Eye On Rates: Who Has Room To Maneuver?

Some Central bankers have more to work with than others … proactively preparing for crisis rather than reacting to it has its merits.

This morning, Russian Central bankers raised the benchmark refinancing rate by 100 basis points to 13% after blowing out $148 billion in currency reserves failed to stem the Rubles fall.

This move contrasts with Wednesday’s action by leaders at the People’s Bank of China who lowered the benchmark one-year lending rate by 108 basis points to 5.58% - the lowest level in more than a decade. On the same day the OECD released a bullish report on Australia’s prospects citing the effectiveness of rate cuts there as one of the reasons they predict that the land down under will emerge from recession within a few quarters and realize GDP growth of 1.7% in 09.

As policy makers scramble to avert disaster a clear pattern is emerging. Those who have managed their economies wisely and have interest rates that are sufficiently high can get results from rate cut stimulation. Those countries that kept rates artificially low and encouraged an easy credit environment for too long have little room to cut and get little reaction when they do. Those who have exhausted all their other options and failed to stem devaluation will be forced to raise rates.

We continue to be long China via the FXI exchange traded fund. We believe that a strong interest rate policy is one of the reasons that they will emerge from the global quagmire before the rest of the pack.

Andrew Barber

How Much Do You Know?

“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”-Warren Buffett

There’s nothing like getting lulled to sleep by her turkey, then getting smoked by my wife, Laura, in Scrabble. No matter how many glasses of wine, I am never realistic about my chances at beating her at that game! The morning after is always when reality bites. I get up to do my research, think about the score, and I feel shame. This must be how the “Depressionistas” are feeling about having sold the US market short -18% lower only one week ago.

No, that’s not a typo – that’s an eighteen percent short squeeze. Despite this move, the US market is still on track to post its worst November since 1987. Most people were not realistic that year either. This is why markets crash folks – when perception eludes reality, markets can bite.

This, of course, is an applicable thought to both the long and the short side of trading. Most levered long investors don’t get this on one side, never mind both. Ask one of the private equity firms who are staring down “portfolio company” bankruptcies or the illiquidity illusionists of “activism” what reality is today versus the perceptions of yesteryear. When access to capital tightens, and cost of long term capital begins to heighten, these “business models” fall apart.

Bill Ackman is one of the more entertaining investors in today’s proverbial game of mass media Scrabble. When I ‘You Tube’d’ him on CNBC earlier in the year, I received plenty of crackberry mail from those who were levered up long “Targ-eh” alongside him. Maybe they can all go “channel checking”, do some shopping, and enjoy “Black Friday” with Bill today. This man is the guru of all things real estate and retail, isn’t he?

Ackman said that when he looks at Target, he thinks about it on a “50-year basis”… he better, because that might be how long it takes for this stock to hit his initial cost basis. He also owns a massive percentage of the shares outstanding of another US retailer that we have often shunned, Borders Group. This company is imploding again this week, trading down to $1/share. That’s one dollar – everything starts on one guys! Now where can I get me some of that “50-year” money?

“Ackmanism” and levered long investing is not complicated. All you need is enough people to not be able to “realistically define what they don’t know.” Then you get those people to give you more and more money so that you can average down into positions. This isn’t Buffett style value investing. Nor is it value investing legend Marty Whitman’s definition. Marty puts the gravity of averaging down into losing positions into context best, “a bargain… that remains a bargain… is no bargain.”

As obvious a bargain as the S&P500 was last week (when we bought it), is as much as it isn’t this morning. We sold the SPY (S&P500) short into Wednesday’s close, primarily as a hedge against what people thought they knew, forgot, and then made up a new narrative to explain. The meme machine of CNBC has gone from depression in their portfolios, to euphoria, back to being chalk full of turkey and no idea what to do next because the futures are down.

The S&P500 has moved into an ominous position in terms of risk versus reward. It wasn’t very long ago that I gave you a “down 1%, up 10%” risk management outlook for the US market. After warning “Beware Of The Squeeze” (, 11/12/08) in mid November, I am now warning you of an up +1%, down -15% setup in the same index. As prices and facts change, I do. The Thanksgiving turkey is done, and the chickens have come home to roost. Volatility (VIX) has dropped -31% in less than a week, and Wednesday’s +3.5% stock market move was on one of the lightest volume days of the month. This is a bad brew.

