“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”
In “The Road To Serfdom”, F.A. Hayek ends an excellent chapter titled “Security and Freedom” with that very American quote from Benjamin Franklin in 1755. Compare and contrast that thought with this quote from America’s central planning elite last night at the Harvard Club:
“Fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength… and the country’s ability to protect our national security interests.” –Tim Geithner
Notwithstanding that Geithner has been a Government Gopher since 1988 (when he joined the Treasury department), the man has since blossomed into a full-fledged storyteller of fear mongering.
Whether it’s been Geithner serving as:
- 1 - Squirrel hunter and yes-man in chief of the Robert Rubin/Larry Summers’ era of ‘we’re bigger than markets’
- 2003-2009 – President of the Big Broker Club at the Federal Reserve Bank of New York
- 2009-2011 – US Treasury Secretary who has overseen a US Dollar Index decline of -16% since he assumed office
It’s no secret that I disagree with Geithner on many scores, but I wholeheartedly agree with him on this - the political strategy of scaring the hell out of whoever he can. With his track record of contributing to this country’s fiscal problems, you should be afraid – very afraid.
How we got here and why it’s not going to change where we are going anytime soon has been compiled in my Early Looks since I decided to start writing about real-time risk management matters 3.5 years ago. Of all the fundamental conclusions I have had about Big Government Intervention, here are two that have achieved the deepest simplicity:
- It shortens economic cycles
- It amplifies market volatility
“It”, being Big Government Intervention… and the Government Gopher being the last man standing who is dumb enough to fundamentally believe that it’s the American public that’s too dumb to understand what’s going on here.
Now when you call someone “dumb”, the elitists who are concerned with titles and resumes dismiss you – but I care as much about their opinion as I do someone who says there should be no fighting in hockey.
Dumb is as dumb does – and if they want to suit someone up in a Ph.D. in Economics dress and send them on over to 111 Whitney Avenue in New Haven, CT to tell me that what Geithner has been doing since 1988 has been smart, I’ll be waiting for them.
“It” is the Big Government Intervention. “They” are the bureaucrats. We are The People.
Back to this Global Macro Grind…
Stocks, Bonds, and Commodities all reminded us yesterday of one fundamental reality that virtually the entire sell-side has had wrong for the past 5 months – GROWTH IS SLOWING. So let’s go through that:
1. Stocks – closing down for the 3rd consecutive day, the US stock market has been down for the last 3 weeks. The rest of the world’s stock markets, started going down a few weeks before that – immediately following The Bernank’s pandering to the central planning elite to remain what we have coined as being “Indefinitely Dovish” (Q2 Macro Theme).
2. Bonds – US Treasury Bonds in particular have been ripping to the upside (see Chart of The Day) ever since The Bernank reminded the world that both his growth and inflation forecasts were wrong (again). Growth Slows As Inflation Accelerates. We remain long Long-term US Treasury bonds (TLT) as a way to play the “Indefinitely Dovish” Macro Theme. We’re also long a US Treasury Flattener (FLAT).
3. Commodities – May has been a mess. And a mess is what you should expect the likes of the Gopher to do to The Correlation Risk that’s imputed in daily US Dollar moves. You cannot experiment with blasting your currency to all-time lows and not assume unintended consequences. Temporary Safety, Mr. Geithner, this is not.
The good news here is that The People get it. They get the principles of individual freedom and national security. They also get that this is the only time in this country’s 235 years of economic history that some central planner has been able to politic on the platform that the markets are “national security” issues.
Geithner has spent the last 23 years of his life working on this. He’s only 49 years old. Imagine spending 47% of your life contributing to the “foundations” of America’s fiscal problems. Trust him – he knows his stuff.
Institutional money managers don’t trust the US stock market rally as much as they did while the stock market was going up – shocker. This week’s Bull/Bear Sentiment reading (Institutional Intelligence survey) saw the spread between Bulls and Bears narrow – big time.
- Bulls dropped from 51% last week to 45.6% this week
- Bears inched up to +18.5% last week to 19.6% this week
- Spread (Bulls minus Bears) narrowed from 32.5 points last week to 26 points this week
I certainly make my fair share of mistakes, but I generally don’t pose a “national security” issue to our country and I certainly don’t make a habit of chasing markets at YTD highs. That’s where we were 3 weeks ago when the Bull/Bear Spread was +38.5 points wide and I shorted US stocks.
Please don’t let America’s central planning storytellers promise you Temporary Safety in exchange for their long-term job security.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are $1, $94.91-99.67, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on May 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“If you do not change direction, you may end up where you are heading.”
Lao Tzu, born in the sixth century B.C., is known as the founder of Taoism and the author of Tao Te Ching. In this book, Lao Tzu describes the Tao “as the mystical source and ideal of all existence”. Interestingly, in some legends he was born after being in the womb for 62 years – as a grown man with a grey beard and long ear lobes (a sign of wisdom).
