The Garbage Man

A guy walks up to me and asks 'What's Punk?'. So I kick over a garbage can and say 'That's punk!'. So he kicks over a garbage can and says 'That's Punk', and I say 'No that's trendy! <> ”
–Billie Joe Armstrong, Singer, Green Day
Keith is flying back from California this morning, so I’ve been handed the pen on the Early Look.  The title Garbage Man has many implications as it relates to investing and careers.  For me, it was actually my first job.  Yes, this former hockey head and now Macro Analyst started his working career as the Garbage Man back in his home town.  I’m not sure I learned a whole lot about investment analysis while digging through the garbage barrels back in Bassano, Alberta, but what I did learn is that as you dig through all that garbage, every once in a while you find a little treasure.
As I sit here drinking my second cup of coffee, listening to Pandora (that’s what the Millennials use to get music these days!), and reviewing the global macro news streaming on to our floor here in New Haven, there are a few little treasures that are emerging.
1.      The Chinese central bank is noting this morning that they view gold prices as very high and they will be wary of “bubble” assets.   It is interesting that the so called “Communists” see bubbles before He Who Sees No Bubbles (Bernanke) and the purported free marketers at the U.S. Fed do.  From a fundamental perspective, this is negative for gold demand in the intermediate term as China is potentially a large buyer of gold to diversify her reserves, though presumably not at bubble prices.

2.      In stark contrast to concerns over Dubai’s debt issues, both Latvia (whose GDP declined by 18.4% in Q3) and Senegal are marketing bond offerings this morning, which suggests the market for emerging market debt is strong and open.  Additionally, the spread between U.S. treasuries and emerging market debt is at 315 basis points, which is in line with levels before the Dubai restructuring was announced.  The implication is obviously that, for now, Dubai appears to be a blip on the radar screen and credit markets continue to open globally even for weak economies like Latvia. Free money and easy credit continues to flow.

3.      The less traditional gauge of employment, the employment index, which is a monthly gauge of online job demand fell one point sequentially to 119 in November.  However, on a year-over-year basis it declined 17%, which is actually the lowest rate of annual decline since September 2008 (so a positive on balance). Interestingly, the occupation that gained the most in terms of “Top Industries Looking for Employees in November” was Transportation and Warehousing. On the margin, this report does look positive and y-o-y compares will look great starting in January.  Accelerating year-over-year employment number should also be additive to inflationary pressures, as will emergency level interest rates . . .

Another topic I want to discuss this morning is China, which we refer to as The Client.  As many of our faithful readers know, we’ve been all bulled up on China this year and rightfully so given her massive stimulus program, high growth, and low inflation, but I thought it might be interesting to lay out the bear thesis on China.  This thesis comes from well known short seller Jim Chanos.  A short seller is sort of the Garbage Man of global investing, if you will.  He or she is always sniff sniff sniffing for that company, or in this case an economy, that doesn’t quite smell right.  With a batting average of 85.1% on shorts since inception, we too know a fair bit about the dark art of shorting.
Chanos’ thesis on China, according to reports, is as follows.   First, given the enormous size of the stimulus of China, $900 billion, versus the size of the economy, $4.3 trillion, Chanos and the China bears postulate that the Chinese reported GDP expansion of 8.9% in Q3 is actually less than should be expected. Second, there appears to be some disconnect in official statistics coming out of China.  As one example, while the growth in car sales is massive, as we have noted, Chanos and the bears are noting that there is no commensurate increase in gasoline sales. Finally, they theorize that there is massive over capacity being built in many Chinese industries.  An example given is in the cement industry, where there is an estimated spare capacity of 340 million tons, which is more than the consumption in U.S, India, and Japan combined.
As of yet, we have not changed our bullish stance on China, but we are concerned about the potential for a H1 2010 slowdown in China. And certainly, any bull should know which garbage pails the bears are pawing around in before they become “trendy”, or worse before their long positions get “punked”.
Good luck out there today,
Daryl G. Jones
Managing Director


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).

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.

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 -0.3%. 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 and 12/2.

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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