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McCarran Airport reported that the number of enplaned/deplaned passengers fell 14.7% in November. The decline was the worst since the months following the 9/11/01 terrorist attacks, and the third straight monthly double digit drop. Hopefully, the follow through to Strip revenues will fare better than October when a 12.8% passenger decline translated into 23.2% revenue hit. I believe it will.

My model projects a 12% Strip revenue decline for November assuming normal hold percentages. The decline should be better than the airport data would otherwise suggest for two reasons. First, Strip slot machines held abnormally low in November of 2007. Second, low gas prices probably enticed a higher percentage of drive-in visitors than in recent months, which are obviously not captured by the McCarran data. Nevada gaming revenues should be released in a couple of weeks.

Less bad is hardly a long-term investment thesis and we remain very negative on Las Vegas.

November data was worst since the 9/11 months
I project Strip revenues will fall less than the passenger decline

Buying Bonds Now? Why We disagree...

Half the story

“For risk averse investors, who can't stomach the ongoing volatility that the bottoming process in equities entails, a broadly spread investment grade bond fund offers upside exposure to an inevitable US recovery with limited downside risk.” Corporate Bonds: Discounting Depression, SeekingAlpha.com Dec. 19, 2008

“…we're talking about investment-grade corporate bonds, which are dirt-cheap right now… it's time to pounce.” The Case for Bonds, Fortune Dec. 22, 2008

“The bonds of high-quality firms normally yield one to two points more than the going rate of U.S. Treasuries to compensate you for added risk…. That's just too good to pass up, experts say”. The Bargain Bin, Money Jan. 2009

The pundit patrol has hit upon a new winning formula for ordinary investors: Buy Corporate bonds. The argument that these media anointed “experts” are espousing is that corporate paper is a lot cheaper than equities and will provide a lot more upside during a recovery period. This theory is based on the fact that the yield spread between investment grade paper and treasuries is at the highest level it has been since the depression.

The problem with this logic is that it does not account for the fact that corporate bonds have attractive yields on a RELATIVE basis. If benchmark rates were to rise significantly in the coming 12-36 months (which those of you who were on our call yesterday know that we anticipate) that spread could compress while overall nominal yields increase at a faster pace –leaving confused investors holding corporate bond funds that are down.

Advising retail investors to put on half a relative value spread makes about as much sense as telling them to put on half a merger-arbitrage stock spread, but in the rush for something to sell the talking heads are more than happy to do it.

To illustrate my point I have included two simple charts. The first shows How wide the spread between Corporate yields and treasuries has become on a relative basis, the second provides a longer term view of Fed Funds and CPI –with a focus on the late 70’s “Volker” era when rates rose dramatically as the Federal reserve fought a strong reflationary surge.

It doesn’t take a huge leap of logic to see the potential for reflationary pressure resulting from the current zero rate environment. Corporate bonds may indeed represent a good deal for some investors –but they deserve to see the whole picture instead of the half that the pundits are presenting.

Andrew Barber
Director, Macro

Money-less Center Banks: Charting SPX vs. The New Reality

The New Reality is reflected in both today’s sector level performance, and that which we have seen emerge in the last 3 weeks of trading. The Financials (XLF) continue to underperform, while the Consumer Discretionary stocks continue to outperform. Today the XLF is down -0.40%; the XLY is up +0.45%, providing balance for an SP500 that is +0.25% on the day.

The liquid long American Capitalist is “re-taking” control of his/her country from the levered long bankers. Check out the relative performance chart that is embedded within the story of the XLF underperforming the SP500. The “supermarket” or “money center” banks have been getting hammered.

The New Reality is that the bankers will get paid to service the client before they service their own agenda. Not only will they do this on the client’s terms… but the US government’s! After all, these banks are “money-less” without becoming government supported organizations.

This stock market is no longer trading day to day on a “liquidity crisis.” That has passed, and so has the volatility associated with it. The credibility crisis will remain a structural problem that will rinse itself clean of all that was conflicted about it in the beginning. This Christmas, we should all be thankful for that.

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Re-Shorting Japan: Industrial Production & Employment Charts

After seeing the EWJ (Japan etf) rally +17% from its November lows, I am thankful this Christmas for having covered it. Next Christmas, I want to be thankful that I re-shorted this political and economic mess. This morning’s macro economic reports out of Japan are charted below.

Now that the Yen is appreciating alongside a depreciating US Dollar, it’s next to impossible to see how Q1 exports in Japan can turn out to be nothing but terrible. While the Japanese export print of -27% y/y for November was the worst number they have ever reported, there is no economic leadership in this compromised socialist story that gets me anywhere other than back on the short side of my longstanding bearish view of Japan.

There is huge “Trend” line resistance in the EWJ etf up at $9.38. We re-shorted it this morning.


Many hedge funds were burned playing the January effect in early 2008. Stocks got creamed, particularly consumer discretionary, and especially gaming. Gaming stocks were pounded to the tune of down 22% in the first two weeks of 2008. See the first chart.

Here is why January 2009 could bring more holiday cheer for the gaming bulls than 2008:

• Short interest is sky high now (2nd chart)
• Investors are much more bearish this time per the BBI (2nd chart)
• Consumer discretionary looks good technically
• Low gas prices bring some optimism
• Real interest rates near zero
• Fire sale valuations

Gaming stocks have had a decent run lately but are still down 70-80% on the year. The industry faces a myriad of issues in 2009 but bearishness is unprecedented, valuations are low, and some markets appear to be stabilizing. The macro croupier may have dealt the pessimists a bad hand, if only temporarily, through the unprecedented use of short term monetary (near zero interest rates) and fiscal stimuli.

A January rally may indeed be in the cards. What a difference a year makes.

