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Washington And Wall Street

“It is a mistake to think businessmen are more immoral than politicians.”
To be clear, I am no Keynesian, but the man did have some great one-liners. I flagged this quote over the weekend while I was reviewing Amity Schlaes, “The Forgotten Man”, which is a historical interpretation of the Great Depression. The political climate in this country is intensifying, and I think there is plenty to glean from the behavioral psychology of political cycles past.
As always, the timing of points of view is critical. Keynes said this in the midst of Franklin D. Roosevelt’s most glaring attacks on corporate America in 1937. FDR needed the populist rhetoric to carry him into his second term, and although this helped him win that short term vote… in the end, the leftist anti-American capitalist tone was arguably one of the main contributors of the second round of crashing in the US stock market. Black Tuesday of 1937 was nasty, and so was the behavior of partisan politicians at that time.
Whether the name is Alex Rodriguez, Tom Daschle, or Dick Fuld – these are all one and the same – people who we lose faith in to do the right thing when no one is looking. This isn’t a Wall Street thing. This isn’t a Washington thing. This is an American thing – and the You Tubes of The New Reality are going to be keeping the score.
On that score, the new head of the US Treasury is off to a horrible start. Not only did Tim Geithner fib about his taxes, now he is failing to deliver on the market expectations that he has set. As Shakespeare wrote, “expectations are the root of all heartache,” and unfortunately Mr. Geithner was too busy being polarized by the politicization of his new seat to have done that required reading. This morning he is “delaying” the Treasury’s plan that he was slated to present. The S&P Futures don’t do delays Timmy. Let’s get with the program.
Geithner isn’t alone. Ben Bernanke may have lost his Goldman buddy, but he is sticking with the program of not delivering on expectations as well. The Fed is pushing out the long anticipated lending of the $200B TALF (term auction lending facility). These tax moneys were supposed to be flowing by February, and now it sounds like that won’t be until at least the end of February.
Michael Phelps smoked pot, and the partisan politicians in Washington didn’t get anything done this weekend. This is what these people are accountable for. If you’re surprised by it – find yourself a cold shower and a reality check. If you’re looking to endorse the “no drama” Obama dream as not having any asterisks, that’s a bid that I am glad to sell on strength…
On Friday, I made sales into the 863-873 resistance levels that I outlined in an intraday note to our clients. That’s not my politics – that’s my investment process. Whether or not it was a “good call” or not will be determined by the tape, and I will be held accountable for making that decision – as I should be. Them be the rules of The New Reality – transparency, accountability, and trust.
After charging +5.2% higher on the week into the face of consensus doubt, the balance of risk versus reward in the SP500’s price has moved to the risk side of the teeter-totter. I am using an upside target of 876 versus downside support of 844.
Combined with the US Dollar having its first down week of 2009, volatility coming down (as measured by the VIX Index) was another big contributor to the upward momentum in the US stock market. On a week over week basis, the VIX was down another -3% to 43.37, taking its cumulative swan dive from the peak of the Liquidity Crisis to -45%. That’s a big differential in expectations. The reality is that all of the 2007 bulls are now bearish, and the 2008 bears are busy writing books… so we are naturally going to see markets climb these walls of qualitative worry, expeditiously, as the quantitative measures go the other way.
This isn’t just a local phenomenon. Globally, stock markets in China and Brazil continue to hammer home the reality that countries who can earn unlevered returns can indeed prosper. Last night the Chinese stock market tacked on another +2%, taking the year-to-date move in the Shanghai Stock Exchange to +22.2%. On Friday, Brazil’s Bovespa charged another +4% higher, taking its 2009 score to +13.9%. While I sold our 6% position in Brazil into that strength, this doesn’t mean that I don’t like Brazil. It simply means that I like to book gains when I have them.
Some investors don’t have gains, some do. If you do have them, and you want to hold onto them for the “long run”, that’s really up to you. Until the US market can close above my almighty intermediate “Trend” line of 885, I’m much more into being a renter than an owner. There are plenty of shoes that have yet to be dropped in the land of the illiquid investor. There are plenty of assets that need to be marked to market that haven’t been.
Every asset has a time, a price, and embedded expectations. Just don’t mistake other people’s liabilities as an “asset” that you need to find a way to think about differently. A handshake can come from an American politician as soon as it can come from an American athlete – whether or not you should expect to trust those handshakes is really up to them. The You Tubes are on – before this stock market takes another leg up, it’s time for everyone to earn back America’s credibility.
Best of luck out there this week,


Washington And Wall Street - etfs020909

Quote Of The Week: Bill Ackman

“While PSIV and Target stock have declined materially, we still believe our fundamental investment case for Target stock will ultimately be realized, although not within the original timeframe we had initially estimated,”
-Bill Ackman

Indeed Bill, indeed… timing and sizing in this business are everything.

