Buying/Covering: SP500 Levels Into The Close...

Finally, the stars have lined up to start investing some of that 76% Cash position we had in our Hedgeye Asset Allocation Model this morning. The US Dollar is up another +1.25% on the day at $87.60, and the gold etf (GLD) is up another +3.1% at $95.46 – I just shorted both the US$ and gold in the Hedgeye Portfolio as a result.

The VIX is putting in an immediate term top at 48.23, trading +12.4% on the day, and the SP500 is effectively oversold anywhere below that dotted green line shown in the chart below at 795.

Keith R. McCullough
CEO & Chief Investment Officer

“You Tubing” David Axelrod on Meet The Press

Below, I have paraphrased (not quoted verbatim, but my best shot using my laptop and DVR recorder) this past weekend’s Meet The Press interview with Obama’s Man, David Axelrod, who was his key strategist throughout the Presidential campaign. Now he’s Senior Advisor to President Obama, and we’re going to hold him to the ‘YouTube’ rules of accountability.

DA: David Axelrod - Senior Advisor to President Obama
DG: David Gregory – Host of NBC’s Meet The Press
KM: Keith McCullough – CIO Research Edge LLC

DG: What will this stimulus plan do to ease the recession, this year?
DA: Well… I think that there will be some immediate activity… you know… let’s understand that this is the worst economic downturn since World War II… so our first mission is to slow the trajectory of it and turn it around… this will help do that – we believe that this will create 3.5M jobs… Ultimately we are going to put people to work doing the work that America needs done in energy, in healthcare, in education, rebuilding our bridges, roads… a lot of those projects are going to begin soon… but let’s be clear, it’s not going to be an overnight turnaround… it took us a long while to get into this mess, it’s going to take us a while to get out of.

KM: Axelrod is already pushing out expectations on the duration of the fix… and trying to insulate the new President’s room for error by using the same Bush fear mongering verbiage of “worst since World War II” – C’mon man, America didn’t hire Obama to make excuses – let’s step up to the plate and show some confidence in your plan.

DG: Will this stimulus plan prevent 10% unemployment?
DA: Well, that’s our hope… there is no doubt that’s what we were looking at, double digit unemployment… this should help put the brakes on that and slow it down.

KM: David, hope is not an economic process. At least say it like you mean it. You definitely did during the Presidential campaign – now it’s time to give Americans something to believe in. Or do you actually believe it?

DG: Mark Zandi at Moody’s thinks the stimulus will create only 2.2M jobs by 2010, leaving unemployment hovering around 10% and probably forcing lawmakers to undertake another stimulus plan? Another stimulus plan?
DA: Look, let’s see how this works out… I respect Mr. Zandi, but there are all kinds of analysis by different economists saying different things… we believe the 3-4M number is an accurate number, a good guess… but there are some unknowns here… let’s give this a try.

KM: “Lets see how this works out”… “a good guess”… are you kidding me?

DG: But is it ambitious enough? Other economists like Paul Krugman say the economy is under-producing to the tune of $2.9 trillion dollars?
DA: Well… let’s see how it goes… we think this spending will have a multiplier effect and that ultimately this will pay off… this will break the hard edge of this recession… we believe this stimulus is where it should be, and we want to move forward.

KM: “Lets see how it goes”? and hope and pray that John Maynard Keynes was right – because if his economics aren’t (and Irving Fisher’s are), we’re definitely going to need to have to ask Congress for a whole lot more of them stimulus moneys come summer time… Axelrod does rhetoric – he doesn’t really do math. This is now very clear.

DG: The President said his metric is 4M jobs. If you have benchmarks along the way that are not being achieved, will you go back to Congress and ask for another stimulus?
DA: I am not going to presuppose that David. That’s a hypothetical that I am not going to deal with. We have great confidence in what we are doing here… and that’s the assumption we are making.

KM: I, David Axelrod, do not manage proactively for tail risk. I manage toward the assumptions embedded in a conclusion that I want to see… not all of the risk and scenario analysis stuff… “I am not going to deal” with those…

DG: Government outlays pay out rather slowly… do you run the risk of losing precious ground as the economy worsens day by day?
DA: Look… obviously this is a complex task administering this program… but there are a lot of projects all over this country that are ready to go, that have been vetted and cleared… and we are just waiting for funding that will begin very quickly.

KM: There is a lot of risk in the Axelrod rhetoric of “shovel ready”… it’s something that he is going to be taken to task on – but since his view is that this has all been “vetted”, he probably has nothing to worry about, right?

