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// August 9th, 2010 // No Comments » // Keith

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// May 23rd, 2010 // No Comments » // Keith

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EARLY LOOK: Try Again

// May 11th, 2010 // No Comments » // Keith

“I make many changes, and reject and try again, until I am satisfied.”
-Beethoven

Managing risk in these globally interconnected times isn’t easy. That’s why we do it. You have to have your feet on the floor early every morning. You have to acknowledge new price data for what it is. You have to consume it, synthesize it, reject it – and try again…

This morning we are waking up to a whole host of Chinese numbers. On balance, they continue to confirm the conclusions embedded in all 3 of our Global Macro Themes for Q2 (Sovereign Debt Dichotomy, Inflation’s V-Bottom, April Flowers/May Showers) and remind us of one of the most important calls we made at the beginning of 2010, Chinese Ox In A Box (white hot loan and money supply growth in China would lead to inflation and government tightening).

We don’t try to shape the data to our investment themes. Sometimes it just does. The data is always changing, and our task as risk managers is to objectively change with it. Whether it’s the people who entered the year raging long everything China (after an 80% up year for China in 2009) or those who entered the month of May levered up long everything USA, it’s all one and the same. Making macro calls remains a competitive process. There will be winners and losers.

The biggest losers around the world today are those citizens who are hostage to the local inflation that they are experiencing in their domestic economies. At the end of the day, China is now importing the inflation associated with a politically charged Western World that creates fiat currencies out of thin air in order to attempt to solve for its sovereign debt problems.

Piling Debt Upon Debt Upon Debt results in long term inflation; particularly in countries where currencies are being debased. Last year, Timmy Geithner and Ben Bernanke debauched the Dollar. This year it’s Jean-Claude Trichet’s turn in clipping coins via a devaluation in the Euro. For those strategists who thought this wouldn’t end in a cyclical spike in global inflation, think again…

Here is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours that took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD:

1. Chinese imports spiked to +49.7% year-over-year growth

2. Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March)

3. Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005

4. Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively

5. Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March

6. China’s Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y!

Again, Inflation’s V-Bottom is a global reality born out of one of the world’s largest importers (China) buying things that are priced in Western Fiat Currencies. For those perpetual inflation doves and stock market bulls who don’t think creating 1 TRILLION Euros isn’t going to debase Europe’s currency value, try again…

After The Keynesian Elixir was applied to those wannabe short sellers of everything Friday May 7th oversold lows, we got what we wanted to see yesterday – the gut check. Did you chase or did you sell?

We sold… all day long…

For transparency purposes, here is my accountability card with time stamps (all EST) in the real-time Virtual Long/Short Portfolio at www.hedgeye.com (if you’d like to receive them real-time throughout each risk management day please email sales@hedgeye.com):

1. 955AM – sold CIT

2. 1005AM – sold BBBY

3. 1010AM – sold PRSP

4. 1045AM – sold SPY

5. 320PM – sold MYGN

6. 327PM – shorted BRK.A

7. 335PM – shorted BX

While ECB Chief Jean-Claude Trichet is lucky that the Coinage Act that was signed into law by President George Washington in 1792 is no longer strictly or universally applied (death sentence to politicians who clipped the citizenry’s coins), that doesn’t change the fact that the Euro is getting smoked right back to new lows again this morning. These politicians have no idea where their inflationary decisions fit in the halls of the last 3 centuries of global economic history. Nor do they care. It’s sad.

Some people have a blind trust that US and European governments are doing the right thing for markets. Some people don’t see the largest Sovereign Debt Bubble in world history as a leading indicator for inflation. Some people don’t see any risks in global markets until it’s too late.

My job as your Risk Manager isn’t to be willfully blind. It’s to make as many changes as I can to my positioning until it feels right. I need to accept and reject data as it finds its way into the correlations associated with marked-to-market pricing. I need to respect that consensus can be right or wrong longer than I can remain solvent. I need to be accountable to every decision I make, because getting it wrong is the only path to figuring out how to get it right again.

My immediate term support and resistance levels for the SP500 are now 1143 and 1168, respectively. On a breakdown and close below 1143, I see no support for the US stock market until 1107. Yesterday I raised my Cash position in the Asset Allocation Model to 58%, dropping my allocation to US Equities from 6% to 3% on strength.

