Chart Of The Week: "Re-Flate"

Proactively predicting what the US Federal Reserve and US Treasury will do has turned out to be fairly straightforward. The only way out of this financial mess is to either raise rates (which “Heli-Ben” doesn’t do) or let the US Dollar get hammered (which Hank is into these days).

If you want to crush your currency, the first thing you should do to your company or country is lever yourself up. Levering up America’s balance sheet is cool with Paulson. Don’t forget that after the SEC waived their leverage rules in 2004, Paulson signed off on levering up Marcus Goldman’s handshake. It takes a leverage banker with some serious experience to get this kind of stuff done folks!

Will there be consequences beyond John Thain not getting his bonus in 2008? You bet - one of the obvious consequences will be asset based inflation. The world has already learned how this works. Cutting rates to zero, allowed asset bubbles from Icelandic banks to San Diego real estate give a new meaning to the sound of the word “pop.” This time was more like “POP, POP… BANG!”

Never say never. Just when the mass media’s pervasive message is “deflation”, we are setting up to “Re Flate”. Our “Re-Flation” Investment Theme is an intermediate one, and while we think price inflation will appreciate on a far lower scale, what happens on the margin is what matters here. Directionally, this will matter to hard assets like gold just as much as speculative growth stocks on the Nasdaq.

See the chart below. This week we saw the US Dollar get pounded for a -3.7% week over week move, while Gold zoomed higher registering a +9% weekly move.

One week ago today, our accountability sheets showed you we were long gold and short the US$ via the GLD and UUP exchange traded funds.

Hank and “Heli” – thanks for the “Trade.”

US Market Performance: Week Ended 12/12/08...

Index Performance:

Week Ended 12/12/08:
DJ (0.1%), SP500 (0.4%), Nasdaq +2.1%, Russell2000 +1.6%

DEC08’ To Date:
DJ (2.3%), SP500 (1.8%), Nasdaq +0.3%, Russell2000 (1.0%)

Q408’ To Date:
DJ (20.5%), SP500 (24.6%), Nasdaq (26.4%), Russell2000 (31.1%)

2008 Year To Date:
DJ (34.9%), SP500 (40.1%), Nasdaq (41.9%), Russell2000 (38.9%)

SP500 Levels Into The Close: BUY > 870

When trading action finds itself in a place like it is right here and now, our quant models flash a critical level that we call the Shark Line. This is the breakout/breakdown line where short sellers either get eaten or paid. I am on the bull side of this “Trade” right now. The pain trade is the higher one from here.

See the chart below. I have a major support line that is developing underwater at 836. If confirmed, the SP500 will have successfully made another higher low for this market’s recent trading cycle – that, on the margin, would also be bullish.

Don’t forget that “Heli-Ben” will be dropping free moneys from the skies at next week’s FOMC meeting. FREE money remains a bullish catalyst for any asset class that has the potential to “Re-Flate” – that includes your shorts.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Has American Confidence Bottomed?

On a morning where I woke up to a Wall Street billionaire calling his business a “giant ponzi scheme”, Bank of American cutting 35,000 jobs, and General Motors setting up to go away… other than making them stare at futures traders selling another panic bottom, what else can this brave New Reality throw at the American consumer’s confidence?

This morning’s University of Michigan Consumer confidence number popped out of its darkened hole, coming in at 59 (see charts), after bottoming in early November at 55. My bet here is that confidence continues to make higher lows alongside higher lows in the SP500. We spent the earlier part of this week buying stocks as American consumer confidence in Obama improved (over 70% of adults are either “hopeful, optimistic, or proud” of his becoming President per the Bloomberg/LA Times poll).

Stock markets are leading indicators. They build strength when confidence in them, on the margin, is improving. They break down when that confidence erodes. While there are plenty of reasons to be bearish (read the last year of my investment notes), most of these reasons are no longer a surprise. When the SP500 futures were down 4% pre-open, the stock market had already swan dived for a peak to trough 48% move. Sometimes it’s just priced into the market folks.

Today’s rally has to have the bears dizzied.


Subway is making an aggressive move in the coffee segment……

Adding more heat to the coffee wars, Subway confirmed yesterday it would begin testing Starbucks-owned Seattle’s Best Coffee at 1,900 locations starting in January.

As the largest publically traded restaurant company, MCD appears to be the 800lb gorilla in the space. Don’t take Subway lightly, with 21,000 stores in the US and $8.0 billion in revenues, the company can have a significant impact on industry trends.

As you can see from the picture below, MCD is turning up the heat on SBUX with a very aggressive
marketing campaign on the West Coast….

Eye on Transparency: $17.1BN+...Missing?

As we noted in The Early Look, it was disappointing to wake up to the Bernie Madoff fraud this morning. At a time when this country desperately needs leadership from the financial services industry, the news seems to get worse every day.

Madoff started his firm in 1960 and according to various biographical sources, “the firm was one of the five broker/dealers most closely involved in developing the Nasdaq market.” In addition, he has at various times served as the Vice Chairman of the NASD, a member of its Board of Governors, President of the Security Traders Association of New York, and Board member of the Depository Trust and Clearing Group.

While Bernie Madoff likely wasn’t a household name outside of Manhattan’s moneyed circles, he was clearly a substantial player in the finance industry and a major player in the asset management world. In total his firm is reputed to have managed north of $50BN dollars, with the hedge fund business managing north of $17BN.

It is unclear exactly how much money is missing, yet the SEC press release states:
“According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.”

In addition, in the same press release, the SEC referenced a conversation that Madoff had with an employee and in this conversation “he admitted that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.”

While it will take months to determine the extent of the losses, the number appears to be between $17BN and $50BN in client assets. If these losses are anywhere near accurate, this is one of the biggest frauds in business history and certainly the largest in money management history.

The implications for this are twofold. First, increased regulatory and transparency rules will have to come into play, a trend that will already be in place under the Obama administration and a Democratic Congress. Second, withdrawals from money managers of all strategies will likely accelerate in the short term. Investors should, and will, have serious doubts in regards to whether their money managers are doing what they say they are doing from both an accounting and strategy perspective.

We are wary that the Madoff fraud is a canary in the coal mine. While we know many, many money managers who have high ethical standards and take their fiduciary responsibilities very seriously, these types of events are rarely isolated. The potential for more Madoffs, and the broader implication of increased asset redemptions, is a tail risk that should be proactively prepared for and managed around.

Daryl Jones
Managing Director
Research Edge LLC

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 80.45%
  • SHORT SIGNALS 78.38%