He Who Sees No Bubbles

“Of course not, but the authorities decided it that way, and they are the ones that rule.”
Geronimo was a famous Apache warrior and medicine man who fought plenty a battle against the authorities in this country. Last week, Daryl Jones wrote a great morning missive about the American legend. At the same time, DJ brilliantly introduced a new nickname for Ben Bernanke – He Who Sees No Bubbles.
Since I am usually the author of making up names for people here at the firm, this was a welcome change. I can only use the Squirrel Hunter joke so many times. While Geithner’s sense of perceived wisdom is a joke and anyone with a YouTube who has watched him knows what I mean. Time reveals all truths.
This morning the New York Post is floating the idea that Chief of Walking Bull Government at JP Morgan,  Jamie Dimon, is interested in taking Timmy Geithner’s job. While that, on the margin, would definitely be US Dollar bullish, we don’t expect to hear such an announcement anytime soon.
One of the most bullish factors helping the Bombed Out Buck register an uncharacteristic +0.6% week-over-week gain last week was the call for Geithner’s resignation. Again, that was bullish for what we call an immediate term US Dollar TRADE. Unfortunately, the intermediate term TREND is for Geithner to continue to rule. The best way to ensure a weak US Dollar policy, is for Obama to keep Geithner in his seat.
Whether you like it or not, Bernanke and Geithner are, as Geronimo would say, “the ones that rule” – at least for now. While it may be bullish for immediate term stock market prices, in the long term, this will make what we knew as American Capitalism, dead.

Great Depressionista
turned He Who Sees No Bubbles hopefully has a few history textbooks that date past 1938. Most economic historians will recall that the US Government dropped short term interest rates to 0.05% in 1938, stoking a annual stock market gain of +25% that year.*Special note to He Who Sees No Bubbles: from 1939 onward, the US stock market cratered, losing 34% of its value over the course of 3 long hard years.
You don’t have to call upon the Apache spiritual insights and sing to the heavens at Turkey Creek to get a signal as to why the stock market lost its upward price momentum after 1938. Once those that rule cut rates to ZERO, the only way for them to go was UP!
The rate of return on 3-month Treasuries is lower this morning than it was at the lows of 1938. This morning, you basically pay “the ones that rule” in this country to hold your hard earned savings.
That special rate of return = 0.01% (minus real-world inflation). Yes, Jamie Dimon’s timing to exit JPM is, as usual, very much on point. He gets this. If you ran a Government sponsored bank,  you would too. Borrow at ZERO, then lend long to your citizenry – this is as good as it gets!
The US Dollar is getting hammered this morning, trading down -0.8% (for a world reserve currency, that’s a big one-day drop), and markets from lands far and wide have a distinct speculative smell of Geronimo’s good ole American West.
Using marked-to-market, real-time prices, commoners like me have the following macro levels to flash into He Who Sees No Bubbles:
1.      SP500 futures indicated up almost a full 1%, taking YTD gains to 22% (only 3% away from 1938’s YTD gain!)

2.      Gold prices are hitting new all-time highs this morning, trading up to $1165/oz (yes, all-time is a long time!)

3.      Copper prices are hitting fresh 14-month highs at $3.19/lb (Dr. Copper does have a better forecasting track record than Ben)

For those who are allowed to see price bubbles overseas, check these out:
1.      China closed up another +0.92% at 83.4% YTD

2.      Russia is trading up +1.4% so far this morning at +131% YTD

3.      Norway is trading up +1.9% so far this morning at +50% YTD

Norway? Who cares about Norway? Maybe the “authorities” of perceived wisdoms would like to tell you that Middle Eastern, Russian, and Norwegian stock markets aren’t leading indicators for gas pump inflation – but we don’t wake up here in New Haven having to think what those Who See No Price Bubbles do.
I took my cash position up to 67% in the Asset Allocation Model with the US stock market hitting its YTD high last Tuesday. The market has since corrected -1.7% from that high, but Friday did not represent either an opportunity to press shorts or raise more cash. You see, “the authorities decided it that way.” They want me to save nothing and chase prices higher. You know, like a monkey – so, for now, I will – monkey see, monkey do.
Into week’s end, I invested 7% of that cash into Australian (EWA), Taiwanese (EWT), and American Tech (XLK) stocks last week. Thankfully, I bought them while they were down (Thursday and Friday). On the heels of another sequentially higher Consumer Price Inflation report, plus calls for Geithner’s resignation, the US Dollar was up – but these rational market reactions will only lasts as long as they last. For now, it’s time to go back to a levered land run by He Who Sees No Bubbles.

My immediate term TRADE lines or resistance and support for the SP500 are 1079 and 1115, respectively.
Best of luck out there this week,


XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

EWT – iShares Taiwan We see a pending trade pact with the Chinese as the next positive catalyst. We bought back the bullish TREND position we continue to fundamentally see in Taiwan on 11/20.

