US Strategy: Irrationally Exuberant


Nobel Laureate Joseph Stiglitz is out this morning saying the stock market recovery is "ïrrationally exuberant" as it relates to an economic recovery.  Mr. Market seems to vehemently disagree with Mr. Stiglitz, as the futures are solidly in the green this morning across the board in the U.S.  While we certainly wouldn't disagree with Mr. Stiglitz's assessment that employment will be a drag on a recovery in the U.S. and that the market has moved very quickly, we continue to play the game in front of us.  So far the game is simply this, dollar down equals stock market up.

On Monday, the S&P 500 closed at 1,040, up 1.5% on the day.  Yesterday’s move was on very low volume, as the S&P 500 broke a 4-day losing streak.  For the S&P 500 the TRADE remains bearish, while the TREND is bullish.  


The MACRO calendar offered an upside surprise yesterday, as the ISM non-manufacturing index rose to 50.9 in September from 48.4.  This was the first reading of the ISM non-manufacturing index in the expansionary territory since September 2008.  Consensus expectations were for a reading of 50.  New orders jumped to 54.2 from 49.9 in August, the highest level since July of 2007, while business activity rose to 55.1 from 51.3.     


Monday’s portfolio moves included selling the EWA and shorting KR, BAC and DRI.  We also re-shorted the DIA.  We are shorting more of the financially leveraged old economy companies in the DIA, which remains the worst performing major equity index globally year-to-date.


The dollar index fell 0.4% on the day, as the inverse correlation between the U.S. dollar and U.S. equities continued to be the primary factor in equity market performance.  The VIX fell 6.4% on Monday and is now up 6.6% over the past week, but at 26.8 still remains solidly below the 30.0 level it broke in early July.

Five of the nine sectors outperformed the S&P 500, with every sector positive on the day.  The three best performing sectors were Financials (XLF), Energy (XLE) and Industrial (XLI), while Technology (XLK), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three.  We are currently long the XLV. 


The Financials (XLF) was the best performing sector on the back of Goldman raising its view on the group.  Goldman highlighted the earnings power at the large banks vs. regionals, upgrading WFC and adding COF to its Conviction Buy List.


Today, the set up for the S&P 500 is: TRADE (1,021) and TREND is positive (983).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 4 of 9 sectors are positive from the TRADE duration.  Yesterday, the XLE, XLF and the XLY moved back to being BULLISH on the TRADE duration.   
Right now the Research Edge models suggest that there is 2% downside and 1% upside in the S&P 500.  At the time of writing, the futures pointed to a meaningfully higher open with Dow +72, Nasdaq +14, and S&P+9.  
Howard Penney
Managing Director





US Strategy: Irrationally Exuberant - S P500


US Strategy: Irrationally Exuberant - s pperf


US Strategy: Irrationally Exuberant - sectorlevels



“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.

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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.


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

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