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EVEN A HOTEL COMPANY IS SEEING STABILITY

Our consumer and macro team have noted signs of stability in our respective sectors. Things appear to be getting less bad. Is that enough for the stock market? Keith McCullough and our macro team believe so, at least for the near term. They believe we won’t hit resistance until 754 on the SPX, or 6% higher than here. Interesting call particularly if you believe, as we do, that the housing delta will turn positive in Q2. Keep a trade a trade is our motto since we all remain concerned with the quasi socialism that’s being proposed.

In my narrow world, we’ve seen evidence of stability. Today, we got some confirmation in two areas where I would’ve least expected it: lodging and Las Vegas. It wasn’t exactly a “business is booming” call to arms, but Starwood Hotels indicated at an investment conference that “the change in the rate of change has stabilized”. You know it’s a bad stock market environment when a positive 2nd derivative becomes an investable delta. The other surprise of the day was the RevPAR data provided by Sheldon Adelson. February occupancy and rate at their Las Vegas properties were 93% and $225, respectively, much higher than the Street was expecting for Q1. Moreover, March is a stronger seasonal month.

We do acknowledge that these are the first positive data points we’ve garnered on either general lodging or Las Vegas. However, we have been making the case for stability in other areas of leisure. We’ve been highlighting the sequentially improving regional gaming markets (see “REGIONALLY SPEAKING, BUSINESS AIN’T THAT BAD” from 2/18/09). PNK posted terrific earnings and the rest of the regional guys were better than bad. In our 2/26/09 note, “CRUISING TOWARDS STABILITY”, we discussed better Jan/Feb bookings.

In any other market, I probably wouldn’t be highlighting “less bad” as an investable theme. However, given the valuations on leisure stocks, rock bottom expectations, high short interest, and Keith’s near-term positive view on the market, any signs of stability are important.
I personally own shares of PNK

Where's Shorty? The VIX...

This morning, we are seeing more of the same. Volume accelerating on the stock market’s UP move as volatility (VIX) continues to break down (-9% on the day). These 3 factor (volume, price, and volatility) acting this way in unison are, on the margin, bullish.

The VIX in particular is forming a formidable bearish Trend at the 50.98 line (thick red line), and should accelerate to the downside if/when the VIX breaks the shorter duration Trade line (dotted red line) at 46.53. There is weak support for the VIX down at 43.42, and it should bounce there… but, make no mistake, the VIX is making lower highs (vs. the 2008 peaks) on rallies and strength in the VIX is to be sold.

Be careful on the short side out there. There are some angry bears out there dealing with today’s short squeeze who know this is the right quantitative call.
KM

Keith R. McCullough
CEO & Chief Investment Officer

Eye on China: No Inflation Here...

Chinese inflation Levels continued to contract rapidly in February…

February CPI & PPI data released by the National Bureau of Statistics in China last night showed a continued decline in price inflation with Consumer Prices declining on a year-over-year basis for the first time since 2002.

CPI:

CPI registered at -1.6% in February, making the specter of deflation a real concern for Beijing. In stark contrast to the pre Olympic period last year, the most recent data shows that collapsing commodity prices has reversed food cost trends, while non-food prices have come in much more modestly (see below).
The dilemma facing the leaders remains how to coax consumers to loosen their purse strings in the face of steady declines at the cash register. Premier Wen Jiabao has recently reiterated the government inflation target of 4% for the year, with expectations that prices will rise as stimulus program projects get under way. Last month we underscored the overlapping cultural and economic incentives for Chinese consumers to save rather than spend in the near term, nothing has changed in this analysis. The middle class have been jolted by factory job losses and the volatility in asset prices globally (a first taste of the negative side of capitalist consumer culture for many). We expect that these more affluent consumers will wait for confirmation that prices have stabilized before re-entering the market for larger purchases.

