“Inconsistent ... just when things seem to be settling a bit, a new set of pressures develops."

ISM Survey - Retail Trade


Yesterday the S&P 500 rallied 1.5% on the back of the ISM survey.  The improvement in the ISM numbers, though impressive, was very narrow with just 5 industries reporting growth in September and 13 industries reporting contraction. 


The quote above is from one of those industries not reporting growth.  That is exactly what we are hearing from restaurant operators we are talking to.  There is no consistency to sales trends.  Tonight YUM will likely confirm the same findings.  I know the financial press had a favorable article about YUM yesterday, but the stock was up 5.1% on a 126% increase in volume.  YUM’s IR team is the best in the business so they are not whispering in anybody’s ear, but it sure seems like somebody knows something.  We will see how today pans out for the stock.


RT reports on Wednesday and that stock was up 5.8% yesterday, but volume was down 26% - not a big RED flag there.  Due to RT’s real estate portfolio is a cheap stock, but it is trading at 8x NTM EV/EBITDA versus 6.6x the group average.  Sales trends really need to improve for the stock to work from here, which seems unlikely.  I’ll pass on that trade for now.





Rosie Xie

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”

I was on a flight to Denver, Colorado last night. Whenever I am flying, I enjoy a tremendous amount of focus time on my research. As my long time associate, Tanya Clark, will attest, I have relatively aggressive stacks of books, papers, and magazines that board these planes.
My goal is to lighten the load, materially, before I land. Mission accomplished last night. Tanya will have the next stack waiting for me wherever I am flying to next. This is the grind. There is always something new to study. There are always opinions and histories to consider. If you want to fly these global macro markets independently, you better not be sleepy.
The most interesting read of last night’s flight was Andy Xie’s “Why One Bubble Burst Deserves Another.” It was cross asset class and thoughtful. Calling out the US Federal Reserve and the US Financial System for what it has become is at least finding the mainstream now. That’s progress.
Xie’s nearest term “call” is actually for the US Dollar to strengthen. His view is that “when the Dollar reverses, the short squeeze could cause a global crisis.” Knowing a thing or two about the dominant inverse correlations currently associated with a Burning The Buck, I’d agree with that.
Tactically, from an immediate term TRADE perspective, the US Dollar is getting washed out. In our upcoming Q4 Macro Strategy Call, I will be calling this quarterly investment theme the Bombed Out Buck. Both on our Macro Morning Call and in our intraday Macro Notes, I have been signaling this for the last few weeks, so this won’t be a surprise to most of you. There are always very important Macro TRADEs to consider within the confines of opposing TRENDs. This is risks management.
My favorite central banker in the world (Glenn Stevens at the Reserve Bank of Australia) is Acknowledging Reality this morning by becoming the 1st major central banker to move away from the Bernanke Doctrine of Currency Devaluation. Stevens RAISED rates by 25bps to 3.25%, and the Australian stock market went UP!
Australia’s leadership provides a stiff reminder to both The Client (China) and the world that issuing a real rate of return will both strengthen a country’s currency and attract foreign investment (Australia’s stock market is +26% YTD ). Unless they’d like to imitate Japan, the US Federal Reserve should not perpetually maintain an interest rate of ZERO for America’s citizenry of savers and foreign investors alike. As the Fed signals this change in rate rhetoric, the Buck should stop Burning.
If Dollar Down got the Debtors, Bankers, and Politicians paid, it’s going to be fascinating to watch US Dollar Denominated Creditors (American and Chinese alike) take back some of that REFLATION for themselves. Both the VIX (breaking out from a TREND perspective) and Gold price (hitting new highs this morning) are telling me that could happen sooner than consensus expects. Dollar UP is going to wreak some serious havoc in most things priced in Bombed Out Bucks.
Heck, even ole Rosie, who provided the most entertaining reading of last night’s flight, should finally start getting paid again on his bearish US Equities stance. He now claims to be “neutral” on equities despite calling them “25% overvalued” – whatever that means. David Rosenberg’s recent Special Report titled “The Case for Commodities, Credit and Canucks” might need a little re-working. There is no Cowboy Up for Alberta’s Oil price if that Buck starts to go up!
Rosie is an ex-Merrill Man, and he gets a little annoyed when we real-time risk managers call him out. He opened his missive stating that “I stand accused of having missed the turn…” Canadian newsflash: Rosie, you aren’t being accused of missing it – you missed it!
If short the US Dollar proves to finally be the consensus that Xie purports it to be, and the Buck stops Burning, a lot is going to change in global capital markets. That has not happened yet, but if it does I think both Rosie and Roubini are going to start looking genius again. They’ll be all over the wires and TV’s, and I doubt they’ll be saying they are “neutral.” Canucks who own bank and base metal stocks are not going to be smiling either.
So that’s my Rosie Xie scenario analysis. Now back to the grind…
This morning, no matter where I go, here are those darn live market prices again. I can’t hide behind a 22 page revisionist treatise on how I really never make mistakes – nor do I want to. Wall Street and Bay Street may not like this thing called YouTube, but it’s here for good. Professionals are now accountable to the replay.
This morning, the US Dollar Index is trading down -0.44%. Therefore it’s not surprising to see the US Equity futures indicated up. Again, Dollar Down = things priced in Dollars up…
At $76.30 however, that’s another higher-low for the US Dollar. On the margin, that’s a less bearish position than the Burning Buck has been in for the past 6 months (a series of lower-highs and lower-lows). As the facts change, I most certainly will. If the US Dollar continues along this socialized path to Japanese bureaucracy, breaking down through the $75.80 line again, I will be very wrong in having only a 3% Asset Allocation to US Equities (after selling into yesterday’s strength) and short oil.
Top 3 reasons for the Buck Burning lower this morning:
1.      The Chinese are at the IMF meetings in Istanbul reminding the world that they want a “Super Sovereign Reserve Currency”

