Don't be SHY: Call Them Bubbles

Last week, as this chart of short term US Treasuries was making its final ascent up into the right of it’s crest, we called it one of the 3 main bubbles that He Who Sees No Bubbles (Bernanke) is not allowed to see:

  1. Gold (immediate term bubble)
  2. 2-year Treasuries (intermediate term bubble)
  3. Banker Bonuses (long term bubble)

So, don’t be shy about this – just see this for what it is and get hedged (SHY is the short term Treasury ETF that we shorted). With 2 year-yields testing 0.65% last week, it was mathematically impossible for yields to go much lower (unless we become Japan, which I guess is possible), particularly if you believe that maintaining a ZERO percent policy on US interest rates isn’t perpetual.


In fact, the only other times that 2-year yields have been this low are December of 2008 and all the way back in 1938 (the early months of 1939 and 2009 were not pretty for equity returns as yields moved higher from their lows).


In the chart below, we have shown the SHY breaking its immediate term TRADE line (today). This raises a critical risk management signal in our macro model. It is both early and leading in terms of its indication. We will have to see if this immediate term breakdown in short term Treasuries holds.


He Who Sees No Bubbles has a unique problem with his vision – he cannot see what he is responsible for creating. Greenspan had really big glasses, but admitted in October of 2008 to missing this altogether as well. This is not new. Cheap money for a select few has plenty of unintended consequences.



Keith R. McCullough
Chief Executive Officer


Don't be SHY: Call Them Bubbles - SHY




December 1, 2009





An article that caught my eye last night shows e-tail share gainers vs. losers on Black Friday. Those with innovation (Amazon) or Size (Walmart/Target) come out ahead. Those selling commodities (Best Buy/Sears) still gained share, but at a far lesser rates. Content always wins. Scalable distribution comes in second. Commodities…stay away.



An article in Internet retailer highlighting the winners and losers of e-tail shopping on Black Friday caught my eye last night. Do I care that it shows how Amazon lead Black Friday web traffic, but Walmart was tops on thanksgiving? Not really. What I do care about is the year/year delta in share gainers. All top five retailers gained share yy on Black Friday according to Experian Hitwise reports. But what I find most interesting is the magnitude of share changes between the top five e-tailers. Am I surprised that Amazon gained nearly 2.5 points to a 13.55% share? Not at all. It’s called innovation (i.e. Kindle). Walmart and Target gaining around a point each (TGT more impressive as it is on a smaller base)? No, not surprised. They’re increasingly using key items as loss-leaders to drive traffic and are now scaling this strategy into their on-line businesses. What is most interesting, I think, is how little share Best Buy and Sears each gained. What’s the key difference between these two and the three top share gainers? Their products are largely commodities and their leverage over the consumer is nil.  Check out these stats…

  •, 13.55%, 11.06%
  •, 11.18%, 9.88%
  • Target, 5.65%, 4.62%
  •, 4.62%, 4.57%
  •, 2.95%, 2.78%



  • In a surprise real estate move, Under Armour is joining the “pop-up” store phenomenon in NYC for the holiday. UA is taking over a vacant storefront on 57th St (formerly the Ebay pop-up store) for the remainder of the holiday and is expected to offer a wide range of product for men, women, and children. This might not be as elaborate as Niketown down the block, but its proximity to the highly trafficked corner of 57th and 5th is sure to create some buzz.
  • Gap’s Holiday Cheer bus campaign rolled into NYC today, complete with a mini parade of drum wielding cheerleaders. The plaid covered tour bus made its way through Manhattan, drumming up PR and giving away free sweaters and coupons for denim. The bus is headed to Chicago, LA, and San Francisco over the next couple of weeks.
  • It’s been a while since there was truly a “hot” toy for the holiday season. The Elmo hysteria peaked a couple of years ago and Cabbage Patch Kids are ancient. Enter Zhu Zhu pets. The Chinese made, robotic hamsters are the toy of the season. These “pets” retail for $8, but appear to be sold out almost everywhere at the moment. If your child really needs a Zhu Zhu, then head to Ebay where the furry creatures can be had for $30-$40!




