Friday, December 31, 2010

Morning Note...

Really not much to say this morning, folks… Happy New Year to your and yours…

Futures ~10bps lower this morning on year-end profit taking, most likely.  Europe was lower on a half-day of action; -25bps on the aggregate but the U.K. and France were both down ~1% and Germany is closed.  Asian markets were mixed overnight, with Shanghai the lone standout at +1.75%.  Oil -80bps, Gold +43bps, USD -45bps, EUR/USD 1.3370. 

In terms of commentary, I thought this was the best piece of the morning thus far:

Perennially, there tends to be a lot of hype around the last day of the year (buzz words like window dressing, portfolio rebalancing, tax loss selling, etc).  I remember I flew back from Hawaii a day early so as not to miss 12/31 a few years back.  It wasn't worth it ... I should've stayed on the beach.  We looked at broader market volumes over the past 10 years on the last day of the year, and today tends to be slower than people make it out to be.  Broader market volumes on 12/31 have been 77% of the December average, and 84% of the prior 10-day average (which tends to be light to begin with).  12/31 is around in-line with the prior 5-day avg.

As for PERFORMANCE, SPX has closed RED on "year-end" 7 of the last 10 times, and RED on 5 of the last 6.  The avg abs value move of SPX = 0.66%.  MVRX has outperformed SPX on 7 of the last 10 year-end days, XLP has lagged on 4 of the last 10, Russell 2000 has underperformed on 8 of the last 10.  Have a safe NYE!  Being 6 blocks from Times Square right now is 50 blocks too close for me.

Regarding Hedge Funds and this year’s performance, here’s an interesting NY Post article:

Hedges clipped

The normally boisterous and upbeat hedge fund crowd is limping into 2011 bearing the heavy weight of lackluster performance and an ominous insider-trading probe -- leading some industry watchers to wonder if the new year could be marred by another round of fund closures.

In 2010, the number of hedge funds to close their doors permanently declined 32 percent to just 585 firms through the end of the third quarter, according to fund tracking outfit Hedge Fund Research. But fund watchers say the recent downturn in closures may just represent a lull in the storm.

In terms of performance, the hedge fund industry -- which prides itself on being smarter than the Average Joe and charging clients 2 percent management fees and 20 percent on the profit -- struggled to eke out superior returns this year, leading the average hedge fund to close 2010 up a mere 7.5 percent, according to Hedge Fund Research. That's below returns for average stock market indexes like the S&P 500, which is up 13 percent this year.

"If the market is continually as tough as it has been, I think you are faced with guys who will say, 'I've had a good career. I've made my investors money,' " before throwing in the towel, said Sam Hocking, head of prime brokerage at BNP Paribas.

Leading that trend to the exit is noted moneyman Stanley Druckenmiller, who announced in August plans to call it quits after 30 years, citing the "stress of performing" amid a rare slump of just 5 percent.

Compounding the industry's pressure has been the Department of Justice's massive insider-trading probe, which has ensnared numerous hedge funds, including Raj Rajaratnam's $3.7 billion Galleon Group and a $1.5 billion health-care fund managed by Morgan Stanley's FrontPoint Partners.

What's more, the FBI in November conducted high-profile raids on three prominent hedge funds, including Diamondback and Level Global, which both manage money for prominent pension funds, including the New York State Common Retirement Fund.

Andrew Schneider, a founder of hedge fund services firm HedgeCo Networks, said investors have definitely grown skittish over who might be implicated next. Following the fed raids, some of his investor clients moved money out of funds that may be more likely targeted for insider trading, like event-driven funds, and reallocated to distressed funds, forex funds and computer-driven funds, Schneider said.

"Investors are holding back new investments in event-driven and merger M&A types of funds because of what's going on, even though some of them passed due diligence," he said. Investors are saying, "We don't know who's involved and we don't want to take the chance," he said.

Among the few fund managers on track to end 2010 with a bang appear to be those who took concentrated risks. Bill Ackman's Pershing Square Capital Management is up 35 percent, with big bets on distressed investments, while John Paulson's controversial gold fund is up 33.6 percent.

