Eye on Obama’s Cabinet

President-elect Obama’s cabinet is very quickly taking shape and has a decidedly Clinton flavor. While none of his appointees are official, or have gone through their Senate confirmation hearings, it is likely that the names that are being widely discussed and acknowledged by the Obama campaign are valid and will form the core of his cabinet.

Obviously the Clinton tone begins with Senator Hilary Clinton and her likely appointment as Secretary of State, but actually resonates in almost every purported appointment, including Bill Richards as Secretary of Commerce (Energy Secretary and Ambassador to the UN under President Clinton), Timothy Geithner as Secretary of Treasury (Assistant Secretary of the Treasury for International Affairs under President Clinton), Rahm Emanuel as Chief of Staff (Senior Advisor to President Clinton for Policy and Strategy), Larry Summers as Special Economic Advisor to the White House (Secretary of the Treasury under President Clinton), and Eric Holder as Attorney General (Deputy Attorney General under President Clinton).

While on one hand these nominations are hardly inspiring as representatives of change, they do, admittedly, represent competent and broadly respected appointees. The economic appointees are most interesting in the context of the country’s current economic ills and while on the margin any semblance of change is probably good, it is hard not to accept some of these appointees with an air of caution, in particular the most relevant position of Secretary of the Treasury, Timothy Geithner. In particular, when we see headlines such as “Timothy Geithner: Obama's Pick for Treasury a 'Great Man for the Job”, we get concerned that expectations are becoming elevated for his performance.

Following Senator Obama’s victory, we had posted on the potential choices for Secretary of the Treasury and we had suggested that Geithner was one of the top three choices, although we preferred Larry Summers as a more experienced and economically rational choice. We are not willing to say that Geithner is a bad choice, as he is not even on the job yet, but as we wrote on November 5th, 2008 in a piece we titled “Obama Treasury Secretary: The Top Contenders”, we wondered “whether he has the experience to manage the current crisis.”

Current Secretary of the Treasury Paulson, at least on paper, appeared to have strong experience, but clearly he has been a disappointing Secretary to say the least and has mismanaged this crisis due to very ineffective communication and a lack of a cohesive plan. While we were early in criticizing Paulson, and actually calling for his resignation, it is now a consensus view, so we won’t dwell on it. Our three most noteworthy red flags on Geithner are based on experience, association with Bob Rubin, and his involvement in trying to “solve” the current crisis.

Until recently, former Treasury Secretary Robert Rubin had an incredibly austere reputation. He was a very successful Secretary of the Treasury and considered an elder statesman and consigliore of sorts in the finance industry. Both Geithner and Summers are reputed to be followers of Rubinomics, which as the New York Times noted today is a combination of “balanced budgets, free trade and financial deregulation”. Obviously, the deregulation pursued under Rubin / Clinton is coming under criticism, due to the current economic crisis, which has as a root cause financial deregulation. Additionally, Rubin’s role as a Directory and Senior Counselor to Citigroup, the most recent of the nation’s banks to be ostensibly taken over by the government, is rightfully being closely scrutinized. So what was once a positive attribute, that is a long association with Robert Rubin, must now be viewed with caution.

At 47, Geithner is youngish for a Treasury Secretary, but age is hardly a fair arbiter of potential success especially given that the President Elect is the same age. Our primary issue with Geithner’s experience relates to the fact that he has had literally no real world business experience or deep academic economic experience. He is a career civil servant, with a Masters in International Economics, and while has been adept at handling his role as President of the New York Federal Reserve, his real notable accomplishment is his leadership role in this current crisis, a solution whose resolution is far from clear.

Geithner’s elevation to Secretary of the Treasury is largely a function of this role in helping to manage and implement a plan in the current economic crisis. As Secretary Paulson stated in a news release following word of Geithner’s nomination:

“I have the highest regard for Tim – his judgment and creativity have been critical to designing and implementing the necessary actions we’ve taken to protect and strengthen our financial system.”

Geithner obviously did not solicit the comments from Secretary Paulson, but to the extent that he did play a critical role in the half baked, ad hoc plan that has been implemented by Paulson, we remain wary.

Daryl Jones
Managing Director

SP500 Levels Into Obama's Discussion...

