Fat Cats With Broken Noses

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street”
-President Barack Obama

Now isn’t that a heroic one-liner from a President who is in a must need situation for a political win? If he understands the math associated with who financed these bonuses, I should hope he is including He Who Sees No Bubbles (Bernanke) and Timmy Geithner in this all encompassing populist attack on bankers.
There is another Political Fat Cat in Italy who has been living rather large as of late. He figured hot tubbin’ with teenagers was cool until his wife found out. Italian Prime Minister, Silvio Berlusconi, learned his lesson the hard way this weekend after taking a statuette of the Milan Cathedral in the melon.
Berlusconi is no hockey player. Apparently a broken nose in Italian Government gets you a couple days in the hospital. In hockey speak we call this getting your medicine.
Whether it is world markets cheering for another dose of Big Government Intervention in Dubai this morning (the UAE is trading up over +10% on “news” of a Abu Dhabi hybrid government bailout) or the reality that we have created Citigroup bankers who are too big to fail, the conclusion here is pretty obvious. Fat Cats aren’t just purring on Wall Street. They are in Washington and they will be seeing politically broken noses when their citizenry figures out the simple truth.
In the US, the truth of the matter isn’t about Democrats or Republicans. It’s about a bubble in Big Government. The Fat Cats in investment banking are simply paying themselves via the system of rules that our government empowered them with. Populist anger with banker bonuses should not be one-dimensional. For a politician in this country to call that out as something that they didn’t help finance is over the top. It’s time for the President to “get” this too.
Back by popular demand this morning, for all you Piggy Banker fans, this is the way banker compensation works. There is this thing called the Piggy Banker Spread (financiers call it the Yield Spread). It’s the spread between the short end of the yield curve and the long end (10-year minus 2-year Treasury Yields). This morning that spread is trading within 3 basis points (or 0.03 percent) away from its widest spread EVER!
Ever, President Obama, is a long time. You are currently signing off on fiscal and monetary policy that creates this Fat Cat Spread for the bankers to chow down on. Yes, this is how the math associated with borrowing from your citizenry’s savings accounts works. You give prudent American savers ZERO as a rate of return. At the same time, Piggy Bankers borrow at ZERO. Then they lend that money out to the citizenry (after they pay themselves) at higher rates of return.
Sorry Big Man, your definition of Fat Cat has a broken nose. And this one might take more than a few days in the hospital to fix.
Away from the most politicized US Treasury and Federal Reserve in modern finance, what’s driving this? Fear. This is the classic political move of fear-mongering to create a crisis that the politicians want to be credited in solving. The short end of America’s yield curve has been fear-mongered into the pig trough. This morning’s rate on 3-month US Treasuries is 0.02%. Yeah, I’m sure the Chinese love that as much as I and anyone with an American savings account does.
Fortunately, free markets are pricing in reality on the long end of the curve. Yes, the Fat Cats with broken political noses can tell you we need to maintain “an emergency level of ZERO percent for an exceptional and extended period”, but at the same time the rest of the world is free to mark these assertions to market. We are now seeing an intermediate and long term breakout in the yield of 10-year US Treasury yields as a result.
At 3.52%, I have 10-year yields busting a move above both of the most influential lines in my global risk management model:
1.      Intermediate term TREND line = 3.41%

2.      Long term TAIL line = 3.21%

At the same time I have the US Dollar breaking out to the upside above both its TRADE and TREND lines:
1.      Immediate term TRADE line = 75.33

2.      Intermediate term TREND line = 76.30

Are these two factors (US Dollar and US Treasuries) highly correlated? You bet your Madoff they are. They are leading indicators for the President Obama and his internal czars of Perceived Financial Wisdom to have a mea culpa on interest rate policy too.
This week is a critical one for those of us who are still data dependent. On Tuesday and Wednesday, we are going to see a continued REFLATION of the US producer and consumer prices. Yes, there was a time in the land of nod when He Who Sees No Bubbles (Bernanke) said we were going to have a Great Depression in prices. But, once again, the data has proven him wrong. The YTD low for CPI in the US was established all the way back in July at -2.1%. Now year-over-year inflation is about to go positive.
Bernanke’s inflation forecasting track record speaks for itself. It’s flat out awful. He would never be hired by us knuckleheads of the gridiron to manage marked-to-market P&L risk. That’s why they saved a special place for him in academia and Washington where forecasting is a revisionist historian’s profession.
I am looking forward to the US Government’s latest storytelling this week. The Fed’s Open Market Committee decision on Wednesday won’t disappoint in terms of political pandering. Fat Cats with broken noses dancing on the hot-stove of You Tube should be an interesting show.
My immediate term support and resistance levels for the SP500 are now 1096 and 1113, respectively.
Best of luck out there today,

EWZ – iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

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.   

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.


With Citigroup repaying TARP and Abu Dhabi bailing out Dubai, markets are rallying across the board.  The only green not on my screen is the NIKKEI 225, down small.  The Tankan index (confidence among Japan’s largest manufacturers) rose the least since the economy emerged from its worst postwar recession as the strong YEN will erode profitability.


