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Morgan Stanley down -31% right now; but where are the evil doers?

At $16/share, this is a lower low than the price we saw when John Mack had his Braveheart call to arms (and meeting with Chris Cox) against his prime brokerage clients and short sellers at large...

Could institutions who are long the stock be selling it? Shhh... don’t tell anyone.

As MLK said, "a lie cannot live".
KM

Helicopter Ben flies again...

Ben Bernanke remains boxed in by the politicized nature of his role. The Fed Funds Futures market is begging for rate cuts, so he is shamelessly signaling that he will deliver on those market expectations. Hence the “Helicopter Ben” nickname. He is who he is. History will not look back on his legacy kindly.

Bernanke is finally right, the domestic “inflation outlook has improved somewhat”, but do not mistake this for Bernanke being early with that call. He has been calling for an inflation slowdown since 2006. In this speech, he is also moving back to the rhetoric that “risks to downside growth have risen.” Combined, these messages on inflation and growth, in English, mean that Bernanke is definitely going to cut interest rates on October 29th, 2008.

In the end, I think the only way out of this mess is to raise rates.

I understand that's not consensus, but I also understand that my macro calls haven't been for the last nine months. I am not making this call for the sake of being contrarian. I am making it because the only way for a capitalist who is flush with cash to earn a return is to give him/her a rate of real return. Cutting nominal interest rates below 2%, effectively re-creates the Greenspan scenario of 2001-2003, which gave birth to this mess of a leverage cycle to begin with.

KM

This Australian Banker Gets It

This morning's move by Aussi central bank chief, Glenn Stevens, to cut interest rates by 100 basis points was one that should be applauded, globally. Not only was he the most objective in taking his target rate up during the global asset inflation mania (see chart, he raised rates since 2001), he is now one of the few who can proactively manage global asset deflation from a position of strength.

Here are 2 charts: CPI & Target Rates for the past 10 years; and the ASX 200 (AUD&USD).

Keith McCullough and Andrew Barber
Research Edge LLC

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Bank of America (BAC): It's a shame that we can't short it...

Bank of America has cut short both its dividend and credibility. Too bad Chris Cox, the SEC, and 'Investment Banking Inc.' is banning us from pricing this stock efficiently...

When grocer Amadeo Giannini founded the Bank of Italy in a saloon in San Francisco at the start of the last century he had limited capital with which to take on the established banking community. It was a crisis, the great earthquake of 1906, which allowed Amadeo to build the reputation that defined his franchise by providing liquidity: he lent to small business owners that needed to rebuild when other banks couldn’t or wouldn’t. Later, after several mergers and a name change to Bank of America, Giannini again found opportunities to grow in crisis –this time the great depression, when he again provided loans at a time when others were unable or unwilling. Ingenuity, hard work and a willingness to take calculated risks on borrowers who were worthy made him a giant of the US credit market. When he died just in 1949, Bank of America was the largest bank in the US.

Today the enormous financial institution that bears the name Bank of America has little resemblance to Giannini’s bank. In the current crisis, instead of being a steadfast lender providing liquidity, it stands in line with the other Wall Street supplicants seeking capital injections from the equity markets and government handouts. The name on the door may still commands respect on Main Street -during the flight to quality spurred by bank failures in August and September BAC’s retail deposits swelled by nearly 10%, but make no mistake: this is no longer Amadeo Giannini’s bank, this is Ken Lewis’s bank –large, generic and weak. With yesterday’s announcement of a 50% dividend reduction and the need to raise $10 billion in a common stock offering, Lewis is starting the long process of shoring up the balance sheet while preparing to digest the massive Merrill Lynch acquisition. It remains to be seen if $10 billion will be sufficient or if Lewis will need to return to the trough again.

