“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
-John Maynard Keynes
I always find it fascinating to listen to grey beard Washington/Wall Street rear-view looking economists talk about their long standing experiences analyzing markets. All the while, one of their idols of government intervention, John Maynard Keynes, was only in his 30’s when he originated some of his most influential writings… Such is history. She usually writes herself after we are all dead.
Yesterday, the Chinese were in Washington to visit with Go Go Geithner and Dora The World Peace Explorer. The Chinese smiled and shook hands. They told Geithner that “we are concerned about the security of our financial assets.” And Timmy said, no worries…
With the US Dollar testing her year-to-date lows this morning, at +89% and +43%, respectively, stock markets from Shanghai to Hong Kong are making new YTD highs. Watch what the Chinese do, not what they say. They are buying what they need; not what American politicians want them to need (US Treasuries).
What Go Go and Goldman really want are not dissimilar from what I want – they want to get paid. The only difference being that I don’t get to use America’s balance sheet as my leverage and her currency as my hall pass. As we debauch America’s currency, Debtors, Bankers, and Politicians get paid. Her creditors (China and the US Consumer), pay the bill.
There has been only ONE other time since Nixon abandoned the Gold standard (1971) that the US Dollar Index has sustainably broken below the $78 line. That was one of the major leading indicators to my calling the crash in 2008. After all of yesterday’s useless political China rhetoric, the US Dollar is trading down again at $78.45.
As long as we are all cool with this, we should have no worries. In the immediate term, this is REFLATIONARY and everyone who owns something denominated in US Dollars wins. In the intermediate term (from now until Q4), we will have a REFLATION ROTATION where year-over-year deflation will morph into reported inflation. In the long run, as Mr. Keynes appropriately acknowledged, “we are all dead.”
Most people who have studied economic history will recall that John Maynard Keynes was a self-made millionaire. He originally made his money as a currency trader. Remember that back then (circa 1913 when America created US Federal Reserve) that the most important objective of the day was for central bankers was to preserve the integrity of their country’s currency. So Keynes simply traded around their groupthink.
Keynes ended up becoming a prolific author, but I would argue that his conclusions were born out of trading markets with live ammo. What we see in today’s America are a bunch of professors, lawyers, and politicians running America’s central bank and Treasury having never traded or managed real risk in their life.
This, in the long run, is a major problem for this country, and many others modeling their economic policies after the fully politicized Greenspan model that we have taught them to use. In the end, countries/economies that socialize individual risk taking and capitalize individual resumes of perceived wisdom will not be those that the Chinese trust.
For now, all we can do in America is hope. And while our President says there is an “Audacity of Hope”, allow me to submit the less eloquent conclusion of a global macro trader – hope is not an investment process.
Provided that we wake up every morning to Go Go and Dora, understanding that this is nothing but an exercise in adult story-telling, we can all manage the risk associated with being invested in markets just fine. As long as you understand the game, just trade the one that’s in front of you.
This morning’s leading indicators are the same ones you were looking at yesterday. While America Burns The Buck, copper, oil, and gold prices continue to march higher. The uncompromised end of the US Treasury yield curve continues to make higher-highs and higher-lows. The yield curve (the spread between Bernanke’s politicized end of the curve and the marked-to-market end at 10 years) continues to trade as steep as it has EVER has.
In the immediate term, this is all great. Its great for banker bonuses. It’s great for Bernanke’s job security. It’s great for just about everyone in de Club, other than the commoner like me and you.
We simpletons need to understand that this is all very subtle and “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

My immediate term upside resistance level for the SP500 is now 991, and I have downside support at 956.
Best of luck out there today,


XLK – SPDR Technology Tech got smushed for the 2nd day in a row on 7/27. Buying red.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

EWA – iShares AustraliaEWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP– iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


XLF – SPDR Financials – Shorted Financials on a bounce on 7/27 with the yield curve as good as it gets.

XLI – SPDR Industrials – We don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares Italy – Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don’t want to be long of.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY – SPDR Consumer Discretionary
– As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.



David Chow Kam-fai has missed a deadline to pay US$200 million to buy out a group of shareholders in Macau Legend Development, Mr. Chow’s company which owns the Landmark hotel and gaming hall and the Fisherman’s Wharf entertainment resort.  The buyout had been offered by Mr. Chow as a means to ending the business relationship between him and the shareholders after the shareholders’ investment in Fisherman’s Wharf (at 10x EBIT) fell flat; Fisherman’s Wharf failed to make financial targets after intense competition from other resorts including the Venetian.

