Compliance: Vic or Treat

Put simply, the new rules don’t create a wide enough net.

-         Vikram Pandit


Just because Vikram Pandit says something, doesn’t mean it’s wrong. 



Compliance: Vic or Treat - Vikram Pandit



We were spooked as we saw the entire world financial system going down the tubes.  America had fomented a housing disaster.  The traditional Manufacture and Distribute model of American finance had found a golden egg-laying goose, courtesy of our elected officials who, outdoing our Third World brothers and sisters, promised Americans not merely a chicken in every pot, but a kitchen to house the pot, and a four bedroom house – complete with two-car garage, trash compacter and satellite dish (in-ground pool optional) – to surround it.  Americans of every stripe – from the criminal, to the gullible, to the hard-working hopeful Believers in the Dream – lined up clutching their worn bank deposit books and three years’ worth of tax returns to get their piece of the American pie. 


Never mind that most Americans realized they were going to have to uphold their end of the bargain by staying employed, putting in an honest day’s work for an honest day’s pay.  If, as our Hedgeye watchword has it, everything important happens at the margin, the margin of homeowner finance soon swelled like a rampant tumor.  Fraudulent financings became increasingly the order of the day as bankers and their administrative minions actually coached people on how to lie on their mortgage applications.  We get that there are gullible, vulnerable and dishonest people out there who leapt at the chance to get something for nothing.  And there is likely a significant number of failed homeowners who allowed themselves to believe that lying on your mortgage app is like cheating on your taxes: everyone does it, no one is hurt by it.  I can get away with it.


For a moment it looked like the banks were actually the Greater Fools, about to be brought low by their own greed.  What a relief, then, when Secretary Paulson stepped in and spread our cash over the crisis like oil upon the waters.  We were wrong.  The homeowners did get flushed away like so many troublesome small turds.  The banks were made whole, and then some, and it was, after all, we who were the Greater Fool of Last Resort.


Speaking at a conference sponsored by The Economist magazine, Pandit said the legislative changes to date could give rise to a new shadow banking system.  “Could,” Mr. Pandit?  Nay, must.  Quoth the Pandit, “Any time the amount of capital required by regulation exceeds the levels judged necessary by the market, opportunities for arbitrage arise.”  Pandit is noting something a fact approximately as obvious, and as rarely remarked upon, as the sun’s rising in the East.  And he made the useful distinction that “the banking system is not synonymous with the financial system as a whole – and Basel only affects the former.” 


As always, the money has done all the talking, though we are not sure exactly who has done its bidding.  Dodd-Frankenstein, as observed by NY Times chief financial correspondent Floyd Norris ( 25 October, “Return of the Shadow”) “does give regulators authority to oversee the next AIG – a huge financial institution that is systemically important even if it is not fully in the conventional regulatory system.”  However, observes Norris, “Congress rejected proposals to let regulators go after shadow sectors,” those being precisely the marginal areas of activity that will take up the slack.  As our neighbor’s bumper sticker reads: “If they outlaw guns, then only outlaws will carry guns.”  And you can bet that if they outlaw mortgage-backed CDS… well, you get the idea.


We are intrigued that Pandit is so afraid of this that he felt the need to speak about it in a public forum.  We are not sure whether he is saying it prophylactically, to prevent being taken to task next time the banking system implodes, or as a way of marking his territory and calling for pre-emptive regulatory approval of his future actions at the helm of Citi.


One thing, though.  He’s got it right.  The regulated banks played with a will into the morass of the unregulated marketplace, extending lines of finance and credit far beyond what the foreshortened horizon of their own regulations permitted them to see.  It is, of course, a fallacy to say that there was not already sufficient regulation in place to prevent the latest disaster.  There was, rather, a lack of will on the part of the regulated marketplace to exercise the caution and diligence required of them by their fiduciary brief.  The fact remains that no bank analyst – and no analyst from the rating agencies – ever visited any of the vast housing developments that were being sold off like hotcakes, all on no-documentation mortgages.  The banks rolled up these same mortgages and sold them to overseas investors, to Orange County – indeed, to one another, and even to other divisions within their own entity. 


