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For the last week or so Anna Massion has been emailing me the offers she’s received from various Las Vegas casino hotels. Anna is one of our gaming/lodging gurus so of course, she has spent some time in Vegas over the last several years. It’s been years since either one of us have seen deals like this. I’ve included a few below:

• The Venetian: $119 per night with over $150 in resort credits – unless LVS is getting a cut of the airline fare, they can’t be making money on this deal. As Anna said, “it’s like they pay me to stay there”.
• Encore: $140 per night – not good for a new luxury hotel
• Wynn Las Vegas: $129 per night – can you say cannibalization?
• Four Seasons: $280 for one night plus a $150 credit – this isn’t coming out of the Four Seasons cut
• Mandalay Bay: $79.99 per night – sounds much better than $80

These are just the most recent promotions. What’s interesting is the progression over the past 3 months. Each promotion is more and more generous. Wait a few months and they’ll pay your mortgage too.

Eye on Credit and Housing

We wanted to highlight the 4.75% interest rate that JPMorgan Chase is advertising on their website for 30-year mortgages today. This is in conjunction with Freddie Mac reporting yesterday that market for 3-year fixed rate mortgages had reached 5.01%, down from a 5.10% a week earlier. This is the lowest rate going back to 1971, which is as far as the data is kept.

While low mortgage rates does not necessarily tell us how many mortgages are being approved, the declining interest rates do imply that credit is getting “unstuck” and that banks are underwriting mortgages. On the margin, this is obviously positive for the consumer and, if the velocity picks, up will clearly be positive for home values.

We’ve lightened up our Trade on consumer stocks over the last week or so because our quantitative models were flashing an overbought signal, but clearly the Trend of an improving consumer environment is supported by this mortgage data.

Daryl G. Jones
Managing Director

Eye on the Kansas City Fed

We wanted to highlight the comments yesterday from Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City, as it relates to the possibility of inflation raising its ugly head in 2009 due to the large amounts to stimulus and record low interest rates both in the U.S., and abroad. We’ve excerpted some key comments of Hoenig’s from a Bloomberg article below:

“Hoenig said the Fed 'must design an exit strategy that at the appropriate time removes excess liquidity from the economy and allows it to withdraw as a significant intermediary.'

Failure to do so risks bringing on inflation and financial market 'excess,' setting the stage for yet another crisis, he said.

Hoenig said on Wednesday that he believes deflation is not a 'large possibility' in the United States, and cautioned that inflation could resume its upward trend once the stimulus measures to jump-start the economy start to work.

Inflation has come down ... but with the stimulus that is in place and if the economy does in fact pick up toward the end of the year, I think we will have pressures up because policy is very accommodative at this time,' he added.”

His statement is supportive of one of our key themes for 2009, which is that the cost of capital will begin to raise in the back half of 2009 and into 2010. This is because basic math suggests rates can only go up, as they are at all time lows in the U.S. With Volcker as an advisor President Elect Obama, we only have to look back to Volcker’s time as Chairman of the Federal Reserve to see how quickly interest rates could go up if and when inflationary concerns emerge, which is graphically depicted below.

Daryl G. Jones
Managing Director

Early Look

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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?