EWA – iShares Australia We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20.

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.   

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.

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.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.

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.


On the MACRO front we will be getting important data points as to the health of the consumer.  Specifically, we are looking at data on Housing (existing home sales and Case Shiller), unemployment and consumer confidence.     


Last week the S&P declined for three consecutive days and the dollar index rose on Thursday and Friday.  On Friday the S&P 500 declined 0.3% and finished the day off the worst levels of the day.  Once again the headwinds were strong for the REFLATION/RECOVERY trade with the bounce in the dollar.  The Dollar Index rose 0.48% on Friday.   


The MACRO calendar was quiet on Friday, but there were some disappointing earnings in the Technology and Homebuilding groups.  At 10am today we will be getting some housing data, with the Existing home sales trends.  According to Bloomberg, sales of existing U.S. homes are expected to rise 2.3% from September to a 5.7 million annual rate. 


The data flow over the past month does not support an upside surprise in existing home sales, so the chances that the consensus estimates are too aggressive are high.  Last week mortgage applications declined 2.5% to the lowest level in 12 years.  It was reported yesterday that mortgage delinquencies rose to a seasonally adjusted rate of 9.6% at the end of the 3Q09. 


On Friday, the VIX declined 1.9% and 5.0% over the past week. 


Three sectors increased on Friday – Healthcare (XLV), Utilities (XLU) and Consumer Staples (XLP).  The best performing sector was Healthcare, up 0.7%.   Healthcare was the beneficiary of a rotation into low BETA defensive sectors of the market.  On Friday the big upside came from the pharma group. 


The worst performing sectors were Energy (XLE), Financials (XLF) and Consumer Discretionary (XLY). Last week was a tough one for sectors with leverage to the global RECOVERY theme.   Both Financials and Energy are the only two sectors broken on the TRADE duration.  The Energy (XLE) was the worst performer today as another bounce in the dollar weighed on commodities and commodity equities. December crude on Friday settled ($0.63) at $76.83 a barrel.


The Consumer Discretionary (XLY) underperformed relative to the broader market, as Housing and Media stocks weighed on the ETF.   The worst performing Media names were Gannett and CBS Corporation.  The Oprah news clearly was influencing the performance of CBS on Friday. 


Next to Energy the Financials are significantly underperforming.  Over the past month the XLF is down 3.8%, while the XLE is down 4.7%.  The Banking sector has generally led the group lower and put in a mixed performance on Friday.  Although, once constant is the high RISK groups such as the mortgage insurers and the GSEs continue to underperform. 


From a risk management standpoint, the ranges for the S&P 500, USD Index and the VIX are seen in the charts below.  The range for the S&P 500 is 36 points or 2% upside and 1% downside.  At the time of writing the major market futures are poised to open to the upside.


Howard Penney

Managing Director








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According to Wikipedia:


“The Game (always capitalized) is a name given to the football game between Harvard University and Yale University. As of 2008, the Harvard Crimson and Yale Bulldogs have met 125 times beginning in 1875, when American football was evolving from rugby. The Harvard-Yale game is played in November at the end of the football season, and the venue alternates between Harvard Stadium and the Yale Bowl. As of 2008, Yale leads the series 65-52-8. The 2009 Game will take place on November 21, 2009.”


The culmination of the college football season begins this weekend with games between traditional rivals.  For the hockey heads at Research Edge, that means the Yale-Harvard football game.  While these two teams are not as competitive as they were back in the 50s and 60s with the likes of Brian Downling, Calvin Hill, and Hank Higdon, it should be a competitive battle and great day, nonetheless.


The newest member of our team, Darius “Sunny D” Dale, is a former offensive lineman for the Bulldogs.  Unfortunately, Yale’s gridiron loss is our gain.  And while the loss of stalwart Dale has led to some offensive line issues this season for the team,  Sunny D has been blocking and tackling very effectively within the confines of 111 Whitney.  In fact, since Sunny D joined our team, Brian McGough hasn’t been sacked once!


Ahead of this weekend, and as a sign of school pride, I wanted to highlight a couple of quotes from two famous Yale practioners of the dark science of economics.  The first, Irving Fisher, is of course a well known academic whose theories are finally coming back into vogue well after his death.  The other would probably not call himself an economist, but as one of the most successful short seller of the modern era, we think Jim Chanos is likely worthy to be held in the same category as some of the great economists of our times.


In a speech he gave to the Virginia Value Investing Conference titled, “Ten Lessons From The Financial Crisis That Investors Will Soon Forget (If They Haven’t Already!”, Chanos made some adroit points.  We wanted to highlight a few:


1. Borrowing Short and Lending Long is Still a Bad Idea – Duration gaps create a mismatched book and short term funding can always be rolled, except in a credit crisis.


