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Confusion of Aims

“A perfection of means, and confusion of aims, seems to be our main problem.”
-Albert Einstein
 
Alan Greenspan and Ben Bernanke have perfected the art of Wall Street expectations. In doing so, these two Lords of Leverage have achieved their means. Cutting interest rates on America’s hard earned savings accounts to ZERO, and using American deposits to socialize Wall Street losses has a price, however. This “confusion of aims, seems to be our main problem” as we head into 2010.
 
In the end, mentally inflexible habits die hard. So will an American policy of abusing her status as the world’s reserve currency and using that currency to create limitless credit. Excessive credit creates asset price bubbles. Then they pop. That’s what you are seeing in Chinese property stocks this month. That’s what you saw in everything US real estate only 14 months ago. If you didn’t get paid to know these things, now you know.
 
The good news out of all of this is that some of us are still alive to write about it. The new rules of New Reality finance are that we can now expose the incompetence of Washington’s Perceived Financial Wisdom real-time. Wikipedia, YouTube, and Google are stubborn little accountability critters that way.
 
The sad news, as we head into another holiday season, is that the percentage of Americans living on food stamps has now hit 11%. Before Greenspan and Bernanke bailed out the tech and real estate bubbles, that number was closer to 6%. This is what we get for giving them the keys to America’s vaults of savings deposits.
 
Even though these guys ignored their own compromised data last week (the Consumer Price Inflation (CPI) report went straight up into the right (+1.8% y/y), the data itself is plenty convincing! He Who Sees No Inflation (Bernanke) gets paid to be willfully blind.
 
Fortunately, I am not the only risk manager who has figured out that an elderly person who lives on a fixed income and puts gas in her car is financing the Piggy Banker Spread (the Yield Spread is +275 basis points wide this morning). In the last three weeks we have seen a tremendous amount of marked-to-market price momentum build against the Fed Chairman’s case for an “extended and exceptional” period of ZERO percent interest rates.
 
Here are those accountability checks:
 
1.      The US Dollar has broken out to the upside on both an immediate term (TRADE) and intermediate term TREND basis

2.      US Financial stocks (XLF) have broken down on both a TRADE and TREND basis

3.      The yield on long term US Treasuries has broken out to the upside with 10-year yields now trading in what we call a Bullish Formation

 
What’s bullish for interest rates is bearish for bonds. That’s what I mean by Bearish and Bullish Formations. In our risk management model that’s what you get when all 3 of our core investment durations (TRADE, TREND, and TAIL) have prices that are above or below the marked-to-market price. In this case long term bonds yields are in a Bullish Formation.
 
For 10-year yields, those levels are as follows:
 
1.      TRADE = 3.43%

2.      TREND = 3.40%

3.      TAIL = 3.21%

 
At 3.62%, last week we saw the highest yield for 10-year Treasuries in the last 4 months. In conjunction with that breakout in bond yields, we also saw a 3-month high in the price of the US Dollar Index and a 3 month low in the price of the US Financials Index (XLF). Yes, all three of these factors hinge on one thing – He Who Sees No Inflation (Bernanke) seeing the light. The market is already discounting a Fed hike in early 2010.
 
While the banking division of Goldman Sachs may like to see the free money rates on the short end of the yield curve in perpetuity, the rest of America doesn’t get those preferred borrowing terms. Goldman’s “research” call is that the Fed keeps rates at ZERO well into 2011. How convenient that would be, for them…
 
Since I covered our long standing short position in the US Dollar on November the 10th and called it the Bombed Out Buck, I have some credibility in calling Goldman’s currency analyst out on this today. This is what he said this morning about getting run over on the short side of last week’s US Dollar squeeze:


“Timing was clearly not optimal, and we were too early in fading the recent improvements in U.S. data and the impact of Greek budget tensions… balance of payments situation remains very dollar negative. We would therefore continue to look for opportunities to position tactically for dollar weakness.”


Goldman didn’t have our inflation forecasts for November CPI and PPI. So I don’t blame them for “tactically” missing why the Dollar could pop, and US Financials (like their own stock) drop. This isn’t called “not being optimal.” This is called being wrong.


Conservative American savers on Main Street are being wronged. It’s time for He Who Sees No Inflation to “get” that. President Obama should. It’s not that complicated. And a confusion of aims is not what is going to get him the political win that he needs against Wall Street.


My immediate term support and resistance lines for the SP500 are now 1089 and 1116, respectively.


Best of luck out there today,
KM


LONG ETFS

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 BrazilAs 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.

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.

 

SHORT ETFS

 

RSX – Market Vectors RussiaWe shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  

 

EWJ – iShares JapanWhile 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 DiscretionaryWe 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.


