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    MARKET EDGES

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Calling A Spade A Spade – Calling Everything A Spade

 

Mass Market Health Care – Going Over-The-Counter?

 

New Rules Of The Pond – The Small Fry Don’t Get Thrown Back Any More

 

And: In The Driver’s Seat – When Free Speech Becomes Expensive Speech

 

How Do You Say That In Newspeak?

 

Nothing is so difficult as not deceiving oneself.

          - Ludwig Wittgenstein

Readers of this Screed are aware of our hyper-sensitivity to the use of language.  A recent example of how word selection skews the debate comes from the Opinion Page of the Wall Street Journal (2 October, “Intelligence Averts another Attack”), where former US Attorney General Michael Mukasey urges Congress to renew, if not expand, facilities granted to US intelligence agencies which are set to expire at the end of this year.  Arguing his case, Judge Mukasey points to successes that have come from the use of roving wiretaps, pen register phone records, and “lone wolf” surveillance authority.

Judge Mukasey opens his argument by stating “one would think” recent events, intelligence successes – notably the arrest of Najibullah Zazi, accused of plotting to blow up the New York subway system – “would generate support for the intelligence-gathering tools that protect this country from Muslim fanatics.”

The debate over the efficacy and appropriateness of enhanced intelligence gathering is of great importance to both the safety and the moral self-image of this nation, and should properly be carried out in public.  Spokespersons on all sides should make their arguments both reasoned and well informed, and without the monolithic rejection of dissenting opinions that characterizes today’s screech-alogue, where much of the news media are barely distinguishable from Jerry Springer (with apologies to Mr. Springer for comparing him to certain so-called “news” networks).

We are dismayed at Judge Mukasey’s use of a phrase which, in this context, amounts to fear-mongering. 

Why does this concern us so?  Because the reality is that there are large numbers of Moslems who are angry at the West, and at the United States in particular.  Whether or not we agree with their gripes, the more we pigeonhole those who disagree with our nation’s policies into visible categories, the more we prevent dialogue.  Yes, we have had intelligence successes.  But the exclusive application of intelligence gathering, interrogations and military action, unaccompanied by aggressive efforts at economic and political rapprochement, is a long-term losing proposition. 

What are “Muslim fanatics” to the average American?  For starters, they are dark-skinned.  They wear loose-fitting clothes and head coverings.  They live in countries none of us ever visited on summer vacation or for Junior Year Abroad.  The men have facial hair, and the women have no faces at all, being covered by the veil.  They have funny-sounding names and speak languages we did not study in high school. They eat with their hands, and they practice a religion that exhorts its followers to kill their enemies.

To state the excessively obvious, we currently have a President who fits some of these characteristics, and we recall that one of the objections raised to the Obama candidacy was the falsehood that he was a Moslem.  As though that would disqualify someone from being President of the United States…?

We are mindful of Judge Muksaey’s personal involvement with terror.  You may recall he was the judge who presided over the trial of Omar Adbel Rahman – the “Blind Sheikh” – convicted of plotting to bomb office buildings in New York.  You may have forgotten that a detail of US Marshalls were assigned to act as his bodyguards because of death threats he received during the proceedings.  There appears to have been disagreement within the Justice Department as to whether these threats were credible; nonetheless, the “Eagle Detail” continued to protect Mukasey for some seven years, at a cost to taxpayers of $28 million.

Giving Judge Mukasey credit for personal bravery and integrity, and assuming he is chagrined at the notion the taxpayers were on the hook for such a stiff bill because of the nation’s inability to root out terror at its source, we nonetheless urge participants in this debate to refrain from making inflammatory statements.  The fact is, by opening his opinion piece with the words “protect this country from Muslim fanatics,” Judge Mukasey has already won a significant percentage of his readership, who will read the piece predisposed to agree with every argument the Judge makes – to accept unquestioningly the policies he is promoting, and to vote accordingly.

Thus is debate eviscerated by the very people who should be presenting a clear vision of the facts to the public.