Grange Johnson, head of LaGrange Capital Management, said the only way to escape the current doldrums is to take risks on beaten-down plays. This year, Johnson's bets on Coinstar, the controversial operator of the DVD kiosk platform Redbox, returned his fund a good 200 percent after Coinstar settled several high-profile lawsuits with its distributors.

Of course, such plays come with their own stresses, said Johnson, whose fund is up roughly 60 percent this year.

"It's the type of investment that is prone to second-guessing," he said.

BGP lower on reports it is delaying payments to vendors as it tried to refinance.  UAM sells medicare prescription drug business to CVS for ~$13/share.  CLWR Chairman to step down.  IMAX higher on reports that Sony may bid $40 for the company.  S to buy $200M in CLWR debt.  BARD raises SWK estimates.  STFL positive on HOT.  BARD raises TNB estimates. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Best Quotes:  Interesting article from yesterday…

Dec. 30 (Bloomberg) -- Marc Faber, who advised investors to buy U.S. stocks in March 2009 as the Standard & Poor’s 500 Index began a rally of as much as 86 percent, said U.S. Treasuries are a “suicidal” investment.
     Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October.
     “This is a suicidal investment,” Faber said in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S.
long-term bonds.”
     On Nov. 3, the Fed said it would buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. U.S. bond funds had withdrawals of $8.62 billion in the week ended Dec. 15, the most in more than two years, according to Washington-based Investment Company Institute.

                          Rising Yields

     Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. U.S. debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.
     Treasuries fell today as reports showed initial jobless claims dropped more than forecast, U.S. businesses expanded at the fastest pace in two decades and pending home resales beat expectations. The yield on the benchmark 10-year note advanced
0.02 percentage point to 3.37 percent at 4:28 p.m. in New York, according to BGCantor Market Data.
     Bonds may rally in the next two or three weeks, Faber said.
     Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to its record of 1,565.15 seven months later, and ended the year up 3.5 percent.
     Faber said equities may continue to advance as the dollar weakens as a result of loose monetary policy.
     “If you print money, the currency goes down and the S&P 500 goes up,” he said. “By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.”

Thursday, December 30, 2010

Morning Note...

Futures are slightly lower this morning (-5bps) despite better than expected Initial Jobless Claims for the week ending December 25th.  Claims came in at 388k, which beat the 415k expectation and the 422k prior reading.  Continuing Claims were 4.128M vs. the 4.084M expectation.  Again, relatively quiet outside of that economic data, although note that Pending Home Sales and Chicago PMI data is due at 10am.  Overseas, Asian markets were mixed overnight as China’s manufacturing dropped for the first time in five months as recent government monetary tightening policies seem to have successfully taken hold.  Across the pond, however, European markets are lower on the aggregate (down ~1%), probably on some year-end profit taking against light volume levels and continued sovereign debt concerns.  Oil –60bps.  Gold -30bps.  USD -35bps.  Euro slightly higher against the USD, at 1.3294. 

Regarding China, here’s more detail off the Thomson Reuters newswire:

Chinese inflation showed signs of cresting in a manufacturing survey on Thursday, an early indication that the government will be able to stick to its course of gradual rather than aggressive monetary tightening. An easing of price pressures could also cap this week's jump in the yuan to a record high against the dollar, which the central bank said had played an important role in taming inflation. HSBC's China Purchasing Mangers' Index fell to a three month-low of 54.4 in December from 55.3 in November, suggesting that the pace of business expansion in the factories of the world's second-largest economy was moderating but still strong. The headline figure offers an early clue about the direction of overall economic growth, but all eyes now are on Chinese inflation, which is running at its fastest in more than two years, and Beijing's policy response to price pressures.  (Thomson)

Regarding consumer spending and the outlook for 2011, I thought this was an interesting story:

            Consumers Opening Wallets May Prompt More Corporate Takeovers 2010-12-30 00:01:00.3 GMT