2. Too Big to Fail = Too Big to Exist – State sponsored entities are given an unfair advantage and implied government backstop encourages excessive risk taking.


3. Capitalism on the Upside and Socialism on the Downside is a Bad Policy – Hands off regulation, until Wall Street needs a hand. All bailouts are not created equal.


4. Quantitative Easing (‘Helicopter Finance’) Has a Cost – Zombie banks financed with cheap money only prolong the problems.


5. Insurance Without Reserves is Not Insurance – Owning hedges does not mean you are hedged as there is counter party risk.


Back on March 5, 2009, we wrote a note titled, “Eye On The Fish: Irving Fisher Revisited”.  In that note we wrote:


“Fisher wrote in “The Debt-Deflation Theory of Great Depressions” that there are two dominant factors in great booms and depressions, “namely over-indebtedness to start with and deflation following soon thereafter.”   A recent report by the Bank Credit Analyst, suggested that current non-financial institution debt in the U.S. is at 190% of GDP versus 160% just prior to the start of the Great Depression.  While we haven’t stress tested the 190% number, we do believe that it is directionally correct.  As Fisher goes on to write, while “over-investment and over-speculation are often important; they would have far less serious results were they not conducted with borrowed money.”  Thus the high debt level only serves to amplify the typical business cycle.


Many of our clients have asked about our thesis that the US dollar needs to go down for the stock market to go up.  Partially this is driven by observations.  We use price rule as a primary factor in much of our work and we have observed that the market and the dollar are inversely correlated, or have been for the last 3+ months.  The derivative question is obviously, why is this so? In our view, it is that the market understands basic Fisher economics.  Specifically, we have an emerging debt asset / imbalance that can only be solved by re-flating assets.”


Fast forward to November 20th, 2009 (today), and it’s safe to assume that ‘He Who Sees No Bubbles’ (Bernanke) and the Squirrel Hunter (Geithner) have inflated us out of the so called Depression.  Unfortunately, while assets are being inflated as Fisher would have recommended, the debt issue is only accelerating.  The Fed’s balance sheet liabilities, which is a broad gauge of its lending to the financial system, expanded to $2.19 trillion this week, which is the highest since December 31st, 2008.  Most concerning, the Fed now holds $847 billion in mortgage backed securities. Yikes!


Enjoy the weekend. Go Bulldogs!


Daryl G. Jones
Managing Director



The Economic Data calendar for the week of the 23rd of November through the 27th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on. 





Yesterday, CAKE’s CFO Doug Benn made what I thought were some interesting comments about restaurant acquisitions in response to a question at an investor conference.  When reading Mr. Benn’s response below, it is important to remember that he is speaking from experience as he was the CFO of RARE when it was acquired by Darden in October 2007.


Question:  Strategically how does the company think about acquisitions going forward, does that become a more important element over the next couple of years or...


Answer:  I think capital allocation is the big question for us, I think next year it’s going to be rather easy, we have $125 million with debt, there is a guaranteed result when you pay down your debt, you know exactly what's going to happen, and then after that there is only the limited number of things that you can do.  The company is going to generate substantial free cash flow, acquisitions would be something that we would consider, but be very careful about generally in our industry, maybe in a lot of industries, but certainly in the restaurant business, the acquirer is not the one that makes well in this acquisition, so you got to be very careful, you're either buying a company that is in trouble when you have to fix it and you got a good deal on it or you're potentially overpaying for something that's working very well. It's something that we would look at, but not something that's imminent at all.


I understand that this was merely an off-the-cuff remark and I may be reading too deeply into his comments, but I find this response to be somewhat telling of how Mr. Benn feels about RARE’s decision to sell out to Darden and subsequently, how he feels about Darden now.  He says that the “acquirer is not the one that makes well,” which in my scenario would be Darden.  He does not say it but that might imply that it is the acquired company that makes out well in the deal, which again, in my scenario points to RARE.  In selling to Darden, RARE received a premium multiple just as trends at LongHorn were beginning to soften.  Trends have obviously deteriorated further since then so what did Darden get out of the deal?


Again, this is just my interpretation of what he was saying!  But, I do think Mr. Benn makes a valid point.  Restaurant acquisitions/mergers do not typically make a lot of sense because like he said, companies are often forced to overpay for assets or buy underperforming assets that require a lot of money to fix (if they can be fixed at all).


Regarding CAKE, I think Mr. Benn’s less than positive view of restaurant “acquirers” means we don’t have to worry about the company making any acquisitions any time soon.  Instead, CAKE’s future earnings growth will come from a return to positive same-store sales growth and new unit growth as he outlined in his presentation yesterday.  This growth plan may not bring about immediate results as it relies on increased consumer spending and job growth, but I think an acquisition would only complicate matters both in the near-term and long-term. 


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