• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here


    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

The Perils Of The Dollar – In _____ We Trust


Voter Turnout – The I Don’t Cares Have It


Corporate Governance – Best Practices, Or No Practices?


And: The Cubs Win The World Series – The Check Is In The Mail – Wall Street Makes A Sell Recommendation


Brother, Can You Spare A Dimon?

Our CEO, Keith McCullough, got some good air play on Bloomberg TV last week, where he is also a contributing editor.  He was called on to pronounce upon the dollar, and in response to a pointed question suggested it would make sense for President Obama to fire Treasury Secretary Geithner.  This is a Zeitgeist sort of thing, with members of Congress – even in the President’s own party – calling for Geithner to step down.  What Washington may not know, unless they are Research Edge subscribers, is that Keith has been bearish on Mr. Geithner and his posse since the word Go.  To this heap feel free to add special adviser Summers, and special mention to Fed Chairman Bernanke (whom we have dubbed He Who Sees No Bubbles), all of whom seem to be taking turns putting the screws to the citizenry.

When asked whether getting rid of the Treasury Secretary was really the solution, Keith observed wryly that neither the President nor the Treasury Secretary was solely to blame for the state of the economy.  To be fair, he observed, we should probably fire Congress.  But how likely is that?

That, of course, started us thinking.

The government’s basic job is to manage the resources of the nation for the benefit of its citizens.  Critical to this function is ensuring a level of fairness, and one of the defining debates throughout the history of the republic is whether such fairness is best expressed in equivalent access, or equivalent outcome.

There is one thing that everyone seems to agree on today: the financial markets model is broken, and we have not yet come anywhere near fixing it, regardless of who is supposed to be the primary beneficiary.

Frankly, we are puzzled by what goes on – or fails to go on – in Washington.  Fed Chairman Bernanke, for example, is a brilliant academic economist.  We are perplexed by his consistently bland approach to the markets, and his insistence that there is no clear evidence of asset price bubbles.  He Who Sees No Bubbles appears to be operating awfully closely with Secretary Geithner, which we believe is a legacy of the Paulson/Geithner partnership, and not the natural order of market oversight.  Secretary Geithner appears only too happy to perpetuate this hand-in-glove arrangement, and those who want to take bank oversight out of the hands of the Fed should gain traction from this too-cozy relationship.

Secretary Geithner, for his part, persistently steps away from the falling dollar, rather than muscling his way into the fight.  We are aware of the old adage about a fish stinking from the head, but President Obama is clearly guided by his economic team, rather than calling the shots himself.  Thus, we believe Treasury policy is being set by Messrs Geithner and summers, and not at all by the President.  Nor, alas, by Paul Volcker.

By now it has become trite to observe that Candidate Obama charged into the fray with brilliance and audacity, and that a frightening change took hold once he was inaugurated.  Gone is the charging warrior who campaigned so effectively.  President Obama’s new name is Man Afraid Of His Shadow.  The Presidential timidity does not bode well for America and the world.

We believe the refusal to stanch the hemorrhaging of the dollar is not merely the product of presidential timidity, but there must be a program at work.  In our simplistic view of the world there are winners and losers, but no cooperators.  The best we can figure out is that Summers, Geithner and Bernanke view the crashing dollar as an inverse bubble and are waiting for it to pop in a massive melt-up as dollar investors worldwide panic.  This is projected to transpire some time in the first quarter, so their temporizing may turn out to have been a genius bit of footwork. 

If this is the game plan, we wonder whether Jamie Dimon, one of the great financial executives of all time, would want to step into Geithner’s shoes.  In an ideal world Jamie Dimon, who built a career on managing risk, would be a great choice for the job.  But so would Paul Volcker, who is the only one in the room with a demonstrated track record of taking the marketplace by the throat in the face of political criticism.  We wonder whether this well has already been poisoned beyond recovery.

There are steps the US could be taking to strengthen the foundation of the dollar – which is the credibility of the financial system.  Instead of addressing root causes, however, we are expending enormous amounts of time and energy beating up on traders’ and bankers’ compensation and calling Lloyd Blankfein dirty names.  Our political leadership have shown themselves largely to be a shameful passel of hypocrites who care nothing for their own posterity, and everything for their own posteriors.