I am sitting here in my hotel room in San Diego having to endure watching CNBC (the room doesn’t have Bloomberg TV). I must say, this show is an absolute circus of manic emotion. No wonder why this tape is so volatile. It's actually quite sad.

What's even sadder (if that's a word) was that few of these talking heads could recommend buying stocks last week. They opted to run from their own shadow instead. With the SP500 having rallied 12% in the last 3 hours of trading, I guess it's ok for the clowns to run around tooting their perpetually bullish horns again!

Back to the proactive process... here are our SP500 lines to manage risk around (see chart). We got very long last week looking for a +14% squeeze, and we are now staring right at it. The next move is to make sales, not chase bozo the clown.

BUY "Trade" = 751
SELL "Trade" = 839

Let's relax and keep it real out there,
Keith McCullough

Eye On The Deflation Trade: Buying TIPs

I bought TIPs today (earning a 10.5% yield) in the 'Hedgeye Portfolio' for the very reason that everyone who has been short commodities (or not levered long them), continues to outperform. Some level of mean reversion is setting up to take hold, and catch the momentum investors who are piling onto this over sold trade off-sides.

Have commodities deflated? Well, I'll save you the debate and show you the chart below. Alongside this, the US government has opted to bring out "Heli Ben" and drop moneys from the heavens. This morning US 10 Year yields we're trading at 3.23%. They are bailing out Citigroup, again… and devaluing our American currency alongside the credibility of her banking system’s handshake.

This deflation “Trend” is setting up to turn higher for a “Trade” into the December Fed rate cut. Much like Greenspan opted to re-flate his way out of problems in 2001-2003, cutting rates to negative (on a real basis) is going to re-stoke the inflation "Trade". This is why we are short the US$ via the UUP, and long OIL.

