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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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  • Early Look: Piggy Banker 0 comments
    Jun 3, 2009 9:39 AM

    “Not by the hair on our chinny-chin-chin. You can't fool us with that old sheepskin.”
    -Three Little Pigs   ...
    As we trekked to higher-highs on low volume in the US stock market yesterday, I for one was having a hard time discerning the sheep from the wolves. That said, the piggies were right where they have always been - hanging out in plain daylight, chowing down at America’s trough.
    After a +39.6% trough-to-peak move in the SP500 from the March 9th lows, all you have to do at this stage of the game is follow the feedbag. Who gets paid with the free monies in play and the US Dollar looking more and more like a straw house? Follow the monies…
    In America, there are three very important constituencies that have been getting paid in Q2:
    1.    The Politicians

    2.    The Debtors

    3.    The Bankers

    Bankers? Getting paid? Uh yeah… big time. The combination of A) a free money short end of the Treasury curve (3-month Treasuries hit 0.13% this morning!) and B) a socialized Heli-Ben flight pattern of limitless credit creation that has imposed the steepest yield curve that we have seen in modern history. The spread between 10 and 2-year Treasury yields hit a new high yesterday at +270 basis points wide!
    In simpleton terms, all that means is that Timmy Geithner and De Boys in De Banking Club get to borrow from a socialized US banking system at effectively less than 1%, and lend it whenever they so choose to the American commoner at, well, whatever rate they so choose. Borrowing short and lending long is what bankers build those big houses with folks – this compensation structure isn’t new.
    What is new is that we have a highly politicized US Financial System that pays Piggy Banker first. The reason why it’s hard to discern the wolves from the pigs is because they’re all in the same house together! Yeah, you might knock off another third of the hedge fund community who shorted this compromised and conflicted system the whole way up, but who cares? Timmy? C’mon – these guys want hedgies to fail – it amplifies their populist political capital.
    The Politicians get paid as the US stock market and home prices stabilize. This is THE REFLATION trade that everyone and their pet piggy bank finally understands. Don’t forget that The Debtors also get paid when you collapse the world’s reserve currency. Roughly 53% of the world’s debt is denominated in US Dollars. Reckless borrowers of levered long days past, worry no more – that big bad wolf ain’t in the business of blowing your underwater houses down!
    So if the Politicians, Debtors, and Bankers are all getting paid in some form of actual or political capital, who loses? Ah… yes, Mr Darwin, there are losers here aren’t there? There two very important ones actually:
    1.    The Creditors

    2.    The Americans

    Of course some Americans, like money managers who can only make money in an up tape don’t lose – the last 3-months have been fantastic, if you we’re long that is. That said, some of them… like say, Bill Ackman, will go as far to cry in public if they can’t muster a way to lever up their clients’ monies one last time to make some hay. If you can’t make money during one of the most expedited short squeezes in US stock market history, and you’re a “fundamentally oriented” lever it up to the wazoo type guy, your asset management house of cards is probably coming down.
    Most Americans who have had the sobriety of a savings account get screwed here. Jaime Dimon will prance around CNBC’s stage while his government funded bank pays effectively zero on this US citizen’s savings. But he’s going to have a great quarter – and he’s “really smart.”
    Never mind the yield curve chow down at the trough of American savings. Now Piggy Bankers and the corporates they pander to are issuing more shares than even the math guys can count. Last check we had Timmy’s survivors of his made-up test with made-up rules plugging the Street with almost $70B in common stock issuance. Jaime was good for $5B of that himself!
    The US stock market may have made a higher-high yesterday, but the US Financials (NYSEARCA:XLF) didn’t. The XLF (Financials ETF) closed down -1.6% on the day, after the Piggy Bankers, well… they pigged out.
    The Creditor of this Piggy Banker story is China. President Obama isn’t highlighting this obviously (he’s more into the storytelling needed to support The Politicians as of late), but when Timmy told the audience in Beijing this week that "Chinese financial assets are very safe," the audience laughed!
    They laughed at the Piggy Banker and sent him back into the stratosphere of American Credibility Lost. The US Dollar and US Treasuries have been marked-to-market folks. This children’s story, unfortunately, doesn’t end with the American dream I aspire to tell my son Jack that I have had the blessing to live.
    I’ve sold all of my exposure to US Equities as of yesterday’s close. No, that doesn’t mean I am shorting this Piggy Banker system en masses, yet… I remain long China, Gold and Inflation Protection (NYSEARCA:TIP). My downside target for the SP500 is 910, and my upside target remains 955. Trade the range. If you have to be invested in the US, that’s all you can do for now.

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