By the Numbers

Research Edge Position: Short UK (EWU)


From our seat we’ve watched European fundamentals slow sequentially over the last months while unemployment (9.8%) and inflation (est. +0.6% in Nov. Y/Y) have accelerated moderately across the region. Although we’ve seen little rhetorical movement in monetary policy from the ECB to raise rates, the bank’s recent announcement to withdraw its emergency stimulus measures has accelerated investment risk for countries with levered balance sheets. In particular, and combined with the news from Dubai World, countries like Greece and Turkey (and even some Eastern European countries that remain levered to Western European banks and foreign currency) have seen manic swings in their equity markets over the last two weeks, while other markets like Russia (RTSI) have corrected from frothy YTD highs.


As the largest economy in the Eurozone, the German economy remains an important proxy for regional health. As the graph below depicts, Factory Orders have slowed sequentially over the last months and although rising on an annual basis, they are still well off historical levels. We attribute this trend in particular to the expiration of country’s cash-for-clunkers program, a strong Euro, and increased fears associated with future joblessness. 


While we’re on balance bullish on the German economy over the intermediate to long term, our stance on the UK remains bearish and we’re short the etf EWU in our virtual portfolio.


Matthew Hedrick



By the Numbers - orders


No slowdown post Golden Week.  SJM steals the show yet again.



We expected November to be strong, but 63% y-o-y growth was better than almost anyone's projection.  Not only did business not decelerate post-Golden Week but it actually accelerated.  Adjusted for higher sequential hold in the month, y-o-y growth would still have been close to 50%.  Easy comps, the strong stock market recovery, lax visa restriction enforcement, the new CE, and new supply were probably all contributing factors to the furious recovery in Macau.  For all the reasons noted, and the coming visit of the Chinese Premier, the pace of growth could continue to exceed expectations through the first quarter of 2010.


While the rising tide lifted most all ships (well almost all - sorry, Altira), SJM continued to outpace its competitors.  LVS lost share due to weaker relative performance at Venetian but Four Seasons showed huge growth once again.  If Four Seasons stabilizes at these levels the property may be able to earn close to $50MM of EBITDA, way ahead of consensus projections.



Y-o-Y Table Revenue Observations:


LVS table revenues up 38% with almost all the growth coming from a 62% increase in VIP revenues

  • Sands was up 63%, driven by a 120% increase in VIP and 4% growth in Mass
    • VIP growth was largely driven by easy hold comparisons.  Sands suffered weak hold in November 2008 of around 1.6%, assuming 10% direct play.  If we assume 12% of total VIP play was direct in Nov '09, this implies hold 3.3% this year. 
    • Junket VIP RC increased 11%
  • Venetian was up 14% with VIP increasing almost 18% and Mass increasing 8%
    • Junket VIP RC increased 3.7% and hold appears to be roughly 50 bps better y-o-y
  • Four Seasons was up 248% y-o-y driven entirely by VIP growth 
    • Junket VIP RC increased almost six-fold to $881MM vs $133MM.  In 3Q09 FS also derived 50% of its RC from direct play versus having almost no direct play in 4Q08.  Therefore, if the direct play is material, volumes could be up even more y-o-y than the junket numbers imply
    • However, FS's very strong growth in VIP will be somewhat masked by low hold that we estimate to be in the 2.0%-2.2% range, assuming direct play was between $250-350MM


Wynn table revenues were up 34%

  • Mass was up 19% and VIP increased 38%
  • Junket RC increased a massive 66% which was somewhat offset by weaker hold
  • Assuming 9% of total VIP play was direct in Nov '08 and 12% was direct in Nov '09, we estimate hold declined 50 bps to 2.5% in Nov '09 


Crown table revenues grew 92%

  • Altira was down 21% (the only property in Macau with lower November revenues)
    • VIP roll was down 25% and hold was in the normal 2.85%-2.9% range
  • CoD table revenue was up 16% sequentially, benefiting from better hold than October m-o-m
    • Mass continued to ramp growing 18% m-o-m to $26MM
    • Junket VIP RC fell 13% sequentially.  It appears that CoD's junket play is stabilizing in the $2.4-3BN monthly range
    • Despite what the company said on its 3Q09 conference call, we saw that there was 10.3% direct VIP play as a % of total VIP roll.  If we assume that the direct play as a % of total VIP play is closer to 12% these last 2 months, it appears that hold was around 3% in November and 2.3% in October


