MCM Macro Morning 12/12/07... 'Waterboarding the Fed Centrists"

There is nothing more deceptive than an obvious fact...
-Sherlock Holmes

Call me lucky, or objective, or literate, or maybe even the French names that Benoit Morin used to call me on the ice at Princeton! ... we have to be pleased with getting this Fed call right... 25bps it is, and THE answer to the question i posed in my MCM Macro Weekend Strategy piece of 'put Bernanke and the Fed Centrists in a box, and the market at risk to the downside; without the "Blue Magic" cuts, what will the Bulls do?', is now part of what we economists call trailing historical data - the Fed Centrists freaked out and sold everything yesterday!

Have no fear Centrists, Larry Kudlow is here!

In last nights Kudlow & Company show, i wouldnt dare say he was sheepish in addressing the US stock market's reaction to the Fed decision, but he certainly didnt look very confident. Yes, Fed Centrists Art Laffer and Jerry Bowyer, were there for moral support... and no, they didnt like it much when ex Fed governor Ford suggested that the market got crushed yesterday because "Bernanke didnt deliver on the 100bps of "Shock & Awe" you were calling for Larry"!...

Yes, i know... the Media business is silly, as are economic conclusions that are driven by Populism...

Finally, we can get back to economic reality here... and, as our friend Sherlock stated above, the facts can often bite.

Reality #1 = the Fed has cut 3 times now since September... and it hasnt done a thing to alleviate the hangover of the US Credit binge. Remember the MCM Theme: Fed Centric/Fed Cut bull case is the Tree; Access to Credit/Capital the Forest... -November07'

Reality #2 = the next Fed meeting is not until January 30th ... and thats a long road to Perdition for the Fed Centrists (especially if they are some of these "Hedgies", who have to manage to weekly, and monthly returns!)

Thanking you for your daily input. Good Luck out there today,
KM
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ASIA weakens, not surprisingly... = Fed Centrist Fear
1. Hang Seng led the region lower, giving back all of yesterdays gains, closing down 2.4% = i'm buying more EWH (Hong Kong's etf) with a 27,157 level in the index as my stop; MCM Trend in HKong remains bullish, and i like EWY short (Korea) against it... yes, contrary to some of the levered long strategies being offered to you out there for ridiculous fees, hedge funds are supposed to hedge!
2. Japan on its way back down again, closing down 70bps; Morgan Stanleys's Takehiro Sito is calling for a "mild recession" in 2008, and wholesale inflation #'s really popped up at +2.3%, which is not only a 14mth high, but a major callout given Japan has been in a 20yr deflation cycle = MCM Trend in Japan remains negative, despite valuation
3. India shrugging off all thats happening in the US and elsewhere, closing up another +54bps, making new highs! = major positive divergence; a celebration (of sorts) for Vikram Pandit's new job post heading Citigroup? (50-year-old Pandit is the second Indian to become CEO of a major American financial institution (after Ramani Ayer, CEO of Hartford Financial Services Group))

EUROPE seeing broad based selling, not surprisingly... = Fed Centrist Fear
1. FTSE down for the 2nd day in London at -90bps; not a freakout, and technical support is 6,404 for the index = macro related selling (for the life of me i still cant figure out how some of the guys i have worked with in my career kept saying "Keith, macro doesnt matter"... but i'll keep reading...
2. France -1.3%, Spain -1.1%, Sweden -1.6%, Switzerland -1.2% = macro matters!
3. Russia only down 17bps; Putin Power outperforming againg; yesterday i wrote about Medvedev's appointment - this is big = MCM Trend remains bullish on the Ruskies; buying some RSX (Russian etf) on down days

OTHER MCM Geopolitical/Country callouts...
1. Saudi stocks continue their runnup, up another +1.8%!!, despite Fed Centrist Fear in the US/Asia/Europe (do the rich dudes in the Middle East even have a Fed?) = represents capital inflows betting that the Middle East takes over as a global growth leader in 2008?
2. United Arab Emirates down 15bps, Qatar stocks only down 5bps = positive divergence vs. global equities...
3. Canadian stuffed by Fed Centrist Fear, at the goal line of technical resistance, closing down 1.5% yesterday = negative, and yes, macro related selling is reason #1
4. Mexico hammered yesterday, under performing US Equities again, closing down -2.7% = MCM Trend remains bearish on Mexico; best fundamental country short we have on our books (EWW is the Mexican etf)
5. Brazil down for the 3rd day in a row, -1.4% = MCM Trend remains bullish on Brazil (re global basic food consumption demand), but the positive momentum in Brazilian equities should be monitored very closely

