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Keith McCullough
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Research Edge, LLC (http://www.researchedgellc.com/) is the leading real-time research firm. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottoms-up and macro analysis with an emphasis on timing. The Research Edge team features... More
My company:
Research Edge LLC
My book:
Diaries of a Hedge Fund Manager
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  • Early Look: You Are My Hero
    “Show me a hero and I will write you a tragedy.”
    -F. Scott Fitzgerald
     
    If you spend enough time in the group-think tanks of Washington economics, you start to believe in your own storytelling. On Jim Lehrer’s PBS town hall with Ben Bernanke this weekend, the Federal Reserve Chairman stated plainly that he was “not going to be the Federal Reserve chairman who presided over the second Great Depression.”
     
    Ben Bernanke, thank you so much for saving me. You are my hero.
     
    This is the very same man who is allegedly an academic messiah of Depression histories. This is the very same man that no less than 3 months ago was signing off on a compromised and conflicted fear-mongering campaign that bailing out Wall Street had to be done or the end of the earth cometh. This is the very same man who is using his history books and lagging economic indicators to prognosticate the future of America’s economy. This is a tragedy.
     
    Obviously, if Bernanke was the hero of this story the US currency wouldn’t have traded down for the 3rd consecutive week last week. Alongside Goldman printing $5/share in earnings and Citigroup paying a trader $100M (yes, that’s million), 99% of Americans who are allowed to, get the joke. The joke is that Bernanke doesn’t get that he is the lemming that’s getting the Debtors, Bankers, and Politicians paid.
     
    Lemming? That’s harsh Keith. Yes, folks, and so will our commoner lives be if I am right and we see what I have been calling for in the 4th quarter – reflation morphing back into inflation. While the high side of my Range Rover macro theme for Q3 was off the mark, my other 2 macro themes (Burning The Buck and Reflation Rotation) continue to play out in lock step.
     
    This morning you are seeing the US Dollar Index trade down again to $78.56. This is only the 4th time in almost 40 years that the $78 level has been tested. That matters.
     
    Since March, the world’s reserve currency has basically crashed. I know, I know – Barron’s is calling for “Hello 9,000: The Dow’s Run Is Far From Over”, but there is a loser in the game of everything priced in US dollars reflating – the Dollar! The US currency has lost -12% of her credibility in less than 4 months. That’s a crash.
     
    Rather than appearing on 60 Minutes, PBS, and writing Wall Street Journal Editorials, I suggest Mr. Bernanke starts spending some time looking at real-time, marked-to-market, leading economic indicators. Since it’s clear that he hasn’t done the math, here are some things to look at:
     
    After keeping a completely politicized “emergency” level of a Fed Funds rate at ZERO, look at what these prices have done in the last 2 weeks:
     
    1.      The CRB Commodities Index +7.5%

    2.      Oil +15%

    3.      Copper +14%

    4.      Gold +5%

    5.      SP500 +11%

    6.      10-year US Treasury yields 3.71%

     
    As Bernanke hinged his cart to the conflicted, saying that he’ll change his monetary policy “when the economic outlook requires us to do so”, the world simply sold more US Dollars, and continued to buy everything else. If America is willing to let her currency burn, why hold any more of it?
     
    Have no fear, our super heroes Hillary Clinton and Timmy Geithner are here. This week, China is sending their B-team to Washington to meet with our equivalents of Dora The World Peace Explorer and her buddy Go Go Goldman Diego to talk about China’s largest invested position. How do you think these meetings are going to go? Go Go doesn’t do global macro…
     
    Again, maybe… just maybe, Main Street isn’t as stupid as Washington makes them out to be. Maybe they see the Reflation Rotation coming for Christmas 2009. Maybe that’s why President Obama’s approval rating just hit a new low.
     
    Maybe people get that the “Great Depression” narrative fallacy was a purely political one. Maybe China gets that this situation is going to end wherever they decide it will. Maybe today’s CNBC heroes are writing the history of the American currency tragedy right before our very eyes.
     
    Keep those eyes wide open. The level of group-think we are seeing in the US market is generational in scope. My refreshed levels for the immediate term TRADE in the SP500 are 948 support and 990 resistance. If the Buck continues to Burn, we’ll get our 990, and the said Great Depressionista bankers will get their raise.
    Jul 27 9:44 AM | Link | Comment!
  • Early Look: Dodging Responsibility

    "It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities."-  Sir Josiah Stamp

    After watching the SP500 hold my 954 line and close there for two days, yesterday Mr. Market blew it right out of the water. That makes me wrong.
     
    I could dance around the math, make excuses, and hide – but I will not. That’s what losers do. My vision of creating this real-time research firm is shaped by a profound belief that we need to re-establish that there is responsibility in recommendation on Wall Street again.
     
    Importantly, yesterday’s critical US market breakout was confirmed by volume. With US market volumes in structural decline, the best I can do right now is measure the market volumetrically on a day-over-day and month-over-month basis. Yesterday’s volume spiked +28% versus Wednesday’s volume. That matters – big time.
     
    I have a lot of macro models. One simple three factor model that I use studies price/volume/volatility. As of now, we have the confluence of these three quantitative factors signaling very bullish outputs. With the Volatility Index (VIX) absolutely crushing the Depressionistas who look at every 1% down move as the signal of the next “crash”, this should be no surprise. The VIX remains broken across all 3 of my durations (TRADE, TREND, and TAIL) and continues to make a series of lower lows.
     
    As volume accelerates into higher stock market highs, no matter where you go this morning, there you are. I, for one, didn’t wake up hoping for the futures to be down because “Microsoft and Amazon missed.” Hope is not an investment process.
     
    So what is the refreshed immediate term TRADE setup for the US stock market from here?
     