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The Art Of Managing Money

“Invest at the point of maximum pessimism.”
-John Templeton
On Friday, there were plenty of opportunities to invest at Sir John Templeton’s point of max gut check. The VIX was at 80 and capitulation volume was at hand. The S&P500 ending up closing +6.3% on the day, after having a +7.4% rally from its intraday lows. If you can’t buy them when they are on fire sale, managing money in a bear market is probably not for you. Bear market rallies are more powerful than those in bull markets.
Not too long ago, a lot of people thought that all investing required was other people’s money. After all, one of the men who I learned from in this business told me once, “you see Keith, the art of managing money, is having money to manage.” Some of the best lessons in life come when people teach you how not to think. That fee hoarding approach doesn’t do the client a whole heck of a lot of good if all you do is freak-out at market lows and lever up long at market tops. If the vaunted Portfolio Manager doesn’t get that, guess what? His or her client will remind them of as much come redemption day. They wear the pants in this relationship.
Admonishing the do whatever it takes to “make money” mantra is what this country needs. We need the return of principles based leadership. Plenty of capital will be made if we do this right. This is going to take time, but this is America… and if I trust in one thing out there in this country, that’s it. Alongside the change in economic leadership that Obama is going to instill, we are going to see the same in the asset management business. Both are long overdue.
We’ve been pointing to firing Hank “The Market Tank” Paulson as one of the major pending catalysts for a short squeeze. With Tim Geithner and Larry Summers respective appointments to “The New Reality”, I was smiling on Friday. No matter what your politics, you have to be proactively preparing for structural change in the leadership of this country. Whether a $500B two year stimulus plan will work or not is not the point. The point is that change matters. Particularly when the media will have you believe that pirates and the apocalypse cometh…
Getting Hank and Mark Cuban out of the game isn’t going to hurt anyone. That much I can say with a high degree of certainty. Turning Citigroup into a government office is probably the right thing to do so that America can get the “Pandit Bandit” on shore, under supervision. Citigroup’s stock is down 86% year-to-date, and while that still may rival Pandit’s Old Lane hedge fund performance, we’ll never know. “Investment Banking Inc.” has a creative way of instituting narrative fallacies into the market’s daily dialogue, so that we simpleton folks forget such non-trivial issues like facts.
The facts are on the scoreboard and it’s time for the compromised to walk the plank. Goldman’s stock broke its 1999 IPO price of $53/share. The Big Mack’s Morgan Stanley, which we remain short in the ‘Hedgeye Portfolio’ trades at $10/share… and according to the analytical savants of yesteryear, both are “trading well below book value.” Ah, right… and what exactly is on those books these days anyway? Now that the Fed is levering up to almost 60x with a capital ratio nose-diving under 2%, will there be enough cash in the pirate ship’s hull to get to the Black Pearls of GS and MS? Or will they too surrender to becoming dry docked government museums?
Citigroup reminds us this morning that the “Pandit Bandit” has no idea what his book value is. You see, that’s a shareholder equity thing… and he gets paid out of the income statement. Pandit also reminded us that he was comfortable buying insider stock ahead of the most certain investment thesis on Wall Street – that Hank Paulson will give $20’s of billions of dollars to his banking cronies in the form of “preferred stock” investments. “Preferred” … Hank and the boys love that, and they will do whatever it takes to “have money to manage.”
With 3-month US Treasuries at 0.01% this morning, money is free. BUT… only if you are in the “Investment Banking Inc.” club… so don’t get all excited and stuff… if you’re like me, flying coach out to California and staying in a Residence Marriot, being a capitalist, you’re not getting any of it. And you know what, you shouldn’t – it’s un-American.
The good news is that if you have proactively prepared for this mess, you are liquid long cash, and have nothing but the blue deflationary skies of opportunity created out of crisis to look forward to. I am looking at office space in San Diego, CA today that’s going to run us a buck a foot. Remember how hard your grandparents had to grind to earn a buck? Maybe someone should fire that memo over to that Target “activist” who is still running around putting leverage on top of leverage with other people’s money.
If you want to manage other people’s money, start by respecting that it’s not yours to lose.
Best of luck out there today,
Long ETFs
OIL iPath ETN Crude Oil –Crude futures rose above $51 per barrel this morning on a weakening US dollar.
EWA –iShares Australia – In a speech in Melbourne today Rio Tinto (EWA: 3.1%) Chairman Skinner predicted the slowdown in Chinese demand for base metals will be short, forecasting a rebound within 2009.
EWG – iShares Germany –  IFO institute business confidence survey fell to its lowest level in over 15 years  at 85.8 in November, down  from 90.2 in October. Moody’s maintained German sovereign debt at Aaa: Stable.
FXI –iShares China –The CSI 300 Index, declined 83.09 points (4.3%) in a broad based sell-off.
 VYM – Vanguard High Dividend Yield ETF --Shares of JPMorgan Chase (VYM:2.33%) and  Bank of America (VYM:2.14%) each rose over 5% in trading in London after the Citi announcement.
Short ETFs
UUP – U.S. Dollar Index –Currency Trading was dominated by the Citi announcement with the Dollar declining against the JPY and EUR.
FXY – CurrencyShares Japanese Yen Trust – The Yen rose to 95.25 USD on news of the Citigroup bailout. 


We’ve got a pretty good look into 1H 2009 slot sales and it’s not pretty. See the first chart for the ugly truth. I’ve also posted the painstaking detail of all new casinos and expansions in North America through 2010. If anything these projections will prove aggressive. Some openings and expansions will slip, maybe indefinitely. Enjoy!


“What human beings can be, they must be.” -Maslow

The broad stock market is down over 50% year-to-date and the economy is weak and getting weaker. We’ve been on the right side of the Trend, but still have friends, family, and clients who have lost a good deal of their personal net worth this year and that can be depressing. Years like this, though, teach us important lessons about personal motivation and happiness. The bottom line, it is not all about money.

Keith and I had been talking about the idea of the company that is now Research Edge well over a year ago. I ultimately opted to not join him from the outset because the risk of the unknown scared me. As did the idea of leaving a good salary and job in a great city, Miami, but as the year wore on and on I realized that I wasn’t happy. I really enjoy investment research, but my motivation for staying in the job I was in was purely money and social prestige, i.e. it was a good firm, rather than any sense of passion.

I had been mulling over leaving for months, for a number of personal and professional reasons, and the inability to make a decision was making me personally unhappy and closed off. And then on September 16th Keith’s Early Look note hit my inbox and the following quote screamed at me:

“So, let's start this morning by getting things right. If your boss or bank has zero credibility - leave. Go somewhere where you can rebuild the wealth that they took from you. Take control of your own destiny. Otherwise, the principles of transparency, accountability, and trust are nothing but words we are giving lip service to . . .”