Best of luck out there today,
KM

EARLY LOOK: The Keynesian Elixir

// May 10th, 2010 // No Comments » // Keith

“The lesson is clear: when we celebrate a great achievement, we are not just celebrating hard work, but also a competitive process where some have won and others have lost.”
-David Shenk

I was reading David Shenk’s new book ‘The Genius In All Of Us’ on Friday and couldn’t stop smiling. Finally, the Perceived Wisdoms associated with intelligence being endowed upon us genetically are dying on the vine of science. This is another major victory for those of us who agree with Shenk that “talent is not a thing; it’s a process.”

Risk management is a process. So is being proactively prepared for The Keynesian Elixir that has become our global economic resolve. Per our friends at Wikipedia, “an elixir is a sweet flavored liquid used in compounding medicines to be taken orally in order to mask an unpleasant taste and intended to cure one’s ills. Elixir in the noun form means a drink which makes people last forever.”

Forever is a long time. I won’t spend this morning reminding you who was bullish at SPX 1217 on April 23rd with the expectation that this bull rush was going to last forever. I don’t need to waste your time calling out who made short sales on Friday’s lows expecting that global markets would go down forever either. What we have here is a very healthy competitive process where some will win and some will lose. That’s my kind of capitalism.

I spent Thursday and Friday covering shorts and getting long. On Friday, I added a 3% position in the Nasdaq (QQQQ) to our Hedgeye Asset Allocation Model, taking our allocation to US Equities up to 6%. I started the week with a zero percent allocation to US Equities. We were short the SP500 (SPY), and now we are long that too.

How can I be bearish on US stocks and end up being long them this morning? The answer to that question is fairly straightforward – time and price. Just because our Q2 Macro Theme for April Flowers/May Showers is playing out doesn’t mean I need to press it at every time and price. That’s what a sell-sider who has never managed money before would do. Every risk manager who has traded a market knows that, at a price, gains on the short side are meant to be taken.

We like to keep score. Some people love that. Some people love to hate it. My job isn’t to wake up and try to make friends. It’s to augment your investment process with some risk management thoughts that don’t pander to whatever it is that professional meeting organizers do.

For the month of May to-date, here’s the score for US Equities: Dow -5.7%, SP500 -6.4%, Nasdaq -8.0%, and the Russell 2000 -8.9%. This is what we call a market that’s immediate term oversold. That doesn’t mean that it’s not broken or bearish. Oversold is as oversold does.

From a risk management perspective, it’s not only critical to probability weight where we are immediate term oversold, but to also have a point of view on ranges of probabilities as to where we could bounce. For two long positions that I currently hold (SPY and QQQQ), here are those ranges:

1. SP500: 1110-1143, with 1143 being our intermediate term TREND line of resistance, and 1172 being the line that’s in play if we close > 1143.

2. Nasdaq: 2267-2335, with 2335 being our intermediate term TREND line of resistance, and 2425 being the line that’s in play if we close > 2335.

On the short side, we shorted the US Dollar on strength last week (on 5/6/10 at 11:29AM) as we thought the Euro was immediate term oversold and the Dollar (UUP) immediate term overbought. At Hedgeye, we define immediate term as the “TRADE” which is 3-weeks or less in terms of duration.

We remain bearish on the Euro for the intermediate term TREND (3-months or more) but, again, that doesn’t mean we are bearish on the Euro at every time and price. While our Q2 Macro Theme of Sovereign Debt Dichotomy had us short the Euro and long the US Dollar, for the immediate term TRADE both of these gains needed to be booked. Here are our refreshed lines of support/resistance for these currency markets:

1. US Dollar: $83.06-84.59

2. Euro: 1.26-1.31

Altogether, all of this presents me with 2 simple macro questions this morning:

1. Where do I sell the QQQQ and SPY?

2. Where do I re-short the Euro and cover my trading short in the US Dollar?

We can get all caught up in the semantics of whether or not this is “too trading oriented”, but I have yet to see a legitimate risk management process that doesn’t need to execute trades in real-time. As time and prices change, we do. It’s a competitive process, not a popularity contest.

Whether we agree ideologically with The Keynesian Elixir of European governments attempting to bail out neighboring governments or not, the only thing that is going to help us all from ourselves this morning is being right. Then we can all celebrate great achievement in risk management, together.

Best of luck out there today,
KM

EARLY LOOK: Catching the Contagion

// May 6th, 2010 // No Comments » // Keith

“Prediction is very difficult, especially when it is about the future.”
-Niels Bohr

Keith has taken his young lad, wife, and daughter up to his ancestral home of Thunder Bay, Ontario, so I’ve been handed the baton on the Early Look. In a similar spirit, I thought I’d quote someone from the land of my ancestors, Denmark.

