The Bullish Reference Rate

I use 3-month LIBOR is a reference rate, not only for those who need to borrow at LIBOR “plus” but as a measure for global counterparty risk.

Alongside the US Dollar (“re-flation”) and a VIX (volatility) indices breaking down, this crashing of LIBOR is amongst the most bullish macro indicators in my playbook.

Below, we have attached both the “Trade” and “Trend” lines for 3-month LIBOR. Both have been broken. Both are bullish for Equities, Commodities, Bonds, and Real Estate, in the immediate term.

A Macro Mystery

A Macro Mystery - asset allocation123008

“The most beautiful experience we can have is the mysterious. It is the fundamental emotion that stands at the cradle of true art and true science...”
-Albert Einstein

Managing my way around this increasingly interconnected global landscape of macro factors, that’s exactly how I have been feeling over the course of the last few weeks - standing “at the cradle of true art and true science…”

Most will agree that consistently earning an absolute return across global macro investment cycles is far from a science. Some are beginning to agree that math and neuroscience are finding a special place in terms of making accurate market predictions. No one will agree that there is a standard (and legal) investment process that is solely based on “art”. That’s what makes this game great. There is a bid and an ask price for every point of view.

In the US market, here are three critical levels of support that the mathematician in me continues to be beholden to: SP500 864, Nasdaq 1501, and Russell 456. Notwithstanding yesterday’s bone dry volume, the “beauty” of the trading “experience” was that, intraday, all 3 of those levels were broken, tested, and tried. As mysterious as it was, all of those indices rallied into the close …  once again confirming the current bullish “Trade” opinion for which I am currently accountable.

On the global macro front, here are three more critical levels that the “artist” in me finds of mathematical relevance: US Dollar Index $82.80, Gold $804/oz, and LIBOR 2.89%. Provided that both the US Dollar and 3-month LIBOR can hold below those levels, I see a very relevant “Re-Flation” Trade continuing to manifest in both Global Equities and Commodities. Gold, of course, needs to hold $804 to confirm this artistically arithmetic conclusion.

All investors have to have a process. For some, that might be asking their friends what they like – for others it could very well be locking themselves in a room with ear muffs. This is what makes markets – where men and women of conviction take a stand and slap it on the tape. Darwin’s rules will win out in the end – the most repeatable process will self select the largest following. My goal, every day, is to prove that my team’s process is worthy of your respect and consideration.

The Russians have considered many economic processes. Over time, most of them have failed. If a process isn’t repeatable across economic cycles, it will fall by the sword of the global capital flows. Today is the anniversary of the USSR’s formation in 1922. Marxist Socialism was tested and tried back then. For a period of time, it actually worked. In the end, it was not repeatable.

My team was both shocked and dismayed that Stalin was voted to the “Top Three Russians Ever” yesterday. No, this wasn’t a 1930’s poll – this was yesterday! The rise of Putin’s nationalist regime has apparently warmed the hearts and minds of Siberians who now have heat, and we get that… heat is good… but for the entire country to find any level of positivity associated with Stalin is both “mysterious” and shocking altogether.

Why is this relevant this morning? Well… “its global this time”… remember? And while we have to admit that Commodities crashing has made the acronym “BRIC” more of a metaphor for what a wall of them feels like when landing on levered long “prop” desk heads… we cannot forget that Brazil, Russia, India, China, and Khazakstan (BRICK) are no less different than SAID (Saudi Arabia, Iran, Drillers) petrodollar kings of the would be “world is awash with liquidity” narrative fallacy past. All of these countries need “Re-flation” to get paid. They are incentivized to do the unthinkable to ensure that both their stock and commodities markets go higher.

If you want to see where the bodies lie in a war, follow the money. Who gets paid for what and why? Both the Israeli and Saudi stock markets have only moved up into the right of their respective charts since the Gaza bombings began. Today is Day 4 of the incursion, and the Middle Eastern stock markets are cheering it on. This isnt art – these are the facts. Debunking how all of these macro factors are interconnected remains both a “beautiful experience” and a mystery to me all at once. But understanding that the Saudis need a $60-70 strike price in oil is far from trivial.

For now, the technicians, scientists, and BRICK layers alike will have a hard time disagreeing with my aformentioned 6 macro levels. I am far from a poet, but within my macro investment process they certainly do rhyme. “Re-flation” is coming…

My upside target for the SP500 remains 915.

Best of luck out there today,

A Macro Mystery - etfs123008


The Obamerica Macro Catalyst

We see a catalyst on the horizon in the way of President Elect Obama’s Inauguration. For those who doubt the ability of an incoming President to have immediate economic impact, especially in a crisis period, we would recommend studying President Roosevelt’s (FDR) first week.

More so than any immediate policy or legislative proposal, FDR’s charisma and the optimism that he conveyed were critical in ending the run on banks that he inherited from President Hoover. In fact, after his first fire side chat, only five days after becoming President, in which he discussed the need for the average citizen to support the banking system, he then reopened the banks that next Monday and citizens lined up to deposit money into banks, which immediately ended the banking crisis.

While we cannot quantify the impact of President Elect Obama becoming President will have on optimism in the U.S., he has a popularity and approval rating that is almost 2x that of President Bush. On January 21st, the United States will wake up with a President that has broad support and approval. And not unlike FDR’s first week, once again, the President words will have an ability to impact the psyche of the country. Additionally, this weekend revealed a couple of more clues in regards to Obama’s initial fiscal plan and, in a nut shell, this plan seems to involve lower than expected taxes and massive stimulus.