It is no longer sufficient to be well informed.  We must be informed about the agendas of those who inform us.  While the shape-shifting phenomenon we call “militant Islam,” or “Muslim fanaticism” continues to pose a threat, it is hardly the only threat.  By hitting superficial Hot Buttons designed to stoke public outrage, commentators effectively stifle debate.  Today’s very real public uncertainty – over military threats, over terrorism, over the economy – is conflated with the basest strains of racism and xenophobia.  The message to the reader or viewer or listener is: do not bother to be any better informed.  I have told you all you need to know. 

With this approach, we risk not fixing today’s problems, and shall not prevent tomorrow’s tragedy.

When Is A Medical Procedure Not A Medical Procedure?

New York Times reports (29 September, “Abortion Fight Complicates Debate On Health Care”) that President Obama appears to have painted himself into a political corner as he tries to square his campaign promise to safeguard a woman’s right to choose, with the clamor of anti-abortion voices in Congress.  “Abortion opponents in both the House and the Senate are seeking to block the millions of middle- and lower-income people who might receive federal insurance subsidies to help them buy health care coverage from using the money on plans that cover abortion.”

In a political environment noted for its rabid partisanship, this issue appears to be fostering consensus, as the Republicans are being joined by what the Times characterizes as “moderate Democrats.”

“Moderate”?  President Clinton was widely congratulated on running a “centrist” administration.  The reality is that, in many critical areas, he trashed the traditionally liberal Democratic agenda and sold out to the right wing.  If not to the “extreme right” Republicans, then certainly not to the “center-left” Republicans. Clinton’s programs embraced what we might call “moderate radical right” Republican principles and made them mainstream.

It was Clinton who trashed Glass-Steagall, essentially handing control of the nation’s financial marketplace to the participants themselves, effectively sidelining both Congressional and regulatory oversight.  “Centrist”?

It was Clinton who pushed through NAFTA.  The one-sided character of this treaty, lacking as it was in labor, social and environmental protections, is arguably a primary cause of the civil war gripping Mexico today.  Though the screeching heads on the alleged news shows would have us believe otherwise, the typical Mexican would rather be working in a factory at a fair wage, and with decent working conditions, than running cocaine across the border.  NAFTA, by forcing local manufacturers out of business, is a principal factor in the dramatic increase in drug trafficking and drug-related violence in the past decade.

No politician will dare make the observation in public that we condone this situation – and blame it all on the Mexicans – because they are dark-skinned third worlders.  Instead, we blame them for wanting to sneak into the United States and steal our jobs, our education and our health care.  Why is no one north of the border willing to stand up for our next door neighbors?  It must be that we are all “Centrists”.

President Obama is continuing the corporate welfare state fostered by every administration since Reagan’s “trickle-down economics” posited that the best way to make the poor less poor, was to make the rich more rich.  President Clinton turns out to have been a down-trickler of substantial proportions.  Also a South-trickler, in his insistence that a richer and more wanton America would somehow fan the embers of prosperity south of the border.  Fan the embers he did, and the conflagration continues to rage out of control.

The intellectual legerdemain by which the agenda of the far right became repackaged as “centrism” has done much to force real debate out of public awareness.  The business-media-political complex is increasingly dedicated to discrediting dissent.  One doesn’t even have to look to the Rush Limbaughs of the world to see that the notion of a “loyal opposition” is long gone.  It has been replaced by members of Congress shouting “you lie!” at the President, and by the Speaker of the House accusing citizens who oppose her positions of being Nazis and thugs.

The denigration of dissent in this country has led to a widening of the dialogue gap.  Today the debate is owned by those who seem to own everything else.  We fear the squelching of legitimate grievances will lead to an explosion as the voices of intelligent debate and honest disagreement are thrust aside by those who shriek the loudest and pay the most.  What suffers is economic and political freedom, to say nothing of the moral standing of our society.  It is in environments like this that societies snap and violence erupts.  Hank Paulson’s visions of marshal law have not yet faded from the horizon.

Meanwhile, in terms of health care, we predict that free enterprise will save the day.  As reported by our retail analysts (Levine’s Lowdown, 30 September) Walgreen, in their fourth quarter conference call, “confirmed that the flu season is off to a record start.  The company has already distributed more than twice as many flu shots this year so far vs. the entire flu season last year.”