One obvious answer is for Congress to force regulators to drop an iron curtain between regulated and unregulated activities, allowing the unregulated market to bear all the risk – with the recognition that they will also reap the profit, while the banks continue to plod along.  For our money – and in your Humble Scrivener’s case, Mr. Pandit has most of it in his tottering institution – plodding is just fine.


But it’s not just fine for the shareholders.  Despite Jack Welch’s recent disavowal of Shareholder Value as “the stupidest idea” to come along in years, bank executives want their institutions to prosper because Dodd-Frankenstein does nothing to undercut Wall Street’s compensation model.  The problem is, as far as the regulated banking system is concerned, there’s no such thing as safe sex.  As has been observed again and again, that first dip into the unregulated world creates instant addiction.  And, like the addict who sells his grandmother’s jewelry and clock radio, the banks will stop at nothing once they are hooked.


On the other hand, we recognize that it is in the unregulated world that all the truly creative ideas are hatched.  Let the word “unregulated” be divorced in the public mind from the word “criminal.”  Indeed, by definition it is easier to violate the rules in a market that has many, than in a venue where there are none.  If this seems cynical, please recognize that many of the greatest advances in all areas of human endeavor have come from outsiders working on their own, and often against the opposition of the institutionalized mainstream.  We need only point to examples such as Galileo and Darwin.  Or if you prefer, Moses, Jesus and Mohammed.  You get the point.


Far from holding the regulated and unregulated markets apart from one another, Dodd-Frankenstein appears to leave the door wide open for the next round of Minskian boom and bust as these two incompatible species attempt once again to produce viable offspring.  Many in our industry gaze despairingly on the micro-meddling going on in Washington and wish the Austrian school of economic theory had more influence in our system, with its notion that “creative destruction” creates fecund soil from which future economic success will sprout.  Does no one in government have the moral courage to stand by and allow significant economic failure to ensue?  If you want destruction, we remind you there is at least one Austrian in government in this land: Arnold Schwarzenegger.


Moshe Silver

Chief Compliance Officer


TODAY’S S&P 500 SET-UP - November 2, 2010

As we look at today’s set up for the S&P 500, the range is 9 points or -0.54% downside to 1178 and 0.22% upside to 1187.  The futures are higher as the Republicans are poised to retake the House and narrow Democrats’ margin in the Senate. 


Earnings today are reported by companies including Emerson Electric, Pfizer, MasterCard and Kellogg.

  • Anadarko Petroleum (APC) 3Q adj. EPS missed est. 
  • Cognex (CGNXS) sees 4Q rev. above est.
  • Corporate Executive Board (EXBD) 3Q adj. EPS beat est.; raised  full-year forecast
  • Ironwood Pharmaceuticals (IRWD), Forest Laboratories (FRX) companies reported positive results from Phase III trial of linaclotide 
  • MEMC Electronic Materials (WFR) 3Q adj. EPS, rev. missed ests, suspended 4Q forecast
  • NutriSystem (NTRI) raised 2010 EPS forecast 
  • RightNow Technologies (RNOW) raised year sales, profit forecast *Rogers (ROG US) 3Q EPS missed est.


  • One day: Dow +0.06%, S&P +0.09%, Nasdaq (0.10%), Russell (0.68%)
  • Month-to-date: Dow +0.06%, S&P +0.09%, Nasdaq (0.1%), Russell (0.68%)
  • Quarter-to-date: Dow +3.12%, S&P +3.78%, Nasdaq +5.75%, Russell +3.32%
  • Year-to-date: Dow +6.68%, S&P +6.21%, Nasdaq +10.39%, Russell +11.7%
  • Sector Performance: Energy +0.12%, Technology +0.08, Financial, +0.01, Industrials 0.00%, Healthcare 0.00%, Materials (0.06%), Consumer Discretionary (0.20%), Consumer Staples (0.42%), and Utilities (0.98%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Baker Hughes +4.40%, Cabot Oil & Gas +4.07% and M&T Bank +3.64%/First Horizon -6.74%, Marshall & Ilsley -4.57% and Avon -4.56%.