Dec. 30 (Bloomberg) -- U.S. consumers put the brakes on dealmaking in 2010. They may be the accelerator next year. Chief executives maintained record levels of cash this year as the recession-weary consumer fueled doubts about an economic recovery. While mergers and acquisitions topped $2 trillion in 2010 -- the first increase in three years -- the amount failed to approach 2007’s $4 trillion peak in global takeovers. Shoppers may help bring 2011 closer to that total. Holiday sales jumped 5.5 percent in the U.S., the best performance in five years, on purchases of clothing and jewelry, according to MasterCard Advisors’ SpendingPulse. As spending rises, companies are more optimistic and willing to take on risk, according to Joseph Gromek, chief executive officer of New York-based Warnaco Group Inc., owner of the Calvin Klein and Speedo brands. “There will be a very aggressive approach,” Gromek said. “The companies that have strong balance sheets with lots of cash on hand will try to be as opportunistic as possible.” The 1,000 biggest companies worldwide, excluding financial- services industries, have amassed more than $3 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg. Most companies and their boards stayed conservative this year, waiting to see how the economy rebounded before pursuing deals, he said. Warnaco invested in its operations and foreign distribution in 2010, and may now look at acquisitions, Gromek said. “Interest rates are very favorable,” he said.

LMT wins $492M Navy contract.  BHP may bid $90 for APC.  EWBC announces repayment of TARP.  CSFB cuts MS, GS estimates.  PIPR lowers PCLN estimates. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Best Quotes:  Interesting BBERG update in the insider trading investigation…

Three Hedge Funds Got Inside Data From Consultant, U.S. Says 2010-12-30 05:01:01.5 GMT

By Bob Van Voris, Pamela MacLean and David Voreacos
     Dec. 30 (Bloomberg) -- A former Primary Global Research LLC expert-networking consultant was charged by U.S. prosecutors in Manhattan with selling inside information to portfolio managers at three unidentified hedge funds.
     Winifred Jiau, arrested in Fremont, California, as part of a national probe of insider trading, was accused of selling data on Nvidia Corp. and Marvell Technology Group Ltd., makers of computer components, through Primary Global, according to a filing yesterday in Manhattan federal court. The hedge funds paid her $200,000 through the firm, prosecutors said. Jiau is the seventh person connected to Primary Global to be charged in a multiyear U.S. insider trading investigation that has ensnared company employees and consultants.
     Jiau, 43, is charged with one count each of conspiracy to commit securities fraud and securities fraud. The first count carries a maximum sentence of 20 years in prison. She appeared yesterday in San Francisco federal court and was ordered held in custody by U.S. Magistrate Judge Nandor Vadas, who set a hearing for Jan. 12 on whether to transfer her to New York.
     The evidence against Jiau is “strong,” Assistant U.S.
Attorney Wilson Leung told the judge, adding that there is a “cooperating witness and audio recordings.” When asked by Vadas if she understood the charges, Jiau said “I not have a chance to know until now.” Barry Portman, her assigned public defender, said the complaint is a “lengthy document.”
     Jiau, who didn’t enter a plea to the charges, is scheduled to appear today to seek release on bail.

                      ‘Expert Consultant’

     Marilyn Gerber, a spokeswoman for Primary Global, said in an e-mailed statement that Jiau served as an “expert consultant” with the company from September 2006 to December 2008, declining further comment.
     Jiau was the fifth Primary Global consultant arrested in an insider-trading crackdown that also has led to criminal charges against two other employees of the company. One of the consultants, former Dell Inc. supply chain manager Daniel DeVore, pleaded guilty Dec. 10.
     On Dec. 16, Federal Bureau of Investigation agents arrested three technology company workers who allegedly sold secrets about Apple Inc., Dell and Advanced Micro Devices Inc. The men, who worked at AMD, Flextronics International Ltd. and Taiwan Semiconductor Manufacturing Co., were arrested on securities fraud and conspiracy charges for a scheme that Manhattan U.S.
Attorney Preet Bharara said operated from 2008 to early 2010.
     James Fleishman, a sales manager at Primary Global, also was arrested the same day as the three men. If convicted, all four face as long as 20 years in prison.

