Over the weekend the Melbourne Institute Monthly Inflation Gauge was reported (official CPI data is only released quarterly by the Bureau of Statistics) with a year-over-year growth level of 2.23%. The continuing decline in inflationary pressures leaves more room for Governor Stevens and his team at the Reserve Bank to cut rates from the current 4.25%.

For the Australians declining inflation is a double-edged sword since the collapse of the commodity bubble of 2008 has dramatically dampened short term prospects for the country’s GDP. Q4 import/export price statistics slated for release on Wednesday will provide an insight into how large the impact of declining metal and fuel prices may be.

We have long admired the resolve that Mr. Stevens and his predecessor Ian Macfarlane used in rate policy during the white hot growth of 2006-2008; their policies left the land down under with plenty of room to cut rates. Unlike Brazil however, Australia’s declining commodity export revenues are not offset by massive internal consumer demand, leaving them vulnerable to long term deflationary pressure.

We will continue to watch Australian equities, which we have owned on several occasions over the past two quarters, if only for a short term “Trade.”

Andrew Barber

SP500 Levels Into The Close

This is getting nasty, and if it weren’t for Gold (GLD) and the VIX not confirming … yet… I’d say we are on the precipice of another SP500 crash. Crash? Yes – the horse and buggy whip US Financials (XLF) are crashing – as they should.

Looking at the chart below, you’ll see my refreshed levels to manage around if we don’t crash. Selling SP500 866 is the dotted red line – that’s where any immediate term “Trade” to the upside runs out of gas. Selling SP500 883 is the new intermediate term “Trend” line – make no mistake, its bearish out there. The US Financials, as a sector, are down -30% for the year to date!

The buy/cover for the immediate term “Trade” line is 803. If you’re in the SP500 crash camp, a 3 standard deviation move in my model will get you SP500 771. That’s another -4% more pain to carry (or risk) if you cover/buy at 803. This Crisis in Credibility has proven to be both well deserved, and painful to the stock market for 2009 year to date, but I still do not think the SP500 will make a lower low versus November’s 752.

Keith R. McCullough
CEO & Chief Investment Officer

Eye On Leadership: President Obama

Transparency, Accountability, and Trust - we like that message, and if only in rhetoric, that's where Obama sides with Research Edge's vision of The New Reality.

Bank of America is no longer America's once vaunted investment banker. Blackstone's lack of transparency is not the new American capitalists interpretation of where this country is headed. Those two stocks are down -19% and -11% today for reasons that are unique to their very own shortsightedness.

Trading down another -9% today, the US Financials (XLF) have already crashed in 2009. Tomorrow that will be yesterday’s news.

For the year to date, we have a developing story of the excesses unwashed meeting their maker. At down -30% for the year to date, in a year that is only 20 days old, today we can say goodbye to the horse and buggy whip thought processes of the leverage cycle past. Goodbye and Good luck.

Before we can “dust ourselves off, and rebuild it”, the SP500 needs to rid itself of the market cap associated with the banking system’s Crisis in Credibility. Everything starts with confidence. Obama has that - and yes, the best things in life take time to build.

We are most likely going to test my downside SP500 support line of 818 in the meantime.

Keith R. McCullough
CEO & Chief Investment Officer

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Selling The Brazilian Bull, For Now...

When I woke up this morning to the Russian stock market crashing to new lows (lower than its October low of 549 on the RTSI), I immediately moved to run the risk management math on our position in Brazil (the EWZ etf). While I don’t believe in the nonsensical Wall Street acronym BRIC (Brazil, Russia, Chindia), I very much believe that when my intermediate “Trend” line breaks that an asset can begin to fall like a brick.

That’s my math and I am sticking to it. The reality is that the Bovespa (see chart) finished off a massive +44% move on January the 6th, right after the US stock market locked in its 3-month cycle high up at 941. While the Bovespa’s recent correction has been about the same as that in the SP500, this only means that it has further to fall if mean reversion has any place in the risk management side of the argument.

No, I am not selling Brazil because I don’t think they will cut rates. No, I am not selling Brazil because I don’t think that it will continue to outgrow the rest of Latin America in 2009. I am selling Brazil today, because the Bovespa index broke a critical level in my model at 38,787.

Keith R. McCullough
CEO & Chief Investment Officer

Trading Gold: Here Are Our Levels...

Gold is having a strong day here, on both an absolute and a relative basis, trading up another +2% to $855/oz.

This is all the more impressive given that the US Dollar continues to gouge price re-flation in pretty near every other asset class. When there is a Credibility Crisis in the banking sector, gold has its perks.

Below we have outlined the bullish intermediate “Trend” line for gold that remains formidable at the $808 line, but also has the shorts covering all the way up to the $835 level, perpetuating this up move.

I have an immediate term “Trade” sell line (dotted red on the chart) up at $875, but that’s just for a “Trade”. The story the gold bears continue claw at is that we haven’t yet made higher highs for this 3-month cycle move. If we push over $920, that thesis will be under assault.

I currently hold a 6% position in Gold via the GLD etf. That’s a better than bad place to be.
Keep moving out there,

Keith R. McCullough
CEO & Chief Investment Officer


For the first time during this credit crisis, the gaming operators can see a silver lining in their cloudy financial positions. The three month LIBOR has plunged to 1.09%. All of these companies maintain significant borrowings off of their credit facilities where the interest rate is determined by a (tiny) spread over LIBOR. The EPS tailwind for 2009 EPS is huge. We are not big EPS followers at Research Edge, but the low rate environment will have a big positive impact on cash flow.

Rock bottom LIBOR alone doesn’t pull these guys out of the debtor’s prison they put themselves in. Taking on excessive debt levels to invest in low ROI projects was a strategy that was destined to fail. Fail it did; shareholders and bondholders have paid the price. Unfortunately, that is a sunk cost. On the margin, the liquidity picture may be looking a bit brighter.

The following charts examine the 2009 financial impact from LIBOR going from just over 3% in late October to the current rate of 1.09%. We looked at late October as the starting point because the companies last gave guidance during the Q3 earnings season. Moreover, that may be the last time many analysts updated their models.

ASCA, BYD, LVS and MGM are the biggest beneficiaries in terms of EPS and cash flow. These companies all maintain very attractive credit facilities and significant borrowings off of those facilities. BYD should receive the largest boost with the October to January decline in LIBOR impacting EPS by 46%. ASCA and MGM are on track for over a 30% increase each. In terms of cash flow, LVS, ASCA, and BYD could all see interest cost savings in excess of 10% of their projected 2009 EBITDA.

Combined with deleveraging bond buybacks, the low rate environment should help MGM and BYD get through 2009 without busting covenants. This will put BYD in the clear for 2010 and beyond but MGM still needs new financing to avoid covenant breaches in 2009. The problem for LVS is the leverage covenant in its Macau bank facility which will likely be breached even with the lower rates. Similarly, ASCA faces a potential Q2 senior leverage covenant breach.

Of course, this analysis assumes a) rates will persist here for all of 2009 and b) analysts have not updated their interest rate assumptions since late October. The actual impact is likely to be less, due to a) and b) above, and worse operating trends. However, while investors have certainly focused on the operating fundamentals, we don’t believe the LIBOR tailwind is appropriately reflected in some of the stocks.