One would think that Niels Bohr was a Danish version of Yogi Berra given the quote above. In fact, Niels Bohr was a physicist. Well, much more than a physicist really, Bohr was the Nobel Prize winner in Physics in 1922 for developing the Bohr model of the atom.

The man basically discovered how the most discrete parts of life work, and for such fine work his home country put him on a postage stamp, put him on the 500 kroner bill, had two elements named after him, and, get this, he even has an asteroid named after him. (As an aside, I’m starting to think my good friend and 12-time Olympic medalist in swimming, Jenny Thompson, got the raw end of the deal when she only got a swimming pool in her hometown named after her.)

Bohr also developed the principle of complementary, which states that “items could be separately analyzed as having several contradictory properties.” As we stare at our screens this morning trying to predict the future, this might have been his most valuable contribution.

While Europe is up small this morning, Asian got pounded over night. China is down more than 4% to a 8-month low and the Nikkei in Japan is down almost 3.5% (after a holiday earlier this week), its largest single day decline in over a year.

Yes, friends, the world is starting to have a freak out moment about sovereign debt. Global markets are getting pounded, Spain is seeing its cost of debt rise to levels not seen since the global financial crises of 2008, and Moody’s has piled on this morning saying contagion could threaten banks in “Portugal, Spain, Italy, Ireland and the U.K.”. While I woke up with a cold, the world, it seems, has Caught the Contagion.

When the world is freaking out though, it’s best to go back to science and facts when trying to predict the future. As it relates to the immediate term future, I’m going to focus on Bohr’s principle of complementary. These freak outs usually create the best buying opportunities, and within the European Union our favorite set up of long Germany and short Spain is one to focus on as they have “very contradictory properties”.

I’ve asked our European Analyst Matt Hedrick to provide a brief overview of some key economic metrics for these two countries, which are outlined below.

On Spain:
1. Spain’s unemployment rate is north of 20%, which is almost 2x the EU average. The unemployed consists largely of recent immigrants (unemployment rate closer to 35%) and construction workers, which will be difficult to re-employ, and thus will keep unemployment high for some time.
2. Spain’s budget deficit-to-GDP was 11.2% at the end of last year and has expanded this year. This is well beyond the danger zone of 10%, which typically highlights the increased potential for a debt default and increased borrowing costs.
3. Spain’s economy at its peak was more than 20% driven by construction and real estate, which will not rebound any time soon. As a result, growth in the “recovery” has been anemic and GDP is expected to decline -0.4% in 2010.
On Germany:
1. German unemployment has held steady in the low 8% level over the past 12 months, with recent improvement coming in last two months, falling to 8.0% in March and 7.8% in April. This outperformance over the Eurozone average (currently at 10%) is due to the success of the government’s short-time work program (Kurzarbeit), which buffered the impact of the economic downturn on unemployment.
2. Germany’s budget deficit stands at 3.5% of GDP. We see this low figure as an extreme advantage, especially as the cost of capital rises for European states over the medium term.
3. The decline of the Euro versus the USD stands to boost Germany’s large export base. Year-to-date the Euro is down 10.8% versus the USD. While GDP is forecast to grow under 2% this year, we expect Europe’s largest economy to outperform, especially as many of its peers are mired in sovereign debt.
While the points above are somewhat of a science in and of themselves, we’ve also represented this Sovereign Dichotomy in our Chart of the Day attached below. This chart outlines the divergences of unemployment in the two countries. Spain’s unemployment parallels that of economic leaders like Sudan and the West Bank, while German unemployment is amongst the lowest in the industrialized world and improving.

When the world Catches the Contagion, volatility will spike (as it has) and investors sell stocks, assets classes and countries indiscriminately. A quick application of Bohr’s principle of complementary tells the science-fearing team at Hedgeye one thing, not all members of the European Union are created equal.

“Prediction is very difficult” . . . especially when we make it so.

Keep your head up and stick on the ice

EARLY LOOK: Agonizing Math

// May 5th, 2010 // No Comments » // Keith

“He who will not economize will have to agonize.”
-Confucius

Yesterday was a great day for risk management. I don’t say that because most markets were down. I say that because markets actually did what the math said they should. In other words, from Spanish equities to US volatility, the macro moves were proactively predictable. Markets don’t lie; people do.

I went into the US equity market part of the day with a similar position to Ben Bernanke – at least in terms of absolutes. Rather than posting a zero percent rate of return to prudent American savers who refuse to be dared to speculate, I posted a zero percent asset allocation to US Equities.

