"It is harder to crack a prejudice than an atom."
-Albert Einstein
The
embedded human factors of Pride and Prejudice are what many societal
models are built on. If you don't want to believe that, take a walk
down to an Irish watering hole today and chirp something passive
aggressive at someone with a Guinness in their hand, and let me know
how that goes...
On
this day in 1761, the first St Patty's Day parade was held in Boston.
March 17th is a national holiday in Ireland and actually a bank holiday
in Northern Ireland - never mind Barclays proclaiming their renewed
mystery of "we're making money" faith yesterday, I can assure you that
anyone having a bank holiday today is smiling. Them "profits" that them
bankers are talking about aint what they used to be folks...
There
is a great article this morning in the Financial Times outlining
Ireland's Finance Minister's (Brian Lenihan) thoughts on outlawing what
the Irish are appropriately labeling "Crony Capitalism"... gee, what's
that Billy Ackman? Isn't buddy-ing up with corporate boards and waving
how much stock you "own" (with other people's money) a tested and tried
part of the American way? Maybe pre You Tube it was - hate to break it
to anyone who isn't paying attention to the secular and societal TREND
that the world is levering up long with right now: Transparency,
Accountability, and Trust...
At
the end of the day, President Obama can get on the box and whine about
AIG bonuses... but the bankers will always find a way to "get creative"
with compensation structures. He can try "compensation caps" .... He
can lean on the moral compass associated with that little ole tax payer
that Goldman alum Jimmy Cramer apparently is all of a sudden "standing
up for".... It won't work.
The
latest edition of Wall Street, by and large, has proven that it's not a
repeatable business. Obama is going to have to unlearn that this Street
isn't what Rubin tells Summers to tell Geithner it is ... it all comes
from the same embedded prejudice - "making money"... and, sadly, for
many of the said leaders of America's Financial System, it's not how
you make that money - it's still all about how much money you make...
Like
the free money leverage cycle, Crony Capitalism is going to die on the
vine. Provided that you are forced to attempt not to lie, and be
transparent about your business (all you Government State Enterprising
Banks listen up), you will be You Tubed...
While
the Russians and Australians are marching forward trying to find ways
to service THE Client (China), American media moguls who have the conch
are still allocating a ridiculous amount of time focusing on who made
money.
Yesterday,
Bloomberg allocated prime time TV to an "exclusive" interview with
Billy The Kid (Ackman). No, this was not a time to focus on the 8%
intraday turnaround in oil prices, or the potential investment
implications of Geopolitical Risks heightening as the Russians renew
their economic footing.... No, no, no - America needs to hear how Billy
can take one last shot at a Billion...
Billy's
latest reactive master plan for Target is fully loaded with Crony
Capitalism. During the interview Margaret Popper asked him how many new
Board members he was proposing for Target (as in his "activist"
investment position that reportedly lost -93% of its value). Now Billy
is in his early 40's and is by all measures (according to anyone he
offers a brokered commission) really "smart" - but the poor guy wasn't
very sharp on his answer: "four, I mean five..." - you see, when he
said 4, he realized that he forgot to include himself!
What
kind of America is this where a hedge fund manager who has never run a
Main Street business in his life can blow up his second hedge fund
(Gotham was his first fund, and it went away), and continue to get the
googly eyes from our manic media because he's allegedly "smart" and
"connected"? I don't get it...
What
I do get is that some (not all) hedge funds aren't businesses. Much
like some investment banks, they are compensation structures. If
Americans want to sign off on the cronyism associated with socializing
their losses and capitalizing their gains, I'll take my ball and go
home. This isn't free market capitalism. This is ridiculous.
Into
the apex of a Bear market short squeeze that we called for, the bankers
did what they do, right on time - they came back! After last night's
close we saw secondaries and convertible offerings slapped on the tape
from Wynn Resorts to that cyclical that some "hedgies" bought at the
top calling it a "paradigm shift" (Alcoa) - the timing of brokered
offerings was impeccable. At the same time Goldman is allegedly
offering loans to something like 1,000 employees who are losing money
in Goldman's "elite" funds... now that's "creative"...
Having
lived on this Street for long enough to know what not to do with my
life, allow me to give you 2 more cents of my advice - if a Wall Street
guru says "its time to get creative" with either his compensation or
ownership structure in whatever it is he is talking about - run...
I
did. As of yesterday's close, I have taken down my exposure to US
Equities in our Asset Allocation Model to 3%. I have a 3% position in
Australian Equities, a 4% position in Chinese Equities (both closed up
+3% In Asian trading), and 75% Cash. In this ETF only Asset Allocation
Portfolio, I am up for the YTD, and happy to watch Wall Street execute
on their predictable prejudices - as Einstein said, prejudices are
"harder to crack than an atom." This remains a Bear market, and fixing
Crony Capitalism will take time.
My immediate term upside/downside targets for the SP500 are 765 and 711, respectively.
