Tuesday, June 22, 2010

Morning Note...

Futures ~15bps lower this morning as yesterday’s downward drift off the exuberant open continues.  As a result, some of yesterday’s strength in commodities and multinational industrials have already given back some gains.  Overseas, Asia pulled back overnight and Europe is trending ~1% lower despite bullish German confidence data.  European CDS are trading slightly wider.  Recall that last night Fitch downgraded BNP (leading all European financials lower this morning) and also made cautious comments about Europe overall at around 5am EST (they cautioned of Euro-double-dip recession).  Further, U.K. Chancellor of the Exchequer George Osborne delivered a package of spending cuts and tax increases (including a bank levy that “will apply to the balance sheets of U.K. banks and building societies, and to the U.K. operations of banks from abroad”) aimed at eliminating their structural budget deficit by 2015.  This puts England at slight odds with the U.S. ahead of this wknd’s G20 summit, as Obama seems to be urging for more stimulus rather than increased austerity.  Regarding the bank levy, France and Germany are said to be considering this measure as well.  In corporate news, WAG is trading lower after missing earning’s estimates.  JBL, RHT, and ADBE report earnings after the bell today.  Existing Home Sales are due at 10am. 

Looking ahead, catalysts on the horizon include the aforementioned G20 meeting (from which nothing truly substantive is expected), tomorrow’s FOMC decision and announcement (from which nothing truly different is expected), a smattering of economic data (German & Eurozone PMI, U.S. housing, U.S. Q1 GDP), and U.S. financial regulation.  Somewhere within that line-up may lie the clue to the next market move from here… From the technical perspective, 1108 remains key support and yesterday’s close above was bullish (despite the fact that yesterday’s action was psychologically damaging).  However, beware a break back down below 1080-ish for a bearish indicator. 

[And by the way, if you don’t believe me when I say yesterday was psychologically damaging, check out this trader’s commentary:  Good Morning - Yesterday was a brutal trade.  The Opening gap collapsed, volume never materialized, and confidence again was shattered.   We had bullish moves above the 50 day, and 100 day moving averages and failed to hold.   We are currently resting above the 200 day of 1100.   The next real bearish indicator technically would be the Dark Cross, where the 50 day(1130 currently) crosses the 200 day.   Something for you to watch.   The MSCI snapped the longest rally in 11 months, on tightening banks rules and government cut backs.   The Euro is rolling.  The weather is picking up in the gulf.   Tropical storms look to be rolling in.   This market is totally hosed right now.   The Financials have no catalyst for rallying.  The Oil companies are seeing their debt being downgraded, and mounting margin pressure is ahead.   The consumer is still without jobs.  The article are now starting to mount on the dire state of housing.   The current administration appears to be only good at going after peoples money.]

So it turns out that – at least thus far – China’s un-peg has proven something of a non-event, especially as China actively bought U.S. dollars to dampen a larger yuan move.  For the moment it would appear that this move was purely political and aimed at pre-empting negative sentiment ahead of this weekend’s G20 meeting.  We saw this acted out in real time in yesterday’s market behavior:  an early short squeeze, followed by a lack of follow-through “real buying,” followed by the realization that no real buying might read as bearish, followed by some selling into the close.  BTIG’s Mike O’Rourke summed things up nicely in his evening note last night:

It was the first day of summer and the longest day of the year in more ways than one.  The trading day started with a great deal of excitement over China returning to a currency policy that, if memory serves correctly, was never officially halted.  In last night’s note, we expected the market’s reaction to be “more excitement than substance” and that proved to be the case today.  Markets in Asia celebrated the news, Europe followed with optimism and the U.S. attempted to embrace the news, but by late afternoon, the S&P 500 was in negative territory. Despite the fanfare, it was another remarkably slow trading day following a string of slow sessions, including Friday’s subdued expiration.  Despite the 2% intraday reversal, the S&P 500 volume still remained light.  The volume over the last 7 trading days has been 27% slower than the previous 20 sessions. 

