Math Nerd Collects Spiders

Spider, Spider Burning Bright

SAN FRANCISCO -- I had breakfast recently at the under-reconstruction-but-still-tony Fairmont Hotel with Diane Garnick, equity derivatives strategist at Merrill Lynch. (No wisecracks, Garnick is married and above reproach. Also, I'm engaged to a wonderful woman who TSC Copy Chief Colin Barr has dubbed "the TaskMistress," as she will hence be known.)

Garnick, a self-described "math nerd," talked about how surprised she's been at the level of institutional interest in the Standard & Poor's depositary receipts (or SPDRs or "spiders"), unit investment trusts that closely track the performance of underlying indices. Garnick said to keep an eye out for international "country-specific" SPDRs in coming weeks.

A popular strategy for institutions worried about the valuations of the biggest of the big caps is to "go long S&P 500 SPDRs (SPY) and buy at the money OEX puts," she said, referring to the S&P 100 Index. The OEX doesn't exactly entail the 100 biggest market-cap companies -- MCI WorldCom (WCOM) being a notable omission -- but it's pretty darn close.

The sector-focused SPDRs are also gaining prominence, she said, suggesting one reason for the increasing volatility in sector rotations is investors "can so quickly and immediately get exposure within a sector and simultaneously short those out of favor." A strategy for "bearish" investors is to buy all nine select sector SPDRs and, come year end, sell those that have depreciated for the tax loss, Garnick said, noting those sold cannot be repurchased for 31 days after, under the "wash sale" rule. (For more on the SPDRs, check out the Nasdaq-Amex site. For more on the wash-sale rule, consult your accountant or neighborhood laundromat.)

Does Whatever a Spider Can

One very important reason the trusts are so enticing is they are not subject to the "uptick rule," so hedge fund and portfolio managers can short the SPDRs if they're falling (or flat), if so desired.

"The nonuptick rule is nice as you can just sell the heck out of these things, but I have not found them to be particularly effective as a short-term hedge, as their volatility never seems to match that of the underlying index," Rick Ziesing, founder of Bonanza Capital Management, in Kennett Square, Pa., said via email. "On the other hand, I am short [Nasdaq 100 Trust Receipts (QQQ)] and SPYs to accompany my stock specific shorts. In a trending market, such as the one we have now, these tools can be effective as a no-brainer way to short the market."

Ziesing's current shorts include financials such as Chase (CMB), Merrill Lynch (MER) and Bank of America (BAC), as well as Ford (F) and General Motors (GM).

The hedge fund manager is also short Level 3 Communications (LVLT), Qwest Communications (QWST), Williams Companies (WMB) and Montana Power (MTP), believing there is an oversupply of fiber network providers. More especially, with the advent of dense-wave multiplexing providing the ability to send more data down the same pipe.

"We love wireless, in fact, we love anybody or anything that helps us all get around the stranglehold the RBOCs have on our ability to get broadband access without hassle, delays, excuses and high cost," Zeising said. "We just don't own them in this environment."

The hedge fund manager runs about $11 million in assets but steadfastly declined to discuss performance. So you can take his comments with a grain of salt if you wish. Furthermore, Zeising notes Kennett Square, Pa., is the self-proclaimed "Mushroom Capital of the World."

TSC Special

Fan favorite Steve Frank was boasting today about how eBay (EBAY) shares didn't really plummet until his former employer -- and CNBC partner -- Dow Jones reported on the online auctioneer's latest outage at around 12:00 p.m. EDT.

Judging by the intraday chart, perhaps that was the case (vs. say "murder"). But I thought the idea was to be ahead of the game? Investors could have gotten a big (and easy) jump on Frank N' Friends if they'd only read TSC staff reporter and jump-shot specialist David Shabelman's morning Nothing But Net piece, posted at 10:39 a.m. EDT. For his efforts (and the fact he could have made -- or saved -- you money), "Shabes" gets the nod today.

Sign O' the Times

Bill Gross, managing director and portfolio manager at Pacific Investment Management Co. (a.k.a. "PIMCO"), was on CNBC's Business Center tonight. You're forgiven if you missed it, because the network was busy hyping its interview with Meg Whitman, CEO of eBay (EBAY) (who looked like she's been through the ringer, BTW).

I love the Internet, I work for an Internet company, but I smell a huge lack of news judgement here. I know people's eyes glaze over like so many hams at Easter when bonds are mentioned, but Gross manages over $27 billion in bonds and is the biggest bond fund manager in the country. He matters. A lot. Trust me.

The PIMCO powerhouse said with the Treasury's refunding next week, bond yields could go "another 10 basis points higher. Then perhaps the economy starts to slow."

In a nutshell, Gross is telling you we're closing in on the top in yields, which would be good for equities which are in need of some stimuli about now.

Speaking of stimuli, Ron Insana asked Gross about the recent rumors in the swaps market.

"There have been recent problems in swaps markets as corporate spreads widened and those desks have been hurt," he said. "As leverage is unwound it can freeze up certain amounts of markets, including corporate and mortgages. Alan Greenspan and company have to cognizant of that potential as they go forward from here."

It's really looking a lot like 1998, isn't it?

PS

Congratulations to "Squawk Box" which celebrated its fourth anniversary today with one of those big "specials" we've all come to love. Don't want to be a spoilsport, but feel compelled to report a large number of emailers say they're sick of the schtick and think one hour is sufficient if there's less goofiness and more reporting. Several say they prefer CNNfn because guests are given more time vs. on Squawk where they sometimes get the (bum) rush job from Mark Haines.

Don't shoot the messenger. Especially since I can't play piano.

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