                       Leaked Information

     DeVore pleaded guilty to conspiracy to commit securities fraud and wire fraud. He said he worked as a paid consultant for Primary Global and, through the firm, accepted money from hedge funds for inside information. At his plea hearing, he said he leaked inside information to clients of Primary Global and New York-based consulting firm Guidepoint Global LLC, according to a transcript.
      James Fingeroth, a spokesman for Guidepoint Global in New York, declined to comment yesterday.
     The U.S. insider trading probe became public last year with the arrest of Galleon Group LLC hedge fund co-founder Raj Rajaratnam. The FBI recorded thousands of conversations during their investigation of the firm, lawyers said at an October hearing. Rajaratnam, who denies the charges, is scheduled to go on trial in Manhattan next year.
     The expert-network arm of the Galleon probe was revealed last month with the execution of search warrants at hedge funds on Nov. 22, and the Nov. 24 arrest of Don Ching Trang Chu, another Primary Global employee.

                        Search Warrants

     FBI agents from New York and Boston executed warrants at the offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumni of SAC Capital Advisors. Agents that day also executed a search warrant at the offices of Loch Capital Management. None of the firms or their employees has been accused of any wrongdoing.
     Expert-networking companies such as Mountain View, California-based Primary Global match investors with specialists who provide insight into specific markets. Prosecutors in the case have described in criminal complaints the links among Primary Global, the technology experts it employed and unidentified hedge funds willing to pay for inside information.
     Santa Clara, California-based Marvell, which makes chips for the BlackBerry phone, declined to comment on Jiau’s arrest.
Bob Sherbin, a spokesman for Nvidia, also based in Santa Clara, said Jiau was a contractor who left the company a year ago, declining further comment.


     A Winifred Jiau filed a sexual-harassment lawsuit against her former employer, San Francisco-based Adteractive Inc., in 2007. The complaint said she has an undergraduate degree from National Taiwan University and a Master’s degree in statistics from Stanford University. The plaintiff in the lawsuit matches the age and northern California residence of the Winifred Jiau charged by prosecutors.
     Jiau founded a company that got funding from Intel Corp., according to the lawsuit. In the suit, filed in California Superior Court in San Francisco, the plaintiff claimed she worked as a senior statistician for Adteractive from April to July of 2006, when she was fired after refusing the alleged sexual advances of a supervisor.
     According to the civil suit, the plaintiff had “over ten years of work experience building financial and economic models” and she “started her own company that was funded by Intel.”


     The case was dismissed on Dec. 29, 2008, after the filing of a notice of a confidential settlement, according to court records. An Adteractive attorney, Aryn Pedowitz, declined to immediately comment on the case.
     Theo Emison III, a lawyer who filed the civil suit, said he was unable to say whether his former client is the woman charged yesterday.
     Prosecutors in the criminal case in Manhattan claim the defendant began getting paid for insider information in September 2006.
     In May 2008, Jiau separately gave two hedge fund portfolio managers, one of whom worked for two hedge funds, “on point and accurate” data about the quarterly financial results at Marvell before it was released to the public, prosecutors said. One of the funds netted more than $820,000 in profits based on that inside information, the FBI said.

                      Cooperating Witness

     Jiau also gave quarterly financial data in August 2008 about Marvell to the same two managers, referred to as CC-1 and
CC-2 in the complaint.
    CC-1 founded a New York entity referred to as Hedge Fund A and CC-2 worked at two separate hedge funds, according to the complaint. A cooperating witness who pleaded guilty, CW-1, began working as a research analyst at Hedge Fund A in March 2008, the FBI said in court papers.
    CC-1 told the cooperating witness to get inside data from various co-conspirators, including Jiau, the FBI said. She gave inside information to CC-1 and CC-2, and the cooperating witness listened to their conversations about Marvell, the FBI said.
    CC-1 also recorded conversations with Jiau, and the complaint quoted Jiau in conversations about Marvel’s second- quarter earnings that the company announced on Aug. 28, 2008.
    When CC-2 asked if she had data yet on the next quarter, she
said: “As soon as I get it, I give you guys a buzz,” according to court papers.
     CW-1 “understood that Jiau obtained the information about Marvell and Nvidia from a source who was not authorized to disseminate” it, according to the complaint.

