Given that the US Dollar remains the dominant macro headwind for the US stock market, and that the US Dollar is up another +0.63% here at 86.03, this weakness shouldn’t be a surprise. When macro factors dominate and momentum lines break, this is what happens. This market trades on price momentum, not valuation.
Last Friday, everyone and their brother was talking about a “weekend bailout” pending. Today, I am hearing less and less of that… hope, after all, is not an investment process. Be patient. Be liquid. Be your own process. We have 11 months left in this year’s game – we’re just getting started.
Keith R. McCullough
CEO & Chief Investment Officer
The Russian Prime Minister gave a key note address at the forum and also participated in a number of panels, below we have highlighted a number of his comments and our interpretation of those comments.
Putin: “In the last few months, virtually every speech on this subject started with criticism of the United States. But I will do nothing of the kind.”
Research Edge: If that’s not starting a speech acknowledging a critical view of the U.S., I’m not sure what is . . . he then went on to say:
Putin: “I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasized the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism.”
Research Edge: It is obviously hard to argue with Putin’s assessment here, but he does fail to mention the catastrophic loss of profits by Russian Oligarchs and “blue chip” Russian companies, such as Gazprom. Putin then went on to specifically question whether the world should rely on the U.S. as heavily as it does:
Putin: “Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.”
Research Edge: In effect, he suggested a concerted world effort to usurp the economic power of the U.S. and its currency. Putin then went on to suggest ways to solve the current economic crisis:
Putin: “Unfortunately, we are increasingly hearing the argument that the build-up of military spending could solve today's social and economic problems. The logic is simple enough. Additional military allocations create new jobs.”
Research Edge: In typical KGB / Putin fashion, he is cautioning against the build-up of the military, yet this is also the first point he makes in discussing an economic recovery and with it implies that a military build-up would be an effective and straightforward solution.
Following his key note address, Putin later participated in a panel in which he took another swipe at American capitalism by smacking down on Michael Dell, CEO and Founder of Dell Computers.
Michael Dell: “When we look at the level of talent [in Russia], there is still room to further utilize the IT sector. So my question to you is: How can we as the IT sector, help you broaden the economy as you come out of the crisis, and take advantage of that great scientific talent that you have?”
Putin: “The trick is that we don’t need any help. We are not invalids, we do not have any limited capacity. People with limited capacity should be helped; pensioners should be helped, developing countries should be help. Our programmers are the best in the world, and everyone would agree, even our Indian colleagues.”
Putin could not have made his disdain for American capitalism and American capitalists more emphatic at Davos. Given the current economic crisis in Russia, which is being highlighted by a currency that is under attack as noted in the Early Look today, Russia’s economic power is largely marginalized, especially within the backdrop of weak commodity prices. Nonetheless, Putin’s tone and words are an important takeaway from Davos and are the leading indicator of potential geopolitical tail risk emerging from Russia, but at this point we do need to consider his words as largely rhetorical. Or as President Obama would say: “Just words.”
Daryl G. Jones
Unionization is what it is. It's not additive to corporate operating margins. Welcome to The New Reality.
Shout out to all the Gordon Gekko's out there!
Everything that matters to our macro model happens on the margin. The delta in today’s Michigan survey was, albeit marginally, negative. The math of a 61.2 report versus a 61.9 report on October 16th (see my note from that report attached below) is what it is – however so marginally so…
This negative delta lines up with both Obama’s approval ratings falling and the weekly ABC/Washington Post number deteriorating on a week over week basis. Effectively, these sentiment reading seem to be tracking the stock market – which, alongside the US$, continues to be amongst the most stealth economic leading indicators I have at my disposal.
Both the Michigan sentiment report and Obama’s Rasmussen approval rating bottomed at 55 and 60% respectively in November (see chart from last week’s note measuring the delta of that sentiment bottom). THE QUESTION now is will these sentiment reversals decelerate at a lesser rate and lock in higher lows versus those of November? We are data dependent, so we will let the math tell us, rather than guess…
Historically (1st chart below) all the way back to 1958, Sentiment washouts have occurred under the 60 line in the Michigan Survey. So if we go into the 50 readings again, remember that that drowning feeling you may have is not a unique one – the November reading of 55 marked the SP500 sentiment bottom of 752.
Keith R. McCullough
CEO & Chief Investment Officer
“Everything comes to him who hustles while he waits.”
