There's an interesting article in the Wall Street Journal this morning, quantifying the "Chinese Investment Spree" of foreign assets, and i cant help but wonder how we're going to look back on this chapter of economic history...
Ironically, today is the anniversary of the Louisiana Purchase. Yes, you're going to have to dust off the ole history books to 1803 for this one, but its worth your 20 seconds to remember that this remains one of the greatest "Trades" in economic history. The Spanish sold the bottom, giving it up to France in 1800... then, worried that trade access to the Mississippi River would be blocked, Thomas Jefferson was able to sucker in Napoleon with a submarine bid of only 3 cents per acre..
Now, instead of going back 204 yrs to the Jefferson trade... lets try 204 days or so back to the Blackstone trade... you know i love these mathematically linear ironies!
New York Times: China Says It Made Blackstone Investment to Raise Returns By KEITH BRADSHERHONG KONG, May 21 — From the outside, the Chinese government's $3 billion purchase of a nonvoting stake in the Blackstone Group might look like a prelude to a broader campaign for control of foreign companies. China to Buy a Stake in Blackstone (May 21, 2007) But a Chinese official ruled that out in an interview Monday, saying the purchase was simply a way to raise returns on overseas investments and did not signal any plan to take control of foreign companies.
Retrospectively, after seeing Blackstone trade from $35 at the highs, down to $21 at the lows, (yes thats a 40% drop), its now crystal clear that China was the one who got submarined.
And now ...the Chinese Sovereign funds are cutting separate $5B checks for pieces of Citigroup and Morgan Stanley?
There can be great ironies revealed by economic cycles... particularly this one.
Remember, its "Global This time"...
Good luck out there today,
KM
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ASIA - Continues to trend lower. The amber lights we've been flashing re: the "Its Global This Time" narrative, should be front, center, and turning red on your screens .
1. Chinese equities were +2.1% and were the only Asian tape with a bid overnight, but remember, those are locals bidding, not institutions, and at the close there is nothing quite like your local Communist government punching you in the nose with another rate hike. In our view, the positive divergence today will likely become a negative one tomorrow as China raised rates to 7.47%, addressing inflation as enemy #1 (as it has been for every Chinese regime in their economic history).
2. Japan was flat over night with no bid to this market and nothing positive coming out of the 2 days of the BOJ meeting. The Trade Surplus in Japan (close to $800B Yen) was reported down 12% y/y vs. an expectation of it continuing to grow = MCM Trend in Japan remains negative. The long hoped for turnaround is no longer a reasonable near term expectation.
3. South Korea down -86bps and underperformed the region after their elections went through as expected. Some pundits think Mr Lee's leadership is "positive, because he is a businessman"? Ever "do business" with one of the fine folks on the Han River? = MCM Trend remains negative here. Stay short EWY (Korean ETF) - Asia's 3rd largest economy is what you want to be short as Global Industrial Production growth slows in 2008.
4. Thailand -1.7%, Vietnam down another 1.7%, Singapore -36bps = negative leading indicators for Asian Industrial Production growth in 2008
EUROPE - Has a bid this morning, but conviction is nowhere to be found. UK GDP for Q3 reported at +3.3% y/y, which not exactly what we would call emergency rate cut time.
1. FTSE up 30bps, is pleading for a catalyst, but remains technically broken unless it can muster a close above the 6,345 line = MCM Trend remains negative on the UK.
2. Turkey down -69bps, showing a negative divergence vs. the region as it wrestles with being accepted into the European Union. This is this just one more negative leading indicator of what in store for the "Its Global this Time" narrative in 2008 . These tapes used to be shining beacons of growth to come, but seem to signalling a different future in 2008 . . . stay tuned!
3. Poland flat, and continues to diverge negatively on European up and down days = continues to build my conviction in the MCM Theme of 'Global Basic Food Consumption Growth will takeover from the consensus "Its Global this time" Industrial Production Growth story in 2008'-Dec08'
OTHER MCM Geopolitical / Country callouts
1. South African stocks seeing a relief rally, albeit a modest one post the selloff concerns surrounding Mr Zuma's election, trading +69bps = there was a time in this world when these rats could hide, but now we have our accountability mechanism (the internet), flashing like a bright light on them when they are found in the garbage cans: POLOKWANE, South Africa (CNN) -- South Africa's top prosecutor said Thursday he has enough evidence to charge Jacob Zuma, the newly-elected leader of the African National Conference, with corruption, following years of allegations.
