Putin’s Puppet Medvedev

President Dmitry Medvedev and Prime Minster Vladimir Putin of Russia’s United Russia party met before congress today to promise Russia would emerge stronger from a world economic crisis, one Putin purported was triggered by U.S. recklessness. Putin’s 45-minute speech, which trumped Medvedev’s much shorter opening remarks, provides further evidence that a return of Putin to the presidential “thrown” is highly probably.

Speculation about a possible Putin comeback first hit the wires on November 5th when Medvedev proposed extending presidential terms (not including his own current one) from four to six years, which Parliament approved on the second of three readings Wednesday. With the current constitutional limits of two consecutive terms, this recent reform will be used to justify holding early elections to return Putin back to his seat.

Tensions have escalated in recent months between Washington and Moscow over U.S. proposed instillation of 10 interceptor missiles in Poland to counter the likes of Iran. Further, the relative lack of response from US and EU officials to negotiate the remove of Russian troops following their invasion of Georgia in early August signals an increased inability of the international community to deal with dictatorial Russia.

Medvedev’s pledge of $200 billion in loans, tax cuts, and other measures might make a small dent in an economy that is expected to slow to 3% growth next year, but it won’t shore up the financial trouble of an economy levered to oil, which just touched a three and a half year low of $51.12. Putin, who stepped down in May, may use the current vacuum of both economic and political leadership to return to power sooner than anyone expects.

Daryl Jones
Managing Director

Matthew Hedrick


The initial claims this morning came in at the highest level since 1992. Despite the fact that a significant increase was heavily anticipated by the market, the reality still has had a shock effect sending stocks down and compressing yields.

If you have been reading our work for any length of time you know that we have expected unemployment to reach 6 to 7% by year end as the pain continues to work through the system. With financial and auto sector layoffs picking up steam we face the real possibility that we will hit the uppedr edge of our range. If we get more signals in coming weeks that the job loss cycle is gaining momentum we may revise and recalibrate our models, but for now we continue to keep our eye on the tape and stick with our process.

Andrew Barber


Keith called in from the airplane while sitting on the Tarmac before takeoff with these levels. Our models indicate a broad buy/cover zone this morning between 790 and 818.

As always we remind anyone who is trading these levels intraday to keep stop losses in place in order to keep a trade a trade to stay in the game.

Andrew Barber

Early Look

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"There have been some changes in terms of the central government's attitude toward Macau. We don't think it's necessarily all that prudent to put more money in until we see how that attitude works its way out." - Bill Weidner, President and COO of LVS

"The fact that the economy and the development and expansion of Macau occurred at such a rapid rate has created a great deal of stress on the community. The central government and the Macau government putting ... a slowdown in visitation was an attempt to give the community a chance to absorb the stuff that had been built." - Steve Wynn as quoted by AP

Bill Weidner may have been correct in his analysis that Beijing is to blame for Macau’s recent woes. However, attacking the government publicly has proven to be counterproductive in the past. Wynn, by contrast, continues to praise the efforts of the Macanese and Central governments going so far to say that the government has “handled practically everything beautifully” (AP quote).

Not only does Wynn build and run the best product, he is also a master politician. He has thrived for 30 years in one of the most regulated businesses out there and his prowess in cultivating and maintaining government relations shows, even overseas. LVS should’ve learned his lesson by now.

Could vs. Should

“There are no such things as bad days, just bad moments.” – Drew McGough

This is one of my favorite quotes of all time. Maybe it was penned long ago by some noble scholar. I don’t know, and I really don’t care. As far as I’m concerned, the author is my 10-year old son, Drew, who has the biggest heart of anyone I know (his siblings would agree).  I absolutely love my job, and am honored to both lead and serve such a talented Research team.  But let’s face some facts…sometimes this industry has a way of doling out rapid-fire sucker punches and watching to see if you get up so it can punch again.  Many Wall Streeters have had these challenges of late, and I had a healthy dose yesterday. Fortunately, when I got home my son reminded me that these were simply bad moments in an otherwise good day. I wish I realized that in the final 30 minutes of trading.

You see, I am a fundamental analyst, and I’ll venture as far as to say that I’m a pretty good one. What I am not, however, is a trader. It’s simply not my thing. It never ceases to amaze me how so many people on Wall Street start off as Analysts, and then think that this earns them the right to trade. Some can make the jump, but my opinion is that most cannot.  In my mind, that’s like spending 10 years as a Police Officer, and then graduating to become a Fireman.  These are two different skill sets.

