SP500 Levels Into The Close...

Of the last 14 position changes we’ve made in the last 3 days of trading, all of them have been buy or cover. This is good. This isn’t easy and I, for one, know what it feels like to be on the wrong side of a “Trade” like this.

Importantly, the SP500’s resistance was overcome today - now that resistance becomes support (down at the 884 line). This is why I covered my SPYs and went long them. The facts don’t lie in momentum modeling. As the facts change, I do.

See the chart below. There is plenty of runway left until we run into the big negative “Trend” line of intermediate resistance. We won’t go there in a straight line, but that line is +14% higher up at 1052. There is immediate term “Trade” resistance at 925, but that line is a moving target that moves higher every time I refresh my models.

I have moved my US Equity invested position up again today.


The price of the average slot machine has rocketed up 45% over the last 6 years. The advent of cashless gaming, new casinos and expansions, and strong consumer demand for gambling helped fuel an environment for the suppliers to aggressively raise prices. Higher prices, of course, translated into gross margins taking off. Gross product margin for IGT climbed over 9% over the same time period. Good times indeed.

The times they-are-a-changin’. The big guy, IGT, has lost a lot of market share and is starting to flex his muscles. Right now IGT’s power is confined to committing its balance sheet to more aggressively help its customers finance their slot purchases. This effort should buy some market share.

Where IGT could really leverage its low cost manufacturing would be in the pricing arena. It’s debatable whether this would be a good move for IGT, but there is no question the rest of the industry would suffer. IGT is in the midst of a cost reduction program which could offset some of the gross margin pressure from lower pricing.

An aggressive pricing strategy combined with better game development could allow IGT to regain some of its lost market share, which has been considerable. However, as we pointed out in our 11/24/08 post, “SHARING THE MARKET”, IGT’s market share has actually stabilized the last few quarters. I expect IGT to continue to redirect R&D towards game development.

IGT may have an opportunity here to steal share through pricing which, successful or not, would likely be detrimental to the industry.

Pricing and gross margins have been on a rocket ship

Eye On The UK: Bad Math!

When I tried to download the Bank of England’s financial liquidity Index last week, the information spit out by my data provider looked incorrect.

The Index, which is calculated on a daily historical basis but only released twice a year for the BOE Financial Stability Report, is a measure of liquidity in the UK financial system drawn from a host of different capital market and credit data. When the numbers that my data program spit out didn’t add up I went straight to the source and downloaded it from the BOE website --only to discover that the files there were also incorrect. The statistical office at the bank was kind enough to have the Index recalculated and posted with the final level coming in slightly lower than when it went up initially on October 28th.

With the refreshed data charted against the benchmark rate, the conclusion is clear: lowering rates did not returned liquidity to the market prior to November. Last week’s abysmal HBOS house Price data -which came in down over 16% year-over-year, illustrates that the 150 basis points cut since then have not moved the needle either.

We are negative of the UK’s prospects, and will continue to remain so until the facts change. Currently, price momentum in the EWU is underperforming our long position in Germany (EWG), because the facts play to the negative side of the UK’s balance sheet position.

Andrew Barber

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Chart Of The Day: Devalue, Re-Flate!

Alongside the last note we just posted on the VIX breaking it’s short term momentum line, we have a very powerful macro signal developing in the US Dollar. On a breakdown and close below $86.34, our Investment Theme of “Re-Flation” will be very hard to ignore.

With the US$ Index trading down -1.2% at $85.82 so far here today, you are seeing a real time example of what I mean. Commodities are raging higher alongside stock markets and foreign currencies, globally. “In the end, we’re all dead”, but in the immediate term, FREE money has it’s short term correlations. Just because we have seen this movie end poorly before doesn’t mean we cant watch it live again.

This is what you get when you have a politicized US Federal Reserve working with a Goldman leverage banker. “Heli-Ben”, drop moneys from the heavens, and “Re-flate”!

Positive intermediate “Trend” line support for the US$ is all the way down at $81.85. That’s a long way from here…

VIX: Bullish Breakdown

The VIX is one of the simpler inverse leading indicators for the SP500, that’s why we painted the line in the attached chart green. This is the green light for getting long US equities. This is one of the multiple factors that had me cover my SPY position and buy it long today.

As you can see the VIX and both the Jan & Feb futures are trading below the 50 DMA and well below realized 30 day vol. While I do not use 50 day moving averages for anything other than painting a behavioral picture of how the masses could react, these lines have relevance on days like today.

The VIX is currently down -3% at 58.23. It could go a lot lower and, as a result, US equities higher. I have an immediate term “Trade” target for the VIX of 52.79 – that’s another -9% from here. There’s huge support for the positive intermediate “Trend” in volatility down at 47.52.

The Chart that the bullish narrative will have stamped all over CNBC...

Its all about the narrative. Now that momentum factors are shaping up positively, these simple and undebatable pictures will find be showing at a theatre near you.

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