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Strength At Home

This note was originally published at 8am this morning, November 29, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The strength of a nation derives from the integrity of the home.”

-Confucius

 

Slowly, but surely, the US Dollar is re-capturing some credibility. Yes, we get that credibility amongst the Fiat Fools is a relative measurement. But for now, with the Europeans doing their best to become Japanese, we’re long the US Dollar and we’ll take what we can get.

 

The strength of a nation is not derived from Piling Debt-Upon-Debt. The strength of a nation is not derived from professional politicians funding long term liabilities with short term fiat paper. The strength of a nation derives from the integrity of a country’s fiscal position.

 

I am well aware of the deficit and debt risks in America. I am certainly not saying they have gone away. That said, everything that matters in global macro happens A) on the margin and B) relative to everything else. What global currency prices are telling me now is that a strong currency at home could be more than just an immediate term TRADE.

 

Last week the US Dollar Index closed up +2.37% and +5.84% higher than its November 4th YTD low. That was the 4th consecutive week of gains and all of a sudden the Buck is Breaking Out above both its immediate and intermediate-term TRADE and TREND lines. Critically, what was resistance for US style fiscal conservatism is now support:

  1. TRADE support = $77.89
  2. TREND support = $79.71

As always, trending currency strength needs multiple factors of support - not the least of which are other foreign currencies weakening. When managing foreign currency risk, never underestimate the power of what’s going on in the rest of the currency basket.

 

In the last 3 weeks, the Euro has dominated headline news. This morning, “news” of an Irish bailout comes with the associated political nonsense. France’s central banking Fiat Chef went as far as to suggest that ze package “is very well tailored and will restore competitiveness in Ireland.” He’s got to be kidding me. Ask someone in Ireland how competitive they are feeling this morning.

 

Euros bulls are obviously having trouble swallowing that weekend old French toast. After losing -3.6% of its value last week, the Euro is trading down another -0.61% this morning at $1.32 versus the USD. It’s broken on both our TRADE and TREND durations:

  1. TRADE = $1.38
  2. TREND = $1.33

All the while, there is this large island of compromised Bureaucrats called Japan that is seeing its currency weaken as the #1 driver to economic-hope slows to a screeching halt. For the month of October, Japanese exports were effectively HALVED in term of their sequential (monthly) growth rate (+7.8% OCT versus +14.4% in SEP). As Asia slows, Japan slows… and these are the globally interconnected days of our lives.

 

Euro DOWN + Yen DOWN = US Dollar UP. Cool. Now Americans need to have the political backbone to maintain the integrity of the home currency. Can we do it? Yes, We Can.

 

I’ve got no problem cheering this Buck Breakout on. Yes, it will equate to immediate term US stock volatility, but I’m already proactively prepared for that. I cut my position in US Equities to The Ber-nank’s favorite exposure (ZERO percent) before the current 3% correction in US Equities started to take hold and this morning I have a 64% asset allocation to Cash waiting, as les bulls like to say, on ze sideline, eh.

 

The Volatility Index (VIX) was up a monster +23.2% last week to 22.22, so at least we’ve dropped some of the levered-long kids off at the pool. Volatility is a concurrent measurement of emotion and can quite often be a contrarian indicator of future performance. Naked swimmers may want to bear that in mind as the price momentum tide rolls out.

 

Strong Dollar nips The Ber-nank’s global inflation race in the bud. Strong Dollar also helps drive up short-term interest rates on my hard earned personal and corporate savings accounts. No, no, Mr. Hard Core Leverage Man, that doesn’t help you too. Strong Dollar helps men and women who are debt-free run strong like bull all over you when you are least expecting it. And this is where the true strength of this Nation lives.

 

My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I remain short the SP500 (SPY) in the Hedgeye Portfolio.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Strength At Home - buck


REVIEWING THE NEW JERSEY GAMING PROPOSALS

The 7 bills designed to breathe life into AC’s casino industry

 

 

Last week the NJ Senate approved 7 bills to improve the casino and racing industry in NJ which are now moving to the Assembly for consideration.  Bill (1) S-490 seeks to legalize internet gaming for existing casino operators.  The second bill, S-1866, would allow for 2 additional “boutique” casino hotels.  Bills (3-7) S- 829, 1866, 1980, 2229, 2290, and 2394 seek to help the horse racing industry by allowing exchange based wagering, implementing a use it or lose it policy of OTW licenses, combining wager pools reducing volatility of payouts, lower minimum number of racing dates, and dedicate more funds to improve and promote horse racing.  

