Less bad; the new good!

On March 6th when I wrote the Early Look “The Wall of Worry,” the market was making new lows, but we were seeing a number of companies in a disparate group of industries that were seeing new signs that things were not continuing to accelerate to the downside – things were becoming “less bad.” Now less bad is the “new good.”

We continue to see signs that the “new good” continues. Today, we learned that February sales at U.S. retailers fell less than forecast and the “made up” gain in January was even better than the previous government number, suggesting that the consumer, the most important part of the economy, may be stabilizing. We will likely learn tomorrow that consumer confidence is stabilizing - the “new good” is that confidence hasn’t slipped any further from last month’s. Importantly, if the market holds its recent performance, March will improve from February. You don’t need a survey to tell you that most Americans are not very confident in the economy. The “new good” is that confidence looks to be bottoming.

In this environment the consumer is increasingly rethinking or being more thoughtful with his purchases. Consumers are more focused on needs over wants…… Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, today’s better than expected retail sales number indicates there is still some level of spending. What is more important is the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It’s likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the “new normal” and large credit card balances will be considered a sin.

Critical to the behavioral changes is the fact that these changes are not limited to one demographic or income group. A survey done by an Ohio-based group suggested that more than “eight in ten people earning in excess of $150,000 or more indicate the current economic crisis will impact their lifestyles over the next five years.”

Howard Penney

Russia Breaking Out?

For the first time in a long time—despite how antithetical it may sounds if you’ve been listening to our “I wouldn’t touch Russia with a ten foot pole” call over the last months—we’re getting bullish on Russia from a trend perspective as the fundamentals are lining up with our multi-factored quantitative models.

Here are the main Macro Factors that line up with this call:

1. Market Performance - The Russian Stock Market (RTS) is up 11.5% from its October lows (or +9.2% since its Nov. low). As reference, major European indices (Germany, France, UK) as well as the SP500 are all trading below their November lows. The RTS, after an intermediate bottom on February 20th, is up 18.4% YTD and up 12.5% March-to-date. These are alpha-generating numbers you cannot afford to ignore.

2. China is the Client - Importantly Russia understands that China is an very important client. On February 18th China announced it will lend $15 Billion to Russia’s state-owned oil firm Rosneft and $10 Billion to pipeline monopoly Transneft. In return the Russian firms ensured China will receives 300,000 barrels of crude a day for 20 years and the completion of the long-awaited extension of Russia’s Siberia-Pacific coast pipeline to China. The agreement will boost Russia’s energy firms who have struggled to raise capital since crude prices crashed since their summer highs last year.

The deal signifies that Russia’s export focus (oil and natural gas in particular) have shifted from the West (Europe) to its new market, China. Russia took a sharp hit from the EU in reaction to its decision to turn off natural gas supplies to the Ukraine and most of continental Europe over New Years over contract disputes. EU officials have already formally convened this year to discuss alternate sources of energy; certainly this helps confirms that Russia’s attention for a new market is East.

3. Stability at Home: we’re bullish on a relative basis Russia’s ability to purge itself of the financial crisis. The RTS is down 75.4% since its high on 5/19/09. Russia has mark-to-market pricing and has faced the reality that oil is currently down in the $40-50 range. The market has shown a more stable trading range (a “bottoming”) since January 20th. Equally, the Ruble has stopped going down, a bullish signal for the investors.

4. The USD/Oil Equation: with the Ruble signaling more stability in the intermediate term, this is bearish for the USD, which is perversely bullish for global equities and commodity reflation. On a trend basis we see oil breaking out if we can get through the $44.50 line.

What might not be discounted in today’s price is the potential for Russia’s debt credit rating to be downgraded, but our quantitative models are close to signaling an entry point opportunity via the Russian etf - RSX.

Matthew Hedrick

UA Nugget: Sales and Sentiment

UA's stock went vertical into Kevin Plank's presentation at the BofA/Merrill (or whatever the proper name) conference. It sold off literally when he opened his mouth, but then had a solid recovery. Pardon me for stating the obvious, but I'm fascinated by stock moves in and around conferences. (Check out the post I put up when Warnaco pre-announced without a press release at the ICR conference).

This one, however, did not come as a shocker to me. UA's numbers at retail have looked good -- and continue to do so this week. Footwear share continues to grow at an obscene $92+ price point for running, and though apparel ticked down this week, it's share is up by over 100bp on average in each of the pat 6 weeks.

I still like this name a lot in 2009.

