The Big Picture

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• Ratcheting Up CEO Pay With Peer Comparison
• Rough Road Ahead
• QOTD: Two Novels That Can Change Your Life
• American Hedge Fund Assets = $1.4 Trillion
• Let’s go Slovakia
• Has The Stock Market “Thrusted” Off A Bottom?
• TBP Conference Has Arrived!
• Video: Ed Dempsey CIO of Pension Partners
• First and Goal for Risk

Ratcheting Up CEO Pay With Peer Comparison Posted: 11 Oct 2011 11:30 AM PDT Click to enlarge graphic: Cozy relationships and 'peer benchmarking' send CEOs' pay soaring (Washington Post) Outsize Severance Continues for Executives, Even After Failed Tenures (NYT)

Rough Road Ahead Posted: 11 Oct 2011 09:00 AM PDT The nation's deteriorating surface transportation infrastructure will cost the American economy more than 870,000 jobs, and increase transportation costs by $430 billion by 2020. > Click for interactive version of Infrastructure projects

QOTD: Two Novels That Can Change Your Life Posted: 11 Oct 2011 07:30 AM PDT A fantastic quote bubbled up in comments the other day: “There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves Orcs." -John Rogers I find this hilarious, because it it true.

American Hedge Fund Assets = $1.4 Trillion Posted: 11 Oct 2011 06:00 AM PDT > Very interesting data points via Absolute Return: American hedge funds reported a healthy increase in assets in this year’s first half and now manage a combined $1.399 trillion. That’s $102 billion, or nearly 8%, more than they managed at the beginning of the year, according to the latest Billion Dollar Club, AR Magazine’s survey of American hedge funds managing $1 billion or more. Bridgewater took the top spot again, followed by J.P. Morgan Asset Management and Paulson & Co. Globally, hedge fund assets amount to $2.16 trillion, up slightly from the $1.82 trillion managed at the beginning of the year. Full results are available online at www.absolutereturn-alpha.com. Q3, there were 241 American hedge fund firms managing assets of $1 billion or more, according to the survey, which appears in the October issue of AR. That’s an increase since January 2011, when there were 225 such funds holding a combined total of $1.297 trillion, according to the survey. The industry’s growth comes at a time when overall hedge fund performance has been lackluster, indicating that most of the increase is due to new inflows from investors. Bridgewater Associates emerges as this year’s biggest winner. With $70.3 billion as of July 1, Bridgewater not only remains the largest American hedge fund firm but also notched the biggest gain in assets, adding $11.4 billion — or 19.35% — since January. The rapid growth of Bridgewater’s new Pure Alpha Major Markets Fund, which the firm launched last year as a way to cap its original Pure Alpha fund, accounted for much of these gains.” > Source: American Hedge Fund Assets Reach $1.4 Trillion, According to AR Magazine October 3, 2011

Let’s go Slovakia Posted: 11 Oct 2011 05:31 AM PDT Markets await the vote of the Slovakian Parliament to approve the expanded EFSF, the last country of the 17 euro members to do so. After the head of the opposition party said he would vote yes on a 2nd vote if the 1st vote failed, it eased concern of a failure of passage. Assuming no surprises, attention has shifted to what comes next and DJ is quoting an EU senior official saying finally, “The discussion is on a haircut, how big it needs to be and whether sovereign creditors may be involved.” Last night Juncker, who heads the euro finance ministers, said a 60% cut may be necessary but his spokesman said he didn’t mean to give an exact figure and only meant to say it would be above 21%. Either a debt swap or outright haircut will be the two options. The ECB will certainly be pushing for the former since their balance sheet is polluted with junk sovereign debt. Once a decision is made amongst the parties involved, the focus will then be on containing the collateral damage both to other sovereigns and to the banks that hold sovereign debt. Also today, the troika today will release their decision on whether Greece behaved enough to get their next allowance check and release of it is expected. In the first monetary step of an Asian central bank to reverse the economic concerns, Indonesia unexpectedly cut interest rates by 25 bps to 6.5%, reversing its Feb hike. China’s sovereign wealth fund bought Chinese bank stocks in the secondary market, news of which was announced after the Shanghai index close but before the Hang Seng closed

