From Harvard to D.E. Shaw, Without Love

In the Financial Times today, D.E. Shaw’s Managing Director, Larry Summers, wrote one of the more impressive and well rounded treatises on the US economy. The article was called “The Big Freeze”, and it’s definitely on the macro required reading list.

On most mornings when my alarm goes off at 4am, I have no idea what I am going to write my “Early Look” about. I am data dependent, and that’s just the way that it is. Summers, however, looks to have had plenty of time to coagulate a lot of the thoughts that I have alluded to in my 2008 missives.

I’m an aspiring Yale economist, of sorts – at least that’s what the B.A. on my resume says. Summers is an established Scribe, and the former head of both the US Treasury and Harvard University. If you think I am too negative on the “Trend”, read his take.

Summers correlates today with the central banking credibility issues associated with the 1970’s, but he points consistently to the 1930’s in the US and the 1990’s in Japan. “Just as the bottom was called a number of times in Japan in the early 1990’s and in the US in the early 1930’s, we have seen and no doubt will see moments of sunlight that create hope that the worst is past”, he wrote.

Other quotes by Larry Summer’s that I wanted to highlight:

• “Then there is the problematic situation of the banking system. Where traditional non-mark to market accounting is in use, banks have not yet revised estimates of their capital to reflect likely future losses… they have instead assumed that the market’s valuation of their assets reflects transient liquidity factors rather than underlying problems.”

• “We do not have a framework in place in which authorities can do what is necessary to counter systemic risk”

• “Government involvement in recapitalizing financial institutions is like devaluation: a very unattractive last resort”

Article at (

Re-Regulating Wall Street: The SEC Tells Citi To "Make Investors Whole"!

The Feds are in the building folks. Citigroup's malfeasance is being called onto the accountability carpet today. This is a very consequential "settlement" for Main Street America as it sets a precedent for more to come. The days of no transparency within the hallowed halls of Wall Street are ending.

If you think the "Tech Bubble" settlements were bad for Wall Street, wait until the lawyers get their nails under this moldy rug.

This is the "R" (Re-Regulation) factor within our RIPTE model. Citigroup (C) has rallied to $20 in recent weeks. On a break down through the $17.79 line, I see $14/share being re-tested. Don't forget what happened to this company in 1991.

Chart Of The Day: McCain vs. The Dow

My Partner, Todd Jordan, is a 'math guy' from the Chicago School of Economics. With a "T" Stat of 2.44, his work below suggests that these correlations are statistically significant. The correlation was 0.45, and the R Square 0.21.

The question for the US stock market is where does Johnny Mac go from here?
  • McCain's Runnup Signalling A Near Term Top?
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Who Is Running South Korea?

In terms of rate and scope of change, South Korea remains one of the more fascinating economies in the world these days. Under their new President, Lee Myung-Bak, they have taken a very proactive approach to monetary and fiscal policy. This morning the Bank of Korea raised rates to an 8 year high of 5.25% in order to fight incipient inflation.

Lee was actually raised in Japan by his Christian mother. He was born in 1941, and didn't return to Korea until after the war in 1945. He attended Korea University, and was thrown in jail for demonstrating against the Korean President in 1964.

In 1965, Lee went on to a long successful business career at Hyundai, where he ultimately served as its Chairman, 27 years later.

After his corporate career, Lee entered political life and became the mayor of Seoul in 2002. Ultimately, he won the Presidential Election at the end of 2007, and is now running the country in as aggressive an economic style as we have seen from a legacy Asian economy in years.

He adheres to what he calls his "747" plan. The main aspirations within that plan are maintaining a +7% annual GDP growth rate until he reaches his goal to become the world's 7th largest economy.

What's most interesting to me about this man is his proactive management of the economy. Whether its firing his finance ministers, defending his currency, or moving aggressively to suppress domestic wage inflation, he is not sitting on his hands waiting for the economy to wag his tail.

