One doesn’t need incredible powers of deduction and analytical skills to conclude that Sheldon Adelson has probably annoyed the powers that be in Beijing and the Macanese government. Our contacts indicate this may actually translate into action.

Beijing knows who the junkets are and could pressure them to direct Rolling Chip business away from the LVS properties to the new Crown casino opening up in Q2. Moreover, Beijing may facilitate faster visa approvals for Crown customers. Finally, Beijing will surely influence the choice of the next Chief Executive of Macau. The Macanese government may have the power to redistribute Lots 7 and 8 on Cotai currently controlled by LVS. The government could take it a step further and take control of Lots 5 and 6 which have been partially developed (Sheraton, St. Regis, etc.) also currently controlled by LVS.

Given the black box that is Beijing, no one knows for sure what will happen. However, it is pretty clear that Adelson has gone too far and some significant consequences may follow. Add this to the growing list of issues facing LVS including: liquidity, covenants, a Las Vegas depression, and the likely sharp downturn in the Macau Rolling Chip segment.

EYE ON EUROPE: Numbers Reflecting Reality

European confidence dropped considerably in December to 67.1 from 74.9 in November, according to an index of executive and consumer sentiment. This 11.6% decline is the lowest level since the index started in 1985 and indicative of broadly bleak economic data in Europe.

Euro-area unemployment rose to a two-year high of 7.8% in November from 7.7% in October; you can bet that December numbers will look even worse as the Euro continues to rise against the dollar, which will drag down export-oriented countries like Germany. Germany reported a -10.6% decline in exports in November, the biggest drop since German reunification in 1990, according to the Federal Statistics Office. Volkswagen, Europe’s biggest carmaker, said its US sales fell 14% in December.

The graph below shows that European consumer confidence across numerous sectors has fallen to double digit lows. We sold our German position via the etf EWG on 12/17 to book a modest gain, paired against a short on the UK (EWU) that is still active.

The numbers reflect the reality. Today the BOE cut interest rates to 1.5% and you can expect the ECB to take similar action when it next meets on January 15th. Both the BOA and ECB (at 2.5%) have room to cut, yet both will be heading down the US’s “road to zero” as they attempt to counter the bleak European economic outlook.

Matthew Hedrick

Obama Just Delivered The Preview - It Was Good!

As bad as yesterday's Q&A was with the press, is as good as this morning's Obama press conference was (just ended). The only thing that has changed in between now and then are this market's prices.

As I went off on in this morning's Early Look, prices are a function of expectations, and expectations are a function of market prices...

This isn't rocket science, and neither will be the market's anticipation of Obama's Inauguration speech. The man has been doubted from the very beginning - being short that January 20th option is something that I hope the bears are really all in on - I'll get longer in the meantime, waiting patiently for my buying range in the SPX of 885-900.

With the VIX oversold and the SPX overbought, we sold a lot of exposure down ahead of this final “Crisis In Confidence” because it was proactively predictable. The large majority of money managers out there aren’t really allowed to get extremely bullish here – and that’s a bullish reality in and of itself, at a price.

Today we're getting the prices we want. The VIX is getting overbought and the SPX oversold.

As the facts change, I change - what do you do, Madame?

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Who's Got Your BETA?

This BETA shift we have been calling for in your portfolios is already starting to work. The next leg of the market making higher lows (after selloffs like this morning's) will be characterized by higher quality, lower beta stocks and asset classes. The base of this market’s bullish recovery is broadening. 2008 is yesterday’s problem.

When beta becomes alpha - that's a very cool thing...

What do we have in our virtual portfolio that is signing this "in the green" song this morning?


Keith R. McCullough
CEO & Chief Investment Officer

What do you do, Madame?

What do you do, Madame? - asset allocation010809

"As the facts change, I change... what do you do, Sir?"
-John Maynard Keynes

To be clear, I am no Keynesian. However, I think this may be one of the best one-liners in the economic dialogue - it is a process.

I have my investment process, and you have yours - together, we can learn from one another and test, implement, and evolve. That's what the most successful dynamic multi-factor systems on this planet have always done. There is no reason to believe that macro economics will end up any differently. When the Street or your boss tells you they "don't do macro", I humbly suggest you challenge that received wisdom from the heavens of non-transparency, and ask well "what is it that you do, Sir?"

Don't forget that the 1st Nobel Prize in Economics wasn't awarded until 1969 - there are plenty a precedent waiting to be set in this profession; plenty of processes to be tested and tried; and plenty of winning and losing investment strategies that will emerge from the facts.