DG: You wanted this to be a bi-partisan package. It is not… do you think this was principle opposition, or calculated efforts by the Republican Party to rebrand themselves?
DA: I don’t know.. I think they have a point of view… the point of view was expressed in the economic policies of the last 8 years – those economic policies have not worked… that’s one of the reasons why we are in the mess we are in.

KM: Good answer by Axelrod here – this is his go to line, and the one that gave him his position of power. If he said that same line, and had Obama repeat it, for the entire 2008 campaign, how could he lose? He didn’t… but what do we do with that one liner now? Show us the change big man – show us the change we can believe in.

DG: Are you creating more permanent government spending in a debt environment, which is very dangerous for the economy of the US?
DA: Well… I think it’s sort of late in the game for folks to be raising the debt issue after doubling the debt over 8 years… most of this spending is going to be spent very quickly… rebuilding 10,000 schools is going to have a short term and long term benefit… for decades we have been deferring investments in energy, healthcare, education – let’s put people to work doing the work that America needs done…

KM: The work that America really needs done is in Financial Services. I get the politics associated with the Energy, Healthcare, Education platform… that won an election. But now that gas prices are under $2 at the pump, I don’t think it matters like it did then. Why isn’t Obama focused on getting people to rebuild Wall Street?

DG: So the lack of bi-partisanship in this bill is not a major concern to the President?
DA: First of all bi-partisanship isn’t just measured by the number of votes you get… its measured by the dialogue you have…

KM: Now, for a politician… that was a classic answer! Welcome to Washington team Obama – welcome to Washington!

DG: What does this tell you about how to approach your agenda and how you approach Republicans?
DA: Look, we’re faced with an economic emergency here, and were going to have to move forward quickly… there are a range of things that we to have to do because the country is in trouble right now… we want to move deliberately, thoughtfully… but we can’t drag our feet because people are counting on us to act in the face of this crisis…

KM: This is true. But be careful to not manage this reactively, like the Bush Administration did – as the US stock market flails, we will see if you will succumb to the pressures associated with not being popular. Being a populist won’t get you to where you ultimately need to get – move “deliberately, and thoughtfully”, if you can – I agree.

DG: The “buy American” provision… this survived in the package… the President said he didn’t want protectionist measures – what is this?
DA: First of all we want to promote American businesses, we all agree on that… there was language added to that provision that respects our international agreements… the last thing we need is a trade war…

KM: You may not want a trade war, but you are being protectionist… on the margin.

DG: But China and India are excluded?
DA: We believe that it achieves our goals without risking the kind of trade war we can’t afford right now…

KM: You may not want a trade war, but if you exclude the Chinese like this – you will get one…

DG: Was it a mistake for Geithner to issue principles and not specifics?
DA: First of all, I understand Wall Street’s reaction… they would have preferred he wheel barrowed down the center of that room with cash and say were going to take care of all of your problems – that wasn’t a practical answer… he planned to lay out a strategy – the strategy is set, and we believe it will help lead us out of the morass… and were going to fill in the details in the next few weeks…

KM: I like this answer. It’s patient and it, ostensibly, implies they have a proactive plan. Only time will tell if this is a New Reality, or simply rhetoric.

DG: So nationalization of banks is not something you anticipate?
DA: Well, we will do what we need to do… but our long term goal is to have a strong private financial sector…

KM: That didn’t sound like a no to me. I think Obama is going to let more banks fail.

DG: Is the Administration prepared to offer more bailout money to at least 2 of the Big Three (auto)?
DA: Well, of course, we need to see what they come up with this week… one thing is clear, really two… we need an auto industry in this country… but it’s going to require a major restructuring …

KM: They are going to bailout big auto, but not big shareholders or big executive comp of big auto.

DG: Can the economy withstand a bankruptcy at GM?
DA: Well, I am not going to … as I said… were going to need a major restructuring of these companies… it’s going to be something that requires sacrifices not just from the auto workers, but from creditors, from shareholders, and executives who run the companies…

KM: A simple no would have sufficed here… if the other part of the answer is that we are going to have a Big Auto “Czar”, God help us all…

DG: Senator Judd Gregg steps down – what happened here?
DA: He had second thoughts and he withdrew… and we’re going to move on…
KM: Let’s hope that the first 4 weeks of Team Obama was the low point – having second thoughts via tax evasion or guys just not wanting to be on the group hug bus of the new, new Washington DC, is not what voters in this country signed up for.

