Walk Like An Egyptian

Takeaway: The Mayans had it wrong. The world didn’t come to an end – which would have solved a lot of problems. Now what?!!

O! My fortunes have corrupted honest men.

-Shakespeare, “Antony and Cleopatra”


During a state visit to Egypt in 1977, then-Israel Prime Minister Menachem Begin toured the National Museum in Cairo.  When asked whether he would care to see the pyramids, he quipped, “Why not?  After all, we built them.”  Begin was taken by surprise when this attempt at humor was met with outrage on the part of the Egyptian public.  Egyptians, it turns out, are proud of their own heritage – a heritage which includes the tradition that it was skilled Egyptian builders who built these massive structures.  Not foreigners in the land.  And not slaves.


Two centuries of enslavement in Egypt form the core of the foundation myth of the Jewish people – Passover, the Festival of Freedom, celebrates the exodus of the Hebrew slaves from Egypt to the desert, from slavery to freedom.  Two facts are often overlooked in the midst of the celebration.  The first is that the Biblical narrative appears to be the only evidence of the Hebrew sojourn in Egypt: two centuries of prosperity, followed by two centuries of slavery and despair, followed by a miraculous redemption and the forging of a nation.  This same narrative, for example, does not figure in the Egyptian consciousness.  The second is the message God instructs Moses to deliver to Pharaoh which is not “Let my people go,” but rather, “Let my people go, and they will serve me.”  The purpose of freedom, in the Biblical narrative, is explicitly so that the newly-aware nation can dedicate itself to serving a higher good – indeed, the Highest Good.  Sort of a precursor to market regulation.


Archaeological evidence appears to support the Egyptian narrative, both as to the age of the structures – the oldest known Pyramid was built in around 2630 BCE – and as to the treatment of the workers.  Large settlements in areas around the Pyramids have been identified as workers’ towns, and everything from housing accommodations, to the waste from the food the workers ate, indicates they were well cared for, if not honored.  Scholars agree that the builders included large numbers of highly skilled artisans, as well as a massive complement of low-paid laborers who pulled, shoved, lifted and winched the giant stones into place.  This should not surprise a Western observer – it is much the same template as the construction of the great European cathedrals.  And the work force appears to have been similarly drawn from the lower economic classes – but not slaves.  Indeed, it was apparently an honor to be involved in building the Pyramids, not something to be shared with outsiders.


But once you become identified with a narrative, it’s hard to shake it.  Thus, at the Passover celebration around the family dinner table, people routinely speak of the Pyramids with a sense of authority, if not proprietorship.  And today’s newspapers abound with instances of people who overcommit to their narrative, refusing to examine evidence that contradicts opinions they have long since come to accept as fact.    


In fact, there is another argument over a pyramid going on right now, pitting modern Pharaohs against one another in a war that will surely see its losers badly bloodied, though it is not clear what trophies await the winners.


Hedge fund Wunderkind Bill Ackman has tied up over a billion dollars of his Pershing Square fund’s capital in a massive, and well-advertised, short of Herbalife stock.  True to the Wall Street tradition of first loading up on a position, then touting it to all the world, Mr. Ackman has appeared on major financial programs, accusing Herbalife of running a massive fraudulent pyramid scheme and describing in loving detail how Herbalife allegedly scams both the investing public, and its own customers-turned-sales force.


Squaring off opposite Mr. Ackman is Daniel Loeb, founder of hedge fund Third Point and a man who uses his multi-billion dollar perch as a bully pulpit to castigate executives whose behavior he finds wanting.  It was Loeb who, in May of last year, broke the news that Yahoo! CEO Scott Thompson did not have a degree in computer science – Thompson tendered his resignation within two weeks of the disclosure.  Challenging Ackman’s massive short of Herbalife stock, reported to be nearly 20% of the outstanding shares (Financial Times, 11 January, “Herbalife Hits Back At Pershing ‘Myths’”) Loeb’s Third Point has disclosed an 8.5% stake in the company, and there are other money managers with long positions.  It’s game on in the land of the pyramids.   


