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Quake or Correction?

This note was originally published at 8am on March 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We learn geology the morning after the earthquake.”

-Ralph Waldo Emerson

 

Emerson was an American Patriot who championed individualism during the mid-19th century. He was born in 1803 in Boston, Massachusetts and lived his life out loud during a time of great American leadership. I don’t think he’d care so much for today’s Big Government Interventions.

 

Today, not unlike any other day, we’ve woken up to the risk management reminder that the world is grounded in uncertainty. From Japan’s earthquake to the Saudi “Day of Rage”, not matter where you go, there it all is…

 

The morning after risk should have been proactively managed is as crystal clear as the mirror you have to look in every morning. Those who are Perma-Political obviously don’t like to do that so much on mornings like this. Sadly, the modern day Japanese, European, and American bureaucrat lives a life of finger pointing as opposed to introspection.

 

I’ll get to answering the Quake or Correction question about the US stock market by the end of this note, but I really think that there’s  a much more critical long-term leadership question that we need to be asking ourselves of the government we should be governing this morning.

 

If we want to make this country Japanese in its fiscal and monetary union, that might be fine for the sake of a 2-year stock market trade – but not in preventing a long-term societal Quake.

 

The Ralph Waldo Emerson years were very formative in terms of how Americans thought about self-directedness and individual liberties. During Emerson’s adult years, Andrew Jackson was the President of the United States (1829-1837). Like all of us, Jackson had plenty of faults associated with living in the moment, but one of them wasn’t accepting the tyranny imposed by a socially elite Big Central Bank.

 

In fact, “after the First Bank of the United States was established by Hamilton, followed by a Second Bank put in by pro-bank Democratic-Republicans after the War of 1812, President Andrew Jackson managed to eliminated the Central Bank after a titanic struggle during the 1830s.” (Murray Rothbard, “The Case Against The Fed”, page 73)

 

On the banking front, Jackson’s battle against Big Central Planning was won against a young Princeton economist by the name of Thomas Biddle, who was serving in a quasi-Bernank seat as the president of the Second Bank of The United States. It gives me chills to think that Big Princeton Keynesians like Paul Krugman and Ben Bernanke have generated so much political power with the same academic dogma since.

 

Unfortunately, after the Jefferson-Jackson libertarian ideals of free markets were fortified via democratic vote, the Civil War came (where Jackson obviously had plenty of accountability issues to deal with on another topic -  slavery) and bankers who hoped for Big Government Intervention capitalized on the crisis.

 

The phrase “Not Worth a Continental” is derived from the same strategy that the Japanese will look toward to solve for event risk in their economy today – issuing fiat paper. During the American Revolution, that’s exactly what the Continental Congress did (print money) – with the bigger problem being that those Continental dollars were non-redeemable in gold (neither are trillions of Yens).

 

“The common phrase, “Not Worth A Continental” became part of the American folklore as a result of this runaway depreciation and accelerated worthlessness of the Continental dollars.” (Rothbard, “The Case Against The Fed”, page 29)

 

Now getting back to living in the today, if we don’t want this country to be hostage to event risk like Japan is this morning (I mean economically), like any good American household or company, we need to get this American balance sheet problem fixed. There comes a tipping point where you can’t print money to internally finance a recovery from a natural disaster, or God forbid, a war.

 

I’m not being alarmist. This is a very serious matter that history certainly has taught us to respect. Ask the German bankers like Paul Warburg who constructed both the German Reichsbank (founded in 1876) and, to a degree, the US Federal Reserve (founded 1913), how being hostage to The Inflation associated with an addiction to printing money ends when calamity strikes…

 

Back to the risk management Question of The Day: Quake or Correction?

 

I’ll grind through the levels here and keep this answer as tight as it needs to be. After all, you should be asking a firm who called for this Asian and US stock market correction for the levels to manage your way out of it…

 

As a reminder, we’ve been calling for a 3-6% correction in both US and Japanese Equities since Valentine’s Day:

  1. JAPAN - This morning’s selloff in Japan makes the cycle-peak-to-drop correction in the Nikkei -5.6% since February 21, 2011
  2. USA - Yesterday’s pounding of US stocks (4th down day in the last 5) makes the cycle-peak-to-drop correction in the SP500 -3.6% since February 18th, 2011

My immediate-term TRADE and intermediate-term TREND targets for the SP500 are now:

  1. SP500 immediate-term downside support = 1283
  2. SP500 intermediate-term downside support = 1265

So, I say Correction. The Quake is already another historical event. Let the Perma-Bulls learn from that again, on the morning after.