Prior to the Merrill announcement, BAC had seemingly abandoned the investment banking and brokerage business. Little or nothing now remains of the firm’s only marquee investment franchise, John Sandelman’s team of “boy wonders” that made NationsBank a risk trading power house in the mid 90’s before the merger with BAC. Lewis sold the last vestige of the NationsBank platform -its prime brokerage unit, to BNP Paribas’ Todd Steinberg (one of Sandelman’s original traders) for $300 million in June. The Merrill Acquisition therefore sits as an abrupt reversal of strategy, backed by the logic that Merrill’s retail focus will be better suited to a financial supermarket model than a trading franchise was. When the deal was announced the same Lewis that had abandoned organic efforts just months before gushed at the opportunity to buy the enormous floundering brokerage and re-enter the market. “We would have been frustrated for quite some time, and this just changes that. I like it again.”

Lewis may suddenly like his bank again but the market doesn’t. As of the close yesterday BAC was trading below our short term trade level of $32.78 and our long term trend line of $35.23 (see the chart below) and selling pressure on the bank’s shares intensified in Europe overnight.

When the great Amadeo Giannini died, it is reported that his estate was valued at a respectable, but miniscule by bank CEO standards, $500,000. This was part of his way. As a manager he abhorred excessive executive salaries and as a person he was decidedly non materialistic. Ken Lewis –whose initial claim to fame was his focus ending the non-stop roll up strategy employed by his immediate predecessors and better focus on risk, received $20.4 million in total compensation for his services in 2007, the same year he announced his intention to purchase Countrywide Financial.

Only in America.

Andrew Barber
Director




Maximum Pessimism

“Invest at the point of maximum pessimism”
-John Templeton

Templeton was a great man. A self made American small town man actually, who sadly passed away on July 8th of this year, right as commodity oriented levered long hedge fund stardom was peaking. In his obituary, which I have taped in my notebook, ‘The Economist’ wrote, “he disliked speculation, and any instrument over-geared to make money… but he was open minded.”

In this business, if there is one lesson I have learned over the course of the last 10 years, it’s just that – you have to be open minded. Mental inflexibility will crush you like a Brazilian soy bean. Yesterday, after posting an intraday note titled “US Market Trade Getting Bullish Down Here” (www.researchedgellc.com, 10/6/08), I finally saw Templeton’s definition of max pessimism.

If you couldn’t buy a stock yesterday, I am not sure you’ll ever be able to. If you stepped up and strapped on the old school American capitalist pants, well done - upward and onward we go. I have moved down from my 96% Cash position to the following asset allocation: 84% Cash, 13% Equities, 3% Gold. We made money again yesterday. Lucky us. We we’re +0.40% in the portfolio.

Commodity led inflation has been absolutely decimated. Inclusive of the -5.2% move in the CRB Commodities Index yesterday, the basket of 19 commodities has deflated to the tune of -35% since the CNBC “Fast Money” euphoric peaks. Countries “over-geared” to commodity inflation like Brazil, Russia, and Saudi Arabia got clocked and capitulated yesterday. Two of those three markets were halted by their governments (Brazil and Russia), while Saudi stocks are trading down another -8% so far this morning. That takes the Saudi Tadawul index down -15% in 2 days, and down almost -50% since every sell side investment banker at the firms who have since imploded ran around with glossy “Sovereign Cash Is Abound” pamphlets. Whether that “sovereign cash” was Asian or Brazilian, or grown by alchemists who fed magical fertilizer into pools of water, turning H20 into oil… it’s all deflating now.

Commodities deflating is great macro factor that is emerging sequentially, particularly for Asian organic profit growth. That’s one of the reasons why I stepped up and bought both the Hong Kong and Chinese ETFs yesterday (EWH and FXI). At the point of “maximum pessimism”, you want to be considering the last things people want to touch. For most, that’s turned into China. For me, the last thing I want to touch is Barclay’s new “research call.” Lehman’s, I mean Barclay’s, Tech analyst is cutting estimates this morning. For those of you with accountability scorecards, since the beginning of August (when LEH was still a $20 stock), the NASDAQ has lost -24% of its value. Mr. Barclay’s, you shouldn’t remind us that you are there. This call you are making after the fact is embarrassing.

