Friday, September 17, 2010

Morning Note...


Happy Friday…  Futures ~20bps higher this morning as both Oracle (ORCL; +3.9%) and Blackberry-maker Research in Motion (RIMM; +4%) reported better-than-expected earnings after last night’s close.  Texas Instruments (TXN; +2.7%) also boosted investor sentiment by announcing a $7.5B buyback and a dividend raise.  In spite of market strength today – or perhaps because of it – Gold continues to make new record highs and bonds are also bid higher.  In economic news, the Consumer Price Index (CPI) for August was in-line with expectations, at +0.3% month-over-month and +1.1% year-over-year.  Worth noting that Credit Default Swaps on Ireland’s debt have risen to record highs.  Europe is down ~50bps on aggregate.  Asia was mostly higher overnight.  The USD basket is up slightly, Oil is flat, and Gold – as previously mentioned – is up 45bps.  Looking ahead, we’ll hear from the FOMC next week, and no policy change is anticipated. 

Very bullish trader commentary here, but note the ETF mention…great stuff, to be sure, but what if all the ETF inflows mentioned are simply going into Gold and Silver? 

Good Morning – Interesting things appear to be happening.  Watch the money.  Risk appetite is returning.   All equity funds see another week of inflows.  Mostly in ETFs, but it is a start.  Fixed income continues to see strong inflows,  that remains a constant.  Money Market funds see large outflows of 22 billion outflows, the biggest in 13 weeks, unwinding the bulk of inflows over the past 5 weeks.     Large cap equities were the big winners ($7.4 billion),   International equities ($1.4 billion) also garnished a good amount of money.    EM equity funds have seen 16 consecutive weeks of inflows.   The U.S. has the biggest 2 week inflow since December of 2008.   Election-cycle.   The typical trough in the cycle is Mid September in the mid-term election year.   1130 has been a struggle technically for us, a move above breaks a 12 week high.    1150 next stop.   Get bullish! 

Here’s an interest observation from the CSFB derivatives desk:

The unavoidable theme in the index/etf options market has been the buying of protection (including but not limited to SPY, QQQQ, IWM, EEM, XLF, and XRT).  Almost every sizable trade that printed in this sector today was a buyer of puts, put spreads, or putspread collars, the majority of which were customers preparing for a moderate selloff of 5-10%.  The put spread buying has softened skew a decent amount to roughly its 12 month average as consensus deems to be that we won't face a double dip scenario leading customers to not mind capping their protection by selling a lower strike put. 

Couple interesting stories on Bloomberg this morning on the alternative investment space:

Citadel Said to Consider Fee Cuts as Hedge Funds Seek Clients 2010-09-17 04:01:00.16 GMT By Saijel Kishan and Katherine Burton

Sept. 17 (Bloomberg) -- Citadel LLC is considering cutting fees on its two main funds as it attempts to attract clients during the worst climate for raising money in two decades, said two people with knowledge of the firm’s plans. The Kensington and Wellington hedge funds at Chicago-based Citadel, the $11.1 billion firm founded by Ken Griffin, are among a handful that pass along all expenses to clients rather than charging the industry-standard 2 percent annual management fee. Expenses at the firm have reached as much as 8 percent of assets, and typically range from 4 percent to 6 percent. Citadel lost 55 percent of assets as markets tumbled in 2008, and when investors sought to take out $1.2 billion the firm suspended redemptions before restoring them in late 2009. Even after last year’s 62 percent return and this year’s 4 percent gain, the funds would still need to climb about 30 percent to make clients whole. Assets fell from $13.5 billion a year ago as money was returned to customers.

Carlyle Said to Seek Stake in Hedge-Fund Firm Amid Buyout Slump 2010-09-17 04:01:00.20 GMT By Cristina Alesci, Saijel Kishan and Jason Kelly

Sept. 17 (Bloomberg) -- Carlyle Group, the world’s second- largest private-equity firm, may buy a stake in a hedge-fund manager and is negotiating with several firms as it seeks to add more liquid investments, said three people briefed on the plans. Carlyle is talking to firms including one hedge fund with as much as $5 billion in assets that trades across multiple markets, said the people, who asked not to be identified because the information is private. The firm is also seeking to raise two new debt funds and a $1 billion pool to buy small companies, the people said. The biggest private-equity firms are adding more liquid investments after the financial crisis sapped investors’
appetites for large buyouts. Blackstone Group LP expanded its debt business with the 2008 purchase of hedge fund GSO Capital Partners LP, and KKR & Co. has formed a group to underwrite debt and equity offerings. A previous effort by Carlyle to add hedge funds failed in 2008 when the firm liquidated a pool hurt by investments in mortgage securities.

Finally, on a personal note, I have never heard Home Depot co-founder Bernie Marcus speak before, but he was terrific on CNBC this morning.  Hopefully his pro-small business and anti-academic-economic-theory rant will resonate in Washington, especially within the Obama Administration.  He basically asks, “what the heck do Summers, Pelosi, and Obama know about running a small business?  They’ve never had to in their lives, and they are out of touch.”  If things end up slow later today, please take the time to skim through this video:  http://classic.cnbc.com/id/15840232?video=1593436488&play=1

JNJ to buy CRXL for EUR24.75/share.  MEE expects to report Q3 loss and guides FY 2010 to low end of range.  BofAMLCO ups DCI.  BARD ups OSK.  CITI cuts FMX.  PIPR cuts SHPGY, ARNA.  UBSS cuts NBL. 

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

Today’s Trivia:  Under what name was Kool-Aid originally marketed?

Yesterday’s Question: What is the important distinction – other than the most obvious – between male and female mosquitoes?

