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Hedgeye Editorial: "Back to the Future"

Below is a real-time response from a retired Wall Street executive to America’s decision to maintain a bloated budget deficit. There are more reasons than just inflation that are driving up long term US sovereign yields.

KM

 

Hedgeye Editorial

To: Keith McCullough

Subject: Back to the Future

 

Good morning –

 

God, Keith, they make me sick.  They, being the politicians.

 

The People spoke…..”Reduce the size of government. No tax increases to fuel more wasteful spending.”

 

As a response, the current Senate minority, supposedly on principle, said no to extending unemployment benefits unless there were offsets in the disgustingly bloated budget.

 

But, leave it to these monkeys. We now read this morning that, in order to secure a “deal” on extending the current tax regime, there will be an extension of unemployment benefits. Of course, sans offsets.

 

More of the same, the same, the same. It does not stop.

 

Yet, merrily we sing along as we get closer and closer to the precipice.

 

God save my grandchildren.

 

Warmest regards,

 

Mark


R3: L&T, Trust, AMZN, and Jimmy's Choos

R3: REQUIRED RETAIL READING

December 6,2010

 

RESEARCH ANECDOTES

  • What a difference a year makes.  This year’s Super Bowl is shaping up to be a virtual car lot, with a whopping eight automakers scheduled to advertise during the most televised event in the world.  Interestingly, this compares to just six auto advertisements last year and five the year before.  Not only are automakers snatching up the $3 million per 30 second slots but they are also planning 2-3 ads each.
  • E-commerce appears to have significant legs, at least if you consider the following facts from a recent Ad Age/Ispos Observer survey.  While 70% of consumers are now comfortable making purchases online, only 50% are doing so.  Furthermore, of those actually shopping online, only 25% of their spend makes its way to the internet.  Clearly much more growth to come from the world of online shopping.
  • According to a Harris Interactive poll, supermarkets and hospitals rank as the most trusted industries to consumers out of 17 industry groups.  Interestingly, while still holding the top spot, supermarkets are highly trusted by 29% of consumers, down substantially from 40% in 2003.  The decline is second only to banks, which lost 15% of trusted consumers over the same time frame.

OUR TAKE ON OVERNIGHT NEWS

 

Cool Temperatures Boost Outerwear Sales - November’s big chill heated up sales for outerwear manufacturers and retailers, and they’re looking for more of the same from Mother Nature. After a warmer than usual start to fall in much of the country — an average October temperature of 56.9 degrees — the weather turned more wintry. Although there were a few days of springlike readings this week, weather forecasting firm Planalytics said that last month was the coldest in the U.S. since 2002 and Black Friday weekend was the coldest in three years. The combination generated an estimated 11 percent spike in outerwear sales compared w ith a year ago. Forecasters predict colder temperatures starting today. Planalytics reported that outerwear sales climbed in several cities, including Los Angeles, where temperatures were in the 40s and volume was up 90 percent over last year; the Seattle region saw a 43 percent increase, Cleveland, 39 percent and Boston, 21 percent. “It’s completely weather-dependent,” said Ken Giddon, president of Rothmans in New York. “When it’s cold, people buy outerwear. And men shop when they’re moved to shop.” Giddon said the outerwear business hasn’t been “truly exciting yet,” but in the past few weeks, he has experienced “nice action” with Spiewak’s $175 retro-inspired wool peacoat and jackets from Cole Haan. Dress overcoats in shorter, tighter models from Hugo Boss, which retail for $645, are also standouts. Stuart Segel, president of Mr. Sid in Newton Center, Mass., has seen an uptick in outerwear sales since the colder temperatures arrived. “The little leather we had we sold quite well,” he said. Coats in technical fabrics or waxed cotton finishes also connected with customers. <WWD>

Hedgeye Retail’s Take: Good timing for the weather to kick in after extremely tough compares with last year’s “perfect storm” of frigid temps that created the appearance of a slowdown.  This year is actually shaping up to be more traditional in terms of timing of outerwear purchases.  It was last year that was an anomaly.