If you are me, making a short call on the SP500 to correct on the order of 4-7%, it stands to reason that I would not only have been short the SP500 but not, at the same time, telling our clients that I want assets allocated to a market that I think is going down. Only a full service super-market-ing broker/dealer would tell you do something like that with your hard earned net worth.

You know I love to be right. I’m not one of those people who wakes up every morning expecting to be wrong. I don’t get paid what I used to, but I am certainly having more fun. My goal this morning isn’t to grandstand. It’s actually to explain what it is that I do. My friends call me Mucker, and I am your Risk Manager.

Every short call starts with a top down Global Macro Theme. We change these themes every three months because market prices and the expectations embedded in them do. As a reminder, our Q2 Macro Themes at Hedgeye Risk Management are:

1. Sovereign Debt Dichotomy (short the Euro, long the USD; short Spain, long Germany)

2. Inflation’s V Bottom (long TIP, oil, Aussi dollars, Chinese Yuan; short SP500, short term Treasuries and select US Equities)

3. April Flowers/May Showers (short the SP500 with a topside target of 1214)

If you’d like the slide presentation for these themes, email the ex-Captain of the Colgate Women’s Field Hockey team who show jumps as our head of sales, Jen Kane, at sales@hedgeye.com . Jen plays center link for us in New Haven and she is flanked by a recently retired pro hockey player named Leclerc and our race car driver, Bergie.

Once we establish these top down themes, we lock, load, and refresh our multi-factor risk management model. We refresh our view (upside/downside bands of probability across 3 investment durations: TRADE, TREND, and TAIL) every 90 minutes of marked-to-market trading. We refresh because prices, volatility, and volumes are constantly changing.

We call this dynamic (real-time) risk management. At the Bloomberg Hedge Fund Conference yesterday afternoon in NYC, I had a great discussion with John Taylor (CEO of FX Concepts) and Dean Curnutt (CEO of Macro Risk Advisors) about being a risk manager in these globally interconnected times. Both gentlemen agreed that managing risk doesn’t occur in your ideologies or politics. It occurs daily and mathematically.

We don’t need to geek out on the math this morning, but we do need to remind you that there is a huge difference between managing risk in an interconnected ecosystem whereby you accept certainty (ie. I know Mastercard is going to have a good quarter) and uncertainty (chaos and complexity theory). The last price is what matters, and your daily objective should be to manage the risks associated with probable outcomes based on that real-time price.

Back to the grind… and explaining what we did yesterday… and what we’ll do this morning…

Like Jim Chanos, who seems perfectly ok with talking about his Chinese short position in transparent forums these days, we like to make all of our moves on a live marked-to-market investment portal. Here’s what we did yesterday as the market weakened – everything is time stamped:

1. 1012AM, sold Mastercard (MA) after a solid EPS report

2. 1019AM, sold the US Dollar ETF (UUP) on strength

3. 1040AM, covered our short position in Ross Stores (ROST) on weakness

4. 1044AM, covered our short position in the Euro (FXE) on weakness

5. 1051AM, bought China (CAF) on weakness

6. 1223PM, bought Intercontinental Exchange (ICE), on weakness

7. 1226PM, covered our short position in the SP500 (SPY) on weakness

That’s it. That’s the best transparency I can give you on what it is that we actually do with all of our math. We have a research team that’s approximately 22 people in size (depending on what Big Alberta eats for breakfast). We grind research. We fade the market’s price action. We rinse and repeat.

As of this morning’s real-time prices, here are some critical risk management thoughts.

1. SP500 immediate term TRADE support and resistance levels are now 1170-1192 (we’ll look to re-short the bounce)

2. SP500 intermediate term TREND line of support = 1143; so ultimately, this correction has another -2.6% to go from last night’s close

3. VIX (volatility) was up +18% yesterday to 23.84 and is now bullish on both TRADE and TREND with TREND line support = 19.51

4. US Equity market volume was up a moon-shot +34% on our daily risk management study = bearish when combined with price/volatility

5. Spanish equities have officially crashed, down another -1.5% this morning and down -21.5% since January

6. The Euro is immediate term oversold and now has refreshed support/resistance levels of 1.29-1.32

7. Brazil’s Bovespa finally broke its intermediate term TREND line = 68,334 after Brazil raised interest rates by 75bps to 9.5%

8. Hong Kong’s Hang Seng is now broken from a TRADE and TREND perspective after trading down another -2.1% overnight

9. Dr. Copper is signaling abort mission to the global growth trade; breaking its intermediate term TREND line of support at $3.35/lb

There are plenty of other “fundamental” news items this morning affecting prices. From Dodd/Shelby on Financial Reform to Putin Power taking this Euro freakout as an opportunity to seize Ukrainian energy assets, the “news” is always there.

