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Keith McCullough
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Research Edge, LLC ( 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
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Diaries of a Hedge Fund Manager
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  • Early Look: Misguided

    “Perceived perception, misguided conception.”
    I can’t, for the life of me, understand how the manic media still clings to Ben Bernanke and Wall Street strategists for guidance as to what is in store for the US Financial system’s future. The #1 risk that remains in this market is the pervasiveness of groupthink.
    Never mind Bernanke’s batting average on inflation forecasting for the last 3 years. YouTubing that would be too embarrassing. Now we are supposed to believe in the perceived wisdom of a man who allegedly knows more about the Great Depression’s history than God himself. I have a fond appreciation for history professors – I just don’t want them anywhere near managing the risk associated with my family’s hard earned capital.
    Bernanke’s perceived perceptions never cease to amaze me. Yesterday, in addressing the potential for reflation to morph into inflation, he talked down Mr. Market’s prowess as a leading indicator. He said that as he looks at long term US Treasury rates, "I don't think the financial markets are indicating a great deal of concern about inflation.” Yes, fellow commoners – the willfully blind now refers to us non- rear view mirror prognosticators as “misguided.”
    Let’s get back to reality here and get 3 things straight when it comes to the market’s interpretation of interest rates:
    1.      Bernanke has the political power of the Almighty to set rates on the short end himself – that’s not a market rate
    2.      The long end of the curve is marked-to-market
    3.      The spread between the short end and the long end = the yield curve; it’s also marked-to-market, not Madoff
    Mr. Bernanke, Given that you and Greenspan have completely politicized the short end of this financial market curve, the only way to monitor the market’s concern for reflation/inflation is to look at the spread. The spread between 10-year and 2-year US Treasuries is as wide as it has EVER been. You know this. C’mon man.
    I will be dedicating the rest of my professional career to You Tubing the perceived wisdom of Wall Street and all those who are hostage to its conflicts and compromises. This is getting so bad, that I have to say it that way. If I were on the ice with Bernanke yesterday, he’d have his jersey pulled over his head.
    The real people who are “misguided” are those who missed both the -57% peak-to-trough crash in the US stock market from Q407’ to Q408’, then called for a Depression (at the bottom), and now missed the +41% Q109’ to Q309’ generational short squeeze. I refuse to put in the reps to play this globally interconnected game and not use that genius technology that every other profession other than Wall Street seems to use called the replay button. I have said my piece.
    Our Range Rover call was for the SP500 to trade in a range for Q3 of 871 to 954. We are 22 days, or 25% of the way, into Q3. The closing low for the SP500 for Q3 to-date was 879 (July 10th) and the closing high came yesterday at 954.
    If the SP500 closes above 954, I will guide you to 955… then 956… and yes Mr. Bernanke, you can do this too – then you should stand up at the Senate today and call for 957! Waive your arms and stuff – get a little nuts like a hockey player for the camera maybe. Your seriously misguided conceptions of reality are wearing on me.
    Many people write off Ron Paul for being a little nutso – and maybe they should. He’s a pistol and he definitely doesn’t fall in line with Groupthink Inc. While he may be too alarmist at times, he often makes one very simple point – what is it that gives you confidence in your economic predictions and why should we trust you? Fair question Mr. Paul – as a fiduciary of financial recommendation, I think there is responsibility in explaining one’s analytical process. History will judge my accuracy.
    History, of course, is not written by CNBC. The long term tail of this country’s economic history is looked back upon long after the fact. In the moment, its our human nature to dismiss evolution. In the moment, the best job security is issued to those who fall in line. In the moment, we allow some of the most reckless abuses of political power that we can never imagine. The long term’s unintended consequences of our perceived financial wisdom are what are most often “misguided.”
    Morgan Stanley is out with a call telling you to sell everything today. Then again, that’s what their management team has been saying for the last +41% up…

    Jul 22 8:16 AM | Link | Comment!
  • Banks Discover Securitization - Who'd 'A Thunk It?