We would venture to say that the lack of enthusiasm for the rally and its inability to sustain the gains led to mild or even quiet de-risking late in the session as the Russell  2000 underperformed the Dow Industrials by 95 basis points.  The S&P 500 broke back below its 200 day moving average late in the session, but managed to squeak out a close above it.  Within the Nasdaq 100, more than half of the index’s loss for the session was attributable to three stocks: Apple, Google and Research In Motion.  We are obviously seeing signs of a market where investors have squared positions here for the start of summer and probably won’t be making big moves unless the economic data  or upcoming earnings season provide a tangible catalyst.

Regarding the yuan, Dennis Gartman had this to say:

THE RENMINBI/DOLLAR PEG DIED OVER THE WEEKEND, but confusion still reigns over the importance of the decision to allow the currency to float within a larger range than it has in the past. We must remember that this is not a free float; this is far from a free float. It is, for all intents, rather like the “crawling pegs” of years past in Europe, with the People’s Bank of China allowing the currency to rise, but to do so within a well maintained corridor and with the Bank intent upon keeping the currency from rising too sharply or from falling too steeply. This is but another step in al long passage toward an eventual free float and we would do well to understand that fact. It will be years perhaps before the Renminbi is freely floating on the spot and forward forex markets, but that is the goal. It will be achieved when it serves China’s best interests to do so and only when it does… not a moment before.

We shall admit that the Chinese decision to announce the end of the peg at this time was political brilliance, for it diffused what might otherwise have been an uncommonly uncomfortable G-20 meeting this weekend in Toronto. Protectionism was in the air, and may still be in the air at the meeting, but the fact that China has moved on the peg has taken the largest target that the protectionists here in the US might have dragged into the arena in Toronto and smashed it, leaving the likes of Senators Schumer and Graham without a moving target to shoot at. ‘Twas brilliant politics on the part of Beijing; they have out-politicked Washington, and for that they have our admiration.

By the way, here’s one for the “in case you missed it” file – great piece on hedge fund Bridgewater Associates and the management style of Ray Dalio from this past weekend’s WSJ.  How refreshing…imagine an absolute focus on truth and accountability.  Love it.  See the quote section below. 

FBRC bullish datapoints on S.  ARBA upgrade at JPM.  CCC cut at BBNT.  BIG cut at JPM.  LNCR announces 20c dividend.  BERN & SGEN cut NOK target.  CITI cuts NOV.  PCX announces mine closure.  PFCB announces $77M capital raise.  RGLD files 6.5M share offering.  JPM cuts RYAAY. 

Asia lower overnight.  Europe lower.  EUR/USD $1.2289.  Oil -45bps.  Gold -31bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
WALGREEN CO               28.77    -4.55%  125815
ZIONS BANCORP            23.21    -2.93%  300
FREDDIE MAC                .484      +2.76% 96706
TRANSOCEAN LTD          52.66    -2.32%  53647
ADOBE SYS INC              33.87    +2.23% 200
CELGENE CORP              55.97    +1.99% 500
ANADARKO PETROLE      42.65    -1.84%  21748
FANNIE MAE                  .417      +1.71% 124562
CVS CAREMARK COR      31.26    -1.64%  1900
NATL OILWELL VAR        36.76    -1.55%  3850

Today’s Trivia:  The highest recorded attendance at a World Cup match was the 1950 Final between Uruguay and Brazil in Rio de Janeiro…how many people were reportedly there?
Yesterday's Answer:  Six of 19 World Cups have been won by the host nation. 

Best Quotes:  Money Talks: A Hedge-Fund King Philosophizes on Truth and Weasels

Staff Must Be Brutally Honest, or Else; Separating Hyenas from the Wildebeest


Ray Dalio of Bridgewater Associates has unusual rules at his hedge fund. He will fire workers who often speak ill of colleagues behind their backs.

WESTPORT, Conn.—The euro was plummeting. The stock market was gyrating. And Ray Dalio, president of one of the world's largest hedge funds, took a moment to talk about mosquitoes.

"Man will never be able to build a flying device like a mosquito," mused Mr. Dalio, the 60-year-old founder of Bridgewater Associates. "I look at nature's complexity and think, man has the intelligence of mold growing on an apple."

Mr. Dalio, his staffers readily admit, is an unusual boss. His firm runs on a set of 295 principles that Mr. Dalio devised and distributed to all employees. The 83-page treatise, which draws lessons from the natural world, advises employees on how to achieve fulfillment at work and in life.

