• run with the bulls

    get your first month

    of hedgeye free


US Dollar: The Line That Matters

I wrote about this in my “Early Look” note this morning, and wanted to hammer on the same point with a picture rather than prose.

Someone needs to send this to Obama’s crackberry with a note attached that says ‘look at what the US stock market did in December when the US$ broke this white dotted line.’ That’s it Mr. President – you don’t need a room full of “economists” to make the call. I don’t think it’s any more complicated than that. Break the buck’s $83.96 line, and assets will start to “re-flate” again.

Note that there is a monumental difference between re-flation and inflation. “Re-flation” builds confidence. Confidence perpetuates momentum. Positive momentum is what the US stock market has lost – that positive momentum line in the SP500 is now 873.

If Geithner can break the dotted white line below, the apocalypse cometh bears trekking the grounds in Davos, Switzerland are going to have to deal with me getting bullish like I was in December. If the US$ holds above this line, commodities and US equity markets are going to continue to be clawed on every rally, as they should.

Geithner's Greenback

Geithner's Greenback - haa012709

“There is nothing more deceptive than an obvious fact.”
-Sherlock Holmes
Holmes has always had my vote as having one of the best analytical processes. Since Wall Street is such a fan of storytelling, I have always been surprised that the pundit patrol doesn’t reference this late nineteenth century fictional character more often – maybe it’s because his creator was Scottish!
Scotland is where my wife and I have ancestral roots, so we’re a little biased, but in this case even the British tend to hold Sir Arthur Conan Doyle’s 56 short detective stories in high regard as well. Regardless, whether you’re Scottish, British, or American this morning, we better all hope and pray that the newly appointed head of the US Treasury, Tim Geithner, upholds the principles of deductive reasoning that Holmes did. Lord knows, Geithner’s predecessor didn’t do the required reading.
Rhetorically at least, “no drama” Obama’s intellectual prowess has stated that this US Administration will consider all voices of reasoning. Whether or not he can deliver on his rhetoric remains the bid/ask spread that we have seen narrow from a 69% approval rating in the first week of January to 60% this week (Rasmussen poll). While polls have their biases, all I care about is measuring this delta.
In Obama does America trust? Last time his approval rating tested the 60% line was the week of November the 20th.  From that November 20th bottom of 752 in the SP500, the market climbed that wall of rightly placed socialist doubt right up to a closing price of 934 on January the 6th. Sherlock’s math clocked that 9% approval rating delta at being worth a +24.2% price differential in US market expectations. Does confidence matter to markets? You bet your Madoff it does!
So where do we go from here? As Wall Street execs love to say “Keith, that’s a great question”… and since Obama is calling for all voices of Sherlock style “deductive reasoning”, here’s my advice: Mr. Geithner, you need to walk away from Hank The Market Tank’s “strong US Dollar” mantra, and break the greenback. That’s it – if you want assets likes houses and portfolios to re-flate, that’s all you need to do.
Yesterday, as the US Dollar was taking it on the chin, we were given an appetizer for this re-flation “Trade” – gold was making a 5 month high, oil was ripping higher, and even the Roubini-ites we’re being forced to cover their shorts. At one point, the SP500 took a peak at the 850 line, putting it up a healthy +2.2% on the day. Then reality bit, a few facts about Bank of America hit the tape, the US dollar paired some of her losses, and stocks went right back down, registering a daily peak to trough -2.5% reversal.
Mr. Geithner, let’s put a muzzle on that China is a “manipulator” lingo of your almighty banking forefathers past. Let the Chinese Yuan appreciate and the US Dollar decline. A break in the US Dollar Index of 83.97 combined with a breakdown in Volatility (VIX) below the 45.24 line will get me to invest some of this 69% position my Asset Allocation Model is holding in Cash. If Americans save less cash and invest more of it, you and Larry Summers will need to ask for less of that “G” (government spending). Sustainably break the buck and get the SP500 to close over the 875 line, and the bullish re-flation trade will be a tough one for even the bears not to chase.
Mr. Geithner, as head of the US Treasury, China is now your largest customer. Forget about the good ole days at the New York City Fed – those champagne toasts with Goldman’s ex-CEO turned Destroyer of Capital are not to be forgotten, but to be understood. Investment Banking Inc. is no longer who you need to pander to – you need to patrol them, and all of the moneys that we give them.
Mr. Geithner, Obama’s White House better be all over you on this – you will be both accountable and transparent. Whether or not we trust you is now your game to lose. Some Volcker-like voice of reason is already in motion reminding your boss that one reason that the US Treasury market is shaking right now is because of you. The Chinese took your “manipulator” comment and sold Treasury bonds in your face – after all, don’t forget that that’s what Kenny Lewis and the boys on the bus down at BofA did to them – remember?
We must remember the facts, because the world is watching us real time, and she doesn’t forget. Whether it is Bank of America selling its stake in Chinese banks or the Pandit Bandit thinking he can get away with buying a brand new $50M jet for his cronies at Citigroup and not call it TARP moneys… it’s all one and the same.
Transparency, Accountability, and Trust – these principles take a career to earn and one bad decision to lose. If you don’t want to take this mantra from me, take it from someone else and call it their idea – I am indifferent, because I just want this country to have credibility again. Sherlock Holmes called these “obvious facts” – let’s not be deceived by them any longer.
Best of luck out there today.