COMMODITIES regaining their thrown (for a day), outperforming global equities by a significant margin...
1. CRB Commodity index outperformed US Equities big yesterday, closing +87bps vs. the SP500 down 2.5% = inflationary; and this is a critical MCM Trend to be weary of if you're thinking about buying US Equities post yesterdays selloff - tomorrow the US will release the PPI, and Friday the CPI - these reports are going to be inflationary, and will keep Bernanke duck taped in that box we have been talking about ... its a long long way to January 30th
2. Oil had a solid day, trading back to the $90 line, and leading the energy complex higher = inflationary
3. Gold held in just fine amidst the Fed Centric Freakout yesterday, trading $811 so far this morning = inflationary... MCM Trend remains bullish on Gold (GLD is our etf position) and Treasury (inflation protected) TIP long position - these long positions most definitely played a big part in MCM having an up day yesterday
4. Corn had a solid day in the fields yesterday, moving to new highs of $4.21/bushel, after the USDA report came out very bullish, increasing their estimate for US Exports by 100M bushels, and cutting their supply estimates, again = inflationary
5. Wheat finally had a down day, trading down to $9.08/bushel; rain in the Midwest being cited as the reason, but cmon' this thing was parabolic guys = still mucho inflationary
6. Base Metals act like death - copper down for the 3rd day in a row here; Goldman cut their estimates for Copper and Aluminum yesterday = proxy for Global Industrial Production (GIP) slowing in 2008?

RATES/CURRENCIES... the Fed Centrist trees fell in the forest... and this time ... everybody heard!
1. 2yr rates down small to 3.04% this morning and the 10yr down a tad to 4.04% = the levels are still positive for equity valuations vs. bonds, but the inversion in the yield curve is becoming less obvious now that the Fed Funds rate is 21bps from the 10yr rate...
2. US$ 76.11, basically didnt budge = MCM Trend remains bullish on the US$... yes!! Bernanke behaved rationally alongside "the data"; he didnt opt to devalue the currency by the a monster amount that the Fed Centrists were clamoring for, and now i can finally relax and sip some egg nog re my MCM Theme from November of 'US$ Bottoming is a Process, not a Point' -November07'
3. Chinese Yuan not getting a lot of press yet, but it is standing stall as it stays at an all time high of 7.37 = inflationary; last night China reported a massive Retail Sales # of 18.8% for November; thats an 8yr high, and tells you exactly why the Chinese central bankers raised their reserve requirement to 14.5% earlier this week (that was their 10th hike of the yr, and most aggressive hike in terms of size, at 100bps this time)...

Private Equity/M&A/Credit ... Citigroup was down 4.4% yesterday, and is breaking down again, for a reason!
1. Lets cut to the chase on this Vikram Pandit news thats all over the tape and state plainly that Citigroup is naming an underperforming Hedge Fund manager as their savior to be?... Yes, i realize that prior to managing Old Lane he was a "stud" at Morgan Stanley - but being a stud at a time when Morgan levered into a lot of businesses that Zoe Cruz just got fired for doesnt impress me all that much... In his Bloomberg interview, he sounded perfectly political however, giving half baked answers on everything right down to 'what kind of ice cream do u like' (he said "Swirl"!)... I am sure he will get along quite well with Paulson and the Government Bailout community, but he has his work cut out for him here... "swirls" may indeed be what he gets used to feeling when the walls of a $165 Billion firm shake; i'm thinking managing the Titanic and the expectations of the folks in Abu Dhabi is going to be a little different than managing the hopes & fears of one of the 25yr old stud "event driven" traders he had on Old Lane's trading desk...
2. Cerberus is apparently dropping out of the bidding for the UK's Northern Rock = you have to be bullish on Cerberus; my friends there deserve all of the credit in the world for maintaining the integrity of their investment process throughout the Credit downturn... not only is Northern Rock toxic waster, but smells now of government intervention - run capitalists, run!