All the while, our role as your Risk Manager, is to have our feet on the floor earlier than most, consume the news, and register the price action. No one said this is easy. That’s why we do it. And global macros risk waits for no one – so there are no days off.

Proactively sell high; buy low; and remember, “he who will not economize, will have to agonize” reactively. So capitalize on his consensus emotions.

Best of luck out there today,
KM

EARLY LOOK: Inflation’s V-Bottom

// May 4th, 2010 // No Comments » // Keith

“The prospects for significant inflation have increased, not only here, but around the world.”
-Warren Buffett

One of our core Macro Themes for Q2 of 2010 is “Inflation’s V-Bottom.” Unlike most of Ben Bernanke and Timmy Geithner’s analytical liabilities, inflation in this interconnected world of prices is marked-to-marked, real-time.

Now Timmy has recently admitted that he is “not an economist” and that he really hasn’t ever had a job in the real world, so I won’t waste any time on his incompetence. He’s explained it himself. Bernanke, on the other hand, is a professor and a historian who twilights as an economist, but his forecasts since 2006 have proven to be at least as bad as some of the worst sell-side strategists on Wall Street. That’s pretty bad.

If you didn’t know, other than in your wages and the conflicted and compromises calculation of US Core CPI, inflation is everywhere. In addition to removing every day things like energy and food from its “core” calculus, the US Government has changed the calculation of inflation 9 times since 1996. That’s a lot.

Now the topic of inflation will make the hair on the backs of US stock market bulls stand on end (for the Fed’s Janet Yellen, that can’t be a pretty sight). Make no mistake – the Fed, doves, and bulls have to be in bed together for the SP500 to breach my Q2 intermediate term target of 1214 to the upside. Being willfully blind to inflation trends is a critical aspect of their storytelling.

There are 3 arguments that have a tendency to populate my inbox on the dovish side of this inflation debate:

1. Unemployment is high

2. Wages are low

3. The Fed sees no inflation

I agree with all 3 of these points. Unemployment the lagging indicator that every monkey in the Wannabe An Economist League is staring at. Wages are not inflating anywhere near the annualized pace of prices that real people have to pay for things (the spread between what you make and what you pay is widening). And Bernanke, sees only what a great historian could – his own confirmation bias about a depression that never happened.

The only great depression I see is the output of points 1-3 on Main Street. For the last decade, the US Federal Reserve has been trained to create a boom and bust economy for Wall Street because that’s how we all get paid. The grand total of US net job adds between 2000-2009 = ZERO.

The perma-bulls cheer Bernanke on because he is daring us to speculate on inflation at the same time that he says he sees none of it. He funds inflation by marking the American citizenry’s return on fixed incomes (savings) to zero percent, and letting Piggy Bankers fly by allowing Wall Street to borrow short and lend long on a marked-to-model fed funds rate.

This thesis isn’t just a machination of my own mind. It’s actually a solution. If you want to create stable consumer spending and small business hiring patterns in this country, give upstanding and unlevered Americans an opportunity to earn fixed incomes on their hard earned cash flows (savings). Warren Buffett gets this and so does the best central banker in the world – Mr. Glenn Stevens at the Reserve Bank of Australia.

Overnight, Stevens took the short term stock market pain for the sake of his citizenry’s long term fixed income and currency gains by raising the Aussi equivalent of a Fed Funds rate by another 25 basis points. This take Australia’s base lending rate 4.5% above the compromised and conflicted fear-mongering bureaucracies of Japan and the United States. This was the 6th time Stevens has raised rates since October – as he’s raised rates, Australian unemployment has gone down!

Without cutting and pasting his entire commentary, here’s what non-group-thinking Glenn had to say about the global economy:
“In both underlying and CPI terms, inflation over the most recent 12 months was around 3 percent. Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.

The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2-3 percent over time. “

Now call me aggressive or call me Mucker – I’m cool with both; but what Warren Buffett, Glenn Stevens, and I are saying here is that inflation doesn’t happen in the vacuum of US domestic politics. Inflation is global. Inflation is created by debtor nations. Inflation, when marked-to-market, isn’t kind.

