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US Market Performance: Week Ended 11/28/08

Index Performance:

The 5 Day Squeeze:
DJ +16.9%, SP500 +19.1%, Nasdaq +17.0%, Russell2000 +22.8%

November 08A:
DJ (5.3%), SP500 (7.5%), Nasdaq (10.8%), Russell2000 (12.0%)

Q408’ To Date:
DJ (18.6%), SP500 (23.2%), Nasdaq (26.6%), Russell2000 (30.4%)

2008 YTD:
DJ (33.4%), SP500 (39.0%), Nasdaq (42.1%), Russell2000 (38.2%)

WHEN INSIDER BUYING IS NOT A GOOD SIGNAL

It’s rare that insider buying is not a good sign. BYD insiders have been buying which I do think is a good signal to investors. BYD management has bought and sold well and the two key individuals there are buying (BB&BB), Bill Boyd and Bob Boughner.

The ASCA situation is a bit different. It’s no secret that that Ray Nielsen and the Craig Nielsen Trust would probably like to sell the company. This has been the investment thesis for quite awhile. Unless management wants to spend their retirement years in jail, there probably isn’t a deal in the works over the near term. Now that’s a signal, although probably not the one investors were looking for.

Next, let’s take a look at how management has done historically on its own stock. The results there are certainly not as good as BYD. The chart below shows the recent buying and it’s pretty obvious that management should stick to running casinos, which they actually do very well.


China: Jump on the positive "Trend"

If you missed the party bus, it doesn’t mean you have to miss the party. China’s FXI gave us a +12% move on Wednesday.

Our China long intermediate "Trend" was further supported yesterday with the announcement from China’s State Council of increased efforts to encourage enterprises to upgrade technology and engage in independent innovation. Key industries such as steel, auto, ship manufacturing, petrochemical, light industry, textile, nonferrous metals, equipment manufacturing, and information technology were highlighted by the Council.

Again, this is very proactive policy coming from the Chinese. In the last days China announced that they are cutting taxes, slashing interest rates, and issuing a $586B stimulus package. With high single-digit GDP growth combined with low single-digit inflation in 2009, China’s ETF (FXI) is a buy.

Matthew Hedrick
Analyst

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Eye On Japan: The Ghost Of Stagnation Past

CPI is down but Shirakawa opposes more rate cuts. Will he hold the line?

October Japanese consumer inflation came in lower for the second month in a row yesterday, reaching 1.9% year-over-year as lower commodity prices eased pricing pressure. Other circumstances could have provided an opportunity for a rate cut but, with the overnight call rate already at 0.3%, BOJ governor Shirakawa has publicly pledged to abstain from further cuts, favoring other strategies to increase liquidity. He can’t cut from zero – how strong a stance these Japanese economic ones are!

This policy course may become more politically difficult for the BOJ with mounting evidence that the recession is deepening rapidly. Data released this week registered a month-over-month decline of 3.1% in industrial production in October and rapidly slowing export data in recent months suggest still further production cuts ahead. Meanwhile domestic demand is slowing rapidly with household spending down 3.8% in October –the eighth consecutive monthly decline, and retail sales for October that were lower by 3.3% year-over-year.

Unemployment dropped to 3.7%, the lowest level since July 2007 and the second lowest since 1998. While at face value this data looks surprisingly positive, all is not as it seems. Japanese employment data does not acknowledge the division between permanent employees and temporary workers, the so called “haken”, who work outside the pension and benefits social-safety-net (see our September 7th post). Toyota’s recent factory layoffs, for instance, were confined to temporary workers, who will not be fully factored into official unemployment data. The figure also excludes those who have ceased looking for a job –a rising group among less educated young adults in large cities.

With the memory of the “lost decade” fresh in the minds of policy makers, the reluctance to take rates to zero again makes simple sense. One alternative measure to spur growth was a corporate tax break on repatriating offshore income proposed by the tax commission. Ideas like this seem to be superior to cutting rates further but, with rates already at a mere 30 basis points, the damage may already be baked in Japanese Stagnation cake.

