Confirmation Bias

“I ask you to judge me by the enemies I have made.”
-Franklin D. Roosevelt
Where did all of the Great Depressionistas go? It is funny and predictable all at the same time. This is Wall Street. We tell stories until they stop making sense – then we drop the context of the narratives altogether, hoping that no one YouTubes us.
It wasn’t too long ago that the Roubinis and Rosenbergs were calling for the end of the US stock market as we know it. After clocking another fresh YTD high on the SP500 last night, I’d have to agree with them. A +62.3% nine-month Minsky Meltup puts an end to what we knew as the Depressionista storytelling, for now…
But why is it that we stop remembering history? How can we go from everyone becoming an expert on 1929-style crashes to dismissing 1933-style recoveries? That’s easy to answer. Wall Street and Washington have what neuroscientists have labeled “Confirmation Bias.”
Per our friends at Wikipedia, Confirmation Bias is “an irrational tendency to search for, interpret or remember information in a way that confirms preconceptions or working hypotheses.” For the common sense crowd, this isn’t new – writers like Francis Bacon (1) and Leo Tolstoy (1) had observed Groupthink phenomena a long time ago…
The reason why I quoted FDR is to contextualize this Confirmation Bias point. Right here and now, how many “economists” and “strategists” are reminding you of the Q4 US Dollar Devaluation period of 1933? The time period is in the same area code of what the Depressionistas sold a lot of books about. Wasn’t the 1933 recovery that made FDR plenty of enemies worth mentioning?
By October of 1933, Roosevelt had devalued the US Dollar by -30%! Then, on October 22nd of 1933, he and his Cornell farmer/economist friend, George Warren, decided to Burn the Buck further by announcing that they’d buy gold in the open market. No one in FDR’s old boy network of Washington economic advisors supported the decision. Plenty of the James Warburgs (the “smart” Wall Street banker crowd) were initially up in arms, but FDR pushed his policy forward.
In Q4 of 1933, FDR effectively Bombed Out the Buck by another -10%, and ran over every patriotic short seller of his policy while doing it. Equities, from Britain to America REFLATED, big time, and John Maynard Keynes became a modern day George Soros.
Today is October 20, 2009, and the US Dollar is trading down again, hitting fresh YTD lows of $75.20. At the same time, on the heels of what didn’t look like Depressionista earnings out of Apple to me, US equity futures are looking to open at higher-YTD-highs. There is no narrative fallacy here folks – this is math.
A monkey or a brain surgeon can figure this out at this point. So don’t get upset with FDR or Obama or whomever might be running you over covering their consensus short position at the highs. Just see this immediate term story line for what it is. Respect it. Manage risk around it.
Across the world today, I am surveying headlines that hardly look deflationary to me. Ben Bernanke was in San Francisco talking about Asia and suggesting that “the United States must increase its national saving rate”. That’s cool Benny, but in what country should we save? And at what rate?
In the US, Japan, and the UK interest rates are effectively ZERO this morning. So American Savers and Creditors alike, even though everything priced in US Dollars is going up, you might want to take a gander at how much slower those US prices are going up versus everywhere else.
Here’s a peak at what the Global Equity Depressionistas have in terms of YTD losses on the short side:
1.      Russia, up another +1.1% this morning to +130% YTD

2.      Turkey, up another 0.87% this morning to +86% YTD

3.      Brazil, up +1.6% yesterday to +79% YTD

4.      China, up 12% in the last 3 weeks (up another +1.5% overnight) to +69% YTD

5.      Australia, up another +1.1% last night to +33% YTD

6.      Hungary, up another +0.61% this morning to +73% YTD

Who cares about Hungary or Turkey? Probably the people who have been smart enough to buy low and flow capital there. The New Reality is that the world is increasingly interconnected. Capital flows, real-time, to rates of return that earn her respect.
Capital chases yield. Yield generates returns. Returns build Savings. Savings drive Investment. 1920’s America or 2010 China, anyone?
You don’t need me to remind you of 1933 economic history to understand how capital flows. Capital chases yield. That’s been a long standing capitalistic pursuit that investors have embraced for generations. So don’t get upset about the US Government’s transparency issues this morning. Just understand this Burning Buck policy and profit from it.
There is still immediate term TRADE upside to the SP500’s 1107 line. Then we’ll be overbought again. However, provided that the Buck continues to Burn, all pullbacks to immediate term SP500 support of 1079 should be bought, not sold. Get out there and make some enemies in the Depressionista camp while you are at it too! I’m starting to have some fun with this.
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.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples
Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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 realis


As a follow up to our 10/16 note, we've got some more Hyatt tidbits.