 

FTC Supports 'Do Not Track' Guidelines -The Federal Trade Commission endorsed the idea of a “do not track” mechanism that would allow consumers to opt out of certain varieties of targeted online marketing that have gained popularity among retailers. The endorsement was one piece of a larger preliminary staff report on consumer privacy in which the commission proposed a framework it says would simplify and streamline online privacy protections for consumers. Among the issues addressed in the report is how consumer activity online can be tracked, stored and used by third parties to target ads to consumers. The commission said first-party marketing, where a company communicates directly with a user based on their purchases on its site, is not at issue. What could be affected by the FTC proposals are practices like retargeting, where consumer activity online is tracked and used to serve ads up to potential customers after they’ve left a site. Most retailers have started using retargeting in the last year because it boosts conversion by several points. So, for example, if a Web surfer were to visit The New York Times after browsing at Saks, she might see a display ad for Saks on the Times’ Web site. <WWD>

Hedgeye Retail’s Take:   Interesting twist for online marketers which stand to take a major hit if they’re no longer allowed to use “cookies” for retargeting.  Seems like this would be hard to enforce but nonetheless it may save consumers from seeing repeated ads from sites they recently browsed.  Ever wonder why you see repeated Under Armour ads after only visiting the UA homepage just once?  Now you know why.

 

UK Bans Reebok Easytone Curve Ads - The United Kingdom has banned print and TV advertisements for Reebok Eastytone Curve shoes, saying research the manufacturer submitted was either too limited or failed to substantiate its claims that the shoes improves muscle tone. The magazine ad featured headline text that stated "Reetone [sic] with every step. Get up to 28% more of a workout for your bum. And up to 11% more for your hamstrings and calves". Underneath was an outline of a woman with the text "28% gluteus maximus", "11% hamstrings" and "11% calves" written next to the corresponding parts of her body. The TV ad featured women walking, dancing, jumping, spinning around and standing, with the camera fixed on their bottoms and legs; all were wearing trainers. The voice-over stated "Reebok EasyTone. Helps tone legs and bum more than regular trainers. Reebok EasyTone with balanced ball inspired technology. Better legs and better bum with every step".   The U.K's Advertising Standards Authority received two complaints challenging the efficacy claims for the product and alleging they were misleading and could not be substantiated.  <Sports One>

Hedgeye Retail’s Take:  Score one for UK consumer protection.  Unfortunately in the U.S, advertising claims are harder to enforce. Ever wonder how “As Seen on TV” turned into a multi-million dollar business?  The ShamWow doesn’t exactly work as advertised.

 

John Lobb Debuts New Campaign, Styles John Lobb has plenty to celebrate — from a new campaign to a range of limited-edition styles. The Paris-based men’s footwear brand recently unveiled its spring ’11 marketing campaign, which highlights the 190 steps it takes to make one pair of shoes. JohnLobb.com/190-Steps shows the craftsmanship that goes into each shoe. From No. 2 (preparation) to No. 182 (hand glazing), the 190 steps illustrate John Lobb’s balance between traditional and modern shoemaking, said Renaud Paul-Dauphin, CEO and general director of the brand. “I like the contrast of modernity and the very iconic way of doing Goodyear-welted shoes,” he said. “It’s about a complex process that takes time — time to make it and be sure you can wear it for a lifetime. Our mission is to keep those [steps] alive.” <WWD>

Hedgeye Retail’s Take:   This campaign is truly worth checking out if you have any interest in learning about the lost art of making something by hand.  Now if only we had a similar site to chronicle the production of a $13 pair of shoes from Payless. 

 

Google punishes rogue e-retailers -Google announced this week that it had changed the way it ranks retail sites to ensure that abusive retailers don’t move up in natural search rankings as a result of consumer complaints posted on online forums. The search engine acted quickly following Sunday’s publication by the New York Times of a major article suggesting that an online retailer of designer eyewear, DecorMyEyes.com, was benefiting from the many complaints consumers were posting about the retailer’s poor service, profane language and threatening behavior. “Being bad to customers is bad for business on Google,” Amit Singhal, a Google fellow, wrote in a post to the Google blog yesterday. Singhal said Google had identified hundreds of merchants, including the one mentioned in the New York Times article, “that, in our opinion, provide an extremely poor user experience.” He did not specify how Google would treat those merchants or how it identifies bad retailers. But he said Google had already implemented a change to the way it ranks these retailers “and Google users are now getting a better experience as a result.” The newspaper article suggested that DecorMyEyes.com benefited from the many negative comments about it on consumer review sites—RipOffReport.com says there are more than 100 complaints about the e-retailer on its site—because those postings contained links from authoritative sites to DecorMyEyes.com, and that search engines like Google give credit for any link to a web site, regardless of whether the comment is positive or negative. <Internet Retailer>

Hedgeye Retail’s Take:  Surprised it took this long for Google to realize that “bad” shouldn’t be turned into something good.  Clearly the retailers were benefitting from “any publicity is good publicity”.  Good news for consumers getting sucked into deals that look too good to be true.