Geithner's Greenback - etfs012709


Analysts and the media community consistently reported a 27.3% plunge in December international visitation to Las Vegas through McCarran airport. I will concede that the international data coming out of the airport is very misleading. My junior analyst and crack researcher Rory Green spent time with people at the airport to fully understand the process.

Rather than a 27.3% decline, the number of international passengers through McCarran Airport actually increased 1.2%. Not exactly blistering growth but compared to what was communicated to the investment community, it might as well have been. The following chart details the actually year over year monthly change in international passengers in 2008.

I remain very negative on the near term and intermediate prospects for Las Vegas. The demise of the world economy will put increasing pressure on the overseas consumer’s ability to jump on a plane to visit Las Vegas and the dollar isn’t as cheap as it used to be. However, I do think the Street may be misreading two recent data points, including December’s international visitation number. As we wrote about in “NO NEW GATES NEEDED HERE”, McCarran’s total passenger traffic drop in December, while similar to November, should translate into a lower gaming revenue decline than November’s -16%.

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.

Blame Canada...

Canada’s Prime Minister Stephen Harper is preparing to introduce a budget that will include a massive stimulus package that could lead to a C$60 billion deficit over the next couple of years. As recently as October, Harper derided deficit spending and encouraged investors to “buy stocks because they were cheap”, so this is a major about face for the Conservative leader and on the margin improves our view of Canada as it indicates a more normal and rational political situation in Canada – assuming the budget passes tomorrow.

Following the abrogation of Parliament late last year, ahead of a planned vote of non-confidence that would have brought down the Conservative government, it seems that Harper may have learned his lesson. While the NDP and Bloc Quebecois have publicly stated that they do not support Prime Minister Harper and will not support this budget, the Liberals have been more coy. Specifically, Liberal Leader Michael Ignatieff, who is also the leader of the Minority, said on Friday:

“On Tuesday, we'll all see whether the prime minister has learned to listen. If he hasn't learned to listen, he's not going to lead for long."

If the Liberal vote is in favor of the budget, it will pass and the Conservatives will remain in power.

The key debate between the Conservatives and the opposition will be on the tax component of the stimulus plan. The opposition leader, Michael Iganatieff of the Liberal Party, is pushing for a package weighted to investment versus tax cuts, with the tax cut component skewed to lower income Canadians. It seems that if the budget, which is to be released tomorrow, satisfies these primary components, the budget should pass.

On the margin, both Harper’s willingness to govern with ideological flexibility and the general thawing of the political process in Canada are positive for our view on Canada. While we are not crazy about deficit spending, Canada has the lowest debt to GDP ratio of any of the Group of Seven countries at ~29% and while this spending is projected to take that ratio up to closer to ~35%, Canada will still have a relatively strong balance sheet.

We have outlined our current Trade levels for the TSX 300 below, which are Buy at 8,424 and Sell at 9,101.

Daryl G. Jones
Managing Director

YouTubing" Larry Summers' "Meet The Press" Interview...

Below I have paraphrased parts of the Larry Summers interview from the January 25th segment of Meet The Press (questions and answers were all words they used… and I shortened the Q&A for the sake of hitting on their most critical points).

DG: David Gregory – Interim Moderator for NBC’s Meet The Press
LS: Larry Summers - Director, National Economic Council
KM: Keith McCullough - CIO, Research Edge LLC

DG: If you have a hole in the economy that’s a at least a trillion, maybe two trillion, don’t you need that stimulus?
LS: David, we have what economists call a multiplier… we surveyed a range of economists, and to a lot of experts both Democrat and Republican… and the President took a balanced point of view between new investments… and also tax cuts, because we recognize we have to help households and businesses to be able to spend.

KM: Backing out the socialist verbiage from the real economic formula of GDP = C +I + G + (ex-im), stimulus means (G), as in government spending, and we should not mistake it for legitimate (I) Investment. Summers knows this – he also sounded like he knows the real (G) number is larger than the proposed $825B. As the market’s expectations for (G) increases, the US Dollar should begin to weaken again (like it is today). Does (G) have a multiplier effect? Sure… but God help us if Obama and Summers are depending on that “range of economists” who missed proactively preparing for this market crash altogether. The only thing worse than one or two “economists” being wrong is a whole room full of them in Washington pandering to a new Administration.

