Brazilian Bulls?

One of the many thanks that I will be giving at this year’s McCullough 2008 Christmas party, is not having bought into the “Fast Money” highs of everything from Brazil to horse manure. Latin American and fertilizer stocks should never be bought at a fully loaded Park Avenue price!

Now that Brazil’s Bovespa Index has seen a -60% price cut from those manic highs to October’s lows, it’s getting very interesting. We bought more of the EWZ etf today for the same 3 reasons that we have been discussing: 1. Best country to own for Re-flation, 2. Pending Brazilian interest rate cuts, and 3. Technical support built up at the line shown below (36,582).

Buy low, sell high.

Eye on Private Equity: Don't count on a 2009 rebound

Eye on Private Equity: Don't count on a 2009 rebound

Two themes we expect to see emerging from private equity land in 2009 are continued bankruptcies of debt-laden portfolio companies, which in 2008 stands at 40 major bankruptcies and counting, and dramatic moves from these private equity owners to stave off bankruptcy. These drastic operational moves will also have many unintended consesquences as highlighted in a Bloomberg article this morning, entitled: "Feinberg Despised in Wisconsin Where Cerberus Lives Up to Name."

Feinberg's Cerebrus Capital Management owns NewPage Corporation, which recently closed a paper mill in Kimberly, Wisconsin, to ostenibly cut over head at the parent company. As a result of the closure, more than 600 jobs were lost in a town of 6,200 people. While outrage at private equity firms for downsizing is certainly not new, the comments aimed at Feinberg are particularly venomous and include, "This is a . .. extremely greedy guy who doesn't care about other human beings . . . he sold his soul to the devil . . . Feinberg has no morals."

Situations similar to this one in Kimberly, Wisconsin will only accelerate in 2009 and with them negative sentiment towards private equity firms. As this sentiment grows, Obama's ability to pass a bill forcing private equity executives to pay capital gains taxes of 35%, up from 15%, will be made easier. With continued failed deals and the outlook for lowered future compensation, the next few years are shaping up to be challening ones for the private equity world.

In addition to the points outlined above, leverage will be much less readily available for traditional leverage buyouts in 2009 than it has been in the past as investors in private equity deal debt, and investment banks that were left holding the debt, have suffered severe losses. As a result, these lenders will not be opening up their balance sheets and the credit markets for LBOs will be closed for the forseeable future, except on a very limited basis.

While it seems like Henry Kravis proclaiming that we were entering the golden age of private equity was just yesterday, and it was less than 18 months ago, that proclamation along with IPO of Blackstone marked the peak of the private equity business. In the traditional levered return sense, the priave equity business will be dead for quite some time. In its place, we will likely see an increased amount of strategic M&A. On the margin, credit markets continue to thaw, and valuations in some sectors have reached compelling levels.

In an environment where access to LBO capital tightens, and the cost of it begins to rise (over the long term; that’s what rates do after they go to zero), those liquid long cash become kings of The New Reality.

Daryl Jones
Managing Director

Bear Tracking: Another Signal For the Bulls...

This morning’s initial read on US Consumer Confidence for the month of December came in positive again (both relative to expectations and on an absolute basis versus the prior University of Michigan reading).

The first chart below shows the sequential improvement from the November freak-out lows. The second chart provides the context for this improvement looking back at prior economic recessions. The point here is that if you are tracking bears, there is a lot of negativity already baked into their footprints.

Admittedly, it is getting harder for me to decipher whether or not the US consumer’s less than toxic confidence level is more about Obama or Bush. All of a sudden, Bush is providing American Capitalists with the economic foundations by which great business are built – cheap oil, zero interest rates, and a stock market that’s been cut in half.

On the confidence issue, Bush going away is probably as positive as Obama coming online. While Obama’s approval rating is destined to come down from its current level of 67%, I do not think the bears get fed on that thesis between now and the inauguration. Fully loaded with the January effect of bear hibernation, the January Obama 20th option remains one that I will be long, at a price. I like buying stocks, patiently, in the SP500 range of 864-884.

Confidence is where markets and multiples are built. We have our “Eyes On” sentiment readings and bad news bears alike.

SP500 Levels: Buy Zone morphing into No-Fly Zone (for the shorts)

Yesterday’s low volume correction day on the NYSE was a signal in and of itself. Some people are tired of 2008, and they just want it to end.