We are short the Japanese equity market via the EWJ ETF and the yen via the FXY ETN. We sincerely hope that Japan does not suffer the same prolonged stagnation that it experienced in the 90’s, but if you read our work you know that we do not consider hope a valid investment thesis. We will remain short as long as the data tells us to.

Andrew Barber
Director

Eye On The Euro Zone: That Shrinking Feeling

EU Inflation plunges, so does confidence…

While we were celebrating the holiday several key economic data points emerged from Europe.

Consumer inflation in the Eurozone declined by the largest margin since 1991 as November CPI declined to 2.1% year-over-year from 3.2% in October and unemployment increased. This decline will provide more ammo to the ECB in its rate cut decision next Tuesday. The market has largely factored in a 75 basis point cut.

New Eurozone sentiment survey data released yesterday plunged lower than anticipated by surveyed economists with many of the major EC confidence indicators coming in the lowest levels for the past decade:

• Economic Confidence: Oct. 74.9 vs. 80 in Sept. (Revised)
• Consumer Confidence: Nov. -25 vs. -24 in Oct.
• Industrial Confidence: Nov. -25 vs. -18 in Oct.
• Service Confidence: Nov. -12 vs. -6 in Oct.
• Retail Confidence: Nov. -13 vs. -13 in Oct.

Euro Zone unemployment for October picked up by 0.1% since September to reach 7.6%. An outlier to the positive side was Germany. November unemployment in Germany arrived at 7.5% (seasonally adjusted), unchanged since October while ILO definition figures from the Federal Labor Office actually showed a decrease of 0.1% to 7% in October.

This job data fits with our thesis on the German economy which we remain long via the EWG ETF. We continue to believe that Germany is the best competitively positioned major economy in the EU. Stability and liquidity is what Germany is long – we like both.

Andrew Barber
Director

Keith McCullough
CIO

India: Don't Ignore The New Reality

Violent attacks in Mumbai overshadow key economic data points…

The terror in Mumbai appears to be finally abating. Indian Commandos freed a reported 200 hostages from the Oberoi-Trident Hotel today and only a handful of remaining terrorists are believed to be still holding out in the Taj Mahal and Tower hotels. The official death count now stands at 124, with over 350 wounded. During the crisis two key data points emerged which were overshadowed by the violence:

• Indian GDP data for Q3 released today arrived at 7.6%. That’s the slowest growth rate registered in 4 years. Finance Minister Chidambaram continues to stick to his guns that the global downturn will be offset in full by increased domestic demand bringing growth back to 9% next year.

• Weekly Indian wholesale Price levels released yesterday showed a slight decline to 8.84%, the fourth consecutive weekly decline (spurred by lower commodity prices). With WPI now having declined over 9 of the past 10 weeks, this data should clear the way for further rate loosening by the central bank.

Clearly Security threats are nothing new to India which has witnessed violent terrorism, both domestic and foreign, in every decade since independence. The nature of these attacks however, planned with military precision, suggests the work of a sophisticated terrorist organization. The fact that Pakistani based Lashkar-e-Toiba’s has denied involvement or endorsement combined with the choice of targets - aimed at hotels catering to foreigners and a Jewish center, raise the unwelcome possibility that is this is the work of a new element in India –possibly one allied with extremists from outside the subcontinent.

Regardless of security issues and the inflation reprieve provided by falling oil prices, we continue to view the Indian economy as structurally flawed and strongly question the rosy economic forecasts that Prime Minister Singh’s administration clings to with looming elections. In a nation heavily dependent on imports for many basic commodities where more than 25% of the population lives below the poverty line ($0.40 per day by Indian government metrics) we discount the ability of consumption to increase to government target levels.

We have been short India for the better balance of 2008. After covering our prior position profitably, we re-shorted India today (via IFN). We’re not sure what the world sees, but we are very sure as to what we see. This is a socialist bureaucracy that will be coming under increasing economic pressure.

Keith McCullough
CIO

Andrew Barber
Director

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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