The quote above from the founder of Taoism is apropos as it relates our investment views of China over the past couple of years. Early last year we introduced the Chinese Ox in a Box theme, which encapsulated our view that Chinese central banking authorities would be forced to raise interest rates due to broad measures of inflation, which would lead to a negative delta in Chinese growth and the likely underperformance of Chinese equities.
This theme played out according to plan as China led the world in tightening monetary policy and the Chinese stock market was one of the worst performers last year, finishing down -14.3%. Of course, markets trade on future expectations, not trailing facts. With China’s dismal equity performance in the rearview mirror, it is now time to focus on those future expectations. Our view is that those expectations are sufficiently low versus the potential upside in Chinese equities. That is, we see asymmetric risk / reward in being long of China.
This “change in direction”, has also led to change in theme name, which we introduced in April on our Q2 Theme Call as Year of the Chinese Bull. That’s right, the hockey heads in New Haven are all bulled up on China. Giddy up! On a serious note, as our subscribers well know, we are far from being cowboys when it comes to managing risk and making recommendations. In fact, there is an omnipresent sense of accountability standing behind all of our research at Hedgeye. As such, the key tenets of our latest thesis on China are outlined below and predicated on a lengthy research trip that Analyst Darius Dale took to Asia last fall.
Firstly, expectations are subdued for Chinese equities. This is reflected in two measures, the performance of the Chinese equity market last year and the valuation, broadly speaking, of Chinese equities. Last year the Shanghai Composite was down -14.3%, which was a negative outlier amongst the world’s largest economies. Despite this, China continued to grow, and so did the earnings of Chinese companies. As a result of lower prices and higher earnings, the Chinese stock market, based on the Shanghai Composite, is trading at roughly14x NTM earnings, which is at the bottom of its long run valuation range.
Second, China is at an inflection point in growth versus global growth more broadly. After five quarters of Chinese growth narrowing versus global growth, Chinese growth bottomed on comparative basis in Q3 2010 and is now reaccelerating versus the rest of the world. In our view, this will primarily come from global growth slowing, as seen in the United States last quarter, versus Chinese growth necessarily accelerating. Even so, as global growth slows, Chinese growth will become much more attractive on a relative basis. In the Chart of the Day below, we highlight this graphically.
Finally, we believe both of the key factors of monetary policy and inflation will begin to work to benefit equities. On the first point, China is not starting to tighten monetarily, but in fact is likely closer to the end of its tightening regime. In fact, as of yesterday’s increase, Chinese banks’ reserve requirement ratios are now at an all-time high of 21.5%, with some exceptions. In addition, China has been raising rates steadily since October 2010. The impact of this proactive tightening can be seen in declining money supply growth in China. Not surprisingly then, our models see tightening being reflected in a gradual decline in the year-over-year growth rates of Chinese CPI.
Now we certainly get that there are risks to being long of China, but on our factors of growth, monetary policy, and inflation, the Chinese equity outlook looks promising over intermediate term. The obvious pushback we get on this thesis relates to our willingness to be long of a Communist nation that formally utilizes central planning. We get that, but also get that things aren’t all that different in many Western nations as it relates to governments trying to influence the economy. In fact we stumbled upon the following quote in our morning grind this morning:
“I absolutely see a continuation of QE2 in some form; the economy certainly isn’t strong enough to survive on its own.”
This quote came from Keith Springer, president of Springer Financial Advisors. Now we don’t know Mr. Springer, so we’ll leave it at that, but admittedly we do find it sad that this nation has gotten to a place where investors legitimately believe the “economy can’t survive” without another dose of Keynesian Kryptonite. Last time I checked my Yale history books, the economy of this great republic has survived – and thrived – over the 230+ years that preceded The Quantitative Easing.
As you head off into the weekend, I’ll leave you with a quote from Confucius to contemplate:
“Men's natures are alike; it is their habits that carry them far apart.”
Or in hockey speak: back check, fore check, pay check.
