STRESS (TESTS)

I opened the month of February noting the malfunction in the stimulus approval process, and since then little has been done to assuage the number one concern for investors: the likelihood of stabilizing our banking system in short order. The only thing we now know for sure is that Treasury Secretary Tim Geithner is a policy eunuch; he’s not even allowed to lie on behalf of the administration any more. Viva Hank Paulson!

President Obama’s de facto state of the union speech earlier this week also did little to calm the investor class. Although I acknowledge its true purpose was to provide a badly needed booster shot of confidence, his track record of boosting the markets from the bully pulpit is eerily similar to GWB’s. The public’s appetite for soaring rhetoric and grandiose plans of a Liberal utopia will lose its potency soon enough. As I recall this country’s competitive advantage was its ability to empower anybody to become wealthier than what one’s station in life at birth would suggest. The 35-hour workweek is in France.

Closing the month the operative word is “no” as in: No, we’re not going to nationalize banks. However, this morning it’s pretty clear that Citi (C) is now essentially under the aegis of government protection despite the Bernanke comment-induced rally earlier this week. And even worse, we now have to wait 6-8 weeks for the bank stress tests to be concluded. Since the lack of available credit is centered on the health of our banks, waiting for an updated diagnosis should dim the probability of any noteworthy rally occurring prior to 1Q09 earnings season. Just say "no" to a rally, too, I guess.

This is a major problem because without building up a buffer of short-term gains, the market is at greater risk of another major selloff as the indexes are already perilously close to technically significant levels. With quarterly index figures being substantially lower than the prior one, the specter of an early close cannot be dismissed either.

What to do?  Without a no-compromise “stimulus” plan providing stimulus, deflation becomes a much bigger worry than I sense the consensus is anticipating. When deflation becomes a concern even gold is unlikely to do much other than lose its value at a slower rate than other asset classes. In the trading portion of one’s gold position I would take profits if one hasn’t already done so since it failed to break through $1,000/oz. Deflation is particularly scary for those carrying debt. Whether one’s financial condition is secure or not, paying down debt is really the best investment move to make right now bar none. On that note, I remain bullish on Treasuries as a safe haven (not TIPS!).  And by no means was I suggesting earlier selling off one’s core D-Day position in Au.

THE YANKEES BETTER WIN

Yesterday the 2009 New York Yankees debuted in their first spring training exhibition game. I may have noted recently why the team’s “gigantic edge in financial resources” is hardly the end-all be-all factor to assure a championship, but, in my view, they have no excuse not to win the World Series this year.

Of all years, the Yankees ability to outspend should “guarantee” a ticker tape parade in the Canyon of Heroes this November. I even consider it their patriotic duty considering the carnage Wall Street has been experiencing (tongue in cheek!). When the well-funded Boston Red Sox balk at making any serious attempt to acquire Mark Teixeira, an ideal long-term fit for their roster, things have clearly gone out of whack. At least for now the Yankees continue to operate in their own economic stratosphere, aided in no small part by the tailwind of opening the new stadium (beyond 2009 is anyone's guess). The Steinbrenner family has shown disdain for fiscal prudence before so I still expect them to wield there almighty pocketbook to procure any necessary parts as the season progresses; relinquishing young talent won't be required this year! This stands to reason becuse the family wealth is primarily concentrated in baseball and not other interests (like commodities trading) so they should be less affected by the economy (for now).

Even as a Yankee fan, however, I readily agree that the current system is perverse and not healthy for the sport despite the irritating fact that the Red Sox have been most vociferous in the call for a salary cap. Why are the Milwaukee Brewers, Oakland Athletics or Pittsburgh Pirates not pounding the table? Like I said before, the probability of contraction is not insignificant as this global depression will probably end in tears.

Without further ado, I would like to see the following lineup be the primary version by June:

1. LF – L, DAMON, Johnny (playing for a contract)
2. SS – R, JETER, Derek (can’t move left, so he better still hit)
3. 1B – S, TEIXEIRA, Mark (nice to have Alex around to occupy the media, eh)
4. 3B – R, A-ROID (sigh, please win the MVP again)
5. 2B – L, CANO, Robinson (capable of besting Pedroia’s 2008 MVP campaign)
6. DH – L, MATSUI, Hideki (a nice luxury item to have around if knees hold up)
7. CF – S, SWISHER, Nick (great value signing, I project to outperform Nady)
8. RF – R, NADY, Xavier (playing for a contract)
9.   C  – S, POSADA, Jorge (38, I expect a new starter by year-end)

The Yankees are an old bunch so there will be plenty of AB’s for the bench, and I obviously have no faith in the stability at the catcher position.  I also don't think there is a need to insert a mediocre offensive player to start the game at CF, like Brett Gardner, especially when a GB pitcher is on the mound or when facing a top caliber opposing pitcher. If healthy, this team should comfortable score over 900 runs.