 


Thoughts on the 7 bills:

With the help of politically connected industry experts, we’ve come up with some thoughts on the proposed legislation. The takeaway is that if these bills get signed or passed, there will still be a lot of issues that need to be resolved before anything can be implemented – especially as it pertains to Bill S-490.

  • Bill S-490 conflicts with the NJ constitution which states that gambling is only allowed in Atlantic City or through the lottery. A section of this bill would allow for state wide gambling as long as the servers sit in AC. This issue could require a referendum to resolve.
  • Bill S-490’s international player provisions complicate the bill, beyond just the expected Department of Justice (DOJ) issues.  According to sources, New Jersey Senator Raymond Lezniak (D) has said that those could be negotiated away and are “throw away issues”, but it’s interesting that the Senate passed with it in. 
    • Apparently the international player provision would be a way to beef up state-ringed liquidity. However, we question why international players would bother going to NJ for their internet betting needs.
    • Individual operator sites are also likely to face fierce competition from Full Tilt Poker and Poker Stars which still operate illegally in the US market and basically own it.
  • The international provision in S-490 and just the Bill itself may force the DOJ to take a position on intrastate gaming.  There have been discussions in Illinois and New York as it relates to intrastate gaming for some time, yet the DOJ has not taken a position.  The DOJ position as it relates to the Internet in other areas such as child porn, makes this a very complicated situation.  In the past the DOJ has taken the position that anything that relates to the Internet is considered interstate.   Allowing this to happen in NJ would acknowledge that use of the Internet can be intrastate.
  • The international provision in S-490 can also raise WTO issues
  • Apparently S-829 (account based wagering) initially included a provision to include international players which was later excluded given the DOJ complications
  • It’s puzzling that while the Governor has all but written off the horse racing industry, S-490 proposes to use 15% of the tax proceeds from I-gaming to fund purses
  • It’s still unclear whether the Governor will sign this package of bills; although given the GOP support, it’s likely that he will at least consider it
  • Harrah’s, AC’s largest operator, is opposed to the proposed bills as it believes passage of these bills will complicate their Federal play for internet gaming legalization, which still appears to be a viable option

 

Proposal Summary:

 

Bill #1:  S-490

Sponsored by Sen. Raymond J. Lesniak; approved by a 29-5 vote

  • Proposes to authorize Atlantic City's 11 casinos to operate intrastate and international Internet wagering
  • All games, including poker, that are played at a casino, as well as variations or composites, may be offered through Internet wagering
  • Internet-based games would be available to New Jersey residents and international bettors, but would be prohibited for bettors across state lines, to conform to federal interstate Internet gambling prohibitions.

Bill #2:  S-1866

Sponsored by Whelan; approved 32-0

  • State Casino Control Commission to create a pilot program to offer two new classifications for casino licensure in addition to the traditional 500-plus room capacity, minimum 60,000 square foot casinos that the commission currently licenses:
    • 1 Small-scale casino project:  no more than 24,000 feet of casino space and at least 200 hotel rooms
    • 1 Staged casino facility project:  begin with no more than 34,000 square feet of casino space and at least 200 hotel rooms initially, increasing to 500 rooms within 5 years and would be required to build up to the 500-room requirement within five years of licensure

Bill #3:  S-829

Sponsored by Sen. Richard J. Codey; approved 34-1

  • Authorize the state Racing Commission to issue a license to the state Sports and Exposition Authority to establish an exchange wagering system in New Jersey
  • Allows New Jersey residents who are at least 18 years of age to open an account; bettors would be able to set up exchange wagering accounts; and two or more bettors would be able to place directly opposing wagers on the outcome of a horse race or races
  • Bets could be paired against opposing wagers in New Jersey or any other state that has a legal exchange wagering system. Exchange wagering could also be set up so that bettors can place their bets in person at the racetrack, by direct telephone call, or by communication through some other electronic medium, including over the Internet.

Bill #4:  S-1980

Sponsored by Sen. Paul A. Sarlo; approved 32-1

  • Changes to the state's "Off-Track and Account Wagering Act," to ensure that off-track wagering (OTW) facilities are being built in New Jersey.  Under the bill, the 15 current permit holders would have to show progress by Jan. 1, 2012, or those permits would revert to the horsemen organizations, and if the horsemen organizations cannot show progress, the permits would go to the open market to allow any private investor to bid on the development rights for those facilities.

