Capital Markets Risk Management: Biotech IPO's

While Healthcare and Biotech Capital Raises have had a historic run through the back half of 2009, the IPO calendar, particularly for speculative biotech, has been notably light.


In yesterday’s morning note we suggested you keep the pricing of the Ironwood Pharmaceuticals IPO on your radar as a potential lead indicator for CRO’s and measure of remaining risk appetite as market momentum & sentiment have rolled in the past couple weeks.  The offering, which was expected to price 16.7M shares at $14-16, ended up pricing at $11.25/share – a 30% haircut and the biggest reduction for a U.S. IPO YTD.


The pricing of IRWD is an extension of the 2009 trend in U.S. Healthcare IPO’s which were both infrequent and uninspiring.  Of the nine Healthcare IPO’s debuting in 2009, six have turned in negative absolute performance while underperforming both the XLV and the S&P500. 


Coming out of the 2001 recession, Biotech IPO’s didn’t see a meaningful, more sustained uptick until 4Q2003.  While the deluge of offerings in the 2000, pre-recession period likely exacerbated the drought in the post recession period it's at least noteworthy to point out the lag between the recovery of the market and ^NBI Index and the recovery in the IPO market.  Presently, the success or failure of Ironwood may serve as a Go or No-Go signal for the IPO market and the growing list of prospective offerings backed up in the pipeline.  


Biotech has been on a tear of late, capital raising has continued unabated, and a successful return of the IPO market would serve as an important confirmationary indicator of resurgent investor interest and pending capital investment to the industry. The outcome here holds important consequences for Drug Development Service companies who need biotech allocations to drive growth as the Large Pharma outsource story loses juice.     


IRWD shares were set to begin trading at 11am and we’d like see at least 3 days of volume & price action before vetting the result.  Our next look at the health of the IPO market may come compliments of Anthera Pharmaceuticals who, notably, amended their S-1 this morning to reduce the size of the intended offering.    


Christian B. Drake



Capital Markets Risk Management: Biotech IPO's - US HC IPO Performance


Capital Markets Risk Management: Biotech IPO's - U.S. Biotech HC IPO s



Boone’s Plan

Position: Short natural gas via the etf UNG


We recently shorted natural gas in our virtual portfolio, on the back of a supply and demand mismatch that we think will build in the intermediate term.  Longer term, though, there are some justifiable reasons to be bullish of natural gas.  T. Boone Pickens provides some interesting rationale for longer term demand for natural gas in the Pickens Plan.


Pickens prefaces the outline of his plan with the point that Americans are addicted to foreign oil, and on that point he is correct.  According to most estimates, the United States uses 25% of the world’s oil despite having only 4% of the world’s population.  Crude oil production in the U.S. peaked in 1970 (Hubbert’s Peak) at 9.7MM barrels per day, has been on steady decline ever since and is now producing less than 4.0MM barrels per day.  Clearly, the U.S. is running out of oil and is becoming increasingly dependent on foreign oil sources.


One of the primary solutions that Pickens, and many advocates of natural gas, offer for as a solution to the issue of foreign oil dependence, is an increased use of natural gas, particular for transportation use.  One on hand, Pickens is an investor who likely has a vested interest in promoting increased use of natural gas, but on the other hand there are some opportunities for natural gas to displace oil.


One example Pickens gives is that 20% of all the oil in the United States is used by 18 wheelers to transport goods around the nations.  Displacing that fleet, with a natural gas fleet, would have a meaningful impact on domestic oil demand.


In contrast to oil, the United States is rich in natural gas. In fact, both production and reserves of natural gas continue to increase in the United States.  The most recent estimates from the Potential Gas Committee, which is the authority that produces estimates every two years, suggests that the United States holds 2.1 trillion cubic feet as of the end of 2008, which is a 35% increase from 2006 (this fact is obviously bearish for price).


