"If the federal government will step in to help them, they are triple-A. If the federal government won’t step in to help them, who knows what they are.”

-Warren Buffett

Yesterday was neither a good day for the Thunder Bay Bears nor the once revered definition of “American Capitalism.” As I am sure US economic historian and author of “Buffett: The Making of An American Capitalist”, Roger Lowenstein, would agree, altogether it was a historical day for finance in this country. Never before has the US portfolio patriarch, Warren Buffett, been forced to answer questions about his market positioning against his own will.

 If any of us Buffett fans thought the man was going to be forthright and transparent about what it is that the ratings agencies actually do, we should think again. I felt like I was listening to a professional politician when Buffett excused Moody’s by suggesting that they simply “made a mistake that 300 million other Americans made.”

We get what Buffett gets – politicians created and perpetuated a ratings system that could be gamed. What Buffett is really doing is playing the game that’s in front of him. Current conflicts, compromises, and constrains aside, his mandate is to make money – not to make you believe how he is making money is “right.”

 To contextualize Buffett’s aforementioned quote about whether or not the states of America should be rated AAA, let’s take a quick step back and understand where this designated ratings system of Perceived Wisdom comes from.

 In 1909 a gentleman by the name of John Moody (who is currently rolling in his grave) started selling independent research like Hedgeye’s (he was paid by subscription, not by the issuers of bonds he was rating). Over the course of time, independent research became a profitable business and it, predictably, found competition with firms like Poor’s Publishing.

By the time the 1970s rolled around and the USA was newly minted with its endowment of the world’s reserve currency (1971), the SEC “decided to penalize brokers for holding bonds that were less than investment grade. The SEC then faced the question of investment grade according to whom? The agency decided to create a new category of officially designated ratings agencies and grandfathered the big three – S&P, Moody’s, and Fitch.” (Roger Lowenstein, The End of Wall Street, page 39).

This, of course, created the kind of business that I, the Saudis, and Warren Buffett love – cartels who have a lock on supply and pricing via government mandate. All you needed to make this the “bubble that none of us saw coming” (Buffett) was more and more government intervention and price supports. Enter Greenspan and some moneys from the heavens and you can all of a sudden see how, from 2002 to 2006, that a conflicted firm like Moody’s saw profits triple and MCO stock go to $74/share.

 “Given the agencies profits were soaring it paid for them to stay on good terms with Wall Street. Moreover, when Lehman took a mortgage pool to Moody’s, it paid the fee only if it was pleased with the rating.” (Lowenstein, The End of Wall Street, page 41).

Sure, even though some of us actually did see this coming… Mr. Buffett, with all due respect, maybe it was because we weren’t being paid to be willfully blind to the problems, in principle, that are obvious here…

 So, after another great low-volume rally to lower-highs in the US stock market yesterday - fully trusting in the good faith of the USA’s Triple-A rating, we should chase stocks higher here on the open, right? C’mon. Let’s get serious here folks. This time there will be no finger pointing at 300 million Americans. No one will be allowed to say they didn’t see this US Sovereign Debt crisis coming with a straight face.

For a preview of what is coming down the pike in terms of US deficit spending and debt obligations, don’t ask Moody’s or Blackrock’s Larry Fink for their forecasts. Just this morning, Fink, who runs a massive asset management business in America’s politically infested waters said that it’s time to “rock n’ roll”…

Maybe we should dial up Chucky Prince and have a ourselves a little dance with the Thunder Bay Bear…

 The Fiat Fools in Europe are already providing a play-by-play preview for all Americans who still aren’t being paid to be willfully blind to see. As a reminder, we think the US deficit/debt problems come home to roost within 3-6 months, so it’s critical to analyze the sequence of events that Western European stock markets and populations alike are currently enduring.

 The road from austerity to the forced selling of sovereign assets leads through the Rubicon of civil unrest…

Greece’s deficit-to-GDP ratio isn’t much different than Triple-A USA’s, but their scheduled debt maturities were closer/larger in duration (and they didn’t have in-house Fiat Fools running the world’s reserve currency with moneys dropping from helicopters), so they are going through the ringer first. Here’s a recap of the forced selling side of the game Buffett would recognize as Monopoly in Europe this morning:

 1.       Greece – selling 3B Euros ($3.7B) worth of sovereign held stakes in railroads, water utilities, and postal services...

2.       Spain – Cajas Murcia is leading another 4 problem banks to merge approximately 75B Euros ($89B) in assets before the June 30^th“rescue” date…

3.       Portugal – parliament approved austerity measures last night (ie. raising taxes and the like)…

“Rock n’ Roll” maybe for professional politicians or someone who recognizes that the art of the money management business is having money to manage… but for the citizenry of socialized nations… this looks more like a sneak preview of the “Road to Perdition” to me.

 My immediate term support and resistance lines for the SP500 are now 1077 and 1106, respectively. We’d be a seller of all US and European equity strength today, ahead of another ominous reminder that big government employment reports are not too big to fail.

 Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Keith McCullough is the CEO and Founder of Hedgeye Risk Management.

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“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”

~ Albert Einstein

The truth is that the US stock market finally closed up for 2 days in a row. The truth is that the SP500 is up +0.2% now for the month of June. The truth is that 2 days and 0.2% does not an immediate or intermediate term TRADE or TREND make.

The truth is that I was just parked on I-95 for almost 2 hours this morning, so I’m going to keep this short and to the point. Into and out of last week’s YTD closing lows for US, European, and Asian equity markets, we covered a lot of short positions (covered SPY on 6/4; covered QQQQ on 6/7). Our cash position in the Hedgeye Asset Allocation Model peaked at 79% early last week. This morning we’ll open the week with a 70% cash position and a 3% position allocated to US Equities.

The truth is that global markets, from countries to their currencies and commodities remain broken from an intermediate term TREND perspective. In the Hedgeye Risk Management model, the intermediate term TREND duration is 3 months or less. If this morning’s rally in the US futures holds and we see the first 3-day rally in US Equities since April, the truth will also be that the immediate term TRADE lines across markets, globally, will come back into play.

In the Hedgeye Risk Management model, the immediate term TRADE is 3 weeks or less in duration. Here are those TRADE lines of resistance (we continue to use them as critical lines of resistance, or stops, as we look to bear market rallies as selling opportunities):

1. S&P 500 = 1104
2. Dow Jones Industrial Average = 10,312
3. Nasdaq Composite = 2276
4. Russell 2000 = 661
5. S&P Consumer Discretionary Sector (XLY) = 32.64
6. S&P Financials Sector (XLF) = $14.97
7. Goldman Sachs (GS) = $141.91

We bought Goldman Sachs (GS) last Thursday at $133.04. This is a good example of buying a great franchise at a great price but, at the same time, understanding what duration we were buying the stock for. Every stock, commodity, currency, etc. can get immediate term oversold. In this environment, that’s where we want to be covering shorts and buying longs. Every market has a time and price where you need to be active.

At the same time, we don’t want to try and pretend to be Warren Buffett here, so you need the discipline to sell/short whatever you bought/covered if it can’t breakout above its immediate term TRADE line of resistance. That’s how we think about risk management in a bear market. As a practical matter, whether it’s the SPY, XLF, or GS, we consider selling decisions at both the security level and in the aggregate.

The truth is that not every investor you are competing with on the bid or offer is duration agnostic. The truth is that some investors are landlocked in a style that doesn’t allow them to capture the immediate term alpha that you can pull out of a market that is breaking down but inevitably bounces. The truth is that this is going to provide a huge advantage to those who are equipped to manage both their absolute exposure to cash and net exposure to short positions in 2010.

From a Hedgeye Macro Theme perspective, we remain very bearish on the only bubble that remains – that of the Fiat Fools in Big Keynesian Governments. After we covered our short position in the Nasdaq last Monday, we also shorted the US Dollar (UUP) as a way to express our being negative on the US deficit and debt disasters that America has yet to address. The good news for Europeans on deficit spending is that they are at least starting to tell the truth.

While a down Dollar may very well be reflationary for commodities priced in US Dollars in the immediate term (we have a 6% allocation to Commodities), in the intermediate term the truth has already been told by the Europeans as to where the Road to Keynesian Perdition ends – with austerity measures. The truth is that we aren’t telling Americans the truth about that because they won’t like austerity measures either.