We do not consider ourselves expert on either Herbalife, nor on the investing acumen of Bill Ackman, Dan Loeb, or the other deep pockets who have stepped into the ring.  (It is rumored that Carl Icahn has bought into Herbalife on the long side.  Observers think this may have an element of Schadenfreude for an Icahn who would love to see Ackman lose this fight.  Icahn and Ackman spent the better part of a decade locked in a tangled lawsuit that resulted in Icahn paying $9 million to Ackman.  That’s not a typo.  We’ll write it out, just to make sure you get it.  After seven years of legal wrangling, Carl Icahn lost a judgment which resulted in him paying nine million dollars to Bill Ackman.  He’s never gotten over it.) 


Ackman told folks he believed Herbalife CEO Michael Johnson threatened him.  Ackman told interviewers on Bloomberg TV he was concerned for his safety and the safety of his family after Johnson said the world would be better off without Bill Ackman.  Other factoids from Johnson’s indignant rant included an allegation that Ackman went public with his accusations against Herbalife in the final days before options expiration, thus spiking the value of put options which, Johnson allowed us to infer, Ackman must own by the boatload.  Would you buy a used short position from this man?


Ackman’s presentation, on the other hand, says that 93% of Herbalife’s independent distributors make zero gross revenues from their sales, while the one in 2,500 distributors who earn $300,000 or more equate to 0.04% of Herbalife distributors.  Would you buy a used vitamin from this man?


Herbalife management has exhibited an unshakeable façade of high moral dudgeon over Ackman’s allegations.  Ackman says Herbalife’s business model is based on people sucking others into an illicit web of upstream and downstream sales.  He says most sellers make no profit whatsoever, but that a tiny fraction of those nestled atop the pyramid structure make scads of money.  He says the profits in the company come, not from legitimate product sales, but from downstream salespersons bringing successive lower tiers into their pyramid.  He challenges the legitimacy of Herbalife’s product line, saying the company spends “immaterial” amounts on research and development.


Herbalife just held a special investor conference intended to rebut Ackman’s claims.  Mr. Ackman was vacationing but said he listened in on the presentation.  His curt Blackberry response indicated he heard nothing to change his mind.


Maybe this comes down to an argument over semantics.  Ackman says it is “very clear that it’s a pyramid scheme,” and that “pyramid schemes are inherently fraudulent.”  This is an inverted two-step logical argument: you must accept the second part of it before you consider the first.  In fact, a Belgian court has declared Herbalife an illegal pyramid scheme, a decision the company “is confident will be reversed on appeal.”  While we are not experts on Belgian law, it appears at least some jurists accept Mr. Ackman’s definition.  Meanwhile, though, no US regulator has used the P-word in connection with Herbalife.  The company, in a carefully-worded rebuttal, says Herbalife “is not an illegal pyramid scheme,” which leaves room for it to be a legal pyramid scheme.  Like the Federal Reserve.


In a nation whose societal stability and economic growth is predicated on what economist Hyman Minsky famously called “Ponzi financing,” having a federal agency shut down Herbalife for fraud is likely skating much too close to the edge.


Speaking of folks who are committed to their narrative, no-longer-quite-so-legendary investor Warren Buffett went public this week with a jolly prediction that “the banks will not get this country in trouble.”  “I guarantee it,” said the Oracle of Omaha, the Dowser of the Dollar, the Prophet of the Portfolio.  Asks one wit at the Huffington Post (10 January, “Warren Buffett: ‘The Banks Will Not Get This Country In Trouble’”) if this is a Guarantee, then “what will Warren Buffett give us if he’s wrong?”  Given the increasingly incestuous relationship between Buffett’s checkbook and the federal government, we predict that Buffett will, by definition, not be wrong, at least not as far as Buffett is concerned.


This is the same Warren Buffett who testified openly to Congress that he invested heavily in Moody’s because it enjoyed a government-guaranteed monopoly.  Far from using his influence to instill responsibility into the process of rating companies and the securities they issue, Buffett rode the crest of a wave carried on the backs of our flagging economy.  Is it accurate to say that we – or you, or any other person – would have done exactly the same thing?  Perhaps.  Should we be entitled to expect more from our leaders?  Yep.