They may not wait long: As infrastructure projects break ground in central regions, streams of laborers will be drawn into the interior (instead of toward coastal factory towns as in years past) creating new geographical pressures on consumer products that could lead to pockets of regional inflation. Anyone who remembers 7th grade history class will recall the tiny pockets of hyper inflation driven by gold rush prospectors swelling the population in distant outposts. We will be watching for any anecdotal evidence of any regional pressure as construction begins in earnest in the coming months.

PPI:

The falloff in prices for energy commodities and base metals continued in February, driving PPI to -4.5% Y/Y, its lowest Y/Y levels since March 2002. The breakout in component costs in the NBSC stats still show no signs of the reflationary clues we have been tracking in base metal prices and Australia/China shipping costs.

Coal was the notable divergent component again, increasing by 18.7% Y/Y, up from 12.3% in January. Last month we noted that announced production cutbacks of as much at 20% by generators on the state electricity grid would likely have an impact. It didn’t.

The PPI puzzle remains. If coal cost pressure remains strong and is joined by increased cost in other raw materials in the March data then it can be taken as a reflationary signal showing remerging demand by heavy industry. Until then, the best clues we have are anecdotal reports and price action in the international commodity markets.

Looking Ahead

We have been bullish on China consistently since December of 2009 and remain so – we are long China via the CAF closed end fund. Find us another country with positive mid single digit GDP growth and negative low single digit consumer price inflation, and we’ll show you another country we get bullish on!

China has liquidity and the potential for massive growth in domestic demand; we will remain flexible and will change our stance if the data undermines our conviction, but for now those factors dominate our model.

Andrew Barber
Director

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Another Positive UA Nugget

While we'll never hear a retailer outwardy bash UA, the tone on the DKS call supports my view on the health of the brand and near-term success of running launch.
No mention of brands in prepared remarks. But In answer to the first question on Q&A...

a. Not reducing any of the major brands (e.g. NKE, UA, etc.) - it's the other brands that they've scaled back on

b. UA running shoes have done quite well

BYD: DEVIL’S IN THE DETAILS

Boyd responded to the rejection of its offer to buy Station Casino’s OpCo assets by reaffirming its offer. Station’s Board rejected BYD’s offer last week, citing concerns surrounding BYD’s financial position and the risk of sharing sensitive financial information with a competitor.

This situation is not likely to be settled soon and the decision will ultimately reside with STN’s bondholders. The most important near term takeaway, however, may be the strength of BYD’s financial position as discussed in BYD’s response filed as an 8k with the SEC yesterday:

“Boyd Gaming reiterates that it has sufficient liquidity under its credit facility to finance a cash transaction, and contemplates that no amendment to its credit facility would be required under the proposed transaction structure.”

What should be noted here is that BYD would not require any amendment to its credit facility to complete the transaction. This is critical to the BYD story. Clearly, unlike the Street, BYD is comfortable with its covenant situation, and more importantly, so are the banks. I’m pretty sure the banks were consulted, and gave their consent, before the offer was made.

I recognize the challenging fundamentals facing BYD this year. However, given the increasingly apparent strength of its financial position, the stock probably should not trade as an option. The regional markets are stabilizing and there is reason to be optimistic about the Las Vegas locals market in 2010. Picking off some of the Station assets would be gravy.

SHAKE AND BREAK

"Gentlemen Prefer Bonds"
-Andrew Mellon
 
With all due respect to Mr. Mellon's legacy of philanthropy, I'll continue to take the other side of that "safety" trade in 2009. I'm not lending my money to the US government and US Corporates. They have resorted to begging for the world to buy into that old saying... it is un-American, and quite sad altogether.
 
Both US corporate bonds and now US Treasury bonds have gone from shaking in my macro model to breaking. For some time now, I've expressed our short thesis on what Wall Street storytellers call "corporate high yield" (it is actually junk) via a short position in the LQD (corporate bond ETF). I am also short shorter-duration US Treasuries (1-3 year bonds) via the SHY exchange traded fund. While plenty of gentlemen are still long these bonds, they aren't working out for them like they have forever.
 