SJM continued its hot streak, with table revenues up 114%

  • Mass was up 38% and VIP was up 191% 


Galaxy table revenue was up 44%, driven by a 45% increase in VIP win and a 39% increase in Mass

  • Starworld continued to perform well with table revenue up 53%, driven by 54% growth in VIP revenues and 38% growth in Mass win


MGM table revenue was up 38%

  • Mass revenue growth was very strong at 53%, while VIP grew 35%
  • Junket rolling chip was up 36% 



Market Share:


LVS share decreased to 20.8% from 23.7% in October, but higher than September's 19.6%

  • Sands' share decreased by 1% to 7.5% sequentially
  • Venetian & FS share decreased to 13.3% from 15.3% in October


WYNN's share at 12.1% increased slightly from a low of 11.9% in October



Crown's market share increased to 12.9% from 11.9% in October

  • Altira was one of the only properties to experience revenue declines y-o-y in the month of November


SJM's share increased to 33.1% from 31.6% in October



Galaxy's share decreased slightly to 12.3% from 12.8% last month

  • Starworld's market share grew to 9.9% from 9.4% in the previous month


MGM's share increase to 8.9%, from 8.0% in October, was mostly hold driven



THE MACAU NOVEMBER DETAIL - Macau Total Bac Rev Share Nov







TLB: NOL Stocking Stuffer

At the close on Friday I noticed a common thread among several of the days’ top outperformers (i.e. TLB, CHRS, LIZ, & DDS) – we had highlighted them a month ago (“Bill Critical for Ailing Retailers” on 11/08) as key beneficiaries of the Business Assistance Act of 2009. While talk of the benefit has crept into late 3Q earnings calls (e.g. CHRS last week), the benefit of this legislation is still flying under the radar of most investors and will provide meaningful relief to some of the smaller undercapitalized retailers.


After speaking with several companies on the topic, there are a few considerations helpful in trying to quantify the materiality of this benefit:


1)      The bill only applies to domestic losses

2)      Re timing of cash receipt:

  • if claiming ’08 losses, process can be underway now but can take 2-3 months to get paperwork in order from start to finish.
  • if claiming ’09 losses, have to wait until taxes are filed for the year (some companies could realize in Q1, but not until 2Q for most).

3)      There are restrictions re eligibility of losses

  • Has to be a valid deduction (e.g. a pure reserve on the books that has not been realized is NOT valid).

4)      A company can recoup up to ~35% of eligible losses



So why revisit this topic now? With TLB reporting tomorrow morning, it’s worth noting given that short interest is at 38% second only to October 15th when it had reached 42% and the stock was 60% higher. While this legislation is hardly the catalyst to send shares back to recent peak levels, it’s important to note the cash infusion – particularly with TLB’s revolver expiring in the 1Q of 2010 that could result in a near-term reprieve.



Casey Flavin


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Unpopular Is As Unpopular Does

President Obama’s approval rating has continued to bounce around low levels on the Rasmussen Presidential Tracking Poll.  As of this morning, President Obama was ranked -11 on the poll, which is the difference between Strongly Approve and Strongly Disapprove.  While this is above his lowest ranking of -15 on November 25th, his approval rating is showing no sign of bouncing meaningfully.   In the Real Clear Politics poll aggregate, which is a rolling average of all major Presidential approval polls, President Obama now has virtually the worst approval rating of his Presidency at 49.3.


The rationale for this continued sinking popularity appears to be the popularity of President Obama’s primary landmark policies on healthcare and Afghanistan.  According to Rasmussen, only 41% of those polled favor the plan proposed by President Obama and Congressional Democrats.   As it relates to Afghanistan, only 37% of the American voters polled favor the new plan for Afghanistan.   Obviously, President Obama can only be as popular as those issues or platforms that he is trying to aggressively advance, at least in the short term.  Longer term, as it relates to his and the Democratic party’s popularity, there are other factors at play.