Buffett’s latest big ticket item is bank behemoth Wells Fargo, the subject of the cover article in this month’s Atlantic magazine (January/February, “What’s Inside America’s Banks?”).  The authors of this article raise a large number of areas of concern for the banking sector – though broadly, and without a lot of detail to beef up their argument.  We cite a few points the editors chose to excerpt in boldface: “When we asked Ed Trott, a former Financial Accounting Standards Board member, whether he trusted bank accounting, he said simply, ‘Absolutely not.’”  “The sheer volume of ‘trading’ at Wells Fargo suggests that the bank is not what it seems.”  “As rules have proliferated, arguments about compliance have become more technical, and punishments have been rare.  Not one senior banker from a major firm has gone to prison for conduct related to the 2008 financial crisis.”


The authors raise a host of issues relating to Wells Fargo, to the bank sector in general, and to new trends in financial regulation.  All the points raised in the piece are important, and nearly every one has the potential to generate a host of deep-dive investigative articles.  For our taste, the authors’ brush is too broad – we spend our waking hours wading in the open sewage of the industry and we crave deep detail.  We urge folks who want to see a large number of critical issues tabulated all in one place to read this piece, though you will likely be more amused – and angered – by reading Matt Taibbi’s article “Secrets and Lies of the Bailout” in the latest Rolling Stone magazine


Bill Ackman gets a cameo in the Atlantic piece and we think it’s pertinent to today’s Herbalife dustup.  Discussing the opacity of bank accounting, the authors write that “Bill Ackman’s journey is particularly telling.”  They go detail Ackman’s 2010 purchase of nearly $1 billion worth of Citigroup stock – about 9% of total assets under management of Ackman’s Pershing Square management company at the time.  Ackman, who had long given banks a wide berth, said “for once I thought you could trust the carrying values on bank books.” 


“Last spring,” report the authors, “Pershing Square sold its entire stake in Citigroup, as the bank’s strategy drifted, at a loss approaching $400 million.”  The article offers this as an example of how treacherous bank investing is.  We read a different story: FDIC chair Sheila Bair made no secret, during the TARP negotiations, that she believed Citigroup was a ticking time bomb.  Bair was opposed to extending the government bailout to Citi, and was quoted publicly well before Ackman’s $1 billion investment. 


In her memoir Bull By The Horns, Bair lays out the political hornets’ nest that gave rise to the allocation of TARP funds.  Discussing her repeated head-butting with Treasury Secretary Geithner, Bair said “he was in constant communication with [Citigroup CEO] Vikram Pandit… I felt like he and Vikram were figuring out what they were going to do and then trying to jam it on me,” (Huffington Post, 27 September 2012, “Sheila Bair: Timothy Geithner Did ‘What Citigroup Needed’”).  Bair is convinced that many of the TARP decisions “were made through the prism of what Citigroup needed.”  Interestingly, Bair believed many of the big banks did not need the 2008 bailout, but were forced to take government funds in order not to leave Citigroup exposed as damaged goods.


Reading between the lines, did Ackman try to pull a Buffett?  Ackman’s investment in Citi followed the Received Wisdom of Geithner et al – the notorious “thirteen bankers” mentality, that the government must support the financial sector and must not interfere.  Readers of the Wall Street Journal knew what Ackman appears to have not known: that Sheila Bair, the senior regulator who arguably knew more about how banks fall apart than anyone else in Washington at the time, believed Citigroup posed a unique set of threats to the nation’s financial system.  We are not privy to Ackman’s thought process, but if he was betting on Geithner & Company to bail him out, he was obviously wrong.


Mr. Buffett appears to sleep soundly at night, secure in the knowledge that his Uncle Sam will pay his gambling debts.  Mr. Buffett has won this favored position through a rare combination of clear-sighted analysis, transparency in the management of his affairs, and ultimately becoming not Too Big To Fail, but Too Big To Ignore.  Buffett no longer needs to test his narrative.  He is the narrative.  For the rest – even the Loebs and Ackmans of the world still need to do their due diligence.