Looks like some of the revisions in the 4th version of the S-1 addressed some of the contentious issues between the Pritzkers.  Below is another glimpse of Pritzker dirty laundry and the conflicts presented by the dual voting structure of the Class A & B Shares.


Risks of Pritzker family drama to future shareholders

“Disputes among Pritzker family members and among Pritzker family members and the trustees of the Pritzker family trusts may...

  • result in significant distractions to our management
  • disrupt our business
  • have a negative effect on the trading price of our Class A common stock and/or generate negative publicity about Hyatt and the Pritzker family


Ghosts of past Pritzker disputes

  • “In the past, disputes have arisen between and among certain Pritzker family members, and between and among beneficiaries of the Pritzker family trusts and the trustees of such trusts, with respect to the ownership, operation, governance, and management of certain Pritzker family business interests
  • “In certain cases, proceedings were initiated, against certain Pritzker family members, including Thomas J. Pritzker, our executive chairman, and other Pritzker family members, some of whom have been or are our directors, and against the trustees, including Thomas J. Pritzker
  • “Such past allegations related to trust management and administration, and violations of certain trustee duties, including fiduciary duties.
  • “Some of these disputes led to significant negative publicity for the Pritzker family.”



Disputes regarding Hyatt IPO

“Recently, with respect to Hyatt, disputes arose between and among certain Pritzker family members and the trustees of trusts with respect to our dual class structure, which will become effective prior to the completion of this offering.

Minsky Meltup: SP500 Levels, Refreshed...

The “shock and awe” of it all may very well have left even Larry Kudlow bearish! Where did all the Bulls go?


I remember those days of the Perpetual Bulls calling for these ZERO percent rate policies all too well. They called for “shock and awe” levels of free moneys… and now they are definitely getting what they asked for!


As the Buck Burns to lower-lows, we’re seeing stocks hit higher-highs. A clanging monkey can even make money being long this market now. Doesn’t this feel great?


Don’t get upset about it. Just do your best to respect that the math of the moment as it will continue to dominate any consideration of the long term. There is no long term in the Fed’s policy. There is only “shock and awe” associated with “exceptionally low rates” for an “exceptional period of time.”


The SP500 remains in what we call a Bullish Formation (positive TRADE, TREND, and TAIL) and it will be immediate term overbought at the 1107 line (dotted red). Provided that the Buck continues to Burn, it should continue to hold a higher-low of support at the 1079 line (dotted green).


If the 1079 line breaks AND we see a US Dollar recovery above the $76.59 line, that solid green line of TREND line resistance (1004) will become the ‘watch-out below’ line from what we have recently labeled the Minsky Meltup.



Keith R. McCullough
Chief Executive Officer


Minsky Meltup: SP500 Levels, Refreshed...  - a5


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The cold wet weather that has dogged the Midwest this year has caused projected harvest start and completion times to be delayed for staple grains, with Corn and Soybean harvests off to the slowest start in decades.  As of October 11, the USDA estimated that only 13% of the total corn crop had been harvested versus an average of 35% by that time in the past five harvests.  Although the harvest is seriously delayed, in absolute size it’s anticipated to be a bumper crop: The USDA estimates a 13 billion bushel season for 2009, which would make it the second largest harvest on record. 


Futures markets ultimately function as insurance markets however, and despite the size of the yield, anticipated prices have risen sharply as more time in the field creates further risk of weather damage and other unknowns. With the harvest expected to drag into late November, the price of December delivery corn has bounced back from last month’s low close of $3 per bushel on September 4th  to  almost $3.85 per bushel in today’s session.