We have contended in the past that President Obama does have a shockingly high approval rating given the state of the economy and, in particular, unemployment.  We’ve posted below a chart that graphs Presidential approval versus approval going back to the 1970s.  There is a clear correlation between high unemployment and low approval.  Interestingly though, the last time that unemployment was this high, that President, Ronald Reagan, had a broad approval rating that was in the mid-30s, which is well below Obama’s current rating.


Employment of course is but one factor relating to the economy.  While declining unemployment will surely have some positive impact on President Obama’s approval rating, Professor Ray Fair, of Yale’s economics department, has done a great deal of working on predicting Presidential and Congressional elections and postulates that the two most important factors are: inflation and economic growth.  Specifically, he looks at the growth rate of the GDP deflator as a sign of inflation and the number of quarters of GDP growth over 3.2% as a positive sign of growth.


Professor Fair has had very good success historically predicting elections, both mid-terms and Presidential, though has had some big misses as well, including President Clinton’s first victory over President George H.W. Bush.  Accordingly, Professor Fair adjusted his model and realized that the economic memory of voters goes back more than one year, and that President Bush was hurt by a weak economy early in his term.  Professor Fair’s models and work over the past four decades does tell us a little though about thinking about the future popularity of a President.  Namely, both growth and inflation are key factors to consider and that stagflation, high inflation and low growth, is likely the worst economic scenario for an incumbent.


From an economic perspective, the Democrats will be faced with accelerating inflation if the fiscal policy remains loose domestically (and with it the dollar weak) and the potential that GDP comparisons are challenging in the back half of next year leading up to midterms.  The worst case scenario is, obviously, that the growth we are seeing is not sustained, and the inflation environment for those goods prices in U.S. dollars – houses, commodities, agriculture goods, etc—continue to inflate because of the weak dollar.


Daryl G. Jones

Managing Director


Unpopular Is As Unpopular Does - obama


Slouching Towards Wall Street… Notes for the Week Ending Friday, December 4, 2009

No Regulation, Radio


The New York Times (2 December, “Black Caucus Seeks To Ease Radio’s Woes”) describes what looks like a pathetically transparent example of the conflicted intertwining of business, politics and the media.


Inner City Radio, a New York company co-founded by prominent New York politician Percy Sutton, owns 17 commercial stations nationwide.  According to the Times, it “faces a possible financial collapse because of pressure by Goldman Sachs and GE Capital to repay nearly $230 million in debt.”  The story goes on to describe ways in which the Congressional Black Caucus has tried to use its leverage to score greater visibility for the ways in which minority-owned businesses have been hurt by the financial crisis.  The lobbyist retained by Inner City is Paul A. Braithwaite, former executive director of the Congressional Black Caucus, and a former senior aide to New York Senator Charles Schumer.  Braithwaite “said the financial crisis has had a particular impact on the radio industry,” citing declines in advertising revenues, and changes in the way audience ratings are computed. 


Barney Frank has gotten into the act here as well.  According to the story, he has arranged for Caucus members to meet with Secretary Geithner and White House Chief of Staff Rahm Emanuel.  Frank also has had discussions with companies regarding Inner City.  Frank declined to name any of the companies with whom he has spoken, but he did not deny that one of their initials might be “GS”.


The article also points out that the Obama administration “did not believe it was appropriate to pressure financial institutions to make concessions for specific loans or businesses.”  In other words, the President believes it is inappropriate to introduce politics into the political process.  Go figure.


We do not learn how the “pressure” from Goldman and GE is any different in the case of Inner City than on any other debtor.  Our guess is that Goldman, being in the risk management business, wants the risk cleaned up and are likely treating Inner City no differently than any other debtor with a similar risk profile.


Times Chief Financial Correspondent Floyd Norris, in his blog (3 December, “The Goldman Veto”) wonders how this story might have been reported if, say, during the 1998 Asian financial crisis, “a group of Republican legislators had threatened to block legislation unless a contributor to their campaign received special treatment.”  