Globally, there are roughly ~10MM vehicles that use natural gas.  Most of the vehicles are located in five countries: Pakistan, Argentina, Brazil, Iran, and India.  In aggregate, this is a very small portion of the world’s vehicular population. There are more than ~800MM vehicles in the world currently, so natural gas is just over 1% of the market in focused regions with access to cheap natural gas.


In his recent State of the Union address, President Obama mentioned clean energy no less than 10x, and made the following statement:


“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”


At the moment, President Obama likely has other issues to focus on, put the potential for incentives to support cleaner forms of energy are clearly being bandied about within the administration and it is likely that natural gas would be a recipient of some incentives, as it is a cleaner form of vehicular fuel than gasoline (formed from oil). Perversely more incentives for natural gas could actually mean a lower price as production should increase.


While in the longer term natural gas is a logical path for the United States to pursue to displace her dependence on oil and for clean energy purposes, the pathway to increased demand will be lengthy.  Setting aside massive government incentives, which could occur, we need to build a fleet of natural gas vehicles and an infrastructure of distribution.  Neither of which is likely to occur in the shorter term and will require massive investments and time.


While we applaud Boone’s efforts, we remain short Natty.



Daryl G. Jones
Managing Director


Not a bad quarter - exactly in-line with us - although sellside had upped whisper expectations the last couple of days so stock is taking one on the chin. Here is our call transcript.





"Over the past year, we substantially reduced operating costs, completed our last significant construction project and strengthened our balance sheet through a multi-phase debt restructuring. Our efforts in 2009 have created a strong foundation for 2010 that we believe will result in a significant increase in cash available to retire outstanding debt and maintain quarterly dividend payments. We also believe we are well positioned to withstand continuing difficult economic conditions and drive significant growth when the economy improves."

- Gordon Kanofsky, Ameristar's Chief Executive Officer and Vice Chairman



Earning Release Highlights

  • "Ameristar Black Hawk achieved record-breaking financial results as the September 29, 2009 grand opening of our luxury hotel and spa complemented the July 2, 2009 Colorado regulatory changes. Ameristar Black Hawk helped to grow the market by 14.9% when compared to the 2008 fourth quarter, and the property increased its fourth quarter market share on a year-over-year basis from 16.9% to 27.1% as a result of the facility and regulatory enhancements."
  • "On December 28, 2009, the Indiana Department of Transportation announced that it was permanently closing the Cline Avenue bridge near Ameristar East Chicago. The bridge has been closed since November 13, 2009 due to safety concerns discovered during an inspection of the bridge. Closure of the bridge has significantly impacted the property's operating results, and we expect this to continue unless and until improved access to Ameristar East Chicago is developed."
    • "We are working closely with government officials to attempt to mitigate the traffic impact.  Additionally, we will continue to evaluate the property's cost structure relative to business levels."
  • "At December 31, 2009, our leverage and senior leverage ratios (each as defined in the senior credit facility) were required to be no more than 6.00:1 and 5.75:1, respectively. As of that date, our leverage and senior leverage ratios were each 4.87:1."
  • 1Q2010 guidance
    • Depreciation: $27.5-$28.5MM
    • Interest expense, net of capitalized interest: $33-$34MM, incl. non-cash interest expense of approx.$2.8MM
    • Tax rate: 42-43%
    • Capex: $30-$35MM
    • Capitalized interest: $0.2-$0.5MM
    • Non-cash stock-based comp: $2.8-$3.3MM