Keith R. McCullough
CEO & Chief Investment Officer


IHG is primarily a franchisor and manager of hotels although the company does maintain ownership of a few gateway European hotels. Due to its fee based business model and exposure to the mid-priced segment in the US through the Holiday Inn brand, IHG tends to be somewhat more defensive than most hotel companies. However, investors looking for a ray of light won’t find it in this release. Here are some takeaways


- Global RevPAR decreased 12.2% in Jan with every market negative territory
- China was actually the weakest market in their portfolio with RevPAR down 22% as the economy slowed and new supply came online (5.4% added focused on major cities)
- The Americas region was down 11.7%, EMEA was down 11.8%, and APAC was down 14.8% (big reversal)
- Rates began to decline in January while previously the decline in RevPAR was mostly occupancy
- Corporate negotiated rates - flat for 09’ (same as MAR commentary); although my guess is that give mix changes towards lower rated business it will be lower
- No sign that RevPAR is bottoming or improving anytime soon


- Seeing some projects get delayed but not cancelled yet, but it’s clear that these could become cancellations if they financing market remains the same
- Cited difficulty in signing new contracts ( similar as MAR & HOT)
- 90% of their pipeline is still new build (new Holiday Inns and Expresses)
- After 2009, there will be a huge drop off in pipelines/openings for most brands given the financing environment and lower economics given the current economic reality
- 23-27k rooms exit the system each year – I assume it stays flat although I believe that it increases
- IHG has performance guarantees on some new builds which could be a big headwind
- They have limited visibility on franchisee financing ability, but if the franchisees go under the banks will want IHG to continue managing and keep the flag (so either way IHG gets paid)

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Eye on China: The Yuan

Although it is very early in the policy implementation stages for the new administration, Obamanomics appears to include a two pronged strategy emerging with respect to China: 1) To Assume a more dominant role for the US in international financial policy while acting to protect domestic industry –in part by demanding that China cease its currency manipulation and, 2) continue to borrow heavily from China to finance the stimulus programs designed to get the US economy moving again.

Put plainly, the people that owe China money and are hoping to borrow much more are also demanding that they place themselves at a competitive disadvantage going forward in the name of fair play.

We believe that internal demand will be the primary engine of growth in China as the short term impact of the massive stimulus programs there are supplemented by steadily increasing personal consumption at home. In the near term, however, Beijing must be pragmatic in defense of its export industries. In the spirit of “soft power” that the administration of Hu Jintao has promoted, it is unlikely that the reaction of officials will be anything more than the polite brush off that they have largely provided until now in response to calls to allow the Yuan rise.

As we noted this yesterday, Luo Ping’s comment to reporters last week that a depreciation of the US Dollar is inevitable signals a certain resignation by Chinese leaders as they continue to float their best customer’s bar tab. We think it is a mistake to read this as a signal that Beijing will also acquiesce to US currency policy demands.

Andrew Barber

Eye on Sentiment: Rasmussen Total Approval Index

As we mentioned in The Early Look today, President Obama’s total approval rating, based on the Rasmussen Daily Tracking poll, is at 60%, which is near the lowest levels of his Presidency. At the peak, Obama’s total approval rating, which is a combination of approve and strongly approve, was at 69%. While the current approval rating is well off the peak, it is still a very high approval rating and eight points above his approval rating on November 6th.

More noteworthy from the poll is the Presidential Approval Index, which stands at +10 today and is charted below. The Presidential Approval Index measures the delta between Strongly Approve and Strongly Disapprove. At its peak, on January 22nd, just two days after the inauguration, this measure stood at +30. In less than a month, President Obama’s Presidential Approval Index rating has declined by an amazing 20 points. This is partially attributable to his very high rating post inauguration, which was obviously unsustainable, but also due to a number of missteps that the administration has made in the first few weeks in office.

The decline in the Presidential Approval Index is about the best leading indicator we can find for President Obama’s approval rating. It shows the broad shift of approval for President Obama as voters downshift from Strongly Approve to Approve and from Disapprove to Strongly Disapprove. To the extent that it matters, it is very likely that President Obama’s broad approval rating heads into the mid-50s in the coming months, if not lower, as these internals are showing a very negative trend. As his approval rating declines further, his mandate is likely to diminish as will his ability to accomplish legislative actions quickly.

Daryl G. Jones
Managing Director


“Well done is better than well said.”
-Benjamin Franklin

Japan’s Finance Minister, Shoichi Nakagawa, didn’t do either. What he said over the weekend at the G-7 meetings, drunk or not, never had a chance. There is nothing about Japan’s economic resolve in the last 20 years that has been “well done” – when considering the disaster of it all, one can understand why the man was bombed.

Nakagawa’s alleged sippin’ of the Sapporo ultimately called for his resignation overnight. This didn’t help Japanese or Asian trading overall – confusion in markets doesn’t breed confidence. Japan closed down another -1.4%, taking the Nikkei to 7,645 and down -14% for 2009 to date. Given the lack of leadership in the world’s largest socialized bureaucracy, one can hardly blame the poor man for boozin’. The reality is that Japan’s yield curve has been flat for the last decade – bankers there have zero interest rates and, alongside that, zero inspiration to attract foreign capital.