 

Go Yale Hockey in The Haven tonight (Game 1 of the playoffs against St Lawrence), and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Quake or Correction? - emerson

 

Quake or Correction? - 3 11 2011 8 02 17 AM


Old School Wall Street

This note was originally published March 16, 2011 at 08:36 in  

“A good player plays where the puck is. A great hockey player plays where the puck is going to be.”

-Wayne Gretzky

 

Just over three years ago, we started Hedgeye with the philosophy that the research business should be transparent, accountable and trustworthy.   At the time, many of our Old School Wall Street critics derided us for naively entering the investment research business with a simple philosophy.  Needless to say, three years, forty five employees, and hundreds of clients later, Hedgeye isn’t such a novelty.  Neither are our core values.  

 

We’ve made a few enemies amongst the Old School Wall Street crowd over the course of the past few years, but we’ve made many more new friends, some of whom we are now honored to count as subscribers to our research.  Yesterday, it seems, we made a new enemy in Peter Boockvar, the Sales Trader /Equity Strategist from Miller Tabak.  Boockvar, it seems, is not so crazy about transparency.

 

At Hedgeye, we are fond of an expression called “YouTubing”. This expression means to analyze and, sometimes, critique, the public comments of politicians, executives, and market commentators.  “YouTubing” is not meant to be a personal attack, but rather a critique related to the substance of those views articulated.  In the Web 2.0 world, if you make public comments, you should expect to be “YouTubed”.  As a firm, we make many public comments, and fully expect to be held accountable to them.

 

Intraday yesterday Keith tweeted the following via @KeithMcCullough:

 

“If Boockvar is long Nikkei and short Yen here, now he knows why no one will ever give him money to manage”

 

This was in response to an appearance by Boockvar on CNBC yesterday, where he discussed his case for Japan. That video is here:

 

http://www.cnbc.com/id/15840232?video=3000010657&play=1  (if the link doesn’t open, copy and paste it into your browser)

 

A paraphrase from his appearance was:

 

“Japan is going to want to print their way out of this. Therefore you want to be long their equities, and short their currencies and short their bonds.”

 

It seems Boockvar’s thesis is that printing money will lead to increasing interest rates in Japan, which will lead to an increase in Japanese equities.  In fact, he also made a bullish call on Japanese equities on December 31st, 2010 on CNBC, which he articulated in this clip:

 

http://seekingalpha.com/article/244389-peter-boockvar-says-buy-japanese-equities (if the link doesn’t open, copy and paste it into your browser)

 

Thesis drift, anyone?

 

Needless to say, Boockvar’s response to Keith’s public critique was less than hospitable and was topped off by calling Keith some not so nice names in a private communication.  Boockvar’s use of schoolyard epithets does nothing to enhance his professional standing in our eyes.  Now, we don’t mean to pick on Boockvar, he just typifies a gang we call Old School Wall Street, and this is just the latest example of how rattled they get by real-time accountability.  Twitter on!

 

Since articulating a coherent view in 140 letters on Twitter can be challenging, we want to restate our position on Japan. Our bearish view on Japan is something we began articulating in Q4 of 2010, in a thesis called Japan’s Jugular.   A key highlight of this thesis is, in contrast to Boockvar’s view, that printing money will have just the opposite impact.  It will lead to increased debt, slowing growth, and declining equity prices.  In fact, in 18 years of Keynesian experimentation, from 1992 to 2010, Japan had on average +0.85% year-over-year GDP growth.  Over the same period, the Nikkei 225 returned -55%  No, Mr. Boockvar, this time is not different . . .

