Monday, November 29, 2010

What the Buffalo Bills can teach us about the U.S. economy + more Miami...

Economic lessons from the 2010 Buffalo Bills...

Here's a little-known secret that may irreparably damage my reputation for some readers:  I am a closet Buffalo Bills fan.  I don't want to be, believe me.  But I must be, because each Sunday I find myself just a bit more interested in the Bills score than the others.  I assume it's a remnant from my time growing up in Buffalo - a leftover feeling of camaraderie and hope from watching a horrible early 80's team (Joe Ferguson, really?) develop over time (#1 pick in '85: Bruce Smith, the addition of Jim Kelly at QB, the 2nd round pick of Thurman Thomas, Andre Reed, etc.) into the early 90's juggernaut that, although it lost four straight Superbowls, still managed to get there each year.  I suppose there's a loyalty that is built up over time when you watch something grow and develop, as I watched the 1984 to 1994 Bills, and you find yourself emotionally involved.

This brings me to the present day Buffalo Bills.  They are 2-9.  Terrible by all accounts.  And, unlucky to boot - they've lost three overtime games this year already.  But do you know what?  I love this team.  I would pay money - if I still lived in Buffalo - to watch this scrappy bunch of no names take elite teams like Baltimore and Pittsburgh to the brink.  They have chemistry, they have grit, and they have hunger...and if management was smart, they would build around those intangibles as a foundation for something real.  Keep Fitzpatrick as QB - the players love him, he's a gunslinger with balls and big heart - rather than give into the temptation to go for the glamor QB pick in the draft.  Don't touch the skill positions - high character and class act Fred Jackson should never have been on the bench at all this year, shame on management for essentially discriminating against a small school player in favor of a guy like Marshawn Lynch....and you are set with WRs Lee Evans, Steve Johnson, Roscoe Parrish, and RB CJ Spiller as potential game breakers.  Don't touch the secondary - there are some young, skilled studs back there.  Instead, focus on the foundational, no-headline-grabbing drafting of offensive and defensive around guys like Eric Wood and Kyle Williams and add depth to the core, trench areas that ultimately determine wins and losses. 

Ok, so how does any of this relate to the U.S. economy, you ask?  Last year's Bills - the 2009 version - were awful (just like the 2008-2009 U.S. economy), and it was clear to anyone objective that they needed line help (aka, nuts-and-bolts foundational jobs to the U.S. economy).  But instead, the Bills management (aka, the Federal Reserve?) made the decision to pursue a short-term "headline-grabbing" fix (aka, artificial stimulus) and signed wideout Terrell Owens in order to sell a few more season tickets rather than address their more important, long-term needs.  Owens, of course, proved to be not much more than a one-and-done bust, along with the very weak 2009 incumbent QB Trent Edwards (aka, Tim Geithner?  anyone, anyone...?)

So what's the lesson?  Well, the 2009 Bills got nothing out of their artificial stimulus injection (Owens), much like the true, underlying U.S. economy got from its injection.  This year, however, the analogy diverges.  The 2010 Bills cut their dead weight (Edwards) and decided to let their down cycle run its course (much like a recession should be allowed to run its natural course) and along the way have actually built character and chemistry through hard, gritty play and effort.  Conversely, the 2010 now-highly-politicized Federal Reserve decided to once again forgo addressing foundational issues in the U.S. economy (massive debt, jobs) and are going for the short-term, glamorous, headline-grabbing fix (aka, Quantitative Easing 2).  And much like last year's Bills artificial Owens injection, it's pretty clear to me that this year's Fed QE2 artificial injection will have similar one-and-done results.

In short, this year's Bills team is bouncing back from a rough patch all on its own - the spark is there, the chemistry is there.  It's palpable, and they should be applauded.

