Death of Libertarian Wall Street

“I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market, too” - Jim Cramer, March 21, 2008.

Something tells me Jim Cramer is not a Libertarian. Only about 200,000 Americans are actually registered Libertarians. How then can I declare the death of a movement that barely registers on the voter registry? Was it ever alive? Indeed it was. In a 1991 Library of Congress survey of the most influential books on Americans, The Holy Bible came in first. Nobody can credibly claim that Christianity was ever dead, at least not in this country. Number 2 on the list? The Libertarian manifesto: Ayn Rand’s Atlas Shrugged.

While they may not have known it, a huge number of Americans, including much of Wall Street, shared Libertarian ideals. I write that in the past tense. The shift away from Libertarianism involves more than just less free markets, but it is here where it is most glaring. When Wall Street cheers government intrusion into our economy by sparking 5% rallies and sells with even greater force any uncertainty to that intrusion, I see a cloudy future for economic freedom.

Surprisingly, it is not the Wall Street capitalists fighting against government interference. According to Rasmussen Reports, only 24% of Americans support the $700bn bailout and 60% think the government will go too far. Bravo. For Wall Street, supposedly comprised of the best and the brightest, to ignore the economic realities of the past is shameful.

Governments have stymied innovation and capital flow, turned recessions into depressions, created a lost economic decade (the 70s), and also subsidized and unreformed Fannie and Freddie, two of the biggest blemishes on our economy. And we are begging them to get involved again? Reagan once said “Government doesn’t solve problems, it subsidizes them.”

Well, Wall Street is certainly playing for a big fat subsidy to solve its problems. So I’m calling the end of an era; the death of our 25+ year relationship with Libertarianism. But I’m making it retroactive. The deathblow wasn’t AIG, Fannie and Freddie, or the current $700bn bailout plan. I look to March 17th, when our government decided it was necessary to bail out a rounding error of our economy, Bear Stearns. Government interference with Bear Stearns did nothing to aid housing, the financial sector, or our economy but it did do something. It reintroduced “Moral Hazard” back into our lexicon and sounded the buzzer for another tip-off of the serious game of socialism vs capitalism. Except it is not a game. It is our economic future.

Not surprisingly, world markets are generally up today, although not much, following the US lead from yesterday. It looks like the roller coaster ride in the US stock market will continue as futures are indicated sharply lower. No volatility relief in sight with our government driving the economic car. Today is the first day of the new quarter. Redemptions have been on everyone’s mind and by now funds know what they have to do. Be prepared for some crazy individual stock moves over the coming weeks.

Harvard economist Jeffrey Miron wrote an interesting piece on calling for “bankruptcy, not bailout.” Sorry Mr. Libertarian, this bailout is going to happen so let’s get on with it and we can start shorting stocks again. Libertarianism is losing and its opponent has almost all of the points. The refs are controlling the game. When the best team doesn’t win its called socialism.

Try and stay free out there.

Todd Jordan
Managing Director

Crisis In Context: 1987 vs. 2008

When Andrew Barber sent me the data set behind this chart, I told him it had to be wrong. It's not.

This crisis is far from over. Be certain of that.

China: Getting More Constructive...

With the Chinese stock market down almost 70% peak to trough, and articles beginning to appear in the consensus press discussing a slowing China, we are naturally starting to get more constructive on being long China via the iShares FTSE Xinhua China 25 ETF, FXI. Classic contrarian indicators are supported by a number of fundamental factors – capitalism, commodities, and currency.

The Chinese stock market is becoming more capitalistic as markets around the globe, including the United States, are becoming less capitalistic. Notably, as we mentioned in the “Early Look” on September 26, 2008, the Chinese government signed off on a plan to “allow margin lending and short selling” four days ago. Ironically, this Communist regime is providing investors more investing “freedom” as governments around the globe, led by the United States, have been banning short selling. Simply, we like to invest in markets where capitalism is expanding.

The CRB Commodities index, which is a compilation of 19 major commodities, reported its single largest down day since 1956 yesterday. This is deflationary. The steady decline of global commodity prices since their May / June 2008 peak has also been deflationary. Clearly, the roughly 70% decline in the Chinese market since its peak is already reflective of a slowing growth outlook, which has now morphed into consensus (see “Beijing Slowdown” in the Wall Street Journal today). We believe the second derivative of this slowing growth, commodity deflation, will serve as a positive catalyst for the Chinese market.

Finally, the Chinese Yuan appears to have put in a top in mid July 2008 versus many major currencies, in particular the US Dollar. As a country whose competitive advantage is cost to produce goods (labor) versus the rest of the world, the lower its costs are in its currency versus the currencies of its major customers, the more appealing its export outlook will become. The Chinese Yuan should only continue to decline as China has signaled a willingness to cut rates with its first easing in 6 years earlier this month. Chinese interest rates have a lot further to fall versus rates in the U.S. (Chinese benchmark rate is currently at 7.2% versus 2.0% in the United States).

Daryl Jones
Managing Director

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US$: Bullish Macro Chart Of The Day

We continue to evolve as our business does. Below we have attached a chart of the US Dollar Index alongside our "Trade" and "Trend" strike prices.

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If the US$ can hold this bullish "Trend", it should continue to deflate other asset classes from foreign currencies to commodities, globally. US denominated cash remains king.



It looks like Japan needs a new tourism slogan. "We hate foreigners but come anyway" just isn't cutting it. As reported in the Syney Morning Herald, Nariaki Nakayama, the new tourism minister, stated that the Japanese were "ethnically homogenous" and "definitely … do not like or desire foreigners".

The Japanese government probably needs to stay out of its economy. This is another example why.


I’ve been hitting on the free cash flow/liquidity/balance sheet theme for quite some time. With this in mind it should be quite clear why I’ve been negative on the industry. A few companies do stand out favorably through this prism: PENN, WYNN, and now BYD. BYD recently suspended construction on Echelon, its huge development on the Las Vegas Strip. With one smart IRR decision, BYD management created huge liquidity, strong free cash flow, and put the company firmly in a position to deleverage. With its new found liquidity and cash flow BYD is in a strong position to maintain its dividend, currently yielding an industry high 6.8%. BYD should be able to generate at least $2 in free cash flow per share (after all capex), for a FCF yield of 22%.

Contrast this with MGM MIRAGE, which pays no dividend but is also building a multi-billion project on the Strip: CityCenter. MGM has been struggling to raise project financing for CityCenter at the same time it is forced to consider its options to fund huge debt maturities on its own balance sheet in 2009 and 2010.

The liquidity line has clearly been drawn.

Which one would you buy?

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