Bernanke's Burden Of Proof

“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
-Alan Greenspan
I understand that Wall Street memories can be as short a New York crack-berry minute; particularly into year-end bonus time. After a 63.8% rally from the March 2009 lows, you have a lot of people proclaiming their mystery of faith as “long term” investors again. It’s funny to watch.
At 52.2%, this morning’s II Bullish to Bearish Survey shows the highest weekly reading of bulls for 2009 to-date. The Depressionistas (bears) have been blown out of the water. Only 16.7% of institutional investors in the survey were allowed to admit they are currently bearish.
That said, I am begging you. Yes, begging you, ahead of Ben Bernanke’s FOMC testimony today, to take 3 seconds to remember what Alan Greenspan told Henry Waxman on Capitol Hill just over a year ago about his forecasting and risk management process.
The aforementioned quote was in response to Greenspan being questioned on his free-market ideology. One “maestro.” One view. One man who became “very distressed” … for a few months, before he started giving $50,000 dinner speeches again, I guess…
Here’s the rest of that riveting revelation of our Wizard of Oz, captured by David Leonhardt at the NY Times:
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working”

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Well, it’s all good and fine for Greenspan to chalk up the failure of his free money leverage Doctrine to being “shocked.” But that doesn’t do me or this country’s future any good if He Who Sees No Bubbles (Bernanke) goes right back to upholding it.

Since Bush, Greenspan, Obama, and Bernanke have embarked on this cut rates to ZERO campaign of socializing Wall Street losses and privatizing levered up gains, the percentage of participants in the USDA’s Food Stamp Program has almost doubled.

No, that’s not a typo. The percentage of people in this country needing food stamps to eat has gone from 6% during Greenspan easy money Tech bubble in 1999 to over 11% today. One in four American children now participate in some form of food assistance program. How’s that for “God’s work.”

This is plain sad. President Obama, these are your Fat Cats. Those who subscribe to starving their population’s fixed income by cutting the rate of return on their savings accounts to ZERO, and reflating the cost of everything they have to pay for in their everyday lives.

Despite yesterday’s November report showing a massive ramp in the monthly Producer Prices (+2.7% year-over-year inflation), this is what He Who Sees No Inflation (Bernanke) had to say to US Senator, Jim Bunning’s request for reconciliation of the math:

“I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead.”
Are you kidding me Ben? First of all, what does that mean? Second of all, what in God’s good name does that do for the 99% of people on Main Street who are paying 2 times what they did last Christmas at the pump? Thirdly, are you kidding me?
The sad reality is that the Fed Chairman is an academic who specialized in researching the history of the Great Depression. He is not a risk manager. He is not a forecaster. He has never seen a price bubble, nor should you expect him to.
This morning you are going to get another inflating price report at 830AM via US Consumer Prices for November. Then, you are going to see Bernanke get You Tubed for the umpteenth time at 215PM when he tells the free world that he sees no price inflation. The Chinese will be watching.
The problem with Bernanke has already been established by Greenpan himself. Again, re-read the aforementioned quotes. “Again”… “Again”… “Again!”
The bankers are getting paid in size by the government. The Piggy Banker Spread (the spread between 10-year and 2-year Treasury yields) is +272 basis points wide this morning. That’s only 4 basis points (0.04%) off of the fattest spread EVER. Yes, Mr. Bernanke, Mr. Geithner, and President Obama – you have set the table, and now the bankers are simply chowing down on what you served up. Don’t put the onus solely on them for eating.
All the while we are seeing Mr. Macro Market bake the long term effects of price inflation into the cake. Greenspan and Bernanke may have an admittedly “significant or permanent” impairment in their vision, but I can tell you this – Americans don’t get paid to wake up every morning willfully blind.
We are now seeing marked-to-market prices breakout to the upside in classic Federal Reserve rate hike leading indicators. Both the US Dollar and long term US Treasury yields have broken out above my intermediate term TREND lines to the upside (those breakout lines are $76.30 USD and 3.41%, respectively).
Greenspan and Bernanke can run from Mr. Macro Market, but they can’t hide. Prices don’t lie. The outputs of their Perceived Wisdoms do. History has a funny way of writing herself that way. While it may be hard for Washington to see this in their crack-berry caves of Groupthink Inc., with time it becomes crystal clear.
My immediate term support and resistance levels for the SP500 are now 1100 and 1115, respectively. I am sure we will test the top end of that range if Bernanke ignores this morning’s inflation data and panders to the most politicized monetary policy wind in US economic history this afternoon.

