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The latest Export data from Korea and India seem to tell different stories…

Indian Export data for December was released today, registering at -1.05 % year-over-year. This is the third consecutive negative Y/Y figure for Indian exports, but a significant improvement from November’s number –both on a Y/Y and an absolute basis. The agony for Korean exports shows no in end sight with a January figure of -32.79% decline –the lowest Y/Y level recorded, worse even than the massive decline following the US withdrawal from South Vietnam and the later collapse of the Saigon government (South Korea was a primary hub for US equipment shipments then).

The divergence between India’s relative December resilience and Korea’s descent into the abyss is interesting but is ultimately somewhat misleading. The critical service industry component of the Indian growth story is ultimately more important than a rebound in exports of cheap motorbikes. This high tech service sector is sinking in lock step with the decline of financial services in the western economies and other major outsourcers with no hope of internal demand to offset the slump.

For the mature industrial block of the Korean economy, the picture is grim. Despite some pockets of strength in the heavy industrials that are still working through a healthy backlog (evidenced by shipbuilder Daewoo’s record numbers reported today), the export market for Korean goods, particularly automobiles and light trucks, continues to contract.

We have been negative on prospects for both India and Korea over the past year and are currently short the Indian equity market via IFN.

Andrew Barber

RT – Looking at the “Gap to Knapp”

An important way of measuring RT’s success in fixing its same-store sales problem will be the narrowing of the company’s “gap to Knapp.” Over the past year, RT same-store sales have been disastrous, but the “Gap to Knapp” has been narrowing recently. Sales trends in the current quarter support that this thesis will continue. At the core of RT’s sales issues is that the concept has been hardest hit in the rural areas of the Southeastern part of the US. This is due in part to high gas prices, but also the availability of gas in gas stations last summer. Both of which have self corrected.

Ironically, I attended a comedy show last night and have never laughed so hard at jokes about how bad the food, service and décor is at Applebee’s. I thought it may just have me laughing because I’m a restaurant analyst, but nope, the crowd really “got the joke.”

SP500 Levels Into The Close...

Despite all of the intraday day noise… there is one macro factor that continues to dominate the US stock market – it’s inverse relationship with the US Dollar. At this point, all I think we need is the US$ Index to stop going up, and stocks can work, for an immediate term “Trade” to SPX 838 …

Interestingly, my models have chugged out a support level for the SP500 that is higher than what I had earlier this morning. There is a margin of safety building at the 808 line (see chart), and that’s only -1% lower from where the market is trading here at 3PM EST. This creates a tolerable risk/reward for me to start covering/buying.

Volatility as measured by the VIX, is up another +5% right now at 47.04, but will be overbought, from an immediate term perspective, at 49.88. So give me a US$ that stops going up, SPX 808, and VIX 50, and I cover/buy.

Keith R. McCullough
CEO & Chief Investment Officer

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Chinese Yuan: The Chart That Hasn't Come Down...

Quite often in global macro, a picture can be more powerful than prose. This is one of those pictures.

Why am I calling it out right here and now? Well, the Chinese Yuan traded down overnight to 6.85, putting it down, yes DOWN, for the year to date. While a -0.4% YTD decline is nothing in the context of the currency volatility that we have seen across global macro, the point here is one that matters on the margin. On an annualized basis, this currency hasn’t depreciated since the peg was removed in 2005 (see chart).

This is one surefire way for the Chinese to stimulate export demand. It’s also a leading indicator for more Chinese interest rate cuts to come. Altogether is a new and emerging factor in our multi-factor macro model. We will be expanding upon the consequences of a weaker Yuan later in the week.

Keith R. McCullough
CEO & Chief Investment Officer

Chinese Propaganda Beating America's?

There was an article this weekend from Xinhua titled "Big Chinese firms squeeze payroll of top executives to cope with crisis." At least these guys are proactively managing the process of damage control! (see below)

Special Report: Global Financial Crisis
BEIJING, Feb. 1 (Xinhua) -- More Chinese firms are slashing executive pay and practicing tighter budgets to get through the economic crisis, the State-owned Assets Supervision and Administration Commission of Shanghai said Saturday.

Eye on Washington: Stimulus Duration Likely to Extend Further

In a note last week entitled “Obamerica: The Honeymoon is Over” we highlighted President Obama’s inability to get a single vote from Republicans in the House for the stimulus bills despite a week of vigorous lobbying. Nonetheless, given the Democratic majority, the bill passed and is now in the Senate, where its future, at least in the current form, seems questionable.

Senate Republican Leader Mitch McConnell made a statement Sunday implying the bill would go down in defeat if it wasn’t stripped of unnecessary spending and focused more on housing issues and taxes. McConnell also went on to specifically challenge Obama’s ability to manage his Democratic colleagues in Congress when he said in an interview:
"I think it may be time ... for the president to kind of get a hold of these Democrats in the Senate and the House, who have rather significant majorities, and shake them a little bit and say, “Look, let's do this the right way”. I can't believe that the president isn't embarrassed about the products that have been produced so far."

While President Obama and Vice President Biden seem to be posturing to suggest they will get at least some Republican support for the bill in the Senate, the Republican Party appears very well organized in opposition to this bill. Senator Jon Kyl from Arizona, who is the No. 2 Republican Senate, backed up McConnell with even stronger words when he stated:
“When I stay start from scratch, what I mean is that the basic approach of this bill, we believe, is wrong.”

Given that the Republicans currently have 41 seats in the Senate, they do have the ability to stop the bill, so it is likely that the bill will change in form, and perhaps dramatically. Ultimately, the investment implications are that approval of the bill will likely be pushed out and with it the duration of the investment catalyst(s) relating to the bill.

Interestingly, the Republicans are continuing to focus on creating the image that President Obama is unable to manage his former Democratic colleagues in the House. They are placing the blame on Democrats in the House for the impractical and unwieldy nature of the bill, but implying that Obama should have managed them better in the process.

That may be partially true, but the reality is that President Obama, due to no action of his own, has in both Nancy Pelosi and Harry Reid two teammates that seem somewhat unwilling to create legislation that would garner bipartisan support. In Reid specifically, President Obama also has a Senate Leader that seems unwilling to cede much influence to the President, which was highlighted by his January 9th comment,”I don’t work for Obama”. Indeed.

Daryl G. Jones
Managing Director

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