“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”
American, European, and Japanese governments have a habit – it’s called tax-payer funded spending. In order to finance this habit, they A) tax you and B) issue debt. Try part B) at home - levering yourself up to pay your political bills typically doesn’t end well.
I know. I know. ‘This time is different’, ‘print the damn coin’, ‘America voted for this’ – blah, blah, blah. This is what Big Government Interventionists of the 21st century repeatedly do. Obama, sadly, is no different than Bush on this score. They both needed to perpetuate a class struggle in order to sell it to their respective Keynesian economic constituencies.
My quibble isn’t political; politics are now about economics. The French have been arguing about this since at least the early 19th century. As one of the 1st economic historians, Adolphe Blanqui, wrote in 1837: “In all the revolutions, there have been but two parties confronting each other; that of the people who wish to live by their own labor, and that of those who would live by the labor of others.”
Back To The Global Macro Grind…
No matter what your politics, you do have to make real-time decisions out there. What else are you supposed to do when politicians are changing the rules of the game on the fly? For the last decade, one of the main risks to growth has been government.
The outgoing Timmy Geithner says the timing of the #DebtCeiling D-Day is “mid-February.” At the latest, my research team has it in early March (coincidentally, March 1st is also when sequester kicks in). Now that it’s mid-January, that means this game of risk is on.
A game? Sadly, yes - a high-stakes game of political chess (they are playing with your money) that will likely require you to do up your chinstrap. Buying stocks in mid-January is hardly as easy as it was buying them in mid-November. Everything in markets has a time and price.
How is risk priced today versus 2-months ago (November 15th)?
- November 15th, the SP500 closed at 1353 = 8% LOWER
- November 15th, the Russell2000 closed at 769 = 13% LOWER
- November 15th, the US Equity Volatility (VIX) closed at 17.99 = 33% HIGHER
Back then (seems like forever ago you could have been long, no?):
- Global Growth was going from slowing to stabilizing
- Fiscal Cliff Fear was all over consensus media
- The NHL was still on strike
Those were some pretty tough times! And today what?
- Global Growth has stabilized
- Oil is starting to break-out again
- Japan and the US are competing with who can “stimulate” the most with debt
And on and on and on the cycle of Big Government Interventionist policy goes….
But this should surprise no one at this point. This is what Keynesian Policy makers repeatedly do:
A) They Shorten Economic Cycles
B) They Amplify Market Volatility
Can you imagine what The Rest of Us will do if the #PoliticalClass just top ticked another market move at an all-time high in the Russell2000? What will The People do if their money manager jammed them into equities at the top of the “fund flows” news cycle?
On a cheerier note, Global Growth hasn’t slowed (yet) and by the looks of Lennar’s (LEN) backlog numbers this morning, our bullish call on US Housing remains intact. Risk never stops moving – it moves both ways.
The first two themes won’t sound new to any of you who read what we write every day. Our process is dynamic – as market prices, economic data, and risk management signals change, we try to. It’s never easy – but neither is excellence.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Corn, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1 (covered our GLD short yesterday during the Obama speech), $110.32-112.82 (bullish breakout in Oil), $7.08-7.26 (shorted CORN yesterday), $79.29-79.98, $1.31-1.34, $87.43-89.41 (Yen oversold yesterday), 1.84-1.94%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Note: Each morning, we will present up to five headlines that Hedgeye CEO Keith McCullough is reading. Please let us know what you think about the feature. Thank you.
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Today we shorted the Consumer Discretionary SPDR ETF (XLY) at $49.06 a share at 3:27 PM EDT in our Real-Time Alerts. Obama's presser today was US Dollar bearish. Dollar Down, Up Oil is not the recipe for US Consumption Growth Stabilizing. That would be what we call a tax. We'll cover on red when the time is right.
We have long considered investor Bill Ackman’s investment in JCPenney (JCP) a bad trade to say the least. Going against Ackman and shorting JCP is a trade worth considering, but not at these levels. Currently, JCP is the only retailer that has a Sentiment Score below 10 (on a scale of 100). This extremely bearish sentiment is all the more reason why you shouldn’t short JCP when it’s in the teens - it’s a bullish signal. But those who want to get long JCP are really putting their faith in CEO Ron Johnson flawlessly executing on his 2013 game plan. That’s a Hail Mary if we ever saw one.
The complete transformation of JCP stores is going to take some time and in turn, the company will likely miss near-term targets in favor of long-term results that work. Make no mistake about it: Johnson is in this for the long haul, especially with his stock warrants being worthless while the stock is below $29 a share. While it seems easy to short JCP, you won’t want to do it with the stock trading in the high-teens unless you're making 'the bankruptcy call'. That might come to fruition, but not in 2013.
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 http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104#ixzz2HIrDzuGl
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
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
Managing Director / Chief Compliance Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.