Rather than attacking the mechanism of market capitalism, it behooves Washington to set public policy that supports economic and political stability.  Chief among these objectives is sustainable job creation, which leads to secure housing markets, sustainable growth in individual savings, and political stability.

A weakening dollar should be an absolute bonanza for the nation’s exporters.  Why it is not is because Washington has allowed so much to go to waste on inefficient industries – like, why we are not exporting automobiles – and because economic policy, law and regulation have done nothing to discourage the diversion of talent from industry to financial engineering.  Our most dynamic sector for the past generation has been the creation of new financial products, which we exported like crazy.  These, notably, are now selling even less well overseas than our cars and trucks.

The dollar is a contract.  Everyone in the world agrees and accepts the store of value represented by that piece of crumpled green paper.  The contract now bears the signature of Tim Geithner, who is presiding over the greatest crisis in confidence this contract has weathered in a very long time.  We do not ascribe cynicism to Secretary Geithner in his handling of the financial crisis.  We believe he is firmly convinced he has done the right thing – or perhaps the only thing possible – throughout his tenure, both at the New York Fed, where he was rather clear-sighted, and now at Treasury, where things have gotten quite muddy.

The problem here is just this muddiness.  The United States is projecting uncertainty to the world.  In this environment, our stock is falling, as represented by our share certificate: that piece of paper bearing Timothy Geithner’s signature.

While firing the CEO of General Motors and imposing pay caps on financial firms that have received billions in government funding is popular, it goes nowhere near addressing the core issues of corporate governance, which no one wants to talk about.  Congress is too conflicted to force real change, as it could mean turning off the spigot of Wall Street largesse.  Truth be told, while the senior executives, traders and bankers at Goldman Sachs and AIG have taken home compensation packages that stirred public outrage, the second biggest group of beneficiaries of these firms’ “excessive” earnings have been Washington insiders.  From lobbyists to Congressional and Presidential campaigns, Wall Street cash is everywhere.

Want to talk about conflicts of interest?  Let’s not kid ourselves, folks.

Jamie Dimon’s name cropped up in the odd article in the financial press in the past few weeks – clearly a trial balloon in the early stages of the debate.  We think it is premature for Man Afraid Of His Shadow to toss Geithner out on his ear.  The President’s approval ratings have not sunk low enough, and there is not clear catalyst necessitating a major change in order to score public relations points.  At the same time, President Obama’s silence, while his boy is being smacked about on the Hill, is not a good sign.  Taken together with the press musings about “Secretary Dimon” this seems to be creating the space for President Obama to make his move, if his advisors deem it smart.  Secretary Geithner, for his part, gave as good as he got in the jostling – something our President seems incapable of doing no matter where he shows up.

What we like about Jamie Dimon is he is not only a genius at risk management, he is also a tough executive who is not above knocking heads together.  This is a great combination for a new Treasury Secretary, or a new Fed Chairman, for that matter.

Given the thanklessness of the task, the failure of the President to utter a peep in defense of a Secretary on whom he has so much riding, and the feckless nastiness of Congress, we wonder why a man of Dimon’s accomplishments would want such a job.  It couldn’t be just for the thrill of seeing his own signature on a dollar bill.

One Person, No Vote

Those who cast the votes decide nothing.  Those who count the votes decide everything.

                                      -  Joseph Stalin

Pity the poor individual investor.  Everything we see about the way people manage their own finances leads us to conclude we really are a nation of dupes.  Speaking of corporate governance issues, the Wall Street Journal cites a troubling statistic (23 November, “Proxy-Voting Advocates Pool Resources On The Web”).  In 2007, some 20% of individual investors at 1,363 public companies voted proxies.  This figure is bad enough.  It shows not merely apathy, but a conviction on the part of the average investor that their own vote literally does not count.

The next year, 2008, on the heels of a new SEC rule allowing companies to distribute proxy materials on line, rather than in the mail, those same companies saw average individual investor participation in proxy voting drop from 20%, down to thirteen percent, a drop of almost one-third.  Never mind that most individual investors don’t know what a proxy is, or that shareholders actually own the company – and theoretically have a say in how the company is run.  The latest technological advances have had the screwball effect of making shareholder access to corporate decision-making even more difficult.