We hope Mr. Ackman reviewed his own narrative before plunging into the Herbalife short – by his own account, the single biggest transaction of his career.  A perfunctory scan of Ackman’s investing track record reveals some giganormous successes, as well as some stunning losses.  Over the years, Ackman has been a steady giver to worthy causes.  We hope the Herbalife chapter will not close with Mr. Ackman bidding to become a beneficiary of one of those same causes.  O fortuna!


Like Pharaoh, there is only one Warren Buffett.  Everyone else has to work for a living.



Ingles Spoken Here


As observers of Brazil’s dysfunctional system of government, we have gone on record as predicting the nation will fall short in its plans to host the 2014 soccer World Cup, and the 2016 Olympic Games.  The World Bank’s “Doing Business” report ranks Brazil 126th out of 183 nations for ease of doing business – a six-point decline from 2011-2012.  It takes on average 119 days to launch a new business in Brazil, compared to 28 days in China, and only 9 in Mexico, and 469 days to get a construction permit issued.  Brazil’s foreign trade is severely hampered by the hundreds of forms that must be completed every time a ship loads or offloads cargo.  Once the cargo makes it to the docks, Brazil’s overburdened rail system and near-nonexistent network of highways make it all but impossible to deliver the goods to sales outlets.  Well-traveled passenger highways are so overtaxed that hundred-mile traffic jams are not uncommon during Sao Paulo’s morning rush hour – Sao Paulo, the nation’s business capital, has the largest number of private commuter helicopters for just that reason.


FIFA, the global soccer authority, has repeatedly expressed its frustration with Brazil’s inability to complete stadium and lodging projects on schedule, and the government’s public/private programs to expand its air, highway and mass transit capacity keep hitting snags.


There is one sector, though, that is gearing up and will be ready to greet the hundreds of thousands of visitors these global events promise to bring.


A new free instruction program is being offered in a language school in the city of Belo Horizonte, capital of the state of Minas Gerais, some 500 KM from Sao Paulo.  The target clientele for this accelerated instruction are the members of the Minas Gerais State Prostitutes’ Association, a professional group whose objective is to provide a safe working environment and fair pay for its members.  Over 300 working women signed up on the spot when the classes were announced, and requests keep coming in.


Cida Vieira, president of the association, says the goal is to help Brazilian sex workers communicate with foreign visitors.  The focus is on international languages that will provide maximum flexibility.  A group of volunteers offer instruction in English and Spanish , as well as remedial Portuguese classes for foreigners who ply their trade in Brazil’s cities.  Vieira says linguistic ability is critical for workers’ dignity: the women need to be able to communicate clearly in order to protect themselves, as well as to negotiate fair prices.  More inquiries are coming in, says Vieira, including women willing to travel from Sao Paulo to receive instruction, and she expects she will have to expand the program.


The stadiums may not be ready, the airports may not be open, the roads may be clogged, but there’s one group of Brazilian professionals ready to ensure visitors have a good time if they ever get there.


Get Rich or Die Mayan


Walk Like An Egyptian - mayan

      Victor Ruiz / Reuters


Sorry, folks.  We couldn’t resist…


Although the authorities had known of the problem all along, endless bickering over minute calculations resulted in repeatedly postponing any action at all from one season to the next.  Seasons stretched into years, which stretched into generations and, ultimately, millennia, until the morning of December 21st came and time ran out.


We will never know all the details, but sources close to the Great Pyramid at Teotihuacan say the bailout came in what was quite literally Last-Minute deal.  Senior plumed serpent and creator deity Quetzalcoatl was, despite long hours of negotiation, unable to forge a compromise with Huitzilopochtli, the deity of war and human sacrifice, and the head of the opposition Tenochtitlan Aztec faction.  Desperate, Quetzalcoatl turned to his senior advisor Tezcatlipoca – whose name, fittingly, means “Smoke Mirror.”  Tezcatlipoca, overseer of the invisible forces that make the night winds blow, has primary responsibility to secure the position of the ruler on the throne.  As Time’s final moments spun yawing out of control Tlaloc, god of rain and fertility, crouched in the shadow of the Pyramid vomiting into one of the baskets used to scoop up the remnants of gore from the daily round of human sacrifices.