We are not sure what the Times’ take on the story is, and why it has chosen to report it in just these terms.  Can it be that a major New York City newspaper is shocked to discover that there is Politics going on in Washington?  Norris is pretty clear in seeing this as a conflict, but neither his commentary nor the underlying story presents any statistics relating to minority-owned businesses, or to the effect of the financial crisis on smaller independent radio broadcast companies.  On the other side of the argument, it makes no attempt to argue the creeping obsolescence of radio in the internet age. 


We find this journalistic approach disappointing.  In the absence of any analysis, readers will fall back on their own prejudices.  For our part, we suspect the Caucus may have a point.  They certainly have an opportunity.  In the world of politics, it would be a crime to waste it. 




As Easy As AAA, BBB, CCC


We have been reading up on the rating agencies’ new-found zeal for assessing risk – something you no doubt thought they were always paid to do.  On the premise that nothing happens in a vacuum, we note that it is only a few short weeks since the National Association of Insurance Commissioners (NAIC), the body representing state insurance commissioners, took the rating of asset backed securities out of the hands of the rating agencies and handed it to Pimco.


In the same time frame, we noted stories such as “Fitch Raises Alarm At Impact Of $98bn Refinancing On European Real Estate” (Financial Times, 24 November).


Cynics – among whom we surely count ourselves – will take a dim view of Fitch now warning that it will be difficult to refinance European securitized real estate debt due to mature in 2014.  The article says there have been declines in the value of the underlying properties of over 40% in the UK and Europe, and that “much of the debt struck at high loan-to-value in the boom years is in breach of covenants.”  Some are wondering where Fitch was when these loans were structured.


A little arm-twisting seems to have been the order of the day at S&P.  The Financial Times reports “S&P To Clarify Rankings On Capital Strength” (Financial Times, 25 November), on the heels of a newly-issued report “ranking 45 of the world’s leading financial institutions by a new risk adjusted capital (RAC) ratio designed to better capture balance sheet strength.”  The report was based on bank balance sheets as of the end of June, and thus does not take into account any housecleaning institutions may have undertaken. 


Investors might be comforted at the introduction of a more robust risk measure for bank capital.  The banks, apparently, were not, and rushed to lobby S&P to issue corrective statements.  Capital adequacy being a highly sensitive topic, banks wanted immediate credit for steps they have taken since the end of June to bolster capital.  The actual effect on the banks might be to raise questions about what kind of scrambling they had to do to boost capital since the second quarter.  UBS, for example, complained that the methodology failed to account for SFr 19 billion proceeds from the mandatory conversion of notes held by the Swiss government.  Six billion Francs worth of these notes were converted in August and are now part of the bank’s capital.  Duly noted, says S&P.  Oh and, says UBS, we are due to get another SFr 13 billion in March 2010.  Please be so kind as to credit that to us now.  We’re sure you’ll find a way.


We will refrain from overly praising the ratings agencies, but it is clear that they are significantly tightening standards in areas where it has often paid for them to remain lax.


And they are calling public attention to problems.  “Mortgage Backed Securities Downgrades Warning,” reports the Financial Times (24 November) citing over $150 billion in loans backed by commercial mortgages due to mature by 2012.  Moody’s does not foresee a strong rebound in the sector, so they are predicting rounds of ratings reductions.  While the article makes no mention of the D-word (“default”) if you are an insurance company, your capital stands to be severely impaired by a ratings downgrade of your portfolio.


Looking for a way out of this morass, the NAIC has come up with a new source of money: income-tax accounting.  The Wall Street Journal reports (28-29 November, “Insurers Nearing Regulatory Victory”) that the state insurance regulators have called for favorable treatment of “deferred tax assets.”  This looks set to add over $11 billion to insurers’ capital with the stroke of a pen.


Time would appear to be running short for the insurers.  The House Financial Services Committee just approved legislation to create a national supervisor for insurers (Financial Times, 4 December, “Systemic Risks Of Insurers In Spotlight”.)  This new office will not regulate insurance, but will coordinate information at a high level to help create policy, respond to crisis, and mitigate risks to the financial system.