In terms of taxes, the following exchange between David Axelrod, Obama’s Campaign Manager and Senior White Advisor, and David Gregory, the Host of Meet the Press was telling:

“MR. GREGORY: All right, but you're not--because the commitment was to, to lower those taxes to definitely--excuse me, I mean to raise those taxes on people by letting those tax cuts expire. You're saying you'll hold on and see. You won't make a decision yet.
MR. AXELROD: Yes, I'm saying that. But I'm also--I also want to stress that what the president-elect and the change--the expiration or the repeal of, of the tax cut for the wealthy, it'll amount to a net tax cut for the American people. It'll just restore some balance, David, which we badly need.”

The message is pretty clear, the idea of raising taxes for the wealthiest Americans is likely off the table in the short term.

In conjunction with Axelrod’s appearance on Meet the Press this weekend, Larry Summers, the incoming director of the National Economic Council, and the “grey hair” on Obama’s economic team wrote:

"In this crisis, doing too little poses a greater threat than doing too much. Any sound economic strategy in the current context must be directed at both creating the jobs that Americans need and doing the work that our economy requires. Any plan geared toward only one of these objectives would be dangerously deficient. Failure to create enough jobs in the short term would put the prospect of recovery at risk. Failure to start undertaking necessary long-term investments would endanger the foundation of our recovery and, ultimately, our children's prosperity."

Summers, who is rarely one to mince words, was very direct in the above statement. The incoming administration is going to err on the side of too much stimulus. And they will have the political capital to do so.

Consumer confidence continues to mount in the face of lower taxes and a massive stimulus . . . Market Bears ignore the potential catalyst of an Obama presidency at their own risk.

Daryl Jones
Managing Director

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

MCD – Sticking To Their Knitting?

On December 16th, the WSJ ran an article about the best CEOs of 2008. One of the CEOs mentioned was Jim Skinner of McDonald’s. Not to take anything away from Mr. Skinner, but he had very little to do with MCD’s turnaround. Instead, it was his job not to mess with what was working.

The article went on to say that "McDonald's has done a terrific job of improving what it does at its existing locations, improving the food, improving service, expanding the menu, expanding hours." Importantly, "They've stuck to their knitting and made their existing stuff better and it's paid off."

MCD’s new beverage strategy is a clear example of the company now expanding the complexity of its store operations instead of maintaining its simplicity. Expanding into gourmet coffee is not an example of “making stuff better” like the company has done successfully in the past.

I don’t believe that MCD’s beverage strategy will drive top line results in 2009 as most people expect. MCD has been so successful for so long that there is a high level of compliancy surrounding the company’s ability to execute. The Bullish-Bearish Indicator from highlights these high expectations. MCD’s rating currently stands at a 60.2 versus the average for all QSR names (including MCD) of 21.9. Additionally, MCD’s bullish-bearish indicator has increased since December 2007 while the rest of the group has declined.

SP500 Levels Into The Close...

This market continues to trade extremely thin, and that makes “making the call” here tougher than on full volume days. That said, the VIX is not confirming any of the intraday weakness that we saw in the market. The step ups of stiff resistance for the VIX are at the 46.30 and 52.61 lines (its currently trading at 44.80).

Alongside lower volatility and expanding breadth, I find myself with a more manageable range whereby I can trade stocks. The “BUY” zone is outlined below within the lines we have painted between SP500 864 and 881. Don’t buy stocks on up days – add to them on down ones. Selling part of this “Trade” up at the 915 line is where my math washes out.

M&A Market Becoming "Unstuck"?

M&A activity, either private equity or strategic, is an indicator that we track broadly. Obviously, and on the margin, if M&A activity is increasing it is bullish for equities. It goes without saying that there has been very limited M&A activity in Q4 2008 and, in fact, M&A globally as of December 22nd was “down 29 percent from the full year 2007.” This week we have seen activity perk up with the IndyMac Bancorp acquisition by a private equity consortium and an announced divestiture by the New York Times.

After closing its doors in July after a $1.3 billion run on deposits over 11 days, IndyMac Bancorp is now close to being sold by the government vis-à-vis the FDIC to private equity firms J.C. Flowers & Co. and Dune Capital Management, and hedge fund Paulson & Co. The deal would be the first of its kind involving an unregulated firm buying a bank-holding company. According to various reports, the deal will include 33 branches, its reverse-mortgage unit and a $176 billion loan-servicing portfolio, with an announcement coming as soon as tomorrow.

In another deal, the New York Times, one of many beleaguered newspaper companies, is strapped for cash, faced with a poor advertising environment and tightened credit markets. With net debt at ~$1.13 billion at the end of the third quarter and a 60% drop in its stock price year-to-date, the Company is looking to raise cash to meet a reported ~$400MM debt repayment in May 2009. The deal according to Barclays Capital could be worth as much as $166.3 million. Earlier this month, the Company said a sale-leaseback of its headquarters building would raise as much as $225 million.

While these are only two deals, they are two notable announcements in a quarter which saw almost no major asset sales. The willingness of buyers to commit capital, in the case of the IndyMac deal, and sellers willing to move prize assets, in the case of the New York Times, could be an early sign that the M&A market is starting to become “unstuck”.

Daryl G. Jones
Managing Director

Matthew Hedrick

111 Whitney Avenue
New Haven, CT 06

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.