    And Now For Something Completely Different
    “Banks Reinvent Securitisation To Cut Capital Costs” reads the Financial Times headline (6 July). The story describes efforts at “smart securitization” by Goldman and Barclay’s to package billions of dollars’ worth of customer assets in vehicles that can be rated by credit rating agencies, then sell them on to third parties.
    This brilliant new strategy will enable the originating banks to reduce their capital requirements, by taking the assets off their books, and replacing them with cash.
    Call us cynical, but we suspect they will be fast-tracked to the market with their products before second and third-round me-too-ers find the door has been slammed shut.

    On the face of it, Barclay’s is offering a clearing system for banks to factor productive assets, swapping balance sheet liability for cash today, thereby freeing up regulatory capital.

    Observers of the current crisis generally agree that bank capital needs to be increased to prevent repeats of the current dismal scenario, and that the quality of that capital should be more robust. This means holding larger reserves – which means lower returns. It also means retaining more of a bank’s liabilities on its own books, not shunting them off to third parties. This means less liquidity.

    What we find impressive is the acceleration of the pace of innovation in the capitalist model. No sooner has the world gotten comfortable with the “R” word – “Recession” – than serious market pundits are talking about a new bull market, and governments and global economic organizations are talking about “already being in a recovery.” Global powerhouse banking firms (Merrill, Morgan, Goldman…) are putting out bullish reports urging folks to Buy China (up some 70-80% since January) – if the recovery is to gain steam, the banks will have to sell their inventory to someone…

    And now, the ink not yet dry on President Obama’s white paper, the bankers are getting back into the securitization business. Factoring assets is a simple business. Factoring assets, as presented by Barclay’s, is sure to become complex. Even a small wrinkle – one single swap in lieu of actual cash – will create an opening for follow-on participants to wreak havoc. We wonder when that first loophole will be probed. We wonder whether any regulators are actually watching.

    We are staying tuned.

    Jul 13 2:06 PM | Link | 1 Comment
  • Hotel California – IOU and U O Me and They O Us and I’m the Gubernator…

    California Dreamin’
    stopped into a church I passed along the way
    well, I got down on my knees and I pretend to pray

    The downside of posting this column weekly is that we get no credit for being right when things move fast.

    On Monday (Financial Times, 6 July, “Opportunistic Wall Street Gears Up To Trade In California IOUs”) we jotted Note To Self predicting that the SEC would deem the State of California scrip to be securities. By the end of the week, that had come to pass.

    Next, we believe, will be an SEC action against Craigslist. Like the cop on the beat who assiduously writes out parking tickets, turning his back on the armed drug dealers at the other end of the block, various courts and government agencies have tried to enjoin, censure, fine, or just plain close down Craigslist over criminal activity – real or alleged – connected to postings on this service.

    The ink on the first California IOUs was not yet dry when postings appeared on Craigslist offering to buy and sell them. Collectors were bidding as much as twice face value, in hopes of getting a piece of history, and speculators got into the game, offering instant cash for the IOUs at a discount. The State promises to pay them off at face value when they mature, in October, plus an interest rate of 3.75%. At the right price, there are those who deem that acceptable risk/reward.

    Rather than going after Craigslist, we urge Chairman Schapiro to explore ways to bring social networking venues into the mainstream of the markets. Deals are already being done away from the eyes of the regulators – deals that the SEC would probably deem securities transactions. The combined resources of FINRA and the SEC could not catch Bernie Madoff – even when he was delivered on the proverbial silver platter by highly qualified professionals who provided extensive analysis. We do not hold out much hope of them catching someone trading limited partnership interests via Twitter.

    If the Commission goes after Craigslist, they will be launching a frontal attack on market transparency – the one thing market regulators should seek to ensure. On the other hand, regulators might learn something from watching the way a marketplace evolves.

    This model of a self-regulating marketplace, where buyers must beware by definition, and where information is freely shared across all segments, should be explored by Schapiro & Co as a paradigm for rethinking the regulatory framework. In a world where Facebook effectively faced down the FARC in Colombia, and Twitter combines with iPhone to tweak the Ayatollahs, we suggest the US regulators would be ill advised to go head to head with the social networking phenomenon – itself the most dynamic emerging global marketplace. We don’t give this much of a chance – but we can dream.

    Tags: California, SEC
    Jul 13 1:24 PM | Link | Comment!
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