That’s why I invested 7% of the cash in my Asset Allocation on yesterday’s market down move. I moved longs versus shorts in the Virtual Portfolio to 21-11. Bernanke’s burden of proof remains something the risk manager in me cannot ignore.
Best of luck out there today,



VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.


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.


Yesterday, the markets avoided what could have been a disastrous day given the data flow from the MACRO calendar.   In early trading today, U.S. Futures and commodities are all higher on speculation that Ben will be good on his word. 


Also after the close, the ABC consumer confidence index rose to -45 in the week ending December 13 -up 2 points from a week earlier.


The S&P 500 was lower on Tuesday, declining by 0.6%.  From where I sit the MACRO calendar was unfavorable and the PPI data was troublesome.  The Financial (XLF) continues to struggle as the banking group is drowning in a sea of dilutive capital raises.  Not to mention the reality that the FED needs to raise interest rates. 


On the MACRO calendar inflation is rearing its ugly head with a 1.8% month-to-month gain in November PPI – 1% above expectations.  In addition, the regional manufacturing recovery lost some momentum as the Empire index fell to 2.6 in December from 23.5 in November; the lowest level in five months.  The one bright spot was industrial production, which rose 0.8% last month vs. consensus expectations for a 0.5% increase.


The dollar index rose 0.8% yesterday to close at 76.96. Despite all the bad news and the strength in the Dollar the market managed to avoid a major breakdown. 


Yesterday, every sector declined except Energy (XLE) and Healthcare (XLV).  Several sectors that benefit from the RECOVERY theme outperformed – Energy (XLE), Consumer Discretionary (XLY) and Industrials (XLI). 


The Energy (XLE) was the best performing sector yesterday, benefiting from the potential for more M&A activity and a stronger commodity.  January crude improved $1.18 at $70.69 a barrel, its first increase in ten days.  Crude benefited from the potential for increased demand coming from the better-than-expected increase in November industrial production; an upwardly revised 2010 economic outlook from Germany and OPEC boosted its 2010 demand forecast. 


The Healthcare (XLV), especially managed care stocks (HMO +0.8%) continued to benefit from expectations for a more watered down reform bill out of the Senate. 


The Consumer Discretionary (XLY) was the third best performing sector yesterday.  The XLY outperformed although the retail group was one of the worst performers yesterday with the S&P Retail Index down 1.2%.  The retail sector was dragged down by Best Buy.  While BBY reported better-than-expected fiscal Q3 EPS, the quality was low.  In addition, the top line was disappointing and it now expects a lower fiscal Q4 gross profit margin due to a continued negative mix shift.


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


In early trading today, crude oil rose for a second day before a report forecast to show that U.S. crude inventories declined last week. The consensus believes that the Energy Department will likely report that stockpiles dropped 2 million barrels for the week ended December 11.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.91) and Sell Trade (74.30).


In London Gold is trading higher by 1.0% to $1,134.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,090) and Sell Trade ($1,149). 


According to Bloomberg copper rose in London on the speculation of interest rates will remain low in the US.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.12) and Sell Trade (3.26).


Howard Penney

Managing Director














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ROST: Can it Get Any Better?