Last week the MACRO calendar dominated the news flow.  On Friday the S&P finished higher by 0.4% on fairly quiet trading.  On the MACRO front sovereign issues and TARP repayments seemed to be top of mind, but on the margin there were a number of positive issues.  Last week the Dow rose 0.80%, S&P rose 0.04%, but the NASDAQ declined 0.18% and the Russell declined 0.40%. 


On Friday the Dollar index closed at 76.573 up 0.7% on the day.  The Dollar index was up three of the five trading days last week.


The RECOVERY theme gained momentum with the better-than-expected increase in Chinese industrial production.  In addition, the retail sales data and the U. of Michigan consumer sentiment data helped retail and Consumer discretionary stocks in general.  The Consumer Discretionary (XLY) outperformed the S&P 500 by 210 basis points last week. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). The breakdown in the inverse relationship between the dollar and risky assets is new. 


After falling early in the week, the retailers rallied strongly on Thursday and Friday.  Better-than-expected November retail sales and December consumer sentiment data created a positive underlying tone for the group. 


The notable underperformer on Friday was Technology (XLK) – the only sector to close down on Friday.  After being a star performer for two weeks the Semis have now become a headwind with the SOX down 1%.  BRCM was one of the weaker names in the group ahead of next Tuesday's analyst meeting.  Elsewhere, telecom equipment names were mostly weaker with JDSU, TLAB and CIEN taking the group lower.  Weaker-than-expected November NPD data weighed on most of the video game stocks, while the MOBILITY names were also under pressure. 


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 17 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading slightly higher.


In early trading today, crude oil is trading lower for the ninth day, and is poised for the longest decline since July 2001.  Declining on supply and demand issues crude is now down 15% since October 21 – the year-to-date high.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.79) and Sell Trade (74.30).


In London Gold is trading basically unchanged.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,090) and Sell Trade (1,147). 


Copper is up for a second day with dollar down and optimism that demand from China will be strong.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.26). 


Howard W. Penney

Managing Director
















The Macau Metro Monitor.  December 14th, 2009.



SJM Holdings will open Macau’s 34th casino tomorrow in an attempt to take a larger share of the mass market.  Following an investment of HK$1.5 billion, Casino Oceanus is set to open with 260 mass-market gaming tables and 560 slot machines spread over three floors and 32,000 square meters.  2,400 people will work at Casino Oceanus.  With no VIP service and no junket operators, and a direct connection to Macau’s main ferry terminal through a covered footbridge, Oceanus is, according to SJM chief executive Ambrose So Shu-fai, targeting “pure mass market”. 

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Regional markets laid an egg in November with same store revenue down 7%, and that’s without the gas headwind.



We estimate that same store revenue in the regional markets declined 7% in November (only LA and MS haven’t reported).  November 2009 did contain one fewer Saturday but the comparison (-4%) wasn’t exactly difficult.  Combining October (one extra Saturday) and November yields a y-o-y decline of 4%.


Given October’s decent performance, many analysts are undoubtedly disappointed.  Other consumer sectors fared better in November – retail sales were surprisingly strong – which furthers the trend of gaming underperformance.  Gaming continues to face a combination of soft discretionary spending and a declining share of the discretionary wallet (see our 10/19 note “THE DOUBLE PCE WHAMMY TO GAMING”). 


Add a third negative factor to the mix:  gas prices.  As shown on the following chart, y-o-y gas prices will be up significantly in December and this headwind will persist through the first quarter at least.  Changes (y-o-y) in gas prices have historically been a statistically significant driver of gaming regional gaming revenues.  That’s bad news for the regional gamers already facing other headwinds.


AS EXPECTED, NOV DISAPPOINTED THE ANALYSTS - regionals vs gas projection


What does this mean for the stocks?  The regional gaming stocks have underperformed the market as can be seen below.  The stocks are not overly expensive but 2010 numbers probably need to come in.  Until they do, it’s hard to make a strong bull case for the group.



The Week Ahead

The Economic Data calendar for the week of the 14th of December through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wa14 1

The Week Ahead - wa14 2

Confidence Economics – THIS IS NEW

In the past month, we witnessed the DJIA holding above 10,000, President Obama’s new strategy for the war on terror, a "less bad" unemployment rate at 10.0%, and more than enough holiday commercials!


Surprisingly, confidence among U.S. consumers increased in December for the first time in three months.  However, current sentiment remains well below indices from more prosperous times.


The Reuters/University of Michigan preliminary index of consumer sentiment rose to 73.4 in December, from 67.4 in November.  The December figure exceeds the average of 65.0 for the first nine months of the year.


Contradicting some of my thoughts earlier in the week, the U of Michigan’s measure of CURRENT CONDITIONS (which reflects a slightly better job market) jumped to 79.1, from 68.8 in November and is the highest level since March 2008.   The index of EXPECTATIONS index also  increased to 69.7 from 66.5 last month.


As you can see from the chart below, confidence clearly appears to be settling in at a higher level.  This is just a preliminary number from the U. of Michigan survey, and the final number will likely be lower, but that is less important. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). 


The breakdown in the inverse relationship between the dollar and risky assets is NEW. 


Howard Penney

Managing Director


Confidence Economics – THIS IS NEW - um

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