My immediate term support and resistance levels for the SP500 are now 1082 and 1104, respectively

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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“Having nothing, nothing can he lose.”

-William Shakespeare

That quote comes from the battle of all Shakespearean battles. “Henry VI”, Part 3 contains more battles than any other Shakespeare play. Yesterday was a big Bull versus Bear battle. And I lost.

No matter where I go this morning, the War of the Proverbial Roses will carry on. A battle lost doesn’t lose the war that we engaged in on the short side at April’s end. If the bulls think I am going to rollover or point fingers today - think again. I’m accountable for this team’s losses. I’m moving forward.

Before we move forward it’s important to take the time to look back. What risks are embedded in the setup for today’s battle given yesterday’s closing prices? What calendar catalysts are in front of us?

The good news is that we called for our own fall in an intraday note yesterday titled “Squeezy: SP500 Risk Management Levels, Refreshed.” Good news because it’s better to understand why you are losing than living in fear of your process. Have a plan - change the plan as prices change.

The most important part about yesterday’s price action was that the immediate term TRADE in price momentum and volatility turned positive for US Equities. We use a simple 3-factor model to measure all durations in our model dynamically: Price, Volatility, and Volume. The third leg of this stool (volume) did not confirm price and volatility, but there really are no buts – the closing price of the major indices are what matter most.

From an immediate term TRADE perspective (3-weeks or less), here are the new lines of support:

1. SP500 = 1101
2. Dow = 10,299
3. Nasdaq = 2276

There are some critical strategy points to be made here.

1. When TRADE lines of resistance become support, you need to change the immediate term plan (stop selling aggressively).
2. TRADE lines of support can quickly become resistance again, so you need to be patient in watching prices confirm new support.
3. TRADE lines are not TREND lines. Never confuse the immediate term with intermediate term durations.

This is where the battle becomes the war - when there is Price Momentum Mismatch between durations (i.e. the TRADE goes bullish within a bearish TREND). So the next leg of analyzing yesterday’s losses on the short side becomes looking forward to the forest of where the real risk in staying short can be found.

From an intermediate term TREND perspective (3-months or more), here are the lines of resistance:

1. SP500 = 1144
2. Dow = 10,698
3. Nasdaq = 2369

Once again, no matter where you go this morning there those real-time prices are – sitting right in between a rock and a hard place of bullish TRADE and bearish TREND. I’ll be selling on rallies toward 1144 and buying on selloffs toward 1101.

How about today? What is Thunder Bay Bear who is Battling Bulls to do?

1. Watch and wait like we did into yesterday’s close.
2. Don’t run out there and get emotional, flailing your rifle and shooting at any bullish price that moves.
3. Watch and wait some more…

The way I look at it is that both my fundamental Fiat Fool macro thesis and my quantitative setup continue to confirm one another for both the intermediate and long term. To a degree, some of the wins I’ve had this week (short the US Dollar, long Gold) continue to confirm the same. The US government is inching toward the Road to Perdition that the Europeans have already started to march upon – austerity.

The #2 story on Bloomberg this morning is born out of the same source of every government oriented story that ends up in your inbox – a leak – “Fed May Trim Growth Outlook”…

Make no mistake, no matter where the immediate term TRADE in this market goes, this is where the real intermediate term war between Bulls versus Bears will be decided – will US GDP growth be slower or faster than consensus expects in 2011?

We’ve been saying Bernanke and the Administration’s growth estimates for both Q4 2010 and all of 2011 are way too high. Apparently the bulls in the Fiat Fool camp have been delivered the message. Evolving the government’s forecasting process is progress for America, but that doesn’t mean this bearish TREND in the US stock market ends as a result. After all, the output of Bernanke and Co. lowering their numbers will be marked-to-market, in the end.

My immediate term support and resistance lines for the SP500 are now 1101 and 1122, respectively. Saddle up. Into the brink of Battling Bulls we go. As “Old Blood and Guts” (Patton) said, it’s time to “lead, follow, or get out of the way.”

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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“A greedy father has thieves for children.”

-Serbian proverb

Not unlike those of the Roman Empire, the political fathers of the modern day Fiat Empire purge their citizenry’s hard earned capital in order to attempt to maintain short term popularity. When they run out of funds, they simply borrow more. Then they spend that too.

I’m in the midst of reading “Rubicon  - The Last Years of the Roman Republic.” I’ve written about this before, but it’s worth mentioning again. The behavioral parallels between professional politicians circa 100BC was eerily similar to what you see in Western Europe and America today.

Sulla (138BC-78BC) was the poster child of what became an untenable Roman dictatorship. Once he captured control, he swept away the ideals that galvanized the Roman Empire’s longstanding pride. The meritocracy that allowed common citizens to rise up against the political aristocracy and lead their country was quashed. The greed and lust for political power in the Republic became disgusting. Tom Holland captures life in the Sulla moment effectively:

“As dictator he had thrown the largest parties in Rome’s history. Everyone in the city had been invited. Spit roasts had sizzled in the streets, vintage wines had flowed from public fountains. The citizens had gorged themselves.” (Rubicon, pg 104).

This, of course, didn’t end well. Leveraging yourself to the habit of overspending never does. European governments are finally coming to grips with this new reality. While their political resolve continues to be borrow-borrow-borrow, then spend what they borrow, unlike America, at least they are implementing some form of austerity on the spending side of this dysfunctional equation.

This morning, markets around the world remain confused. This is mainly a function of professional investors being confused, not the people whose money they are managing. To the citizenry of all nations who are over-geared, the output of austerity is crystal clear – slowing growth and less to gorge.

Here are some interesting thoughts from influential Europeans in this morning’s news:

1. UK– George Osborne (the new Chancellor of the Exchequer): “At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent.”

2. Russia – Igor Shuvalov (First Deputy Prime Minister): “I’d be very cautious about stock investments in this country. I would welcome real investors who can build factories, something new in this country.”

3. Italy – Claudio Artusi (CEO of City Life – Milan’s $2.6B real estate project that’s built the tallest building in Italy): “Our investors are more concerned about long term value than short term returns. The project is aimed at the top end of the market and won’t be affected by the economic cycle.”

Confusion from the Italian sitting on his perch at Club Myopia and, at the same time, admission of the new Age of Austerity that has been voted into the UK’s political system. All the while Spanish and French governments are trying to convince the Russians to buy their broken promissory notes (more sovereign debt auctions this morning) as the Russians look to start taxing their almighty petrodollars (considering a tax on oil exports from tax-exempt Siberian oil fields).

The only way that this unsustainable Piling Debt Upon Debt plan changes is if we change the governments who plan to keep spending. Germany has a much better fiscal position than the US at this stage of the game and has already implemented austerity measures on the order of 2.7% of GDP. Part in parcel with Osborne’s comments in the UK this morning is David Cameron getting rid of the FSA (Financial Services Authority). Why? Because it doesn’t work.

You can’t solve problems with politicians who perpetuated the problems. Change is good and it seems to me that those countries who have the political backbone to make changes first will win this race to the bottom in the end (you need to hit bottom before you bounce).

Levered markets, politicians, and financiers alike need to take a good, hard, and long look at the bottom before they change their ways. Artusi’s fanciful expectations are a metaphor for an era that’s passing us by. The score for Italy’s latest version of an opulent “City Life” is on the board – only 90 of 390 luxury apartments sold. The Fiat Empire may not be burning yet, but the smell is becoming awfully familiar…

We covered our short position in the SP500 (SPY) yesterday on market weakness. That doesn’t mean I’m not bearish. It simply means I think I can re-short the market higher. We will see if I’m right about that. My immediate term support and resistance lines are now 1101 and 1127, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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“Who will guard the guards themselves?”

-Juvenal

In recent writings, I’ve been focusing on the events that led to the fall of the Roman Empire. I’ve been trying to wrap my head around the dynamics of politics and power in societies that are dominated by professional politicians as they finally hit their tipping point.

I have a profound respect for economic and political history, not because it’s ever the same, but because the patterns of human behavior often rhyme. I’m certainly not an expert on Rome pre 49BC when Julius Ceasar crossed the Rubicon, but in hindsight I can see as well as you can. The outputs of certain abuses of power become crystal clear.

One of the best parts about my job has turned out to be putting myself at the very heart of an exclusive network of thought leaders. Every morning I basically have an opportunity to inspire a debate. The more outside of consensus I get, the louder the feedback mechanism of the Hedgeye network becomes.