U.S. Textile Mills Caught in Export Credit Crunch - The U.S. textile industry is struggling with a new credit crisis that is undermining billions of dollars in exports to the Western Hemisphere, its top market. The industry has faced a long-term credit crisis for more than a decade, but the situation has worsened with the economic downturn and bank failures and bailouts in the U.S. The volume of U.S. textile exports to the region — most to Mexico and Central America — has declined 24 percent since last year because it is harder than ever to obtain financing credit and guarantees, industry representatives said. The National Council of Textile Organizations and several of its member textile firms in the Carolinas, including Mount Vernon Mills, Parkdale Mills and Tuscarora Yarns, along with the National Cotton Council of America are lobbying to secure more financing and seeking help from Congress. <>


Schumer Contacts the NBA on Jersey Issue - U.S. Senator Charles E. Schumer announced he has made a direct appeal to National Basketball Association Commissioner David Stern asking him to terminate the leagues contract with the adidas company if it doesn’t scrap plans to ship its game-day jersey production overseas. Last week, Schumer, who held a press conference outside the NBA Store in New York City on Sunday, said adidas plans to end its contract with American Classic Outfitters, a Perry, NY-based supplier and will for the first time produce the game-day jerseys worn by NBA players at facilities outside of the USA. Adidas has an exclusive contract with the NBA to supply the league’s teams with their official uniforms. Schumer had called on adidas to reverse the decision and continue to make NBA jerseys in the United States – a move that could save approximately 100 jobs in Perry, NY, and many more across the country.  <>


Cyber Monday Seen As Bigger Than 2008 - Cyber Monday provided a bit of digital encouragement to retail shares Monday as investors digested news of an otherwise lackluster Black Friday shopping weekend. Early indications were that Cyber Monday was shaping up to be a strong day for online sales this year. In 2008, it was one of the biggest online shopping days of the year, a blockbuster in an otherwise parched season. A National Retail Federation survey predicted that 96.5 million Americans planned to shop online Monday, up from 85 million in 2008. Morning traffic on ShopStyle, an online fashion search engine, was high, with page views up 40 percent over last year and click-throughs to retailers up close to 50 percent over 2008, said founder and executive vice president Andy Moss. “Last year, Cyber Monday was our biggest day or close to it, and I think we’re seeing the same trend again,” he said. “More and more retailers are doing more and more offers on Cyber Monday, and it’s a compelling time to shop.” <>


Luxe Retailers Set Markdowns - With at least 20 percent less inventory on hand, luxury retailers say they’re back to a “normal” markdown cadence and will break prices on major designer collections this week, generally at up to 40 percent off. These are permanent markdowns on major designer labels like Prada, Lanvin and Gucci, as opposed to the temporary “friends and family” or one-day-only markdowns seen on a range of labels through the season. Last year, after the collapse of Lehman Bros., the AIG crisis and turmoil in the credit markets, luxury retailers found themselves stuck with bloated inventories and few customers, and desperately broke price a week or so before Thanksgiving. Neiman Marcus was among the first, but Saks Fifth Avenue responded with steeper markdowns. Last Christmas, eye-popping discounts of 75 percent and more for designer merchandise were not uncommon, but this year, inventories in many cases are 20 percent leaner.  <>


Key to Luxe Boost: Turning to New Categories - Down but not out, the luxury market should look to new categories — along with female and older consumers — to boost its bottom line in 2010. That was one of the messages at “Luxury Beyond The Crisis,” a conference organized by The International Luxury Business Association at the Hotel Westin in Paris last week. New luxury categories — including technology, furniture, travel and spas — will help the sector register a 4 percent revenue increase next year, said Jean-Marc Bellaïche, partner at Boston Consulting Group in Paris. Minus such categories, a 3 percent dip is projected for the sector. Although luxury fashion brands are already rallying in Far East, Bellaïche said he is also optimistic about growth prospects in the U.S., where the recession has hurt sales.  <>