2.      Fed Heads (Fisher and Dudley) came out dovish on rate hikes yesterday

3.      The Australians raised rates, reminding the Chinese that they’ll take all that Chinese investment capital away from the US that they can get

Reflection, imitation, and experience. These are the things that make this macro game so great. I am grateful for an industry that perpetuates piles of required reading material. Every opinion should be heard. Every voice should have the opportunity to be right or wrong. That’s what makes flying with stacks of papers, books, and magazines so much fun.
The three most critical lines in my macro model this morning are: SPX 1048, US Dollar Index 77.14, and VIX 26.15. Dollar down -0.57% was US Equity bullish yesterday (SPX +1.5% on staggeringly low volume), and it will be again here on the open. As prices change, my risk management moves will. I have immediate term downside support for the SP500 at 1021.
As for Rosie, Xie, and Me, the best we can do is admit the bitterest of lessons when we are wrong. Experience can only make us all more right.
Best of luck out there today,



EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

DIA  – Diamonds Trust In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

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.



Macau’s trade deficit for the first eight months of 2009 widened by 1.4% over the same period last year to MOP 17.98 billion or US$2.28 billion.  According to figures released by the Statistics and Census Service (DSEC), the total value of merchandise exports dropped by 55.3% year-over-year to MOP5.11 billion or US$647 million, of which the value of domestic exports and re-exports declined by 69.5% and 32.1% respectively.  The exports/imports ratio decreased by 17.1% year-over-year to 22.1% for the period.




City of Dreams and Altira have joined Asia Miles.  From now on, Asia Miles members will earn 500 miles for every eligible stay at City of Dreams’ Crown Towers and Altira Macau.  For every eligible stay at City of Dreams’ Hard Rock Hotel, members will earn 250 miles.  Miles can also be earned at the properties through spending certain amounts of money at retail outlets, restaurants, and bars at the resorts.

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A full year after the last positive reading, today’s ISM Non-Manufacturing Index September reading showed expansion in the US Service Industry sector with a jump to 50.9 from the August reading of 48.4. The improvement, though impressive, was very narrow with just 5 industries reporting growth in September and 13 industries reporting contraction.


Narrow or not this reading is positive. It is also as good as it is going to get.


Gut check: unemployment is continuing to climb, many of the short-term incentives for consumer liquidity like cash-for-clunkers or foreclosure short-sales have reached their full incentive potential and the savings rate is on the rise despite historical low interest rates. In the absence of a catalyst for growth in the US economy in the form of real demand the glass half full brigade are grasping at the only straws they have left—strong equity performance YTD and the appearance of a bottom in the housing market.


The baby boomers are entering the home stretch for retirement with a busted currency, a broken financial system and employment insecurity –these factors WILL create incentive to curtail spending.  The ISM-NMI for September is an incomplete rear view of last month’s spending; Wednesday’s measure of outstanding Consumer Credit for August by the Federal Reserve will provide another part of the story.


At 50.9, today’s data was positive by any measure, but it is not enough to change our minds (and we refuse to change the subject).  



Andrew Barber






OEH sold the Windsor Court Hotel in New Orleans for a whopping 50x 2008 EBITDA. Not so good on a NAV basis of only $137k per key.



The Windsor Court Hotel in New Orleans was finally sold.  The asset had been available for sale since 2006.  OEH sold the hotel to The Berger Company for 15x 2007 EBITDA and over 50x 2008 EBITDA.  The valuation may look high but on a net asset valuation it was only $137,422 per key. 


The sale probably makes sense as the asset is likely permanently impaired from its peak, pre-Katrina EBITDA estimated at $7MM in 2004 and $6.5MM (including business interruption insurance) in 2005.  Moreover, the sale was part of OEH's delevering strategy.  The degradation of EBITDA to less than $1MM, triggered a violation of the leverage covenant in the Windsor Court's $47.5MM mortgage.  The renegotiated agreement required rapid amortization of the mortgage; $9MM immediately, $7.5MM due 10/5/2009, and $7.5MM annually thereafter). At the time of the sale, the property had $37MM of debt.  


The low per key value is consistent with what we've seen in the transactions markets.  Surprisingly, the $137k NAV for the Windsor Court is actually below the $150k average transaction value seen over the past 12 months. The following table lists the hotel deals over the last 12 months.


NAV NOT LOOKING SO HOT - hotel comps

Slouching Towards Wall Street… Notes for the Week Ending Friday, October 2, 2009

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 (, 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


Attention Students...

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