other PIIGS) CDS. Who really wins from all this? Germany, who rumors have as saying that they are close to letting Greece go. As Zero Hedge has long speculated, a Greek failure, and a collapse in the EMU, while a significant near-term negative, will be, paradoxically, the event that saves Germany, France, Benelux, and the core of the soon to be former European Union.

LATimes:

- Iranian officials trumpeted new nuclear and military ambitions Monday in the face of domestic political discord and stepped-up international talk of tightening economic sanctions against the Islamic Republic. Ali Akbar Salehi, head of Iran's Atomic Energy Organization, announced that Tehran had informed the United Nations' nuclear watchdog that it intended to launch construction of 10 new nuclear-fuel plants in the Persian calendar year starting March 2010 and begin producing 20%-enriched uranium to provide fuel for a Tehran medical reactor. Iranian military officials also announced plans to build new military planes, aerial drones and anti-aircraft missiles in a flurry of pronouncements hailing national achievements ahead of annual commemorations of Iran's 1979 Islamic Revolution on Thursday, when a burgeoning opposition movement and security forces are expected to clash on the streets of Tehran and other cities.

USAToday:

- Social Security's annual surplus nearly evaporated in 2009 for the first time in 25 years as the recession led hundreds of thousands of workers to retire or claim disability. The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated. Since 1984, Social Security has raked in more in payroll taxes than it has paid in benefits, accumulating a $2.5 trillion trust fund. But because the government uses the trust fund to pay for other programs, tax increases, spending cuts or new borrowing will be required to make up the difference between taxes collected and benefits owed. Experts say the trend points to a more basic problem for Social Security: looming retirements by Baby Boomers will create annual losses beginning in 2016 or 2017. "The moment of truth has arrived," says Rep. Paul Ryan, R-Wis., top Republican on the House Budget Committee. "This is a wake-up call."

Reuters:

- EU plans for regulating the hedge fund industry still carry "significant risks," warned Britain's Financial Services Authority (FSA), even though many of the stricter rules have been toned down. "I would not underestimate the significant risks that still exist in this draft directive. It could still go badly wrong in some important areas," Dan Waters, sector leader for asset management at the FSA, said at the EDHEC-Risk Summit on Monday.

- Key risks to watch in Spain.

- The producer of one in four of the world's lights, which sold its semiconductor business in 2006 after it was undercut by Asian rivals, has invested more than 4 billion euros ($5.47 billion) to ride the clean-tech wave and defend its world-leading position. But this time, Philips is better prepared for competition. The company is betting on a shift in the lighting market, away from inefficient incandescent light bulbs and toward light-emitting diodes or LEDs -- perhaps best known for their use in the flashing indicators found on most consumer devices. "In terms of value around 2015, LED will be bigger than conventional light sources," said Philips executive Niels Haverkorn. In the fourth quarter of 2009, LED-based products made up more than 10 percent of Philips' lighting sales for the first time.

Financial Times:

- China has overtaken the European Union to become Iran’s largest trading partner, according to a new analysis of the commercial ties between the two countries. The growing business links between Beijing and Tehran underline China’s reluctance to agree to any further economic sanctions on Iran as western countries escalate their campaign to contain the country’s nuclear ambitions. While Russia has softened its opposition to placing more pressure on the Iranian economy, China has not done the same. Official figures say the EU remains Tehran’s largest commercial partner, with trade totaling $35bn in 2008, compared with $29bn with China. But this number disguises the fact that much of Iran’s trade with the United Arab Emirates consists of goods channeled to or from China. Majid-Reza Hariri, deputy head of the Iran-China Chamber of Commerce, said that transhipments to China accounted for more than half of Tehran’s $15bn (€10.9bn, £9.6bn) trade with the UAE. When this is taken into account, China’s trade with Iran totals at least $36.5bn, which could be more than with the entire EU bloc.

Independent:

- It's the politics, stupid. After years in which market forces dominated, in which economies were supposedly self-regulating and in which the nation state appeared increasingly to be impotent, markets are now struggling to cope with the return of what might loosely be called "political economy". Since the beginning of the year, the economic news has, for the most part, been reasonably good. The US economy is expanding at a decent pace, allowing the unemployment rate to fall, the Chinese economy is booming and European economies are, for the most part, pulling themselves out of recession. Yet the mood in financial markets has changed dramatically. The euphoria which dominated much of 2009 has, since the New Year, been replaced by a hangover. The return of politics is unsettling for investors. For many years, investors thought they understood the "rules of the game". Central bankers were dedicated to the achievement of price stability. If inflation was a bit too high, interest rates would go up. If it was a bit too low, rates would come back down again. Finance ministers, meanwhile, were devoted to fiscal conservatism. Not for them the evils of big budget deficits and Keynesian demand management policies. Their job was to borrow as little as possible, thereby keeping interest rates at low levels to allow investment in the private sector to flourish. These were simple rules. Investors loved them. Yet the rules have now been torn up. In their place, we now have political whim and policymaking expediency. This is hardly surprising. Markets have not exactly covered themselves in glory in recent years. Yet the fallout from this shift away from market forces is, as yet, poorly understood. Investors are no longer able to make confident predictions about the future because the future will increasingly be determined by politics, not by markets. And that makes investors feel uncomfortable. Consider, for example, the tragedy unfolding in Greece.

Telegraph:

- Pension funds will fight to force down fees paid to hedge funds following 2008’s $5bn (£3.2bn) exodus after the financial crisis left hedge funds struggling to win investors back.

- Climate makes money move in mysterious ways. In all the coverage lately given to the UN's Intergovernmental Panel on Climate Change and its embattled chairman, Dr Rajendra Pachauri, one rather important part of the story has largely been missed. This is the way in which, in its obsession with climate change, different branches of the UK Government have in recent years been pouring hundreds of millions of pounds of taxpayers' money into a bewildering array of "climate-related" projects, often throwing a veil of mystery over how much is being paid, to whom and why.

Sonntag:

- The US won’t seek to renegotiate the settlement with Switzerland that says UBS AG must hand over client data on 4,450 accounts, citing US Ambassador to Switzerland Donald Beyer in an interview.

Xinhua:
- Senior Chinese leader Zhou Yongkang Monday urged law enforcement personnel to make firm efforts to safeguard stability in the national capital this year. Zhou, a Standing Committee member of the Political Bureau of the Communist Party of China (CPC) Central Committee, made the remarks after he heard a report from the municipal government on maintaining the capital's stability. He commended work of Beijing's political and law enforcement workers in maintaining social stability in the past year, especially during celebrations marking the 60th anniversary of the founding of the New China. However, Zhou warned of the "arduous" task of maintaining social stability this year as "there are still many predictable and unpredictable factors that may affect social harmony and stability." "Our country is still in a stage when many conflicts are likely to arise," said Zhou, who is also the secretary of the Political and Legislative Affairs Committee of the CPC Central Committee.

BETWEEN THE HEDGES

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Monday, February 08, 2010

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