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We received further confirmation overnight from China that the stimulus package is having an impact. Industrial output increased at a rate of just 3.8% in the first two months on 2009; following December’s 5.9% and November’s 5.4% clip. February rose 11% on its own however, a figure heavily skewed by the placement of Lunar New Year (which increased the number of working days), but the data still suggests that the pace is picking up for heavy industry. Major signals of this increase in activity included a 39.13% Y/Y increase in cement production and a 22.9% increase in automobile output.

The increase in cement manufacturing is directly correlated to the larger than expected growth in fixed asset investments which we discussed yesterday in depth. As the government has increased its infrastructure projects the impact on heavy industry is being felt rapidly -for example the announced tripling of railroad investment spending which helped drive an increase in steel production during February.

The pickup in automotive production is evidence that consumer demand has not completely disappeared. Sales of domestically made vehicles rose 25% in February according to the China Association of Automotive Manufacturers following the reduction in the sales tax on small cars, part of November stimulus program. Further government action -such as a program to subsidize vehicle purchases by farmers, are expected to take effect this month. The fact that a government incentive got Chinese consumers making major purchases is a massively positive data point for the automotive industry as it continues to consolidate an expand.

Clearly the combined YTD output data, the lowest growth rate in 5 years, is an unwelcome reminder of how bad the external demand picture is for China’s critical export industries. We continue to be bullish however, and view the positive data points emerging from the heavy industrial sectors as a signal that the stimulus plan is working and that the pace of growth will return to higher levels in the coming months. It’s a hard road ahead, but the Ox has the brute strength to get the job done.


The National Bureau of Statistics released data showing that growth in retail sales contracted in January and February, increasing 15.2%, compared to a 20.2% increase in the same period last year, signaling a continuing trend of slowing demand. This is the third straight decline, following December’s 17.4% growth and 22% in October. Consumption was 2 trillion Yuan ($290billion) during the first two months of 2009. Retail sales for 2008 were up 21.6% when Chinese GDP growth was approximately 9%, slipping into single-digit growth for the first time in six years. Retail sales in urban areas increased by 14.1%, Y/Y, while sales in rural areas increased 17%.

This data, while underscoring the fragility of the developing Chinese consumer base, is still better than bad on the margin. We are taking a somewhat contrarian view in arguing that still-double-digit growth levels in consumer spending, combined with the signal sent by automotive sales, suggest that consumers can still be coaxed back into the market. Obviously, with deflationary pressure and rising unemployment, retailers are not even close to being out of the woods yet -we will be following the situation closely.


Official credit data released last night confirmed the estimates we referenced in yesterday’s post. The People’s Bank of China reported that banks extended 1.07 trillion Yuan in new loans in February, as state companies and government agencies borrowed to finance stimulus projects - a 30% Y/Y increase. This follows January when a record 1.62 trillion Yuan of new loans were extended to finance the increase in investment, increasing total outstanding Yuan denominated loans to 33 trillion Yuan by the end of February, 24.2% higher than the previous year, as M2 reached 50.7 trillion Yuan. At the same time, Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) requested that lenders increase their provisions to 150% of their non-performing loans, up from 130%, as a precaution over solvency risks -suggesting that the reality of defaults in the face of massive export contraction is being prepared for proactively, a positive signal.

The Ministry of Commerce has announced that going forward; provincial commerce officials will have the power to authorize the establishment of foreign owned ventures and inflows of foreign direct investment (FDI). These officials will also have the power to approve foreign acquisitions up to $100 million, although foreign strategic investments in listed Chinese companies will still require approval by the central government. This move is in direct response to the four straight months of contraction in FDI, which fell 32.6% in January, Y/Y, as capital flows essentially dried-up globally.

The active encouragement of increased foreign investment, coupled with decentralization that could expedite the process significantly strikes us as a very positive development which, when coupled with the expansion of credit and proactive risk management measures adopted by Beijing show the government’s firm commitment to meeting growth targets.

We have been bullish on China consistently since December of 2009 and remain so – we are long China via the CAF closed end fund.

Andrew Barber


"The game taught me the game."
-Jesse Livermore

As you might imagine, I get a lot of emails throughout the day. Feedback is greatly appreciated and I'd like to thank everyone who continues to enrich our exclusive research network for their great questions.

In this ever so globally interconnected market place of interacting factors, I am a firm believer that collaboration wins. As my Partner, Daryl Jones, reminded me yesterday, "in the long history of humankind... those who learned to collaborate and improvise most effectively have prevailed" (Darwin).