If you are in the camp that $86/oil or your $2 million dollar 3500 square foot house in Connecticut isn’t inflationary because of where you finally noticed the deflation from the mother of all global peaks in prices in 2008, well… that’s not the real world – sorry to break it to you. For the record, I have one of those inflated houses in CT and I do consider the gas in my cars “core.”

As of last night’s close, Chinese and Indian stocks hit new YTD and 8 week lows, respectively, because governments in those countries agree with governments from Australia to Brazil – inflation continues to accelerate sequentially. It’s just math.

My immediate term support and resistance levels for the SP500 are now 1192 and 1217, respectively.

Best of luck out there today,
KM

EARLY LOOK: Crackberry Minutes

// May 3rd, 2010 // No Comments » // Keith

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
-Warren Buffett

Whether it’s Greece, Goldman, or British Petroleum this morning, it’s all one and the same thing. I agree with Mr. Buffett – reputational risk remains something you cannot control in a Crackberry Minute.

Despite one of the largest proposed government bailouts in world history, stocks from Athens to Hong Kong continued to sell off early this morning. Contrary to popular political beliefs, the people of this world apparently aren’t as stupid as the politicians would like to think. Thankfully, You Tube and Google are democratizing and expediting the discovery process. In the end, this will make our world a better place.

In between now and then, a lot is going to happen. While it may not be clear yet how this will end for GS and BP, for Greece it will end in default. There is no calculation that reveals a reasonable probability that after saddling themselves with another 110 Billion Euros of debt, the Greeks can grow GDP at the same time as they promise to cut the deficit. It’s not hard to figure this out and, as usual, Mr. Macro Market already has. It’s just math.

Understanding that most politicians don’t do math is important. Just see these Crackberry Debt Addicts for who they are as they chase one another for short term resolve to long term issues. Instead of Paulson, this time it’s Papandreou. The names have changed but this blue magic is exactly what Hank Paulson and his banking cronies tried to sell you in May of 2008. Borrowing short to fund long term liabilities eventually ends in tears (or in Paulson’s case, puking in the West Wing).

Puking isn’t cool, but it happens. That’s what you saw Friday with the conflicted and compromised sponsors of Goldman’s stock. Sadly, after writing my senior thesis on the credibility of his investment process here in New Haven many moons ago, I need to You Tube Mr. Buffett on that analytical score this morning.

Now before you read this Buffett statement about Goldman, please take a third of a Crackberry Minute and re-read the aforementioned Buffett quote on reputation.

“If you think about that, you’ll do things differently”…

Now here is the You Tube of Buffett from Berkshire’s annual meeting over the weekend: “There is no question that the press of the past few weeks hurt the company… the allegation of something didn’t fall in the category of losing reputation.”

Alrighty then…

Understanding that Buffett has $68B in derivatives exposure (yes, some of it is opaque) and a $5B preferred stake in Goldman that pays him as long as GS has capital, what did all of these reporters expect the man to say about Goldman? Before you take his or anyone’s advice on anything investment related in this world, please ask them how they get paid.

According to Buffett himself, “every day that Goldman doesn’t call our preferred is money in the bank… that’s $15 a tick. Tick, tick, tick. I don’t want those ticks to go away.” Cherry cokes, some DQ, and counting your government sponsored preferreds by Crackberry Minutes? Lovely…

For Americans to watch one of our most trusted investors tell us to trust him on this is just plain sad. I never thought I’d say this, but I have to this morning. Shame on you Mr. Buffett. Shame on you. We are looking for the Good Guys in this marketplace to lock arms with us, be accountable, and lead; not push their own book.

I had more replies to my Friday morning Good Guys note than I have in 2.5 years of writing my morning missives. For any reply, my Hedgeyes and I are always grateful. Each and every one of them provides us an opportunity to learn and evolve. Friday’s replies weren’t about tactical decision making however. They were unanimously from the heart. People want legitimate leadership they can trust, not lip service to the word capitalism.

And with that, a devastating oil slick, and the mother of all Keynesian European bailouts we shall carry on this morning. Feet on the floor, understanding that we can build a firm like this for the next 20 years and I will always be Crackberry Minutes away from letting the power of money ruin our reputation.

After shorting it on 4/29/10 at 10:19AM ($120.28 SPY), we remain short the SP500 in the Hedgeye Virtual Portfolio. At 10:26AM on Friday we re-shorted the Euro on strength. My immediate term support and resistance levels for the SP500 and Euro are 1179-1191 and 1.31-1.34, respectively.

