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Eye On The UK Housing Market: Bad to Toxic...

BOE stimulus has not yet reached consumers…

Gordon Brown says that he is “angry” at lenders - this is understandable. In the wake of a $75 billion bank bailout and successive rate cuts the latest data shows that UK banks are not passing through liquidity into the consumer market.

In sharp contrast to the USA, where we are seeing a refi recovery, mortgage approval statistics released today showed the lowest acceptance levels in almost a decade while the BOE’s measure of lending indicated that consumer credit has failed to expand as hoped after government recapitalizations. With average mortgage rates falling by less than half that of BOE cuts and lender surveys confirming a refusal by many banks to extend further credit, there appears no relief in sight for the UK housing market. HBOS numbers released today show a year-over-year decline of 18.9% in December, yet British homeowners feel no closer to a bottom.

We are short the UK via the EWU etf, which underperformed miserably today relative to US Equities. We continue to believe that the economy there is lacking any clear near term catalysts for renewed growth no matter how low rates go. There is no “Obamerica” for Britain.

Andrew Barber
Director

If the market closes right here...

Best first day for the SP500 since 1988... remember 1987?
KM

VIX Oversold, Finally!

I have been waiting for this VIX level, patiently. This is another way to think about making sales on the long/short sides right here and now. As overbought as the SP500 is for an immediate term “Trade” (see my prior SP500 “Making Sales” note) is as oversold as the VIX is under 38.

Down another 6.4% at $37.45, the VIX is hitting its 3 day low as the SP500 hits its 3 day highs. The VIX has effectively crashed -54% from its November 20th peak of $80.86 – yes, that was also the date of the SP500’s capitulation low of 752.

The VIX could easily put on a +27% move from this level and not violate the dotted red line we are showing below in this chart. If that were to occur, stocks aren’t going to be going up at the same time. Manage towards the improbable outcomes as well as the obvious ones – that’s what risk management is all about. It feels really good to be long here, but all good things find a point of exhaustion.
KM

Keith R. McCullough
CEO / Chief Investment Officer

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SP500 Levels: Making Sales...

At 928, the SP500 is riding the wave of her intraday highs here…. and this is a great spot to be making sales. We’d been making the call to buy them for over a month now, so with the SP500 +6.5% in less than 3 trading days, this is your payday. Not making sales anywhere north of the 922 line would constitute getting “piggy”.

The trading range that is forming in the face of a 50% price cut in volatility is this:

BUY “Trade” = 878
SELL “Trade” = 922

That’s both a nice 5% trading band of a sandbox for the real short sellers to pick off those hurrying into what they have been missing on the long side here, and a very solid base of support for those who bought the November/December lows. We’re a long way from that SP500 low of 752 by the way, +23.4% higher to be precise. Day 1 of the New Year is no day to start making up for last year. Stay with the process. Stay patient. Prices will come back to where we can make purchases again – they always do.

Keith McCullough
Research Edge LLC

Gazprom Pulls the Gas Cord

The “action” finally happened. Russia’s natural gas provider, Gazprom, halted deliveries of natural gas to Ukraine yesterday, the culmination of long stand-off between the two nations (or two companies, depending on how you chose to look at it). The decision results from months of attempted negotiation over the settlement of $2.1 billion worth of debt on gas, which Ukraine received in November and December but refused to pay for.

This gas story is nothing new; in January 2006 Gazprom also turned off Ukraine’s supply. On 12/14 I wrote a weekend edition piece entitled: “Eye On The Energy Threat: Ukraine’s Geopolitical Impact”. In it I highlighted many of Ukraine’s geopolitical forces at work, including: its geographic importance as a transit country for natural gas from Russia to Europe; the country’s political orientation as it becomes more “western” and Euro-centric; and discussed Europe’s alternative energy strategies to become less reliant on Russia for its natural gas supply.

This latest shut-off was predictable. While I don’t discount that numerous political gestures are at work behind the scenes, we simply need to return to the clichéd expression, “Cash is King”, to understand the fundamentals. The fundamental for Russia right now is CASH, for she doesn’t have it. Like the rest of the world that is levered to commodities, Russia’s balance sheet doesn’t look like it did over the summer when commodities were reaching historical highs. This came to a head yesterday when Gazprom decided it was done negotiating over repayment and gas price. Russia signaled to Ukraine—which receives heavily subsidized gas from Russia to the tune of half of the European market price—that either the Ukraine is going to play ball their way or suffer the consequences.

This point may be marked as Ukraine’s struggle to transition from a socialist to capitalist state. On one hand the latest news reports from Ukraine show democratic-thinking leaders and a populous looking West. Yet on the other hand, Ukraine has a weak economy (high debt, and unstable currency, and like Russia is levered to commodities) and therefore needs Russia’s handout. The country’s lack of negotiating power is evidenced by Ukraine’s President Viktor Yushchenko attempt on December 31st to negotiate the transit price (what Gazprom pays Ukraine to ship gas through the country to Europe) from $1.70 per 1,000 cubic meters per 100 kilometers to $2. Kindly stated, Ukraine has a weak handshake and no cards to put out on the table.

Ukraine has agreed to pay $1.52 billion to Gazprom by January 11th, leaving a balance of over half a billion dollars to pay off its debt. It will be interesting to monitor this development in the next days. In the wake of the shut-off Gazprom stated it will increase supply to Europe via a line running through Belarus. Unlike in 2006, Europeans are not as worried for they have adequate inventory and alternative supplies such as liquefied natural gas. Ukraine says it has gas in storage equivalent to about 35% of annual consumption.
Let’s hope this number is accurate. Today’s weather report out of Kiev shows 13 degrees Fahrenheit and a chance of snow.
Matthew Hedrick
Analyst

EYE ON CHINA: RETAIL SALES IN HONG KONG OUTPERFORM

In their daily review of Asian newswires and economic releases, our Macau office highlighted an article from the South China Morning Post this morning, which discussed retail sales in Hong Kong. I’ve outlined a few key data points in the article below, but the summary is that retails sales were much better than expected in Hong Kong over the holiday season, which is very supportive of our decoupling thesis on Hong Kong and China.

Key highlights from the article include:
• Aeon stores with 33 Hong Kong outlets grew 9 % y-o-y in the week of December 24 – 30th.
• Sun Hung Kai Properties, Hong Kong’s largest private operator of shopping centers, said sales at its 20 shopping malls grew more than 10% y-o-y; and
• A record 420,000 shoppers visited apm, SKHP’s flagship shopping center in Kwun Tong for New Year countdown.

Based on these preliminary reports, which are more than anecdotal, both holiday sales and traffic were very strong in Hong Kong over the holidays. As we have been emphasizing over the last few months, both stock selection and country selection will be critical in 2009. While a rising tide, in terms of emerging market growth did indeed lift all boats from 2003 - 2007, in the coming 12-months differentiation will occur. And rightfully so as the economic prospects and country balance sheets are widely divergent in emerging markets, and the countries formerly known as BRICK.

We continue to be long FXI, which is the iShares FTSE/XINhua China 25 Index.

Daryl G. Jones
Managing Director

Andrew Barber
Director

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