Maximum Pessimism

“Invest at the point of maximum pessimism”
-John Templeton

Templeton was a great man. A self made American small town man actually, who sadly passed away on July 8th of this year, right as commodity oriented levered long hedge fund stardom was peaking. In his obituary, which I have taped in my notebook, ‘The Economist’ wrote, “he disliked speculation, and any instrument over-geared to make money… but he was open minded.”

In this business, if there is one lesson I have learned over the course of the last 10 years, it’s just that – you have to be open minded. Mental inflexibility will crush you like a Brazilian soy bean. Yesterday, after posting an intraday note titled “US Market Trade Getting Bullish Down Here” (, 10/6/08), I finally saw Templeton’s definition of max pessimism.

If you couldn’t buy a stock yesterday, I am not sure you’ll ever be able to. If you stepped up and strapped on the old school American capitalist pants, well done - upward and onward we go. I have moved down from my 96% Cash position to the following asset allocation: 84% Cash, 13% Equities, 3% Gold. We made money again yesterday. Lucky us. We we’re +0.40% in the portfolio.

Commodity led inflation has been absolutely decimated. Inclusive of the -5.2% move in the CRB Commodities Index yesterday, the basket of 19 commodities has deflated to the tune of -35% since the CNBC “Fast Money” euphoric peaks. Countries “over-geared” to commodity inflation like Brazil, Russia, and Saudi Arabia got clocked and capitulated yesterday. Two of those three markets were halted by their governments (Brazil and Russia), while Saudi stocks are trading down another -8% so far this morning. That takes the Saudi Tadawul index down -15% in 2 days, and down almost -50% since every sell side investment banker at the firms who have since imploded ran around with glossy “Sovereign Cash Is Abound” pamphlets. Whether that “sovereign cash” was Asian or Brazilian, or grown by alchemists who fed magical fertilizer into pools of water, turning H20 into oil… it’s all deflating now.

Commodities deflating is great macro factor that is emerging sequentially, particularly for Asian organic profit growth. That’s one of the reasons why I stepped up and bought both the Hong Kong and Chinese ETFs yesterday (EWH and FXI). At the point of “maximum pessimism”, you want to be considering the last things people want to touch. For most, that’s turned into China. For me, the last thing I want to touch is Barclay’s new “research call.” Lehman’s, I mean Barclay’s, Tech analyst is cutting estimates this morning. For those of you with accountability scorecards, since the beginning of August (when LEH was still a $20 stock), the NASDAQ has lost -24% of its value. Mr. Barclay’s, you shouldn’t remind us that you are there. This call you are making after the fact is embarrassing.

What is not embarrassing is the world class performance of Australian central bank chief, Glenn Stevens. He was one of the few central bankers who appropriately raised rates into the apex of the global asset mania. And now he’s the only one with enough bullets left in his rate cutting gun to make an interest rate cut actually matter. This morning Australia cut rates by a full 100 basis points, and stocks rallied +1.7%, leading Asian trading in what I thought was a relatively constructive evening session for Asia overall.

The point that matters here is that Stevens can make one. He cut rates by a full percent, and still has a healthy 6% base rate to work with. If and when bailout Ben has his hand forced to cut by 100 basis points, the USA will have negative real interest rates. Not unlike the Japanese king, who held rates “steady” at 0.50% overnight, politicized central bankers end up pandering to socialists and bureaucrats. I doubt your average “hedgie” is allowed to read books on his crack berry these days, so he or she may not be aware that Japan’s 2 decades of economic stagnation were born out of the same bailout solutions that Larry Kudlow and CNBC were cheering on your government to make.

Maybe now they are booing. These stock market mania networks tend to blow with the wind. Who knows… Ironically, I used to actually enjoy the Kudlow and Company session at 7pm, where the odd “open minded” debate would reveal itself, making John Templeton proud. Last night, was more like a circus of idiot savants, rifling off reckless commentary on this manic show CNBC calls “Wall Street Crisis”. Thank God for them, they’re helping create the appropriate level of confusion and pessimism that those of us with cash are looking for.

Have a great day,

Europe: Just For The Record

You don’t need to be a genius to see the global economy slowing. While the US is one homogenous retail market, Europe is quite the opposite, making it tougher to quantify the sales trajectory. Check out the comp charts below. Let’s also see how different management teams have changed their tone towards Europe…

"I can sit here and talk about the upside of Western Europe here for quite some time if you want me to, but I'm pretty excited about it because we put a lot of work into that and I think it just goes to show you we have a good handle on what it takes to fix some of these markets and what we need to do. Sometimes it may take a little longer than others, but at the end of the day I think we've demonstrated our ability to get these things turned around and get them back on a growth schedule again." - Charlie Denson President of Nike Brand, Sept. 20, 2007

JJB Sports - "The worst retail recession I have ever known" Sept. 26, 2008

Adidas - Sales declined "exclusively as a result of continued declines in the UK" Aug 5, 2008

Polo Ralph Lauren - "There is talk that maybe England would begin to catch some of the cold we have" Aug. 06, 2008

VFC - Beginning to see weakness. July 15, 2008

Marks and Spencer - "Ireland specifically is suffering probably more than the UK at the moment." Oct. 2, 2008

Inditex - "Spain is slightly below the average"
Analyst response: "That seems to imply that Spanish like for likes are probably down 3% to 4%." "That's a bit more than slightly below average." Sept. 17, 2008

Q1 2008 (Sept. 20, 2007) "Spain and Portugal had a fantastic quarter"
Q1 2009 (Sept 24, 2008) "Probably the biggest challenge right now in Spain and Portugal"

Quiksilver - "Southern Europe has been hit harder than others." Spain was the example. Sept. 4, 2008

Polo Ralph Lauren - "Spain is feeling a pull back in what had been a very robust business" "There is some concern in Spain" Aug. 06, 2008

VFC - Beginning to see weakness in the 2nd consecutive quarter. July 15, 2008

Nike - France has been difficult for Nike since Q1 2008
1Q 09: "We are seeing some tough economic conditions in Spain, Italy, and France"
"The softness is really along the Mediterranean, Iberia, Southern France, Italy …"

Nike – Softness and tough economic conditions in Italy. Sept. 24, 2008
VFC - Beginning to see weakness in the 2nd consecutive quarter. July 15, 2008

Adidas - Double digit increases and higher growth in 2008
"We are making progress in several markets from Italy to Central Europe" Aug 5, 2008

BMY weak - Tobin's comments... short and to the point.