We’ve had a great year in 2008, and we’re looking to make 2009 and better one. The immediate term setup for the SP500 continues to be bullish. I have established a “No-Fly” Zone for my own short sales in the 864-884 range. The key here is that we finally have a bullish trade-able range. With the crash in the VIX now in the rear view mirror, I think the January effect will have a very good shot at self perpetuating these higher lows we have been making, both locally, and globally. Don’t forget the Obama macro calendar catalyst will be front and center on investor radars come January 1st (next week).

This US tape remains one that you should trade. The only SP500 resistance I see between here and 997, is 914.

Keith R. McCullough
Research Edge LLC

Twas the night before christmas

'Twas the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse…’
-By Clement Clarke Moore or Henry Livingston

Much like the newfound bearishness that has become pervasive on the Street, there is plenty of authorship controversy on who actually wrote the script for this global bear market crash or “The Night Before Christmas.” Was it Roubini or Houdini? Was it Livingston or Moore? Is it a poem or a true story? These are the questions dancing “with visions of sugar plums” in all of our heads.

The poem which was published on this day, anonymously, in 1823 is also known by historians as “A Visit From St. Nicholas”, and no matter who’s story you side with, there is no argument about the narrative… with his wife and children sound asleep, a man awakens to noises outside his house. It doesn’t have to be Christmas for this story to rhyme with your every morning. These are the days of our global macro lives.

Yesterday, “away to my window I flew like a flash”, and thought I saw “Chinese Reindeer.” This of course turned out to be my Dad’s dogs, and China cutting interest rates. Unfortunately (for me) my immediate term investment call was wrong - the Chinese locals didn’t agree with my conclusions; they wanted deeper rate cuts than 27 basis points and they sold off the Shanghai Stock Exchange last night for its biggest down day in the last five weeks, taking the market down by -4.6%.  We have been long China since the October lows, so this didn’t have candy canes dancing in my head this morning.

Broadly, stocks in Asia were weak. Even though he has no more clothes, Japan was closed for the “Emperor’s Birthday.” Hong Kong closed down -2.8% on one of its lowest volume days in two years. Low volume selloffs do not, on their own, confirm a change in the direction of my momentum models, but absolute price changes like this are critical to examine, always. We are long the Hang Seng via the EWH exchange traded fund, and we have critical support for that index at 14,037. After its two-day -6.1% correction, the market is “nestled all snug” above support at 14,220.

As the facts change, we will. So stay tuned for tomorrow. We host a daily 830AM EST “Macro” conference call with clients, and this very much a fluid situation that we monitor on a line by line basis across 27 “Macro” risk management factors in my model.

European stocks have a bit of a bid this morning but markets, like those in Asia and the USA, are trading very thin, so it is more difficult for me to make conclusions with the kind of conviction my readers expect of me. Sometimes the best thing to do in markets is to do nothing. In Europe, since we sold our long Germany position and covered our UK shorts, that’s exactly where I have us – doing nothing.

European equities look the worst of the “Big 3” regions (Asia, USA, Europe), primarily because of the “Re-Flation” Trade. The output of a crashing US Dollar is a “re-flating” Euro. As the euro appreciates, their prospects for a 2009 recovery in exports to Asia darken. The world is flat now, and those countries devaluing their currencies (USA, China, Russia, etc…) are putting themselves in a competitively advantaged position on that important export scorecard.

The Russian Ruble will be an interesting story to tell on 2008’s “Night Before Christmas.” Despite the US Dollar selling off hard in the last few weeks, Putin’s reindeer Rubles have been falling as precipitously as the men formerly known as the “oligarchs.” With the ruble trading down another -1% to 28.46/USD this morning, and 10 of the top 25 Russian “oligarchs” having allegedly had margin calls as of late, CNBC should be deploying their star “trader”, Guy Adami, to Siberia for a consulting gig. “Fast Money’s” latest commercial has poor Guy warning investors “don’t buy on margin!” Instead of the Santa pants, I think someone slapped the lawyer pants on these entertainers – I couldn’t make this stuff up if I tried.

