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    MARKET EDGES

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“One of life’s most painful moments comes when we must admit that we didn’t do our homework, that we are not prepared.”
-Merlin Olson

For you Los Angeles Rams fans, Olson remains, The Man. During his 15 year NFL career, Olson proactively prepared himself physically for the ultimate test of mind over matter, and never missed a single game in 15 years. As global market participants are forced to deal with Dick Fuld’s self assessed “whac-a-mole” reactive management style, I can only hope that the next “leaders” of our financial system consider being proactive risk managers in their pre-game preparation. They are playing with your money. That’s a game with the highest of stakes.

‘The Question’ as we like to call it, as to how this game ends, is no longer about Lehman, or how a “consortium” of financial firms dealing with their own internal angst can put humpty dumpty back together again. ‘The Question’ is what will emerge from all of this? After Lehman, will it be Merrill Lynch or Goldman Sachs? After them, what’s left? What is the structure of this industry going to look like 3, 6, and 9 months from now? If that’s too “short term” for you, that’s really too bad – there is a duration mismatch between your investment time horizon and the game clock. Capital markets wait for no one.

As I walked out of Grand Central Station’s north exit yesterday, and emerged onto the sidewalk outside of what had always been Bear Stearns, I couldn’t help but realize that the only thing that had changed about that building was the blue wallboard, scaffolding, and a few makeshift “JP Morgan” plastic banners. What’s really changed within that building? The business model of its prior tenant has been compromised, but what happens there now is just as conflicted and constrained. The “Trend” here will be to rebuild Wall Street’s operating structure. Changing the names will only protract this inevitable feeling we all wakeup to every morning. As John Wooden would have said, “if you didn’t have time to do it right, when will you have time to do this over”.

This morning is not unlike any other. Game time is 9:30AM, and stocks, bonds, and commodities will be marked to market once again. As Tom Hanks famously said in ‘A League of Their Own’, “there’s no crying in baseball!”, and there’s certainly no crying on a trading desk. Remember that fancy investment banking idea of “marking to model” – there’s no more of that either. This trading game is called free market capitalism, and you better be proactively prepared to dance with the daily facts.

This morning’s facts are more of the same. There is a massive elephant on the field called the global economy, and he’s slowing, big time. If you didn’t see that picture I posted on the portal yesterday, you should check it out. That elephant is still playing “whac-a-mole” alongside Fuld, and the gophers of this globally interconnected market place are popping up are all over the map. Europe reported a horrendous industrial production growth number for July of -1.7% year over year, and Japan reported a Q2 year over year GDP growth rate of down -3%. In China, industrial production growth for the month of august came in at a 6 year low, so now the revisionist historians can tell you why the Chinese stock market has lost 2/3 of its value in 9 months. Stock markets are leading indicators. Economic reports are trailing facts that remind you what you proactively prepared for or flat out missed.

Asian traders covered their shorts in Japan on the foreseeable GDP news, and the Nikkei finally had an up day, closing +0.93%. However China didn’t budge from its year to date lows, and we continue to see the contagion associated with slowing economic growth spread to other Asian indices. Indonesia was down another -3.5%; India was down -2.7%; and Vietnam lost another -4.2%.

I don’t think Merlin Olson’s “most painful moments” have been felt here in US trading, yet. Once the Lehman soap opera is drained from the CNBC pail, we’re going to be stuck mopping up the floors of the same old buildings, muddying the water again. Structural industry change will take time. Plastic banners blow away in the wind.

Have a great weekend,
KM