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Brazil: "Re-Flation", South American Style...

I bought Brazil yesterday for 3 reasons:

1. It was down (I buy red)
2. They are next up to cut rates aggressively
3. It’s the high beta “Re-Flation” Trade

That’s it. The Brazilian exchange traded fund, EWZ, has just shot up to +9% on the day. Remember the “R” in BRIC? This one has a bid to cover.
KM

Does Anyone Believe This Rally?

I don't think so - the feedback I am getting from my network has one conclusion: people are not long enough.

I’ll agree with everyone’s super duper analysis that this is bad for the intermediate “Trend”… as for the Trade, the dumbest guys in the room are going to get this the most right… over thinking it gets the intellects to perpetuate the squeeze
KM

EVERYBODY’S RUNNING IN 2009

The running category is going to be a share war in 2009. UA will emerge a winner…NKE will sustain at all costs…AdiBok has its back against the wall.

The Running category is going to have its share of fireworks in 2009. For starters, Under Armour is making a big push into the space – and my strong view is that UA will succeed. The company is going in at price points averaging around $90, which is at the very high end of what runners will pay, and they’re going about the R&D and marketing in all the right ways. Huge opportunity for UA given that this is a $5bn category at retail. Nike owns this category with 65% share, and the next largest brand (Asics) at 15%. Past that, there are several more brands that bring up the rear in the 2-6% range. UA is not even on the map. The consumer genuinely wants this brand to succeed. Don’t underestimate that. Every point of share is 3-4% top line growth to UA (not including running apparel). I still don’t see why this company cannot have 3-5% of the US footwear industry over 3 years, which alone grows UA by 2/3.

But what about everyone else? Asics and Saucony (owned by Payless) each garner over 80% of sales from running, and they’ll put up a fight. New Balance is 32%, and will put up a fight as well. This is not to mention brands like K Swiss that are growing into running, and Nike that will defend its turf at all cost. The big loser? I’d hate to be Adidas/Reebok. I personally think neither stands a chance in the US next year. They’re not proactively managing for the tail risk we’re likely to see.

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The Road To ZERO

I am not sure that everyone is aware of the global macro calendar this week, but on Friday (our Thursday night), the Bank of Japan is going to be making their call on interest rates. While the chart below looks more Japanese than it does American, look at it for what it is… and don’t think for one second that Japan won’t follow “Heli-Ben’s” move on Friday and cut to ZERO as well – been there, done that. These guys are the FREE money, flat yield curve, pros.

Now people who have been missing the latest “Re-flation” in Chinese stocks and gold (we have been long both) are going to be delivered the revisionist memo as to the ever so elusive macro “WHY”!

FREE money is crushing the US currency alongside the integrity of “Investment Banking Inc.’s” handshake. As the bond market begins to figure out that all is no longer safe in the land of nod – the “Re-flation” squeeze in US equities, and equities globally, will defy the academic view (which I agree with) that this Japanese exercise will not end well.

Strap on your seatbelt’s.
KM

Heli-Ben" is Santa! Christmas comes early!

In markets, and in life, there are always unintended consequences born out of aggressive actions. The politicized US Federal Reserve has certainly proven this since Clinton/Greenspan created the modern world of finance’s first Fed-watching mania. The Fed’s decision to cut to a “targeted range of ZERO to 0.25%” is the final chapter in a world that has come to be managed reactively, rather than proactively.

Clearly, today’s political pressures have mounted on Ben Bernanke to the point of no return. He is officially dropping US interest rates to ZERO. The best things in life, at least in the immediate term, are those that come for FREE. “Heli-Ben” flies again!

The unintended consequences will be dominated by the realities of our latest Investment Theme – “Re-Flation” – and there is no better chart that reflects the prospects for that “Re-flation” than the one below. Bah Bye US Dollar - hello asset class appreciation. While no one can truly believe that he has cut rates below those that are currently in place in Japan, guess what? He just did – believe it!

Never mind the long term implications – those don’t matter right here and now. This is very positive for the US stock market in the immediate term. My immediate term “Trade” target for the SP500 is 916. Next level of resistance in my model after that is 934.

Keith McCullough
Research Edge, LLC

EYE ON THE UK: INFLATION

UK Consumer inflation for November came in at 4.1% today, down from 4.5 in October but still well above their French neighbors across the channel, who came in at 1.9% for the same period, down from 3% the month prior. The pound reached a new low against the Euro on the news as the deflating economy clears the path for more cuts by the BOE.

The UK continues to be the sickliest looking of the large European economies. With a housing market in freefall, a devastated financial sector and inflation levels that remain high on a relative basis –the prospect of a recovery in the foreseeable future is very dim indeed –regardless of any more intervention by Brown, Darling & King LTD.

Although we closed out of EWU position last Friday we will continue to keep our eye on the UK and will look for opportunities to re-short into strength

Andrew Barber
Director

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