The New Reality (sorry Vikram Pandit, that’s our line you are using now – don’t be the raccoon), is that politicians, globally, will be YouTubed and held accountable, real time. Politicians stand on no lower moral ground obviously than some of the bankers or bandits who got us into this mess. Now that the Obama love fest is over, Americans are coming to their senses and reminding themselves of as much.

At -8.5% for the year to-date, the USA isn’t down as much as Japan, but it’s still rather embarrassing. While Timmy Geithner wasn’t loaded last week, maybe if he pounded back a few Bud heavies prior to his being YouTubed he wouldn’t have looked like he was such a stiff. From the Pandit Bandit to the tricky Dick Fuld wanna be’s who performed marvelously in front of Congress last week, I bet they wouldn’t have minded if Timmy chugged back a few and endowed them all with another trillion of bailout moneys. “Booo-yah” Timmy Boy! Boozin’!

Unfortunately, for the bankers at least, there were no wheel barrows of moneys marched down the Congressional aisle. While “Heli-Ben” (Pandit, don’t go using that line of ours now) was doing his best to drop massive amounts of US Debt on our former Chinese friends, Timmy was told to save some of the moneys for teachers, firefighters and tree huggers instead. My Mom is a teacher, my Dad is a fireman, and my brother hugs trees – too bad they are Canadian!

Today, “no drama” Obama will be signing the almighty stimulus bill from Colorado rather than from ole Bushy’s desk. Maybe he is looking for some karma of his own – maybe he just needed to get away from that evil doer Washington DC rhetoric. Obama’s approval ratings have fallen rather dramatically in the last 6 weeks. Since the first week of January his approval rating (Rasmussen poll) has tanked from 69% to 60%.

Obama saw a 60% approval rating in the week of November 20th. Ironically enough, that was the week where the SP500 bottomed at 752. Given that the SP500 is now trading almost +10% higher than that global Liquidity Crisis capitulation low, Obama and his strategy man, David Axelrod, should be rather thankful that it hasn’t been worse.

With the world’s 2nd largest economy sending their Finance Minister to the microphone drunk, the Chinese signing their largest oil deal ever with the Russians last night ($25B, Vladdy – we lend you that cash that we used to lend Americans, you give us the black stuff), and America’s Batman being soured on by Gotham… could things for Obamerica be worse? Of course they can… so pay attention to the deltas out there in your geopolitical analysis. Everything that matters to markets from here will most definitely occur on the margin.

We all know, in hindsight, what Obama’s confidence did for the US stock market in December. However, most people still don’t fully realize what that did to the US Dollar. As the buck broke down in December, stocks broke out to higher highs, almost weekly, and never looked back at making lower lows. The only week that we saw a material rally in American stocks in 2009 was the one week where the US Dollar Index was down on the week. Last week, was not that week, of course. Last week, the US$ Index closed up a tidy +1.5% and the SP500 lost -4.8% as a result. This morning, the US$ is bid 1% higher, and S&P Futures another -2% lower…

Hold on here Keith, this doesn’t make sense. If Biden wants the world to “buy American”, and the Chinese are selling into that… shouldn’t the dollar break down? In theory, every economic case can be made – that’s why John Maynard Keynes and Irving Fisher never got along. But The New Reality is that the inverse correlation between the US Dollar and US Equities is as formidably relevant as any major one I see right now in macro.

For 2009 to-date, the US Dollar Index is +7% and US stocks are -8.5%. Interestingly, the CRB Commodities Index is down exactly the same percentage as the US Dollar is up – seven percent. While seven is a lucky number in China, and there is a seven in the Chinese stock market’s YTD return of +27%, there may be no other correlation to be made here other than that being the minimum amount of cocktails a Japanese man who has to talk transparently about his country’s economic situation needs to pound back prior to speaking.

Markets, globally, are going to try to put in another higher low this week, and I think they should. I have our Hedgeye Asset Allocation Model holding a 76% position in Cash (US Dollar denominated!), and I am looking forward to getting invested again at lower prices.

If one thing has held true for the last 12 months of investing, it is quite simply that patience pays. In The New Reality, this proactive risk management approach will allow you to buy low and sell high. Buying from forced sellers and drunken sailors of the free money leverage cycle will continue to remind us that, “well done is better than well said.”

My downside target for the SP500 to cover/buy stocks remains 810.

Boozin' - etfs021709

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