                       Wiretap Recordings

     Recorded and wiretapped conversations have been at the center of the Galleon probe and its various arms. Investigators made consensual and wiretap recordings of an unidentified expert-networking firm’s phones, the land lines of an unidentified hedge fund and the mobile phones of two of the men arrested Dec. 16 -- Mark Anthony Longoria, who worked at chipmaker AMD, and Walter Shimoon, formerly of Flextronics, a Singapore-based maker of electronic components -- the U.S. said.
     At least two hedge funds are described in the complaint against the men. Neither is identified by name.
     The U.S. also made consensual recordings using five cooperating witnesses, had a tap on mobile phones used by Shimoon and Longoria, and recorded conversations at Primary Global in November 2009, a month after Rajaratnam’s arrest, according to court papers.

                          One Witness

     Court papers indicate at least five people have been working with the government in the insider-trading probe. Only one witness was identified by name: Richard Choo-Beng Lee, a former partner at San Jose, California-based hedge fund Spherix Capital LLC. He began cooperating with the U.S. in April 2009, according to court records, providing information to Bharara’s office in the government’s case against Galleon. He pleaded guilty in November 2009.
     His partner at Spherix, Ali Far, who also worked as an analyst and portfolio manager at Galleon, pleaded guilty and is aiding the U.S. in the Galleon probe.
     The U.S. said Chu established a relationship with Lee and that Spherix paid Chu’s firm, Primary Global, for tips concerning Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc., according to the government’s complaint.
     At yesterday’s court hearing in San Francisco, Portman told the judge that Jiau is a U.S. citizen and has known about the insider-trading investigation since mid-December. She didn’t attempt to flee when FBI agents arrived at her home, the lawyer said in his argument that she be released.
     Leung countered that Jiau is a “flight risk,” and that when agents went to her house, they heard her car running in an attempt to drive off. Leung said the agents found packed luggage inside her house.
     Leung said that Jiau claimed she had just returned from a trip to Asia. The prosecutor said her Asia trip took place in October, and that she had traveled to Beijing and returned through Taiwan.
     The case is U.S. v. Jiau, 10-Mag.-2900, U.S. District Court for the Southern District of New York (Manhattan).

Wednesday, December 29, 2010

Morning Note...

Futures are up ~20bps this morning as Asia recovers from recent weakness overnight and Europe trends slightly higher.  Asia was up ~1% on average and Europe is up 75bps on aggregate.  On this side of the pond, news and volumes remain light, which is as to be expected given the holidays.   For the moment, stocks continue their slow and steady “melt up” into year-end, probably for lack of bad news than anything else.   There is some small M&A chatter this morning, however, as BJ’s Wholesale Club (BJ; +5%) is rumored to be a takeout target for Leonard Green & Partners.  Oil -40bps.  Gold +5bps.  USD -20bps and EUR/USD 1.3133. 

No economic data on tap for today, but Initial Jobless Claims and Continuing Claims are due tomorrow at 8:30am, and Pending Home Sales are due at 10am tomorrow. 

Regarding recent stock action, here’s a pithy quote from

There have been 19 trading sessions in December.  The S&P 500 has logged a gain in all but three of the sessions; it has not had consecutive losing sessions; and its biggest loss has been a 0.5% decline on December 15.  Since gaining 1.3% on December 2, the S&P 500 has not gained more than 0.6% in a single session.

Any guesses as to how today's session might go?

The odds-on bet is that there will be more "drifting" in the major averages during the day before things finally settle with a small gain for the S&P 500.  That isn't a guarantee, but it certainly seems to have been the modus operandi for most of the month.

In other commentary, Knight also put out a cautious piece this morning that is worth a glance:

            Drifting Into Year-End

Bottom Line – Yesterday’s US stock market action did nothing to change our current outlook. While our view is that the intermediate-term outlook is still positive for US stocks there are signs of some technical deterioration in the short-term indicators we follow suggesting the risk of a pullback is high. But seasonal influences are powerful witness yesterday’s recovery from early weakness so any pullback may be postponed until January.

Yesterday’s US market showed a softer tone than Monday with breadth mildly negative  but volumes remained pre-holiday like and small-caps underperformed. Precious metal and energy related issues were aided by the recent strength in their underlying commodities.