Our sources indicate Tezcatlipoca received Quetzalcoatl’s tacit approval – plausibly deniable, of course – to continue to create more Time.  No one is sure where all this additional Time is coming from.  Critics charge it will have to be taken back from future generations, but supporters of the plan say the Deities had no other choice and point out that, after all, they own the machine that creates Time, so who’s to say when it’s too much?  All this seems to have resulted in kicking the human sacrifice down the road yet again. 


If you are reading this, then you know what was preposterously obvious all along: this Mayan calendar thing was a farce, trumped up by bloggers and .  Accordingly, we shall see what the next millennium brings.  Unless, of course, there was truth to all these wild rumors.  Maybe the doomsayers were right.  Maybe the Mayans had Time figured out to the last tittle and jot.  Maybe the world really did come to an



Moshe Silver

Managing Director / Chief Compliance Officer

MACAU: A Solid Start In January

2013 has been a good year for Macau thus far, with last week’s average daily table revenue climbing by HK$899 million, up 64% year-over-year. The smoking restrictions that were put into place by the government have yet to make a material impact on business like many thought it would. We do expect a slowdown in the back half of January due to the calendar shift of the Chinese New Year celebration into February this year.  Our full month projection is for year-over-year growth of 8-13%. In terms of market share, MPEL and Galaxy take the lead while MGM, SJM and LVS are behind.


MACAU: A Solid Start In January  - macau1

European Banking Monitor: Risk Measures Remain Broadly Bullish

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


* On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – EU Financial swaps were mixed this past week, with German and French swaps nominally higher while Spanish and Italian swaps continued to tighten. 


European Banking Monitor: Risk Measures Remain Broadly Bullish  - yy. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk


European Banking Monitor: Risk Measures Remain Broadly Bullish  - yy. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Risk Measures Remain Broadly Bullish  - yy. facility

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

FDX: Dynamite Deals

UPS (UPS) has announced it will withdraw its $7 billion bid for shipping company TNT due to European antitrust concerns. There is now a clear road for an acquisition by FedEx (FDX). What’s interesting is that UPS was likely trying to work out a deal for TNT’s European assets with FedEx to get the deal done. FDX may have wanted no part in that and thus, now has all options on the table for a TNT acquisition. 


With UPS gone, FDX is likely the only TNT buyer around. They could buy the entire company on the cheap and integrate pieces that fit well with their existing structure. TNT may have to sell or risk dying out slowly. We’ll have to wait and see what happens for now, but expect a bid for TNT from FDX sooner rather than later. 


FDX: Dynamite Deals   - eu1


FDX: Dynamite Deals   - asia2


Another good week in Macau but 2nd half of Jan comps are tough



Macau had another solid week here in January.  While the smoking restrictions may have an impact on margins, it does not appear to be affecting demand yet.  Average daily table revs this past week were HK$899 million, up 64% over last year.  Remember that last year’s comp is a little skewed since business levels usually wane ahead of the Chinese New Year.  Indeed, we still expect a slowdown in the back half of January this year due to the calendar shift of the Chinese New Year celebration into February this year.  Our full month projection is for YoY growth of 8-13%.  


For market shares, MPEL and Galaxy continue to trend above normal while MGM, SJM, and LVS are below.  








Still Overbought: SP500 Levels, Refreshed

Takeaway: Mr. Market doesn’t seem too excited about shooting above the intraday high of Bernanke’s Top (SEP14, 2012 = 1474) and staying there.



The immediate-term TRADE overbought signal I issued on Friday was based on a signal for lower-highs. This morning’s price/volume/volatility data is giving me another lower high.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1474
  2. Immediate-term TRADE support = 1464
  3. Intermediate-term TREND support = 1421


In other words, Mr. Market doesn’t seem too excited about shooting above the intraday high of Bernanke’s Top (SEP 14, 2012 = 1474) and staying there. At least not yet. And with a lot of people forced to chase last week’s highs, I think that matters.




Keith R. McCullough
Chief Executive Officer


Still Overbought: SP500 Levels, Refreshed - SPX

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