This is becoming necessary, not only practically, but politically.  European Central Bank president Jean-Claude Trichet has told the European regulators that he considers large insurance companies to be “systematically important institutions,” and as the capital base of major insurers has been chopped down significantly, their ability to pay claims in large crisis situations may soon be called into question.


The FT article points out that “there have been times when life insurers have been forced to sell certain assets, for example equities during the dotcom stock market crash.”  The new proposed European capital rules will, it is hoped, influence insurers’ behavior and the management of their portfolios. 


The Financial Stability Board, the international central bankers’ group, recently added six insurers to its list of “systemically important cross border institutions”, which means our domestic insurance industry will also come under scrutiny.  In prophylactically confronting the tide of global opinion, US regulators are taking swift steps to beef up domestic insurers’ capital.  We are puzzled as to why the regulators themselves are pushing for this to be done by accounting legerdemain, rather than by requiring the insurance companies to forsake the behavior that got them into capital trouble in the first place.


Speaking of behavior modification, the Financial Times (5-6 December, “Legal Rulings Show Banks Will Pay For Their Follies”) mentions recent legal rulings in which major banks are being called to account for predatory, inappropriate, and just plain dumb lending practices.


In the case of a Florida homebuilder, Tousa, “a bankruptcy judge ruled that Citigroup and other banks made fraudulent transfers when they lent Tousa about $500m in 2007.”  Less than six months after receiving half a billion dollars in bank loans, Tousa filed for bankruptcy.


Pulling no punches, bankruptcy court Judge John Olson found the lenders were “grossly negligent” and “should have known the company was insolvent.”  The judge might have been tipped of by two items relating to the loan.  One is that Tousa’s CEO stood to receive a $4.5 million bonus, largely contingent on closing the financing.  The other is that Tousa had retained global consulting group Alix Partners to provide the solvency opinion that Citigroup had required as a condition of issuing the loan.  The FT reports Tousa “agreed to pay $2m if Alix opined that Tousa would still be solvent after the loan, but would pay only time charges and costs if it did not so opine.”


We are not sure whether to burst into shrieks of outrage, or uncontrollable giggles.  At the present juncture in our financial history, it boggles the imagination that corporate governance at Citigroup is still so lacking that they actually participated in such a transaction.  Indeed, if Citi knew of the contractual arrangement between Tousa and Alix – and they had a right to that information, as a $500 million loan hung in the balance – it would appear they had an obligation to their shareholders to nix the deal.  They may have even had a regulatory obligation to report the Tousa / Alix contract to the SEC.


Having blamed the ratings agencies for their role in creating the meltdown – as touched upon for example in SIGTARP Neil Barofsky’s report on the AIG bailout – the regulators have doubled back and are attacking the rating agencies for trying to raise their own standards.  We bet the next thing will be attacks on “activist judges” such as Judge Olson.  Jed Rakoff, the judge who kicked the SEC / BofA settlement back into the mudpit, should take note.  With the markets strong once again, no one cares much about transparency or responsible corporate governance.




The Rock-Bottom Line


A casual stroll through the lunatic asylum shows that faith does not prove anything.

                        - Friedrich Nietzsche


Speaking of the New York Times, a CEO who has crossed battleaxes with Floyd Norris on more than one occasion is back in the news again – and in Norris’ blog.


Our colleague, retail analyst Eric Levine, recently posted that is offering more holiday discounts and contests than ever before, a strategy that has produced a return to positive growth, according to Overstock CEO Patrick Byrne.


We scratched our head when we read this, because we remembered an item in last week’s Financial Times (24 November, “Overstock”) which mentions that “After a decade in business, Overstock has never turned a profit and its shares have slumped 80 percent over five years…”  Levine goes on to quote CEO Byrne reporting that Black Friday had produced their biggest single sales day ever, only to be eclipsed by Cyber Monday, which trounced their Friday sales by thirteen percent.