Now we should get a few things straight, Keith and have I known each other for 15+ years, played hockey together, worked together, I was in his wedding, he will be in mine (if that day ever comes!), so I certainly don’t always take the man all that seriously. But that quote was a catalyst for me. I decided I was quitting and started an intensive interview process with Keith and the rest of the team at Research Edge and two weeks later I was up and running in New Haven.

So Daryl . . . what is your point? Good question. Simply that we need to put ourselves in positions that maximize our happiness and focus on goals along that path. When I read Keith’s quote, the clarity dawned on me. I’m not the most successful guy in the world, but I’ve come a long way from what are fairly humble roots and any success I’ve ever had was based on my being passionate about something. In hindsight, it is now laughable to think that either a generous paycheck or a “good” firm were adequate motivators for me. In fact, they both detracted from my happiness and my motivation. My motivation has always been about being part of a successful team, improving every day, and enabling people around me to be successful. In my new role, I have all of that and I am confident that monetary success will follow.

Finding satisfaction in our careers and creating a satisfying workplace for employees is critical to living and enabling others to live happy lives at work. Psychologist Frederick Herzberg developed a model that framed up the foundation for a rewarding career. His Two Factor Theory (also known as Herzberg’s Motivation Hygiene Theory) was based on interviews with 200+ accountants and engineers in the Pittsburgh area. The gist of the interview analysis was that Herzberg asked the respondents to relate times when they felt exceptionally good or bad about a current or previous job.

The results were interesting and somewhat nuanced. The Two Factor Theory distinguished between motivators and hygiene factors. Motivators are attributes of the job that provide positive satisfaction and arise from achievement, recognition, and personal growth. Hygiene factors, on the other hand, do not give satisfaction, although dissatisfactions results from their absence. These factors include such things as benefits, salary, job security, and a comfortable work environment.

Herzberg theorizes, based on his study, that hygiene factors are required to make sure an employee is not dissatisfied, but they do not necessarily promote satisfaction. Motivators, on the other hand, drive satisfaction and happiness beyond the basic level of hygiene (i.e. that it is a palatable job). Herzberg also classified actions in the workplace as either movements, you perform an action because you have to, or motivations, you perform an action because you want to perform the action. In this context, the goal of any employer should be to create a highly “motivated” workplace in which employees perform actions on their own volition.

To be fair, there are many criticisms of Herzberg theories and many of them focus on the simplicity of the model. Intuitively, though, I think we can all agree a workplace and job must satisfy basic requirements or we will be dissatisfied, and unhappy. On the other hand, for a job to be truly satisfying and rewarding it does require more. I outlined my key attributes for a satisfying work environment above and my requirements are not atypical.

Motivating our employees and ourselves is critical to the success of any company. Motivated employees will do a better job, will produce higher quality work, and are typically more productive. In knowledge based industries, the productivity of employees is critical and will reflect directly on the bottom line.

While money is many times seen as the key motivator for employees, especially in the finance industry, money is actually a relatively low level motivator. In fact, it is more supportive of hygienic needs, so staving off dissatisfaction, rather than promoting satisfaction. As Abraham Maslow suggests in his “Theory of Motivation”, money “tends to have a motivating impact on staff that lasts only a short period of time.”

Abraham Maslow wrote his paper “A Theory of Human Motivation” in 1943 and many of its key points are still incredibly relevant today. Maslow studied what he termed exemplary people, which included Frederick Douglass, Eleanor Roosevelt, Albert Einstein, and more broadly the top 1% of students in certain colleges. Based on these studies he created a hierarchy of needs and as humans moved up the hierarchy the more satisfied and, thus, motivated they become.

As employers and employees we need to focus on the fourth level of Maslow’s hierarchy of needs. This is the esteem level and has as its requirements: self esteem, confidence, achievement, respect of others, and respect by others. We need to both put ourselves in an environment where we can fulfill these needs and create environments so that those that work for us can fulfill these needs. The point of fulfilling the fourth level of esteem is to reach the self-actualization stage - the stage in which we motivate ourselves. Maslow summed up motivation and the idea of being personally content best himself when he said:

“Musicians must make music, artists must paint, poets must write if they are to be ultimately at peace with themselves. What human beings can be, they must be. They must be true to their own nature. This need we may call self-actualization.”

I couldn’t agree more.

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