But this year's Federal Reserve is unfortunately going the way of the 2009 Bills - laden with an egotistical superstar (QE2) who distracts the mob from the real issues at hand for only a short while before they resurface again.  Caveat Emptor, folks.  The Fed could learn something valuable from this scrappy Bills team:  recession (aka, rebuilding) takes time and is not a dirty word to be avoided.  In fact, it can sow the seeds for greatness for years to come, just like the 1984-1985 Bills.  Are you listening, Bernanke?  It's Ryan Fitzpatrick on the line...and he's asking you to grow a pair. 

More Miami driving... 

My Dad taught me an important lesson about basketball referees when I was younger.  "Good refs or bad refs don't really matter much," he explained.  "It's the inconsistent refs who are most dangerous."  His point was that players can adjust to a referee who makes consistently good calls or consistently bad calls...and to the referee who makes consistently tight calls or instead lets the ticky-tack stuff go.  But a referee who is inconstent - good, then bad...tight, then loose - can ruin a game.

Which brings me to my most recent rant about Miami driving:  Miami drivers are notoriously inconsistent, and it drives me consistently crazy. 

Inconsistency #1:  On surface roads (local streets), Miami drivers routinely crawl along at a snail's pace.  No rush, no stress, clearly no friggin' job - or anything else important - to get to.  As I have written before, a Miami driver rarely goes at a green light until a count of "one-mississippi...two-mississippi" has passed.  90% of the time I will honk at the guy ahead of me at a green light because the person is busy texting, or talking on the phone, or finishing off that coffee, or actually (I am not kidding) reading the paper while driving.  So you could safely argue that Miami drivers are slow, sluggish, and unresponsive on surface roads.  However, please explain why those very same drivers become Evel-freakin-Knievel as soon at they enter the highway, especially I-95 (just named the most dangerous road in America, btw.)

Look, I am a pretty fast driver at times, but I am generally efficient and safe (knock wood!)  But I-95 scares the bejeezus out of me.  As soon as I slow to 70mph (from 75mph, let's say) behind a slow-moving truck or someone that I need to pass, people whizz around me on both sides at ~90mph so that I can't actually change lanes.  And usually, when these people buzz past (and they do "buzz" past - the lanes are notoriously narrow on I-95...hmmm, maybe there's a correlation between that fact and the mortality rate on this road, eh Miami?), they are also either on the phone or texting at the same time.  WTF?  Seriously, WTF?

So how can the same folks who fall asleep at green lights on surface roads also become speed-racing, texting psychopaths on the expressway?  Miami, pay attention please:  just like in basketball refereeing, inconsistency kills...

Inconsistency #2:  I have written about the innate laziness of the Miami driver before.  For example, it must simply be too taxing - too damn hard - for people to actually flick their wrist and click that turn signal to indicate that they are changing lanes or suddenly slamming on the brakes and making a turn.  I know, that seems like a lot to ask!  In the routine course of daily driving, people never seem to use turn signals when they would be of actual benefit to the broader public.  Instead, a level of "driving ESP' is required:  hmmm, is that guy pausing a touch...I dunno, I don't like the looks of his swerving....I think he's a sudden-turn candidate...CON-SONAR...CRAZY IVAN!  (Which way did he turn, Jonesy?  To the starboard, sir!!)  Anyway, the lack of turn-signaling leaves you constantly guessing on Miami roads.

Except for this amazing discovery...when a road naturally curves to the right or the left - meaning there is no choice on which way to go - do you know what Miami drivers will do?  Yes, they will put on their turn signal!!  WTF?  Aaaaarrrrrrghhhhh.  I mean, just shoot me.  Why the hell would you indicate that you are turning when we all know you are turning because the road is actually going that way and we are all turning too?!  Folks, if I sound a little distraught, it's because this stuff is enough to drive a person insane.  Or maybe it already has.  And bear in mind, I am not talking about one isolated incident here - I am telling you that I have seen it over and over and over.  And given that 70% of Miami is Hispanic, I really think someone with driving experience in Cuba or South America needs to tell me the origin of all this senseless inconsistency.  I just don't get it...