  • Four properties actually improved their EBITDA margins due to cost management and regulatory benefits
  • They extracted $60MM of savings across their properties
  • Missouri loss limit removal - $6.8MM benefit at least (ie recovered all their lobbying costs) and in Colorado, they think they recovered all lobbying costs in just 3 months from the regulatory benefits
  • Hotel at Blackhawk has been "gangbusters", took 5x their fair share of market growth in that market.
  • Think that 27% is a sustainable level of market share in Blackhawk for them (up from 17% pre-hotel and reg changes)
  • East Chicago: replacing the bridge is at least 3-4 years out.  They are continuing to downsize the cost structure at that property to offset some of the losses from the bridge closure.
  • Anticipate a substantial reduction in debt going forward with proceeds from the significant cash flow they generate from operations now that their capital spending is just maintenance related
  • Once their swaps expire they should experience materially lower interest expense (save $12MM in 2H2010), assuming current LIBOR rates
  • Total capex in the $60-65MM range in 2010 (the $70-80MM in their presentation includes construction payables from 2009 work), spent over $60MM in 2009 on true maintenance capex.


  • No significant change in Jan trends from what they saw in Dec aside from weather related issues
  • Amount in dispute with Colony is not material
  • Not really interested in Riveria's property, but they will be opportunistic. However, they don't see a lot of compelling distressed opportunities, but will be prudent now until they get out of this recession
  • Corporate expense may see a slight increase in 2010
  • Other than seasonality they do believe that Blackhawk can see similar margins that they saw in the 3rd Q.  4Q is always impacted by weather in 4Q.
  • The $25.8MM was maintenance capex in the 4Q
  • "We are out the of the development business for now"
  • Update on the Estate? none
  • Corporate and expense includes the $3.8MM of discontinued project development expenses
  • CIP of $18.5MM at Dec 31 includes construction payables on Blackhawk
  • Market share in Vickburg  - 42-43% in 4Q09.  Where could it go, used to be in the high 40's.
    • Think that 42-43% range is a reasonable expectation
  • What do they consider "compelling" valuation for assets
    • most workouts leave existing equity in place which complicates the distressed situations. Need a 15-20% ROI to get "excited" about doing due-diligence
  • Won't see any more big regulatory changes like what they had in CO & MO but are focused on monitoring smoking bans and the like
  • The impact of the bridge on EBITDA should be about $10-15MM in 2010 vs. their original expectation. In 4Q2009, think that there was a $2-3MM adverse impact on East Chicago due to the bridge closure.
  • Have been marketing the "heck out of the [Blackhawk] property" and its working, but unclear that there was a negative impact on margins because of that - feel like they got a good return on the marketing expense.  Will continue to market heavily there - lots of people in the Denver market are not aware of their property
  • Some of the construction payables are included in the $30-35MM estimate
  • Hopeful that longer term margins at Blackhawk would be better than what they have at Council Bluffs (lower tax rate in CO)
  • Expectation is that dividends will remain flat, assuming that the business remains stable
  • Liquidity update for those people that can't (or are too lazy to) do math and didn't bother reading the release:  Need $60-65MM of cash on hand to operate + $96.5MM+ plus $100MM of R/C powder
  • Original purchase price was $670MM for East Chicago.  Written down by $424MM
  • Step up in promotional dollars in 4Q09? - Part of it is Blackhawk comp rooms, part is East Chicago based on road being closed (necessity to maintain volume). More than likely this is will go for another Q or 2.  In the summer though they can spend less since its peak tourism season anyway at Blackhawk.

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Einhorn's Objectivity

In this morning’s Early Look I said that I would post David Einhorn’s full rebuttal.


David does his own work, and I have a great deal of respect for his independent research process. I have not edited any part of his reply to my Early Look note from January 29th, titled “Red Light Risk.”


This is one of the most even-handed and intellectually objective replies I  have had since I started this firm. Some people get very emotional when I stand on the other side of their timing in a position. There is zero emotion in this rebuttal.


Many thanks to DE for letting me pass this along to you, unedited (his comments are in red, within the body of the original text).




"As investors, we can't change the course of events, but we can attempt to protect capital in the face of foreseeable risks."