Bill #5: S-2229

Sponsored by Codey; approved 34-0

  • Allow racetracks to combine all wagers placed on the results of one or more runnings or harness horse races into a single pari-mutuel pool.  By creating larger pari-mutuel pools, racetracks can handle a greater variety of wagers and reduce the adverse effect of large pay-outs to the racetrack's bottom line.

Bill #6:  S-2390

Sponsored by Sarlo and Whelan; approved 34-0

  • Lower the minimum requirement for the number of standardbred horse racing dates scheduled at the Meadowlands Racetrack and Freehold Raceway to 100 dates per season at each track; ensuring larger purses and more prestigious races at the racetrack each year

Bill #7:  S-2394

Sponsored by Sarlo;  approved 31-3

  • Dedicate an amount equal to the sales and use taxes associated with horse racing, breeding, training, raising or boarding to programs designed to improve and promote thoroughbred and standardbred horse breeding in New Jersey.

Require the director of the state Division of Taxation to annually deposit an amount equal to the sales and use tax revenue collected in association with horse racing and breeding into a new fund within the state Department of Law and Public Safety - the "New Jersey Standardbred and Thoroughbred Racehorse Incentive Fund" - which will be maintained by the state Racing Commission.


Do Washington and the IMF have your back?

Washington continues to spend US taxpayers’ dollars with reckless abandon.  Who is looking out for the US tax payer? 

 

After the fact, the International Monetary Fund has conceded it could have done better in predicting Ireland’s property and banking crash that led to this weekend announcement of a $113 billion bail-out by the IMF, of which the USA is the largest contributor with a 17.67% quota. 

 

Ajai Chopra, deputy director of the IMF’s European department, who leads the mission to Ireland, said in an interview with the Financial Times: “we are a learning institution” and “there is no question that we – and other observers – could have done better.”

 

While the comments from the Ajai Chopra appear candid and forthcoming they do not instill a lot of confidence in an institution that has the responsibility of doling out US tax payer money to bail out the European Union. 

 

On November 5, 2010, Timothy Geithner (with a nod from Chairman Bernanke) agreed to increase the commitment of the US tax payer share of bailing out the world’s problems from $60 billion to $133 billion.  In total, the total size of the IMF quotas – the contributions of the 187 member states to the fund’s capital – will be doubled from $340 billion to about $756 billion. 

 

I could be wrong, but I don’t think the Treasury wrote a memo to the 2 million Americans whose unemployment benefits are expiring informing them that their benefits are less important than helping the Irish government shore up its hemorrhaging banking system.

 

Also on November 5th the IMF’s Executive Board realigned the quota shares to better reflect the changing relative weights of the IMF’s member countries in the global economy, but the USA 17.67% quota is the largest share and bigger that the BRIC’s combined.  In the most recent realignment, China jumped Germany, France and Britain in the Fund's rankings, with its quota share rising to 6.19% from 3.65%.  India is eighth, Russia is ninth, and Brazil is tenth in terms of their share.  Together, the four countries will have 14.18% of IMF quotas. 

 

This weekend, the $113 billion bailout of Ireland sheds some light on why the IMF expedited the decision to rush through a 122% increase in the size of the fund.  Ireland alone accounted for 33% of the total funds previously available.   

Today the press is making a big deal about Obama putting in a pay freeze for government employees, citing it will save $2 billion on 2011.  Where was the manic media when the head of the treasury and Federal Reserve agreed to spend an incremental $73 billion of US taxpayer money on “bail-out” money for the IMF? 

 

These savings being made by the administration need to be put into perspective because they pale in comparison to the figures being spent on bailing out other countries.  Why is there not more attention being focused on this?

 

Today’s FT provided a list of banks called the Inter Alpha Group of Banks.  They represent everything that went wrong in European banking from 2005 to 2010;

  • Commerzbank — Subprime exposure, disastrous acquisition, 2008 blow-up, government capital injection, peripheral exposure
  • ING — Subprime exposure, 2008 blow-up, government capital injection, forced break-up, peripheral exposure.
  • Allied Irish Banks – too painful to recount
  • Banco Espirito Santo — peripheral exposure
  • National Bank of Greece — peripheral exposure from hell
  • KBC Bank – subprime exposure, 2008 blow up, government capital injection(s)
  • Royal Bank of Scotland – subprime exposure, disastrous acquisition, 2008 blow-up, government capital injection
  • Société Générale — subprime exposure,  weird derivatives stuff, weirder staff management
  • Santander – Spanish property exposure, peripheral exposure

 

How does it make you feel that the US taxpayer is providing $133 billion to keep these bankers solvent?