Has The Stock Market “Thrusted” Off A Bottom? Posted: 11 Oct 2011 05:30 AM PDT The Wall Street Journal – Chart Watchers See Upbeat Turn Several Technical Analysts Say Stock Moves Last Week May Signal a Market Bottom; 'Upside Breakout' Ahead? Dan Greenhaus, who looks at charts though he doesn't consider himself a technician, has been watching the size of the S&P 500′s gains. The index rose 1.75% or more for three straight days last week, just the fourth time it has done so since World War II. Every other time has "marked a significant market bottom" or come quite close, says Mr. Greenhaus, who is chief global strategist at New York-based brokerage firm BTIG LLC. In each instance, the S&P 500 was higher one year later, he says. "I'm a bear, but what I'm saying is that I'd be intellectually dishonest if I came across something like this and just buried it," he says. "We probably could push higher, but you're talking about a small window, and I don't have a lot of conviction in that." Comment We decided to take a further look at the highlighted statement above to see if we have hit a 'significant bottom' in the stock market after 3 consecutive daily rallies of 1.75% or more last week. Our analysis shows this is not the fourth time since WWII that the market had three consecutive daily rallies of at least 1.75%, but the eleventh.  Additionally, this has occurred 34 times since the 1929 stock market crash.  However, this has only occurred 4 times since 1974.  We look at these periods in detail below. October 1974 Let's begin with the 3-day period in 1974.  The chart below shows the S&P 500 from June 20 to December 31 1974.  Between October 7 and October 14, 1974 the S&P 500 rose about 16%.  Although the market continued to move sideways for the next couple of months, this was, in fact, a significant bottom in the stock market.  Technicians would argue that this large three-day "thrust" did not trigger a technical breakout, but this move did occur near the low. August 1984 In the beginning of August 1984 the market saw another 3-day period of consecutive daily rallies of 1.75% or more.  As the chart below highlights, the market rallied 8% between August 1 and August 3, 1984. The market continued to rally until the 1987 crash over three years later.  Technicians would argue that "thrust" produced a breakout and the market responded by not looking back for over three years. August 2002 The chart below shows the next 3-day period in which stocks advanced by 1.75% or more each day.  Between August 6 and August 8, 2002 the market rallied 8%. As the chart below shows, this was not a significant bottom.  The market continued to fall another 11% by October of that year (three months later). October 2011 The chart below shows last week's 3-day advance from October 4 to October 6, 2011.  Much like the 2002 incident, it is hard to make the case this "thrust" resulted in a breakout. Conclusion A lot of people have been talking about this pattern.  The implication is this represents a thrust off a low and the start of a significant move higher.  History shows this has only been the case when this pattern results in a breakout of the previous range (see 1984).  When this thrust results in a move back into a defined range (see 2002), it has little meaning.  When the market only barely broke out (see 1974), the market churned sideways for months before moving higher. Has the market's trend changed?  For now, the answer appears to be "no."  Until a breakout is established, we would not get that excited about the three consecutive daily rallies of 1.75% or more. Source: Bianco Research, LLC. October 10, 2011

TBP Conference Has Arrived! Posted: 11 Oct 2011 04:30 AM PDT OK, today is the big day. Lots of you asked if there would be an audio or video recording — and we have retained FORA TV to shoot the entire event. They will edit, digitize and host the entire event, for what I am told is a moderate amount (as in under $100). I’ll post updates as they occur. Here is what I am doing all day:

Video: Ed Dempsey CIO of Pension Partners Posted: 11 Oct 2011 03:30 AM PDT To avoid suffering from excess selective perception, I try to hunt out people who have differing views from my own. It is a challenge to find someone who 1) has a methodology that is defendable; 2) reaches a different conclusion than I do; 3) Has a respectable track record and so 4) cannot be dismissed outright. Ed Dempsey and Michael Gayed are two such people. New highs this year are certainly possible, but are not what I am expecting. Regardless, this is a rather interesting pair of videos, coming out before yesterday’s face ripper: Source: After Predicting the "Summer Swoon," Ed Dempsey Now Sees a "Fall Melt-Up" by Yahoo Finance Source: The Stock Market: Now More Volatile Than Ever! by Yahoo Finance

First and Goal for Risk Posted: 10 Oct 2011 10:00 PM PDT We asked last week if the S&P500 (our proxy for risk markets) was capable of clearing the "red zone",  the zone of resistance between 1175-1195, which included the 50-day moving average.  The market's answer?  Like a hot knife through butter! Interestingly, the S&P500 closed at its high of the day at?  1194.91!   Not a sold out crowd today as the volume was super light.  Nevertheless,  impressive.   The bears need to take a goal line stance right here and push back the momentum or the next stop is S&P500 1230, the top of the recent trading range which began with the August collapse. We have posted several pieces on the three macro bears that have been weighing on equities:  1)  Europe's sovereign debt and banking crisis;  2)  The slowing of the U.S. economy and employment problem; and 3) China hard landing concerns.   We're not sure — and have our doubts — all three bears have gone into hibernation for the winter, but they do appear to be, at least, napping. Today's intervention to support the banking system by the Chinese government was a big, yet under appreciated, catalyst for the rally, in our opinion.   The FT writes, Central Huijin, the domestic arm of China's sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would "support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks". The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC's Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent. The U.S. economic data looks to be improving and Europe has a plan to have a plan to recapitalize the banks and fire break the contagion of a Greek default. We're always flying blind with China due the country's lack of transparency, but the equity markets have been hammered over there and should rebound on the intervention news providing more confidence for the global markets.  The announcement of intervention came after the market closed but Asian ETFs were up big in New York trading. The U.S. data, including Friday's employment number, are not great, but beating to the upside.  The key now is for earnings to confirm the U.S. economy is not sliding into recession.  Company outlooks are more important in this season than almost any we can recall. We're most worried about Europe.  There is more time for the markets to continue to hope as the E.U. summit meeting has been postponed to October 23rd to give policymakers more time to hammer out the details.  They really need to get this right. A big commitment by a national government to backstop its banking system could have adverse consequences for the sovereign's credit rating, which negates the positive contribution of the recapitalization.  This destablizing feedback took down Ireland and the worries seem to be the biggest point of disagreement between Merkel and Sarkozy. The markets aren't focused on these concerns and want to believe the three bears are hibernating for winter. They want to rebound from the August collapse like a beach ball held underwater.   And that they are.    Stay tuned.

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