Yesterday’s market action did nothing to change our view that the risks of a mild correction remain high. Upside participation has narrowed as has the new high list and volumes have been tepid as prices rise. Sentiment continues to be quite bullish.

The setup for a pullback would in our view be the following: SPX breaking 1251 sees 1233, DJIA breaking 11519 sees 11421, NASDAQ Composite breaking 2645 sees 2613, NDX breaking 2209 sees 2197 and Russell 2000 breaking 785 sees 768.

NBL announces new offshore discovery.  RBCM ups CRNT.  DARA announces $4M offering.  CNBC’s Fast Money positive on IM.  RNOW upgraded to OW at PIPR.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Best Quotes:  Hedgeye…


"This stubbornness in the face of clear data is right up there with the efficient market believers."
-Jeremy Grantham (Quarterly Letter, October 2010)

Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.

This isn't to say that there aren't plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.

I'm fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn't working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.

Yesterday, I was re-reading Jeremy Grantham's Quarterly Letter for October titled "Night of the Living Fed" and that helped me re-think my global macro positioning heading into 2011.

Before you scroll down, don't worry - I'm not covering my short position in the SP500 (it's -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I've been bearish plenty enough times on US stocks in my career with performance that's worse than that.

Being bearish on US stocks here doesn't mean you have to be bearish on everything - that's a US-centric stock market investor's risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America's currency and hold rates of return on American savings accounts unsustainably low.

Grantham, Grant, and Hussman aren't fans of The Ber-nank either. So, while hope is not an investment process, I'm really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.

On the politicized US central bank, here are some valuable excerpts from Grantham in the "Night of the Living Fed":

1.       On Evolution: "... displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment."
2.       On Quantitative Guessing (QG): "Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy."
3.       On US Economic Growth: "... on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world."

The "real world" is, of course, real-time... and... as Ludwig von Mises said, "for many people, the "long run" quickly becomes the short run." There's no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.

On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here's what the expectations of higher prices (inflation) have done:

1.       Week-to-date = +0.61%
2.       Month-to-date = +9.6%!
3.       Quarter-to-date = +16.1%

For a man who preaches "price stability", that's nice Heli-Ben... really nice. The 45 MILLION Americans on food stamps salute you.

On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning's ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn't cool for the 90% of Americans who aren't levered-long the SPY.

Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07' and early 08') that stocks are "cheap" even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.

Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.

My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.

Best of luck out there today,

Tuesday, December 28, 2010

Morning Note...

Futures are up ~20bps on another quiet holiday morning, and U.S. markets – and market volume – continue to be affected by snowstorms in the northeast.  (Note that yesterday was the slowest volume day of the year to date.)  S&P/CaseShiller October Home Prices were slightly weaker than expected, both month-over-month (-1% vs. -.6% expectation) and year-over-year (-.8% vs. the -.2% expectation).  Asian stocks were lower overnight, led by China on the back of it’s recent “anti-inflation” tightening measures and fears that more will follow.  Additionally, the Japanese Finance Minister promised “bold action” against a rising JPY.  Europe is ticking slightly higher as of writing, but note that the U.K. market is closed.  Also interesting to note Europe is up despite France’s downward 3Q10 GDP revision, which might also signal problems ahead in 2011 for the Euro region.  The euro is stable, however, at 1.3204 vs. the USD.  Oil +60bps.  Gold +1.6%.

Initial Jobless Claims & Pending Home Sales data due Thursday morning the 30th – there are no economic releases set for tomorrow.

The latest inflation-watch news from Hedgeye:


"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
 -John Maynard Keynes

A Google search for quotes related to "inflation" produces quotes from Keynes in the first 10 spots.  While his radical idea that government should spend money it doesn't have may have saved us from the brink of a financial collapse, he might not have agreed with QG (Quantitative Guessing) and the impact it is having on global inflation. 

The week in between two holidays is challenging on many fronts - personally and professionally.  Typically, there is little incremental macro data in the U.S. because politicians take time off for the holidays rather than trying to force issues when there is no audience.  In addition, most "big money" institutions are not going to make any big bets when there is no liquidity.   