The aforementioned quote came from one of our many thoughtful subscribers. He’s studied the aftermath of what I have been writing about as of late. Juvenal was a Roman poet from the 1st century AD.  I consider myself very fortunate to be privy to thoughts like these – it’s always important to consider what winners in this business are thinking. Collaborative thought is a critical driver of risk management.

Our subscriber wrote:

 “Through his Satires of Juvenal, who once asked, “Quis custodiet ipsos custodes?” Effectively meaning, “Who will guard the guards themselves?” (along with other similar, idiomatic translations) the question posed by Plato and put to Socrates as the main character in The Republic, is as proper now as it was more than 2,000 years ago. With Fiat Fools and global government incompetence accelerating the journey down the Road to Perdition, every free market thinker should ask, and then answer for himself, this question.”

Sometimes it’s that simple – risk management, that is. Sometimes the best absolute performance is assigned to whomever is able to contextualize all that’s going on in this interconnected world and ask themselves the right question first.

Answering the question of “who will guard the guards” of the Fiat Fools becomes less and less clear by the day. Whether it’s Jean-Claude Trichet talking circles around the ECB’s bailout program this morning or Alan Greenspan doing his best to attempt to dislodge himself from the problems he perpetuated, this all seems to be heading the same way. The guardians of debt financed deficit spending are expediting their own demise.

This morning, Greenspan is making headlines by finally admitting that the US cannot Pile Debt Upon Debt Upon Debt in perpetuity. In a WSJ Op-Ed, he wrote: “Perceptions of a large U.S. borrowing capacity are misleading… Long-term rate increases can emerge with unexpected suddenness” and that the Big Government Keynesians of the world need a “tectonic shift” in the way that they have been purporting to guard their respective citizenries.

It’s US Open time, and even I will give Mr. Greenspan a golf clap for that. Well done. Listening to the facts and evolving the thought process is always a critical part of any risk manager’s evolution.

But will the guards who have been guarding Ben Bernanke and his Japanese style monetary policy hold the line? Do the guards of Washington’s Economic Officialdom care what the 84-year-old man of the money printing presses is saying this morning?

My risk management style isn’t to ask an academic like Larry Summers or Christina Romer in Washington for a leading indicator that might start answering these questions. I ask Mr. Macro Market. What we have seen in the last 3 weeks may not be a “tectonic shift” in the market, but it’s certainly a change on the margin. As Ben Bernanke and Tim Geithner refuse to address the debt and deficit problems in this country, the US Dollar has started to fall.

Since its highs in early June where we shorted it, the US Dollar has all of a sudden lost over -3% of its value. Now any currency trader (which John Maynard Keynes was himself) will quickly remind you that this is partly because the Euro has stopped going down. And I will, in turn, quickly agree – after all, market prices don’t lie; politicians do. All currency moves should be considered relative to each other.

This, importantly, only amplifies my point. As Europe admits that it has a deficit problem, implements austerity measures and, at the same time, the US Administration continues to maintain this ridiculous stance that America’s spending and debt problems are “different”, the Euro actually becomes relatively more credible than the US Dollar. Again, everything is relative between two fiat currencies that are manipulated by Fiat Fools.

Now I am certain that I will get a lot of emails on that statement, because it’s not patriotic to say the Euro is anything but a dog with fleas, but managing risk with your patriotism or politics only gets you in trouble so let’s take a step back and respect that in the last decade the Fiat Fools of US monetary policy have done nothing but debauch the value of the US Dollar. Pull up a 30 year chart of the US Dollar and the story is the same – a long term series of lower-highs and lower-lows.

Why is that? Where have the guards of fiscal conservatism gone? Who will guard the guards of the US currency debasement experiment from here?

Sadly, after seeing Ben Bernanke’s Fed add another $14 BILLION of mortgage backed security toxic waste to America’s liabilities this past week (taking the Fed’s balance sheet up to its highs of $2.35 TRILLION dollars!), there are fewer and fewer guards with credibility left.

My immediate term support and resistance lines for the SP500 are now 1099 and 1135, respectively. We remain short the US Dollar via the UUP.

Best of luck out there today and enjoy your weekend,

KM

Keith R. McCullough
Chief Executive Officer

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“China is a big country, inhabited by many Chinese.”

-Charles de Gaulle

I love that quote. Maybe Chuck Schumer should read it and respect who is wearing the pants in this Global Debtor/Creditorrelationship. He and his protectionist politician friends of the modern day Roman Empire should stop biting the hand that underwrites their lavish lifestyles and open their eyes to reality.

Our job as your Global Risk Manager is to make sure you don’t miss the big stuff. China is “a big country” that is turning into one really Big Creditor. While yesterday’s pre-open futures fireworks were fascinating to watch, closing prices are what matter in this interconnected world of risk management and, as we pointed out at this hour yesterday, China’s decision to let its currency appreciate is not good for the world’s largest debtor nation.

In terms of total reported and unfunded liabilities, the USA is pushing its debt toward a $57 TRILLION hole ($13.1T in debt that trades + $44T in unfunded liabilities like pension, social security, etc.). In lieu of this mathematical reality and an updated US deficit estimate of $1.6 TRILLION for 2010 (+14% y/y vs. 09’), President Obama’s budget director, Peter Orszag, has decided to leave the Cabinet.

Watch what the people in Washington Officialdom do folks, not what they say…  

Orszag’s decision certainly makes sense to us. He’s only 41 years old and apparently wants to attempt to maintain whatever remains of his actuarial credibility. Both the powers that be at Harvard and in China seem to agree with us on this reputational point:

1. “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” –Alberto Alesina, Harvard University Professor
2. “The Fed’s decision to buy” another $300B in Treasuries was called “irresponsible” because it “could weaken the dollar” – Li Xiangyang from the government backed Chinese Academy of Social Sciences

With all of Europe and Japan attempting to implement some form of austerity, the writing is on the wall now for the professional politicians of America. Either tell it like it is and do what newly elected David Cameron is going to do in the UK this morning or get out of the way (Orszag opted for the latter option).

No matter what we have the spine to do politically here in America, the Chinese have officially told us that they are going to march down their own path. Raising the value of its currency and “focusing on domestic demand” means exactly what that country “inhabited by many Chinese” said. They have focused on being the world’s growth engine of exports for plenty long enough. Now it’s time for them to hunker down, build their military, and focus on what they can control.

Sound familiar?

Of course it does - for any student of history at least. If you want to make a global macro call on where this Geopolitical Game of Risk is headed, don’t ask someone in Club Myopia for their “read.” Watch the data.

While the Manic Media was getting hyper about the futures being bid up 24 hours ago, this is what was happening in China:

1. Food - China, the world’s 2nd largest corn consumer, was forecast to become a net importer of the grain for the first time in 14 years (USDA data)
2. Discretionary Consumption - Companies focused on the Chinese market, including Beijing-based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said they would gain from lower import costs and stronger consumer purchasing power.
3. Incomes - More than 20 provinces and cities have overseen increases in minimum wages in recent months to help support incomes

This is what a country called America used to be able to do when it had a strong currency/strong balance sheet policy. This not only provided us the generational opportunity to becomes the world’s largest buyer, but also its largest creditor nation. With that status in hand, we saw wages, incomes, and consumption levels make this country the greatest place on the planet.

Sound familiar?

China is starting to get what Reagan and Volcker taught them – respect the cost and value of your sovereign currency and many great powers will be born out of holding Global Creditor status.

These are early days in Chinese policy shifting, but the Chinese have been here before. In different centuries than this, China has made up almost a third of global GDP (peaking at 32% of global GDP in 1839 when the War with Britain began; “The World Economy: Historical Statistics” by Angus Maddison). By the time Deng Xiaoping began to implement reform in the late 1970’s the Chinese had to dig themselves out of the deep dark hole of less than 6% of global GDP. 

In macro, markets, and in life, to understand where you are going, you better have a real good handle on where you came from. Don’t think for one second that the Chinese don’t see the forest through the trees here folks. They’ve seen the dark hole that politicians can lead a country into. “China is a big country” with a longer history than ours.