Well, Keith was off-site presenting at a conference yesterday, so I was the de-facto PM executing trades in the Hedgeye Portfolio. When he and I spoke in the morning with the S&P at 860, he told me to buy SPYs (S&P 500 etf) if it hit 814. “No way we get that shot” I thought.  Well, 5 hrs and a 6.5% intraday swing later, I saw 814 approaching. My eyes were glued to the screen, I swear my heart-rate was up at least 20 bpm, and I felt like just downed a Jolt/Red-Bull cocktail. So what did I do? I let it ride. I watched 814 go to 811, 809, and 807. Then I booked it. That’s when I realized two things: 1) I got lucky. I got a good price, but for the wrong reason. I may as well have been at a roulette table and 2) I am not a trader, and I don’t want to be. This is what makes us unique at Research Edge. I’ll be the Police Officer all day. Keith can be Fire Chief. It’s in his blood.

Ok McGough, do you actually have a point here? Yes. As lousy (and sometimes lucky) as I am a trader, is as how weak so many companies are in allocating capital in their own businesses. Obvious or not, we’re seeing it every day. My Jr Analyst Zach Brown whipped up some great analysis on all the components of the S&P to support this premise. Unfortunately, the examples are too numerous to state them all. Overwhelming conclusions…

1. Stock Repo. Companies buy back stock when they can (when margins are at peak and valuations are rich), not when they should. Particularly in Consumer Discretionary, Consumer Staples, and Healthcare. Offenders outnumber good citizens by 8 to 1.

2. FX. There is a massive bifurcation between the flow-through rates of FX gains to the bottom line by company, and by sector. You know how companies tell you what the FX impact is to their business in a given quarter? Ignore them. Most of them do not know. We know the top line, the international exposure, the change in FX, and the incremental change in EBIT. There are some massive discrepancies out there. Check out Warnaco’s (WRC) stock over the past two weeks. There are a lot more WRCs out there.

3. SG&A/Capex. Depending on the business model, investment in the business will show up as either SG&A or capex.  The trend today is obvious. Cut headcount, pull back an overextended asset base, unwind investments gone wrong, and print those savings on the P&L to keep margins high. Guess what folks, when our economy comes out of whatever it is in, would you rather own a company that is actually stepping up and investing today (and probably taking down margins), or one that has already ‘pulled the goalie’ with 1 minute left in the 3rd period and is down 3 goals to 1? The answer is obvious to me.

I still think that the big theme in 2009 will be all about ‘quality bifurcation.’  Companies that respect history, think strategically, act tactically, and are willing to zig when outside pressure from short-term investors is telling them to zag, will end up coming out ahead as meaningful share gainers.  These are companies that invest when they should, not when they could. They’ll pick up the pieces from the poorly-managed companies that are going to have to reap what they’ve sewn.

This market and this economy are going to continue to dole bad moments. Mitigate them in your portfolio by proactively looking for the factors above.

Brian McGough
President and Director of Research

Long ETFs

EWA –iShares Australia – The Reserve Bank of Australia released data showing that it purchased $3.15 billion AUD in October to support the currency.  BHP Billiton Ltd. (EWA:13.5%) declined to its lowest level since September 2005.

EWG – iShares Germany –  Volkswagen AG (EWG:13.6%) announced intentions to complete  the  Chattanooga, Tennessee, plant by the second half of 2010 while predicting no production cuts for US.

FXI –iShares China –The CSI 300 Index, declined 20.73 points (1.1%), led by energy and basic materials stocks.

VYM – Vanguard High Dividend Yield ETF  -- Oil prices fell below $53 to almost a two-year low  this morning leading  Chevron (VYM: 4.11%) and ConocoPhillips  (VYM: 2.92%) indicating down at the open.

Short ETFs

UUP – U.S. Dollar Index --The pound fell to $1.48 this morning on weak UK retail sales numbers.

EWJ – iShares Japan -- The Nikkei 225 dropped 570.18,  (6.9%), closing at 7,703.04 the lowest close since Oct. 28.  Export data showed  a  7.7% Y/Y decline .

FXY – Currency Shares Japanese Yen Trust -- The yen reached 95.28 per dollar today, vs. 95.73 yesterday, as selling pressure on Asian currencies, particularly the Korean Won, sparked volatile trading.


The Merrill Lynch High Yield index declined to a yield of over 20%, as of yesterday, to the surprise of almost nobody. In a market where the spread between agencies and treasuries is still over 160 basis points there is no chance of finding buyers for paper that actually has investment risk. I read a book once that compared arbitrage to picking up nickels lying on the ground while trying to dodge steamrollers –this market feels more like the ground is covered in silver dollars and everyone has their arms in casts.

Traditionally the order of risk dictates that capital flows as follows: arbitrage, relative value and then directional. The theory goes that, as capital seeps into the markets, it tends to pool in the lower ground first picking off attractive riskless (or risk defined) spreads. Therefore by extension lower rated paper shouldn’t rise until after arbitrage spreads begin to contract - In other words only when sufficient liquidity returns to the market to take out low hanging fruit will investors start to focus on individual corporate risks and actually figure out which ones are worth buying.

Until then it’s all just junk.

Andrew Barber

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