Yesterday's Answer:  Female mosquitoes are the only ones that bite…

Best Quotes:  From Hedgeye…

EARLY LOOK: DEEPLY DISTURBING
"It is not the function of our government to keep the citizen from falling into error; it is the function of the citizen to keep the government from falling into error."
- United States Supreme Court decision in American Communications Association v. Douds

Before I start getting into one of the most critical long term TAIL risks that I am currently seeing develop in my interconnected global macro model (analytically incompetent Congressmen starting an economic war with China), allow me to paint a few mathematical lines around the core of the issue - unawareness.

1.       US Dollar: for the week-to-date = DOWN -1.8% (just another week of the same debauchery)
2.       Chinese Yuan: for the week-to-date = UP +0.90% (its best week in 28 months)

Now President Obama has been crystal clear in rhetoric on making decisions "based on facts" so we, as citizens, should hold him accountable to that in order "to keep the government from falling into error."

To be fair, maybe our immediate term TRADE duration (3-weeks or less) is too short term for the economic sophisticates managing America's currency risk from Washington, DC. So let's look at currency "manipulation" on our intermediate term TREND duration:

1.       US Dollar: has declined in 13 of the last 16 weeks, and has lost over -8% of its value since early June when CNBC started begging Bernanke for QE2.
2.       Chinese Yuan: has been stable, not losing more than 0.5% of its value in any given week for the last 3 months.

If the intermediate term TREND of US Dollar devaluation and Chinese Yuan appreciation doesn't fit your partisan politicking, let's blow the charts out to the longest of long term so that your local politician who is gasping for the over-compensation air of re-election at the mid-terms can get "smart" on the math.

1.       US Dollar: after Nixon abandoned the gold standard (1971) and endowed both the Fed and Congress with the inalienable right to manipulate the world's reserve currency via the US Federal Reserve Fund Rate, the US Dollar has only made a series of lower-highs and lower-lows.
2.       Chinese Yuan: since China de-pegged its currency in 2005, the Chinese Yuan has only appreciated in value. This morning's price is the highest price ever for the Chinese Yuan. By our math, ever is a long time.

For the mathematically challenged, we've provided a picture of the long-term US Dollar chart so that you can forward it to Chuck Schumer (Democrat - New York) and Sander Levin (Democrat - Michigan). Before we YouTube what these professional politicians had to say on this matter, here's what the Chinese said overnight:

1.       "Large fluctuations in the US Dollar's exchange rate may impede the global economic recovery." -Chinese Central Bank
2.       "The appreciation of the renminbi cannot solve the trade deficit with China and can't fix the US unemployment problem." -Jiang Yu
3.       "Pressure cannot solve the issue, rather it may lead to the contrary." -Jiang Yu (spokesperson for the Foreign Ministry in Beijing)

Back to America's conflicted, compromised, and confused:

1.       "We have to figure out ways to change behavior" -Tim Geithner
2.       "The U.S. economy is trying to pick itself up off the ground, China's currency manipulation is like a boot to the throat of our recovery." -Chuck Schumer
3.       "Chinese practices have led to a staggering US Trade Deficit... and it's deeply disturbing."  - Sander Levin

You got that right Colonel Sander Levin - the comments coming out of your mouth are Deeply Disturbing on so many levels that are obvious to any educated American on global risk matters right now that I can end with that. If your objective is to fear-monger uneducated Americans into going anti-China, shame on you.

Chuck Schumer became a member of the New York State Assembly in 1975. Sander Levin assumed office in Michigan's 12th district in 1983. If these two characters want to point fingers at China for US government spending, deficit building, and debt incursion rather than hold themselves accountable to zero US private payroll adds in the last decade, they can go ahead and try - maybe that gets the next lemming in line to vote for them again, but in the age of the internet, I don't think Americans are that stupid. Gentlemen, you have been YouTubed.

What do the alleged "non-partisan" people in Washington have to say about all this? Eswar Prasad, Senior Fellow at the Brookings Institute, concluded that "as the US mid-term election nears, the temptation of grandstanding on China will be irresistible to most Congressman."

Thank you, Mr. Prasad.

The fact of the matter is that US Dollar depreciation is aided and abetted by stock market cheerleading to keep the US Federal Funds rate at ZERO percent anytime this country has an economic problem. That horse has been beaten to a dead pulp and has only equated to a high/low society whereby guys like me get paid to trade the volatility of commodity prices born out of that Dollar Depreciation as America's poor get jammed with higher prices.

Mr. President, you tell me who is lying here, because it certainly isn't market prices. The price of oats are up +24% in the last month alone (I eat oatmeal for breakfast). On our immediate term TRADE duration here are the highest inverse correlations to the USD Dollar:

1.       Sugar = 0.90
2.       Oats = 0.88
3.       Cotton = 0.86
4.       Corn = 0.85
5.       Oil = 0.79

*note to Chuck - these are very high inverse correlations.

According to the US Census Bureau, there were 43.6 MILLION Americans living in poverty in 2009 and the latest reading on Americans who live off of food stamps is about that same number (which is at a 15 year high). Professional politicians who are pointing fingers at the Chinese this morning get one big fat middle one from me - their fear-mongering is Deeply Disturbing. It's US monetary policy, stupid.

My immediate term support and resistance lines for the SP500 are now 1111 and 1134, respectively. With the US stock market being immediate term TRADE bullish, I have upped my asset allocation to US Equities to 6% this week and taken my position in cash down to 46%. With US Congress imposing this kind of systemic risk to our financial system however, I'll be a net seller all day today.

Best of luck out there today,
KM