More Miami Heat...

Headed to the Heat-Wizards game tonight, and we'll see if anything has changed since my last visit (Heat-Celtics).  I wrote back in July that the Heat would start 10-10 on the year, and I think they are 9-7 to this point, so clearly I will be routing for the Wizards tonight!

I caught a Chris Bosh post-game interview the other night (I think it was after Friday night's Sixers game) and I have to admit I genuinely like Bosh.  I mean, who the hell ever knows the truth behind these things, but I get the sense that he's a good dude and a likable guy.  (Unlike Wade and LeBron, who I think are probably behind-the-scenes @ssholes, to be honest.) 

Anyway, despite my feelings for Bosh, he said something so colossally stupid that I thought someone should have been fired over it.  He told the sideline reporter (a ridiculous homer named Jason Jackson - just my opinion) that - and I am paraphrasing here - the Heat would be fine as long as he, Wade, and James just did the same stuff this year that they all did separately on different teams last year.  Something like "as long as we do what we each did last year, we'll be fine."  Whaaaaat?  Chris, how ignorant are you?  And how bad is Miami's coaching or managing if this message is being conveyed?  How bad must things be if Bosh is also speaking for his teammates, and if they really all feel that excelling individually just like last year is the ticket to Miami's success this year?  Folks, that's moronic.  He advocated the construct of three superstars playing like individuals and then expecting a team to sprout out of it.  Where is the team concept?  Where is the buy-in from the stars?  Where is the humility and the admission that these guys need to be flexible and feel each other out and even make some sacrifices along the way in order to arrive at something where the whole is greater than the sum of the parts?  (Pssst,'s a hint:  that's the definition of a team)

Look, I have beaten the Heat dead-horse enough at this point, but I have to say that if the message from Heat management down to Heat coaches and down to Heat stars and down to Heat players is "just do what you did as individuals last year and we'll be fine," then the Miami Heat are in much, much bigger trouble than anyone might have thought.  That attitude needs to be re-framed, in a big way.  When stars come together, sacrifices are needed - someone has to take the charges, someone has to make the extra pass, someone has to box out...and it can't just be the two other role players on the court at the time.

We'll see how it looks tonight, but after Bosh's comments the other day, I remain a non-believer... In fact, the Miami Tepid jokes are too obvious at this point.  Let's get classical instead and just go with the Miami Hubris.

Morning Note...

Futures ~30bps lower this morning as markets digest the official EU85 billion Ireland bailout (European markets are ~1% weaker, EUR/USD breaks below 200-day moving average), consider the EC’s slight downward 2011 GDP revisions and cautious forward commentary, and process U.S. retail sales data (positive, but generally weaker than expected) for “Black Friday.”  Drilling down on retail sales a bit, the National Retail Federation reported sales of $45 billion over the weekend, up 6.4% from last year.  On the other hand, Shoppertrak reported Black Friday sales up only 0.3% and traffic up 2.2%, both of which disappoint expectations.  Given the strong retail focus this morning, it’s worth a cut-and-paste from the Barclay’s retail desk (from last night):

It seems like Shoppertrak (which is the most high profile and well respected consultant for Black Friday results) is the only source that is negative on how sales went this weekend.  If I'm not mistaken, last year Shoppertrak said that sales increased 0.5% on Black Friday, but the Census Bureau data later showed that sales in November increased 2%.  I realize thats not apples to apples but I think the point is that both bulls and bears will have plenty of data points from this weekend and its just too premature to make any sort of sweeping generalization around how sales went.   

When everyone gets to work tomorrow the headlines will be negative (Ireland bailout and Shoppertrak saying Black Friday only up 0.3%) so don't be surprised to see the market indicated lower.  Its still feels easier to be short than long given the big run that retailers have had, a dicey macro backdrop overseas and the governments recent interest in money managers.  However, just be a little careful.  There are going to be winners and losers in this holiday season and it feels like investors are having a tougher time find shorts than longs.  Moreover, November started out quite well and I don't think it would surprise anyone if the month was a beat when sales are reported the first week in December. 

