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SPX: TESTING OUR LIMITS

Our breakaway level on the S&P 500 is 949. If the market closes above that line we have an upside target of 1024. If it closes below that line our downside target is a lower low of 875.

In general, the data this morning held more bullish indicators than bearish:

· The VIX declined yesterday with a closing level of 53.11
· Yesterday’s volume was comparatively light yesterday –less than half the level we had seen during the capitulation sessions in previous weeks
· Sentiment indicators continue to come in at historic lows
· Credit spreads continue to show signs of contraction
At the time of this update, our marginally bullish stance is being tested, but we rely on a disciplined process and will adjust our market levels accordingly.

Andrew Barber
Director

INVESTNG IN THE DELTA

Capitalism rising in the east and setting in the west – Todd Jordan

With Keith McCullough unavailable today, it is once again my turn at bat. I recently spent a week in China so it seemed to be the appropriate topic for this morning’s note.

“Go west young man” – John Soule, 1851



Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.

So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.

I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.

But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.

In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.

Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.

I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.

Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.

The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.

Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.

The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.

Todd Jordan
Managing Director


ARGENTINA AND PNK: A FOLLOW UP

Below I’ve re-posted a note by Andrew Barber that provides an overview of the current Argentinean crisis. During the last financial crisis there, unemployment rose to 25%. EBITDA at PNK’s Casino Magic Argentina dropped from $9 million to $2 million in 2002. Food for thought.

STEALING THE FUTURE

In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.

Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.

Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.

Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.

As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.

Andrew Barber
Director
I personally own shares of PNK

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STEALING THE FUTURE

In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.

Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.

Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.

Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.

As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.

Andrew Barber
Director

PINNACLED IN ARGENTINA

The Argentinean stock market plunged 11% today on news that the government will nationalize private pensions to the tune of $29 billion. Government bonds are now yielding 24%. The fall in commodity prices is already taking its toll on an economy that generates the majority of its export revenue from raw materials. The government’s cash grab could be another step to a governmental and/or economic collapse.

While buried in the international section of the PNK’s EBITDA tables, Casino Magic Argentina actually generated almost $15 million of EBITDA in 2007, or 9% of total company EBITDA. This is a real number and it is very conceivable that this EBITDA could go away.

FXI: PANDAS

The China bear narrative has kicked into full gear from the front page of the Wall Street Journal’s dire warnings to the constant chatter on financial television about the chilling impact on the global economy.

The glass half empty argument is straight forward: GDP came in at 9% - significantly below growth levels in previous quarters and below consensus estimates. Industrial Output is cooling -something that the commodities markets (particularly copper) have already been telling us for months, and the global slowdown is hurting Chinese exporters. Today the Ministry of Finance announced increases in export rebates for manufactures of consumer products like textiles and toys to help offset slowing demand from the US & EU. A bleak picture.

Our, somewhat contrarian view is that all of this signifies a shift in the nature and trajectory of Chinese growth, but not its direction. Retail sales held in strong for September as both consumer and producer inflations levels came down. It looks clear to us that China’s economy will redirect towards domestic consumption as its primary driver. This transition will not be without hiccups - greater seasonality and more modest near-term growth rates for starters, but it should also enjoy the benefits of a more diversified base and the potential for sustained long-term growth as domestic consumer markets in the central and western provinces continue to develop.

Currently we are continuing to hold our FXI position although it is almost 4% below our entry point. We often find ourselves taking a contrarian stance, but that is not because we seek it out. If the fundamental data points for our China thesis deteriorate than we will adjust our opinion, but for now the glass appears more than half full to us.

Andrew Barber
Director

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