 

Lord & Taylor Confirms Yonkers Unit -  Lord & Taylor says Yonkers, N.Y., could just be the first stop on a new expansion trail. “Business has been very strong. We are looking to open new stores to expand our concept,” Richard Baker, chairman of Lord & Taylor’s parent company, the Hudson’s Bay Trading Co., told WWD. “We are working on a number of additional full-line stores, in addition to outlets, in existing markets and perhaps new markets.” He didn’t specify any potential sites. Baker, and Forest City Enterprises Inc., developer of the Ridge Hill mixed-use center in Yonkers, confirmed Friday that Lord & Taylor will open an 80,000-square-foot, two-level unit on the site in spring 2012. Yonkers marks Lord & Taylor’s first regular-price store opening in 10 years. Lord & Taylor now operates 46 units concentrated in the Northeast. There are also stores in Washington, Chicago and Detroit. Lord & Taylor opened its first two outlets this year. “Ridge Hill is located in a portion of Westchester with great demographics. We think it is very underserved,” Baker said. <WWD>

Hedgeye Retail’s Take:   Growth=IPO (eventually).

 

What's Next for Mindy Meads? - Mindy Meads, Aeropostale Inc.’s co-chief executive officer, herself chose to leave the company, market sources said. The disclosure Wednesday that Meads’ last day at the retailer is Dec. 15 surprised the investment community. Meads could not be reached for comment about the reasons for her departure. An Aéropostale spokesman said Meads will “pursue other interests,” and that she’s leaving the company with a “solid infrastructure” of merchants. Some sources said she didn’t always see eye to eye with former ceo Julian Geiger, who resigned earlier this year. Geiger, who remains as chairman, named Meads and then-chief operating officer and executive vice president Thomas Johnson co-ceos in February. The shared position is atypical, and sources said that Meads became less directly involved with merchandising, a role at which she excelled. Before Meads joined Aéropostale three years ago, boxy sweatshirts and traditional cotton T-shirts lined the store’s shelves. Meads infused the brand with a trendy sensibility while keeping prices low. <WWD>

Hedgeye Retail’s Take:   Not surprisingly co-CEO’s didn’t work out.  This was one of our top risks as it pertained to ARO beginning the day the succession plan was originally announced.

 

Jimmy Choo to Relaunch Men's Footwear - Jimmy Choo is re-entering the men’s footwear arena. Though the London-based luxury brand had previously offered men’s shoes (the line was discontinued in 2002), its multi-gender collaboration last year with H&M prompted it to embark on a new collection, set for fall ’11. “The H&M collaboration showed us that our brand is bigger than our business today and that there is a demand for the Jimmy Choo aesthetic in the men’s categories,” said CEO Joshua Schulman. “Creating a focused Jimmy Choo men’s shoe collection at the luxury level is consistent with our goal of evolving into a significant dual gender lifestyle brand across categories, channels and geographies.” The Italian-made assortment of about 12 styles will include dress shoes, moccasins, biker boots, sneakers and evening slippers in a variety of colors and materials. <WWD>

Hedgeye Retail’s Take:   Is there really demand for men’s Jimmy Choo’s or just the co-branded, cheaper collabs with H&M?  Sounds like yet another attempt to diversify ahead of another impending IPO.

 

Amazon invests $175 million in Groupon rival LivingSocial - While analysts await confirmation of rumors that Google Inc. will acquire Groupon, the  daily deal site’s principal rival LivingSocial announced yesterday that it secured a $175 million investment from Amazon.com Inc. LivingSocial also announced it raised $8 million from venture capital firm Lightspeed Venture Partners.  LivingSocial says it generates revenue of more than $1 million a day on average. It says it expects its 2011 revenue will surpass $500 million .Amazon.com, No. 1 in the Internet Retailer Top 500 Guide, investing in LivingSocial is a clear sign the world’s largest online retailer intends to become a bigger player in both online daily deals as well as in local commerce, says Colin Sebastian, an analyst for Lazard Capital Markets who covers e-commerce stocks.  <Internet Retailer>

Hedgeye Retail’s Take:  Clearly a cheaper way to play the “Groupon” euphoria in an industry that has yet to consolidate and shake out all the fringe players.  Interestingly, this puts Amazon slightly closer to the physical world of retailing with the coupon site generally focused on local, real-world discounts.