Sanderson Farm (SAFM) is trading lower after being downgraded at KeyBanc.  The thesis is that rising corn prices make feed costs more expensive.  As the story goes corn prices will continue rising due to a declining U.S. dollar boosting exports and expectations that ethanol producers will use more corn.


Keith bought SAFM today on the downgrade.  At research edge we do not agree that corn is headed much higher.  At the current prices for crude oil, Ethanol is not a concern and the bumper crop for corn will ultimately dictate the future of corn prices, which is likely lower.   In two weeks, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and the state of the industry.  Notwithstanding a slight uptick in the price of corn, the industry outlook is positive and SAFM is one of the best managed companies in the space.


Our bottom line: Corn has a broken TAIL and a bullish TREND… within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.







Last week’s copper import data release for September from China caught many observers by surprise.  At 399,000 metric tons, arriving shipments increased from August by 23%. With more questions than answers raised by these figures, Shanghai contracts saw selling pressure on heavier than average volume and declining open interest on Friday before last night’s snap back as traders are beginning to suspect that copper is being stockpiled in China.  In fact, China has imported 1.9MM tons year-to-date, which us up 77% from a year ago.


The two critical factors for traders this week will be the NBS release of production data for September and the weekly stock level report by the Shanghai Exchange on Friday. If production failed to keep pace with imports last month then rising stock levels should weigh on the futures market, potentially offset if Friday’s stocks track inventory reports to date –which have not indicated a dramatic increase, indicating that late summer levels were lower than originally thought.


From a macro perspective, either outcome –rising stock levels or heated production, support continued concerns about forming asset bubbles on a shorter duration (either commodity or construction), while also supporting continued strong growth trajectory on a longer duration (barring a dramatic shortfall in production figures, something we do not factor as likely). 


The concerns articulated by traders in Shanghai futures market last week have also been supported by inventories building on the Comex and LME.  In aggregate, the combined total on both exchanges is now over 400,000 metric tons, which is significantly above the low set in July of 312,357.  Last week oil was up 9 – 10%, while copper was essentially flat which has us wondering whether these supply data points are starting to offset the perception of improved economic demand in 2010 and U.S. dollar weakness as the key drivers of copper’s price.


Daryl G. Jones

Managing Director


Andrew Barber







Chart of The Week: Credibility Crisis

With the Buck Burning again today (down another -0.4% at $75.31), the US Equity market is testing higher-YTD-highs…


That’s just the way it is folks. Dollar Down gets the Debtors and Bankers paid. The Creditors foot the bill.


There is no need to get political or emotional about this in your portfolio. Making money on the long side of this macro inverse correlation is becoming relatively easy. The Volatility Index has been smashed (VIX down -25% in the last 2 weeks) and volumes are starting to accelerate again on the up moves. For the immediate term TRADE at least, all is well in the house of levered cards that the American Financial System built.


What’s fascinating about this is that as Wall Street gets paid, the US Consumer isn’t buying in. While some in Washington might like to think that Americans are as stupid as politicians look while being YouTubed on economics, they aren’t. When it comes to their wallet, Americans are always aware of reality.


The New Reality is that both America’s currency and the government officials that fail to support it have been revealed. This is the Credibility Crisis. Andrew Barber and I show this to scale in the chart below which overlays the US Dollar with the University of Michigan Consumer Confidence going back 3 years.


There are 3 points to be made about the 2 factors in this chart:

  1. They are correlated
  2. They have been since Bernanke started playing this REFLATION game
  3. They both continue to make a series of long term lower-highs

Friday’s Michigan Consumer Confidence reading (for the month of October) came in at 69.4. That was a lower-high versus the reading we saw in September of 73.5. If the US Dollar continues along its current path of negative price momentum, it won’t be long before it tests making a lower-all time-low.


I know. The US Dollar Bulls say that the Buck hasn’t yet Burned below its 2008 low. That’s plenty fine until it isn’t. Just remember that the US Dollar reference point from 2008 not only prefaced a crash in US Consumer spending ($150 oil), but it was a 38 year low for America’s currency.


Everything priced in Dollars can continue to REFLATE, other than the American Financial System’s Credibility.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Credibility Crisis - COTW Oct 19


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