My immediate term support and resistance levels for the SP500 are now 1095 and 1139, respectively. In the Hedgeye Portfoliowe sold our position in Gold (GLD) at $123.04 and we’ll be looking to buy that back on the pullback. Immediate term TRADE support for the price of Gold is now $1220/oz.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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“I am for a government rigorously frugal and simple, applying all the possible savings of the public revenue to the discharge of the national debt; and not for a multiplication of officers and salaries merely to make partisans."

-Thomas Jefferson

In the spirit of searching for historical answers to the current problems in my head, I have started reading “Founding Brothers: The Revolutionary Generation” by Joseph J. Ellis. Suffice it to say, some of these common men rose up in the most American of ways – in a meritocracy.

American political history, like Washington and Wall Street storytelling, can be romantic. After all, for many, it’s all about twisting facts to fit a certain fiction that consensus can consume as believable. The reality of life seems to be that we never quite realize we are making history in the moment.

If Jefferson wasn’t partisan in his politics, John Adams wouldn’t have lost his marbles as many times as he did going off on Jefferson’s duplicity. Watch what people do, not what they say – we all have some form of partisanship in our lives. We are human. With that understood, it’s easier to consume the quotes of great leaders and storytellers at face value. The aforementioned Jefferson quote is brilliant when I consider it in the context of today’s conflicted professional politicians.

George Washington, John Adams, and Thomas Jefferson certainly had their political differences. Most men with a point of view do. One thing these “Founding Brothers” had in common, however, was their concept of frugality.

Per our friends at Wikipedia, frugality “is the practice of acquiring goods and services in a restrained manner, and resourcefully using already owned economic goods and services to achieve a longer term goal.”

You can tell stories about how frugal you may be but, within the context of our fore-fathers definition of the word, as an American society we have veered far from it. Being Rigorously Frugal is a solution that I’d like to put forth to this colossal American balance sheet mess. Everything starts with respecting the cost of capital and savings.

In the chart of the day, we’re showing the long term TAIL of the US Savings Rate going back to 1971 (when America was endowed with the world’s reserve currency). Today, US Savings are only 3.6% of GDP and, never mind “applying all the possible savings of the public to discharge the national debt”, our professional politicians get overly paid to perpetuate a levering up of our diminished savings!

As a reference point, Brazilian and Chinese savings as a percentage of GDP are approximately 4x and 10x America’s, respectively. Throughout the global economic downturn of 2008, neither of these countries fear-mongered their citizenry into believing that we were experiencing a “great depression.” Throughout the global economic upturn of 2009, both of these countries had the political spine to tighten monetary policy in the face of inflating prices.

Hopefully, you are already murmuring that China and Brazil are different than the US. From a growth perspective, they are – we get that. There is a huge difference between unlevered organic growth and levered deficit Spend-And-Hope growth.

Chinese savings (including corporate and household) have amassed to 49.5 TRILLION Yuan. Yes, that’s a lot of Yuan ($7.3 TRILLION US Dollars) – and guess what the wealth effect is for anyone bearing that Chinese Yuan is when China allows their currency to appreciate?

A large number of Americans living in the modern day Roman Empire of Fiat Fools don’t win here. If they aren’t Rigorously Frugal, that is. Gluttons of government sponsored over-consumption get taxed on anything we import from China or Brazil as the value of their respective economies and currencies appreciate. It doesn’t have to be this way, but until we change ourselves, the world will likely change us.

America is not alone in its addiction to cheap fiat moneys and over-consumption. The difference between America and the UK as of the past few months however is that the British are making the hard decisions that the “multiplication of officers and salaries” in the Officialdom of Washington aren’t willing to make.

Both Adams and Jefferson were more than half a decade dead by 1886 (they actually both died within 5 hours of one another), but that was the last time Britain had a Chancellor of The Exchequer as young as recently appointed George Osborne.

Osborne is my age and apparently agrees with my solution to this mess. This is what he had to say last night after he made cuts to healthcare spending, public salaries, housing subsidies, etc:

“I’m not going to hide hard choices from the British people… This is an emergency budget, so let me speak plainly about the emergency that we face.

Maybe Osborne and newly elected PM, David Cameron, aren’t as Rigorously Frugal as implied by the 79% asset allocation to cash I moved us to on June 9th, 2010; certainly not as Rigorously Frugal as the 96% cash position I moved to on September 18th, 2008; but, directionally at least, frugality is as frugality does.

The beauty of having cash savings is that you can invest those hard earned moneys opportunistically. Since June 9th, the SP500 is +3.6% higher. I have been investing opportunistically. I have been picking my spots. This morning the cash allocation in the Hedgeye Asset Allocation Model is down to 61%.

I’ve always been conservative in my finances. I’ve never used leverage in running a fund. This doesn’t make me the Street’s favorite hedge fund manager, but it certainly keeps me alive. That’s all this Rigorously Frugal believer of what I think I will call a “Revolutionary Generation” 30 years from now has to say about that.

My immediate term support and resistance lines in the SP500 are now 1087 and 1129, respectively. Yesterday, on market weakness, we raised our asset allocation to International Equities from zero percent to 3% by buying a country that has a very respectful savings rate - Singapore (EWS).

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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Risk management firm Hedgeye.com today hosted its Q3 Macro Themes conference call with Keith McCullough and other analysts at the firm. They focused mainly on three topics: American Austerity, Housing Headwinds, and Bear Market Macro.

After a brief introduction, Keith went through the three themes and took questions. We've compiled a round up of Hedgeye's general view of the third-quarter of 2010 and it's certainly not pretty. Here's what we took away:

American Austerity

• It's all about policy. It's hard to change the reality of debt because we're perpetuating higher debts and deficits
• Implement a higher return on capital in American's wallets.
• Fix tax revenue to fix spending
• Get ready for lower GDP growth
• Who is going to earn a return on 1% savings account??
• Taxes may have to go up a lot more in this country
• We are patriotic but the U.S. is a PIIG
• Short the S&P, Long gold

Housing Headwinds

• Shadow inventory not being counted
• Price vs supply, price vs demand
• Mortgage applications are "abysmal"
• We're back to 1995-1998 levels of demand; demand has consistently fallen since 2005 and is making new lows
• Housing prices can still slide

Bear Market Macro

• What is this 'Bear Market Macro'? Chaos theory, essentially
• All major markets are bearish
• Unless the S&P breaks out above 1144, we're staying Bearish
• Unless all sectors work together, the economies will falter
• Consumer leverage is BEYOND key in terms of GDP and growth
• The fiat fools are beyond ridiculous at this point
• David Rosenberg is gonna be right in regard to Treasury yields.
• Corn, grains good for the commodity plays, metals bad
• 1006, 1005 is the next support level for the S&P

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“Being ignorant is not so much a shame, as being unwilling to learn.”

-Benjamin Franklin

After finishing “Founding Brothers” by Joseph J. Ellis, I just started digging into “Benjamin Franklin - An American Life” by Walter Isaacson. Being a Canadian hockey player these days can feel golden at times, but not when I’m staring at the mountain that is my reading pile of American history.

On June 23rd I titled my EarlyLook“Rigorously Frugal” in reference to how the Founding Fathers of America considered government spending. By immersing myself in Franklin’s American story, one thing has already become crystal clear – on a relative basis to Thomas Jefferson, Benjamin Franklin lived frugally.

What I love about Franklin is that he wasn’t twirled up in the trees with the squirrel hunters espousing theories. He was a doer. If we had him running a portfolio in these globally interconnected times, I think he would find a way to do quite well. The man never stopped learning.

Ahead of our 4th of July weekend, here are 3 more Franklin quotes that I think fit our financial times:

1. “We are all born ignorant, but one must work hard to remain stupid.”
2. “A penny save is a penny earned.”
3. “By failing to prepare, you are preparing to fail.”

As a practical matter, I think a lot of Americans are already moving down the right path when it comes to preparing their personal balance sheets for the inevitable. While the US government literally does the opposite of these 3 Franklin quotes, Americans are proving to do what they’ve always done – evolve.

On the first point, dropping Americans 401ks to 201ks and then fear mongering them from the mountain tops of political life did exactly what professional politicians preached – it scared the hell out of the American people. Whether it be from a mortgage application or a US equity fund flow perspective, Americans are proving that they haven’t remained “stupid” enough to make the same mistake twice. They aren’t buying houses or stocks.

On the second score, while the savings rate in this country has its own problems in terms of how it’s calculated, there is no doubt that the direction of cash in savings accounts of fiscally conservative Americans is going one way – up. Earlier this week we saw the US savings rate bump back up to 4%. Everything starts with a penny saved (after buying our Gold position back yesterday, our allocation to cash in the Hedgeye Asset Allocation Model is now 58%).