What is not embarrassing is the world class performance of Australian central bank chief, Glenn Stevens. He was one of the few central bankers who appropriately raised rates into the apex of the global asset mania. And now he’s the only one with enough bullets left in his rate cutting gun to make an interest rate cut actually matter. This morning Australia cut rates by a full 100 basis points, and stocks rallied +1.7%, leading Asian trading in what I thought was a relatively constructive evening session for Asia overall.

The point that matters here is that Stevens can make one. He cut rates by a full percent, and still has a healthy 6% base rate to work with. If and when bailout Ben has his hand forced to cut by 100 basis points, the USA will have negative real interest rates. Not unlike the Japanese king, who held rates “steady” at 0.50% overnight, politicized central bankers end up pandering to socialists and bureaucrats. I doubt your average “hedgie” is allowed to read books on his crack berry these days, so he or she may not be aware that Japan’s 2 decades of economic stagnation were born out of the same bailout solutions that Larry Kudlow and CNBC were cheering on your government to make.

Maybe now they are booing. These stock market mania networks tend to blow with the wind. Who knows… Ironically, I used to actually enjoy the Kudlow and Company session at 7pm, where the odd “open minded” debate would reveal itself, making John Templeton proud. Last night, was more like a circus of idiot savants, rifling off reckless commentary on this manic show CNBC calls “Wall Street Crisis”. Thank God for them, they’re helping create the appropriate level of confusion and pessimism that those of us with cash are looking for.

Have a great day,
KM



Europe: Just For The Record

You don’t need to be a genius to see the global economy slowing. While the US is one homogenous retail market, Europe is quite the opposite, making it tougher to quantify the sales trajectory. Check out the comp charts below. Let’s also see how different management teams have changed their tone towards Europe…

WESTERN EUROPE
"I can sit here and talk about the upside of Western Europe here for quite some time if you want me to, but I'm pretty excited about it because we put a lot of work into that and I think it just goes to show you we have a good handle on what it takes to fix some of these markets and what we need to do. Sometimes it may take a little longer than others, but at the end of the day I think we've demonstrated our ability to get these things turned around and get them back on a growth schedule again." - Charlie Denson President of Nike Brand, Sept. 20, 2007

GREAT BRITAIN
JJB Sports - "The worst retail recession I have ever known" Sept. 26, 2008

Adidas - Sales declined "exclusively as a result of continued declines in the UK" Aug 5, 2008

Polo Ralph Lauren - "There is talk that maybe England would begin to catch some of the cold we have" Aug. 06, 2008

VFC - Beginning to see weakness. July 15, 2008

IRELAND
Marks and Spencer - "Ireland specifically is suffering probably more than the UK at the moment." Oct. 2, 2008

SPAIN/PORTUGAL
Inditex - "Spain is slightly below the average"
Analyst response: "That seems to imply that Spanish like for likes are probably down 3% to 4%." "That's a bit more than slightly below average." Sept. 17, 2008

Nike
Q1 2008 (Sept. 20, 2007) "Spain and Portugal had a fantastic quarter"
Q1 2009 (Sept 24, 2008) "Probably the biggest challenge right now in Spain and Portugal"

Quiksilver - "Southern Europe has been hit harder than others." Spain was the example. Sept. 4, 2008

Polo Ralph Lauren - "Spain is feeling a pull back in what had been a very robust business" "There is some concern in Spain" Aug. 06, 2008

VFC - Beginning to see weakness in the 2nd consecutive quarter. July 15, 2008

FRANCE
Nike - France has been difficult for Nike since Q1 2008
1Q 09: "We are seeing some tough economic conditions in Spain, Italy, and France"
"The softness is really along the Mediterranean, Iberia, Southern France, Italy …"

ITALY
Nike – Softness and tough economic conditions in Italy. Sept. 24, 2008
VFC - Beginning to see weakness in the 2nd consecutive quarter. July 15, 2008

Adidas - Double digit increases and higher growth in 2008
"We are making progress in several markets from Italy to Central Europe" Aug 5, 2008

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