Byrne, for those of you whose chief leisure activity is minding your own business, has issued numerous public statements over the years as he sounded off about illegal naked short selling and the ways in which these dastards have ganged up on his stock, among others.  We have read some of these rants, and they are generally well reasoned and, we think, largely on the money.  If Byrne has committed a sin in his public statements, it has been to reveal the seamy underside of how this bit of Wall Street takes your money. 


The political winds have been blowing against Byrne.  At the SEC, Chairman Schapiro has done a masterful job of Doing Nothing to Great Fanfare over the political firestorm about short sellers.  We think this was probably well advised, in light of the immense disservice done to the markets when the crisis burst like a pus bubble and regulators threw on “emergency” bans against shorting.


What the SEC chose not to touch was the variety of mechanisms that make naked short selling possible – and that still exist.  These include lack of controls on Easy To Borrow lists, where the same securities can be shorted multiple times, and by multiple customers, without an actual count of securities available for borrow.  And no one has any notion of how many shares of how many different issues are floating around in “Ex Clearing” contracts where they will never have to be reported as unsettled short sales, and thus never be bought in.


Byrne has attacked Norris before as being part of a press cabal that plays to the SEC’s hand, determined to turn a blind eye to what is going on and – in Byrne’s analysis – promoting exactly the illegitimate activity from which Overstock’s stock has suffered.


Byrne has now come up with a new one.  In a dispute over the recognition of revenues, Overstock has fired not one, but two auditors – first PriceWaterhouse, and now Grant Thornton.  This was after the SEC questioned certain accounting assumptions, and Overstock and Grant Thornton got into an imbroglio over whether the auditor had, in fact, signed off on a formal opinion on the transactions under review.


Byrne and Grant Thornton have exchanged public statements accusing each other of lying.  Overstock has said there are a plenty of audit firms out there that would love their business, but they are not going to retain a new auditor until they get a clear resolution, which will require a definitive statement from the SEC.  In the meantime, in order not to be delinquent in making its required filings, Overstock has taken the unusual – we think unique in regulatory history – step of filing an unaudited 10Q.  In explaining the situation to Overstock shareholders, Byrne issued a letter that opens with a quote from philosopher Friedrich Nietzsche: “All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.”


As near as we can tell, the amount of money at issue in the transactions being questioned by the SEC is $785,000.  This does not strike us as even a material amount for a company that reported $195 million in gross revenues for the quarter ended September 30.  Given Byrne’s public image as a CEO who clings tenaciously to principle, we are not surprised to see him going after his auditors.  And who knows?  Maybe he will emerge both victorious and right.


But we admit to being perplexed as to why a CEO of a company that has not turned a profit in a decade would want to call such attention to himself.  We caught Overstock’s holiday season commercials recently.  It features a quartet all dressed in white singing, to the tune of “Jingle Bells”, “Oh-Oh-Oh!  The Big-Big ‘O’”.


Byrne’s statement about the big jump in Black Friday and Cyber Monday sales might hold a clue to the company’s overall performance.  “Promotions have been good for us,” said Byrne, “and we switched to free shipping for the whole season.  We’ve never done this much discounting before.”


For all his entertainment value as a CEO, we wonder whether Overstock’s “Big, Big ‘O’” will be just as big this year as in the past.




Let’s Assume We Had An Economy


It’s been a challenging year for us all.

                        - Ben Bernanke


Economists are famous for working from assumptions.  In his recent job interview, Fed Chairman Ben “I Really Need This Job” Bernanke attempted to cajole his interlocutors into sharing his assumption that Fed “expertise” is needed to re-stabilize the nation’s economy.


The nation has been following economists’ assumptions for years.  We followed Chairman Greenspan’s assumptions (the “Maestro”) into an era of irrational exuberance – oddly, the man who identified it appears to have been its single greatest proponent and driving force.