I would like to see the following rotation by June:

L, C.C. Sabathia (it’s nice to have Alex around to occupy the media, eh)

R, Chien-Ming Wang (power GB pitcher to break up the power K guys)

R, A.J. Burnett (should thrive with a gaggle of bigger stars around)

R, Phil Hughes (we know he has it)

L, Andy Pettitte (still a huge mismatch vs other team’s #5s)

Clearly the omission of Joba Chamberlain from the above list is glaring. However, I believe he is still too immature to serve in an already well-stocked rotation. The Yankees are MUCH better served using him to firm up the end-game bridge to Mariano Rivera. At best, guys like Brian Bruney and Damaso Marte are suited for the 6^th or 7^th innings. There is also that minor issue of Rivera coming off of surgery at 39 and Joba being shut down last year himself with injury. He’s still a baby, and his arm needs to be protected until he grows up figuratively and literally. Please.

Conclusion:  This year we should see a much worse-than-normal disparity between the haves and have-nots in MLB so I expect a healthy 2009 Yankees to sweep the floor with its AL rivals. In particular, I don’t expect the AL East to be nearly as competitive as most would expect by merely extrapolating last year’s results. The Yankees made massive upgrades while I forecast Red Sox offensive production to decline, and Rays to buckle from loftier expectations; not exactly wild predictions. All of the above suggests a realistic shot at a 108-victory regular season campaign.

WELCOME BACK TIGER

As a golf aficionado it’s with awe I welcome back Eldrick “Tiger” Woods to competition to defend his WGC-Accenture Match Play Championship around noon. His past feats are, without a hint of hyperbole, truly legendary.  If Woods was never to raise another trophy over his head again, he could eventually take satisfaction knowing that his 2008 U.S. Open victory would probably be considered the most remarkable achievement in the history of the sport while hobbled with a stress fracture and torn ACL in his left leg. However, as we all know, this week’s field is unlikely to enjoy such a luxury.

Despite the nearly nine month layoff, the prospect of Woods winning is offered at +400 on the moneyline at Sportsbook.com (info purposes only!). The next tier of favorites (Phil Mickelson, Sergio Garcia, and Anthony Kim) is each going at +1500, and Mickelson just won last week at Riviera. That’s [well-deserved] respect.

In a low-stakes “February Madness” game I’m participating in, my final four is: Tiger, Phil, Ian Poulter, and Robert Karlsson. Considering the unintended consequence of Mr. Cablasian 's layoff was an opportunity to improve his short game while regaining the facility to swing hard without pain, I don’t see any reason not to anoint him the winner right now. His ability to use golf-appropriate intimidation is yet another skill that is probably not as appreciated by the casual fan; in a 1-on-1 match play format in particular.

Winning a stroke play tournament is so difficult because no matter how good the best players are, on any given week one is also competing with “hot” players. This is the same reason why the Yankees can’t be expected to be fairly considered an overwhelming favorite to win the World Series despite the gigantic edge in financial resources at the franchise’s disposal. However, how can you not love Tiger’s chance to dispatch opponents one at a time? A little research will make the not-so-surprising revelation that he dominates in the match play format for just that reason.

Common Sense.  Even Tiger’s return won’t solve the economic headwinds facing the PGA Tour this year, if not longer, so it’s good to hear former #1 Greg Norman suggest a pay cut for the players by lowering purses.  Sports is typically a recession-resistant industry, but in this economic cycle discretionary income is like a unicorn; it exists only in fantasy. The major sports leagues – MLB, NFL, and NBA – have all had layoffs, and NASCAR’s growth trajectory has taken a dramatic reversal. Playing golf, let alone regularly and well, is still beyond the reach of most and to ignore today’s zeitgeist of thrift would be retarded. Hopefully PGA Commissioner Tim Finchem has rabbit ears on this matter.

SPORTS LEAGUE PAIR TRADE: Short MLB, Long MLS

A-Rod/A-Fraud/A-Roid is in the news again, and in desperate need for some brilliant PR help. As paparazzi cannon fodder goes, he makes Tom Cruise look like Machiavelli.