 

Howard Penney

Managing Director 


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R3: Black and Blue

R3: REQUIRED RETAIL READING

November 29, 2010

 

 

 

OUR TAKE ON OVERNIGHT NEWS

 

Yes, It’s all about Black Friday and Cyber Monday. It’s painful to get caught up in who sold more sweater sets, what video game is hot, and what parts of the country had climate that was 5 degrees cooler than a year-ago. But let’s at least review that more notable headlines…

  1. First off, ranges for all the tracking services were between 0% and 3.5% growth. In other words, there was ample ammo for both the bulls and bears to take advantage of.
  2. Let’s out this weekend into context: The Black Friday weekend accounts for at least 10 percent of holiday sales, while 40 percent of the season’s sales occur between Dec. 15 and 25. Holiday sales overall generally account for 30-40% of a retailer’s annual case flow.
  3. Per WWD, “The Consumer is Back!” With consumers shopping a lot for them-selves this past weekend, retailers optimistically believe many still need to get out and buy gifts for their families and friends. However, they cautioned that the Black Friday period shouldn’t be regarded as a true barometer for what lies ahead, and noted that the 2008 holiday season was a bust even after a big Black Friday. “There’s just no guarantee,” acknowledged Terry Lundgren, chairman, chief executive officer and president of Macy’s Inc. But Black Friday, Lundgren added, “felt good, right out of the box.” “While Black Friday weekend is not always an indicator of holiday season performance, retailers should be encouraged that a focus on value and discretionary gifts has shoppers in the spirit to spend,” said Matthew Shay, NRF president and ceo. <WWD> 
  4. “Cyber Monday is really evolving to “Cyber Everyday.”  Per NPD, “[E-tailers] are using online as the continuous sale of the season. Cyber Monday has never been the busiest online shopping day; the biggest day is 10 days before Christmas. At eBay, peak buying hours on Black Friday were 6 p.m. to 8 p.m. MST. Meanwhile, sales from eBay’s mobile apps in the U.S. nearly doubled over Black Friday 2009. Globally, eBay mobile is on track to nearly triple its sales over last year. EBay expects mobile sales to exceed $1.5 billion this year. In women’s wear, Ugg boots were popular at $99, almost 40 percent off, according to a spokeswoman. So was a Hayden cashmere sweater for $69 at Bluefly’s eBay store. But while apparel was popular, the biggest categories online mirrored those at brick-and-mortar stores: consumer electronics and toys were in strong demand. <WWD> 

Hedgeye Retail’s Take: Good or bad, it is flat-out iresponsble to draw a conclusion based on this weekend. We’ve had solid Black Friday weekends in the past that have ended very poorly. One thing we do find notable is that men accounted for a greater percent of traffic. That’s purely anecdotal – but if true then it is a good event for retail. Men tend to have longer-and more drawn out cycles in fashion.

 

JNY, Company of the Year - Keeping up with The Jones Group wasn’t easy in 2010. In a year when many fashion players were reluctant to make big moves, the company struck high-profile footwear deals with Stuart Weitzman and Brian Atwood, upped the presence of its core brands and brought new talent in to every corner of the company. “We’re becoming the place to be,” said Jones CEO Wesley Card, who recently changed the name of the 40-year-old firm from Jones Apparel Group to The Jones Group to better reflect its new, wide-ranging approach. “We wanted to keep the Jones connection and [incorporate] a modern tone,” said Card. “And it is more attractive to outsiders looking at us.” “The name change symbolizes that other categories are just as important,” added Richard Dickson, the former Mattel executive who Card hired as his right-hand man last January, a move the CEO called the biggest milestone of the year.  “I really felt I could get the company only so far with my background and expertise. We’ve always been very good at operating the business, but that’s different than managing a brand,” Card said. “Richard loves the fashion and the product ... and he was ready to take on something big.” Dickson, who serves as president of Jones and CEO of its branded business and was the architect behind the reinvention of Barbie, knows how to capitalize on good brand stories. He said he found plenty of them when he arrived at Jones, which has been built around powerhouse department store labels such as Nine West, Easy Spirit, Jones New York and Anne Klein. “This is a stable of healthy brands that have stood the test of time,” Dickson said. “They will only get stronger with the fresh energy at the company.” <WWD>

Hedgeye Retail’s Take: Apparently share performance is not part of WWD’s “Company of the Year” criteria. The fact that JNY took the cake is an embarrassment to the industry.               

