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Shockingly, President Obama Taps Krueger to Lead Council of Economic Advisors

Conclusion: President Obama’s choice of Alan Krueger, who is a talented academic economist, is a predictable doubling down of his faith in Clinton-era Keynesians.


President Obama has been fairly predictable in his selections for key cabinet and personnel decisions. Generally, the key members of the Obama team have two criteria: they have served in government before and they served in the Clinton administration. Some of the key examples include: 

  • Peter Orzag was replaced by Jack Lew at OMB, who was serving in the State Department and ran the OMB under Clinton; 
  • Secretary of Defense Bob Gates was replaced by Leon Panetta who was then head of the CIA and a prior Chief of Staff to President Clinton; 
  • Obama Chief of Staff Rahm Emmanuel was replaced by Bill Daley, who served in Clinton’s cabinet; and 
  • Larry Summers was replaced at the National Economic Council by Gene Sperling who was then serving in the Treasury Department and was a prior member of the National Economic Council. 

This list could certainly be extended, but the simple take away is that given the conventional and predictable choice on personnel decisions, Obama has made, well, the conventional and predictable choice.


In addition to having both governmental experience and a prior post in the Clinton administration, Krueger is also personally close to Summers, Geithner, and Bernanke. According to press reports, Krueger is tennis buddies with Summers and Geithner and is a member of the Princeton economics department with Bernanke. Predictable is as predicable does.


Just because he is a known entity and has strong ties to Obama’s current and past economic advisors, that doesn’t necessarily mean Krueger is not qualified for the role. In fact, he is probably more than qualified based on his resume, but the question is whether is the right man for the job at this time.


In reviewing some of his key writings, we have found Krueger to be, at times, an unconventional and out of the box thinking that does belie his Princeton / Clintonian / government training. In particular, as sticklers for data integrity, we are fans of Krueger’s focus on economic data integrity and his leadership at the Princeton Data Improvement Initiative.  Despite this, the negatives surrounding Krueger appear to outweigh the positives for the role of leading the Council of Economic Advisors.


The core of Krueger’s academic work has been in the area of labor economics, which, given the high and sticky unemployment rate, could be of benefit to the Obama Administration. In fact, analyzing the most unemployed areas of the economy and determining how to re-train or reallocate those resources may well be the key to improving the outlook for employment. That said, it is not clear, at least based on some of his recent comments, that Krueger actually has a grasp on the current employment issues. In a March 30thopinion article for Bloomberg, Krueger wrote:


“Instead, I suspect we’re going to see a continuing decline in the unemployment rate, though there surely will be some blips along the way.”


When he penned that article almost six months ago, the unemployment rate was 8.9%. It has since ticked up to 9.1% in direct contrast to his prediction.


A review of Krueger's writings have also revealed that he is about as Keynesian as economists come. On this front, one of his more recent writings that is worth highlighting is from the Economix blog from the New York Times on January 12th, 2009. The article was titled, “A Future Consumption Tax To Fix Today’s Economy” and the title about says it all.


To be fair, there are certainly some merits to a consumption tax. In fact, Canada implemented a 7% consumption tax in the 1991 and  was at least partially responsible for getting Canada’s fiscal house in order. Krueger, though, is proposing something that’s a slightly different tact, which is to implement a consumption tax in a time of economic duress to fix the economy. According to Krueger:


“In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place.”


No doubt in the highly rational halls of academia, this concept makes sense, but in the real world consumers won’t spend more today because of the fear of some tax in the future. Even floating this idea shows a basic misunderstanding of the confidence component related to consumer spending. That is, as consumers feel good about the economic future, their job security, and the prices of their assets (homes and portfolios), they will naturally spend more. It shouldn‘t take a PHD in economics from Harvard to realize that the fear of a punitive future tax is illusory as it relates to promoting consumption.


The concept of an increased role by the government to solve economic problems is a common theme in Krueger's publicly expressed views. The most recent example of this is from Krueger’s September 21st, 2010 testimony to the Senate Banking, Housing and Urban Affairs Committee in his role as Assistant Treasury Secretary of Economic Policy on the topic of the nation’s infrastructure.


In the testimony, Krueger tied the high sticky unemployment to a lack of recovery in the construction sector. As he rightfully noted, “one in five jobs lost since 2007 was in the construction sector” and “the construction industry has lost over 25 percent of its total payroll jobs.” So, in Krueger’s view, creating incentives to grow employment in the construction sector should go a long ways in solving the nation’s unemployment agency. An adroit point, but to solve this issue he proposes the creation of a new pseudo-government entity called a National Infrastructure Bank. In a nut shell, according to Krueger, the solution for the country’s construction woes are for the government to take over the construction financing industry via this new entity.


Another key article of Krueger’s to highlight is an October 20, 2008 blog for the New York Times in which he, and probably rightfully, criticizes the Bush administration’s lackluster efforts at privatizing public labor exchanges. According to Krueger:


“Public labor exchange offices were established in the early days of the New Deal to help the unemployed find jobs. This function is now done in One-Stop Career Centers, which help to match workers to job openings and monitor that Unemployment Insurance recipients are actively searching for work. Some 3 million unemployment insurance beneficiaries a year are placed in jobs through the labor exchanges, and 9 million utilize their services.”


The core of Krueger’s argument in this article was that private labor exchanges worked, and that Bush administration attempts to privatize them were ineffective. No doubt that is a fair point that has been supported by fact, but unfortunately Krueger went on to write:


“Just as it has tried to with other government functions such as Social Security, the Census, the Federal Emergency Management Agency and national defense, the Bush administration has been trying to outsource or eliminate services for the unemployed.”