Chinese Manufacturing Accelerates as Asia Leads Global Rebound - China’s manufacturing grew last month at the fastest pace in five years, a survey showed, helping Asia to lead the recovery from the global economic slump. The purchasing managers’ index released by HSBC Holdings Plc rose to a seasonally adjusted 55.7 from 55.4. The government’s PMI, also published today, held at an 18-month high. A report later today may show that U.S. manufacturing grew for a fourth month in November, a Bloomberg News survey showed. Stocks rose around the world after the Chinese figures added to evidence that the country is powering a global recovery from the worst recession since World War II. Australia’s central bank cited the speed of Asia’s rebound in today’s unprecedented decision to raise interest rates for a third straight month. India beat economists’ forecasts yesterday with 7.9 percent growth in the third quarter and South Korea said today its exports gained for the first time in 13 months.  <>


European Footwear - Euro-footwear’s fate in the hands of importers and brands - Last November 19th the majority of European Union (EU) states voted against the continuation of punitive antidumping duties on leather footwear imported from China and Vietnam. However, this is not a final, binding decision and it will be considered for ratification by the Council of Member States. It is a theme which could prejudice the unity of the EU since countries which no longer have a shoe manufacturing industry are being unduly influenced by the interests of large importers and distributors, as well as major brands which are manufactured in Asia. Back in 2006, when the European Commission under Peter Mandelson, confirmed the punitive duties on leather shoes manufactured in China and Vietnam, there were already signs of a split in the EU. Manufacturing countries such as Italy, Spain and Portugal were already at loggerheads with northern countries with little or no footwear industry left, and which simply wanted to represent the interests of consumer groups (votes?) demanding "cheaper footwear". <>


Under Armour Wins Boston College Contract - Under Armour topped Canton, MA-based Reebok and won a six-year deal to  become the exclusive official outfitter for Boston College's football and basketball squads, and 29 other varsity teams. The deal starts in July 2010. UA will replace long-time BC-endorser Reebok. The company will provide all the teams with uniforms and training apparel, footwear and coaches’ clothing. It will also advertise its products at games. The deal represents UA's first collegiate deal in the Northeast. The company has similar agreements with Texas Tech, the University of Maryland and Auburn University in Alabama. Boston College Athletics Director Gene DeFilippo said the new partnership "will provide the school’s student athletes the best chance to excel on the national stage." <>


Europe’s Jobless Rate at Highest in Almost 11 Years - Europe’s unemployment rate held at the highest in more than a decade in October as companies cut jobs even after the economy emerged from the recession. Unemployment in the 16-nation euro area remained at 9.8 percent after being revised higher to that level in September, the European Union statistics office in Luxembourg said today. That was the highest rate since December 1998 and in line with the median forecast of 35 economists in a Bloomberg News survey. The September jobless rate was revised from a previously reported 9.7 percent. European companies are reducing costs to shore up earnings battered by the worst global slump since World War II. ThyssenKrupp AG, Germany’s largest steelmaker, said on Nov. 27 that it plans to cut 20,000 jobs. Still, Europe’s service and manufacturing industries expanded at the fastest pace in two years in November, suggesting the economy is gathering strength.  <>


German November Jobless Falls as Recovery Widens - German unemployment fell in November as government measures discouraged firings and the economy recovered from the recession. The number of people out of work fell a seasonally adjusted 7,000 to 3.42 million, the Nuremberg-based Federal Labor Agency said today. The jobless rate declined to 8.1 percent in November from 8.2 percent the previous month. Germany’s economy, Europe’s largest, pulled out of recession in the second quarter and grew 0.7 percent in the third quarter. The Ifo institute’s business confidence index increased more than economists forecast to a 15-month high in November, suggesting the recovery may gather pace next year.  <>


Industry Urges Trade Benefits for Cambodia - Apparel brands, retailers and Cambodian officials are urging duty free benefits for Cambodia, the eighth-largest apparel supplier to the U.S., arguing the move would help the country stay competitive at a crucial time. During a program last month marking the 10th anniversary of the Better Factories Cambodia project, an initiative to improve labor compliance in the Cambodian garment industry, speakers said the competitiveness of the country’s apparel industry is threatened by the economic environment as well as the lifting of quotas last year on garment imports from China and the conclusion of the Vietnam monitoring program, also last year.  <>