  • ADVANCE/DECLINE LINE: 146 (-428)  
  • VOLUME: NYSE: 959.57 (-7.39%)
  • VIX: 21.83 +2.97% - YTD PERFORMANCE: (+0.69%) - THE VIX IS UP FOR THE LAST 6 DAYS
  • SPX PUT/CALL RATIO: 2.57 from 3.37 -23.66%  


  • TED SPREAD: 16.73 -1.725 (-9.347%)
  • 3-MONTH T-BILL YIELD: 0.13% +0.01%    
  • YIELD CURVE: 2.32 from 2.32


  • CRB: 301.53 +0.29%
  • Oil: 82.95 +1.87% - BULLISH
  • COPPER: 378.50 +1.38% - BULLISH
  • GOLD: 1,352.68 -0.37% - BULLISH


  • EURO: 1.3901 -0.33% - BULLISH
  • DOLLAR: 77.296 +0.04%  - BASING



European markets:

  • FTSE 100: +0.90%; DAX: +0.44%; CAC 40: +0.30%
  • European markets are trading higher, having quickly reversed slight opening falls that saw CAC down (0.3%) and FTSE100, DAX (0.1%).
  • Continuing M&A activity and generally well received results from European heavy-weights, particularly in the UK, was countered by caution ahead of the US Federal Reserve policy decision on Wednesday and additional capital raisings announcements by banks.
  • Advancing sectors lead decliners 5-4, with banks and utilities amongst the leading fallers, travel & leisure and personal & household products the leading gainers.
  • France Oct final Manufacturing PMI 55.2 vs preliminary 55.2
  • Germany Oct final Manufacturing PMI 56.6 vs preliminary 56.1
  • EuroZone Oct final Manufacturing PMI 54.6 vs preliminary 54.1

Asian markets: 

  • Nikkei +0.06%; Hang Seng +0.1%; Shanghai Composite (0.28%)
  • Asian markets traded in a tight band today, with many investors choosing to stay out of action ahead of today’s Federal Open Market Committee meeting.
  •  A surprise decision to raise interest rates in Australia pushed regional markets down in the early afternoon, though most recovered before closing. Australia raises cash rate 25bp to 4.75%.
  • India raised interest rates for a sixth time this year, hiking the Repo Rate and the Reverse Repo Rate by 25bps each.
  • China ended down slightly, as investors sold financials and carmakers. 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, November 2nd, 2010



During The Japan Academy of Gambling and Gaming Studies panel discussion,  panelists said no decision has been made on the Casino Act submission date to the Diet, any taxation plans, and potential destinations.  Hakubun Shimomura, congressional representative for the Liberal Democratic Party, and Kazuaki Sasaki, assistant professor at Nihon University College of Economics, believe casino taxation in Japan will be similar to that of S'pore's--low in the beginning and higher later.  Issey Koga, congressional representative for the Democratic Party of Japan, reiterated his hope to submit the draft by the next Diet session.  “We were targeting our draft law to be submitted by now last year and it didn’t happen,” Koga said. “I’m hoping we’ll be able to push the draft law through by next year.” 


Michael Hands of Penn National, stressed PENN's primary interest in the prefecture of Kyushu, particularly Fukuoka--its  capital city, but he said that the tabling of a bill during the next session would be the signal for various regions to get organized, select locations, create concepts and create consensus.  Matt Maddox, CFO of WYNN, said if WYNN builds a casino in Japan, it will be "very unique."  Ten casino operators including Harrah’s Entertainment, Penn Gaming, and MGM Resorts International have expressed interest in Japan.