Regarding Europe’s weakness and the Irish bailout (when do the Irish drinking jokes begin to circulate, btw?), here is some good commentary from Morgan Stanley:

The much-awaited details of the Irish bailout and bank-restructuring package released today were broadly as expected.  Positives in the announcement should be constructive for the EUR near term.  At the same time, the risk of contagion to Portugal and (to a much lesser extent) Spain remains undiminished and should continue to cap EUR upside into yearend.

The overall bailout amounts to €85bn as reported earlier, but there were some positive surprises in the details.  Reliance on external funding is smaller than expected, with the Irish National Pension Reserve Fund contributing €17.5bn of the total and the European Financial Stability Mechanism, the IMF and the EFSF (plus bilateral loans) €22.5bn each.  As reported in the press earlier this weekend, bailout loan maturities may be stretched to up to 10 years (also for Greece), which would ease (but not eliminate) acute refunding pressures post 2013.  And it appears that, while EFSF funding will carry an 5.8% interest rate, the rates on IMF and EFSM financing will be significantly lower.  Finally, easing Ireland’s adjustment burden somewhat, the Government will have an extra year (until 2014) to meet the 3% budget deficit target.

The bank-restructuring plan – €10bn for immediate recapitalization plus €25bn in reserve for future needs – was reassuring in that no haircuts will be imposed on senior bank bond-holders, which reduces the risk of contagion to financials across EMU.  Also constructive, news on the post-2013 credit resolution mechanism (CRM) confirmed that private sector participation would be limited to post-2013 debt and occur on a case-by-case basis only.

In last week’s FX Pulse Overview, we argued that, since the early fall, contagion risk has been the main link between peripheral EMU sovereign risk (see attached) and the EUR.  From this perspective the prospect for sustained near-term EUR upside still looks limited.  The Portuguese government is fully funded through yearend, but appears vulnerable to contagion psychology in the market-place.  It faces a hefty redemption schedule in January and February, and (in contrast to Spain) it is heavily reliant on foreign investors and its small size makes it vulnerable to a buyer “walkout.”  As a result, the ECB’s willingness to support peripheral EMU bond markets, and thereby to defuse contagion psychology, could turn out to be crucial for EUR stability near term.

Note that November jobs data is due this Friday and will be closely watched.  More trader talk, including the official first use (at least across my desk) of the “Santa Claus Rally:”

There are lots of economic data this week for folks to mull abut.   The November employment report will be released Friday, and expectations are 150,000 the same number that we got in October. The November jobless rate is expected to remain at 9.6%. If that forecast proves correct, it would be the fourth-consecutive month that the rate was 9.6%.  Same Store Sales for the Month of November also out on Thursday, they will include black Friday and Cyber Monday in the report.  The overarching takeaway seems to be that trends were solid during black Friday with earlier store openings and in general a very responsive consumer.  It appears that the Irish have worked out a deal.   What you need to watch is how the bond market reacts today.  The European markets had started out strong, and the SPZ were up 10 ticks on the clarity, but have given it all back.  The costs to insure Irish, Greek and Portuguese debt has been rising even as finance ministers talk of 'bailouts.'  Banks continue to be for sale, and that is another negative talking point.  Things continue to escalate on the Korean peninsula, as China has now asked for six party talks to cool tensions from the North Korea attack last week.   Escalation there could cause investors to dump stocks here.   Lots of negativity, if we can make it thought this without any serious damage a Santa rally is still in the cards.   Have a great day. 

BCAP ups RDC, SPN.  CSFB ups FDX, SJR.  GSCO ups MTL, TX.  Janney ups AEO.  JPHQ ups ROSYY.  WEFA ups DE.  CITI cuts AMP.  DBAB cuts FRO.  GSCO cuts TIN.  STFL cuts EBAY.   