-David Einhorn


Admittedly, when "bottom's up" we are bottom up investors, but bottom’s up drinkers hedge fund manager David Einhorn proclaimed his new macro mystery of investing faith at the 'Value Investing Congress' on October 19, 2009, I was smiling. Our Hedgeyes call this proactively managing macro risk and I do support Mr. Einhorn's message thanks.


Einhorn and I are about the same age. We both grew up in a hedge fund bubble. For a decade, we were probably both overpaid I can’t speak for you, but even though I have started a valuable business that has created high paying jobs and provided a good value to my customers, I would agree with this.  I feel very fortunate. He still runs money and sometimes my mouth and I run my mouth, so I am thinking that he's probably worth a lot more than me. But what does that mean?


To some in this business, that means a lot. To others, it means nothing at all put me in this group. We all wake up early every morning with a passion to play this game. David's Greenlight Capital now has its macro views. I have mine. Game on much less conflict here, than you think.


The global macro risk manager's job in this business is to acknowledge amber flashing lights, before they go red. It's also being keenly aware of when one of your big "ideas" is everyone else's too. Measuring consensus is part of any repeatable Red Light Risk Management process.


Embedded in our macro risk management process are 3 dominating Global Macro Themes. We change them quarterly, because the math changes daily. As a reminder, my team's current Macro Themes for Q1 of 2010 are:


1.       Buck Breakout (bullish on the US Dollar; bearish on gold) We are bullish on the dollar vs. the yen, euro, & pound.  We like the dollar more than most everything but gold at the moment.  Or maybe we just hate it less than the other currencies.  We are long various European sovereign CDS.


2.       Rate Run-up (bearish on government bonds)  agreed at some point, but no real view on this quarter.


3.       Chinese Ox In A Box (bearish on Chinese equities; bullish on Chinese currency) I would tend to agree, but have no position and no real conviction.  It seems to be working.


I do not know what Einhorn thinks on Macro Themes 2 and 3 but, now that he does macro, he obviously better have a view. That said, I do know that he stands on the other side of me with regards to both the US Dollar and Gold.


In that same speech, Einhorn made the following conclusions about gold:


1.       "Of course, gold should do very well if there is a sovereign debt default or currency crisis."


2.       "I subscribed to Warren Buffett's old criticism that gold just sits there with no yield and viewed gold's long term value as difficult to assess."


3.       "Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible."


After being bullish on gold since 2003, and vehemently bearish on what I labeled the "Burning Buck" in early 2009, I do think I have the credibility associated with understanding the bearish dollar/bullish gold case Agreed. There are many aspects to Einhorn's conclusions that I agree with, but not at every price and every duration. My guess is your current quibble is more about duration than price.  I’d be willing to bet there will come a time where you will like gold at a substantially higher price.


Now, if you really want to manage Red Light Risk in global macro, you better manage those two things dynamically  - price and duration. I have written about this before, but it's worth mentioning again. Duration Mismatch is one of the top 3 risks that has hurt me over the course of my risk management career. We need to monitor it systematically and measure it scientifically. Just as I am still trying to learn and improve (like incorporating more macro thinking), I am hopeful to improve here, as well.


Back to Einhorn's points on gold. On an immediate (TRADE) to intermediate term (TREND) duration (3 weeks to 3 months), gold has not done well in the face of sovereign debt default risks rising. I don’t know.  I wouldn’t say my speech was an important date….but since then gold is up a little and the S&P is down a bit.  It was about 3 months ago. (Since our actual entry, the results have been much more decisively in our favor) Gold is up a lot in Euros, where the sovereign crisis appears to be at the moment  Now maybe he meant a sovereign debt default crisis in the USA it would do very well in a US crisis and that was my point.  My guess is that such an event, if it ever happens, is quite a ways away and would not fit into the thinking of someone investing for 3 months or less and, to be fair, we should give him the benefit of the doubt the benefit of the doubt is always appreciated here until he replies to this. But, so far, with CDS (credit default swaps) in Greece blowing out to 414 basis points last night, gold is still going down not relative to the place where the crisis exists.


