'Twas the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse…’
-By Clement Clarke Moore or Henry Livingston
Much like the newfound bearishness that has become pervasive on the Street, there is plenty of authorship controversy on who actually wrote the script for this global bear market crash or “The Night Before Christmas.” Was it Roubini or Houdini? Was it Livingston or Moore? Is it a poem or a true story? These are the questions dancing “with visions of sugar plums” in all of our heads.
The poem which was published on this day, anonymously, in 1823 is also known by historians as “A Visit From St. Nicholas”, and no matter who’s story you side with, there is no argument about the narrative… with his wife and children sound asleep, a man awakens to noises outside his house. It doesn’t have to be Christmas for this story to rhyme with your every morning. These are the days of our global macro lives.
Yesterday, “away to my window I flew like a flash”, and thought I saw “Chinese Reindeer.” This of course turned out to be my Dad’s dogs, and China cutting interest rates. Unfortunately (for me) my immediate term investment call was wrong - the Chinese locals didn’t agree with my conclusions; they wanted deeper rate cuts than 27 basis points and they sold off the Shanghai Stock Exchange last night for its biggest down day in the last five weeks, taking the market down by -4.6%. We have been long China since the October lows, so this didn’t have candy canes dancing in my head this morning.
Broadly, stocks in Asia were weak. Even though he has no more clothes, Japan was closed for the “Emperor’s Birthday.” Hong Kong closed down -2.8% on one of its lowest volume days in two years. Low volume selloffs do not, on their own, confirm a change in the direction of my momentum models, but absolute price changes like this are critical to examine, always. We are long the Hang Seng via the EWH exchange traded fund, and we have critical support for that index at 14,037. After its two-day -6.1% correction, the market is “nestled all snug” above support at 14,220.
As the facts change, we will. So stay tuned for tomorrow. We host a daily 830AM EST “Macro” conference call with clients, and this very much a fluid situation that we monitor on a line by line basis across 27 “Macro” risk management factors in my model.
European stocks have a bit of a bid this morning but markets, like those in Asia and the USA, are trading very thin, so it is more difficult for me to make conclusions with the kind of conviction my readers expect of me. Sometimes the best thing to do in markets is to do nothing. In Europe, since we sold our long Germany position and covered our UK shorts, that’s exactly where I have us – doing nothing.
European equities look the worst of the “Big 3” regions (Asia, USA, Europe), primarily because of the “Re-Flation” Trade. The output of a crashing US Dollar is a “re-flating” Euro. As the euro appreciates, their prospects for a 2009 recovery in exports to Asia darken. The world is flat now, and those countries devaluing their currencies (USA, China, Russia, etc…) are putting themselves in a competitively advantaged position on that important export scorecard.
The Russian Ruble will be an interesting story to tell on 2008’s “Night Before Christmas.” Despite the US Dollar selling off hard in the last few weeks, Putin’s reindeer Rubles have been falling as precipitously as the men formerly known as the “oligarchs.” With the ruble trading down another -1% to 28.46/USD this morning, and 10 of the top 25 Russian “oligarchs” having allegedly had margin calls as of late, CNBC should be deploying their star “trader”, Guy Adami, to Siberia for a consulting gig. “Fast Money’s” latest commercial has poor Guy warning investors “don’t buy on margin!” Instead of the Santa pants, I think someone slapped the lawyer pants on these entertainers – I couldn’t make this stuff up if I tried.
From Russia, to Saudi Arabia, there seems to be some “hopes that St Nicholas will soon be there.” We posted a note on our portal yesterday titled “Leading Indicators For Oil's Pending Re-Flation” (www.researchedgellc.com, 12/22), and as early a leading indicator these two stock market’s were in July that the Russian tea parties were not going to end well, they may very well be signaling a short term bottom in oil prices now. The Russian stock market is up again this morning, taking it’s “re-flation” to +20% from its October lows, while the Saudi Tadawul Index has appreciated +13% in the last month. We’re a long way from that $147.27/barrel “Fast Money” peak of July 11, 2008. In terms of this global economy’s most basic need, what goes down, will eventually go up.
Commodities in general look like they are ready to bottom. My models have the following buy prices for the CRB Commodities Index, Oil, and Gold: $214, $38.26, and $801. The CRB outperformed US Equities again yesterday, and this was primarily because gold continues to flash an early “re-flation” signal, trading higher once again on the week to date. Oil bears are everywhere all of a sudden “And mamma in her 'kerchief, and I in my cap” are looking forward to their overdue year end settling down “for a long winter's nap.”
“Twas the night before Christmas”… when all through the global markets house, no more “Fast Money” creatures are stirring, not even Bernie’s spouse.
Best of the season to you and your families,
SPY-S&P 500 Depository Receipts – Front Month CME S&P 500 contracts were up slightly in trading this morning, reaching 878 on the high side prior to 6:30am.
USO - U.S. OIL FUND – Front month NYMEX Light Sweet crude contracts were flat this morning trading in a range from 39.05 to 40.04 prior to 6:30 AM.