On the final point, whether it was preparing for a slowdown in Chinese or US economic growth, a lot of our clients were proactively prepared for the swoons that we’ve recently seen in global equities. As of last night’s close, China and the US are down -27.3% and -7.9% YTD, respectively. Those who were unwilling to learn that there is a global interconnectedness to fiat currencies and the Debtor Nations that create them are learning now.

Yesterday we had our largest audience ever for a quarterly Macro Themes conference call. As Big Alberta (Daryl Jones) and I broke bread with our American teammates for dinner last night in New Haven, there was a sense of graciousness that I have not yet felt in my investing life. We are grateful for our clients giving us the opportunity to build a new American business. Without their confidence in us, we wouldn’t have been able to build while we learn.

I realize that sometimes I sound overly doomsday’ish when I write about the state of this American union – and to be clear, I remain bearish on all that has become the Officialdom of Perceived Wisdoms in Washington’s economic department – but I am also humbled and proud to have the opportunity to be industrious and frugal in building this American business. I may not make the money I used to make working on Wall Street, but I am certainly happier.

My immediate term support and resistance levels for the SP500 are now 1012 and 1069, respectively.

Enjoy America’s 4th of July with your families and friends,

KM

Keith R. McCullough
Chief Executive Officer

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Keith McCullough spoke with Bloomberg Television this morning about Tim Geithner's handling of the situation with China.

• 0:35 Tim Geithner's decision not to label China a currency manipulator is his best decision on China to date.
• 1:25 This olive branch will move the yuan higher, 3-6%, over the next 18 months.
• 2:15 Politicians are incompetent and they should not be listened to on the yuan.
• 2:25 In the end this yuan rise is a negative for consumer spending.

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People are nervous about the long term outlook, and they should be.” 

-Paul Volcker

I had a great day of meetings in New York City yesterday. It’s always additive to get the City’s pulse on risk management matters. The biggest risk that I found myself talking about was one that I haven’t spent enough time writing about – the risk associated with the world’s largest current bubble imploding – short term US Treasuries.

This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.

Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.

I could go off this morning on the credit quality of US Treasuries, but Jim Grant has done a much better job than anyone else on this topic and I’ll point you to his most recent “prospectus” for US Treasury bonds as required reading. His conclusions weren’t bullish.

Back to the tail risks embedded in the lowest Fed Funds and Treasury yields ever, I’ve started to frame this up using 3 D’s – The Disguise, The Dare, and The Delay.

What risks are implied when the US government is setting unsustainable and unreasonable expectations that rates will stay at ZERO percent forever?

1. The Disguise– considering an ever forever disguises financial risk and unintended consequences.
2. The Dare– both the Fed and Treasury are effectively daring you to get out there and lever yourself up with either “cheap” liabilities or chase “higher yielding” asset classes than the “risk free” rate of zero percent.
3. The Delay– bad actors who are bad stewards of capital get their bad capital allocation decisions (losses) socialized and this delays much needed restructuring of their balance sheets.

When US interest rates push higher – and they will when you least expect them to – you are going to see a 3D version of massive global asset management blowups. This time, no one can say “no one saw this coming.”

Getting the timing right on this is what it is – difficult. That’s why we call this a tail risk. There is a less than a 3% probability of US Treasuries imploding today, or next week. But… every day that 2-year yields hit their lowest level ever, creates a higher probability over the intermediate to long term that Treasury rates go up.

In terms of immediate term leading indicators for interest rate risk, I think the best one for a country’s fiscal and balance sheet health is its currency. Watching the US Dollar hit lower-immediate-term lows yesterday hopefully got President Obama’s attention.

The US Dollar Index is down for the 6th consecutive week and has lost -6.7% of its value since the beginning of June. For the world’s alleged “reserve” fiat currency, that’s a lot and we, as your Risk Manager, think you should be paying acute attention to this.

As a reminder, our Q3 Macro Theme of American Austerity submits a very straightforward thesis – the US Dollar is going to become what the Euro has been for the last 3-6 months as both the US and the world come to grips with the reality that both the US deficit and debt to GDP ratios are going to look a lot like Spain’s in 2011.

Put another way, assuming that the US Dollar is going to be an American entitlement that we can use and abuse as the world’s reserve currency forever, and that short term US Treasury Bonds will trade at their highest prices ever and forever, is no longer reasonable.

My immediate term support and resistance levels for the SP500 are now 1077 and 1121, respectively. We shorted the US Dollar on June 7th via the UUP etf and remain bearish on both the US’s fiscal position and its balance sheet health.

We’ll be doing a full slide presentation and conference call on American Sovereign Debt and the implications of the aforementioned tail risk that’s mounting on the short end of the Treasury curve in a few weeks.

Have a great weekend and best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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Keith McCullough of Hedgeye has a piece in Forbes about how the initiation of this second round of quantitative easing may signal the collapse of the American economy.

He goes into grave detail about why the market is now too obsessed with Bernanke and the Fed's movements, how government spending is bringing the U.S. to a cataclysmic position due to our rising debt to GDP ratios, per economists Rogoff and Reinhart, and plenty more about the perils of government spending.

But what McCullough, and many of those trying to stop the Fed and government from spending more, don't offer are solutions, or more specifically any explanation for how their desired austerity will actually lead to a more robust economy.

Bear in mind, that right now there aren't signs that the government is in deficit trouble. There are long-term worries, yes, but treasuries are at record low yields.

The best argument for austerity is that without that bitter discipline, it will be too easy to postpone the deep structural issues we have.

Still, the US is in an unemployment crisis right now. Adding thousands of more unemployed to that heap isn't going to make conditions for those unemployed any better.

In the end, cutting during the economy's darkest hours, whether from Fed measures or more fiscal options, won't put people back to work. It will put more people on the streets. This isn't just theory, It's what's going on in Europe right now.

And the signs suggest that a prolonged unemployment crisis in America will be seriously destabilizing. The tea party is associated with being anti-tax (TEA is an acronym for "taxed enough already"), but that same strain would emerge differently under a GOP administration with continued massive unemployment.

So it's a tough case to make that the government ought not to anything.

Now that doesn't mean the new Works Progress Administration, but a good start would be to move money from inefficient places (defense has been suggested before) to more efficient programs, like high speed rail, new roads, a more efficient electrical grid, and others.

Of course, that task is made harder by folks screaming about the deficit and spending, as if that were the end-all, be-all.

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CNBC's senior economics reporter Steve Liesman and Keith McCullough, the chief executive of Hedgeye Risk Management, have been going at it on Twitter this afternoon.

The fight appears to be over the economy, sources, TV air time, the dollar, the end of the world, who's right and who's wrong, blah blah blah. 

But it's entertaining to say the least.

Here's the first shot.

Liesman fires back.

McCullough dishes it right back.

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Hedgeye Risk Management's CEO Keith McCullough is picking a fight with the Federal Reserve in his morning newsletter titled "Bernanke's War."

McCullough writes:

I’ve fought the Fed before, and won. If no one else wants to strap it on and do this, I’ll officially wear the C and stand on the front lines of this war. If the last 3 weeks of Down Dollar is the best you have Bernanke, game on.

“Don’t fight the Fed.” Yep. Got it. That and Madoff’s returns are about as believable as the Hunger Games. On our Q2 Macro Themes call in early April we’ll show you a full slide deck of what fighting the Fed at intermediate-term market turns has saved you:

Then again, back in December of 2010, McCullough blogged the exact same thing:

Conventional wisdom says don’t “fight the Fed.”

We live in unconventional times.

Not only do I think it’s a great time to pick a fight with the Chairman of the Federal Reserve, I think we can win.

Let’s go in reverse order and start with the US Dollar first. Last week the US Dollar was up another +0.86% for the week.  It closed higher for the 5th week out of the last 6 and +5.3% higher than its YTD low established on November the 4th (post QG2 and the midterm elections).

We’ve been long the US Dollar (UUP) since November the 4th in anticipation of both global inflation accelerating and globally interconnected risk compounding. We’ve also had a keen eye on the macro calendar catalyst pending in the new year of both Ron Paul being able to subpoena the Fed and Republicans having a mandate for American Austerity measures.