IM thinks MGM may not be buying market share as aggressively as people think.  IM said the mass floors at MGM were busier than WYNN's and the new incentives for the VIP rooms are not "as outlandish as" what Adelson claimed.

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"My way of joking is to tell the truth.  It's the funniest joke in the world".

-George Bernard Shaw


Both the Reserve Bank of Australia and the Reserve Bank of India certainly have their version of the truth today as both raised rates on inflation fears; for India’s central bank it’s the sixth such move this year. 


At home we have multiple storytellers giving their versions of the truth.  George Bernard Shaw was most commonly known as an Irish playwright skilled in many spheres of literature.  As you can probably tell from this morning’s quote, his work tended to fall into the satire or black comedy categories.  The black cloud that is the political theatre unfolding in the U.S. certainly would have provided Shaw with some material, were he alive today.


While Shaw held some controversial views that were anathema to many of those around him, his flair for music, literary criticism, journalism and drama was widely recognized.  Reconciling the vilification Shaw endured for his stances on the World Wars and other topics with the broad acclaim he received for his work (including a Nobel Prize for Literature and an Oscar) is difficult.  The bottom line is that most people love a good story line and can appreciate the person who can tell one.


In the run up to today mid-term elections, the Political Partisan Playwrights have been kicking into overdrive.  Political Prose has been weaved around every political theme imaginable; government spending, taxes, and immigration, to name but a few.  The resulting narratives have been recited ad nauseam and I can’t wait until it’s over.  Political commercials seem to get worse every election cycle.


We can argue which political versions of the truth are more tenuously linked to fact than others but the only certainty about every politician on the soap box is this: none is as allied to the truth as they are to their prospects of being elected.


At Hedgeye, we prefer to examine data than listen to political sound bites (however amusing).  As my colleague and Managing Director of Macro, Daryl Jones, wrote yesterday on the election, “The turnout measures for Republicans are very positive and should drive a big Republican win to the tune of a net gain of 9 seats in the Senate and more than 65 seats in the House”.   Daryl’s mathematical reckoning anchored on a selection of political polls that he has been following closely as part of this macro process.  While the likely Republican gains have already been priced into the markets, we will continue to be confronted with political versions of the truth for some time past today’s vote. 


Economic versions of the truth are just as commonplace in our manic media.  The interpretation of the ISM and personal income yesterday are perfect cases in point.  George Bernard Shaw died in 1950 but even if he were alive today, despite his talent for literary criticism, I think he would struggle to follow the convoluted economic plotlines being laid out by some present day commentators – and he was a co-founder of the London School of Economics! 


The main question I have for the storytellers is as follows: how does the economic reality we are faced with marry the expectations imbedded in Wall Street Groupthink?  Yesterday I posted a note on the ISM and personal income print titled, “Q4 2010 THEMES UPDATE – CONSUMER CANNONBALL”, that outlined the moving parts behind a major component of the U.S. economy.  The ISM print was less-than-comforting given that the upside was primarily driven by exports (a small part of the economy) while personal income and spending weakened (pertaining to the largest part of our economy). 


Government support is waning and taxes are going up.  We are in the midst of Jobless Stagflation and the data is continuing to confirm that.  If you ever had any doubt that political motivations can sway departments of government to take artistic license (especially a week before elections) with economic data, take a look at the chart below.


The story of the 3Q10 GDP number would be a masterful piece of black comedy – and a fitting ode to Bernard Shaw – if it were funny.  The consumer services sector is growing while consumer goods are decelerating but the evidence of government propping up the respective components of GDP is obvious.  Inventory accounted for 72% of 3Q10 GDP growth and exports declined even with the Almighty Buck burning at the stake.  Whatever version of the truth you choose to believe, the trends are unsustainable given our ever-increasing deficits. 


One version of the truth that is front of you today is that risk is clearly building in the market and most choose to ignore the facts.  Over the past six trading days the VIX is up 15.2% and the S&P 500 is UP +0.10%.  The inverse correlation of the VIX and the S&P 500 is 0.84.  The prospects of the FED saving the anemic economy are clearly priced in.   


