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Charting the Chinese Yuan: Bullish "Trend" Remains...

In terms of our ‘Hedgeye Asset Allocation’ model, if there is one thing that 2008 has proven, it's that cash is king. All cash in this increasingly inter connected global marketplace of factors is not created equal, however...

The US Dollar's resurgence from the thralls of forever is pretty well known at this point. The Japanese Yen tacked on another +7% this week, making it one of the more impressive cash stories of the back half of the year. But the 2008 stability MVP in the currency market remains the Chinese Yuan (see chart below).

Given China's well publicized slowdown in economic growth this year, you have to be impressed with their currency's resilience. The new world order of economics and balance of power are changing. If you refuse to acknowledge that, your headache will not abate. China has $1.9 Trillion in currency reserves. Amongst the few kings that remain, their cash (and its valuation) seems to depend on the rest of the world, the least.
KM

Eye on Trust...

My friend, Paul Kedrosky, posted a very profound image (see below) this morning on his site in a note titled, "White Powder, Threats, and Financial Services Companies"...

This is what American leadership at "Investment Banking Inc." has brought us to. It's embarrassing, and sad, all at the same time.

Building back the trust of the people who's money Wall Street manages will be a process that will take time.
KM

WMS: YOUTUBING AHEAD OF EARNINGS

Gaming stocks have gotten blasted since WMS reported their fiscal Q4 on 8/5/08. WMS is no exception, down 37% in almost 3 months. The suppliers have actually outperformed their operating brethren, if I can take the liberty of using the term “outperform” for such a dismal performance.

The world has changed. The credit crisis has hammered the sector. WMS is in great shape financially but its customers are not. That is a problem. I fully expect management to capitalize on the opportunity to lower guidance.

I think it is instructive to keep in mind what was said in the prior quarter’s release and conference call. To make it easy to examine the sequential change in management’s tone, I’ve put together a table detailing fiscal 2009 and Q1 guidance. I’ve also YouTubed some important metrics discussed last quarter in preparation for Monday.

• Open orders for new gaming machines and platform conversion kits totaled more than 11,700, which represents 40% of expected fiscal 09 unit volume guidance and is 700 units ahead of last yr's compare
• Average selling price guidance for fiscal 09 represents a 3-8% increase over realized results in 4FQ-08.
• They expect to continue to charge for the value-add in their products, contrary to the belief that discounting runs rampant
• Typical revenue breakdown: Q1 20-21%, Q2 23-25, Q3 25-27%, Q4 28-30%

In addition to revised guidance, the open order metric will be critical to understanding underlying demand vs. last year but also to gauge the conservatism in management’s guidance. For example, open orders exceeding 40% of next 12 month expected demand could be indicative of conservative guidance. Hopefully, that will be the case.

Fiscal 2009 guidance given last quarter

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ASIAN CURRENCY DIVERGENCE CONTINUES

The Yen has gained 7% against the dollar so far this week as the “borrow cheap, lend dear” game ended for arbs and the great deleveraging continues to drive depositor towards perceived safety. Japanese conglomerates will be scrambling in the coming months to adjust to a new “strong Yen” environment as they watch the currencies of their export markets and manufacturing bases swing wildly –some will be caught flat footed and lead to serious margin compression.

On the other side of the ledger, the collapse of the Rupee is further indication that the wheels are coming off the track for the “I’ in BRIC. With a greater than 20% slide against the dollar YTD and foreign currency reserves that have declined by 15% since May the risk for the government in India is a flight of any capital. This rapid decline stands to offset any positive impact that the oil correction could have on inflation in this import dependent nation. There will be no easy policy fix for PM Singh’s coalition as they face the abyss.

Andrew Barber
Director

S&P LEVELS

Emotions have changed but our math hasn’t.

We held the BUY trade line at 858.33 yesterday and we continue to today. Our ultimate threshold to capture capitulation selling is 820 –at that point we are buyers of any quality stock that people will sell us.

We like sales, especially in stocks.

Andrew Barber for KM

OUTLAWING GRAVITY PART 2: “TEMPORARY RELIEF”

The SEC release 34-58809, dated October 17th was just brought to our attention by our compliance department. It seems that NASDAQ has suspended the application of continued listing requirements related to the bid price and market value of shares until January 16, 2009.

According to the filing, “Nasdaq believes that this temporary suspension will permit companies to focus on running their business, rather than satisfying market-based requirements that are largely beyond their control in the current environment”.

As with the short sale ban, our immediate concern is that this type of temporary rule change carries the risk of unintended consequences that might dwarf the problems it was intended to relieve.

Andrew Barber
Director

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