As they continue their marketing plan to become America’s low-cost standard health-care provider of choice, we predict Walgreen will open low-cost abortion clinics at select locations.  Not to be outdone, we can’t wait to see what Amazon will offer – and how ‘bout that new iPhone download?!  Talk about a killer app! 

D.K. Market Integrity

Dictum meum pactum (“My word is my bond”)

                   - Motto of the London Stock Exchange

We hear the following story from some smaller market participants.  We have tried to track down outside confirmation, but without success.  Nonetheless, this appears to have happened on more than one occasion, and we have sufficient faith in our sources to present this for what it’s worth.  We sincerely hope it turns out to be a fairy tale.  We fear it shall not.

This emerged as the tale of a ne’er do well junior clerk on a major bank trading desk.  He was contacting traders at smaller firms with whom his desk executes.  In his conversations, he held himself out as a trader looking to fill customer orders.  Our clerk never actually executed any trades, but he got his name around, and people started thinking he’s important.  In hopes of one day winning his business, traders were sending him to Yankee and Knick games, and taking him to dinner at Nobu.

One fine day, our clerk slipped up and actually gave an order to a trader who makes markets in hard-to-trade securities.  When he tries to get it printed, he is passed to the head of the bank’s desk who (a) denies the trade was a good trade, (b) informs the trader that his clerk had no authority to enter trades, and that anyway his is a principal desk and does not handle customer business.  The trader, after letting the initial shock wear off, tells the head of the Major Bank Trading Desk that, of course, he assumes they will break the trade – which is a couple of hundred thousand shares of an illiquid stock.

The head of the bank’s desk replied, “Management’s policy is, you have to take us to arbitration.”

It would appear that some larger banks, a number of which are sitting on TARP billions, have stopped reconciling trade errors with smaller operators, when the errors go against the bank.

Our friends at major firms have heard nothing about this – and our friends who run liquid market-making desks ditto.  But our circle of smaller operators have reported this as becoming almost common practice when the try to reconcile unfavorable trade breaks with major houses.

The smaller firms have no choice but to eat losses on discrepancies that go against them.  The cost to an operation of going to arbitration is simply too great, as none of the proceeds of the transaction would be available until there was a settlement or an award.  A fourteen million-dollar discrepancy is a rounding error to a major bank.  To an independent market maker, it is life or death, and they will eat a loss of a few cents on a hundred thousand shares, rather than not have food on the table.

If this is in fact going on, it bodes ill for our industry.  It would mean the big banks, by using the letter of the law, will consistently  squeeze smaller operators, many of whom stand to be driven out of business. 

The age-old standard of reconciling trade differences, regardless of the relative power of market participants, guaranteed protection and market integrity to customers and professionals alike.  By flexing their capital muscles, the large banks will bring this system to its knees.  Despite the hysteria in the press at the time, Lehman and Bear and Merrill Lynch were not the End of Wall Street.  Goldman and Morgan becoming banks was not the End of Wall Street.  Even Madoff was not the End of Wall Street.  But if this practice spreads, then it really is Game Over for the financial markets as we know them.  The fall of the Berlin Wall and the Soviet Union marked the end of the Dictatorship of the Proletariat.  It has now been replaced by the Dictatorship of the Billionaire-iat.    We hardly think this is what President Obama had in mind when he spoke of reforming the financial markets.

The Conflict Of The Unconflicted

To shoot a man because one disagrees with his interpretation of Darwin or Hegel is a sinister tribute to the supremacy of ideas in human affairs – but a tribute nevertheless.

                   - George Steiner

Research Edge was founded on a simple vision: the old model of Wall Street sell-side research is broken, and there is a crying need for unconflicted investment research – research that emanates from a neutral analysis of the available facts and that is not driven by the need to create transactions.

We thought this was so good, we all cast our lot together with CEO and founder Keith McCullough.  Keith was drawn to this approach as a moral imperative, and we share his vision.

Apparently so do you, because our subscriber base continues to grow.  Whether our readers follow all our ideas or not, they are nearly unanimous in praise of the unique clarity of our analytical approach.