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MCM Trades/Fades
1. shorted more of the following existing short positions: Mastercard (MA), Hasbro (HAS), Atmel (ATML), Kohl's (KSS), Mexico (EWW)...
2. sold my EBAY into Citigroup bulling it up onto their Focus List on the open yesterday... i outlined that in yesterdays note... many thanks to the fine folks at Citi; i'm looking forward to buying it back again, lower...
3. sold another 1/3 of my WalMart (WMT) yesterday as it was testing $50... i wanted to take down long exposure into the squeeze ahead of the Fed; no fundamental reason other than price; we booked another +10.3% gain
4. sold my Toll Brothers (TOL) after the Fed's decision yesterday ... keep a trade a trade; the facts changed (the chart broke on heavy volume), so i changed - realizing small losses are better than big ones... we can buy this one back lower...
5. bought a starter position in Brunswick (BC) on the close yesterday, after listening to the webcast of their analyst day presentation... MCM Value cost basis going to be established here, and this is going to be one of the ways we play the emergence of the baby boom retirees as they roll into the sweet spot of the leisure consumption curve in 2008; i also like the prospects recovery in 2008-2009 from Florida's local recession, and the potential for Sovereign Funds, Asians, Canadian, Europeans, etc buying high end US coastal properties as the US economic downturn matures, and as their respective foreign currencies continue to strengthen versus the US Dollar...
6. bought more Gold (GLD) yesterday, post the Fed's communique ... post China's massive inflation print yesterday of +6.9% y/y, i wanted to be longer into the upcoming PPI and CPI inflation reports (thursday and friday), and gold was for sale on the market close...
7. bought more Gap (GPS) yesterday into the close... i said i was going to buy more of it on down days, and i did, moving to a full position; hedged with Kohl's (KSS) short
8. covered all of my Wyndham Hotels (WYN), stock was down 10.2% yesterday, after they guided down on their timeshare business for 2008... this is what i was looking for, and we booked the gain
9. covered 1/3 of my Sears Holdings on the close; stock was down another 3.7%... you know i love booking gains on the short side in Lampertville... Jack says its ok for his Dad to be a "meany", as long as he is right!
10. covered 1/3 of my BonTon (BONT) into the close; stock was down 7.3%...
11. re-shorted the InterParfums (IPAR) on the bounce yesterday... same thesis, better price... i wanted to get shorter and the fine folks at the Motley Fool recommended people buy this thing yesterday, so i took the other side of that trade... no need to ignore that this company blew up for us once (they guided down on 11/28), and with a big part of the company's bullish narrative focused on their opportunity getting extra business with The Gap (GPS), we still have plenty of room for further disappointments here - I have a pretty good handle on whats going on at The Gap right now (were long it), and nowhere on the new CEO's priority list is giving away free (outsourced) fragrance gross margin $ to this weak management team at IPAR who keeps making insider sales... Proctor & Gamble is going after this business aggressively all of a sudden as well, and Elizabeth Arden (RDEN) is having some inventory problems, allegedly...
12. shorted some McDonald's (MCD) $63.35 ... you know i love analyzing 52 week highs - what better cost basis to establish a short position than the highest ever offered!... most of you who know me well know A) that i eat at this place too much and B) remember that my buying MCD under $14 in 2003 actually had a big impact on my career ... 7x EBITDA was the price we paid back then, as restaurant operating margins were making all time lows, and no one even knew they had real estate ... now it trades 12x EBITDA, margins are peaking, insiders are selling, and Bill Ackman at Pershing is going to have to start selling soon if he gets client redemptions from this Target (TGT) "activist investment" he sold the Street on... very low risk short, at this price 13. shorted Jack in The Box (JBX); classic MCM Momentum modelling short ... unless people are "popping" out of their homes to the > 2100 JBX stores this month, this California company looks like they are going to have some issues getting to the sell side's December quarterly revenue estimate of $872M (someone's out there at $912M as wel?)... dont ask me why, but after 2 consecutive quarters of revenue growth decelerating, the Street expects their business to magically re-accelerate, even though last year's comparison that they are up against, was one of the best in corporate history...
14. shorted General Electric (GE) post their analyst day yesterday, where they guided down 2008 numbers... no question that this cyclical titanic had a great 2007 on the topline ... but the note to self in that statement should be 1. this is a cyclical and 2. 2007 ends in 3 weeks... stock prices are discounting mechanisms, and GE's resurgent stock price, that hit a new cycle peak/high of $42 in October (remember October; oh were those the lever it up long investing days, werent they... such fond memories we will all have). was simply a function of the global economic cycle surging to unprecedented highs... the stock is ultra expensive, and their CEO just told us to expect growth to slow yr/yr... if anyone tells you they have an edge on where this company's revenues will be 9-18 months from now, send me their email address...
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MCM Trends/Themes
Fed Centric/Fed Cut bull case is the Tree; Access to Credit/Capital the Forest... -November07'
Rebalancing to the Left; look for Socialism to regain her footing, Globally, in 2008... -November 07'
Bonds, Banks, and Bailouts; Blue Magic is bad, in the end... -November 07'
'US$ Bottoming is a Process, not a Point' -November07'
'YouTubing America' - Transparency/Accountability will transform Washington to Wall Street -Dec08
'Paulson & the Fed Centrists want you to call 1-888-995-HOPE' -Dec08'
'The Double Edged Fear Sword: Fear is now the dominating market factor, not Credit - Fear for Fed Centric Bulls & Consensus Bears alike'... -Dec08'
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Closed Out Positions (realized gains in green, losses in red)
Long
EWH (bought 20.70, sold 21.35) = +3.1%
BBY (bought 46.60, sold 49.40) = +6.0%
MLHR (bought 26.70, sold 27.65) = +3.9%
HOG (bought 45.10, sold 49.96) = +10.8%
EAT (bought 21.54, sold 22.44) = +4.2%
EBAY (bought 31.70, sold $34.91) = +10.1%
TOL (bought 22.30, sold 21.51) = -3.5%