Gold is going down because I am right on the Buck Breakout. Yes, as Mr. Buffet pointed out to David We didn’t discuss this.  I was relying on his public statements. way back when, there are many risks embedded in evaluating the gold price. But those difficulties work both ways! Today, in terms of measuring the risks of being long gold, the r-square is highest relative to up moves in the US Dollar. I haven’t done the math, but it feels more correlated to equities than the dollar to me at the moment.  I suspect that that correlation will break down in gold’s favor at some point.


Managing Red Light Risk is just that. You have to accept that there are many types of investors telling many different types of qualitative stories about what it is that they are bullish on. You also have to accept that Mr. Macro Market's math will rule the day over all the storytelling I strongly agree with this.


This morning the US Dollar is making a 5 month-high at $78.94. Gold is trading down another -1% for the week to-date at $1083/oz. I am long the US Dollar and short Gold via the UUP and GLD etfs, respectively, and I have a zero percent allocation in our Asset Allocation Model to Commodities.


The long term TAIL of resistance for the US Dollar Index is up at $80.21, and I think it's going to test that line this year. My long term TAIL line of support for the gold price is down at $997/oz. That's another -8% of Red Light "foreseeable risk" that these Hedgeyes are calling out for you Mr. Einhorn. I do think we have a different view on duration.  I have no idea which way the next $80 in gold will be.  If I had a strong view, I would modify my position, as I’d rather buy it back cheaper.  Sadly, I don’t and you may well be right.  I do have a strong view as to which way the next $500+ will be and I don’t want to give that up just because I might have to temporarily give up a fraction of our gains to date to the volatility gods in the meantime.  Welcome to the game of proactively managing macro risk. It's a full contact sport. I don’t see it as full contact.  I am still not betting these things big enough to look at it that way.


Best of luck out there today, and have a nice weekend  (de)




Keith R. McCullough
Chief Executive Officer

R3: RL: Big Enough?


February 3, 2009


A big beat by RL, and the company gave the bulls plenty to chew on here. But a miss vs. our model, and let’s face it…expectations were high. Retail looked solid, and the balance sheet continues to improve, but wholesale definitely turned down. We’ve been waiting for a pullback to get involved – but we need to get clear on wholesale earnings to be certain that $5.75 next year is still a reality.





A big beat by RL, and the company gave the bulls plenty to chew on here. But a miss vs. our model, and let’s face it…expectations were high. Retail looked solid, and the balance sheet continues to improve, but wholesale definitely turned down. We’ve been waiting for a pullback to get involved – but we need to get clear on wholesale earnings to be certain that $5.75 next year is still a reality.


“Footwear cited as primary positive driver of wholesale, first such call out suggesting traction there perhaps modestly ahead of expectations. That perhaps explains away part of the wholesale margin decline as footwear is lower margin at this stage, but it flies in the face of a wholesale top line miss (or suggests that apparel and accessories failed to show up)."


R3: RL: Big Enough? - RL SIGMA


R3: RL: Big Enough? - RL Comp 1 10




  • Despite increased traffic and the weak economy, Rent A Center just reported a 2.3% skips and stolen rate as percentage of per store revenues, its best rate in 6 years. Additionally, management noted that the average income of its customer base continues to trickle higher.
  • According to a Harris Interactive poll, the NFL continues to widen its lead as the most favorite sport in America amongst fans who follow more than one sport. Pro football posted a 400bps increase in popularity in 2009, widening its lead over baseball. Approximately 35% of fans say football is their favorite, while baseball is favored by 16%. College football, auto racing, and the NBA round out the top 5.
  • After an incredible run of outsized same store sales gains, Japan’s deep value, fashion retailer UNIQLO reported a 7.2% decrease in January sales. Interestingly, the company warned that the sales shortfall was entirely due a shortage in inventory after the company sold out of its Heattech baselayer products during December. This marks the first retailer that definitively cited inventory shortage as the root cause of weakness in sales. Definitely not a bad problem if rectified quickly, but something to watch as retailers are faced with the decision to increase inventories or continue to run lean.