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

Today’s Trivia:  Where was the potato first cultivated, reportedly in 200 A.D.?
Yesterday’s Question:  Believe it or not, there is actually some controversy (admittedly…a tiny bit) over Barack Obama’s claim as the first African-American U.S. President.  Any idea who may have been the first?

Yesterday's Answer:  29th U.S. President Warren G. Harding was rumored to have had a great-grandmother of African American descent. 

Best Quotes:  BTIG…

Celtic Clarity.

Wednesday's recovery led by improving economic data in the U.S. was thwarted by the resumption of global worries.  North Korea escalated its rhetoric as the U.S. and South Korea commenced joint military maneuvers.  Ireland's bailout talks continued to progress, and new uncertainty arose for the senior bondholders at the Irish Banks.  The deterioration of the Irish government's credibility and effectiveness increased doubts about its ability to adhere to its pledge to back the banks' bonds.  The selloff in the bonds and reports in the media fueled questions about whether or not the senior bondholders would be forced to accept a debt for equity swap as part of the bailout.  As in every bailout situation, such a move is a change in the rules during the middle of the game.  

Ireland formally received an 85 Billion bailout today (20% of which is coming from Ireland itself).  The feared worst-case scenario for the banks appears to have been avoided.  The plan calls for 10 Billion in immediate recapitalization of the banking system (with an additional €25 Billion contingency backstop).  The exact transmission of that recapitalization was unclear in the release.  Every official release stresses continuity with the current policy.  It appears that the plan offers the banks 3 months to attempt to raise the necessary capital from the private markets, otherwise, the Irish government will use the bailout funds to backstop them.  

This episode has been marred by Germany's poor communication and mixing comments about a permanent sovereign debt solution post European Financial Stability Facility (EFSF) in mid-2013 with the daily dialogue about Ireland.  The German double talk started to fuel global backlash.  Last week the latest was that former Italian Prime Minister Romano Prodi said German Chancellor Merkel's comments were making matters worse.  Now, on a daily basis, the Germans have been forced to assert that the current bailout will be under the framework of the EFSF.  The Germans did advance their cause for a permanent solution, but the loss sharing the Germans sought is officially delayed to post EFSF in mid-2013.  Plans for a new permanent European Financial Stability Mechanism (EFSM) were announced as part of this plan.  Half of the €45 Billion European contribution to the bailout will be from the EFSM, but despite this development, the Eurogroup was sure to state that "We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013."  The good thing is that if everyone knows the rules will change to a more responsible structure in 2 ½ years, investors can plan appropriately.  

Domestic Developments.

The positive news domestically was lost amidst the global fears and the quiet holiday trading.  On Friday, half of Wednesday's gains were erased in what was the slowest session of the year.  To add some perspective to how slow it was, volume was down 37% from the post Thanksgiving session last year.  Since September, we have been talking about our expectation that weekly Initial Jobless Claims will break below 400,000 before year-end.  Last week's print of 407,000 was a dramatic step in the right direction.  We expect this to be the new baseline from which Initial Jobless Claims will fluctuate.  

The early headlines on Black Friday activity have commenced.  ShopperTrak noted that Black Friday sales only rose 0.3%, while traffic rose 2.2%.  We would note that by ShopperTrak's calculations, Black Friday sales grew throughout the recession, 3% in 2008 and 0.5% in 2009, so 2010 is a record number.  We think Black Friday sales probably became a more predominant influence on the holiday selling season during the recession as consumers relied upon deals.   For example, although Black Friday sales grew throughout 2008 and 2009, overall holiday sales contracted 5.5% and 0.4% respectively according to ShopperTrak.  Although the 2010 Black Friday growth appears uninspiring, there are a number of positive underlying metrics to this holiday season.  There is the increase in traffic, and increases in purchases for oneself and sales in the first two weeks of November were up over 6% year over year.