That was December 14 he wrote that. Well, here's a chart of the dollar index starting on December 14, 2010. It proceeded to tank all the way through September 2011.

We don't know, it's possible that he sold quickly after that, or that he will say that since he bought the dollar in November 2010 that he was right that it jumped after that.

The bottom line though: The last time he made a similar pronouncement, with dollar bullish tendencies, the dollar fell.

Read the full newsletter here >

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Competition is pretty much ubiquitous with the high-flying world of finance.

So it shouldn't come as a surprise that many stellar athletes either work, or have worked, on Wall Street. 

We've compiled a list of top athletes ranging from professional football players to Olympians working in positions from sales trader to hedge fund manager. 

Some are still working in finance, while others have retired. We even found one who left banking to pursue a career as a pro athlete. 

If you think someone should be included on the list, feel free to send us an email.

Keith McCullough

Wall Street Career: McCullough is the CEO and founder of Hedgeye Risk Management.  Prior to starting Hedgeye, he was a hedge fund manager at Carlyle-Blue Wave Partners, Magnetar Capital, Falconhenge Partners and Dawson-Herman Capital Management.  His first Wall Street gig was working as an institutional equity sales analyst at Credit Suisse First Boston.  McCullough regularly appears on CNBC. 

Athletic Career: He captained the Yale Varsity Hockey Team to a Division I Ivy League Championship.

Source: Hedgeye

Gerald Donini

Wall Street Career: Donini is currently the head of equities at Barclays' offices in New York.  His previous experience includes working at Lehman Brothers from 1998 to 2008.  Prior to Lehman, he worked at Deutsche Bank, Credit Suisse First Boston and O'Connor & Associates. 

Athletic Career: Donini was the shot put champion at Brown University.  He still holds the school record.

Source: BrownBears.com / Bloomberg

Jeff 'The Killer' Kilburg

Wall Street Career: Kilburg is a senior development director at Treasury Curve, LLC.  He began hs career at the CBOE and later moved to the CBOT, which is now called the CME Group.  Kilburg regularly appears on CNBC.

Athletic Career: Kilburg was a four-year football scholarship student-athlete at Notre Dame.  

Source: Treasury Curve

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We were wondering if things might be a bit awkward on the set of CNBC's "Fast Money" these days ever since Keith McCullough started appearing on the show as a contributor.

That's because McCullough, the CEO and founder of Hedgeye Risk Management (formerly known as Research Edge LLC), used to rip into the the show's on-air talent and producers both on his blog and in emailed client reports. 

Sometimes he would call the on-air talent --  or in his words "the crackberry analysts"-- "donkeys" and "monkeys" and liken the show to a "circus" or a "zoo."  He also constantly pointed out that "Fast Money" substitute host, trader Joe Terranova mispronounces China calling it "China-r."

McCullough wrote these comments from 2008 to 2010, a time when the show's regular panelists included (and still include) Pete Najarian, Jon Najarian, Tim Seymour, Guy Adami and Karen Finerman.  Anchor Dylan Ratigan left the financial news network in 2009 and Melissa Lee took his place as host. 

McCullough's blog is hidden behind a paywall, however, some of the quotes are publicly available on his  "Diary of a Hedge Fund Manager" blog archive and the others can be tracked down through an advanced search on Google. 

McCullough did not respond to multiple requests for comment.  CNBC, on the other hand, did have something to say about it.

"The intellectual combat and differing opinions that are expressed on Fast Money and throughout the day on CNBC provide viewers and investors with valuable insights and balanced analysis," said Brian Steel, CNBC's VP of public relations.

So maybe it's all water under the bridge.

Still, you'd think it would be a little bit tense on the site.

In November 2008, McCullough likened Fast Money traders to Don King, of boxing world fame.

"The Chinese etf that we are long (FXI) had a +15% up day yesterday, and it literally dizzied the dudes on CNBC's "Fast Money." There is no better way to characterize their explanation for this week's rally in China other than hilarious. These cats don't have a process - that we know. But man oh man is it funny to hear these traders get all amped up and "fundamental" - they remind me of Don King."

November 14, 2008

McCullough also gave Fast Money fans specific warnings about what would happen if they followed the show's advice.

"George Washington said, "few men have virtue of withstanding the highest bidder."He obviously would not have seen eye to eye with the producers of CNBC's "Fast Money", or any "momentum" oriented hedge fund manager, where the objective is plainly stated as "buy high, and sell higher!" ......... We're setting up for the aforementioned inflationary trends to fade. "Fast Money" fans, if you're levered long everything energy/basic materials, brace yourselves!"

November 14, 2008

Source: Research Edge "EARLY LOOK: FADING FAST MONEY" email

In fact, he encouraged viewers to stop listening to Fast Money and pay attention to him instead.

"Instead of listening to what one of the crackberry "Fast Money" dudes was telling you to use as a "China signal" (something about store checking Chinese imports at Wal-Mart?), stay in the home team's corner here "

November 14, 2008

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With the Stanley Cup finals happening, we have decided to share with you our best hockey players in finance list. 

It appears Wall Street firms have a penchant for hiring these super competitive athletes.  We tracked down a bunch of former professional hockey players and college stars who are now working on Wall Street as traders, financial advisers, hedge funders and bankers.  

So check out our round up of some of the best ice hockey players in the financial services industry.  (Note: These names are not in any particular order).  

If we're missing any big names, feel free to send an email to jlaroche@businessinsider.com with your nomination.  Please include a photo. 

Clark Gillies

Finance Job: He's a senior vice president at Hilton Capital. 

Age: 59

Position: Forward

Hockey Team(s): New York Islanders and Buffalo Sabres

Highlights: While in the NHL, he played in 958 games, scored 697 points and spent 1023 minutes in the penalty box. He's a member of the Hockey Hall of Fame.  He also won four consecutive Stanley Cups with the New York Islanders. 

Source: Hockeydb.com

Patrick Hickey

Finance Job: He's an investment advisor at RBC. He's a Drexel Burnham and Bear Stearns alum, too.

Age: 60

Position: Foward

Hockey Teams: Toronto Maple Leafs, New York Rangers and Team Canada (1978).

Highlights: While in the NHL, he played in 644 games, scored 404 points and spent 351 minutes in the penalty box. 

He was also general manager and governor of the American Hockey League affiliate of the Los Angeles Kings.  He was named American Hockey League Executive of the Year in 1992. 

Mike Richter, who runs a private equity fund, was a goalie for the New York Rangers when the won the Stanley Cup.

Finance Job: Richter is the founding partner of $100 million private equity fund Environmental Capital Partners. 

Age: 46

School: University of Wisconsin (He later attended Yale after retiring from pro hockey)

Position: Goalie

Hockey Team(s): U.S. National Team and the New York Rangers. 

Highlights: He was selected by the New York Rangers round 2 No. 28 overall in 1985 NHL Entry Draft.  He played for the Rangers from 1988 until 2003 and lead to team to winning the Stanley cup in 1994.  

He's a member of the U.S. Hockey Hall of Fame and his Jersey hangs in Madison Square Garden.

He represented the U.S. hockey team and helped the team capture the World Cup Gold in 1996 and an Olympic Silver Medal in 2002.

Source: Hockeydb.com

We've seen Jim Cramer upset, but this is on a whole other level.

In the last week Cramer has gone to war on Twitter and on his website, The Street, to respond to attacks from buy-side researcher Keith McCullough, of Hedgeye. At question is Linn Energy (LINE), an energy company whose stock is set for a merger.

The problem with that, according to Barron's and McCullough's Hedgeye, is that Linn's annual dividend will increase after it merges with another energy company, Berry Petroleum. Barron's and Hedgeye (as the firm said in a call last week) both believe that the increased dividend will be hard for the company to support.

Cramer disagreed. He's long the stock, and for the record, it is on a tear — up over 6% in the last 5 days.

Now on Wall Street, when two (non-billionaire hedge fund manager) individuals have a disagreement about a stock, they politely wait and see (talk smack amongst themselves) what happens.

Not so with Linn Energy.

For days McCullough and his friends took to Twitter to call Jim Cramer every name under the sun. Perhaps it was to call attention to their research, perhaps it's because we don't have the Libor scandal to entertain us all  summer.

But this is what it looked like:

Cramer apparently blocked him.