Walking Co. Files Reorganization Plan - The Walking Company Holdings, Inc. filed a reorganization plan under which the company intends to keep 207 of its 214 (over 96%) current store locations open and pay off all of its debts and future obligations to trade creditors. It plans to exit Chapter 11 protection "sometime this spring." In a court filing on Monday, the company said it had negotiated new lease agreements with landlords of about 90 of its 210 stores and that the move will generate annual cost savings of about $3 million. The retailer had filed for bankruptcy protection in December, with a plan to close almost half of its stores. The Walking Co said it has obtained a commitment from an investor group led by Richard Kayne of Kayne Anderson Capital Advisors LP to invest $10 million to recapitalize the company. Wells Fargo Retail Finance has agreed to provide $30 million as exit financing. "Today our company took a major step forward in the process of emerging from chapter 11. I want to commend all of the professionals working on behalf of the company -- the unsecured creditors committee, landlords, financial institutions, and otherwise -- on their diligence in achieving this result," said Andrew Feshbach, CEO of The Walking Company, in a statement. <>


Nike and Others Form Sustainability Coalition - Ten organizations, including Nike and the Outdoor Industry Association, announced the launch of the GreenXchange (GX), a Web-based marketplace where companies can collaborate and share intellectual property (IP) which can lead to new sustainability business models and innovation. The remaining eight are: Best Buy, Creative Commons, IDEO, Mountain Equipment Co-op, nGenera,, 2degrees and Yahoo. Announced at a CEO breakfast at the World Economic Forum in Davos, Switzerland, the organizations called on other corporations to join them in committing to opening up their IP to fast-track the development of innovative solutions to sustainability challenges. "Nike is today committing to placing more than 400 of our patents on GX for research, demonstrating our belief that the best way to stimulate sustainable innovation is through open innovation," said Mark Parker, NIKE, Inc. president and CEO. "Our hope is this will unleash new innovation to help solve current obstacles to sustainability issues." <>


PPR Eyeing Rentabiliweb Stake - French retail-to-luxury group PPR is set to join rival French luxury player LVMH Moët Hennessy Louis Vuitton as a minority shareholder in Rentabiliweb, which provides payment platforms for Web sites, market sources said on Tuesday. Belgium-based Rentabiliweb, whose subsidiary, Mailorama, made headlines in November after a cash handout it had planned in Paris turned into a riot, last week unveiled plans to raise funds and transfer from the Alternext to the Euronext market in Brussels and Paris. Rentabiliweb said it planned to raise around 18 million euros, or $25 million, in funds by increasing capital by roughly 6 million euros, or $8.3 million, and selling 12.2 million euros, or $16.9 million, worth of existing shares. Dollar figures are calculated at current exchange. “In the context of this capital increase, PPR could take a stake equivalent to roughly 2 percent of the firm’s capital,” said one source. “This stake reflects PPR’s strong belief in the growth prospects of the online sector, in particular e-commerce.”  <>


Loft Gift Cards for Bloggers Stir Buzz - A new Loft blogging strategy has created some buzz, but not entirely the kind intended. A group of bloggers was invited to preview Loft’s summer collection on Jan. 26 and each received a free gift card, ranging from $10 to $500. But Loft executives insist it wasn’t a ploy to insure favorable reviews about the collection, just to generate some blogging action. “They could write whatever they want. Obviously, there’s freedom of speech,” said Gary Muto, president of Loft, which is a division of AnnTaylor Stores Corp. “These are independent bloggers, not affiliated [with] any publications. We invited them to come in and write something. We treat bloggers more as potential clients. We don’t believe bloggers to be the same as the editorial community. We don’t incentivize the press. We would never do that.”  <>


Dick's SG Set to Move Into New Findlay Headquarters - Dick's Sporting Goods plans to fully occupy its new corporate headquarters by the end of February. The $150 million, 670,000-square-foot complex occupies 116 acres of land beside the main runway at the Pittsburgh International Airport in Findlay, PA.