How much did Bill know about Borders? How much does the Street know about Mumbai, India? Has Bill been to India? Have Indians been to Borders? In closing, maybe that’s the best Thanksgiving idea we have this morning. That everyone from India to Wall Street strap on the accountability pants, travel the globe’s bookstores, and start reading about what it is out there that “they realistically don’t know.”

I, for one, have a lot of reading to do. My new downside target for the S&P500 is 757.

Have a great weekend,

Long ETFs

GLD -SPDR Gold Shares –LME Gold is on path for the largest one month gain in 2.5 years.

TIP –iShares Lehman TIPS Bond --Treasuries are on track for the largest monthly gain in almost twenty years as 10-year yields reached an all-time low this week. The 10-year bid yield this morning was 2.94% with Fed Funds futures indicating a 64% chance of a 50 basis point cut on or before the Fed meeting on 12/16.

OIL - iPath ETN Crude Oil –Crude declined in advance of this weekend’s OPEC meeting in Cairo to discuss further tightening measures after last month’s 1.5 million barrel per day reduction failed to overcome market concerns over decreasing demand.  NYMEX Light Sweet front month contracts traded as low as $53.00, down from above $54.90 in late trading on Wed. before 6 AM this morning

EWA –iShares Australia – The Australian dollar rose to $0.65 USD as of late Wed.

EWG – iShares Germany  -- ThyssenKrupp AG (EWG: 1.01%) announced cost cutting of more than  1 billion EUR on significantly lower sales. Commerzbank AG (EWG:1.09%) announced planes to accelerate the 5.1 billion EUR Dresdner Bank acquisition to complete a 60% stake by January.

FXI –iShares China – The CSI 300 Index 2.2% to close at 1,829.92. Aluminum Corp. of China (FXI:1.34%) traded down as  aluminum futures declined 4% hitting the  Shanghai exchange limit.

VYM – Vanguard High Dividend Yield ETF –Korean manufacturer LG Electronics announced that it is not in discussions to acquire General Electric’s (VYM: 5.2%) home appliance unit. EC antitrust regulators issued a preliminary report today accusing Pfizer (VYM: 2.6%) and other major pharmaceutical companies of using legal actions to deliberately stall the sale of generic medications after the expiration of patent protection, with EU Commissioner Kroes commenting that antitrust actions are likely.

Short ETFs

SPY –S&P 500 DR –S&P 500 futures traded as low as 881.2 before 6:30AM this morning, threatening to cut into the largest weekly gain since 1974. Oil prices and retail promotions for “black Friday” dominate domestic stock headlines.

EWU – iShares United Kingdom – Existing Royal Bank of Scotland Group (EWU: 1.05%)shareholders took only 0.2% of the current offering leaving the remaining 20billion GBP placement in the hands of the government –bringing the total government stake to 58%.

UUP – U.S. Dollar Index – The USD 1.2871 per EUR from $1.2904 yesterday, while the Pound declined to  1.5416 USD.

EWJ – iShares Japan –Data shows factory output declined 3.1% from September while household spending declined 3.8% for the same period.

FXY – CurrencyShares Japanese Yen Trust – Earlier today the USD reached 95.26 yen, from 95.19 yesterday and 95.96 a week ago.


Don’t look to the tribes to offset the precipitous drop in slot sales everywhere else. Their casinos are struggling too. Layoffs and expansion delays are indicative of the slowdown. Tribal casinos also tend to be more one-off in terms of location. In these less competitive markets, the pressure to offer the latest and greatest slots is diminished. Tribes do not have to buy slots either.

As we’ve written about extensively over the past few weeks, slot sales are likely to be down considerably in 1H 2009 after a likely strong December quarter. Slot sales to new casinos and casino expansions could be down around 50%. Replacement demand should fall as well despite an easy comparison, as corporate CFO’s reign in Capex to stave off liquidity issues.