 

Wal-Mart Launches Formal Bid for Massmart - Wal-Mart, looking to tap growth in Africa, said on Monday that it had made a formal offer of about 17 billion rand ($2.4 billion) for a majority stake in Massmart, the South African retail chain. Wal-Mart said its aim was to “grow its international business by increasing its exposure to emerging markets with high growth potential.” Wal-Mart is offering 148 rand per Massmart share to acquire 51 percent in the discount retailer, a 19.2 percent premium over the 30-day moving average of the company’s stock price as of September 23, the shares’ last day of trading before the approach was announced. Having obtained a unanimous recommendation from the Massmart board, Wal-Mart needs the approval of the South African competition authorities as well as 75 percent of Massmart’s shareholders. <Dealbook.NYTimes.com>

Hedgeye Retail’s Take: WMT continues to seek international growth opportunities in an effort to create greater scale and further reduce its cost base and appears to be doing just that in South Africa. Apparently Japan isn’t the only country where the retailer has stepped up acquisition activity of late.

 

Running Remains Robust - The red-hot product category is on track to finish 2010 up 20 percent over the $5 billion in sales it did last year in the U.S., according to SportsOneSource. Almost all retail segments have profited from that boom: Mall and family footwear chains have both seen sales rise sharply. And the technical channel, which sped through the recession posting gains, is poised to finish 2010 at $760 million, up about 12 percent from last year, according to the Independent Running Retailers Association, whose membership represents roughly 60 percent of the specialty store volume. <WWD>

Hedgeye Retail’s Take: With sales in technical running really starting to ramp in the 2H of 2010, we expect continued strength to carry well into 2011 with footwear retailers as the primary beneficiaries.

 

Coty Closes in on OPI - Coty Inc., the seller of perfumes by Sarah Jessica Parker and Vera Wang, is close to buying nail-care company OPI Products Inc. for about $1 billion in cash, said two people with knowledge of the situation. The two closely held companies may announce the deal by today, said the people, who asked not to be identified because the matter is private. Private-equity firms Bain Capital LLC and Advent International Corp. were among the companies that also made bids, people close to the situation said last month. OPI, founded almost three decades ago by Chief Executive Officer George Schaeffer, sells polish used in nail salons, hand-and-foot care products and body lotion. Coty has bolstered its cosmetics business with acquisitions this month, agreeing to buy skin-care maker Philosophy and Dr. Scheller Cosmetics AG. Cysette Burset, a spokeswoman for New York-based Coty, wasn’t reachable for comment, nor was Harris Shepard, a representative for OPI, which is based in North Hollywood, California. <Bloomberg>

Hedgeye Retail’s Take: Just a week after acquiring Philosophy and Dr. Scheller Cosmetics AG earlier this month, Coty remains zeroed in on the nail-care company as it continues to build out its cosmetics business. With Bain and Advent International also in the running for OPI, Coty faces a more competition this time around and likely a higher premium as well.

 

Luxury Watches See Bright 2011 -  Watchmakers are looking to keep up the momentum. Luxury watches were particularly hard hit at the start of the global financial crisis two years ago. But with the U.S. stock market up more than 7 percent this year, compensation rebounding among high earners in the financial services industry and pent-up demand bred by consumer austerity, the forecasts of brand executives are positive. The watch sector at Christian Dior, whose timepieces retail from $1,000 to $500,000, is among the encouraging indicators of strength in the luxury sector. Sidney Toledano, president and chief executive officer of Christian Dior, said the company’s watch business “is developing extremely well,” having picked up sharply since the beginning of the year. “It’s one of the key categories developing in the first nine months. We’re dedicating even more space [to watches] in our stores.” Toledano cited robust sales of Dior’s Christal range, and of limited edition watches and unique pieces carrying prices of as much as 200,000 euros, or $266,000 at current exchange rates. Demand for watches across Asia, and particularly in China, is “very, very strong,” Toledano said. Philippe Pascal, president of LVMH’s watch and jewelry group, indicated that the luxury sector will be propelled into 2011 following a year of growth. “After a very dynamic nine months, up 29 percent versus last year, we started the [holiday] season with significantly increased marketing investments on key brands in key markets, including in the U.S.A., to support Tag Heuer, Hublot and Zenith. “Retail assortments are improving for our brands and, in fact, we are out of stock on some of our bestsellers due to demand,” he said. “So we are expecting a good holiday season across the world and for Chinese New Year [early February].” <WWD>

Hedgeye Retail’s Take: We can’t make a blanket statement about all of luxury based on one company...but $500,000 watches picking up steam???