About 1,200 employees will occupy the space, according to The Pittsburgh Tribune. The center is the first phase of what eventually could be a 2 million-square-foot complex. The complex, which is pursuing LEED certification, is seven stories tall at its highest point, with 675,000 square feet of space. There's a separate, 60,000-square-foot aviation center to accommodate five corporate aircraft. The new site features a waterfall-like fountain and a large sports complex.  <>


CIT Veteran Breuer Joins R&R -  Sydnee Breuer has joined Rosenthal & Rosenthal as senior vice president for business development. A 20-year veteran of CIT Group, where she was most recently senior vice president for business development and underwriting, Breuer will work from R&R’s offices in Woodland Hills, Calif., and report to Harry Friedman, executive vice president. <>


Americans Leery of Too Much Gov't Regulation of Business - At a time of increasing debate over the optimal relationship between government and business in the U.S., new Gallup polling shows that 57% of Americans are worried that there will be too much government regulation of business, while 37% worry that there will not be enough. Half of Americans believe the government should become less involved in regulating and controlling business, with 24% saying the government should become more involved and 23% saying things are about right.

R3: RL: Big Enough? - G1

Two questions Gallup asked on Jan. 26-27 measured the American public's overall views toward government regulation of business. The first asked directly about government regulation of business. The second asked Americans if they worried more about the prospect of too much or too little government regulation. Responses to both questions indicate that Americans remain leery of too much government regulation and control over business. This sentiment persists despite a significant loss of the public's confidence in banks and skepticism about the honesty and ethics of bankers over the last two years, and with increased focus on the negative impact of the actions of some big banks and other businesses on the nation's financial crisis. These results are generally consistent with a slightly different question that Gallup last updated in late August and early September of last year. Those results showed that about a quarter of Americans felt there was too little government regulation of business and industry. The majority of Americans believed that there was either too much regulation, or about the right amount. The current "worry" question measures these attitudes in a different way, but shows the same basic pattern of results. Given a choice, a little more than a third of Americans say they worry more about not having enough regulation of business, while 57% say their worry is that there would be too much regulation. <>