THE M3: LOTS 5&6, STANLEY HO, NEW CE

The Macau Metro Monitor.  December 21st, 2009

 

 

LAS VEGAS SANDS: COTAI WORK TO RESTART WITHIN 5 MONTHS wsj.com

Las Vegas Sands Chairman Sheldon Adelson said that he expects construction to be restarted on the company’s Cotai Strip project in about five months.  The first phase of the project will be finished by June 2011 and phase two will be completed by the end of 2011, according to Adelson.  Sands China, recently listed on Hong Kong’s stock exchange, raised US$1.75 billion in project financing last month to restart construction on Lots 5&6.  It will also use US$500 million raised from the US$2.5 billion initial public offering for construction purposes.  Construction was halted in November 2008 due to a lack of funding.

 

LVS’ plans include more than 20,000 hotel rooms in Macau, about 1.6 million square feet of exhibition space, more than 2 million square feet of retail malls and six theaters.  Separately, Adelson said that the first stage of the Marina Bay Sands integrated resort in Singapore will open in early April.

 


MACAU SAR’S THIRD-TERM GOVERNMENT SWORN IN shanghaidaily.com

The celebration marking the 10th anniversary of Macau’s return to the motherland and the inauguration of the third-term government of the Macau Special Administrative Region was held on Sunday.  Chinese president Hu Jintao attended the ceremony, where Macau SAR Chief Executive Fernando Chui Sai On and principal officials of the SAR governments were sworn in. 

 


NEW MACAU LEADER TO DIVERSIFY ECONOMY FROM GAMING reuters.com

Macau plans to diversify its economy over the next five years into sectors such as logistics, according to new Chief Executive Fernando Chui.  Chinese leaders also pledged to better regulate gaming in the territory.  Chui said, “While enhancing regulations on the gaming industry, we will also put emphasis on the convention, exhibition, logistics, and cultural industries.  We will also focus on the upgrade and transformation of traditional industries.”

 


STANLEY HO APPEARS IN PUBLIC macaudailytimes.com.mo

Stanley Ho made his first appearance in more than four months at the inauguration of the third-term Macau SAR government at the Macau dome yesterday.  The 88 year-old had been hospitalized in Hong Kong and has reportedly undergone two surgeries.

 

 

MACAU CONSUMER PRICES DECLINE IN NOVEMBER forextv.com

Macau’s Statistics and Census Service announced that the consumer price index decreased 0.11% year-over-year in November, compared to the 1.1% fall in the previous month.  On a monthly basis, the CPI increased 0.49% in November, faster than the 0.28% growth in the preceding month.  For the January-November period, consumer prices have risen by 1.21% when compared to the same period in 2008.

 


GROUNDBREAKING FOR NEW UNIVERSITY OF MACAU English.cctv.com

President Hu Jintao ended his two-day tour of Macau on Sunday with a groundbreaking ceremony for the SAR’s only comprehensive university.  The move follows up on a promise by the Central Government to give more land to Macau.  The university now begins construction of its new campus on Hengqin Island.  


US STRATEGY – VERY NARROW PERFORMANCE

The S&P 500 finished by 0.6% in uneventful trading on Friday. That said only two sectors were up on the day – Financials and Technology.  Healthcare and Consumer Discretionary were flat on the day and every other sector declined.

 

The MACRO calendar was quiet, while some sovereign and geopolitical concerns were the focus on Friday. 

 

The dollar index rose 0.2% on Friday and is now up for three straight weeks.  Last week the dollar index rose 1.6%.  The strong dollar led the S&P to decline 0.4% last week, as Energy and Technology were the only sectors that outperformed and were up last week. 

 

The Technology (XLK) was the best performing sector on Friday.  The earnings calendar was the driver of the outperformance, with ORCL and RIMM leading the way.  Another notable gainer was TTWO, up 9.2% after Carl Icahn increased his stake in the company. 

 

The only other sector up on Friday was the Financials (XLF).  The XLF was up on the back of the banking group, with the BKX gaining 2.3%.  Although, last week the BKX declined 2.1% and is now down two weeks in a row.  There was some positive sell-side commentary on the sector, but a short covering rally seemed to be in place.

 

The Consumer Discretionary (XLY) underperformed on Friday, but was flat on an absolute basis.  There were some concerns about the holiday shopping season in the eastern US this weekend.  A bright spot were Restaurants stocks, with DRI up 7.3% on the day.  On Friday, Malcolm Knapp reported that November casual dining same-store sales came in -4.6% with traffic -4.4%.  On a 2-year average basis, this points to a nearly 190 bp sequential improvement in comparable sales trends.  Also on Friday, SBUX improved 6.4%.   

 

Consumer staples were the worst performing sector on Friday, declining 1.1%.  On a MACRO level the dollar was the likely culprit for the decline.  The big drag on the sector were Tobacco names and the Food Retailers.  The two worst performing name were WAG and WFMI. 

 

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

 

In early trading crude oil is relatively quiet as OPEC has a consensus on “no change” in oil production quotas for the bloc’s meeting tomorrow.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.52) and Sell Trade (74.30).