At the end of the day, however, A-Rod still has his guaranteed millions to collect, if not the public adoration he desperately seeks. The real loser here appears to be MLB. Ultimately, I would not be surprised if the league’s special monopoly exemption gets revoked within the span of Obama’s administration unless it dramatically reforms itself. I envision the NFL league capitalism/franchise socialism model will be the only alternative. In other words, the Yankee spendthrift payroll strategy is about to come to an end.

Out of Touch.  The demand for escapist entertainment is escalating with every passing day, but MLB has effectively conceded its ability to cement itself in the minds of an already highly distracted younger generation by doing its best to disgust the adults that currently support the sport. Even "better," both player union and league management is culpable for allowing the American Pastime become so vulnerable. The SI article (see A-Roid) makes it clear that union leadership probably tipped off players about to be “randomly” tested for banned substances, so any breach of ethics is imaginable. Regarding league management, Commissioner Bud Selig collected a $17.5 million base salary for the 2007 fiscal year ending October 31, 2007, and signed a three-year extension through 2012. I think we all know the direction, if not magnitude, of his future compensation. For what seems to be an absentee job relative to the visibility and engagement of NFL commissioner Roger Goodell, Selig’s income, the most lucrative among the major sports leagues by wide margin, is revolting. How is that acceptable for a league enjoying such a luxury as no competition? Considering the mood in Washington, I can’t see how this lasts much longer. The public should have access to the detailed financial condition of the league and all of its franchises.

It's the Economy, Stupid.  Greed, impropriety and apathy aside, MLB has another problem: the economy. Sports may be recession-resistance, but hardly anything can withstand a depression. [The IMF has just reported that the global economy may be already in a depression] During the Great Depression baseball attendance fell dramatically. This time around it doesn’t even have the availability of a national icon like Babe Ruth. The nature of media and entertainment being so “long-tailed” as it is, that caliber of hero may only be reserved for a [successful] war-time President. In any case, the probability of at least one team contracting from the league seems better than even.

The Bigger They Are...  The fallout of the financial and economic crisis disproportionately affects the NY Metro region so it will be very interesting to see how well the four new stadia opening will perform: new Yankee Stadium, Citi Field (Mets), new Meadowlands Stadium (Jets/Giants) and Red Bulls Arena (soccer team). I suspect Year 1 will be o.k., but disastrous for years following. After all, the impetus of all these fields was to capitalize on luxury boxes that catered to [formerly] deep-pocketed corporations. Now, I suspect I’ll soon be able to afford to rent one of these boxes for personal use.

Soccer is the Big Winner.  The best a business can realistically hope for over the prolonged difficult economic period ahead is to gain market share. And within the sports leagues it would seem that Major League Soccer is positioned to be the big winner. Soccer is not only a global sport that Americans are rapidly becoming more fond of, but attending games is still family-friendly and affordable. Its popularity from the top-down is driven by the growing quality of the men’s national team; from the grassroots by the millions of kids playing the sport from a young age.

Over the course of his three month loan to AC Milan, MLS’ top (read: only) celebrity, David Beckham, has brought the league millions of dollars worth of free advertising as speculation of a permanent transfer took a life of its own. Whether he leaves or not is not that important; the L.A. Galaxy, and by extension MLS, is being mentioned in the same breath as a world famous club such as AC Milan of Serie A. As a player, Becks is not the caliber of LeBron James anyway, a bottom dwelling team like the Galaxy can lose just as many games without him. Sure, the reported $15m transfer fee (goes to the league) is being refused for now, but one superstar celebrity does not a team make, and saying no now is rule #1 in the art of negotiation (especially while you’re scrambling to construct a backup plan)

In a cash strapped environment, this is just the type of excitement, albeit somewhat insulting, a marginal league needs in spades. Besides, the election of Barack Obama could be a major consideration for FIFA to award Chicago the 2016 World Cup and thereby providing a turbo boost to the sports domestic popularity. Yes, if I had a few million to allocate toward an investment in a sports franchise, it would probably be toward one in the MLS.

