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SP500 Levels Into The Close

A lot of people expressed difficulty in agreeing with my view that we could very well see a -4% pullback in this tape. That’s probably why we are correcting.

After refreshing our model, here’s how the math flushes out. Be patient – this is turning into a very predictable and trade-able range. Volatility is shooting up today, like we thought it would from those oversold immediate term lows. Next line of resistance for the VIX is $45.83, but as we climb towards that line and see the SP500 fall into the buy zone, this tape sets up very bullishly. For the SP500 my levels are:

BUY “Trend” = 895-901 (see chart)
SELL “Trade” = 951

Keith R. McCullough
CEO & Chief Investment Officer


Romanian Red

ROMANIA TRADES DEEP IN THE RED

Like many of the European markets that closed down today on a stronger Euro and the “reality” of disrupted-- or in some cases completely cut-off--gas lines from Russia, Romania took a very precipitous -12% nose dive on the day.

Today’s slide can be significantly attributed to Banca Transilvania, the country’s second-biggest publically traded bank that accounts for 61% of the index, which lost some 58% of its value, having resumed trading today after the bank’s stock was suspended. Additionally state-owned gas distributor Transgaz fell from a one-month high as Gazprom reduced supplies.

Romania’s market performance in Q4 ‘08 was quite stable. (See graph). From its low on October 27th, the Bucharest’s BET Index rose +18% as of trading yesterday. Q3 GDP growth in Romania stood impressively at 8.9%, the highest in Europe, riding years of growth that drew foreign investment.

Irrespective of today’s crisis in local credibility, we do not think that Romania can sustain 9% GDP growth in 2009. That said, as we look Eastern European countries like Romania, an important question we continue to ask ourselves internally is: could Eastern European growth decouple from that in Western Europe? Stay tuned…

Matt Hedrick
Analyst

Eye On The Crisis in Credibility: The Indian "Chairman" Who Cooked His Books

B. Ramalinga Raju, Chairman of the Indian outsourcing specialist Satyam Computer Services, has resigned, confessing that he cooked the firm’s books for several years.

Was this CRISIS IN CREDIBILITY a factor in global equity market weakness today? You bet your Madoff it was!

Raju admitted to grossly inflating Satyam’s cash and bank balances by $1 billion and fudging the firm’s revenues and operating margin in the quarter that ended in September 2008. The actual operating margin was 3% ($12.5 million), on revenues of $434 million. He reported an operating margin of 24% ($133 million), on $554 million in revenues. Debts were overstated by $100 million, and liabilities understated by $253 million.

The confession sent the stock of Satyam Computer Services (NYSE: SAY) plunging by 138.70 rupees ($2.84), or 77.5%, to 40.25 rupees (82 cents), and pulled down the BSE Sensex 30 index by 749.05 points, or 7.25%, today.

In the wake of Madoff, Raju’s actions further erode the credibility of executive leaders and put a black mark on India’s software sector. Raju’s statement that he cooked the books to prevent a take-over of Satyam is not a process, it’s an excuse. Ironically Satyam means “truth” in Sanskrit. This news further adds to our bearish view on India.

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Deflating The Eurozone's PPI

This chart is more of the same on the global inflation report front for the month of December. As commodities were getting crushed, and the Euro’s currency “re-flated”, producer prices tanked. This European report (see chart) was the largest month over month decline in 27 years! Don’t expect to see the same in January.

This, of course, paves the way for the Europeans to continue to cut interest rates. Sans le inflation, Monsieur Sarkozy will be pounding the political free drums. That’s a bet you can lever up long on!

Keith R. McCullough
CEO & Chief Investment Officer

Got Yen?

We hope you have less of this compromised socialist currency, if any of it whatsoever. While we covered our short position in the Yen (via the FXY etf) yesterday, that certainly doesn’t mean we like it here. I will be looking for an entry point to re-short it on strength.

The October-December squeeze in the Yen was an output of one of the great levered long investor unwinds – the Yen carry trade. This also occurred in the time period of global asset class rotation where the safety of cash became king. Now that both the US and Japanese governments are cutting interest rates to zero, it inspires the capitalist in me to hold less and less of a currency that earns no rate of return on my hard earned savings.

As the “liquidity crisis” continues to burn itself away from consensus, look for both the US Dollar and the Yen to underperform as they have been doing for the last month.

We remain short the US$ via the UUP etf.
KM

Keith R. McCullough
CEO & Chief Investment Officer

Eye on Taiwan: Another Rate Cut Today

This morning’s rate cut was Taiwan’s 6th since September!

See the chart below. While growth falling off a cliff from September to November is now a fact for the revisionist historians to chew on, the reality is that both the Chinese and Taiwanese stock markets proactively predicted the growth slowdown for the 6-9 months prior to the news hitting the tape.

Now what? Well, that answer is fairly straightforward for Asian governments – jus copy Greenspan – cut rates to zero, cut taxes, and create stimulus.

We remain long Taiwan via the EWT etf.

Keith R. McCullough
CEO & Chief Investment Officer

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