Real-time, all the time. Transparency with no banking or brokerage fee slapped on it is our small contribution to being the change we want to see in this profession.

Our Sector Head for Financials, Josh Steiner, and I will be holding a conference call in our lunchroom today titled, “Underappreciated Legislative Risk for Financials.” Please email sales@hedgeye.com if are interested in participating in an open Q&A.

Best of luck out there today,
KM

EARLY LOOK: Good Guys

// April 30th, 2010 // No Comments » // Keith

“Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.”
-George Washington

Are you a good or a bad guy? It’s a question that all guys know the answer to, but no guy gets to answer for himself. Unfortunately, in the culture of ‘how much money do you make’ versus ‘how do you make your money’, some of the bad guys in this business are now making us all look bad. Being painted with a broad brush can be frustrating.

Some of the Wall Street You Tubing and email gotchas that have been captured in recent months are just plain un-American. Sure, some of these politicians and financiers can lock themselves in their Connecticut compounds and never be accountable or show their faces, but they definitely won’t be the guys who show their sons the way to survive the risk management exercise of not getting a bloody nose at recess.

What I am looking for in America is for the good guys and gals in this business to rise up above their compensation insecurities and make a stand. It’s one thing to wake up every morning knowing you are a good guy; it’s entirely another thing to have a bad guy pay you off to keep your mouth shut.

I’m Canadian. My son seems like he has a shot at being a good guy. He’s American. Before he has to deal with who is and who is not a good guy in this world, he will be well versed in respecting the history of all the men and women who made this country great.

One of those guys is George Washington and his aforementioned quote about the quality of men speaks for itself. On this day in 1789, Washington was made the first President of the United States of America. He was sworn in at Federal Hall in the city where guys need to start stepping up to the leadership bar now – New York City. To all the good guys on trading desks, offices, and cubicles in NYC, it’s time.

This morning, on the heels of overnight news of a “criminal investigation”, populist crowds are going to be calling out everyone at Goldman Sachs a bad guy. At the same time, Bank of America is downgrading Goldman from whatever their compromised and conflicted ratings mean to something less positive. All of this populism and posturing, when painted with broad strokes, reaches new heights of American hypocrisy.

There are good and bad guys at GS. There are good and bad guys at BAC. There are good and bad guys in your office. There are good and bad guys all over the world. This is not a time to be pointing fingers anymore. It’s time for the good guys to raise their hands, be accountable for the bad behavior of their teammates, and start taking on some real-time responsibility to change this mess.

That’s it. Had to get that off my chest.

Back to Grinding Lemmings:

1. Immediate term levels of support and resistance for the SP500 are now 1190 and 1217, respectively.

2. Immediate term levels of support and resistance for GS are now $151.11 and $164.98, respectively.

3. Immediate term levels of support and resistance for BAC are now $16.78 and $18.91, respectively.

I shorted BAC in the Virtual Portfolio yesterday, primarily because the math told me too; but also because our head of Financials research here at Hedgeye, Josh Steiner, agreed that these allegations of bad guys doing bad things isn’t just about Goldman. It’s about our profession.

If we are headed down the path of criminal investigations rather than civil ones, I can assure everyone in America of this: there is a small number of criminals working on Wall Street, and they will be smoked out of their holes. Everyone in this business knows who the bad guys are. It’s time.

They can send me hate mail. They can remind me that Carl Levin doesn’t know what market makers do. Been there, done that and I get both. They can do whatever so inspires them to live in the shallow and dark halls of opacity. My front door is open here this morning in New Haven, Connecticut and I employ a full house of good guys and gals who will be standing on the front lines of whatever it is about transparency and trust that they portend to stand against.

We stand for re-building the credibility of America’s financial system. It’s time to lock arms with the good guys of Wall Street and play Red Rover. From New Haven to New York, please stand with us and begin to form the line. As Washington said, it’s time to “guard against the impostures of pretended patriotism.”

Have a great weekend with your families and friends,
KM

EARLY LOOK: Grinding Lemmings

// April 29th, 2010 // No Comments » // Keith

“I am turned into a sort of machine for observing facts and grinding out conclusions.”
-Charles Darwin

It’s only fitting that after the weekly Institutional Investor “bearish” survey dropped to its lowest level since 1987 (only 17% of investors admitted to being bearish in the week of April 19th) that the US stock market got clocked. If you didn’t know that the buy-side of this business chases performance, now you know.

