In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.

Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.

Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.

Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.

As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.

Andrew Barber


The Argentinean stock market plunged 11% today on news that the government will nationalize private pensions to the tune of $29 billion. Government bonds are now yielding 24%. The fall in commodity prices is already taking its toll on an economy that generates the majority of its export revenue from raw materials. The government’s cash grab could be another step to a governmental and/or economic collapse.

While buried in the international section of the PNK’s EBITDA tables, Casino Magic Argentina actually generated almost $15 million of EBITDA in 2007, or 9% of total company EBITDA. This is a real number and it is very conceivable that this EBITDA could go away.


The China bear narrative has kicked into full gear from the front page of the Wall Street Journal’s dire warnings to the constant chatter on financial television about the chilling impact on the global economy.

The glass half empty argument is straight forward: GDP came in at 9% - significantly below growth levels in previous quarters and below consensus estimates. Industrial Output is cooling -something that the commodities markets (particularly copper) have already been telling us for months, and the global slowdown is hurting Chinese exporters. Today the Ministry of Finance announced increases in export rebates for manufactures of consumer products like textiles and toys to help offset slowing demand from the US & EU. A bleak picture.

Our, somewhat contrarian view is that all of this signifies a shift in the nature and trajectory of Chinese growth, but not its direction. Retail sales held in strong for September as both consumer and producer inflations levels came down. It looks clear to us that China’s economy will redirect towards domestic consumption as its primary driver. This transition will not be without hiccups - greater seasonality and more modest near-term growth rates for starters, but it should also enjoy the benefits of a more diversified base and the potential for sustained long-term growth as domestic consumer markets in the central and western provinces continue to develop.

Currently we are continuing to hold our FXI position although it is almost 4% below our entry point. We often find ourselves taking a contrarian stance, but that is not because we seek it out. If the fundamental data points for our China thesis deteriorate than we will adjust our opinion, but for now the glass appears more than half full to us.

Andrew Barber

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Our upside target level for the S&P 500 in the near term is 1030.64 provided that the index can hold above 952. We remain 75% cash and 25% equities but will look to selectively increase our equity position if the S&P 500 remains above our support level through the week.

Current volatility has forced us to keep our target levels exceptionally wide. To put the present situation in historical context we calculated the intraday spread between low and high for the cash S&P as a percentage of the prior session’s close since November of 1984: 34.21% of all days with moves that exceeded 5% were in calendar 2008 and 31.58% were in sessions after September 17th of this year.

PS -For those who are superstitious: 55.26% of moves that were 5% or greater happened on days in the month of October.

Andrew Barber

SBUX - Coffee Advertising Wars

Over the next 12-months Starbucks will be forming a new advertising strategy – they have no choice. Starbucks is a great brand and the world needs to hear it. Unfortunately, this is real weakness fir the company. In fact, SBUX’s most recent AD agency told the company they don’t want to do business with them anymore.

Yesterday, Dunkin’ Donuts fired a shot at Starbucks by saying that it beat SBUX in a recent national blind taste test (for more details, visit, and SBUX has no real way of responding. I’m sure management at Starbucks doesn’t feel the need to respond, but the company needs to be on TV reassuring customers what the brand stands for.

At some point in 2009, MCD will be on TV talking about the company’s coffee initiative. Taken together McDonald’s and Dunkin’ Donuts will be spending a significant amount of money promoting their respective brands. Starbucks can’t sit on the side lines. Going forward the Starbucks brand will need to have a competitive voice in the advertising world.

Lastly a small, global coffee icon is starting to accelerate its growth plans. The Juan Valdez Cafe chain is now selling coffee at 101 stores across Colombia, as well as stores in New York, Seattle, Philadelphia, Santiago, and Spain. According to press reports the company plans to add 500 more shops across the U.S., Latin America and Europe by 2010.

Taking The Shots

“You’ll miss 100% of the shots you don’t take”
-Wayne Gretzky

After seeing Warren Buffett quote Gretzky last week, I guess the barn doors have been opened for we men of the ice to start quoting the man they call “The Great One” in investment letters! Life is definitely too short not to take the shots. Amen.

Some people opted to move to cash, at the market’s bottom. Clearly, they wanted out of the game when most did. We don’t need to pay them 2 and 20 for that. If you want to be in this game, you better have a process. We have one that allowed us to take our shots buying stocks on October the 10th when they “V” bottomed. The SP500’s intraday low was 839 and the closing price for the history books found the back of the net at 899. From the intraday low to yesterday’s closing high of 985, “Mr. Market” has given us a plump +17.4% gain. From that closing low to closing high, the SP500 has issued us a +9.6% return in 6 trading days. If you don’t “trade”, maybe these moves aren’t of interest. Or are they?

Stylistically, it has always fascinated me to hear how different investors in this business are this type of guy or that type of gal. “Value”, “Growth”, “Momentum”, “Butterfly Wing Nut”… it’s all out there. We’re in the business of being the guys and gals who are right. Do your own research. Be your own process. Sell high, buy low. This is only as complicated as you are pretending to make it.

We fortuitously covered a lot of our shorts in the morning yesterday. In the last week, we have covered many of our country ETFs (India, Japan, Austria), and locked in gains on our higher beta shorts. Days like yesterday, with the SP500 +4.8%, and Chinese ETFs trading 2x that beta, can wreak havoc on portfolios that have beta mismatch. In English, that means you think you are hedged, but your shorts have higher betas than your longs, and they squeeze you to the point of not being able to realize a positive return on an up day. It used to happen to me all the time. Trust me, it sucks.

Math is a wonderful thing. It allows us to manage away from embedded portfolio risks like beta mismatching. It also helps us monitor sentiment in a more systematic way. Yesterday’s move in both volatility and credit spreads were critical macro factors that had us move to a longer position in the morning. The VIX (volatility index) closed at 52.95 yesterday - that’s a 24% drop from where we started buying stocks! You don’t need a PhD in math to know that that matters. Nor do you need one to realize that the TED spread (3mth Treasuries vs. 3mth LIBOR) has narrowed by almost 150 basis points in the last 6 trading days. Combined, these factors are very bullish.

This morning, rather than spend your time reading the Wall Street Journal’s page 1 article about “China’s slowdown less likely to stave off a world recession”, I think you are best served to proactively monitor the global factors at work within this increasingly interconnected global market place. I guess yesterday’s history report woke someone at News Corp up to the fact that China has slowed – hello, “McFly”, yesterday’s GDP report was the 5th consecutive quarter of slowing. This is not new. Markets are discounting mechanisms of future events, not historical ones. China has already lost almost 70% of its value from this time last year.

Yesterday, we issued an intraday note to our ‘Research Edge’ Macro clients titled “Chinese GDP Outlook: Are We Bullish Enough” (, 10/20), and I guess it’s only fitting that this note was effectively the antithesis of the WSJ’s this morning. It would be hard to be as bearish as we were on Asia 9 months ago, so now we get to be that guy who is annoying the shorts, rather than being the bear annoying the bulls. This business is only as complicated as you want to make it. Sell high, buy low.

Our SP500 model remains in a negative intermediate “Trend” position, but is building positive immediate term “Trade” momentum. Provided that the SP500 can hold and close about the 952.11 line, it’s still safe to be partially invested in US stocks. Our math says that the US market has another +6% upside from yesterday’s close. As prices and fundamental data points change, we will. This complex system of market factors maintains an underlying simplicity in its behavior. Rather than arguing about whether you are a “value” or “growth” guy, now is definitely a good time to consider the guys and gals who have a process that’s allowing them to take the shots, and score.

Best of luck out there today,