Chinese Chart Of The Day: PMI Accelerates, Sequentially

For the better part of the last three months, the bears have been stuck with a thesis we were flashing them 9-12 months ago – that China is “slowing”…

Well, like all great stories, there is an ending… and then, a new narrative finds new beginnings. This morning’s Chinese PMI accelerating sequentially (see chart) may not be a huge move on a nominal basis, but the point is that on the margin, the move was finally higher. Since the month of November couldn’t have been worse in terms of global trade, December was bound to be better than toxic – and it was…

Everything that matters most in our macro models occurs here – on the margin. This data point is now old news, and surely one that the China bears will have a tough time getting “unstuck” in their models; that’s if they have them, of course…

We remain long both China and Hong Kong via the FXI and EWH etfs.

Keith R. McCullough
CEO & Chief Investment Officer

Eye On Korea: Equities, Currencies, Reserves...

Korean stocks and The Won are trading up, we are not a buyer… waiting to re-enter the game on the short side, rather.

Bank of Korea announced the first increase in foreign currency reserves in 9 months today, spurring the Won higher against the dollar and Yen and lifting stocks higher. The won was the worst performing major Asian currency in 2008 and the KOSPI was a complete disaster at -40% for the year , but the glass half full crowd is now starting to buy again based on the thesis that the worst is over. We disagree.

The increase in currency reserves does not necessarily indicate as large a bullish turn as it might look at first blush. After the central bank spent 65 billion dollars trying to prop up the Won it appears to have finally found a bottom 25% lower than the dollar for the year and about 35-40% lower than both the Yen and Yuan. The good news is clearly that Korean exports will be more competitive in China, which now accounts for over 20% of total sales abroad. The bad news is that -even with resilient Chinese buyers for semiconductors and cell phones, the heavy concentration of Korean industry on large machinery; nautical and automotive manufacturing will probably mean that the real economy won’t bottom out until later in the year at best when the government’s $11 billion stimulus package focused on public works (hopefully) gets under way.

Additionally, despite the improvement in regulation and oversight since the financial crises a decade ago, the Korean banking sector is more levered than other Asian institutions and is still far from done working through the bad real estate debt that it gorged on over the past 5 years. Despite currency stability and lower nominal rates the credit market, Korea remains frozen, as evidenced by the Korean Development Bank’s recently announced Dollar and Yen denominated debt issuance –needed to shore up short term working capital.

We will keep our eye on Korea carefully and as always reserve to right to change our mind as soon as the data changes, but for the time being the bad there continues to outweigh the good.

Andrew Barber


As positive as I am on MGM and most of the gaming operators as a trade, a dose of reality is in order. The market is powering gaming stocks higher, particularly those with Las Vegas exposure. Apparently, visitation to Las Vegas and Atlantic City was strong over the Christmas/New Year’s holiday week. However, one must consider the type of customer attracted to room rates slashed by 30% and lowered table minimums.

Heavy discounting is the reason Las Vegas was able to fill its rooms. The flow through on negative room rates is around 90%. Gaming revenues should be significantly lower, assuming normal hold, due to a lower end average customer and lower table revenues. From a profitability standpoint, this past New Year’s will not be viewed as a success.

However, with such bearishness surrounding the beaten down gaming sector heading into 2009, any superficially positive data point can have an impact. We pointed out as much in our bullish 12/26/08 post “A TALE OF TWO YEARS” which called for a January rally. The January Effect is indeed alive and well in this sector but keeping a short leash on this long trade probably makes sense.


December was a tough month in Macau and even tougher for Wynn Macau. Following a fairly strong start to Q4, Wynn Macau has struggled and lost share in a declining market in November and December. For Q4, on a year over year basis, we estimate Wynn is flattish in both its mass market and rolling chip business (revenue). However, the month of December was likely down around 10% in both segments. Obviously, this is not a favorable sequential trend. The downturn appears to be related mostly to volume and not hold percentage.

The consensus Wynn Macau EBITDA estimate is around $115 million for Q4. I believe the property could miss this number by $15-20 million. I doubt Wynn Las Vegas will make up the difference. Rather, Wynn Las Vegas may also miss the consensus projection of $65m. Only abnormally good luck at Wynn Las Vegas over the New Year’s celebration can save the quarter.

Eye On Volatility: Time to Sell Vol. On Small Caps?

Overall market volatility is declining, but less rapidly for small cap stocks…

This week marked the first decline of 30-day realized volatility on the S&P 500 below 60 since the first week of October and the first time the VIX has closed below 40 since October 1st. As both real and expected volatility on the SPX decline closer to the upper edges of historical averages they remain significantly higher for small cap names. Although the volatility levels implied by options on smaller capitalized stocks are normally higher than that of larger cap names, the current level of divergence remains wider than it has been for years prior to last fall.

From an options standpoint, the traditional liquidity issues facing small cap stocks are exacerbated by the demise of well capitalized “upstairs” trading desks at investment banks and other financial risk intermediaries who used the listed markets as virtual crossing networks for thinner names in years past. Now, with fewer and less well capitalized market makers increasing focused on large cap names expect volume to decline significantly in small cap option land.

The still-rich premiums in small cap names make strategies involving selling options look attractive here, but keep these factors in mind if you are considering any.