While there is merit in Krueger defending a specific government program with which he has deep knowledge, the danger is to then go on, with a broad brush, and assess that the government is more effective than the private sector at managing a wide range of activities.


In general, this was a pretty uninspired choice by President Obama and unfortunately not a choice that is going to guide the President to a new way of thinking in attempting to solve the nation’s economic woes.


Daryl G. Jones

Director of Research


Word is that LVS is getting more aggressive (finally?) with junket commissions in Macau.



We are of the understanding that LVS utilize a more competitive commission structure to amp its VIP business.  As can be seen in the following chart, LVS has been consistently losing share over the past two years in this segment and is now at an all-time low of 9%.  Of course, YoY VIP market growth has generally been +50%, so even LVS is showing strong growth.




LVS will be trying to grow the VIP business next year when their new rooms open.  Their plan is to match anyone else on commissions/deals but only for the top 4 volume guys in the market.  We are assuming they will also be more aggressive in advancing commissions to junkets.  LVS will have new VIP rooms opening – 2 rooms at Four Seasons (by Chinese New Year) and also rooms in Q3 and Q4 at Four Seasons.  At Venetian and Sands, existing rooms will be remodeled and refurbished.  Management believes that the new hardware is key to getting the new junket deals in place.


The problem for LVS is that until they open the new rooms and offer more competitive commission structures, their VIP share is probably going to worsen, beginning in August through the rest of the year.  How successful will they be next year?  Hard to say.  Regaining respect is not easy in the Chinese culture once lost – and LVS has burned a lot of Chinese bridges.  Junkets have not shown an interest in coming back despite LVS reaching out this year.  If they are successful, companies like MPEL and WYNN could be at risk for share loss.  I’m not sure they are losing much sleep yet, however.

Alan Krueger: Predictable, conventional, and Keynesian

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Bearish Formation: SP500 Levels, Refreshed

POSITION: Short Financials (XLF)


I thought the SP500 could easily have tested 1108 on the downside before it tests 1208 on the upside. Evidently I thought wrong.


Across all 3 durations in my risk management model (TRADE, TREND, and TAIL), the SP500 remains bearish: 

  1. Long-term TAIL resistance = 1263
  2. Intermediate-term TREND resistance = 1289
  3. Immediate-term TRADE resistance = 1212 

Given generationally high levels of volatility and abnormally low levels of volume (on rallies), I’m going to use an immediate-term TRADE range to sell into of 1. I haven’t shorted the SPY in a while. Expect that to change if these 3 lines hold in the next 3 days (month end).


We call this a Bearish Formation (bearish across all 3 durations). I don’t play hero when I see a Bearish Formation and buy everything on “valuation.” That’s primarily because my role as a risk manager is to not blow up in the immediate-to-intermediate-term. If you run money with a duration that’s beyond my long-term TAIL and no one is going to call your capital for 3 years of more, we may have different decision trees.


In the immediate-term, Bearish Formations heighten the probability of crashes, big time. We almost had one in August (the drawdown was 18% from April). That doesn’t exempt this market from having one in September or October. The math still supports managing that risk.


Immediate-term TRADE support lines are now 1161 and 1110.



Keith R. McCullough
Chief Executive Officer


Bearish Formation: SP500 Levels, Refreshed - SPX


Notable macro data points, news items, and price action pertaining to the restaurant space.






Supply-side uncertainty is said to be the driving force behind the raised net-long positions across eleven agricultural futures and options in the week ended August 23rd, according to Bloomberg.  Speculators increased bullish bets on agricultural commodities to the highest level since early May after adverse weather further eroded yield prospects for corn and soybeans crops in the U.S.




Quick Service restaurant stocks continue to outperform on all durations and the food processors continue to lag as commodity price uncertainty weighs on sentiment.  SAFM’s recently reported 3QFY11 earnings miss did little to convince investors that the sector is out of the woods.


THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT - subsectors fbr




  • DNKN shares are pricy at current levels, according to Barron’s.  Echoing some of what we have been saying for some time, the article points out that DNKN is trading at a premium to SBUX, MCD, DIN, and THI.
  • YUM is lobbying the federal government, using a little-used provision from the 1970’s allowing states to permit restaurants for Supplemental Nutrition Assistance Program (SNAP) benefits.  The provision allows the elderly, disabled, or homeless the option of exchanging food stamps at participating restaurants.  Thus far, only a few states have opted into the program.



  • EAT raised its quarterly dividend to 16c per share from 14c.




Howard Penney

Managing Director


Rory Green





The Macau Metro Monitor, August 29, 2011



CHINA EXPANDS BANK RESERVE RULES Channel News Asia, Intelligence Macau

According to Xinhua news agency, the People's Bank of China has ordered commercial lenders to include margin deposits in the reserves they must set aside.  The margin deposit is the collateral used for banks' off-balance sheet and securities transactions.  This move to further restrict bank lending indicates that containing inflation remains a government priority despite signs of a domestic slowdown.


IM believes this clamp on liquidity will pull 1 trillion yuan out of the banking system; in context, China is expected to see bank loans rise by ~6x that amount in 2011.



Macau government said the second government cash handout of 2011 will be implemented starting tomorrow.  Each Macau permanent resident will receive MOP3,000 while each non-permanent resident will get MOP1,800.  Earlier this year, the government had already handed out MOP4,000 to each permanent resident while each non-permanent resident got MOP2,400. The cash handout program was first unveiled in 2008, when inflation in Macau peaked.



Unemployment rate for May-July 2011 held stable at 2.7%, same as the previous period (April-June 2011).  Total labor force was 340,000 in May-July 2011 and the labor force participation rate stood at 71.8%, with the employed population increasing by about 2,200 over the previous period to 331,000.


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