Of course, this isn't a gender thing, so THE question could very well be "what do you do, Madame?" In fact, neuroscience is starting to uncover The New Reality that women are actually predisposed to make better portfolio decisions than men, on balance, when under stress. Sorry guys!

One of our sharpest female clients jumped right on my suggestion from yesterday's Early Look ("Crisis In Credibility",, 1/7/09) and effectively peppered me with questions as to the implications. She, as usual, was all over the pin with THE questions she was asking. Given the facts that have revealed themselves over the course of the last 3 months, THE question remains: why doesn't Wall Street understand that there is no longer a "Liquidity Crisis" and that all we have left is a "Crisis in Credibility?"

Whether it be Satyam Computer's Indian fraud announcement that continues to rock Asian equity markets or Chinese computer giant Lenovo trading down -26% last night on missing expectations, it's all one and the same - we have ourselves a crisis in both the credibility of the financial system's leadership and the research process embedded therein. If we didn't, expectations from Madoff to the "Made-Up" wouldn't be creating so much heartache in your 401k's.

"Expectations" are indeed "the root of all heartache", and to be clear, I am not a Shakespearean student in creative writing either, but his point lines up very appropriately with the Keynesian one. When the facts change, you better make moves in your portfolio, or your investors will soon be expressing heartache of their own.

Why does this process gospel according to Keith matter to the market this morning? Well, because it matters every morning. When I started selling our position in Commodities and Equities into the peaks of pessimism caught off sides, I was doing so because the facts in my macro model were changing. I didn't do it to be cute. I didn't do it to pander to a core constituency. I simply did it because I thought I was going to be right.

There are 3 things that have changed in the last 72 hours of global macro fact gathering: 1. Prices, 2. Expectations embedded in those prices, and 3. Timing of macro catalysts.

Of those 3, price and expectations are correlated functions of one another. As prices rose, so did expectations - so I started selling into them. We sold all of our "re-flated" Commodities, all of Brazil, and all of Hong Kong - prices in the two latter equity markets had risen over +40% since we started getting bullish, while the price of oil had raced +46% higher in less than 9 trading days. As prices and expectations change, I change... what do you do, Madame?

When it comes to understanding markets, Madame Speaker, Nancy Pelosi, is not in the same league as my aforementioned client. Yesterday, Pelosi, and Congress at large changed the point #3 in what mattered most to my macro model on the margin - TIMING. I sent out 2 separate intraday macro notes to our top tier Macro clients yesterday titled "Beware of Congress" and "Obama Having a Rougher Day" - so I won't rehash those notes in full, but I will say that the facts were changing yesterday - real time - and markets wait for no one.

The bottom line is that Congress is pushing out the timing of the catalysts associated with Obama's inauguration. On the margin, these pending catalysts are mostly positive... but their duration was being pushed out, at least rhetorically. I actually think this is great for the US stock market in general, because it creates a longer dated tail of positive announcements - in the face of a dreadful pending employment report tomorrow, and Q4 earnings season right around the corner, God knows we need that.

I don't need to be bullish or bearish. Neither do you. We have to be right. This is going to be a dog fight in 2009 as to who has both the best investment processes and returns. We will never, ever give up. We have your back. We appreciate your business and feedback - without it, we wouldn't be aware of as many facts changing in this globally interconnected market place as there are.

My buy/cover range for the SP500 is now 885-900. I proactively cut my asset allocation to US Equities in half over the course of the last week. Now I am open to buy more, lower.

Best of luck out there today.

What do you do, Madame? - etfs010809


We will soon see how much of an impact the flood of junket credit had on the Macau market in 1H 2008. The following chart shows the quarterly Rolling Chip (RC) volume in 2008 and the 2009 volume assuming a Q4 2008 run rate. Sure there may be some seasonality associated with Chinese New Year in Q1 but the underlying credit situation is deteriorating sequentially. Yesterday, LVS President Bill Weidner commented that junket operators have been unable to collect a lot of the money they lent their VIP players.

RC volume could be down 20-25% in 1H 2009. MPEL will be impacted the most as 96% of its revenues were from RC in 2008. However, Wynn Macau and Galaxy were not far behind, each generating around 80% of their respective 2008 revenues from RC. Granted, the mass market profit margin is roughly double that of rolling chip but rolling chip generates more dollar profits than mass market. That is certainly true for most of the properties in Macau, including Wynn Macau.

Macau estimates certainly look like they need to come down.

1H 2009 Rolling Chip will be impacted by tough comparisons and deteriorating credit environment

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