The Chinese stock market has been closed all week for the Chinese New Year – the Year of The Ox. Leaders born in the Year of the Ox are patient, speak little, and inspire confidence in people. The glory days of the reactive crackberry data point managers are waning. Obama should think twice about promoting that perceived risk management device. It can polarize your thoughts.
I always tell my team that sometimes the best decision they can make in their stocks is to do nothing. This certainly doesn’t imply that they should work less hard. It most definitely suggests that they should focus on working smarter. Thomas Edison’s process and track record speaks for itself – you can indeed hustle while you wait.
I sold into CNBC’s crackberry “breaking news rally” on Wednesday because it was based on hope. Hope is not an investment process – particularly when driven by a producer/preacher who is paid to be perpetually bullish. Fortunately, I took the Cash position up in our Asset Allocation model to 82% on that move, and now I own the liquidity I need to take advantage of this manic media’s colossal misinterpretation of an “event” that has yet to occur.
On weakness I’ll be a buyer, but a patient one. The US Dollar continues to rise this morning and this will continue to pressure commodities and US stocks alike. Remember, without a breakdown in their dollars, Americans will be paid to save them, rather than invest them – as the bond market breaks down, yields on cash savings continue to climb. I invested 3% of that cash yesterday in Brazilian equities. Now I have a 79% position in cash, which on a day like yesterday helped me close up on the day – during an Illiquidity Crisis, cash remains king.
Not all cash is the same however – ask Europe’s levered long wanna be power broker, Vladdy Putin, what’s in his wallet? The Ruble is getting pounded this week, and falling to its lowest level in 11 years. The Russian Trading System Index, meanwhile, continues to wallow in concert with the world’s ‘no more KGB boy’ in my portfolio vote, trading down again this morning to 529. This is the only major stock market in the world that is trading below its October/November Liquidity Crisis lows. What we have now folks, is a failure to communicate – for those having their own Illiquidity Crisis that is… marking your levered long positioning to market is a nasty de-leveraging process. That’s the ruble; that’s Blackstone; that was Lehman Brothers.
Those investors who bought into the idea that the “Bad Bank Bailout” was going to warm the hearts and minds of those group-thinking financial czars in the Swiss Alps have to think that through now, all weekend long… and yes, that’s going to be a painful mental exercise. Hustling to buy the futures on Wednesday didn’t pay. Since the US market trades on price momentum, forced buyers turned forced sellers will be forced to do the required reading on what actually happened to 747 US banking thrifts between 1 (they went to zero).
We don’t need “no drama” Obama to remind us that some people in our business behaved “shamefully.” C’mon Man, this isn’t new. Some people on Wall Street have always behaved without responsibility. The only difference between now and then are that the rules of the game are changing – transparency and accountability will rule as we re-regulate those who need to be regulated. If you are someone, as the frenchie goalie in Paul Newman’s “Slapshot” said, “gets de penalty… and has to go to de box for 2 mee-nutes… and feel shame.” Guess what? You are finally going take that long overdue time off in the sin bin.
The #1 story on Bloomberg this morning is titled “Wall Street Bonuses May Go By The Way of The Dodo.” The WSJ is breaking news that both Morgan Stanley and Goldman are getting ready for another round of job cuts. I have the Street firing out their resumes into my system faster than NYC reporters chased Madoff back into his apartment. This is The New Reality. Wall Street is going to be rebuilt. Everything starts with a handshake and trust.
Corporate Executives of America, who aren’t yet working for state government enterprises, my advice to you is this: stop trading your expense line for your personal compensation structure – just stop. Take a step back before you make your next round of job cuts and think. If you didn’t think when you decided to build capacity at a cyclical top, or God forbid buy back your stock at the same time – now is your time to not make the same mistake twice. Just stop. Think about what you are doing. Proactively manage your business. If you don’t, my research team will You Tube you.
Companies that fit the bill on the fiduciary mismanagement of their shareholder’s capital and livelihood of their workers beware. In the past few weeks I have added Caterpillar, Coach, and Target to the list of those that should feel shame on this score – these guys all bought the top and are now selling the bottom. This isn’t just about Wall Street – this is about America. Wall Street has taken their turn with the flashlights in their eyes. Corporate America - you are next.
If the SP500 breaks the 839 level, I have 804 as next support. Be patient, and wait for your opportunities. That’s what winners do. This is purely a Darwinian exercise at this stage of the game. The strong will get stronger – and remember, “everything comes to him who hustles while he waits.”
Have a great weekend.
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