Some may find it unappealing to consider that America’s economy can be as fragile as the data suggests.  As I wrote last week in my Early Look note titled, “BEING A LADY”, “America is a great nation and I’m proud to be an American”.  As a proud American, I would pay good money to see any political party come to grips with reality and face the cold hard truth.    


As Shaw himself would say, “All great truths begin as blasphemies”.


Function in disaster; finish in style,


Howard Penney




Pretty much an in-line quarter.  Commentary in a forthcoming note.



“Fiscal 2011 first quarter total revenues and product sales revenues rose to record first quarter levels as strong demand for our new Bluebird xD gaming machine contributed to our ability to overcome the challenging industry environment for replacement unit sales”

- Brian R. Gamache, Chairman and Chief Executive Officer



  • New unit shipments in the U.S. and Canada: 3,192
    • Replacement: 2,900 units
  • International shipments: 2,146
    • "Growth in Mexico and New South Wales, Australia, along with modest growth in Asia and Latin America, were the primary contributors to the Company’s international growth that more than offset lower shipments to Europe, which continues to be impacted by the challenging economic environment."
  • 10% ASP increase was attributed to "significant initial demand for the new Bluebird xD category-creating gaming machine that was launched in June 2010."
    • "The premium-featured, networked-ready Bluebird®2 and Bluebird xD units represented 90% of total global new unit sales"
    • "Bluebird xD units accounting for 35% of total global shipments"
    • "Mechanical reel products were 20% of global new unit shipments"
  • "Gaming operations revenues were essentially flat at $76.3 million, reflecting a 1% increase in the average installed participation footprint to 10,379 gaming machines and average daily revenue of $76.36 per unit"
  • "The launch of THE LORD OF THE RINGS game on our Adaptive Gaming® platform was the principal contributor to the 556 unit year-over-year net increase in the percentage of coin-in participation category. Other gaming operations revenues reflect a slight decline in royalty income as a result of WMS’ direct entry into markets previously served through content licenses to third-parties."
  • Guidance for Dec 2010 Q:
    • Revenue of $198-to-$205 million with an operating margin of 19.0%-to-19.5%
    • "Our December 2010 quarterly revenue guidance anticipates that the domestic marketplace will continue to reflect gaming operators’ restrained capital budgets and a lower rate of new casino openings and expansions. The operating margin guidance for the December 2010 quarter reflects sequential improvements in product sales gross margin and operating costs declining as a percentage of revenues compared with the September 2010 quarter."
  • Reaffirmed FY2011 revenue guidance of $830-to-$850 million
  • "$3.8 million pre-tax, or $0.04 per diluted share, charge related to the costs of closing the Company’s main Netherlands facility and consolidating its operations into other WMS facilities"
  • "During the September 2010 quarter, we invested $22.9 million in gaming operations equipment...and $50 million in share repurchases.... Our balance sheet remains strong with $122.5 million in total cash and no debt."