Volcker's Soul

“I may not be alive to see the crisis, but my soul will come back to haunt you.”
-Paul Volcker (February 2nd, 2010)
Hearing Paul Volcker speak his mind is always both a pleasure and a privilege. The man didn’t win any Washington Groupthink points while testifying to the Senate Banking Committee yesterday, but who really cares?
As the old battle axe of the American Financial System’s credibility-lost was attempting to beat some very basic points about how the conflicted and compromised business model of a “full service” investment bank works into the melons of paid off politicians, the US stock market rose like a phoenix.
At one point, Volcker told one financially illiterate politician, “my soul will come back to haunt you”, and the Bubble Boy who missed proactively preparing  for the recent financial crisis actually snickered. At the same time I was being pinged by a few market players that “this Volker Rule is dead.”
Well folks, as our American patriot admitted yesterday, he may very well be dead by the time these reactive short term Washington decisions come home to roost. But as sure as you are waking up to a nice two-day pop in your 401k this morning, Bank of America is paying their bankers $4.4 Billion in bonuses. If you don’t know those bonuses were partly financed by a government sponsored Piggy Banker Spread – now you know.
The Stickler (Bank of America’s spokesperson, Robert Stickler) is seemingly empathizing with the 11% of Americans who are now on the USDA Food Stamp Program (up from 6% when Bernanke took over from Greenspan) saying this morning that, “we attempted to balance the need to pay competitively with our understanding of the general concern.”
Nice Stickler. Nice.
Again, for those incompetent political lemmings who don’t get the trade. Bernanke’s academic background (Great Depressionista) is being used as a political backboard to fear-monger this country into buying that we need an “emergency level of zero percent” interest rates on our hard earned savings accounts for an “extended and exceptional” period of time…
Then, the government supported bankers borrow moneys on the short end of the curve at zero percent, plug the citizenry with a higher lending rate, and keep the spread between what American citizens would have ordinarily kept as fixed income in their savings accounts.
Americans aren’t stupid, but most of the elected politicians using their short term job security duration to judge Paul Volcker’s long term wisdom must be. This morning’s ABC/Washington Post weekly consumer confidence reading dropped from minus -48 to minus -49. Nice Stickler. Nice!
Since no one running this country really gets paid to proactively prepare our children for the long term, let’s just go back to our immediate to intermediate term market views. Pavlov, if you are still out there, at 930AM, will you please ring the bells?
As the fleeting momentum of the “Volcker Rule” faded, so did the price momentum that was being built behind the buck’s credibility. After having a bang up week of +1.7% last week, the US Dollar is down for three straight days this week, and I am feeling the immediate term TRADE shame. Both Gold and the SP500 were up yesterday. I am short both.
I remain bullish on a continued Buck Breakout here in Q1 of 2010. A three-day -0.8% correction from the 5-month high the US Dollar reached on Friday certainly has my attention. So does a +3.4% bounce in the gold price. For now, irrespective of Volcker being put back in the closet, I am maintaining my intermediate term (3-month) view and the positions implied therein. The Fed needs to raise rates.
On US Dollar weakness yesterday, I upped my position in the US Dollar (UUP) to a 12% position in our Asset Allocation Model. Having had sold some into Friday’s strength, this is what I do. It doesn’t always work, but the idea is to buy on red and sell on green, actively managing exposures to my core positions.
On Friday, I titled my Early Look, “Red Light Risk”, and shorted the SP500 (SPY) when it was up a full percent on the rally associated with the Q4 GDP report. That made me look smart for a day, and not so smart yesterday.
I also highlighted the risk associated with what we call Duration Mismatch, using David Einhorn’s long position in gold as an practical example of a difference in opinion on duration. David kindly sent me a note in reply on Saturday morning, and it turns out the only thing we really disagree on is timing.
Einhorn wrote, “We are bullish on the dollar vs. the yen, euro, & pound. We like the dollar more than most everything but gold at the moment. Or maybe we just hate it less than the other currencies. We are long various European sovereign CDS.” My name is Keith McCullough, and I support that message.
I’ll post David’s full rebuttal on our Macro portal sometime today. It was one of the most even-handed and intellectually objective replies I think I have ever had since I started this firm.
If only America’s political leadership had the economic and financial understandings of the real players who wake up to play this game every day like David Einhorn does. Maybe one of the most thoughtful leaders of an American generation of finance wouldn’t have to threaten some crackberry politician with his soul…
My immediate term support and resistance lines for the SP500 are now 1071 and 1116, respectively.
Best of luck out there today,


XLK – SPDR Technology
— We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.  

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 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.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


USO – United States Oil
FundWe have been waiting, patiently, to short the US Oil Fund on an up day, which we got on 2/2/10. We are bullish on the Buck and bearish on China right now. These factors contribute to our multi-factor (bearish) intermediate term stance on the oil price.

EWJ – iShares Japan
We shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.

UNG – United States Natural Gas
Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it.  

XLE – SPDR Energy
The Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.

SPY – SPDR S&P 500
The SP500 broke our intermediate term TREND line earlier this week and remains broken. The 4Q09 GDP report confirms that Bernanke has to raise interest rates. ZERO is not a perpetual policy unless the USA wants to become Japan. We shorted SPY on 1/29/10.

GLD – SPDR Gold Shares
We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish. Russia’s GDP fell 7.9% in 2009.
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.

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