We now read the story of Audit Integrity, a provider of “forensic risk analysis” and related in-depth company analyses for investors.  Featured in Forbes Magazine’s “Best Managed Companies in America” (January 2004) Audit Integrity boasts a highly qualified analytical team and has received positive mention in the press for its new service: a forensic accounting approach to identifying bankruptcy-prone companies.

Now, one of those companies has decided it does not care to have such a bright light shone in its eyes.

Our neighbors at Integrity Research Associates (www.integrity-research.com, 2 October, “Audit In The Hot Seat?”) report “this past week the parent of the rental company Hertz filed a law suit against the forensic research firm Audit Integrity for defamation over a report which suggested the car rental company could go bankrupt.”

Audit Integrity introduced its bankruptcy monitoring product last month, and published a list of public companies it considers at risk.  Hertz was one of them.

A spokesman for Hertz said Audit Integrity was “spreading misinformation” and that “the situation was so unfair that the lawsuit was warranted.”

The Hertz public relations team did not mention statements in the company’s most recent 10K referring to what steps the company might have to take “If our cash flows and capital resources are insufficient to fund our debt service obligation,” such that “alternative measures may not be successful and may not permit us to meet scheduled debt service obligations.”

Audit Integrity’s lawyers will no doubt point to this language as supporting the research firm’s position that Hertz is, by its own admission, on shaky ground.  Hertz’ attorneys will predictably say it is boilerplate, and that any public company needs to have a statement to this effect in its financials.

That “boilerplate” can be used as a colorable defense seems to fly in the face of the notion of transparency in reporting.  A company either is, or is not in a predictably precarious financial situation.  Auditors who hedge their opinion to cover every remotest eventuality are providing not an opinion, but a meaningless cut-and-paste text collage.  An opinion based on this approach is a fantasy. 

Meanwhile, companies that rely on boilerplate to win lawsuits are merely gaming the system.  The larger question is how far do current accounting reporting standards rely on intentional obfuscation, and who will call the accounting firms, the CFOs and the boards of directors out on it?  What does it say about the transparency of our marketplace that companies can make a successful business out of uncovering key financial information that public companies have hidden from their shareholders – with the assistance of expensive accounting firms, paid for by those very shareholders?

Right or wrong on their bankruptcy call, Audit Integrity has come up with something that bears a closer look.  And clearly, they have touched a nerve.

The Vitriol Of Tyrol

Long noted for their neutrality and their ability to guard others’ secrets, the Swiss have done a complete U-turn.  Things started out badly when the US started leaning on them over bank secrecy.  You may recall that we linked the ferocity of the US attack at least in part to the refusal of the Swiss to take large quantities of US Treasury securities into their managed accounts.  This was, admittedly, just a notion – based on nothing more than the observation that Switzerland has lots of OPM (Other People’s Money) and lots of its own securities to invest it in.

Now that famous Swiss bank secrecy has evaporated, they appear to be making up for lost time in other areas as well.

This week they arrested filmmaker Roman Polanski, wanted in the US since 1978 for drugging and raping a 13 year-old girl.

This may be Switzerland’s way of getting in a free shot at the US.  Isn’t this just what we need at this juncture?  While the President and all the leaders of the G20 are moving heaven and earth to rationalize the global economic system, Secretary of State Clinton is being publicly importuned by the President of Poland to intercede on behalf of a self-confessed child rapist.  There is no graceful exit for this for Secretary Clinton, and it is a distraction the world hardly needs. 

We are puzzled at the vociferous support and outright adulation that Polanski has garnered over this affair.  We are all for the power of repentance to change a person’s life – but we don’t think  that being forced to accept the Oscar in absentia constitutes just punishment for raping a child. 

In a sign that things may truly be changing, we found a bit of wry humor in the unlikeliest of places.  Reporting on the story (29 September, “Director Polanski Files For Release”) Al Jazeera went out of its way to mention that a petition protesting Polanski’s detention was signed by Woody Allen.

Well he just would, wouldn’t he?

Moshe Silver

Chief Compliance Officer