Today, the US government will issue another staggering $34B worth of 3-year Treasuries. This is the other side of Paulson and Geithner's free money program - it doesn't come out of thin air. As the said leaders of this country continue to socialize Wall Street's losses with debt issuance, bonds are breaking down, and yields are breaking out.
 
As yields breakout from their longstanding low cost of capital Trend line, over-geared business models start to Shake and Break. While it has the same ring to it, do not mistake this for Will Farrell's "Shake and Bake" move in 'Talladega Nights' - this isn't a go to move for those addicted to leverage! This is more like a leading indicator for their investment vehicles getting wrecked.
 
As cost of global capital continues to accelerate and the access to it continues to tighten, you end up with a marked-to-market value of equity that is lower than what it was before. Whether that equity is "Private" or GE's, it doesn't matter - returns go down on said "equity" when your financing costs go up.
 
No, this isn't that complicated to understand, but it's very difficult for those who lust for leverage to explain. For the last 25 years, the cost of capital in America was conveniently politicized (decreased) at every sniff of an economic growth yellow flag. The go to "Shake and Bake" move by many executives was simply to step on the gas, raise more equity, and pile it on top of losing positions, and/or sell it high to some other poor soul at a private equity shop who didn't do global macro who was perfectly willing to earn a fee to do the same...
 
Ask the folks in the fur coats up in Iceland how this scheme ends. When the debt burden starts to Shake and Break, it's over. Iceland's stock market is obviously a gong show that comes into focus from time to time. Yesterday, it crashed for another -15% down move. These Icelandic guys once fancied themselves as capitalists, like the old American kind who are watching West Texas crude oil breakout of its base alongside these higher interest rates (we're long Oil)... but make no mistake, there is nothing that focuses the mind like a good ole fashioned hanging used to in the wild West ... Shake and Break anyone?
 
The worst part about the Shaking and Breaking in the Treasury market is that we have an incompetent team running the US Treasury (or is there anyone on the team - they can't seem to find Timmy any teammates). No wonder why the deer in headlights (Timmy Geithner) has only found one US market savant to support him (Jimmy Cramer).
 
I wrote an Early Look called "Jimmy and Timmy" a few weeks back, and poor Cramer felt obliged to bust out his Shake and Bake move of an op-Ed in the New York Times - for those of you who'd like to hold Jimmy accountable, I am sure you can find a reprint of that wonderful piece of whatever that was...
 
The New Reality is this: The New York Times ran a headline article on the US Dollar's strength yesterday, and that was equally as relevant, from a contrarian's perspective, as Cramer getting air time on making a macro call - when these things happen, in unison, at a bare minimum, get out of the way.
 
As the US Treasury market continues to break down, the US Dollar (and support for Timmy) will wane. This is good. As the US Dollar strength loses its momentum, US stocks should continue to lose their downward price momentum - on the margin, this is one more reason why stocks are looking to put in an immediate term bottom here.
 
To be clear, this is a Trading bottom. Especially in raging bear markets, bottoms are processes, not points. As the US stock market's volume readings continue to decline, and volatility (VIX) continues to dampen, we're getting closer to that Shake and Bake move called the short squeeze.
 
Immediate term price momentum in the US Dollar index will break at the 88.53 line. We have tested and tried the 89.00 US$ Index level on 3 separate occasions in 2009 - a third failure to break-out of that sound barrier will force people to look at this through our cross asset class lenses...
 
My immediate term upside target in the SP500 is 711. If we close above that line in the face of a US Dollar finally being de-valued (and you're short this market), my advice would be to make sure you have your chin strap done up. Above that line, the short seller of US equities is going to Shake and Break.
 
Gentlemen, start your engines...



LONG ETFS

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.
QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on 3/2 and again on Friday of last week.

SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +18.5% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.

TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.

SHORT ETFS

LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.2688. The USD is down versus the Yen at 98.3480 and down versus the Pound at $1.3834 as of 6am today.


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