In conversation Mr. Dalio weighs in on a range of topics, from inflation to the virtues of home-grown tomatoes. He started writing down his principles about three years ago, basing many on his observations of interactions between employees.

Because money talks, people listen. Bridgewater which started investing institutional money in 1985 with a $5 million investment, now oversees $75 billion. With its largest fund returning an average of about 13% annually over the past 19 years, Bridgewater counts among its investors most of the world's sovereign wealth funds and big pension funds like the Arizona State Retirement System.

Mr. Dalio is among a handful of philosopher-investors known not only for moneymaking prowess but also for their distinctive take on life. Former trader Nassim Taleb gained note for his "Black Swan" theory about the fragility of human knowledge. Warren Buffett's folksy aphorisms are almost as famous as his fortune. ("Love is the most important thing and yet you can't buy it.")

Mr. Dalio's basic philosophy is what he calls "hyper-realism," a notion that brutal honesty, no matter how uncomfortable, yields the best results. Principle No. 8: "There is nothing to fear from truth....Being truthful is essential to being an independent thinker and obtaining greater understanding of what is right."

At Bridgewater, being truthful also requires being a bit ruthless. Employees aren't allowed to talk critically about someone unless the person is present. Principal No. 11: "Never say anything about a person you wouldn't say to him directly. If you do, you are a slimy weasel." If an employee breaks the rule three times, they can be fired.

"Most people actually love this rule,'' says Mr. Dalio.

Recordings of company meetings are stored electronically in what some employees call a "transparency library," and many can be listened to by any of the firm's 1,000 employees.

At first, Bridgewater trader Jon Hantler, a veteran of Deutsche Bank and Putnam Investments, had difficulty adjusting to the hyper-realism at Bridgewater, where colleagues openly critiqued his ideas and drilled into his weaknesses.

"I would go home defeated," said Mr. Hantler. "My wife would tell you, it was a challenging thing for us." But then, six months ago, his wife joined Bridgewater in its client-service unit.

One benefit of adopting the company culture: "Our fights are less frequent, shorter and less painful,'' he said. "I am more open-minded."

At a recent staff meeting in a Bridgewater conference room, Mr. Dalio blasted a department head who admitted he'd given an employee a better performance rating than he deserved. "Telling me what I want to hear creates a sugar addiction," said Mr. Dalio, who was wearing chinos, boat shoes and a company name badge with the word "Ray" in big letters.

Some investors like the tough love. "It's not a bunch of bull, it's not a bunch of platitudes," says Bruce Zimmerman, chief investment officer of The University of Texas Investment Management Company, which oversees the school's investments. "I think the way they are brutally honest with each other helps with results."

In many of its funds, Bridgewater takes investment positions that aren't tied to the performance of the stock market. This helped its largest investment fund return 9.4% at the height of the crisis in 2008, while many other investors were clocking big losses. It didn't work as well last year. The firm's largest fund had a return of 2%, while the U.S. stock market rallied strongly. Since the credit crisis began heating up in July 2007, the fund has returned an average of 11% annually.

Mr. Dalio says he's not interested in discussing his principles "in front of the world." But they have leaked out anyway, to the blog Dealbreaker. The blog excerpted them under the headline, "Be the Hyena. Attack the Wildebeest," a reference to the hedge-fund king's ruminations on natural selection.

"Like the hyenas attacking the wildebeest, successful people might not even know if or how their pursuits of self interest helps society, but it typically does," Mr. Dalio writes.

At Bridgewater's headquarters in Connecticut, a stone wall marks the entrance to a long driveway winding through the woods. A brook flows beneath the building, a three-story structure of glass and stone. Employees like to point out there are few flashy cars in the lot.

"We are nerds," says Seth Birnbaum, a portfolio strategist who came to Bridgewater eight years ago out of Amherst College, where he studied philosophy, political science and economics.

Growing up on Long Island, Mr. Dalio says, he was a "very ordinary kid who was a substandard high school student."

Today, his net worth is an estimated $4 billion, according to Forbes. He lives in the hedge fund capital of Greenwich, where he once threw a benefit party that featured the Allman Brothers Band and Bonnie Raitt.

At home, too, he applies his hyper-realist philosophy, even with his family. "Each person finds this hard," he says, "until you get used to it."