Not to be outdone Cramer took to his website to explain his position, and accused McCullough and co. of "orchestrating one of the most well-orchestrated raids" on the stock he'd ever seen.

From The Street:

I have to congratulate them, even though I would have thought such a thing in violation of the 1934 Securities Exchange Act. I get that because when I studied law I learned that FDR appointed Joseph Kennedy to the SEC because he knew that Kennedy orchestrated Linn-like raids and FDR wanted them stopped. Perhaps what's happened is that you are now allowed to do what FDR didn't want and get away with it. I don't think it is right, but I don't make the rules...

Long after these guys are driven from the game, I will be writing here, just like I have for 31,000 columns before this. I urge those who doubt my resolve to ask anyone who has ever met me. Ever. Or go read Confessions of a Street Addict, which came out before many of these attackers were in middle school. I think they might find that I am, let's say, combative? Resolute? Implacable? A little bit of all of those. I wouldn't be that way, if it weren't a huge amount of fun for me to play D then go on the O and because I genuinely believe that I can help people -- not destroy stocks and people and firms -- but actually help people make some money in a good, honest and decent way.

Drops mic, walks off stage...

The final word in this argument, however, hasn't come from Cramer or McCullough. It has come from on high — from the hallowed halls of Omega Advisors.

Yes, Leon Cooperman reiterated his confidence in Linn's ability to pay the dividend on CNBC yesterday.

From The Street:

"We have done our homework," Cooperman said of Omega's investment in Linn Energy. He also referenced similar Omega investments such as Atlas Energy (ATLS_) and Atlas Pipeline Partners (APL_).

Suddenly, McCullough doesn't seem to want to talk about it. He's moved on to touting a new media channel his hedge fund is launching, which may be the reason he started this nonsense in the first place.

Back to your Excel spreadsheet.

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Two of Twitter's most notorious characters, Keith McCullough, the CEO of Hedgeye, and anonymous financial blogger ZeroHedge got in an epic spat on Twitter last night and it's still continuing this morning. 

ZeroHedge is famous for his relentless gloom and mockery of the financial and political system.

McCullough is known for trumpeting his endless #timestamps, and for attacking the traditional Wall street system.

ZeroHedge started the fight when he called out McCullough on his 26-year-old energy analyst Kevin Kaiser's bearish call last week on Kinder Morgan.  A lot of people on Wall Street have been criticizing that call that knocked $4 billion off the company's market cap. 

McCullough defended his analyst by pointing out that they were right on Linn Energy ($LINE).  ZeroHedge snapped back by hinting that they got the idea from The Value Investors Club, a website where people post different investment picks.

Then McCullough whipped out his classic "timestamp" phrase on ZeroHedge telling him to timestamp his trade ideas.  ZeroHedge used that opportunity to make a swipe at Hedgeye's business model saying that they are "based on daytrading hedge fund hotel ideas without capital at risk." (Burn!)

The fight continues to get nasty.  You can see all of the Tweets below: 

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An under-the-radar financial blog is at war with one of the most polarizing companies in finance: Hedgeye Risk Management. 

Stay-at-home dad Carmine Pirone runs the blog, named Cramer's Shirt. It's a shout-out to "Mad Money" star Jim Cramer, who memorably duked it out with Hedgeye's CEO, Keith McCullough, on Twitter in 2012.

In March of this year, Pirone assessed Hedgeye's business actions, and specifically McCullough's, labeling them as fraudulent on his blog. Pirone claims McCullough passes himself off as a trader, especially through his language on Twitter. On top of that, Pirone says, McCullough doesn't accurately report his "trades"— he picks and chooses what wins to tell his followers.

But Hedgeye's terms of service and McCullough have addressed that. McCullough doesn't trade. No one at Hedgeye does. The company is an "actionable investment research" agency, aka a tip sheet, not a fund with a portfolio. And it claims to hold transparency in high esteem.

Pirone republished his allegations again on April 7. Four days later, a law firm representing Hedgeye slapped him with a lawsuit. The complaint seeks a jury trial on Hedgeye's defamation claims against Pirone for his accusations of fraud. In late April, he was served with an amended complaint, that time with a summons to appear in court attached.

Hedgeye Risk Management

McCullough is a former hedge-funder — as you can read in his book "Diary of a Hedge Fund Manager"— but Hedgeye doesn't run any money. The employees there spend their time analyzing and researching markets, not buying and selling. Instead, Hedgeye sells research to clients, likely both institutional investors and mom-and-pop day traders, the latter for a subscription fee of $29.95 a month. Institutions pay a much heftier sum, anywhere from $40,000 all the way up to half a million, according to McCullough. He's said that institutional investors account for 90% of Hedgeye's subscriber base.

What's helped give McCullough's research firm a recognizable name in the finance world is his self-assured, combative Twitter presence. McCullough does not hesitate to insult or attack people, and often gleefully ridicules the brokerage firms and analysts he describes as "Old Wall Street." Add CNBC's Steve Liesman (and, more generally, CNBC, from whose air McCullough has been banished), Doug Kass, anonymous finance blogger ZeroHedge, and the Fed to the list of people and institutions that McCullough has battled.

McCullough also uses Twitter to tease a Hedgeye subscription service, #RealTimeAlerts, which provides clients with buy, sell, short, and other signals on a variety of different securities. Potentially addressing the recent controversy, McCullough has even tweeted screenshots of exactly what subscribers see. 

The horror that is Real-Time Alerts (18 for our last 19 on timing signals) #timestampedhttp://t.co/OrsZdH0vSl

— Keith McCullough (@KeithMcCullough) April 14, 2014

As any businessperson would, McCullough uses his presence on social media to market himself and his company. But his tactics have attracted considerable criticism, most notably from the man his company is suing.

The Prospective Hedgeye Client

Pirone, who became interested in finance at about age 12, now has two daughters, a 3-year-old and a 6-month-old. He often scrolls through CNBC articles with one hand — while the other holds a baby bottle. Pirone openly discloses he hasn't been employed since 2011, but he day trades (although not frequently). 

"I think three times in my life I’ve sold in the same day because it was an option ... maybe 'swing trader' is a better term for me. I usually hold stuff for years, sometimes, especially stocks," Pirone told Business Insider.

Pirone became interested in Hedgeye and its real-time alerts. But before subscribing, he decided to follow the recommendations and see how they did. 

"I was, like, 'Well, this is crap.' It doesn’t take very long to figure it out. Surely people are on to this, but I was watching and [McCullough] seems to be suckering these people in," he said.

Hedgeye has declined to comment on the lawsuit.

How McCullough Presents Himself

In the simplest terms, Pirone thinks McCullough and his company don't tell the whole truth about their real-time alerts' recommendations. From McCullough's feed, Pirone claims that a newbie to "finance Twitter" might even think that McCullough trades. Remember, he doesn't.

Last time I had a bad day like this was the best day of the yr to sell

— Keith McCullough (@KeithMcCullough) February 11, 2014

In fact, I enjoy short selling so much, I'm going to short something else here in #RealTimeAlerts

— Keith McCullough (@KeithMcCullough) February 12, 2014

"I mean, if you can merely give out paper trades and charge an admission price to see them, why take the actual risk of investing real money, right? In that sense he's smarter than all of us," Pirone wrote of McCullough in a post.

At some point — Business Insider hasn't confirmed when — Hedgeye appeared to change the language explaining its real-time alerts (as CalibratedConfidence noted on ZeroHedge via screenshot). “Every day, you will receive email alerts in real-time whenever Hedgeye CEO Keith McCullough makes any trade,” the company’s previous explainer read.

The version currently reads: “Receive email alerts every day in real-time whenever our proprietary model flashes a Buy or Sell signal.” 

Moreover, the day after Pirone's post was published, Hedgeye posted this video, making its intentions with real-time alerts clear. "This is what I would do in this security, right here, right now, timestamped. That's it. It's not a portfolio. I don't run a portfolio," McCullough noted.

Hedgeye's SEC public disclosure says the same: Neither McCullough nor anyone else at the company trades. An SEC technical-assistance associate says the file or revision date isn't available to the public on these documents.

McCullough also argues that, regardless of his tweets, he can't hide from Hedgeye's subscribers.

"I've shown over 2,700 signals since 2008. If you’re a subscriber, you can actually see all of those signals ... Every single timestamp we’ve ever had is open for anyone to look at," McCullough explained on Yahoo Finance's Breakout.