Short
RIMM (short 113.90, cover 111.60) = +1.0%
DAVE (short 14.24 , cover 13.60) = +4.5%
DLTR (short 28.51, cover 26.47) = +7.2%
HTZ (short 19.29, cover 18.58 ) = +3.7%
TGT (short 57.93 , cover 59.04 ) = - 1.9%
SPG (short 90.60, cover 94.10) = -3.9%
LIZ (short 25.58, cover 24.19) = +5.4%
BKC (short 26.74, cover 25.80) = +3.5%
EWP (short 68.03, cover 67.47) = -0.82%
HAS (short 27.51, cover 26.35) = +4.2%
DLTR (short 29.52, cover 28.18 ) = +4.5%
CPB (short 35.62, cover 36.76) = -3.2%
IPAR (short 20.48, cover 16.47) = +19.6%
TLF (short 4.04, cover 3.27) = +19.1%
AN (short 16.99, cover 16.70) = +1.7%
WYN (short 28.19, cover 27.39) = +2.8%

MCM Disclosure/Disclaimer: This email and/or blog is for a select group of my friends, and represents a beta test of an idea that i am incubating. My email and blog writings are prepared without regard to the unique circumstances or goals of those who read them. They do not provide investment advice that should be specifically acted upon without considering the all encompassing range of investment information and/or considerations available in the public domain and/or without considering all appropriate professional advice. This should not be considered a solicitation to buy or sell any security or to participate in any investment strategy. The information and editorials in these writings are not necessarily complete or perfectly accurate and are not guaranteed by Keith McCullough or MCM. This information is protected from disclosure and constitute opinions only as of the date of their issuance. Opinions are subject to change without notice, and Keith McCullough or MCM do not accept any liability whatseoever for any losses estimated to be atttributable to any use of this content. Keith McCullough and/or McCullough Capital Management, Inc. likely owns and/or is currently trading in all of the securities cited in these emails and/or blogs.
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