"It is harder to crack a prejudice than an atom."
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,
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%.
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.