2. Canada finally put up its 1st up day in the last 5 trading days, closing up, barely, by +24bps = technical breakdown in the TSX is obvious at this point, and it begs the same question that all of our other negative leading indicators are asking us - that is if you agree with MCM in that stocks are leading indicators . . . is Global Industrial Production growth going to slow in 2008?
3. Mexico down another -62bps, and we continue to see positive P&L with this simpleton position of short EWW = MCM Trend in Mexico remains negative.
4. Brazil up for the 2nd day in a row at +1.1%, providing leadership to the wavering global equity tape = MCM Trend in Brazil is positive . There is a big difference to being levered to Global Basic Food Consumption vs. Industrial Production, real big.
COMMODITIES - Continue to give the "stiff arm" to the Fed Centrists (Kudlow, Laffer, etc) who continue to make reckless and unobjective comments relative to reality, because that is their job. This is classic Taleb theory, which is simply that Wall St Bulls are paid to seek out the data points supporting their bullish stance, and ignore the balance of the facts opposing these stances. He calls this narrative fallacy.
1. CRB Commodity index +90bps yesterday, outperforming the SP500 which was down 7bps = stagflation.
2. Oil led the index higher with a +2.2% move, reminding technicians that no one ever became a billionaire putting capital at risk being purely a "chart guy". (Dennis Gartman is great, just not on the idea of shorting oil with his "head and shoulders formation" call...) = inflationary, and supported by convincing fundamentals in the weak US inventory data yesterday.
3. Gold remains as solid as solid gets at $806 last = inflationary.
4. Wheat strength remains, trading $9.77/bushel, and hopefully hammering home to traders in who keep trying to short wheat in Chicago that rain in Kansas can be trumped by 1.1B Indians who are actively tendering wheat, daily = inflationary .
5. Base Metals having their 2nd up day in a row. Copper leads the way +2% = yes, Larry Kudlow, this is inflationary as well.
RATES/CURRENCIES - 10yr yields approaching the 4% line. That's where the MCM Trade on US Equities gets more interesting on the long side.
1. 2yr 3.15%; 10yr 4.06% = implied US Equity yields starting to look more attractive than Bond Yields ... stay tuned
2. US$ up, again!, at 77.75... one of the guys I recently worked with said "Keith, i think you'll eventually get it right". It's fun when the "eventual" becomes yesterday.
3. Euro making new lows, again!, at 1.43, and the Pound Sterling continues to get pounded, braking the 2.00 line this morning = inflationary for American consumers.
4. Chinese Yuan making new highs, post their rate hike decision. Yuan 7.36 represents a +5.7% gain since where it started 2007 (7.81) = this is a stealth inflationary factor that I don't see many people writing about - particularly for US apparel, which showed a huge +.8% month/month pop within the November CPI report. The days of Kohl's (KSS) selling you a golf shirt for $4.99 are gone, unless they blow up their margin structure.
Private Equity/M&A/Credit/Hedge Funds - Introducing a new MCM Theme this morning: ''Litigations & Redemptions' - The Tide has rolled out on the Levered Long Community'-Dec08'. If you were naughty this year, well then beware because Santa MCM is analyzing your positions!
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MCM Trades/Fades
1. WMT - Re-purchased another 1/3 of Wal-Mart (WMT) at $47.94 on market weakness yesterday. We'll pay 8x LTM EBITDA and receive a 1.8% dividend yield (especially when real interest rates are negative!) for the only large cap Retailer who understand that its time to pair back domestic capex spending ahead of the pending US Retail Bankruptcy cycle. WMT has already guided for down margins in 2008 and "the question is" for the other management teams out there, why haven't you? The best part about having an opportunity to buy our WMT back (last time we sold it close to $50), is that it helps us remain aggressive with our Target (TGT) short position into year end (our Virtual Hedge fund hedges!). Ackman is in trouble being levered long (we understand that his "TGT Fund" is levered 3:1). TGT came out today saying that their "credit card review is taking longer than expected". Since that catalyst is gone, you can you can bet that no hedge fund on the current holders list has negative momentum, earnings risk and exposure to US Consumer on their year end wish list. As a result, we believe that TGT will be better to sell at least through year end.
