“Invest at the point of maximum pessimism.”
-John Templeton
Other than being rich politicians with nice cars, what do Ted Stevens and John Mack have in common? They both got ‘You Tubed’ yesterday, big time! Poor Ted is going to finish up his Senatorial career looking at a different kind of bar exam, while the once revered Mack will be dealing with an oversupply of mirrors that are en-route to his home via FedEx for Christmas, compliments of Research Edge…
I know, I know – be nice Keith… I am; I am getting an early start on Christmas shopping, supporting the economy, ya’ know! As far as I know, Mack isn’t getting a $100,000 wet bar for his house from the Japanese or anything like that… he only had his faithful “Investment Banking Inc” crew issue news release upon news release that his “deal” with Mitsubishi Financial was solid. For the life of me though, I can’t find the Morgan Stanley release this morning that reminds us that Mitsubishi had to raise 990B Yen last night… weird.
After seeing the S&P500 crash for a -45.7% down move since, well… about this time last year… I have witnessed plenty of weird stuff. One of the non-trivial revelations has been that individuals from Washington to Wall Street are being ‘You Tubed’. What does that mean? Well, quite simply, it means that this brave new interconnected world holds transparency, accountability and trust in the palm of its hand. If you sway, if you swear, if you swindle, if you sing – either American Idol or we card carrying members of ‘New American Capitalists Inc’ are going to “smoke you out of your hole” (I had to put quotes on that – Bush needs a shout out once in a while).
Investors in this brave new world have voted. Morgan Stanley got crushed yesterday, because it should have - their largest shareholder needs bailout capital! The smartest freedom fighters of the hedge fund planet who shorted Volkswagen are getting run over by Porsche this morning – not because of “evil doers” – because fundamentals are going to prevail over fear mongering (Porsche wants 75% of the company). This works both ways folks - long and short. This is what makes a market. This is called capitalism.
If you broke down and cried over Hong Kong’s -12.7% decline yesterday, we hope you didn’t sell. Hope, unfortunately, is not an investment process. The Hang Seng exploded to the upside for a +14.4% move overnight, and now you can pick yourself up off your knees and sing halleluiah to the heavens. Even I broke a bit of a sweat looking at Asia 24 hours ago, but somehow I found it within me to heed Templeton’s words of wisdom and “invest at the point of maximum pessimism.” We added to our long EWH position yesterday on weakness.
Overall, we covered all but 4 of our short positions in the “Hedgeye Portfolio” yesterday. We remain short the US Dollar (UUP), which is trading down this morning, finally. Given that “Heli-Ben” will be flying the free money chopper into his FOMC rate cutting meeting tomorrow, it’s about time. We remain short India, via the India Fund (IFN); the BSE Sensex Index in India flashed a very negative divergence overnight, closing down another -2.2% in the face of strength in China, Korea, and Singapore, which all had +3-4% up days. India is a bureaucracy with runaway wage inflation and a pending Presidential election. Is it weird that the new CEO of Citigroup, Vikram Pandit’s, “best idea” when he ran his hedge fund, Old Lane, into the parking garage was “long India”? ‘You Tubers’ think so…
Covering shorts consistently, and profitably, is not one of the Street’s core competencies. While I will happily hand over the keys to the billionaires with Porsches when it comes to levering up a “great long idea” in an up market, I’ll meet them on highway 95 at 430am daily if they want to rev up their short selling engines with me as I am driving through Stamford. Short selling is not something you should do unless you have a tested and tried process. Save the “concentrated activism” horse power for the bull markets guys.
Understanding that moving our cash position to 73% down from 96% in September is critical in contextualizing why I am far less bearish today than I was then (see the new ‘Hedgeye Asset Allocation’ model above), one of the most important macro factors in my asset allocation model that is flashing bullish for stocks is the thawing of credit spreads. We posted a note to our RE Macro clients yesterday titled, “Eye on Credit: Signs of a November Thaw?” (www.researchedgellc.com, 10/27/08), and the executive summary point from that thought is emphasized by both the TED spread again this morning as well as liquidity trade currencies (the US$ and the Yen) trading down for the 1st time in a week. Risk spreads narrowing is also being expressed by countries like Russia and Hungary not trading down for once. In fact, Hungary is flashing a positive divergence, trading up +7.1%.
Otherwise, I don’t think a page 1 Wall Street Journal article on “Microsoft’s Africa Strategy” is going to help you much in figuring out this complex global marketplace of factors. I think you are best served watching what people on ‘You Tube’’ do, not what they say. If they say one thing, and do something else… well, they might end up in the slammer, or God forbid, have their Porsche stolen…
My name is Keith McCullough – I drive a Porsche, and I support this message.
KM
Long ETFs
EWA – iShares Australia – The Australian Central Bank bought its own currency today for a third day. Australian interest rate futures are now pricing in a 50 bps cut from the 6.0% rate next month.
FXC – Currency Shares Canadian Dollar Trust – Canada’s major newspaper, The Globe and Mail, yesterday had an article highlighting the weakness of the “Loonie” in recent days, a contrarian indicator in our books. The TSX Composite is currently down -27% for the month, which would be its largest monthly decline since 1919.
EWG – iShares Germany – German consumer confidence advanced slightly yesterday, which was a positive surprise. Volkswagen, which is 4+% of the EWG, is up ~93% on a short squeeze as Porsche increases its stake.
FXI – iShares China – The Yuan is up 0.11% this morning erasing yesterday’s loss and government bonds are up, which suggest signs of foreign currency intervention and is positive.
EWH - iShares Hong Kong - The Hang Seng Index is up 14% intraday, its largest one day raise in over 10-years, and a dramatic snap back from yesterday’s decline. The key driver is HSBC, which is up 10%. The government has also named a task force, headed by Stephen Roach from Morgan Stanley and Victor Fund from Li & Fung Ltd, to respond to the credit crisis.
Short ETFs
IFN – India Fund – The Rupee is up after 8 straight days of selling. The Securities and Exchange Board of India raised the limit for controlling shareholders from 55% to 75%.
UUP – U.S. Dollar Index – We continue to be short ahead of a likely Fed interest rate cut later this week, which we view as negative for U.S. dollar valuation.
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