THE M3: GALAXY HK BOND SALE; SANDS APPEAL; COTAI PLOTS

The Macau Metro Monitor, December 6th, 2010


GALAXY ENTERTAINMENT PLANS 1 BILLION YUAN BOND SALE IN HONG KONG
Bloomberg

Galaxy will be the 1st operator to access the HK debt market by raising 1 billion yuan ($150 MM).  Robert Drake, Galaxy's CFO, said Galaxy will begin marketing the bonds to investors immediately.  “This is opportunistic financing,” Drake said. “There’s a strong demand for renminbi out there and this is just another example of how we use opportunities to increase our financial flexibility and strengthen our balance sheet."  BofA, BOC International, HSBC, and UBS AG will manage the sale.  According to the a source, the company will meet bond investors in Hong Kong and Singapore from Dec. 7. 


SANDS FILES APPEAL macaubusiness.com, Intelligence Macau

According to Sands' legal advisor, Leonel Alves, Sands China has already appealed the government’s decision to reject the company’s application for additional land in Cotai on the sites known as parcels 7 and 8.  He has asked Macau CEO Chui to overturn the rejection of the land concession.  IM was surprised that the meeting with Chui took place immediately.  IM says getting a swift meeting with Chui is not a smart move by LVS as it smacks hugely of foreign saber-rattling makes Chui look weak. 

 

GOVERNMENT LOOKS FOR 'MORE DIVERSIFICATION' IN COTAI PLOTS Macau Daily TImes

Director of the Lands, Public Works and Transport Bureau (DSSOPT), Jaime Carion, said yesterday that the Government is now looking at developing non-gaming projects in Cotai.  "We are looking at more diversification in the Cotai area rather than being exclusively for the casino industry. We want to promote more cultural activities, sightseeing and recreation for families,” he pointed out.  Carion reiterated that the Sands'  7 & 8 sites are not "fully complete" and that SJM had expressed interest in the sites. 


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WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 10 improved / 1 of 10 worsened / 3 of 10 unchanged
  • Intermediate-term (MoM): Negative / 0 of 10 improved / 7 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Negative / 0 of 10 improved / 6 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - summary

 

1. US Financials CDS Monitor – Swaps tightened across domestic financials last week, widening for just 3 of the 28 reference entities and tightening for the other 25.

Tightened the most vs last week: PRU, MBI, AGO

Widened the most vs last week: XL, AON, MMC

Tightened the most vs last month/widened the least: SLM, PMI, JPM

Widened the most vs last month: CB, TRV, MBI

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - us cds

 

2. European Financials CDS Monitor – In Europe, banks swaps tightened significantly following the Irish bailout.  Swaps tightened for 37 of the 39 reference entities.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - euro cds

 

3. Sovereign CDS – Sovereign CDS fell 39 bps on average last week, as swaps responded favorably to the bailout.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 8.23 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - high yield

 

5. Leveraged Loan Index Monitor – After sinking since early November, the Leveraged Loan Index reversed course and rose 1.3 points versus last week.   

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - Lev loan

 

6. TED Spread Monitor – The TED spread increased sharply into the end of the week, rising 3 points by Friday to close at 17.2.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - TED spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 7.5 points, closing at 21.9 on Friday.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell, ending the week 21 bps below last week’s close.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads closed the week at 173 bps, 8 bps lower than last week.     

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - MCDX

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index was close to flat, falling 0.2 points at 217.  

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - Baltic Dry

 

11. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 0.33% upside to TRADE resistance, 2.2% downside to TRADE support. This implies 6 to 1 downside to upside ratio near-term. We generally look to see 2 to 1 upside/downside ratios to be long and 2 to 1 downside ratios to be short.

 

WEEKLY FINANCIALS RISK MONITOR: NOW POSITIVE ON A SHORT-TERM BASIS - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 6, 2010

 

As we look at today’s set up for the S&P 500, the range is 30 points or -2.1% downside to 1199 and 0.35% upside to 1229.  Equity futures are trading below fair value following Friday's late recovery sparked by a leak of Fed Chairman Bernanke's interview for 60 Minutes which went out overnight. Bernanke said the Fed could purchase Treasuries beyond the scheduled $600B on the back of slow normalization of the US unemployment rate suggesting QE3 is a possibility.