We headed into the holiday lull with a bullish sentiment, an overbought market and MACRO factors that continue to keep us on the bearish side of a tightly-wound, high-risk environment.  Yesterday, on a stealth day for MACRO news, the VIX shot up 7.29%, putting a two-day move at 13.89% (but still down 18.5% YTD). 

The world is interconnected and this year's "tweener week" is filled with interesting global macro data points, especially after China used the holiday weekend to hike interest rates in an attempt to ward off mounting inflation.

The news/rumors this week do not stop with China!  After the first of the year, Taiwan and South Korea will also be raising rates to battle domestic inflation.  How ironic that the region of the world (Asia) that is the hot bed for "deflation" for the balance of the planet is fighting a battle against domestic inflation.  If slowing growth in the emerging markets is not on your list of 10 surprises for 1Q11, it should be.  

Don't take my word for it; the Chinese equity market is now down 9 of the last 10 days, declining 1.74% last night (down over 3% at one point).  The Chinese don't mince words about where they think things are headed.  Overnight China's Premier Wen Jiabao said measures to curb the country's property market "weren't well implemented" and reiterated his goal for home prices to return to a "reasonable level" during his term that ends in 2012. 

This is the killer statement by Wen Jiabao: "We introduced about 15 measures this year but it appears that they were not well-implemented....I believe that after some time, the home market will return to a reasonable level with our efforts." 

If China did not get it right in 2010 (even though the Shanghai Composite is down 16.6% YTD) and they implement measures to curb property prices more effectively in 2011 and demand begins to slow as a result of a heightening cycle, we could see Industrials (XLI) and Metals (XLB) quickly come under pressure.  With the Chinese market as a leading indicator of growth and the market trading down 3.1% over the past month, those sectors and commodities with the biggest leverage to Chinese demand are likely headed lower, despite recent moves higher.

Over the past month: 

(1)    The S&P 500 is up 5.1%
(2)    The XLB is up 9.6%
(3)    The XLE is up 7.5%
(4)    The XLI is up 6.7%
(5)    The CRB is up 9.3%
(6)    Copper is up 13.8%   

In light of Wen Jiabao's statement, it is interesting to note that the best performing sectors year-to-date are also those with the most leverage to Chinese demand.  The four best performing sectors are:

(1)    Consumer Discretionary (XLY up 26.03% YTD)
(2)    Industrials (XLI up 25.51% YTD)
(3)    Energy (XLE up 17.82% YTD)
(4)    Materials (XLB up 15.79% YTD)

While most Asian central bankers seem to see that there is an inflation problem, in the USA we still cannot see it, despite a number of "real life" examples of real inflation hitting the U.S. consumer hard.  Yes, we are going to hammer home a key theme in 2011: Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

Of course, the components of any inflation index are up for debate.  For instance, the government and most people that disagree with our view on inflation prefer to exclude staple, non-discretionary aspects of consumer spending such as food and energy from the calculation.  One item I hope we can all agree to include is healthcare costs. 

According to the Commonwealth Fund (a non-profit fund), U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay for it.  They cited that private-insurance premiums for families rose three times faster than median household income over six years and deductibles rose almost five times faster.  In 15 states, health-insurance premiums are the equivalent of at least 20% of median household income for people under 65.

While the market has rallied on the back of the Government pumping another $800 billion into the economy to prop up the ailing consumer, the average American remains liquidity-impaired and the U.S. housing market is headed lower, not higher.  With these factors still in place, the now positive bias toward stronger-than-expected GDP growth in 2011 can certainly be questioned.

Inflation is a policy that, as Keynes said, confiscates part of the citizens' wealth. The government's most recent move, to implement payroll tax cuts while extending unemployment benefits, may go some way to stimulate the economy in the short term but runs a considerable risk of exacerbating the deficit.  In this interconnected global economy, as the world's fastest-growing economies take strong measures to curb inflation, the net effect could be icy for world growth.  In the U.S. certainly, from a global and domestic perspective, the evidence is clear that inflation is here to stay on a global basis and Jobless Stagflation is going to impact the economy in 2011.