From Russia, to Saudi Arabia, there seems to be some “hopes that St Nicholas will soon be there.” We posted a note on our portal yesterday titled “Leading Indicators For Oil's Pending Re-Flation” (, 12/22), and as early a leading indicator these two stock market’s were in July that the Russian tea parties were not going to end well, they may very well be signaling a short term bottom in oil prices now. The Russian stock market is up again this morning, taking it’s “re-flation” to +20% from its October lows, while the Saudi Tadawul Index has appreciated +13% in the last month. We’re a long way from that $147.27/barrel “Fast Money” peak of July 11, 2008. In terms of this global economy’s most basic need, what goes down, will eventually go up.

Commodities in general look like they are ready to bottom. My models have the following buy prices for the CRB Commodities Index, Oil, and Gold: $214, $38.26, and $801. The CRB outperformed US Equities again yesterday, and this was primarily because gold continues to flash an early “re-flation” signal, trading higher once again on the week to date. Oil bears are everywhere all of a sudden “And mamma in her 'kerchief, and I in my cap” are looking forward to their overdue year end settling down “for a long winter's nap.”

“Twas the night before Christmas”… when all through the global markets house, no more “Fast Money” creatures are stirring, not even Bernie’s spouse.

Best of the season to you and your families,

Long ETFs

SPY-S&P 500 Depository Receipts – Front Month CME S&P 500 contracts were up slightly in trading this morning, reaching 878 on the high side prior to 6:30am.

USO - U.S. OIL FUND – Front month NYMEX Light Sweet crude contracts were flat this morning trading in a range from 39.05 to 40.04 prior to 6:30 AM.

VYM – Vanguard High Dividend Yield- Spokesmen for Bank of America (VYM: 3.27%), dismissed a Financial Times story that reported BAC had canceled plans to raise capital by selling its stake in China Construction Bank under political pressure from Beijing.

DIA –DIAMONDS Trust Series – Front Month CBOT DJIA contracts rose in trading this morning, reaching 8,573 on the high side prior to 6:30am.

EWT – iShares Taiwan — Taiwan’s industrial production fell 28.35% in November Y/Y with export orders declining an unprecedented 28.51% from a year earlier.

EWZ – iShares Brazil — Stocks fell the most in three weeks as commodity prices declined. President Lula da Silva calls on consumers to step up spending.

EWH –iShares Hong Kong – The Hang Seng closed in negative territory to 2.75%, at 14220.79. Aluminum Corp. of China Ltd, the nation’s number one producer of metal, fell 9.9%.

FXI –iShares China —The CSI300 closed down today 4.89% to 1918.95. Stocks fell on concern that the interest rate cut to 5.31% was too small.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust -  The Yen is up slightly against the USD this morning to 90.115.

Keith R. McCullough
CEO & Chief Investment Officer


The hotel business is bad and getting worse. Estimates need to come down, again. I feel like a broken record. We’ve been very consistent in our negative view on lodging for the past 6 months. Our 12/10/08 post, “TIMESHARE TO CONTRIBUTE IN A DIFFERENT WAY” was the first non-negative lodging post we’ve had at Research Edge, ever.

Now for a second one. So why are we getting a little more positive? Answer: Cash flow. Certain lodging companies have the opportunity to curtail timeshare development and harvest the cash from this business. Timeshare is a hugely capital intensive business during the growth phase but highly cash generative as it winds down. Sure, timeshare has contributed to GAAP EPS growth over the past few years and that will wind down too, but book earnings have become almost meaningless. Even EBITDA multiples are becoming less important as a valuation technique here at the trough.

So why favor MAR over other timeshare/lodging operators such as HOT or WYN? There are a number of reasons. First, MAR hasn’t yet announced that it is reducing timeshare capex, so that catalyst is potentially ahead. We believe timeshare cash flow will turn positive in 2009. Second, MAR’s lodging business model is fee based and, thus, more defensive and not capital intensive. Cash flow is less sensitive to RevPAR changes than for a hotel owner. Third, MAR is the most diversified across lodging segments. Finally, MAR is the largest market cap company in lodging right now. Our macro/quant analyst (and our CEO), Keith McCullough, has identified market cap as a favorable factor right now.

MAR will report in late January and investors should be prepared for lower guidance. Thanks to some recent Johnny-come-lately downgrades, they probably already are. Cash is king here, not EPS.

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