It’s actually somewhat sad that this profession has become a game within a game of who is the largest lemming. Like Moody’s or S&P’s ratings, I suppose everything has to be measured on a relative basis. The Johnny Come Roubinis getting amped up on the bearish side of the Sovereign Debt Dichotomy this morning are only -18.7% and -13.2% late (Greek and Spanish YTD stock market performance, inclusive of this morning’s short covering rallies).

Per Wikipedia, “the behavior of lemmings is much the same as that of many other rodents which have periodic population booms and then disperse in all directions, seeking the food and shelter that their natural habitat cannot provide.”

We’ll have to see where Darwin washes out the blindly bullish lemmings this go around, but this isn’t just about bulls having a couple of down days. Plenty a wannabe short seller has had their playoff season end the way that the Washington Capitals did last night in DC – miserably.

To have a deep respect for the opportunity that is developing on the short side of global markets, look no further than the quantification of the Pain Trade that the Roubinis and Rosenberg lovers of 2008 have endured. According to the Jedi Master of Grinding Lemmings, Sir Jeremy Grantham, “this time the recovery for the total market was 80% in one year, second only to 1932, and the really speculative stocks are almost double the market, as they also were in 1932.”

Now some lemmings will give you a blind stare when you start whipping around dates that don’t go beyond 2003, because a lot of people my age in this business had never really been forced to incorporate the macro morning research grind into their risk management process until 2008. Call your buddy and see if you can get a bead on what Ackman is going to file on next. While you are at it, sleep in.

After the Volatility Index (VIX) broke down below the 20 level in 2003, the VIX almost never traded above 21 until 2007. I for one made way too much money during that period, and I hardly believe that it had anything to do with anything more than a period of massive liquidity and depressed volatility. Never say never, but that was an aberrational performance run that will ring in my ears forever.

Four years like that can make people truly believe that their performance is due to their own intellect. When I was watching ex-Goldmanite, Josh Birnbaum, testify on Tuesday, I couldn’t help but think of the depressing reality that there are still some guys like that out there in this business. No regret or societal responsibility. No shame. The name on the back of their jersey always means more than the one on the front.

Now if you want to see someone who operates under a different mantra than that in real-life, turn on the NHL playoffs and watch a man drop his face in front of a 90 mile an hour slap-shot. He’ll take it in the teeth and hand his chicklets to the trainer on the bench so that he can get out there with his teammates for the next shift. The difference between what Blankfein’s and the NHL boys encounter is called accountability. Hockey dressing rooms have 4 walls, not a P&L and 4 trading screens.

Back to the macro grind, here’s what I am seeing out there today:

USA

1. SP500 range has immediate term upside downside in the SP500 1180-1201

2. SP500 intermediate term support down at 1140; not closing/holding above 1201 into early May should perpetuate May Showers

3. VIX breakout above both my immediate and intermediate term lines of resistance (intermediate term TREND support = 19.46)

4. Volume studies continuing to flash bearish (yesterday’s up day came on -16% day/day volume)

5. Sector Studies showing 4 out of 9 SP500 sectors now broken from an immediate term TRADE perspective (XLV, XLF, XLB, XLP)

6. Sentiment moved, barely, yesterday in the II Survey with Bears going from 17% (lowest since 1987) to 18%

International

1. China down another -1.1% overnight to -12.5% YTD remains broken on both TRADE and TREND durations

2. Hong Kong equities down again last night (-0.81%) with the Hang Sang finally breaking its intermediate term TREND line = 21,129

3. German unemployment surprises to the positive again at 7.8% in April versus 8% (March); remains our favorite country long side

4. Russia cuts interest rates for the 13th time in the last year and the market was up another +0.73% taking YTD to +9% = inflation signal

5. Latvia is getting hammered, trading down -4.6%; just one of the many countries with sovereign debt problems that are taking turns day-to-day

6. Greek CDS finally narrows to 650 bps wide; every dog has its day; Greek stocks are still down -18.7% YTD, trading below the February 8th low

Grinding Lemmings is what we really enjoy doing. All is good and fine until you become one. Maybe that’s why the life cycle on a Wall Street prop desk is so short. After all, “it is unknown why lemming populations fluctuate with such variance roughly every four years, before plummeting to near extinction” (Wikipedia).

We love to win; we hate to lose; and if we ever lose respect for the name on the front of our jerseys, we won’t be pointing fingers or saying we don’t know and don’t remember. That’s what losers and lemmings do.

Best of luck out there today,
KM