In what is expected to be a quiet start to the week, apparent problems within the European Union as how to best to tackle the deepening sovereign debt crisis likely to dominate trading.

  • Human Genome Sciences Inc. (HGSI) and Glaxo said FDA has extended Benlysta PDUFA target date from Dec. 9 2010 to Mar. 10 and requested additional information
  • J.M. Smucker (SJM) may rise ~7% over next year as variety of food offerings, strong cash position offset rising coffee costs, Barron’s reported
  • Massey Energy (MEE) said President Baxter Phillips Jr. will succeed Don Blankenship as ceo after he retires on Dec. 31
  • Oshkosh (OSK) won $413.2m contract for 1,800 tactical vehicles for the Army National Guard, U.S. Defense Department said
  • Urban Outfitters (URBN) may not be a bargain vs peers, Barron’s reported in its “The Trader” column
  • Whirlpool (WHR) may rise to $100 or higher amid growing emerging market demand, Barron’s said

 PERFORMANCE

  • One day: Dow +0.17%, S&P +0.26%, Nasdaq +0.47%, Russell +0.69%
  • Last Week:  Dow +2.62%, S&P +2.97%, Nasdaq +2.24%, Russell +3.23%
  • Month-to-date: Dow +3.42%, S&P +3.74%, Nasdaq +3.73%, Russell +4.05%
  • Quarter-to-date: Dow +5.51%, S&P +7.32%, Nasdaq +9.41%, Russell +11.87%
  • Year-to-date: Dow +9.15%, S&P +9.83%, Nasdaq +14.2%, Russell +20.95%
  • Sector Performance (last week): Materials +6.14%, Energy +5.30%, Financials +5.27%, Industrials +4.10%, Consumer Discretionary +3.06%, Tech +2.29%, Healthcare +1.67%, Consumer Staples +1.09% and Utilities +1.34%,

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 728 (-542)  
  • VOLUME: NYSE 906.80 (-18.71%)
  • VIX:  18.01 -7.12% YTD PERFORMANCE: -16.93%
  • SPX PUT/CALL RATIO: 1.31 from 1.58 -16.88%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.36 0.203 (1.182%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.02%  
  • YIELD CURVE: 2.54 from 2.44

COMMODITY/GROWTH EXPECTATION:

  • CRB: 316.16 +1.30% (+4.99% last week)
  • Oil: 89.19 +1.35% (+6.48% last week)
  • COPPER: 399.90 +0.50% (+6.29% last week)
  • GOLD: 1,406.28 +1.39% (+3.40% last week)

CURRENCIES:

  • EURO: 1.3414 +1.59%% (+1.30% last week)
  • DOLLAR: 79.377 -1.15% (-1.22% last week)

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets have pared or reversed initial modest gains as the regions debt worries weighed ahead of the EuroZone Finance Ministers meeting later today.
  • Peripheral European indices led the fall, with Spain and Italy down over (1%) and debt spreads widened modestly after last week's enthusiasm over ECB bond buying waned.
  • Reports that JC Flowers had pulled away from a Spanish Bank investment also hit sentiment.
  • Declining sectors lead advancers 11-7 with banks and retailers leading the fallers.
  • Basic resources and chemicals lead gainers.
  • Major indices currently trade close to session lows.

ASIAN MARKTES:

  • Nikkei (0.11%); Hang Seng (0.36%); Shanghai Composite +0.52%
  • Most markets closed mixed.
  • China's shift in policy to "prudent" from "appropriately relaxed" is continuing to dictate trading patterns.
  •  Japan was mixed, opening by falling slightly on a stronger yen, but bargain-hunting quickly limited losses. Volume fell to the lowest since late Oct.
  • South Korea ended flat, with car-parts makers rising on the finalized trade agreement between the country and the US

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - levels and trends 126

 

THE DAILY OUTLOOK - equities 126

 

THE DAILY OUTLOOK - vix 126

 

THE DAILY OUTLOOK - usd 1 126

 

THE DAILY OUTLOOK - oil 1 126

 

THE DAILY OUTLOOK - gold 1 126

 

THE DAILY OUTLOOK - copper 126


Printing Price Volatility

“If the government owns all of the printing presses, it will determine what is to be printed and what is not to be printed.”