1) Need For Patience: Although the premiums for options sellers on small cap names may be attractive, volume is light. It makes no sense to chase the market; pick a price that you deem attractive for the risk involved and stick with it.
2) Fundamental Conviction: In no way, shape or form is this an endorsement of arbitrage or so called “relative value” dispersal strategies – selling options in the current market without a fundamental directional conviction is not advised. For now, tactical equity investing is best kept in the cash market, with any options selling confined to strategic enhancement.
3) Rates: Any long term option will derive a portion of its value from prevailing interest rates since an option seller is providing the buyer with leverage. Any options seller that is using long dated contracts should consider this factor carefully.
4) Duration: the absence of liquidity is a major driver of current high implied volatility. Anyone that is stepping up to sell options in this market to take advantage of this must be prepared to stay to the bitter end. As we said earlier, volume may be lighter by the time options with 6 to 12 month durations expire so don’t count on trading out in advance on that.
As always, feel free to contact me with any questions about any options strategies that you are considering.

Andrew Barber

Eye On Goals

Eye on Goals

“Expectations are the root of all heartache.” –Shakespeare

“Blessed is the man who expects nothing for he shall never be disappointed.” –Alexander Pope

“We need to challenge the soft bigotry of low expectaions.” –President George W. Bush

New Year’s is synonymous with setting goals, either in the terms of resolutions as it relates to personal improvement or, in many instances, planning at businesses. Since I clearly I have a lot to improve on personally, combined with fact that I’m Captaining our Macro business, the last week or two, along with of course enjoying my Mom’s fine cooking, has given me some time to contemplate goal setting – both specifically and more in the abstract.

There have been a number of studies done on the success of New Year’s resolutions. In general, the studies show that more than half of adult American’s make New Year’s resolution and only 10% of those resolutions are ever kept. In fact, many are broken within four or five weeks.

Just as Keith likes to call the market because people say it cannot be done, I’ve decided to make New Year’s Resolutions this year, simply because the odds are overwhelming against me. So I’d like to publicly establish my physical fitness goals for 2009. They are as follows: to run a half marathon by June 30, 2009, to complete a sprint distance triathlon by September 30, 2009, and to lose 10 pounds through the course of the year. I also have a number of personal and professional goals, which I won’t delve into, but these are the core of my fitness related goals.

From the very outset, I have a higher chance to succeed than most goal setters. First, I’ve publicly declared my goals, which creates a level of accountability. Second, I have quantified the goals by both dates and objectives. Finally, I’ve set reasonable, though not easy goals. Admittedly I could probably run a half marathon today, or so my 110 pound former Dartmouth cross country star running partner believes (thought undoubtedly she thinks these distances are easier than they are), but the reality is, I never have, so in my mind this is a reasonable goal.

Keith and I have been exchanging emails over the weekend about specific goals for the Macro business at Research Edge. Now for those of our clients and colleagues who have known Keith for as long as I have, you all probably know that at times he likes to, as we say in hockey terms, “chirp.” On the ice he would “chirp” opposing players and the referees and off the ice, as hockey captain, he would “chirp” our teammates who were unfocused or not living up to their potential.

Now that he is CEO, and we are no longer college hockey teammates, I don’t think we can call it chirping anymore, but rather a proactive management process. I sent Keith my goals for Macro for 2009 and his response to me was: “If you think you have the process in place to over-deliver on these, I’m comfortable with you putting them on the tape. I only want beatable expectations, and then, like you said, you drive a higher ante after these bars are cleared.” Keith’s point is not that I should set low ball goals, but rather I should establish goals that if the team works hard and executes, they can beat.

By any measure, 2008 was a successful year for Research Edge. Less than a year ago, the Company was a whiteboard in Keith’s living room. The Company now has over 25 employees, three offices, a client base that is in the hundreds (representing some of the top money managers around the world), and a revenue growth rate that would be the envy of any start-up.

That all said, I think Keith, Brian, and Michael, who are the founding Partners, probably would admit that they missed their “expectations” for 2008. Does that mean the Company failed? Of course not, we actually had an incredibly successful year, but what it does mean is that setting goals, particularly in a business that has no real comparables, can be incredibly difficult. I think that’s why Keith always cites the aforementioned Shakespearean quote. He genuinely thinks the only people that can beat us is ourselves.

After reviewing a large amount of literature relating to goal setting, it is clear that there are a number of key steps to enhancing the success rate of achieving goals.

First, set goals that are specific. Just as I did in my personal physical goals above, establish goals that you can quantify (number of new clients, growth in same store sales, etc) and that have a date attached to them. Within this framework, the goals are measurable and you can determine when and if the goals are achieved and whether they need to be adjusted.

Second, establish a plan to achieve the goals. Behind every specific goal there should be a plan with a reasonable timeframe to achieve that goal. As an example, in a sales organization, assuming you have the relevant data on close rates, the plan to increase sales could be largely driven by expanding reach, so making more sales calls. Ultimately, as the sales moves through the sales funnel, these sales calls will result in a closed deals.

Finally, make sure that your goals have reasonable expectations attached to them. The three quotes at the outset of the note were actually part of a discussion I was having with a friend that related to the importance of managing expectations. In both personal and business goal setting, this is probably the most important point. You need a goal that is both achievable, but also requires you to work hard to achieve it.

Since I started this note by quoting the first and third most quoted writers in the English language, Shakespeare and Pope, and a President who many believe doesn’t have a great handle on the English language, I will end by quoting the second most quoted writer in the English language, Tennyson: “While I plan, and plan, my hair Is gray before I know it.” Planning time is over. By now, your goals should be established and 2009 should be a year of exceeding all expectations. Good luck out there.

Daryl G. Jones
Managing Director

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