    1.      SP500 support 939, resistance 984

    2.      Nasdaq support 1883, resistance 1993

    3.      Dow support 8719, resistance 9188

     
    My macro models update every 90 minutes of marked-to-market trading. No, I don’t have a “side pocket” or “level 3” accounting plug in my models. As prices and other dynamic market factors change, I do. That’s not new. The only thing that is new is my waking up to being wrong on my SP500 levels ahead of this morning’s open.
     
    I don’t intend on being wrong for Monday’s US market open, so I will continue to keep proactively moving exposures in both the Asset Allocation Model and our virtual hedge fund portfolio (researchedgellc.com <www.researchedgellc.com>; ). I currently have 17 longs and 15 shorts (including short MCD, which Howard Penney nailed yesterday).
     
    While the top side of my Range Rover SP500 level missed the mark, that doesn’t mean I was short that line. I simply missed the beta of associated with a big +2.3% US market move. In so far as I wasn’t interested in chasing the 200-day Moving Monkeys over the cliff on July 10th’s Q3 closing low of 879, I am not looking to clang symbols and clamor for levered long bananas here at 976.
     
    The New Reality is this: a lot of people missed the -57% crash in the US stock market and now a lot of people are missing the +44% REFLATION from the March 9th low. Until Wall Street changes, career risk is at stake for those who don’t freak out at bottoms and chase tops. That’s the constrained US Financial System that this country has built.
     
    What’s the number one driver of the top end of this rally? That’s simple – a US Government sponsored Burning of The Buck. As Bernanke provided Washington/Wall Street with another “Misguided” outlook, those who understand carry trading are sucking the last gasps of air that free moneys will give them. As they rightly should.
     
    The dollar is down on the week, again, and has lost -13% of it’s value since March. By the time Q4 hits, this won’t be about DEFLATION anymore. INFLATION, inspired by US Dollar DEVALUATION, will be coming off my fingertips in t-minus 3 months. Prepare your risk management setup and portfolios accordingly.
     
    History is not written on a one-day or one-year duration. Ask Alan Greenspan about that. The ex-Limitless Credit Creation Chairman himself recently stated that “there was a flaw in the model that I perceived as the critical functioning structure that defines how the world works.”
     
    Amen, Mr. Greenspan. Amen. Please forward your memo to Chairman Bernanke because “we cannot dodge the consequences of dodging our responsibilities.”

    Jul 24 8:11 AM | Link | Comment!
  • Early Look: Tidal Pools

    “All the busy little creatures chasing out their destinies… living in their pools they soon forget about the sea...”
    – Neil Peart
     
    Ok, Keith quotes Nietzsche, and McGough quotes lyrics from Canada’s most successful progressive rock trio.  Poke fun if you’d like, but no one can ever claim that we at Research Edge are not open to inspiration from all angles!
     
    But this quote hit home with me yesterday as I drove down I-95 from Boston to Connecticut. I had the pleasure earlier in the day of having lunch with one of the future leaders of Wall Street.  Half of our conversation revolved around the obscenity surrounding how so many people are trying to time little ripples of info related to 3Q and 4Q EPS instead of focusing on 30-foot waves forming on the horizon. Ever sit on a surfboard and get caught up watching the beach instead of the horizon? I don’t suggest you try. It hurts…
     
    But that is what we’re seeing now on the Street. There’s no shortage of stats that should make us step back and question where the long term opportunity really is. Consider the following…
     
    1.      US retail sales growth came in at -8.99% last month, and the ‘chatter’ was all about how this was a positive development because it was better than expectations. But what about the 15% growth number we saw in China?


    2.      860k autos were sold in the US in June per Motor Intelligence. But that compares to 1,142k in China in the same period.


    3.      510,563 total new accounts opened throughout the second quarter at Etrade, TD Ameritrade and Charles Schwab combined. Yes, that’s a big number. But what about the 484,799 new individual equity accounts opened in China LAST WEEK?
    I won’t beat this China horse any more. Our Macro team just published a China Black Book that more than covers everything any investor needs to know on the topic. (If you’d like a copy, feel free to email macro@researchedgellc.com.)
     
    But what about investors that are staying closer to home (either by choice or by mandate)? Even within the US, I feel like people are hyper focused on the tidal pools. The best example is CIT.
     
    I can’t even count the number of calls I got last week on this whole CIT situation. “Hey McGough… what name can I play on this theme?”  The answer? No one. To try and pick one company that will get hurt is a useless exercise. Spending effort on that is completely missing the potentially HUGE call, which is picking the second and third derivative of this situation. This all boils down to private equity as a three-legged bar stool. What do I mean?
     
    a.       Let’s look at all the PE deals done over 5 years at peak multiples and peak (single digit) margins. Now layer on a weaker consumer and 100% debt to total capital. Cash flow ain’t looking too good. These smaller and/or private companies are the ones that will be most impacted by tightening credit/factoring.


    b.      Now let’s look at the portfolio of companies for each private equity firm – it’s not that tough to do. All it takes is for one domino in the portfolio to topple, and then others could follow as they trip covenants, and act irrationally as they try to keep their heads above water. (2nd derivative).


    c.       Then this plays into the third derivative (mathematically speaking, there’s probably a better way to frame this up – but you get the drift). This includes the impact of the vendors, retailers, sourcing companies, and other trade partners that will be impacted as dominos fall. You can go to your little one-on-one meeting at a conference and have a CEO tell you that all is hunky dory. But I can all but guarantee you that 90%+ of them are not spending a whole lot of time on whether this key critical uncertainty even exists – nevermind how to come out on top.
    This is when investors get paid to not only think a step ahead of the competition, but to think a step ahead of the people running the companies.

    Tags: CIT, China
    Jul 23 9:28 AM | Link | Comment!
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