 

Naturally any good contrarian is looking for a buying opportunity given the dramatic sell off in Japan over the past few days.  We would caution against this, despite the relief rally this morning, for two reasons:

  1. Unknown unknowns – The derivative impact of the earthquake has been damage to the nuclear power infrastructure in Japan.  At this point, there is limited information from which to evaluate the real impact of this damage, in particular at the Fukushima Dai-Ichi plant, where this morning it was reported that a second reactor may have ruptured.  The point is, we have no idea how this will end and be resolved.
  2. Known knowns: The Japanese economy reached a negative inflection point last year when its pension plan began selling assets to fund pension obligations.  This highlights two key components of our negative thesis on Japan: demographics and debt.  Japan has both the oldest population in the world, with ~22.7% of the population 65 years of age or older, and is the most indebted developed nation, with a debt-to-GDP ratio of 205%+.  The risk is that this tragedy only accelerates negative growth in Japan due to an inflexibility created from almost two decades of Keynesian policies.

Of course, there will be an opportunity to get long the Japanese recovery trade eventually. As always, duration matters; however, after the January 17, 1995 Kobe earthquake, Japanese equities lost (-24.7%) before bottoming out nearly six months later on July 3. The Nikkei 225 did not break even until nearly 11 months later on December 7 of that year.

 

Now a public service message to Peter Boockvar and Friends:

 

This is the new Wall Street where accountability and transparency matters.  While your long term track record is cool, let’s just start with the last three years.  For the record, every single position we’ve take in the Hedgeye Portfolio since inception is on our website for the world to see.  We encourage you to do the same.

 

Next time you want to challenge someone to head down to the schoolyard for disagreeing with your thesis, add me to that list.  My email is djones@hedgeye.com.  My friends call me Big Alberta, and I’ll be waiting at the puck for you.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

 

Old School Wall Street - Chart of the Day

 

Old School Wall Street - Virtual Portfolio



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THE M3: JACOBS SUIT HEADS TO VEGAS; LAND RECLAMATION TENDERS; SJM HENGQIN; S'PORE HOTEL AFTERSHOCK

The Macau Metro Monitor, March 15, 2011

 

 

SETBACK FOR SANDS IN MACAU SUIT WSJ

A district judge rejected pleas by LVS to dismiss Jacobs' suit against his former employer.  Judge Elizabeth Gonzalez of Las Vegas said that there was sufficient evidence of influence from Las Vegas on Macau operations to justify Nevada court jurisdiction. Sands China attorneys will decide shortly on whether to appeal the ruling.  Meanwhile, the judge said that the case will proceeds towards settlement talks.

 

TENDERS SOUGHT FOR LAND RECLAIMATION AND HOUSING www.macaudailytimes.com.

Macau’s Infrastructure Development Office (GDI) will launch three public tenders today and run through May 3rd, two for the construction of public housing in Seac Pai Van and another one for the land reclamation project in the peninsula’s northeast. The PRC State Council approved Macau’s 3.5 square kilometre land reclamation plan in 2009 which included five areas of claimed land situated in the Macau peninsula’s northeast (A), south of Avenida Sun Yat Sen (NAPE - B) and North of Taipa island (C, D and E). 

 

"Area A” is set to be ready before 2016 and will be the link between the territory and the artificial island of the Zhuhai-Macau-Hong Kong Bridge. Zones A and B are planned mainly for road infrastructure, tourism and recreation facilities, parks and green areas, public buildings and commercial and residential neighbourhoods.  Meanwhile, in zones C, D and E, located in northern Taipa, land will be used for public and community facilities, transport infrastructure, commercial and residential districts and for diverse industries’ projects. Local officials have guaranteed that no gaming developments will take place in the new areas.  The public tender for the second and third phases of the Seac Pai Van housing complex, in Coloane, will have a total of 932 apartments

 

SJM HOLDINGS INTERESTED IN HENGQIN ISLAND www.macaubusiness.com

SJM Holdings chief executive Ambrose So Shu Fai was quoted saying that while the company is interested in investing in Hengqin Island that they do not have any concrete development plans.

 

ECONOMIC AFTERSHOCKS HIT SINGAPORE HOTELS www.businesstimes.com.sg

Several major hotels, including the 2 IR's, have and continue to receive reservation cancellations in the aftermath of the disaster in Japan.  All the hotels that responded to The Business Times said that they would be waiving cancellation  fees.  So far the impact on the two IR's seems immaterial.  RWS saw hotel room cancellations from at least 31 affected guests since Sunday, said Lee Sin Yee, spokesman for the resort, but no cancellations of conventions or meetings organised by Japanese corporations so far. Marina Bay Sands declined to disclose how many disaster-related hotel room cancellations it has received so far.

 



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