-Ludwig von Mises

 

On a flight to Calgary, Alberta yesterday I was reviewing “Economic Policy – Thoughts For Today and Tomorrow” by Austrian economist, historian, and philosopher Ludwig von Mises. His book, published by The Liberty Fund, compiles the following 6 lectures that von Mises gave in Argentina in 1959:

  1. “Capitalism”
  2. “Socialism”
  3. “Interventionism”
  4. “Inflation” 
  5. “Foreign Investment”
  6. “Politics and Ideas”

This book is only 75 pages long and sits amongst the classics in my library. The deep simplicity that von Mises achieves in explaining complex macro-economic issues is unrivalled. I highly recommend it to anyone looking for the opposing argument to Big Government Intervention.

 

In the coming weeks I’ll refer to these lectures, quoting one of the founding fathers of libertarian free-market thinking whenever the opportunity presents itself. After watching a completely politicized head of the US Federal Reserve telling stories on 60 Minutes last night, one of those opportunities is now.

 

Post Ben Bernanke’s interview, the #1 headline on Bloomberg this morning should shock anyone considering this country’s constitutional underpinnings: “Bernanke Says Fed May Take More Action To Curb Joblessness”… One man, one ideology, one power to print money…

 

Before I get into what The Ber-nank’s professional politicking for additional Quantitative Guessing (otherwise known as printing moneys) entailed, let’s take a step back and re-read what the US Federal Reserve said most recently about its go forward QG2 strategy:

 

“The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

 

In English, sans le Greenspan-esque obscurity, this means that the Bernanke Fed’s goals are:

  1. Fostering maximum employment
  2. Fostering price stability

Sounds nice, in theory…  but last week’s US Unemployment rate hitting a new high of 9.8% was an unmitigated train-wreck on point #1 and on point #2, never mind “price stability”… Ben Bernanke is fostering some of the highest levels of price volatility that modern markets have ever seen. How about fostering some accountability, dude.

 

Look at last week’s week-over-week percentage moves:

  1. SP500 = +2.9%
  2. CRB Commodities Index = +5.0%
  3. Oil = +6.5%
  4. Gold = +3.1%
  5. Copper = +6.1%
  6. VIX = -18.9%

Bernanke must be kidding himself, because he certainly isn’t kidding me. That VIX (Volatility) decline of -18.9% week-over-week came the week after the VIX rocketed +23.2% higher. At this point, he’s Printing Price Volatility in volatility itself!

 

Let’s go back to some of The Ber-nank’s key statements on 60 Minutes:

  1. On Growth – “we’re not very far from the level where the economy is not self sustaining…”
  2. On Employment – “it takes about 2.5% growth just to keep unemployment stable…”
  3. On Inflation – “fears of inflation are overstated…”

In response, I guess my first question is, according to who? The man’s macro-economic conclusions are littered with ideology and inaccuracy. Maybe it’s a blessing in disguise that Ben Bernanke speaks this academic dogma out loud to the world. After all, it’s better to remain a humble looking man who knows nothing about the interconnectedness of global macro markets and says nothing, than to open one’s mouth and remove all doubt.

 

Rather than take my word for it on this global Fiat Experiment gone bad, I can only hope at this point that the people of the world look at real-time market prices (price instability) and the outcomes of these Greenspan and Bernanke interventions on both the sustainability of growth and employment. The records speak for themselves.

 

As for a solution to this mess. I’ve said this before, but I’ll say it again – the first solution is to STOP – that’s it. Stop this man from doing what he is doing in perpetuating all-time highs in the price of the #1 food staple for 3 BILLION people (rice) and anything else for that matter that’s priced in the dollars that he is on a mission to debauch.

 

Finally, I’d like to submit a few passages from Ludwig von Mises 3rd lecture, called “Interventionism”:

 

“The idea of government interference as a “solution” to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism.” (“Economic Policy”, page 38)

 

“Is there a remedy  against such happenings? I would say, yes, there is a remedy. And this remedy is the power of the citizens; they have to prevent the establishment of such an autocratic regime that arrogates to itself a higher wisdom than that of the average citizen. This is the fundamental difference between freedom and serfdom.” (“Economic Policy”, page 39)

 

Stop. Listen. Re-think.

 

My immediate term support and resistance levels for the SP500 are now 1199 and 1229, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Printing Price Volatility - Bernanke EL PNG


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