  • They are seeing improving sentiment among operators to refresh their floors
  • Units for Penn's new MD casino were not in this quarter's shipment but will be accounted for in the Dec quarter
  • In New South Wales: WMS had 4 of the top penny denomination games and therefore believe that there is meaningful upside to sales here
  • Revenues from gaming operations were basically flat. Average win per day was lower YoY as a result of WAP product that was really refresher product vs. growing the footprint, and the weak consumer environment.
  • Lord of the Rings is pricing as a % of coin in despite being a stand alone unit. 
  • 54% of their sales came from product sales this quarter vs 59% last year.
  • They have identified things to increase xD gross margins and expect to reach margin parity btw xD and BB2 by June 2011, even as they plan to increase BB2 margins at the same time
  • D&A continued to decrease as they benefited from the greater longevity of their units in gaming operations.  They do expect the absolute D&A to increase in the future.
  • Increase in notes receivable reflects their increased direct selling into markets that traditionally depend on 3rd party financing like Indian gaming markets or markets where they go through a distributor
  • In the December quarter this year, there are fewer new openings and expansions in NA but there are opportunities in portal applications, UK margins, Mexico and New South Wales
  • Ultra Hit progressive is live at 5 sites across 100 games. Coin in has increased as much as 35% across these machines.
  • Piggy Banking - 2nd themes in the 1st portal family will launch soon. There will also be a Pengwin launch as the 1st theme in the 2nd portal family.
  • Expect to commercially launch their UK online casino later this quarter but their revenue guidance has very little coming from this business and they expect slightly negative margins
  • PlayersLife web services was also recently launched
  • Already have over 500 Lord of the Rings games rolled out, already have over 125,000 unique sign-ons for LoRs
  • Will demonstrate over a dozen games with PlayersLife capabilities at G2E
  • Will have 4 unique games that will demonstrate the capability of CPUNext 3
  • Do not expect any meaningful increase in replacements in 2011 over 2010 levels
  • Expect to reach their 55% margin for product sales as they fix their margins on xD



  • Thoughts on shipshare?
    • Guess that it's similar to last quarter "31-32%"
    • Of the trade-in games they took - 2/3rds were competitor games
    • Feel like they gained share in the Q
  • Game Ops - was a good quarter vs. their budget. Have 4 WAP launches in Q2 & 3 - lots of the growth is derived from launches which will make for a good Q4. Up against a tough comp when Wizard of Oz was at its zenith.
  • Product sales growth margin - BB2 margins are likely in-line with what it was last year. The issue is that they sold a higher % of xD than they thought and that had a bigger margin impact.
  • Price Is Right didn't place as many units as they thought probably bc they launched with the mechanical spinning reel version instead of the video
  • Margin guidance for FY2011 excludes the Netherlands charge
  • Customer feedback on replacement demand seems similar to last year's - hoping that this year isn't a head fake
  • Is operating margin guidance ambitious for the back half of the year, given their guidance for the Dec quarter?
    • Price increases in Jan
    • xD improvement
    • Additional volume
  • Italy - when should that start to have an impact?
    • Start in the June 2011 quarter
    • Operating lease market rather than a for sale market
  • They have been providing conversion and sale packages to customers for a long time. There is no difference to that approach. That ends up being deferred revenues until they are used by the customers.
  • Discrepancy between cash used on stock buyback in the release and what's on the CFS is due to the closing of the trades during the last 2 days of the quarter
  • Did Cosmo ship in the Sept quarter?
    • yes - most of them shipped 
  • There was no capex spent on Italy in the quarter. Two thirds was on the BB1 to BB2 refresher and the rest was on the Lord of the Rings roll out.
  • Reason that the MD units was delayed was because of the 90 day acceptance clause in the contract.  All the games were for sale.
  • There is an uptick in the quality of their competitor participation product
  • Think that less than 40% of new unit shipments will be international over the next few quarters - still thinks it will be closer to 35%
  • Any overall slowdown in Mexico for Class 3 conversions? Think that the market could be much larger than it is today (40,000 units)
  • Order size in NA is still on average 15-18/units per facility. Class II was a little bigger for them in terms of unit size orders.
  • Bally's lawsuit - litigation cost baked into guidance given in F4Q 2010 earnings release.

Taking Sanity Seriously

This note was originally published at 8am this morning, November 01, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Everything is changing. People are taking their comedians seriously and the politicians as a joke.”

- Will Rogers


This weekend during his 200,000 plus people “Rally To Restore Sanity And/Or Fear”, Jon Stewart joined the ranks of calling the press out as the Manic Media. “If we amplify everything, we hear nothing,” he said. “The press is our immune system. If it overreacts to everything, we eventually get sicker.”


I don’t think he was precluding the financial media from that statement either. At least in politics there’s a core competency in being raging Republican or Democrat. In the arena of finance, the incompetence of academic dogma and Keynesian policy is pervasive. What sell-side lovers amplify as “news” becomes a contra-indicator that we make money from. Thank God for that.