The Journal article quotes one expert on corporate accountability as saying online proxy voting is “under the radar”.  The average shareholder does not have the tools to assess and decide in the proxy voting process.  Apparently the introduction of on-line proxy statements and voting has made this process measurably less efficient.  This was perhaps foreseeable in the wake of the SEC rule permitting on-line prospectus delivery.  What individual investors did not read when they received it in the mail, they now don’t even know where to find.  If the average retail investor can not find a regulatory filing on the internet, what does that say about the overall level of sophistication of the investing public?  Note to all compliance officers out there: time for a Suitability reality check. 

Into this fray have stepped some new web sites that compile proxy information and give guidance on voting.  MoxyVote.com is the site featured in the WSJ article.  Its web site bears the heading “30% of shares are held by individual investors, but most have no voice in the boardroom.  Let’s change that.”  The site combines access to current proxy issues, with social networking.  It has a useful list of forthcoming proxies, showing the date windows for on-line voting.  And there is a list of Advocates, outfits such as The Nathan Cummings Foundation and Investors Against Genocide who stand ready to weigh in on social issues.  As of this writing, none of the top ten advocates had an opinion on any current proxy, so the site was more a curiosity than a source of a juicy story.  Still, it is a new website.

As the social networking generation become increasingly aware of their own finances, this type of website should grow in importance.  All change happens from the ground up.  It is a fool’s errand to wait for Congress to pass a law that will change the financial markets.  We can hope, though, that the increase in outrage will translate into a rejection of shareholder apathy.

In a related matter, also mentioned in the Journal story, the new NYSE proxy voting rule goes into effect in January.  The standard practice of brokerage firms voting proxies on behalf of their customers will end, and the rule of one person, one vote, will reassert itself – at least for those 30% of shares held by individuals.  In the past, brokerage firms consistently voted their customers’ proxies in favor of management proposals.  This has resulted in some questionable outcomes, including the recent votes for the board of directors of Citigroup and Bank of America, where it appears broker votes resulted in reinstating directors where were opposed by a substantial majority of shareholders who actually cast ballots.

The Council of Institutional Investors, a corporate governance advocacy group, estimates that as much as 85% of the shares of public companies are held in street name at brokerage firms.  These are the shares the brokers get to vote under the old system.  The NYSE has asked the SEC to do away with broker voting in the past, but the SEC under Chairman Cox did not address their request.  It was not until July of this year, under Chairman Schapiro, that the SEC voted to end the practice of broker voting.  Even then, the vote was 3-2, leaving open the question of whether those in government truly believe the American public are incapable of acting in their own best interest.

MoxyVote.com was created by the partners of TFS Capital LLC, an investment adviser based in Richmond, VA.  They say they intend to remain at arm’s length, and not use the website to advance their own investment agenda.  TFS say they think the website is “a good business idea.”  Clearly, if it takes off, it will enhance both the corporate governance process, and the bank accounts of the TFS partners who created it.  A win all around, we would say.

It is early days yet in the world of on-line advocacy.  It is too early to be skeptical, but perhaps not too early to be hopeful.

Some Explaining To Do

The NASDAQ stock market recently closed their comments period on a proposal for Corporate Governance “Best Practices”.  Among the observations in their Proposal were examples of non-US markets.  “The corporate governance model widely followed around the world is often referred to as ‘comply or disclose’ or ‘comply or explain.’”  The new proposal may give some flexibility to issuers – in that an explanation may be proffered in a case where otherwise delisting may be mandated.  It also seeks to establish greater transparency for investors, precisely because of the “disclose” or “explain” provisions it suggests.

This proposal goes at least part way to the heart of the matter, and perhaps explains why we are so hopelessly mired in an inefficient regulatory system.

The proposal asks questions such as “Should the company develop a process to facilitate shareholder communication with directors…?” and wonders whether there should be a limit placed on the number of boards a director may serve on.  “To facilitate independent board leadership,” asks the Proposal, “should the company either have an independent Chairman or an independent Lead Director?”  Forgive us for being thick-headed – we thought these were givens.

Forget attacking Lloyd Blankfein’s paycheck.  If Congress is serious about financial reform, they need to get inside the corporate boardroom.  You know, where all those campaign contributions come from?  Wall Street executives paying themselves should be the least of Washington’s worries.  After all, it is just folks doing what they do – and it is transparent.  The financial services industry is capital intensive: it takes a lot of money to make a lot of money, and the people who generate the revenues expect to take home fifty percent or more of what they bring in.