EBay Fined Over LVMH Fragrance Sales - EBay was fined 1.7 million euros, or $2.6 million at current exchange rates, by a court here for failing to prevent the trade of LVMH Moët Hennessy Louis Vuitton SA’s fragrances and cosmetics on its French Web site. The online auction giant was found to have violated an injunction issued in June 2008, requiring eBay to stop French users from buying or selling LVMH fragrance products on any eBay site in the world, even if the products are genuine and unused. To comply with the injunction, eBay introduced filtering software to check millions of daily listings and make them inaccessible to French users. LVMH argued that more than 1,300 listings for fragrances and cosmetics still managed to appear on eBay’s French site, while eBay said the listings were posted by users who deliberately circumvented the systems that were put in place after last year’s injunction. <>


Hal Waives Threshold on Safilo Debt - Safilo Group SpA escaped bankruptcy on Monday as Hal Holding NV said it had accepted 50.99 percent of the troubled Italian eyewear maker’s tendered notes. The Amsterdam-listed Hal waived the minimum 60 percent tender threshold and said it had reached an agreement with Safilo and Only3T SpA, which holds a 39.9 percent stake in the company and is controlled by the Tabacchi family, to acquire an equity interest in Safilo ranging from 37.23 percent to 49.99 percent. Hal will proceed with the cash settlement on Friday and the acquisition of Hal’s equity interest in Safilo is expected to close in the first quarter of 2010. The commencement of the tender offer allows Safilo to avoid default and a likely bankruptcy and permits a restructuring of Safilo to proceed. <>


U.S.-China Walk Fine Line on Trade - A volley of trade disputes between China and the U.S. is complicating efforts by both countries to keep tensions to a low simmer in order to achieve goals on a range of issues, from climate change and foreign policy to addressing the fallout from the global financial crisis. The relationship between Washington and Beijing has historically been dogged by ambivalence over trade policies, currency manipulation and the large amount of U.S. debt China holds. As the Obama administration nears its one-year anniversary, it walks a fine line between holding China’s feet to the fire on trade obligations and trying to refrain from pushing the Asian nation too far. U.S.-China trade relations in recent months have been overshadowed by President Obama’s decision in September to impose punitive tariffs on Chinese tires. The move prompted a swift response from Beijing, which launched trade remedy investigations of U.S. poultry exports.  <>


Customs IPR Seizures Fall in '09; Counterfeit Shoes the top Product Seized - U.S. Customs & Border Protection seizures for intellectual property rights violations dropped 4 percent to $260.7 million in fiscal year 2009 from $272.7 million a year earlier, the agency said. In fiscal year 2008, Customs intellectual property rights actions spiked 38.6 percent compared with 2007. The number of seizure actions in 2009 declined 1 percent to 14,841 from 14,992 during fiscal year 2008. Last year, seizures increased 9.7 percent. Counterfeit shoes were the top product seized, accounting for $99.7 million, or 38 percent, of all infringing goods, the same share as a year earlier. Jewelry appeared on the list of top commodities seized for the first time, accounting for 4 percent of the total. China was again the top source for counterfeit goods, accounting for $204.7 million, or 79 percent, of all intellectual property rights seizures, Customs said.  <>

