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US Market Performance: Week Ended 12/26/08...

Index Performance:

Week Ended 12/26/08:
DJ (0.7%), SP500 (1.7%), Nasdaq (2.2%), Russell2000 (2.0%)

December 08’ To Date:
DJ (3.6%), SP500 (2.6%), Nasdaq (0.40%), Russell2000 +0.80%

Q408’ To Date:
DJ (21.5%), SP500 (25.2%), Nasdaq (26.9%), Russell2000 (29.8%)

2008 Year To Date:
DJ (35.8%), SP500 (40.6%), Nasdaq (42.3%), Russell2000 (37.8%)

Keith R. McCullough
CEO / Chief Investment Officer

NOVEMBER LV AIRPORT DATA

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...

EYE ON YIELDS: CORPORATE SPREADS
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

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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.
KM

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.
KM

A TALE OF TWO YEARS

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

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