“We took a perfectly useless psychopath like Valentine, and turned him into a successful executive. And during the same time, we turned an honest, hard-working man into a violently, deranged, would-be killer! Now, what are we going to do about taking Winthorpe back and returning Valentine to the ghetto?”
-Randolph Duke from the movie Trading Places
When thinking about some of the topics that have been discussed in our morning meeting recently, the topic of a HIGH vs. LOW society has come up several times. I joked that it’s like working at Hedgeye Risk Management where you have the Ivy League educated vs. everyone else. All kidding aside, as a firm, we have some of the most talented young people working at Hedgeye, thanks to our ties with Yale University.
That being said, the first thing I think of when talking about the HIGH vs. LOW society is the highly entertaining movie Trading Places. (Sadly, our talented young group from Yale is too young to remember the movie.) The storyline is that of a HIGH vs. LOW society and the movie has been called a modern take on Mark Twain's classic 19th century novel The Prince and the Pauper.
Fast forward to yesterday’s press briefing by White House Press Secretary Robert Gibbs and Treasury Secretary Tim Geithner; Mr. Gibbs commented that the market is going up because of Obama’s Administrative policies. Mr. Gibbs is correct to a degree, and Mr. Obama gets full credit for the market’s performance under his term as president. In fact, the President even gets credit for calling the bottom in the market when on March 3rd he offered some advice on the market saying stocks are "potentially a good deal for those willing to think long term.” Great call!
Obama’s policies have created a V-shaped recovery and a 78% return in the market since he nearly called the bottom perfectly. In many respects, his policies have created this HIGH vs. LOW society which might be very difficult to get out from under.
Yesterday, the S&P 500 rallied 1.1% (now up 8.6% YTD) on the back of the earnings calendar, with better-than-expected results out of the Financials (XLF - up 18.4% YTD) and Technology (XLK - up 4.4% YTD). The Financials led the way yesterday, thanks to JP Morgan, and is the most striking example of the HIGH vs. LOW society.
FOOD STAMPS VS PIGGY BANKERS SPREAD - The most recent statistics from the NY Times are that one in eight Americans rely on food stamps; one in four children in the United States rely on food stamps; and one in 50 Americans live on nothing but food stamps. Contrast those disturbing facts against JPM’s reported earnings, which is a company that is printing money because of the Piggy Banker Spread.
To quote the CEO of JPM - “China’s growing, India’s growing, Japan is growing, home prices have stopped going down, consumers income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.” Yet, according to the FED, we still have the need for interest rates to stay at exceptionally low levels.
President Obama’s campaign promised “Change” and to help the middle class. Unfortunately, his policies that have helped drive the V shape recovery in the S&P 500 are only making the rich feel richer.
RICH vs. POOR - Back in early 2009, the spread in confidence levels, as measured by the Conference Board, between those people making more than $50,000 per year and those making less than $15,000 was 2 points. As of the most recent reading the spread stands at 17 points.
YOUNG vs. OLD - The Millennials were often cited as a strong political force that helped the Obama administration get elected. It’s also the Millennials that are being hurt the most by the current recession. Unemployment levels among the youngest demographic of our society stand at 25% versus 9.7% for the national average.
BULLISH BEARISH SURVEY vs. CONSUMER CONFIDENCE - The most recent Institutional Investor survey shows one of the widest spreads between “bulls” and “bears” since 2007. This, contrasted against the most recent ABC consumer confidence index, which fell to -47 in the week ending April 11, down 4 points from a week earlier, highlights the Wall Street vs. Main Street disconnect. As an aside, today it was reported that the UK Nationwide consumer confidence fell to 72 in March vs. 81 in February. We are not alone!
We have a chart book of MACRO data points that has only one relevant shape to describe the current economic recovery and that is a V and the signs of “over stimulation” continue. China’s economic growth accelerated to the fastest pace in almost three years in 1Q10 - GDP rose 11.9%. The market reaction to the news was muted as the case for continued policy tightening is clear.
We are short the S&P 500 and "fighting the Fed" which makes us wrong, for now. Right now, it’s more prudent to manage risk around the excessive stimulus measures that are unsustainable and inflationary.
As for Billy Ray Valentine and Louis Winthorpe III - they're not just getting rich... They're getting even!
Function in disaster; finish in style
Howard Penney
Managing Director
