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Quote Of The Week: Neel Kashkari ((Director of Treasury's Office of Financial Stability)

"We're not day traders, and we're not looking for a return tomorrow"
-Neel Kashkari (Director of Treasury's Office of Financial Stability)

After losing approximately $9B (as in billion), or 1/3 of the value implied in the so called “preferred investments” Neel and his investment banking mentor Hank Paulson made in structurally impaired banking businesses, we should send this guy back to business school. He wasn’t there very long ago – he’ll be cool with it.

Neel is what the real risk managers in this business call a “theoretical guy.” He has never traded a day in his life, and this is no environment for a rookie to be holding the panic button.

You see, Neel didn’t lose this money in one day – he and Hank “The Market Tank” lost it over the course of a month. Managing risk on a monthly basis is presumably a pragmatic strategy for someone in charge of “directing financial stability”; particularly if your boss is the Goldman guy who oversaw the build out of some of the most levered short term prop trading businesses that the world has ever seen.

Per Wikipedia, you’ll notice that Neel being unaware of how market’s trade really isn’t his fault:
“Prior to joining the Treasury Department, Kashkari was a Vice President at Goldman, Sachs & Co. in San Francisco, where he led Goldman's Information Technology Security Investment Banking practice, advising public and private companies on mergers and acquisitions and financial transactions. Kashkari has a Bachelor's and Master's degree in engineering from the University of Illinois at Urbana-Champaign and an MBA in 2002 from the Wharton School at the University of Pennsylvania.[2][1] Before enrolling in Wharton's MBA program, Kashkari worked for the aerospace firm TRW, where, amongst other projects, he worked on the James Webb Space Telescope.”

Neel has never traded a market with real capital. He has never managed real time risk. He wouldn’t know a trading return if he saw the opportunity to earn one tomorrow anyway. After losing $9B’s, his aforementioned quote is right on the money - I can guarantee you he will never be hired to “trade” anything.

This is all so sad and ridiculous all at once. Unfortunately for Mr. Paulson, American history will record his judgment calls for what they were – wrong. Hiring a junior Goldman banker to be his “yes man” when this country needed both perspective and proactive risk management most is what it is. Shame on you Hank.

We are looking forward to The New Reality; we are looking forward to new leadership at the US Treasury; we, like all Americans, are looking forward to earning a return tomorrow.

Keith R. McCullough
CEO / Chief Investment Officer

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.”
KM

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%)

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 80.28%
  • SHORT SIGNALS 78.51%

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.
KM

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.
KM

EYE ON COFFEE WARS: SUBWAY VS MACDonalds VS STARBUCKS

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….


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