The Barking Lot

“One dog barks because it sees something; a hundred dogs bark because they heard the first dog bark.”
-Chinese Proverb

Thank God for Chinese proverbs and the cash on their balance sheet. As consensus continues to doubt China’s economic resolve, the Shanghai Stock Exchange continues to run the consensus short sellers right over.

When this week’s cover of The Economist is titled “Asia’s Shock”, the notion that being short China is a unique concept renders itself quite reckless. The Chinese own the two things that American investment bankers need most, cash and liquidity. They are putting that cash to work, surgically via stimulus, and seeing some impressive results. Last night, stocks in China added another +2.3%, taking their 3-day Year of the Ox move to +5.8%, and putting the Chinese stock market up +15.5% for 2009 to date. Yes, as the great Tim Russert would say, “This is BIG.”

Why is it big? Could there be fundamentals supporting McCullough’s China barking? Aren’t the Chinese making up the numbers like Madoff did? These are all questions that inquiring momentum chasers would now like to know the answer to…

Everything in global macro that really matters happens on the margin. The delta in the Chinese PMI report last night improved significantly. China printed a real time manufacturing reading for January of 45.3 versus 41.2 reported in December and, importantly, significantly above the November lows. China’s central bank governor, Zhou, followed up with comments to the world’s media that the $586B stimulus plan is proving to have “initial positive results.” Indeed, Mr. Zhou, indeed…

This Chinese re-acceleration is not a surprise to us. We have been calling for both a sequential and seasonal lift in Q1 (versus Q4’s lows) for China for some time now. Greenspan and Clinton taught China this “go to” fiscal/monetary dance move – should that move work for America and no one else? Of course not – that’s silly. The reality is quite simply that this is one of the largest domestic stimulus plans in economic history – and it will have an impact!

Cutting rates, cutting taxes, and infusing stimulus is not the trifecta that an investor should be shorting AFTER a stock market has crashed. However fleeting the fundamentalists believe the “re-flation” trade may be, stocks can go up, a lot longer than the short seller can remain solvent. We know this - we have learned that lesson the hard way. We also know that being one of a hundred economic dogs barking about the same negativity is as dangerous a place to be as when they were chasing each other’s tails in the land of positivity.

Stocks in Brazil seem to be starting to discount that the government could start to provide aggressive economic stimulus as well. Brazil’s stock market raced +2.8% higher yesterday, taking the Bovespa Index to 39,746, and +5.8% for 2009 to date. While Brazil is underperforming the Chinese gold medalists, they are “re-flating” just the same.

Back to America, the question remains – can the US stock market continue to “re-flate” from her November lows? So far, at every opportunity to be proven wrong, The New Reality bulls have run the bears right over on that front. After yesterday’s +1.6% move, the SP500 is now trading +11.4% from that November “Liquidity Crisis” low of 752.

Impressively, this US portfolio “re-flation” has occurred with some of the horse and buggy whip US Financials all but going away. Can the US stock market continue to make higher lows without the financials? Yesterday it certainly did. In the face of a great move in Consumer Discretionary and Healthcare, the XLF (SP Financials Sector) was down another -1.8%.

The reality is that once you take stocks to zero (and make no mistake, Obama will let more banks go there), the mathematical probability of putting higher lows in an index containing those zeroes goes UP. While it may be entertaining for the manic media to keep you abreast of the daily malfeasance of investment banking executives, they represent less than 5% of the SP500 at this point. Been there, done that – let’s get on with the capitalism show before the Chinese really leave us behind.

I continue to worry that the Chinese will leave some Americans behind – mostly because they should. Some of the broken handshakes that our bankers issued to Chinese officials will never be forgotten. This is partly why the US Bond market is shaking right now (we are short US corporate bonds via the LQD etf; see our virtual portfolio at, and yields continue to push higher. When the largest US customer of Treasuries stops buying American, and invests their cash savings at home, it affects the math!

In a roundabout way, this is great for the next generation of American capitalists. Those who haven’t been barking with the dogs in the crowd – those who haven’t levered themselves up and own both their own liquidity and duration of their investments. As the bond market goes down, and the US yield curve steepens, that good ole fashion American industry of borrowing short and lending long starts to work again – if I am the only dog barking up that big ole oak tree of capitalism, I’m cool with that.

Into the US market’s weakness earlier this week I moved my position in US Cash back down to 79%. I know, call me wild and crazy getting all invested and stuff… patience will continue to pay dividends – unlevered returns on cash will remain king of The Barking Lot.