This week brings us the Super Bowl of market hope:

  1. Tuesday = Midterm Elections
  2. Wednesday = Federal Reserve’s Decision to Debauch The Dollar
  3. Thursday = European Central Bank and Bank of England Fiat Fool statements

Then on Friday, everyone will come back from their mid-term election and Dollar debasement parties in Washington DC to be hung-over by Hedgeye reminding them that neither Republicans or Quantitative Guessing will result in anything more than what we already have in this country, Jobless Stagflation.


Jobless Stagflation? What’s that? Don’t ask Barron’s – they decided to title this weekend’s cover story “Bye-Bye, Bear”…


No, I couldn’t make that up if I tried… and no, I don’t think the probability is very high that Barron’s is a leading indicator on the US stock market’s next major move either.


Let’s start Taking Sanity Seriously and understand what’s occurred since Ben Bernanke exercised his conflicted and compromised right to give the perma-bulls and financial media alike something to cheer on since the Jackson Hole Groupthink Summit on August 27th:

  1. The SP500 is up +13%
  2. The CRB Commodities Index is up +14.5%
  3. The Input Price component of Chinese manufacturing is up +15.5%

Seriously? Yes, this is a very serious level of expedited inflation folks.


But what does it mean? Doesn’t this mean that Burning The Buck at the stake is a credible, everybody-wins, strategy? Or does the Manic Media on the Western side of the world get paid to suspend disbelief and take the Groupthinker’s word for it that this is going to end in jobs?


The Manic Media doesn’t do buy-side equations, but we’ll give them another one to chew on now that our clients have their positions on:


QG = COGS inflation


Seriously. It’s sort of one of those IF/THEN equations that they can build upon using the equation we gave them a few weeks back:


QE = i


Take these equations very seriously.


If, Quantitative Easing (QE) = inflation, and QE = QG (Quantitative Guessing), then QG = COGS (cost of goods) inflation. I know, I know. This is as brilliant a mathematical revelation as Morgan Stanley cutting its US Dollar forecast this morning “As The Federal Reserve Sets To Ease.” That and “Thirty Three Hour Race May Induce ECB Surrender on Weak Dollar” are top Bloomberg headlines this morning, fyi.


Notwithstanding the analytical incompetence of the political media on financial matters, this turns Jon Stewart into a very savvy politician, of sorts. Or is he a politician? Maybe he’s just simplifying the common sense signals that normal human beings have in their heads as Washington attempts to fear-monger you into believing that there is only deflation and, as a result, you should earn 0.17% on your hard earned savings in perpetuity?


Here’s what the Chinese think about this American style Burning of the Buck this morning:

  1. “US Dollar depreciation exacerbates currency war” –China Trade Ministry
  2. “China should buy gold, oil, to avoid US Dollar losses” –Chinese Business Reports
  3. “Yuan deposits rise as Hong Kong currency peg debate heats up” –Bloomberg Asia

Seriously? Yes, the Chinese  are seemingly sane folks.


Oh, and they have the real-time price data to support it. There was a creepy little Halloween critter in China’s better than expected PMI reports last night (54.7 OCT vs 53.8 SEP) called COGS (cost of goods) that showed input prices rise to 69.9 in October versus 65.5 and 60.5 in September and August, respectively. At the same time, South Korea released a new high in their inflation report of 4.1% overnight versus 3.6% in September.


If you’re taking the global interconnectedness of markets and prices seriously, you’re seeing inflation rise, globally, as joblessness stagnates locally. This is called Jobless Stagflation. And we don’t think the Manic Media’s stock market cheerleaders will make that go away by the end of this week.


My immediate term support and resistance lines for the SP500 are now 1169 and 1192, respectively. In the Hedgeye Portfolio, I remain short both the US Dollar (UUP) and the SP500 (SPY). I’ll be a seller of all buy-and-hope oriented strength this week.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Taking Sanity Seriously - SERIOUS