Our Eyes are on Lee's South Korean embryonic test to expand capitalistically. The KOSPI Index has yet to flash a buy signal yet...

Stay tuned.

(dates, facts, etc cross referenced with @
  • South Korean Flag

Beware of the (E) in the US Consumer RIPTE Model

Weekly jobless claims were reported higher yet again this week at 455,000 claims, up from last week's 448,000. Since mid July, the "Trend" here in US Employment has deteriorated materially. Within our RIPTE framework, "E" (Employment) is taking over as the most relevant when considering US growth, or lack thereof.

This is not only the highest nominal reading we've had in Q3, but the highest we've had since March of 2002. To dismiss it as another "negative" data point that the market has already discounted would be analytically reckless. The 4 week avg is now 420,000, and I think 500,000 is in the cards within the next 3-6 months.


The Favre Trade

The “Trade” in the US market still looks as good as that for hopeful NY Jets fans this morning, after acquiring Brett Favre. The problem, of course, is that these are short term “Trades”. Favre is 38 years old, the bull market is 25 years old - we are closer to the end of their respective runs than new beginnings.

Favre is one of my favorite athletes. He’s real and he leaves it all on the field every day. The problem is that (for an NFL player) he is old. Not as old as John McCain, but old. The latest market “Trade” higher is more of the same old nonsense. Find a bullish narrative, and ride it. “Drill, drill, drill” – bring oil prices down, and ride John McCain and his clean-coal fueled All-American Harley into the US election. He’ll salute the troops, flip the International community the bird, and save our stock market from Obama ‘s proposed socialist salvation.

Didn’t you hear? Obama is apparently down and out like Favre used to be when he was addicted to pain killers – ask Larry Kudlow, who is turning into the other side of the Lou Dobbs trade. “Drill, drill, drill – Go Goldilocks! Go Johnny Mac!”

The political leadership in this country, and the partisan media who spin it, is plain scary. Lou Dobbs on the Left, Larry Kudlow on the Right. They are both metaphors that reflect more of the same – a hurried sound bite culture that hears, but rarely listens. Charge the blackberries, forget the books. It’s manic, and it transcends how Americans have been trained to “invest”.

The S&P 500’s intraday high yesterday was 1291. The high end of my trading range was 1292 – close enough. As the math changes, I do. For this morning’s open, the high end of my trading range moves to 1299. If we are blessed with that number, I’ll happily sell into it, and go to 95% cash.

I can be bearish on the US stock market’s “Trend”, but still be bullish on some of our fundamental long ideas. Yesterday, Brian McGough nailed this Ralph Lauren (RL) long call. The day prior it was Howard Penney getting Brinker (EAT) right; and the day before that Todd Jordan defied the shorts with the call to own Leapfrog (LF). There are no rules stating that “Macro Guys” can’t pick stocks. This is what makes this game great.

Currently, the best macro short call that I have been pressing short is Japan. I’m short Japan via the EWJ (etf) and names like Toyota (TM), which printed a down -28% year over year net income report in Asia overnight. In the face of a bullish “Trade” here in the US, the Nikkei got smacked again for another -1% down day, and the Japanese Yen moved to fresh intermediate term lows of 109.44. Stagflation is a macroeconomic circumstance that you want to be short.

In the face of the world’s largest car maker imploding their bottom line, the world’s largest insurer, AIG, is trading down -8% pre-open, after printing a $5.4B loss. Taiwan’s exports for the month of July slowed to, get this, 8% year over year, versus +21% in June! No, that’s not good for the “it’s global this time” Asian growth story. The Taiwanese dollar chart rivals that of the Japanese Yen, having its biggest down day in 3 months, extending its streak of daily losses to eight.

It is getting more global out there, and Brett Favre greyer. The only mania that will be left after all these fundamental realities are absorbed may very well be manic depression. Be careful out there at the high end of my trading range.

Good luck,

Early Look

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