VYM – Vanguard High Dividend Yield- Spokesmen for Bank of America (VYM: 3.27%), dismissed a Financial Times story that reported BAC had canceled plans to raise capital by selling its stake in China Construction Bank under political pressure from Beijing.
DIA –DIAMONDS Trust Series – Front Month CBOT DJIA contracts rose in trading this morning, reaching 8,573 on the high side prior to 6:30am.
EWT – iShares Taiwan — Taiwan’s industrial production fell 28.35% in November Y/Y with export orders declining an unprecedented 28.51% from a year earlier.
EWZ – iShares Brazil — Stocks fell the most in three weeks as commodity prices declined. President Lula da Silva calls on consumers to step up spending.
EWH –iShares Hong Kong – The Hang Seng closed in negative territory to 2.75%, at 14220.79. Aluminum Corp. of China Ltd, the nation’s number one producer of metal, fell 9.9%.
FXI –iShares China —The CSI300 closed down today 4.89% to 1918.95. Stocks fell on concern that the interest rate cut to 5.31% was too small.
FXY – CurrencyShares Japanese Yen Trust - The Yen is up slightly against the USD this morning to 90.115.
Keith R. McCullough
CEO & Chief Investment Officer
'Twas the night before Christmas, when all through the house
Now for a second one. So why are we getting a little more positive? Answer: Cash flow. Certain lodging companies have the opportunity to curtail timeshare development and harvest the cash from this business. Timeshare is a hugely capital intensive business during the growth phase but highly cash generative as it winds down. Sure, timeshare has contributed to GAAP EPS growth over the past few years and that will wind down too, but book earnings have become almost meaningless. Even EBITDA multiples are becoming less important as a valuation technique here at the trough.
So why favor MAR over other timeshare/lodging operators such as HOT or WYN? There are a number of reasons. First, MAR hasn’t yet announced that it is reducing timeshare capex, so that catalyst is potentially ahead. We believe timeshare cash flow will turn positive in 2009. Second, MAR’s lodging business model is fee based and, thus, more defensive and not capital intensive. Cash flow is less sensitive to RevPAR changes than for a hotel owner. Third, MAR is the most diversified across lodging segments. Finally, MAR is the largest market cap company in lodging right now. Our macro/quant analyst (and our CEO), Keith McCullough, has identified market cap as a favorable factor right now.
MAR will report in late January and investors should be prepared for lower guidance. Thanks to some recent Johnny-come-lately downgrades, they probably already are. Cash is king here, not EPS.
It would be hard for anyone to convince me that the Russian Trading System and Saudi Tadawul Index didn’t proactively predict the oncoming tsunami in the price of oil. As “speculators” (or plain dummies) bought into the media’s manic “Fast Money” June/July highs, the local Ruskies and Saudis said “sold to you” (see chart).
Now, as the same “Fast Money” CNBC traders whine about “Deflation”, the Russian and Saudi stock markets continue to make higher lows. The RTSI is +18% from its freak-out lows, while Tadawul has “re-flated” by +13% in the last month.
We weren’t part of the mania that bought into oil prices at $145/barrel. We bought oil last week between $37-39/barrel. We are Research Edge.
Research Edge LLC
Specifically, the package outlined five points: (1.) Building more homes for low-income families, (2.) Encouraging home buying, (3.) Supporting property developers to deal with the changing market, (4.) Enhancing the role of local governments in stabilizing the real estate market, and (5.) Improving surveillance on the property market.
The plan will help incentivize new buyers. Under the new package home owners for at least 2+ years can sell their homes without having to pay taxes. This is a change from the previous 5+ year rule. And if owners sell their homes within 2 years, they will only pay tax on profits from the sale, not the actual sales prices.
Further, the Chinese government said it will work with commercial banks to extend credit to developers based on property demand. Already the government has encouraged people with “smaller-than-average” apartments to buy a second one.
Property prices in 70 major cities in China rose 0.2% in November Y/Y, the lowest numbers since the government began publishing the figure in July, 2005. A total of 2.7 Trillion Yuan (387.5 Billion USD) was injected into real estate development in the first 11 months of 2008, up 22.7% Y/Y. Yet total sales were down 18.3% Y/Y, with residential sales down 18.8% Y/Y during this same period.
We continue to be long China’s ETF FXI and applaud the government's proactive capitalist policy making.
Chinese stocks are up +20% from their lows because they are leading indicators – that’s what stock markets are. The -70% peak to trough crash in Chinese stocks proactively predicted this global economic tsunami. Now they are speaking to the global risk managers, softly, telling them to cover their China shorts.
There’s a new leader in global finance emerging in The New Reality. She has $2 trillion in reserves, and she’s wearing the pants. Alongside your Christmas cocktails, you should be thinking about the ramifications of as much. British merchants who didn’t see the USA coming in the early 1900’s will remind you that history has a tendency to rhyme.
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