2. RSX - Sold our trading positon in the Russian ETF (RSX) at $51.36. We booked a 4% gain into market strength after Putin was named Time Magazine's Man of the Year! http://www.time.com/time/specials/2007/personoftheyear/
3. HOG - Sold the 1/3 of the Harley (HOG) position that we bought back at $46.55. This was an exposure move and we still like this one under $45.
4. TIP - Sold 1/3 of our Treasury Inflation Protected (TIP) at $105.97. The Street's inflation expectations are now more aligned with our view, so it is time to sell into those expectations.
5. KSS - Covered all of our Kohls (KSS) at $45.37. The stock had another down -4% day yesterday. We booked another +13.8% win for MCM on the short side. The short high, cover low strategy continues to work.
6. KMB - Shorted Kimberly Clark (KMB) yesterday at $68.82. With a $29B market cap, a $34B enterprise value and trading at 10x LTM EBITDA, this stock is expensive for a company that has set themselves up to miss in 2008. In our view, the best case is that sales growth is cut in half in 08' to 3-4% y/y vs. the +8% expected for 2007 and decelerating top line growth is a consistent MCM short theme. The stock put in an all time high in Q2 of 2007, as sales peaked and management continued to deliver on what has been a solid turnaround, but now they have to compare against these strong results in a tougher consumer environment with higher input costs. The consensus estimates for EBIT and EPS for 2008 imply significant margin expansion as management hopes for commodity relief. Hope is not a business model.
7. CAT - Shorted some Caterpillar (CAT) into a strong market open yesterday at $71.49. This is a big, sloppy and over owned situation with only 1.6% of the float held short. Big mutual fund managers can't afford to lose the relative performance game in 08' owning this one. With a $45B market cap and $72B enterprise value, the substantial debt balance will give "the Big Cat" little room to move as the economic cycle shifts under his feet. That said, it is cheap if you believe the Street's 08' #s. We don't believe those numbers predominantly because we have a much more negative view than most on Global Industrial Production growth slowing in 08'. In Q3, over 58% of CAT's sales came from the rest of the world and as the "it's global this time" narrative morphs from an asset into a liability, that exposure with hurt.
8. EWW - Re-shorted Mexico ETF (EWW) at $56.97 yesterday on a squeezed up open. Short thesis is simple - Mexico has the highest correlations to U.S. GDP growth slowing and this populist meca is the best fundamental country ETF short I can find.
9. SHLD - Re-shorted Sears Holdings (SHLD) at $106.09 into a strong open. The best part about this ride on the short side is that we get to take it over, and over, and over again.
10. BAGL - Re-shorted Einstein Noah Bagels (BAGL) at $16.84 on the bounce. Evidently, even rock hard stale bagels bounce on Lexington Avenue in December. We are grateful for another entry point. With wheat making new highs, the short thesis not only remains, it gets more better.
11. WYN - Re-shorted Wyndham Hotels (WYN) yesterday at $25.01. We had a $25 low and E-trade kindly filled us. We are happy to regain short exposure to a company that has no idea what the time share business is going to do to them in 2008.
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MCM Trends/Themes
Fed Centric/Fed Cut bull case is the Tree; Access to Credit/Capital the Forest... -November07'
Rebalancing to the Left; look for Socialism to regain her footing, Globally, in 2008... -November 07'
Bonds, Banks, and Bailouts; Blue Magic is bad, in the end... -November 07'
'US$ 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'
'Global Basic Food Consumption Growth will takeover from the consensus "Its Global this time" Industrial Production Growth story in 2008'-Dec08'
'Litigations & Redemptions' - The Tide has rolled out on the Levered Long Community'-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%
EWH (bought $22.73. sold 21.98) = -3.2%
COST (bought 69.67, sold 68.74) = -1.3%
RSX (bought 49.32, sold 51.36) = +4.0%
HOG ($48.20, sold 46.55) = -3.4%
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%
MCD (short 63.35, cover 61.22) = +3.4%
DLTR (short 29.46, cover 27.66) = +6.1%
MA (short 219.44, cover 212.72) = +3.1%
SHLD (short $112.51, cover 104.37 ) = +7.2%
BKC (short $28.02, cover 27.70 ) = +1.3%
EWW (short 59.40, cover 55.83) = +6.0%
GE (short 37.60, cover 36.48) = +3.0%
JBX (short 28.49, cover 25.74) = +9.6%
BAGL (short $20.15, cover 16.43) = +18.5%
KSS (short 52.64, cover 45.37) = +13.8%
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 whatsoever for any losses estimated to be attributable 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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