DG: Only $250B worth of stimulus this year (according to Goldman Sachs)… only $250B worth of impact this year, don’t you want more of a jumpstart?
LS: The President has committed through a letter from his OMD Director, Peter Orzag, that ¾ of this $825B program will be spent in the first 18 months… we are doing everything we can … but we aren’t going to rush things to the point of being wasteful… speed is a crucial concern… but these problems aren’t going to be solved that fast. We also have to be mindful of having the right kind of plan that will carry us forward over time.

KM: My math has 0.75% of 825B = $618.75B worth of stimulus being spent in the first 18 months. That’s a big number, and one that could get a lot bigger as the winds begin to blow towards the next election cycle. Transparency and accountability rules are what the President is talking about – let’s see if he can deliver on his rhetoric and print that number, on time. I agree that managing this number reactively is not the patient solution that this country needs – the political pundits and the media want the money spent yesterday, with their crackberry and a coffee on the side – be careful who we are feeding rhetoric to here.

DG: If the size of the package is important… if the deficit is a concern, why not put some of that spending off until later?
LS: David, respectfully, I would disagree with the Washington Post – there are cops being laid off across the country, saving their jobs is saving jobs … its helping the economy, its protecting our neighborhoods… responsibility is integral to the Presidents style of leadership.

KM: In English, this is a big spending Democrat talking – oh baby is he going to spend it, and then some… they won’t worry about the debt until it’s too late. This is the Robert Rubin school of American leverage – ask the folks over at Citigroup or Goldman how that treated them.

DG: Bush tax cuts - why would you want to raise taxes right now? Why not put that expiration date off until say 2013? Why is that a bad idea?
LS: 2013? First it’s a bad idea because we simply can’t afford it! We have a trillion dollar deficit… but understand this, there will be tax cuts for the other 95% of Americans.

KM: This was the funniest question Gregory asked – reminding me that he wasn’t in the area code of being capable of having a real Tim Russert like economic debate – 2013? Even Summers looked at him funny! Then he gave him the obvious answer.

DG: Banking Crisis – $700B has been dedicated, will more money be needed down the road?
LS: we’re gratified that Congress has given the President the authorization he needs to unlock the $700B that the Bush administration worked with congress to create… the Presidents financial recovery program is going to be very different from what we have seen so far – it’s going to emphasize transparency – it’s going to emphasize accountability… perhaps most importantly, the priority has to be getting credit flowing again so that the economy will operate…

KM: Blame Bush for the “burden” but be “gratified” that he got you the the bag money – this is so hypocritical that it’s very sad… the rest of Summers answer I can sign off on – Transparency, Accountability, and Trust – but that’s something I have been saying for 14 months. Thanks for the knucks Mr. Summers!

DG: Will more money be needed? Do tax payers have to expect we are not done paying it?
LS: We can make important progress and get started with the support that has been provided… what ultimately will be necessary is something that will play out over time… we are going to be proactive… the President is going to do what is necessary, but only in the context of responsibility… in the context of trust…

KM: There is that Research Edge lingo again – that’s right Mr. Summers, you need to be “proactive” as you come to realize that the answer to this questions is simply YES.

DG: Why can’t you just make them lend?
LS: sure it does… who knows what the government could do… it wouldn’t be responsible for an institution to raise its lending without having capital - frankly that’s why there needs to be more capital – but they need to lend more in a way that’s consistent with their solvency and their capital adequacy…

KM: Summers was clear on this and it was his unifying point across the interview – he needs to give them more and more bailout moneys before he can make them lend it – after all, “who knows what” a socialized government can do?

DG: what do you say to someone who is trying to prepare for their future? They have lost confidence – they say what do I do?
LS: This is why I believe President Obama was elected – this is why his call for an age of responsibility as we manage our own finances, as we do our own jobs, is so very important … people need to work hard and play by the rules… those of us responsible for economic policy need to do everything we can to make this economy work…

KM: Other than hope and pray, I agree that people need to start managing their own finances in a self directed way – what I do not agree with is having my government feel like they are the ones responsible for “making this economy work.”

Keith R. McCullough
CEO & Chief Investment Officer

US Housing: Bullish Bottom Forming?

One month of data does not an intermediate “Trend” make , but this is a data point that the bears were not prepared for. This month’s existing home sales came in +6.5% higher than last month’s # (see charts below), and more importantly, inventories came down hard, as a result.

The bears will cling and claw to the fact that 45% of these home sales came in “distressed” situations – but who cares? aren’t distressed homes still homes? No, these aren’t Wall Street homes – sales in the Northeast were actually down -1.4% again – but don’t sales in the West and the South being up +13.5% and +7.5% matter? You bet your Madoff they do… unloading the Main Street inventory overhang in this country matters, big time.

Months of supply came down to 9.3. This is down significantly from the peak and the 11.2 months recorded in November. As the facts change, I do – these facts are bullish; particularly in the face of a zero percent Fed funds rate, and an Obama administration focused on getting banks to lend to those seeking new lows in 30 year mortgage rates.

Bottoms are processes, not points…

Keith R. McCullough
CEO & Chief Investment Officer