The businessman and former lawmaker has pledged to spend HK$3 billion on a revamp of Fisherman’s Wharf.  Shareholders have been selling large tranches of their stakes but remain in the consortium.


The rate of unemployment in Macau rose by 0.1% to 3.6% in the second quarter compared to the first three months of the year, according to official statistics.  According to the Census and Statistics Bureau, the rate of unemployment between April and June also rose 0.8% compared to 2Q08. 


We all know same-store sales growth was weak for casual dining operators in 2008, but continued unit growth, albeit at a decelerated rate of growth, helped to support overall revenue growth.  As shown by the chart below, new unit growth has turned negative for the bar and grill segment in 2009 so achieving revenue growth will be increasingly more difficult this year as demand remains weak.  And, this chart only accounts for Ruby Tuesday, O’Charley’s, Applebee’s and Chili’s.  The total reduction in supply would look much greater if we could account for all of the mom and pop and privately-owned restaurant closures, including Bennigan’s.

Although the cut back in development could put increased pressure on revenues in the near-term, this rationalization of units will benefit all of the relevant players once consumer demand returns.  It is a well known fact that there was too much casual dining supply, particularly in the bar and grill segment, as same-store sales turned negative in early 2006, prior to the economic slowdown.  The economic slowdown only magnified the problem, convincing restaurant operators to curb their growth targets.   

As excess supply is removed, unit economics should improve across the board as there will be fewer seats to fill.  Restaurant operators cannot cut costs forever so as I said last week sustainable operating margin growth relies on business picking up, the timing of which is still unknown.  As almost all of the restaurant companies’ management teams have said (I am paraphrasing), “due to the economic slowdown, we have made changes that make us better positioned to outperform once sales return,” this is definitely true for the bar and grill segment as a whole.

RESTAURANT INDUSTRY - Supply Trends - bar and grill supply


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June trade data released today for Hong Kong saw the deficit expand to 16.5 HK Billion, with total exports increasing to  211 HK Billion a year-over-year decrease on 5.41%  -a big sequential improvement over May.  Shipments to the mainland increased by 10.18% (NSA) over last June and accounted for 52.5% of the total, continuing the trend that has held since February when the impact of Beijing’s stimulus was first felt and exports to “The Client” rose to more than 50%.


For us, this data is an excellent rear view mirror confirming the impact of Beijing’s plan, but is less valuable as an indication of future demand. Although the Export orders in neighboring markets like Taiwan suggest consumer spending in China is showing no signs of slowing anytime soon, Baltic Shipping indices (admittedly a volatile and imperfect measure) have pulled back in recent weeks as anecdotal evidence that stockpiles for base metals and other industrial commodities have built to surplus levels that may at least warrant a breather for heavy imports in August.


We view the Shanghai Composite’s current level as unsustainable as more easy credit finds its way into the hands of more first time equity investors and prices reach irrational highs. We also believe that the internal demand spurred by the stimulus will plateau for a period in the near term unless the nature of that demand shows signs of broadening more rapidly than it has thus far. Neither of these opinions makes us bearish on a long duration basis necessarily, we simply manage risk in real time and focus on the math first, the narrative second.

Andrew Barber


Where's Wang?

Sometimes macro pictures capture much more than we can with prose…

Andrew Barber’s picture of President Obama shaking hands with The Client (China) today frames up this critical stage of American economic history quite well. These, as we say, are the early days of The New Reality…


Keith R. McCullough
Chief Executive Officer

Where's Wang? - wang2

Yes, In Q2 US Housing Bottomed...

According to data released by the U.S. Department of Housing and Urban Development, sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes.  Consensus had forecast seasonally adjusted sales of 352,000. 

While the rate of improvement is consistent with our 2Q09 housing bottom call, the rate of sales is still 21% below the year ago levels.  For reference, four years ago (during the height of the housing boom), the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month.

This report is impressive given what is going on with existing home sales and all of the foreclosure activity, which is sending home prices significantly lower.

I think most people would agree that Obama's $8,000 tax credit for first-time homebuyers is having a positive impact, but what will happen when it goes away in December?

Importantly, the June inventory of new homes dropped to 281,000, an 8.8 month supply at current rates of sale; in May, supply stood at 10.2 months.  Most of the excess inventories tend to be concentrated in just a few markets, such as California, southern Florida, Las Vegas and Arizona. 

As we look forward, "the construction-put-in-place” data next month will likely suggest that housing will be an additive to GDP versus being a drag as it has been more recently.

Howard Penney

Managing Director

Yes, In Q2 US Housing Bottomed...  - housingch


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