Happy Saint Patrick's Day,
KM
LONG ETFS
EWA - iShares Australia-EWA
has a nice dividend yield of 7.54% on the trailing 12-months. With
interest rates at 3.25% (further room to stimulate) and a $26.5BN
stimulus package in place, plus a commodity based economy with
proximity to China's H1 reacceleration, there are a lot of ways to win
being long Australia.
USO - Oil Fund-
We bought oil on Friday (3/6) with the US dollar breaking down and the
S&P500 rallying to the upside. With declining contango in the
futures curve and evidence that OPEC cuts are beginning to work, we
believe the oil trade may have fundamental legs from this level.
CAF - Morgan Stanley China fund -
The Shanghai Stock Exchange is up +21.8% for 2009 to-date. We're long
China as a growth story, especially relative to other large economies.
We believe the country's domestic appetite for raw materials will
continue throughout 2009 as the country re-flates. From the initial
stimulus package to cutting taxes, the Chinese have shown leadership
and a proactive response to the credit crisis.
GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.
TIP - iShares TIPS-
The U.S. government will have to continue to sell Treasuries at record
levels to fund domestic stimulus programs. The Chinese will continue to
be the largest buyer of U.S. Treasuries, albeit at a price. The
implication being that terms will have to be more compelling for
foreign funders of U.S. debt, which is why long term rates are trending
upwards. This is negative for both Treasuries and corporate bonds.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
SHORT ETFS
EWU - iShares UK
-The UK economy is in its deepest recession since WWII. We're bearish
on the country because of a number of macro factors. From a monetary
standpoint we believe the Central Bank has done "too little too late"
to manage the interest rate and now it is running out of room to cut.
The benchmark currently stands at 0.50% after a 50bps reduction on 3/5.
While the Central Bank is printing money and buying government
Treasuries to help capitalize its increasingly nationalized banks, the
country has a considerable ways to go in the face of severe deflation.
Unemployment is on the rise, housing prices continue to fall, and the
trade deficit continues to steepen month-over-month, which will hurt
the export-dependent economy.
XLI - SPDR Industrials -
This group was up yesterday largely because the USD was down. We
shorted XLI into strength; it ranks among the top three worst sectors
in the market. From a fundamental perspective, industrials are
typically later cycle stocks and so should continue to underperform
their early cycle counterparts.
DIA -Diamonds Trust-We
re-shorted the DJIA on Friday (3/13) on an up move as we believe on a
Trade basis, the risk / reward for the market favors the downside.
EWW - iShares Mexico-
We're short Mexico due in part to the country's dependence on export
revenues from one monopolistic oil company, PEMEX. Mexican oil exports
contribute significantly to the country's total export revenue and
PEMEX pays a sizable percentage of taxes and royalties to the federal
government's budget. This relationship is unstable due to the
volatility of oil prices, the inability of PEMEX to pay down its debt,
and the fact that PEMEX's crude oil production has been in decline
since 2004 and is down 10% YTD. Additionally, the potential
geo-political risks associated with the burgeoning power of regional
drug lords signals that the country's economy is under serious duress.
IFN -The India Fund-
We have had a consistently negative bias on Indian equities since we
launched the firm early last year. We believe the growth story of
"Chindia" is dead. We contest that the Indian population, grappling
with rampant poverty, a class divide, and poor health and education
services, will not be able to sustain internal consumption levels
sufficient to meet targeted growth level. Other negative trends we've
followed include: the reversal of foreign investment, the decrease in
equity issuance, and a massive national deficit. Trade data for
February paints a grim picture with exports declining by 15.87% Y/Y and
imports sliding by 18.22%.
XLP -SPDR Consumer Staples- Third best performing sector yesterday, but remains broken. We shorted PG yesterday and think this group is bearish.
LQD -iShares Corporate Bonds-
Corporate bonds have had a huge move off their 2008 lows and we expect
with the eventual rising of interest rates in the back half of 2009
that bonds will give some of that move back. Moody's estimates US
corporate bond default rates to climb to 15.1% in 2009, up from a
previous 2009 estimate of 10.4%.
SHY -iShares 1-3 Year Treasury Bonds-
On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere
north of +0.97% moves the bonds that trade on those yields into a
negative intermediate "Trend." If you pull up a three year chart of
2-Year Treasuries you'll see the massive macro Trend of interest rates
starting to move in the opposite direction. We call this chart the
"Queen Mary" and its new-found positive slope means that America's cost
of capital will start to go up, implying that access to capital will
tighten. Yield is inversely correlated to bond price, so the rising
yield is bearish for Treasuries.
UUP - U.S. Dollar Index -
We believe that the US Dollar is the leading indicator for the US stock
market. In the immediate term, what is bad for the US Dollar should be
good for the stock market. The Euro is up versus the USD at $1.2993.
The USD is up versus the Yen at 98.5050 and up versus the Pound at
$1.4046 as of 6am today.
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