"January effect" was not effective in 2008
Investors are much more bearish heading into 2009

Bush and Billy's Boxing Day

"The only blind person at Christmas time is he who has not Christmas in his heart."
-Hellen Keller

Like most countries in the Commonwealth, Canada has her own “Boxing Day” traditions. I would be remiss not to call out the most obvious, which is Day 1 of the World Junior Hockey Championships. This is the jersey that all little boys growing up in this country aspire to wear in front of their families on the day after Christmas.

“Boxing day”, of course, does not allude to athletics. Its origins date back hundreds of years to when the wealthy would take the day and seize it as an opportunity to give back to both their employees and people of their respective communities who were less fortunate. Rather than chasing CNBC for the “latest” holiday shopping stat this morning, one has to wonder where and when the Street went wrong over the course of time. Christmas is about giving, not taking.

Perhaps it takes a blind woman’s genius to boil this point down to its deepest simplicity. The aforementioned one by Hellen Keller certainly gets me there. This morning’s #1 Bloomberg news headline is “Holiday sales tumble…”, and I can’t help but take the other side of this building consensus of negativity.

Over a year ago, the US Consumer Discretionary stocks were trading 50% higher, and hopes were abound that the “activists hedgies” who bought over valued wares like “Tar-g-eh” were going to warm the hearts of the levered long community with cashmere sweater sets. Now that the real hedge funds (one’s that actually hedge), are starting to take market share, I for one, am thankful for that. Most of our clients stayed long Wal-Mart (WMT), and short Target (TGT) in 2008.

If you look at Target’s stock price as a proxy for all of last year’s “holiday sales” and “activist investing” punditry, the metaphor rhymes. I remember sitting here at my desk on Boxing Day of 2007, listening to the entertainers talk about “Target taking share in a different demographic”. The stock price, meanwhile, has lost -37% of its value since December 26, 2007.

“Activist”, Billy Ackman, either forgot or was unaware that the US Consumer spending cycle is cyclical. Ostensibly, if you thought 64 consecutive quarters of positive consumer spending in this country was an economic “Trend” that you could straight line out to forever, you probably felt pretty good about telling all of your friends to buy into these candy canes dancing in your head too. Don’t blame Billy – he has been You Tubed as one of the many who “don’t do macro.”

I bought the US Consumer Discretionary Index (XLY) in our virtual Portfolio on Christmas Eve. Not because I had Christmas in my heart – rather because proactively predicting the Street’s Boxing Day narrative is about as simple as “making a call” gets. When there is a lack of a narrative, the Street will make one up… and now that the US Consumer stocks are outperforming nearly every one of the 9 sector indices we follow, we think they’ll ultimately change the #1 headline to something more positive.

Stocks discount expectations of the future. They don’t really care about the past. While Target miserably underperforming the sector since its early December rally isn’t our problem (since December 10th, TGT is down -17%), we have to be asking ourselves why it is that a large population of investors being “short the consumer”, after the group has lost ∏ of its value, still makes sense.

George Bush has a few weeks left in office, and before he moves back to Texas, he may very well leave US Consumers with the most wonderful gift of all. With oil trading at $36/barrel, interest rates at ZERO, and a stock market that’s on track to have one of its best sale prices in the last 150 years, we have to tip our hat to the man who may be the world’s most misunderstood.

You see, rather than getting all caught up in his approval ratings, and that he’s still lookin’ to get that there credit thing “unstuck”, contrarians may be best served to be focused on the good intentioned Texan having had this master plan in his back pocket for the last 8 years. Remember, Bush has taken the Presidency as an opportunity to read books and stuff – maybe he is signaling a return to a Boxing Day of giving. If Americans were ever ready for that change, now is the time.

Enjoy the rest of your weekend with your loved ones,

Long ETFs

SPY-S&P 500 Depository Receipts – Front Month CME S&P 500 contracts opened up slightly, trading as high as 866.5 before 7AM this morning.

XLY Consumer Discretionary SPDR - ShopperTrak estimates visits to U.S. retail stores declined 5.3% -a 24% percent Y/Y drop, during the weekend of Dec 19-21.

USO - U.S. OIL FUND – Front month NYMEX Light Sweet crude contracts traded as high as 36.9 before 7AM this morning as the market focused on reports of OPEC member production cuts in compliance with last week’s decision.

GLD -SPDR Gold Shares – Spot gold traded up slightly to $848.50 an ounce this morning on the Tokyo Commodity Exchange.

VYM – Vanguard High Dividend Yield- Commerce Department data shows consumer spending fell by 0.6% in November - less than forecast as cheaper gasoline helped fuel more spending.

DIA –DIAMONDS Trust Series – Front Month CBOT DJIA contracts opened up slightly at 8,430 this morning.

EWT – iShares Taiwan —The Taiex index closed up 0.3% at 4,425.08 this morning, a decline of 5.7% for the week.  

EWZ – iShares Brazil — Central Bank foreign currency inflow estimates showed a net of +$29 million in the first 19 days of December vs. $3.1 billion in all of November.

EWH –iShares Hong Kong – From the South China Morning Post: Hong Kong retailers experienced increased traffic over the holiday due to more visiting mainland shoppers than last year with some malls reporting more than 10% increases in shoppers Y/Y.

FXI –iShares China — The CSI 300 declined 0.5% percent to close at 1,862.10, down 9.3% for the week. The yuan declined 0.15% to 6.8414 this morning as NBS data showed Chinese industrial companies’ net income increased 4.9% in the first 11 months of 2008, the slowest pace of growth since the agency first began reporting the data.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust - The yen traded down to 90.47 USD/127.19 EUR this morning as Trade Ministry data showed  factory output for November decreased -8.1% over the prior month.

Keith R. McCullough
CEO & Chief Investment Officer

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