Enjoy the weekend with your friends and family,
Daryl G. Jones
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TODAY’S S&P 500 SET-UP - May 18, 2011
US stocks have been down for the last 3 days and the last 3 weeks – and after taking a good hard looking at the intermediate term TREND line of 1319 in the SP500, we should see another low-volume bounce to lower-long-term highs; resistance = 1340. As we look at today’s set up for the S&P 500, the range is 17 points or -0.75% downside to 1319 and 0.53% upside to 1336.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -483 (+584)
- VOLUME: NYSE 971.43 (+7.07%)
- VIX: 17.55 -3.78% YTD PERFORMANCE: -1.13%
- SPX PUT/CALL RATIO: 1.89 from 1.88 (+0.77%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 22.96
- 3-MONTH T-BILL YIELD: 0.04%
- 10-Year: 3.12 from 3.15
- YIELD CURVE: 2.57 from 2.61
MACRO DATA POINTS:
- MBA mortgage applications index up 7.8% week ended May 13; Refis up 13%, largest gain in 10 weeks; Purchases fell 3.2%; Avg. 30-yr fixed rate 4.60%, lowest since end Nov., vs 4.67% prior week
- 10:30 a.m.: DoE Inventories
- 11:30 a.m.: U.S. to sell $5b 56-day cash mgmt bills
- 2 p.m.: FOMC Minutes
- 7 p.m.: Fed’s Bullard speaks in New York
WHAT TO WATCH:
- U.S. Treasury Secretary Geithner said the IMF needs to name an interim leader because Strauss-Kahn is “obviously not in a position” to run the fund; Europe seeks to keep top position
- EU Commission completes quarterly review of EU/IMF financial assistance program to Ireland; authorizes the release of the second installment
- Bullish sentiment decreases to 45.6% from 51.1% in the latest US Investor's Intelligence poll
- Banking groups opposed to simpler mortgage forms - Bloomberg
- Fed wants to subject US banks to annual stress tests - FT
- Russian President Dmitry Medvedev says he doesn’t exclude that some oil companies are colluding to increase prices for gasoline on the domestic market.
- Google’s First Bond Sale Drew Orders Exceeding $10b: WSJ
COMMODITY HEADLINES FROM BLOOMBERG:
- Milk Rally Causing Higher Prices at Wal-Mart Also Spurring Gains in Output
- Commodities Rebound on Outlook for Stronger Demand From Emerging Markets
- Oil Rises From Three-Month Low as Supplies of Cushing Crude, Gasoline Drop
- Copper Climbs to One-Week High as Commodities, Equities Rebound From Drops
- Corn Advances for Fifth Straight Day as Wet Weather May Delay U.S. Seeding
- Gold Gains for First Day in Four on Weaker Dollar, European Debt Concern
- Drought in China’s Hubei Withers Rapeseed, Wheat Crops, Delays Plantings
- Oil, Gold Will Drive Rebound in Commodities on Shortages, JPMorgan Says
- Coffee Rises on Concern About Limited Supplies; Sugar, Cocoa Prices Gain
- Silver May Slide 16% After Breaching 100-Day Average: Technical Analysis
- Drought Spells EU Power Squeeze as Nuclear Reactors Halt: Energy Markets
- Copper Demand From China’s Cable Makers May Double as Cities, Grids Expand
- Bunge Offers $138 Million for Tully Sugar, Above Louis Dreyfus-Backed Bid
- India Shipping to Gain From Japan $30 Billion Steel Bill: Freight Markets
- UK Mar ILO unemployment rate +7.7% vs consensus +7.8% and prior +7.8%; UK Apr claimant count +12.4k vs consensus unchanged
- BOE keeps 6-3 vote in May to hold rates at record low
- Greek Banks Surge as ECB Officials Rule Out Debt Restructuring
- Irish Household Wealth Rises 6% in Q4 2010 , Central Bank Says
- Asia was strong overnight
- Vietnam was a negative divergence down 2.03%
- Japan March tertiary activity index (6.0%) m/m – the biggest drop in 22 years -- to 93.5.
The Macau Metro Monitor, May 18, 2011
MGM CHINA'S IPO SECURES FOUR CORNERSTONES WSJ, SCMP
John Paulson's firm plans to invest up to US$75MM in the MGM JV; through his company Tracinda Corp, Kirk Kerkorian has agreed to subscribe for up to US$50MM; property developer Asia Standard International, controlled by HK businessman Poon Jing, has pledged to invest up to US$40MM; and Dornbirn Inc, owned by Hong Kong real-estate developer Walter Kwok, will chip in up to US$25MM—Kwok is the former chairman of blue chip developer Sun Hung Kai Properties Ltd.
Like the other cornerstone investors, Paulson & Co. has agreed not to sell its shares for at least six months after the listing. The public offering runs from May 23 to 26 with pricing due to be announced on May 27. The shares are set to begin trading on June 3 under stock code 2282.
RWS FINED S$530,000 FOR FOUR BREACHES Channel News Asia
RWS was fined S$200,000 for reimbursing the entry levy payable by Singapore citizens and permanent residents. On July 15 last year, a senior management staff of RWS gave cash to media representatives - who are Singapore citizens and permanent residents - to help them pay the entry levy payable by them to enter its casino premises to cover the launch of the Ladies Club. Also, RWS was fined S$330,000 for 3 separate cases of casino surveillance non-compliance.
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