 

Gold erased earlier gains to trade little changed in Asia at $1,112.57 an ounce by 2:15 p.m. in Singapore. It had earlier gained as much as 0.6% to $1,119.69.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,101) and Sell Trade ($1,151). 

 

Copper climbed for the first time in three days in Asia on optimism the global economic recovery is gaining momentum.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.14) and Sell Trade (3.26).

 

Howard Penney

Managing Director

 

US STRATEGY – VERY NARROW PERFORMANCE - sp1

 

US STRATEGY – VERY NARROW PERFORMANCE - usdx2

 

US STRATEGY – VERY NARROW PERFORMANCE - vix3

 

US STRATEGY – VERY NARROW PERFORMANCE - oil4

 

US STRATEGY – VERY NARROW PERFORMANCE - gold5

 

US STRATEGY – VERY NARROW PERFORMANCE - copper6

 


Early Look

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THE WORLD ACCORDING TO SHELDON

CityCenter sucks, other senior managers caused LVS's huge stock price decline, and moving back up to 3rd richest is most important. I'm paraphrasing and embellishing but you get the gist.

 

 

LVS Chairman and CEO Sheldon Adelson recently shed some light on a lot of issues.  I don't know if it is the light of truth but it is entertaining.  Here we go.

 

 

ON CITY CENTER:

"Even though there is a lot of publicity about it, I haven't heard anyone who's seen it tell me it is going to be a winner. They have no strategy. They have no obvious plan. If they try to compete in the travel and tour business, they will cannibalize all their other properties, like the Bellagio. They don't have a convention space big enough to make an impact. So they built it without a strategy. How ill-advisable is that?"

 

- Negative comments by competitors is commonplace in the casino industry.  This statement is particularly harsh but may not be far off base.  The "without a strategy" comment is a little much.  The strategy was to capitalize on runaway consumer spending and housing prices.  We know how that is turning out.

 

 

ON WHAT CAUSED THE PRECIPITOUS STOCK PRICE DECLINE:

"We did have a few bad managers, and they were the primary reason why our stock fell 99%. Those guys financed our expansion by borrowing against future assets (casinos) that generate income, rather than taking out normal project finance loans. It put us in a horrible position. Now those executives are gone, and I love coming to work again."

 

- Bill Weidner and Brad Stone, it's all your fault!  Why didn't you guys advise Sheldon to sell the company at $140 per share?  Normal project finance loans?  Most casino companies have financed their developments on their own balance sheet.  But hey, why let the facts get in the way of a good game of blame game? 

 

 

ON SHELDON'S GOAL:

"My priority now is to get back to where I was, to be worth $40 billion again and rank third in America."

 

- World peace, eliminate hunger, top notch healthcare for all?  I'm a capitalist too but even if I was the greediest guy on the planet, I like to think that I would at least announce my greed in a more palatable way.  I'm in no position to judge though.  Even though he is no longer #3, he's still one of the tallest guys in the country, when he sits on his wallet (another Sheldon quote, this one from the good ole days).


The Week Ahead

The Economic Data calendar for the shortened holiday week of the 21st of December through the 24th 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 - ahead21

The Week Ahead - ahead22


Why the Euro is NOT a Buy

We’ve critically hit on (ad nauseam at times) the politicization of the Fed to keep rates low for an “exceptional and extended” period.  However, with Thursday’s decision by the Senate Finance Committee to vote in Bernanke for a second term now in the rear view and with the release of highly inflationary November US CPI and PPI numbers this week that even Bernanke won’t be allowed to ignore (+1.8% Y/Y and +2.7% Y/Y, respectively), we believe markets are increasingly pricing in expectations of a US rate hike.

 

As expectations for a hike move toward the near months we’ve already seen sharp impacts in the currency markets. In particular, the USD gained impressive upward momentum with the US Dollar Index trading positive for 5 of the last 6 day this week; and certainly yesterday’s monster move of +1% in the USDX contributes evidence that the Reflation TRADE is unwinding. US Financial (XLF) and Energy (XLE) stocks (proxies for inflation) are obvious examples of this.

 

As it relates to the Euro, increased bets that the Fed will hike and thereby reduce the spread between the US interest rate and the ECB’s 1% benchmark rate have begun to shift buyers away from the Euro. This week alone the EUR lost 2.3% versus the greenback. It’s lost -4.5% in the last month.

 

As we get more confirmation from the unwinding of the Reflation TRADE, we’ll look to take a more aggressive stance on global currencies. At times this year we’ve been short the US dollar via the etf UUP in our model portfolio. As it relates to the EUR-USD, the levels below suggest at the right price that we could get paired off, short the Euro, long the USD.  Stay tuned.

 

Matthew Hedrick
Analyst

 

Why the Euro is NOT a Buy - Euro1

 


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