4Q08.4 EARNINGS – STIMULUS MALFUNCTION, BUY GOLD

“In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.” -Ronald Reagan, Inaugural Address, January 20, 1981

Rightly or wrongly one needn’t sing the praises of Reaganomics other than in the privacy of one’s home for at least the next four years. Under Barack Obama’s administration the new speed limit for Wall Street is 25 MPH: no more autobahn; yield to all pedestrians. Accepting the spirit of this new world order, along with short term trading/risk management is the only constructive way to navigate the markets right now as the stability of our global economic infrastructure remains in jeopardy. The irony of this situation is that the clarion call of populism is being heeded when it’s least needed. The financial gulf between the middle class from the elite has taken a sharp reversal, and everybody is in a terrible bind; worrying about the top 1% is not constructive in this discussion, and they were the predominant victims of Madoff anyway.

A bigger message could not have been sent last Thursday when Obama declared that Wall Street’s behavior was “shameful” with an hour still remaining in the trading day; how about all the calls to cap "bonuses." Needless to say the market sold off heavily into the close as any number of his advisors could have predicted for him beforehand. Clearly, when it comes to strengthening the Mind, Body, and Spirit of our overall domestic economy, our largest most innovative industry, financial services, is going to suffer at least a few lashes for past sins. This is not to say profits (and bonuses) formerly inflated by financial engineering was an ideal foundation of growth, but an entire generation of our best and brightest (or at least most ambitious) has been disrupted, and probably forced to reinvent themselves. This may be a blessing in the long-run, but how does this possibly help expedite recovery in the short run? How does a TARP-funded firm like Goldman Sachs (GS) sustain its legendary reputation that driven by its risk/reward-loving culture? 

To me the only short term remedies that should be funded are based on the principals of providing food and mortgage workouts of existing homeowners. Obama may intellectually understand that our banking system requires emergency surgery, but he's still insisting on bootstrappin more entitlement spending. How original to waste political capital on repaying your political allies. Considering the prospect of requiring more funds (preferably smart infrastructure related) down the road, we've got to preserve the health of our Treasury market as long as possible. His own prominent economic advisors (of note Larry Summers) preached a prescription of Timely, Targeted & Temporary measures, which earned him the trust of financial conservatives. To the credit of every Republican and about a dozen Democrats who voted against the House version of the Stimulus bill, a loud message was sent to Mr. Post-Partisan, and provided the necessary fodder for the Senate to fulfill its traditional role of breathing in some prudence to the process. As of late Sunday it seems that the Democrats won't be able to bully there way just yet.

Buy Gold.  As was the case last week, there may be earning reports galore to ponder, but all eyes need to be fixed on Washington. However, “selling on the news” is not as straightforward proposition as it was for our anticipated Aggregator/Bad Bank rally (ended at 2:15 last Wednesday after the Fed held rates steady). This week it’s anyone’s guess what new plan Treasury Secretary Tim Geithner will unveil. There is a large risk that the Aggregator Bank idea may be rejected because it would require more taxpayer money to purchase illiquid, toxic assets. Under this administration, the nationalization route (wiping out equity shareholders) as was adopted by Sweden in the early 90’s may be prescribed for the likes of Citigroup (C) and Bank of America (BAC). After all, the Resolution Trust Corporation created to unwind troubled assets from the S&L crisis in the 1980’s was a Republican solution. The lack of policy consensus, the continuation of poor corporate and economic results around the globe, and especially the rapid deterioration of all non USD or JPY currencies (most recently the Mexican peso) suggests the conditions are ripe for a major rally in Gold (GLD) and other precious metals (e.g. SLV, PTM) is ahead of us. I will add this doesn't automatically suggests its time to short Treasuries: there's still plenty of demand for capital presercation, and the U.S. won't hesitate to meet it. However, Obama will soon learn that there is a limit to everything which is why Senate Republicans must find a may to hold the line on social entitlement dollars masquerading as stimulus.

Disclosure: No positions.

Super Game V.43

Year-to-date NFL: 10-1, +8.5 units; Cumulative 13-3, +9.5 units

Considering the Cardinals had to play uphill the entire game, my strong conviction that they were capable of winning was more than justified. The Cardinals were almost too content to utilize Larry Fitzgerald as a decoy at first, but the deficit stemming from a huge penalty imbalance and that INT returned for a TD at the end of the half changed everything. Ultimately, Ben Roethlisberger's uncanny escapability, which seems to have a high component of luck, versus Kurt Warner's, or lack thereof, was most prominent in my mind. I couldn't even begin to handicap next year's favorite's so hopefully that bodes well for another wacky season. An entertaining game for all. Time to study for March Madness and the Masters.