We followed the assumptions of Tim Geithner, among others, when as head of the New York Fed he participated in blowing the lid off bank leverage ratios.  It is fascinating to see Geithner and Blankfein duking it out in the public media – at long distance, to be sure – over whether or not Goldman would have gone out of business but for the government bailout program.  Geithner gave Goldman and their brethren untold miles of rope, with which many – Bear Stearns, Lehman, Merrill Lynch, to name a few – dutifully hanged themselves.  He is now taking credit for cutting down the one firm that never put its own head in the noose and getting into a public urinating competition over it, all the while ignoring the American consumer twisting and convulsing and slowly strangling on the gallows.  In their defense, Goldman Sachs never pretended their job was to do anything other than gulp down as much punch as they could.   Geithner, on the other hand, was one of those charged with controlling access to the booze.


The nation is now not really debating whether to confirm Chairman Bernanke for another term.  There is not much chance of him not being reconfirmed.  The debate comes down more to what assumptions we will buy into, and which ones we will deflect to third parties. 


Astonishingly, Bernanke’s assumption of “expertise” appears to be generally in the ascendant.  The Fed under Greenspan showed considerable expertise in creating the mother of all market bubbles – equities, housing, and risk derivatives.  Bernanke showed considerable expertise in addressing the inflationary / deflationary concerns in the last few months, but the overall lack of Fed expertise to derail the Greenspan bubble express should be more deeply troubling than it is.


Ron Paul’s idea to hold the Fed accountable through an audit mechanism has actually gained traction, but we do not for a moment believe the solution to Fed errors is allowing Congress to tell them how to run their business.  Talk about “expertise”!


Bernanke supporters are doing an odd pat-and-smack as they attempt to head off the political consequences of voting to reconfirm Bernanke.  The Wall Street Journal (4 December, “Greenspan Haunts The Room”) quoted Senator Chris Dodd as praising Berenanke personally, yet saying “the Fed failed terribly in giving us the kind of warnings that we should have.”  It is a bit difficult to separate the man from the institution.  Indeed, the Journal points out that the institution and the man are truly seen as one.


The simple fact that no one wants to face is, it is the people, not the institutions, who make decisions.  People who score tactical victories, and people who make terrible mistakes.  If we could remove that human element from our economic decision-making, we would be golden.  That was the theory behind bringing professional economists to Washington and having them make decisions for us.  Science would rule the day and we would no longer have to worry about human error.


We’re still waiting.


Meanwhile Senator Jim Bunning addressed Bernanke saying, “Now I want to read a quote to you, Mr. Greesnp—“  Can’t shake the ghost, can we?


After the laughter died down, Senator Bunning corrected himself and said, “Mr. Bernanke.  That’s a Freudian slip, believe me.”


We all know what a Freudian Slip is: it’s when you say one thing, when you really mean your mother.


Moshe Silver

Chief Compliance Officer


Chart of The Week: Unemployment Read Through

Friday’s drop in the unemployment rate to 10% had a major impact on the short end of the US Treasury curve, the price of the US Dollar Index, and the price of Gold.


On a week-over week basis, these 3 moves were as follows:

  1. US Dollar Index +1.5%, closing above its immediate term TRADE line of $75.36
  2. 2-year Treasury yields shooting up +22% to close the week at +0.83% versus +0.68% in the week prior
  3. Gold prices dropped 6% from the intra-week highs, and down for the 1st week in the last 5

In the Chart of The Week, Matt Hedrick and I show what the currency and bond markets wanted Ben Bernanke to see. What matters here, as always, is what happened on the margin.


That big green arrow in the bar chart dropping from a +40bps sequential acceleration in the unemployment rate to 10.2% (October) to the minus -20bps monthly deceleration (November) is the largest delta we have seen on a month-to-month basis going back to when this crisis in US employment began.


He Who Sees No Bubbles (Bernanke) obviously saw some pop (gold and 2-year Treasuries) on Friday. Yes, they are both priced in US Dollars. No, they didn’t crash. But they did pop.


The Federal Reserve continues to maintain a policy of “exceptional and extended” that we (and now the bond, gold, and currency markets) , consider UNREASONABLE and UNSUSTAINABLE.


ZERO is not a perpetual rate policy. Just get it over with Ben, and raise by 50 beeps. The market is already discounting the move.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Unemployment Read Through - unemploy10


Chart of The Week: Unemployment Read Through - bpchange



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