Half-Baked Bulls

“To go beyond is as wrong as to fall short.”
We were in San Francisco, California meeting with investors yesterday. There wasn’t a cloud in the sky. There weren’t many raging bears. There were a lot of Half-Baked Bulls.
What is a Half-Baked Bull? Well, legendary California storyteller, Wilson Mizner, said that “most hard-boiled people are half-baked,” and if I spend enough time in the California sun, my Scottish turned Irish/Canadian forehead is too.
Rather than joining the ranks of some of the illustriously qualitative Wall Street strategists this morning, I guess it’s a lot easier to quantify where the buy-side really flushes out on this.
In the latest Institutional Investor Bullish/Bearish survey, we saw one of the lowest readings of Bears since the stock market crashed. And get this: AFTER the market rallies +64% from her March low (more than it EVER has over a 9 month period in modern history) only 17.6% of pros will now admit that they are bearish. Can someone pay me 2 and 20 for that?
Notwithstanding that the Bearish side of this survey routinely ran double and triple this current level of depressed Bearish sentiment in the last year, what is also fascinating to note is that 51% of institutional investors will now admit that they are bullish. Basically, we have gone from institutional money not being allowed to be bullish to not being allowed to be bearish. This is getting good!
With all of the Bernanke and Roubini fear-mongering this year, it’s been very difficult for Groupthink Inc. to get bullish and capitalize on the most hated rally of the decade. It’s been very infrequent to see a reading of Bulls greater than 50% in 2009. In fact, the last time we saw the weekly sentiment reading touch the 51% level for the Bulls was in the last week of September. The spread between Bulls and Bears is currently at its most bullish level of 2009. Again, at the top!
So, macro math fans – drum-roll – looking at the monthly returns for the SP500 and corresponding sentiment levels in the Institutional Investor Sentiment Survey, here’s how Wall Street consensus-climbing really works:
1.      September 2009 = SP500 up +3.6% (bullish sentiment peaks at 51% in the last week of September as Bears drop to 24%)

2.      October 2009 = SP500 down -2.0% (bullish sentiment drops to 47% mid-month as Bears climb to 26%)

3.      November 2009 = SP500 up +5.7% (bullish sentiment peaks again at 51% last week, AT THE YTD HIGH, and Bears hit new lows)

So, if all you did was manage risk on this one simple sentiment factor, would you be levered up long for December or positioned for another October like correction? If you ask a 2008 Bull turned Bear, turned 2009 Bull, I can assure you that their answer will be half-baked.
How is this headline for half-baked?, “Stocks Rise Around World on Dubai, China; Dollar, Yen Decline”…
That’s the #1 headline on Bloomberg this morning. So, let’s dig into it.
1.      Stocks Rise Around The World – after falling for most of last week, this is true; most equity markets are rallying to lower-highs on low volumes

2.      Dubai said that they are in “constructive talks” – this is true, but what did you expect Dubai World to call their talks? Dubai’s Credit Default Swaps have only improved by 53 basis points on this “news”; stock markets in the UAE (down another -5.6%) and Qatar (down -8.3%) are still getting hammered.

3.      China – they reported another solid PMI number at 55.2, and yes that’s an 18 month-high, but so was last month’s report. I am long China via the CAF, but will not be willfully blind to the fact that sequential (monthly) gains in Chinese growth may be stalling here.

4.      Dollar – getting crushed and now Timmy Geithner gets to make up more stories that a currency hitting new YTD lows is a bullish signal for the US Economy and his job performance; I have said it before, and I’ll say it again, a breakdown of the US Dollar into the $72-74 range is no longer bullish for REFLATION – this is the Danger Zone.

5.      Yen Decline – after hitting a 14-year high last week (yes, that’s high), prices do have every opportunity to fall; we shorted the Yen on its highs last week via the FXY, but this is just for a TRADE. The New Reality is that Geithner has no idea what the unintended consequences are of a crashing Dollar. They are global. They bubble up prices like that of the Yen. Then cost of exports and debt on one of the most levered islands man has ever created becomes a ticking time bomb.

Back to California. Another very consistent response I get in meetings with investors is that if He Who Sees No Bubbles (Bernanke) raises rates, the US stock market is going to hell in a hand basket. I disagree.
Yes, we will see an overdue correction. Yes, we will see the Half-Baked Bulls rollover again. Yes, when you cut to ZERO, the only way to move next is UP.
The Australians get this. Glenn Stevens at the Reserve Bank of Australia raised rates for the 3rd time in 3 months last night. He now has the Aussi’s sending the Chinese a base lending rate of return of 3.75%. Oh, and by the way, Australian stocks went up again on the news, taking their YTD stock market gains to +27% - outperforming the FTSE, Nikkei, and SP500 handily.
If China’s growth slows sequentially in Q1 of 2010, Stevens (unlike Bernanke) is actually positioned to CUT rates. There is nothing Half-Baked about that. This is called proactive, rather than reactive, risk management.
Remember, when it comes to keeping rates unreasonably low for an unsustainable amount of time, “to go beyond is as wrong as to fall short.” It’s time for He Who Sees No Bubbles to pull up a price chart of gold, the Yen, or short term US Treasuries this morning and wake up.
My immediate term support and resistance lines for the SP500 are now 1081 and 1110, respectively.
Best of luck out there today,



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.