Hedgeye's real-time alerts also omit details — dividends, trading commissions, capital-gains taxes — from financial advice, Pirone points out. In fairness, though, the firm's terms of service, last updated in September 2012, specifically say that the company doesn't account for those factors.

 A Question Of Performance

Pirone analyzed Hedgeye's real-time alerts record from 2013. "The weighted average return of all trades last year from Jan 1, 2013–Dec. 11, 2013 was .3382%, that’s not 33% that’s a fraction of ONE PERCENT," he wrote in his post.

Soon after, McCullough tweeted his "reality," which didn't address his 2013 real return. His scorecard showed information from 2014 without percentage gains.

Real-Time Alerts reality (the score) YTD #timestampedhttp://t.co/6d7t9fyqpl

— Keith McCullough (@KeithMcCullough) April 13, 2014

"Perhaps my favorite was when after he had gotten his face torn off shorting TWTR [Twitter] this past December, he shorted again near the all time high. When it fell back down to the low 60’s soon after he of course let everyone know that he shorted it at 73, but he conveniently left out he covered $1 lower just north of 72, not in the low 60’s," Pirone wrote.

A Fund Once Powered By Hedgeye

While Pirone's blog analyzed McCullough's hypothetical success, Griffin Asset Management had taken it a step further. In 2012, the company offered a fund based on McCullough's real-time alerts. The aim was to create a low-volatility fund with exposure to numerous asset classes from around the world, Doug Famigletti, president and CIO of Griffin, told Business Insider. 

"We attempted to take the trades and create a portfolio," he said. "And obviously whenever you take any trade recommendation you need to take a lot of things into consideration"— including the various types of assets and the ratio between longs and shorts.

The trading didn't go well. Griffin used a back-tested model to scale real-time alerts into workable trading. But the project lasted only a little over a year.

"With any sort of investment management product, you have to have a product big enough to be sustainable to make the costs not very high, especially on a fund format," Famigletti said. "You're trading quite a bit, to move exposures around, which works much better in a fund format, than in a single account format."

Famigletti said that Griffin may not have seen the success it had hoped for because of size limitations, even though he and his associates control about $400 million for both institutions and individuals. 

"I went into that partnership thinking we could build something very successful. And I think the reason we weren't as successful as we wanted to be was because we're not that large of a firm. I, personally, think that there are a lot of big firms right now that are running mutual funds that look a lot like Real-Time Alerts," Famigletti said.

Full disclosure, as Famigletti wanted: He has more than a passing professional relationship with Hedgeye and McCullough. He roomed with Daryl Jones, Hedgeye's current director of research, back in the day in New York City, and the three of them played hockey together. Famigletti's endorsement even appears on the back of McCullough's book.

The High Cost Of Dividends And Taxes

As previously mentioned, Hedgeye doesn't spend much time addressing dividends or taxes. But both can, of course, affect returns.

"If over the next year, you have more longs than shorts, you're going to have a net positive from dividends, as long as the yield is comparable," Famigletti noted. "It really depends on which securities are held."

On the other hand, if you short often, as McCullough seems to encourage, paying dividends can gouge profits.

"Taxes are an incredibly important piece of that because it's all short-term gains. If you make 10% and it's all short-term gains, you're paying it all out in marginal-income tax rate. So that's important," Famigletti said. 

But he also doesn't feel Hedgeye has a responsibility to account for these factors in its real-time alerts' profits. Wall Street brokerage firms, for example, do not. Nor do many mutual funds, hedge funds, or other investment companies that tout their returns.

"I mean, Goldman Sachs publishes a conviction buy list. They move that around quite a bit. When they say they gained 20% in a stock, they don't say [whether] you took gains based on taxes," Famigletti said.

Who's Signing Up For Real-Time Alerts?

While Hedgeye hasn't revealed the precise demographic composition of its clients, McCullough has said 90% of them are institutional investors. And the company's ADV Form, a public disclosure filed with the SEC, reveals even more.

Eric Chaffee, a law professor with expertise in securities regulation at the University of Toledo, helped Business Insider interpret the document. "It is fair to say that the company is reporting no individual clients .... [and] appears not to focus on serving individuals," Chaffee told Business Insider in an email after reviewing the document. 

The screenshot below outlines the rest of Hedgeye's clients, as the company reported them.

But then there's Will Hassell, a 17-year-old subscriber to Hedgeye's Morning Newsletter, from Huntsville, Alabama. He signed up a little under three months ago but has followed McCullough and Hedgeye on Twitter for about nine months. 

"I kind of almost use [McCullough] as contrast to some of the other analysts and ideas out there ... a more macro view rather than stock specific," Hassell told Business Insider. 

Hassell considered subscribing to real-time alerts. The low cost attracted him. But on second thought, he realized the tool wouldn't really help him. 

"Especially with real-time alerts, [McCullough's] doing a lot of shorting. With me, I’m more cautious of shorts ... I’m not really a big day trader, so for me, it’s not that useful," Hassell said.

So far, though, Hassell feels good about his subscription to Hedgeye's newsletters. They've benefitted him on a larger scale.

“For what I use it for, I think it has given me more of a clarity. I have gone and done stuff that he’s recommended, like being long on the euro. That’s been paying off a lot," he explained. "It's not really stocks. It’s generally more macro level."

Considering Hassell's subscription, the company's SEC reportings may not be accurate, according to Chaffee. "Which is especially troubling considering the warning at the top of the form," he said. That warning reads: "You must keep this form updated by filing periodic amendments."

A technical-assistance associate at the SEC told Business Insider that the search function would return the most recent information on Hedgeye that the SEC possesses. The site, updated nightly, would also show any amendments. Hedgeye, however, did submit its brochure with the SEC on March 14, 2014. That document states that the company "welcomes individual investors to subscribe" but doesn't report any currently. It also reports "no material changes as of October 2013."

Further, individual, potentially less-experienced traders such as Hassell — to whom the $29.95 subscription fee might appeal — won't have resources nearly as large as institutions like Griffin. And even this firm struggled to apply real-time alerts to a real portfolio.

Famigletti, however, thinks the benefit depends on how subscribers apply real-time alerts to their trades. In his mind, most people interested in subscribing would understand the complexities of the market. 

"I caution anybody that thinks they can subscribe to something for $29.95 a month and think it's going to make them rich," he said. "I've been in this business for 17 years, and a lot of people who read blogs, subscribe to newsletters, they're not totally naive."

Hedgeye Goes After Pirone

Hedgeye's lawsuit, brought by Raipher D. Pellegrino & Associates, alleges that Pirone falsified the accusations of fraud and intended to harm McCullough's and Hedgeye's reputations. And as a result, the company has lost subscribers and money.

In defamation cases, the burden of proof lies with the plaintiff, First Amendment lawyer Bob Corn-Revere, a partner at Davis Wright Tremaine LLP, told Business Insider. "The basics don't change ... But whether you're dealing with a public figure or private figure matters a lot," he said. 

To prove that damage, Hedgeye would likely have to release company information, such as subscription numbers and profits, in court. As a private company, Hedgeye's apparent success has created conjecture in the finance and media worlds about both.

"Generally, if someone is claiming they've been injured, they have to document that injury," Corn-Revere said, although he didn't want to speculate on the case. 

Based on employees' recent tweets, however, the opposite seems true, another point that CalibratedConfidence brought to light.

Great day for subscriber growth @hedgeye !

— Daryl Jones (@HedgeyeDJ) March 10, 2014

If this case goes to court, which seems unlikely, those tweets could come back to haunt Hedgeye. "Whenever you're collecting evidence about whether or not a company has been harmed, you're going to look to occurrences, online or not, to bring up in depositions," Corn-Revere said.

Pellegrino's firm filed the suit as of May 5, 2014, but wouldn't comment on an ongoing case. Pirone immediately started a PayPal account to help raise money for his fight against Hedgeye.

Below is a copy of Hedgeye's original complaint against Pirone. On Page 2, Section B, there's a typo — that the plaintiff will pay damages to the plaintiff. The second suit had the same mistake, according to Pirone. 

"I'm not concerned about this case at all. I don't see how it could possibly go to trial. On page two, it looks like they're suing themselves ... The most annoying part is that I have to spend time addressing this," Pirone said.

SEE ALSO: Two Of The Most Notorious Folks On Twitter Got Into A Huge Fight Last Night

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