I am on the road this week, but I have my trusty notebooks with me, and the aforementioned 'Reminiscence of a Stock Operator' quote taped in the insert of one of them. If you want to throw me off my game, steal my notebooks - they help me proactively prepare and plan for my every move.

I was fortunate enough to first cut my teeth in this game in the Baby-Bear market of 2000-2002. What we have here in 2008-2009 is much more akin to Papa-Bear, and one has to sleep with one eye open to be sure not to get mauled by him. While we made a decent Bear Market trading call in the last few weeks, I will not mistake this for anything other than what it was - a Trade.

One of the better risk managers I learned from in this business used to always say, "keep a trade a trade" - and as are most rules/patterns that govern dynamic systems within the mathematical spheres of Chaos Theory, that one is very simple. I don't make a habit of violating it.

Yesterday, I sold into the proactively predictable follow through squeeze that Mr. Market offered up to us, partly because I am human and I, like most, fear missing large short term percentage gains... bear market rallies tend to go too far too fast, however - history's lessons are crystal clear on this front.

I know, I know... a lot of people out there fancy themselves as "investors for the long run", and I respect and appreciate that strategy, provided that they are not buying SP +57% higher than Monday's low, and selling 2009 consensus Bear Market fear (yesterday's weekly II Investor Sentiment Survey showed only 26% of Institutional money managers admitting they are bullish - bears were reported up again at 47%!). In today's game at least, I consider "trading" the most impactful risk management strategy one can employ. Talking about risk management doesn't do you any good unless you act on it.

I cut our Asset Allocation Model's US Equities position down from 24% on Monday to 12% by yesterday's close. The SP500 is up +6.7% over the span of the last 48 hours, and I think most people would be looked on pretty kindly if that was their reported annual return for either 2008 or 2009... so I don't lose too much sleep in booking some of it. I am still long the SP500 via the SPY etf, but I sold out of my position in the Nasdaq (QQQQ) for a healthy gain.

For the last 4 trading days, I have started off our Macro client 830AM strategy call saying that the reward in being long the US stock market was outstripping the risk. This morning, the immediate term Trade's risk/reward is balanced for the SP500 at +3% upside versus -3% downside. For the Nasdaq, the risk outstrips the reward by one percent at -3% versus +2% upside.

If you're looking for what my notebook says on critical support levels for both the SP500 and the Nasdaq, I'm at 703 and 1329, on those broad indices respectively. As the facts/math within this game changes, I will. All the while, expect me to keep my feet moving out there - when Bears are chasing you, standing still with a bucket full of fish in your hands of positive Macro ETF gains is not what I recommend...

My Asset Allocation to USD denominated Cash has been the beneficiary of selling down US Equity exposure. I'm now back up to 69% Cash, and that position makes me nervous. Why? well, because the one thing I hear most frequently from my friends in the hedge fund community is how much Cash they are in. That, as John McCain would say, "my friends" is consensus.

I am from Thunder Bay, Ontario. Bears don't scare me - but consensus does, to a fault. I guess that's a personal thing that I have to live with. Jesse Livermore reminded us all that "the game does not change and neither does human nature."

May the game continue to teach us the game, and God Bless this country's brave Bear Market Operators.


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.

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 +17.2% 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.


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.


The “Delta” charts below display some of the “less bad” and stabilizing results we’re seeing in the gaming markets. Year over year monthly same store revenue growth is presented against a six month moving average to analyze the sequential deltas.

Not all gaming markets are moving in the right direction, however. We’ve separated the markets into the categories of The Good, The Less Bad, and The Ugly and have included the tickers of the companies with exposure to each.

The Ugly:
• Las Vegas Strip – The only thing worse than the gaming revenue trends are the room rate trends. Unfortunately, room rates have higher margins. (MGM, WYNN, LVS)
• Locals Las Vegas – Won’t overcome a 45% peak-to-trough housing crash this year. Population growth could drive 2010 revenues higher. This market should look Less Bad soon. (BYD)
• Atlantic City – The economy, Pennsylvania, smoking bans, where do we begin? (BYD)
• Mississippi – This was a tweener. We don’t have February data yet and I’m conservative so I’ll throw it in the ugly basket. (ISLE, PNK, PENN)
• Macau – Looks can be deceiving. Tough Rolling Chip comparisons from an overflow of junket credit last year distorts the picture here. By September, this market may skip a category right to The Good. (LVS, WYNN, MGM)

No comment necessary.
Tough 2009 but 2010 could show positive growth
Looks can be deceiving. Wait until September.

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