There is plenty of rhetoric about short-term orientation, but spanking Wall Street it Macy’s window does nothing.  The way into the financial markets is through the tax code, and through accounting standards.

Creating a tax structure that rewards long-term holding of assets, or revenues generated over longer periods of time, would force bankers and traders to rethink their approach.  Creating tax structures that favor job-creating investments and legitimate business hedging are a way to coax cooperation out of the financial sector.  Similarly, creating accounting standards that bring out the risk in different asset classes should push companies to behave differently.  Lloyd Blankfein and we agree, for example, that mark to market is the way to fly.  The notion that a company can make up its own valuation for an illiquid asset and get an auditor to sign off on it is ludicrous and monumentally irresponsible.  Goldman’s own internal risk management includes a rigorous daily Worst Case valuation of all its assets.  It doesn’t seem to have hurt their profitability, nor their share price.

For all the rampant negligence in corporate America, we have not yet seen a move to discipline independent directors, who are well paid for exercising a fiduciary responsibility.  Congress has the power to enforce that responsibility – but perhaps not the will, given the entanglements between the nether regions of Washington and the upper reaches of corporate America.  Congress continues to stoke short-termism by not forcing the issue on responsible corporate governance.  Increased shareholder participation may force some of these issues, but it would be nice to see Washington take more of an interest in how policies affect the Little Guy.  Remember the Little Guy?

The Hard Sell

“Slouching Towards Wall Street” acknowledges the tribulations of Brian Kennedy, formerly of Jefferies & Co.  Mr. Kennedy, as described in the Wall Street Journal (20 November, “Analyst ‘Sell’ Call Ends Up As ‘Bye’ Call”) appears to have made a spectacular call on CardioNet, Inc, in a report issued on 24 April of this year.  The Journal says “Mr. Kennedy accurately predicted a dire cut in the price Medicare pays for CardioNet’s remote heart-monitoring system.”  Accordingly, he issued a “Sell” recommendation. 

Mr. Kennedy’s Sell recommendation on CardioNet was among only 8% of Jefferies’ overall analyst recommendations this year.  That fits the overall profile of Wall Street where on average only about 7% of analyst recommendations actually say “Sell.”  The Journal article points out that investors who followed Mr. Kennedy’s call would have been spared losses of up to 75% in the price of the stock. 

Great call, we would say. 

Apparently, we would be wrong.

Mr. Kennedy claims a senior Jefferies analyst attacked him for “rocking the boat.”  CardioNet took a more sensible approach.  They publicly accused Jefferies of failing to do proper due diligence, then fired off a letter to FINRA in which they “suggested the Jefferies report may have been part of a plot to enrich CardioNet short sellers.”

Mr. Kennedy, meanwhile, says the Jefferies analyst research committee “blocked him from releasing more detailed information on how he made his call.”  Such information included conversations with Medicare contractors responsible for setting reimbursement rates for CardioNet’s systems, conversations that Mr. Kennedy said provided important information.

Within two days of Mr. Kennedy’s report coming out, Citi reiterated its Buy rating on CardioNet, specifically calling into question the Jefferies report.  Citi, a CardioNet underwriter, was joined by Leerink Swann, another CardioNet underwriter, which reiterated its own Buy rating “within hours of Mr. Kennedy’s report.”  Jefferies is not a CardioNet underwriter.

In June, CardioNet announced that certain private insurers were cutting their reimbursement rates.  But the bombshell came in July, when the company announced that Medicare was cutting reimbursement almost in half.  CardioNet’s CEO – the one who wrote the letter accusing Jefferies of abetting the short sellers – said that the Medicare rate cut means CardioNet “will not be able to sustain operations as a stand-alone company.”  This was pretty much what Mr. Kennedy had predicted, according to the Journal article.  It seems Mr. Kennedy was speaking to the right people and asking the right questions, something other analysts following the stock may have failed to do. 

“Mr. Kennedy quit his job in July,” reports the Journal.  He is looking for work at an independent research firm. 

The wave of the future, sort of thing.

Moshe Silver

Chief Compliance Officer