I like the CEOs quote here. It looks like BMY wont raise their bid.

Thomas Tobin
Managing Director


"Bristol-Myers Squibb Comments on Eli Lilly as New Erbitux Marketing Partner"
Will Receive $1 Billion Upon Completion of Transaction
PRINCETON, N.J., Oct 06, 2008 (BUSINESS WIRE) -- Eli Lilly and Company (NYSE: LLY) announced today that it will acquire ImClone Systems (NASDAQ:IMCL) for $70 per share, or approximately $6.5 billion. Bristol-Myers Squibb currently owns approximately 16.6 percent of all outstanding shares of ImClone. Based on Bristol-Myers Squibb's ownership of 14.4 million shares of ImClone, the transaction will be worth approximately $1 billion in cash to Bristol-Myers Squibb.
"We are pleased to have initiated a process that has resulted in the substantial increase of ImClone's value for all of its stockholders," said James M. Cornelius, Chairman and Chief Executive Officer, Bristol-Myers Squibb. "We are also proud to have contributed to this creation of value by providing commercial and R&D support to the company over the course of our relationship, which will continue now with Eli Lilly, a well-respected research organization.
"From the beginning, we had viewed our potential acquisition of ImClone as a strategically and financially sound add-on to our oncology business, consolidating a successful relationship that has extended over seven years. We felt it was in the best interest of Bristol-Myers Squibb shareholders not to raise our previous $62/share all cash offer, exercising discipline and evaluating this potential investment within the context of other alternatives open to the company.
"Looking ahead, we will work closely with Eli Lilly and Company, a company I know well, to continue to bring to patients not only ERBITUX(R), the important cancer therapy we co-commercialize in the U.S. and Canada with ImClone, and co-develop in Japan with Merck KGaA and ImClone, but other compounds, including IMC-11F8, under development by ImClone to which Bristol-Myers Squibb holds long-term marketing rights."
About Bristol-Myers Squibb
Bristol-Myers Squibb is a global biopharmaceutical company whose mission is to extend and enhance human life.
SOURCE: Bristol-Myers Squibb
Bristol-Myers Squibb
Tracy Furey,
Brian Henry,
Investor Relations:
John Elicker,
Copyright Business Wire 2008


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US Market Update: Still Buying...

If you can't buyem today, when can you?

I am now at 84% Cash, 3% Gold, 13% Stocks.

GS and MS: Tricksy and Wiksy...

Morgan Stanley and Goldman Sachs are making amends, kind of...

One of the 12 steps that every recovering addict must make, according to the Alcoholics Anonymous program, is to make amends to every person that they harmed while they were under the influence. Accordingly, Morgan Stanley and Goldman Sachs have released a flood of update filings with the SEC over the past few weeks covering some of the hundreds of structured products that they have jammed through their retail distribution networks over the years. The reason for this sudden flurry of paper is that, in the wake of Lehman’s failure, all of the retail investors who bought the products (typically notes linked to the performance of equities, indices or commodities that were packaged as “principal protected”) have suddenly panicked at the thought that they have credit exposure to the issuing bank.

Morgan Stanley and Goldman (along with Lehman and Bear) were such prolific issuers of these exotic retail products that they were given a special filing status by the SEC: “Well Known Seasoned Issuer” or “WKSI” (pronounced Wiksy). This allowed them to issue structured notes to the public with a 2 or 3 page summary instead of filing a full blown prospectus.

Now that they have filed these updates on those streamlined filings, everyone who, for example, purchased one of Morgan Stanley’s “Buffered Return Enhanced Notes” which were “designed for investors who seek a return of twice the appreciation of the Asian Equity Index Basket” can find the updated term sheet at the SEC’s site and Google what the implications of owning “Senior unsecured obligations of Morgan Stanley” are.

Having their own brokerage force sell their proprietary debt to unsophisticated retail investors at terms advantageous to themselves in the guise of “risk free” investments was a great business for the banks while it lasted. Now, in the cold light of sobriety, the potential for self dealing and misstatement of risk all looks rather different.

I wish I could write this from the pure perspective of an outraged observer but, truth be told: I sold tons of this type of stuff through the retail systems of banks I worked at in my 20’s.

Andrew Barber


I write this as I jet toward Hong Kong on route to my final destination, Macau. This needs to be short because I’m in a bad mood. I’m too tall for coach, especially on a 17 hour flight, yet as a partner I need to set a good example. I’ll be sending around a petition to ban reclining seats in coach, please sign. Two hours into the flight and my knees, neck, and computer are all breaking down. Maybe one leg of the flight will be example enough.

My itinerary is top notch, set up by my Macau consultants who are also top notch. These will not be the run of the mill Macau investor meetings. I’ve got junket operators, mid-level casino employees, government officials, development guys, and of course corporate and casino management on the schedule.

This may be a bit unorthodox but I’d like to invite clients to send me questions you would like answered. I will do my best to find concrete answers to those questions and post them for you on my portal. Please email all questions to:

Stay grounded. Flying sucks.

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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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