Throw a tribal casino downturn into the mix and the picture isn’t pretty. The following are just some examples of tribes cutting back:

• Pechanga laid off 368 workers, or 8 percent of its workforce
• Morongo Casino, also in southern CA laid off 95 casino workers
• Thunder Valley Casino, managed by Station Casinos, stopped construction on a hotel and will likely downsize the project.
• Foxwoods laid off 700 workers.
• Mohegan Sun cut 600 jobs through attrition and there are rumors of layoffs for early 2009
• Odawa Casino in northern MI laid off 100 employees

Foxwoods laid off 700 employees

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

Thanksgiving: China's FXI gives us a +12% move yesterday!

There's nothing wrong with being late to the party and eating the left overs ... that's the way you should be looking at being long China from here... if you haven't been with us for this most recent ride that is!

China will be the only country in the top 10 GDP leaders of the world who will drive a high single digit GDP growth rate in 2009. Will growth be lower than it was at the peak? Of course, that's why we we're short it prior to the masses coming to grips with the reality that you shouldn’t be long everything "Chindia" at a global stock market mania top.

High single digit growth combined with low single digit inflation = buy China. They are cutting taxes, tarriffs, and interest rates alongside plugging in a $586B stimulus plan. Export growth will remain double digits, and China's trade surplus will stay in the area code of $275B (new record). Gravy anyone?

Have a wonderful Thanksgiving,

(chart courtesy of

Eye On Leadership: UBS Execs

The AFP broke this story overnight. Exemplary move for Thanksgiving. The "New Reality" is going to be a full scale exercise of earning credibility back, one day at a time.

"LUZERN (Switzerland) - Former senior executives at Switzerland's biggest bank UBS have voluntarily renounced about 70 million Swiss francs (S$88 million) in bonuses and wages, the bank's chairman Peter Kurer said on Thursday."

Eye On Leadership: Obama Wisely Taps Volcker!

Today President-elect Obama announced the creation of the President’s Economic Recovery Advisory Board, a panel of outside advisers headed by 81-year-old Paul Volcker. [Compared to Secretary Paulson’s (aka Hank the Tank) selection of a 34 year old former Associate level investment banker as the Head of TARP, Obama wisely selected the universally respected Paul Volcker to head this Advisory Board].

As you recall, Daryl Jones’ posted on Volcker from 9/27 (Eye On Leadership: Volcker As Bailout Czar!) in which we laid our support behind “the 6’7, cigar chomping Princeton graduate” to lead financial policy under the new administration. While the Secretary of the Treasury went to Timothy Geithner, it is our hope that the experienced Volcker will be utilized, despite sitting outside Obama’s inner circle of advisors.

Volcker, who is credited for ending stagflation in the 1980s, played an integral role in turning around poor market conditions, recessionary growth, and rampant inflation. Volcker started his career in 1952 when he joined the Fed Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank, which he held until joining the US Treasury Department in 1962 as director of financial analysis. A year later he was promoted to deputy under-secretary of monetary affairs before returning to Chase Manhattan Bank as vice president and director of planning in 1965.

From 1969 to 1974 Volcker served as under-secretary of the Treasury for international monetary affairs. He played an integral role in 1971 repealing the 1944 Bretton Woods Agreements that pegged currency exchange rates to gold, crafting a new system in which the US dollar became the “reserve currency”.
A Democrat, Volcker was inaugurated by President Jimmy Carter on July 25, 1979 as the new Fed chairman. Known to be conservative, he fit the bill as the bright and able candidate from Wall Street, and made it his priority to end stagflation (a period of inflation with slow to zero growth). On October 4th September PPI showed a rise of 17% y-o-y, the largest increase in 5 years. Called to action, he inherited an expanding money supply that caused a weak dollar and a soaring trade deficit.

Taking charge in October Volcker cut the money supply by increasing the federal funds rate to a record 12% to clobber an inflation rate slightly lower than 9%. Into 1980, interest rates continued to rise and the economy sank into recession. Republican Ronald Reagan won the election in November 1980. By the middle of 1981 inflation topped 9.7% and dropped to 9% at year’s end. By 1983 Volcker’s constraint of the money supply showed positive signs. Despite unemployment of 9.7% in 1982, CPI for all of 1982 fell to 3.8%, from 13.3% in 1979 and the beast of inflation had been beaten.

We applaud President Elect Obama’s choice in Volcker. As we have outlined above, he is experienced, willing to make tough decisions against political winds, and respected far beyond partisan association.

Daryl Jones
Managing Director

Matt Hedrick

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.