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).

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.


FXY – CurrencyShares Japanese Yen We took the opportunity to short a 14-year high in the Japanese Yen on 11/27.  The BOJ will definitely be intervening if the unintended consequences of a Geithner Buck Burning persists.


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.

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.

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The Macau Metro Monitor.  December 2nd, 2009




Macau saw its GDP expand by 8.2% in the third quarter.  The growth was helped by a 22.3% year-over-year increase in gross gaming revenues.  The gaming industry generated MOP 31.8 billion in gross revenues in the third quarter and MOP 83.2 billion in the first three quarters. The gaming revenues for the third quarter are the highest quarterly revenues on record in Macau. 





Macau’s exports fell by 54.7% year-over-year in the first ten months of 2009, to MOP 6.36 billion.  Imports fell by 18.5%, to MOP 29.62 billion.  Based on these figures from the Statistics and Census Bureau, Macau’s balance of trade posted a deficit of MOP 23.26 billion.  The ratio of imports to exports fell 17.1% to 21.5%.


For the second day in a row the S&P 500 held the 1,081 trade line.  The S&P 500 finished higher by 0.4% on light volume, although most of the day was spent in negative territory.  The biggest headwind continued to be the Dubai World issue, although the potential contagion from the issues appears to be limited for the time being.  Yesterday was a huge day of outperformance for the Financials (XLF), inching back above the TRADE and TREND lines, barely.


Setting aside the Dubai World concerns, there were a number of positive factors at work: (1) upbeat trends for Cyber Monday, (2) better-than-expected regional manufacturing data, and (3) Global semiconductor sales rose 5.1% in October; the eighth consecutive monthly increase.


The Dollar index closed down 0.16% at 74.48 and the VIX was down slightly.


On the MACRO calendar, the Chicago PMI rose to 56.1 in November from 54.2 in October, the highest level since August of 2008.  This compares to expectations for a pullback to the 53 level.   New orders improved to 62.8 from 61.4, the highest level since May of 2007. Despite the good news, the names most leveraged to the RECOVERY theme underperformed.  The Industrials (XLI) rose 0.3% and the Energy (XLE) was down 0.4%.  It appears that Geopolitical concerns were more of an influence on the Energy related names. 


On Monday, retail stocks were among the worst performers with the S&P Retail Index down 0.5%. The news from Black Friday was mixed with traffic up but average spending down. 


Three sectors outperformed the S&P 500 (Financials, Materials and Utilities) and three sectors were down on the day (Energy, Healthcare and Consumer Staples).  Consumer Discretionary (XLY) was flat on the day.  The beneficiaries of Cyber Monday (AMZN) were offset by the weakness in the bricks and mortar retailers. 


The Financials (XLF) sector was the best performer on Monday, rising 2.7%.  The banks contributed most of the outperformance, with the KBW Bank index snapping a week long losing streak.  Only four stocks declined in the (XLY), with AIG down 15% on the day.  Concerns surrounding the potential contagion from Dubai eased on Monday. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 29 points or 1.5% upside and 1.5% downside.  At the time of writing the major market futures are headed higher.


Crude oil is trading higher for a second Day as Chinese manufacturing expanded at the fastest pace in five years.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.11) and Sell Trade (75.58).


In London today gold rose to a record as the dollar declined and as increased geopolitical concerns over Iran’s nuclear program helping gold’s “safe-haven” status.  Gold gained as much as 1.7% to $1,199.43 an ounce.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,163) and Sell Trade (1,203).


Like crude oil, Copper is trading higher for a third day as Chinese manufacturing expanded at the fastest pace in five years.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.20). 


Howard Penney

Managing Director














Slouching Towards Wall Street… Notes for the Week Ending Friday, November 27, 2009

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. 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. 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


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