 

Comscore Results on Free Shipping - A notable study from Comscore on e-Commerce Transactions with Free Shipping indicates that free shipping was included on 41% of transactions in Q3 down from 42% last year. With Wal-Mart challenging retailers to extend the option to consumers here in Q4 in addition to fewer incentives in Q3, we suspect Q4 transactions in 2010 is likely to set a new high water market compared to last year’s 44% level.

Hedgeye Retail’s Take: Perhaps the retailers that adapted the Zappos Model realized that it is impossible to replicate profitable on a small scale. (Note, Amazon is NOT small scale).

 

Consensus Yields Demographic Shifts - The overall growth of the online population in the US is stagnating, and most future growth will come from increases in minority audiences including Hispanics, blacks, seniors and children. Hispanics are the fastest-growing segment of the US population, and eMarketer expects the Hispanic online population to grow by nearly 10 million people between 2010 and 2014. Next year, eMarketer forecasts 32.2 million Hispanics, or 62.9% of the US Hispanic population, will be online. The results of the 2010 census could push those estimates up even further. While the bureau has consistently projected strong growth within minority populations through 2050, the new figures for all races may change more than the bureau projected. The census’s open-ended questions on racial and ethnic background—including a write-in answer for filers who did not feel their background could be explained by a single check-box answer—caused much confusion and comment. It is still unclear how respondents identified themselves and their families. <emarketer>

Hedgeye Retail’s Take: Looks like one of the fastest growing consumer bases just accelerated.

 

R3: Black and Blue - R3 11 29 10

 

 


MACAU STILL TRACKING UP AROUND 40% FOR NOVEMBER

November 40% growth projection unchanged.

 

 

Macau table game revenues were HK$14.8 billion through this past weekend.  Including two more days of revenues and a full month of slot revenue, we are keeping our projection of HK$16.2-16.7 billion for November.  This represents 37-41% growth over November of 2009. 

 

In terms of market share, LVS continues to move higher after a dreadful start, but 15% is still well below recent levels of 19-20%.  Surely, low hold has played a part.  MPEL has moderated following a strong start to the month and is back down to 14.2%.  Wynn’s share is a healthy 16.4%, a run rate they are undoubtedly happy with following the last few months of disappointing market share.

 

As always, we will have the full breakout (Mass, VIP, slots, etc.) later this week.

 

MACAU STILL TRACKING UP AROUND 40% FOR NOVEMBER - macau133


Hedgeye Editorial: "1995 Revisited"

Post Thanksgiving To Do: Show more client editorials from the Hedgeye Network

 

KM Reply:

 

On the timing of the debt/deficit commission - fair point - someone always knows something... but in this case, I think what you and I know is what any rational analyst is capable of concluding. This commission has been in motion for a while now and I think they are simply reflecting upon what we talk about every day - they know what we know.

 

Hedgeye Editorial

To: Keith R. McCullough

Subject: 1995 Revisited

 

Keith - I did not run a hedge fund in 1995 but I sat across the desk from someone who did. 

 

Upon reflection here are my thoughts on the asset allocation (sell bonds and move to stocks) question.  The answer to the question revolves around the composition of bond exposure and the collateral upon which it rests. 

 

As we now know, many strategies employ leverage and leverage requires collateral.  To the extent people have no leverage, own bonds outright and can re-allocate into stocks I see the "rotation" argument.  To the extent there is leveraged derivative composition (swaps etc) to create bond exposure and a leveraged equity portfolio is the collateral upon which the counterparty has access by virtue of the swaps - you have margin calls.  I suspect that reducing leverage impacts the prices of all underlying collateral - asset class not withstanding - (we have seen this movie before).

 

Second point - the timing of this Debt Commission "draft release" needs some scrutiny.  Why the rush?  Possible answers - Could they know how shaky the foundation of low interest rates is to the status quo?  Could they have insight about the need for other G-20 members to see a framework of a plan?  By virtue of intensely studying the issue, they know something and the timing is an expression of that knowledge...

 

-Anonymous Hedge Fund PM


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