Best of luck out there today.

The Barking Lot - etfs020409


Wynn Resorts held a spot conference call to outline a cost reduction program that will save the company $75-100MM annually. Salary reductions and hourly cutbacks in Las Vegas will drive the majority of the savings. Management wouldn’t comment specifically on earnings other than to say that there will be a lot of “non-recurring” expenses.

The value added of this call to investors is limited. Why not at least provide some preliminary operating numbers? One explanation could be that they are still working their way through what expenses to classify as non-recurring versus being included in operating EBITDA. Starwood recently reported a quarter with over $350 million in “non-recurring” expenses that will no doubt benefit margins in future periods. WYNN definitely laid the groundwork for some big charges.

Margins are the wild card for Q4 and 2009. We are pretty sure the top line will be well below formal estimates as will true EBITDA. Street consensus revenue estimates of $737MM and $3.50bn for Q4 2008 and full year 2009, respectively, are probably each too high by about 10%. This is not a new call for us. We wrote about a potential earnings shortfall back in our 12/10/08 post, “NOV MACAU MARKET SHARE ANALYSIS”, and again in our 1/9/09 post, “WYNN: IT’S NOT JUST Q4 I’M WORRIED ABOUT”. After last night’s call, our call will now be the consensus call.

Finally, A Flurry of positives For The US Stock Market...

"Senate Republican plan proposes cutting U.S. Corp. tax bracket to 25% from 35% for 1 year"

While this isn't a new conceptually, the timing matters relative to the market's expectations. God knows people are bearish out there, but the US Dollar and VIX are breaking down here through important levels of support. These factors, combined with tax cutting rhetoric, are going to be hard for the bears to fight.

Keep moving out there - we've been investing our oversized cash position. If the US$ goes down, stocks are going up.

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In “THE INDUSTRY THANKS YOU, MR.ENSIGN” (01/13/09), we highlighted the benefits that highly levered gaming companies may see coming their way as a result of a piece of legislation proposed by Nevada’s own Senator John Ensign. Ensign’s Senate Bill would have eliminated the negative tax ramifications of buying back discounted bonds. Unfortunately, SB33, due to a lack of sway on the part of the Republican Senator proposing it, has little chance of passing.

While not quite as attractive, a provision allowing companies to spread the tax bite of discounted buybacks over eight years is included in the stimulus package currently being wrangled in Congress. When all is said and done, it’s possible that some or all of the tax on bond buyback gains could be eliminated altogether. This provision would provide significant incentive for heavily leveraged companies to buy back their bonds. For example, a company buying back bonds at 60 cents on the dollar would de-lever by about 26 cents (40 cents less the tax bite). If the provision is in place, the company could defer that 14 cent tax.

This provision is almost written for the gaming sector. BYD, MGM, ISLE, and PNK all face potential leverage covenant breaches, but have ample liquidity to buy back discounted bonds. Less taxes = more de-levering.

Rory Green
Junior Analyst

Eye On Australia: Is Hope All That Remains?

At a 45 year low with more room to go, will it be enough?

As forecast by most, the Reserve Bank of Australia lowered its benchmark cash rate by 100 basis points today. At 3.25%, Aussi rates are at a 45 year low, and now they can only hope that easing credit combined with the governments $27 Billion ($42B AUS) stimulus package will provide a cushion down under. The ASX 200 rose +0.35% on the news .

For Glenn Stevens the game plan will now shift to “wait & see” as the next step in recovery is largely out of their hands. Although at this stage the RBA still has room to cut, the only prospects for sustaining growth at levels seen over recent years rest on a rebound in external demand for base metals and energy & agricultural commodities. In effect, the rate cuts and stimulus package in Australia, at best, may help keep the country on a relatively even footing while it waits for Beijing’s stimulus package to kick in.

We will keep our eye on Australia and the EWA etf. While we admire Governor Stevens for the resolve he showed during the bubble period, for now we are not involved in Australian equities. We will be watching for signals that are beyond his control.

Andrew Barber

Daschle Withdrawl: What's The Macro Call?

From our Healthcare Sector Head, Tom Tobin:

"This is positive for healthcare. Delay to name a successor when timing is everything in getting major Heathcare Reform done. Also negative for the dollar as entitlement spending remains a long term budget risk."

KM Macro Read Across:

1. Healthcare (XLV) is now +1.7% on the day - we are long that ETF.
2. US Dollar (UUP) remains weak today - we are short that ETF.
3. US Dollar weakness augurs positively for US stocks in the immediate term.

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