Function in disaster; finish in style.

Howard Penney

Rare earth stocks (MCP, REE, SHZ) are ticking higher on reports that China will cut export quotas.  GM initiated OW at JPHQ, OP at CSFB, Buy at CITI, and OP at RBCM.  WSJ reports that AIG could raise $2-3 billion from Nan Shan sale.  LOGI denies production halt on Google TV set-top boxes. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Best Quotes:  Weather update…

New York Travelers Face Delays as Winds Slow Clear-Up (Update1)
2010-12-28 11:41:35.917 GMT

     (Updates with wind forecast in second paragraph.)

By Aaron Clark and Stuart Biggs
     Dec. 28 (Bloomberg) -- New York commuters and travelers face further disruptions today as winds hinder efforts to clear roads and runways following the heaviest December snows in six decades.
     While the storm is moving slowly away, rising atmospheric pressure will continue to cause winds gusting to about 40 mph
(64 kph) in some open areas, commercial forecaster AccuWeather Inc. said on its website. Winds may “quickly” cover roads with snow, according to a winter weather advisory from the National Weather Service late yesterday.
     Airports may struggle to keep runways clear, said Pennsylvania-based AccuWeather. New York’s LaGuardia, John F.
Kennedy International and Newark Liberty airports opened last night for outgoing traffic after snows forced shutdowns.
Airlines have canceled more than 6,000 flights nationwide since airports began to close on Dec. 26.
     NJ Transit, which carries about 170,000 commuters to and from New York City daily, said passengers should expect delays because of local road conditions. The agency expected to restore bus services at 12:01 a.m. and planned to operate reduced train services today aside from on the Atlantic City Rail Line, it said in a statement on its website. Amtrak will pare rail services between Boston, New York and Washington, it said.

                        30-inch Snowfall

     More than a foot of snow fell across the northeast yesterday, with some areas in New Jersey getting more than 30 inches (76 centimeters), according to AccuWeather. Central Park had 20 inches of snow by 8 a.m. yesterday, the most for the month since 1948, the National Weather Service said.
     New York City will have winds between 16 mph and 20 mph with gusts as high as 31 mph, according to a Weather Service forecast. Its winter weather advisory, covering a wider region, said gusts may hit 55 mph overnight before slowing to 40 mph by morning.
     The storm reached New York the day after Christmas, one of the five busiest shopping days of the year. It may take retailers two weeks to recover from lost sales, said Marshal Cohen, chief industry analyst at NPD Group Inc., a research firm based in Port Washington, New York.
     New York, which faces a $2.5 billion deficit in the $65 billion budget projected for next year, will be more affected by lost economic activity than clean-up costs, Mayor Michael Bloomberg said at a City Hall news conference on Dec. 26. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
     The snowfall was the fifth-largest on record for the city, Sanitation Commissioner John Doherty said on Dec. 26.

                      Flight Cancelations

     U.S. carriers canceled at least 3,389 flights yesterday, after cutting more than 3,334 on Dec. 26, as they waited for airports to open in the Northeast, spokesmen said. Airlines in some cases grounded flights ahead of the storm to keep planes from getting stuck at closed facilities.
     The storm brought snow as far south as parts of Jacksonville, Florida, AccuWeather said. The storm system began in the South over the Christmas holiday. Four inches of snow fell in Chattanooga, Tennessee, while 8 inches was reported in Gatlinburg, Tennessee.
     Environment Canada issued a blizzard warning yesterday for northeastern New Brunswick and warned of heavy snow or rain in the rest of the Maritime provinces. The snowfall is expected to taper off into flurries today, the agency said.

Monday, December 27, 2010


Friends & Colleagues,

As my third year at Brightpoint Capital in Miami nears an end, I have made the difficult decision to resign my trading position.  In short, it is simply time for me to move on.

Details are to follow, as it remains to be seen whether I will serve out another two weeks or - more likely - depart immediately.  Regardless, I will be back in touch soon with details of my transition, and I hope to resume the Morning Note within a couple of weeks.

Wishing you all the best for a happy, healthy conclusion to 2010...and for a great start to 2011!

All the Best,