With Keith managing risk around our cautious view on ROST (shorted again today), we remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve.  Recall that on November 19th we posted a note suggesting that the anniversary of the best time in recent history for off-pricers is now upon us.  When you add in eight quarters in a row of inventory declines (while sales have accelerated) it remains hard to envision anything but a deceleration in momentum is on the horizon.  There is no question that this has been a great run, as it has been for other retailers benefitting from value pricing and the consumer trade-down effect.  But, if you’re curious what could happen while results remain robust on an absolute basis, with growth continuing at a decreasing rate, take a look at Aeropostale’s recent performance. 


Check out this historical perspective below, which takes a detailed but long look at the relationship between the industry’s inventory management (represented by the Sales/Inventory spread) vs. ROST historical same-store sales.  The Sales/Inventory spread for clothing and accessories retailers is currently at its widest margin since before 1996.  Truly amazing!  We then line this up against Ross’ topline results and you will see that ROST’s same-store sales exceed the Sales/Inventory spread far more frequently than not, 138 months out of 166 or 83% of the time.  In fact, of the 28 times the sales/inventory spread outpaced comps over 13 years, 3 have been since September of this year alone.


The cleanliness of the inventory pipeline for retailers and manufacturers alike is about as good as we’ve ever seen and as a result, there are simply less “quality”  goods for ROST to procure.  Additionally, with fewer units floating around in the pipeline, we should begin to see ROST (and others) no longer being able to buy as close to need as we have seen over the past year.  This should have an adverse impact on inventory turns as well as the industry’s ability to flow fresh, unique good as frequently.  All this points to diminishing upside on margins and earnings…



ROST: Can it Get Any Better? - ROST SInv vs Comps 12 09



ROST: Can it Get Any Better? - ROST SInv Spread vs EBIT 12 09



Negative Datapoint from H&M

Negative Datapoint from H&M


H&M’s sales comps are flat-out manic. Substantial slowdown in November, but pick-up in first two weeks of Dec. The volatility in sales trends has picked up at H&M – which (aside from Li&Fung) is the closest thing to a barometer for global apparel spending.


Comps accelerated their rate of decline drastically on a 1 and 2 year basis.  Comps almost fell to August’s levels which were the worst seen in over 5 years.  Only August 2009 and April 2008 experienced greater declines over the last 5 years.


As we’ve said in the past, H&M’s results are important to follow because it serves as a meaningful pulse on global discretionary spending. Many people underestimate how truly massive and relevant H&M is. While slightly smaller on the top line than Gap, its $2.6bn in EBIT dwarf’s Gap’s $1.6bn. Aside from being one of the largest, most profitable and highest-return apparel companies in the world, it is clearly the most diverse. 


In a move that we’d say is somewhat out of character for this company, it provided no commentary on the month’s results, but instead pointed to the more positive December trends which are up 11% over the first two weeks.  In other words – ignore the bad, focus on the good.  Nonetheless, if December holds at a double digit rate, then the 2-yr trend will be net positive. Let’s hope this continues. But ‘hope’ as we often say, is not an investment process.


Negative Datapoint from H&M - 1 year H M


Negative Datapoint from H&M - H M 2 yr




As a reminder this is what “He Who Sees No Bubbles” said recently…


“Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.  “The Federal Reserve is committed to keeping inflation low and will be able to do so.”


-          December 7, 2009 - Fed Chairman Ben S. Bernanke in a speech to the Economic Club of Washington


The US Dollar has strengthened over the past few weeks and is strong again today.  Today’s PPI reading and Wednesday’s CPI could be the river card that reveals why?  We have been calling for inflation to return and that time is now. 


The consensus estimates for the seasonally-adjusted November CPI is 0.4% according to Bloomberg versus 0.3% in October.  Given the implied relative strength of gasoline and food prices in the November retail sales data, an upside surprise to consensus is a better than average possibility.


A consensus report would boost year-to-year CPI inflation from minus 0.2% in October to roughly a positive 1.9% in November.  The November CPI data will officially end the recent period of formal DEFLATION.


Inflation is moving lower?


Howard Penney

Managing Director




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