As the winners and losers on Wall Street continue to reveal themselves, the New Reality will perpetuate investor demand for transparency, accountability, and trust.

The Liquidity Crisis of October/November of 2008 was marked to market by a SP500 closing price on November 20th of 752. While that freak-out low is now -15.4% lower than Friday’s close, this doesn’t mean that those land locked in their own Illiquidity Crisis (private equity, concentrated activists, etc…) wont continue to fear monger investors, blaming their timing and sizing mistakes on the narrative fallacy of a “Depression” and the like…

If there are two factors we want you to own in your portfolios, they are: Liquidity and Duration. Don’t be locked into illiquid investments, and don’t let your money manager be held hostage to the duration that other investors force upon them.

Keith R. McCullough
CEO / Chief Investment Officer

Early Look

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Chart Of The Week: When The Nasty, Is Good...

Despite it not being mainstream economic thought yet, I continue to anchor on the US Dollar being the lead indicator for the US stock market. In the immediate term, what is bad for the US$ is going to be good for the stock market.

This week was the 1st week of 2009 where the US Dollar declined on a week over week basis. Importantly, the buck didn’t stop going up until we received these two nasty economic reports show in the chart below (jobless claims, and the unemployment report). I’ve been saying this for the last few weeks, and I’ll say it again, and again, the worse the economic data gets, the better it is for the stock market – nasty news (including socializing Wall Street’s losses) breaks the buck’s upward momentum. Deflating the Dollar, re-flates the stock market.

The SP500 was +5.2% this week, and the US Dollar was down -0.66%. If they break the buck by another 300-600 basis points, you better not be bearish like this market’s consensus is. This Thursday-Friday move was a powerful preview of what can happen when everyone expects the nasty.

Keith R. McCullough
CEO / Chief Investment Officer

US Market Performance: Week Ended 2/6/09

Index Performance:

Week Ended 2/6/09:
DJ +3.5%, SP500 +5.2%, Nasdaq +7.8%, Russell2000 +6.1%

2009 Year-To-Date:
DJ (5.6%), SP500 (3.8%), Nasdaq +0.9%, Russell2000 (5.8%)

Keith R. McCullough
CEO / Chief Investment Officer

GIL: Follow the 'Leader'?

I don’t believe in GIL’s strategy or sustainability of returns, but the Q looks OK to me, and the CEO is buying again after selling 250% higher. This guy can trade his stock. Follow the ‘leader’?

This quarter should be abysmal, with a 3,000bp sequential slowdown in sales, and a 1,000bp erosion in margins. Yes, you read that right, I did not err with too many zeros. It would take a lot for me to ever turn fundamentally positive on the trajectory of this company’s margins long-term, as it is growing into slower growth businesses where it is a price taker with increased capital requirements to sustain growth and profitability. That’s not a disaster scenario as long as management realizes it. This team does not.

But few things are linear in this business. After missing and/or guiding down for the past six quarters, 1Q09 should mark the bottom for GIL. Note that the CEO sold 3.6mm shares of stock about this time last year – just before the business completely fell apart and over $4bn in equity value went away. Well…at least he avoided losing $130mm in his own capital.

Here are a few considerations on the quarter.
1) Revenue:
a. Negatives: 1) Pricing down 7-9% at a minimum, and GIL does not benefit from price increases granted by WMT to the extent as Hanesbrands and Fruit due to meaningfully less exposure. 2) FX has been a 1.5% tailwind over the past year. At current FX cross rates, this reverts to a -1.5% headwind. 3) Prewett acquisition has helped revs for the past 11 months. GIL shows 1 quarter of that in this quarter, which helps by 4% in total, but then we’re back to relying on organic growth – where GIL has struggled.

b. Positives: 1) 1Q is the least significant revenue quarter. 2) There’s a 5-10% volume opportunity this year from Europe, with a call option on Japan and Mexico. 3) The US mass retail underwear program started in 3Q, which still leaves some yy growth for 2 more quarters.

2) Margins: a) GIL comps in 1Q against a 600bp margin boost due to mix last year. b) Inventories were +32% at the end of 4Q relative to 27% growth in sales. That’s not great, but does not make me too queasy. c) The biggest negative is also emerging into a positive. Cotton will be a crushing blow to GIL this quarter. Every penny in cotton prices equals about $0.035 in EPS. With cotton having been cut by $0.30 to about $0.50 over the past nine months, we’re approaching the inflection point where the 9-12-month gap from purchase to booking as COGS on the P&L shows up in earnings.

3) Capex/Working Cap: Capital expenditures should be up by about $15mm off a base of ~$100mm in ’09 to expand the DR facility and Rio Nance One. This should add an incremental 7-8mm dozens of annual capacity (8%). Keep in mind that there should also be $70mm of additional working capital to support growth in 2010 and the cash payment resulting from the CRA audit (~$17mm).