US Housing Will Bottom In Q209'


Since the beginning of 2009, I have been very clear on my stance as it relates to the housing crisis - the worst of the housing crisis is behind us. I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in 2Q09. Forming a bottom in housing is a process, not a specific data point.

The bubble in residential real estate is the root cause for the problems we face today. Therefore, it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow those assets, in addition to other asset classes (i.e. equities), to obtain higher prices and ultimately, a higher valuation.

Today we learned that housing starts in the U.S. surged in February from a record low number in January. February housing starts saw a 22% increase from January; the biggest jump since 1990. While we are not out of the woods, these numbers are a part of the bottoming process and provide some visibility that we may see housing starts reach a bottom in the 2Q09. At the very least, it should provide comfort that the end is near.

We understand that builders are facing record foreclosures that will keep prices down year-over-year for the balance of 2009. Importantly, we will see the deceleration in prices begin to slow, also in 2Q09.

Howard W. Penney
Managing Director


Whether it’s the ferry service or some sort of visa easing, recent Mass Market visitation to the Venetian has been strong, potentially up over 10% from last year. There seems to be some speculation that Chinese officials have been more lenient letting people into Macau in recent weeks.

Macau and LVS still face the difficult credit comparisons in the Rolling Chip business for another couple of quarters. Any offset from the more profitable Mass Market segment would be welcome.

ANECDOTE: ‘The Hazardous Side of Sears’

First we see a cluster of insider sales at Sears in from mid December through last week – the greatest insider activity since a $120-$140 stock in 2005.

Then Sears discloses today the receipt of administrative subpoena from the Ventura County DA seeking information related to the handling of hazardous waste in Ventura County and the state of California.

Then for kickers, SHLD sends out the promo email below for 75-80% off apparel.

Sounds to me like Sears has a company-wide problem with getting rid waste.

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Presidential Approval Down, Stock Market Up

On February 17th, 2009, we wrote the following in a note entitled, “Eye on Sentiment: Rasmussen Total Approval Index”, the following:

“The decline in the Presidential Approval Index is about the best leading indicator we can find for President Obama’s approval rating. It shows the broad shift of approval for President Obama as voters downshift from Strongly Approve to Approve and from Disapprove to Strongly Disapprove. To the extent that it matters, it is very likely that President Obama’s broad approval rating heads into the mid-50s in the coming months, if not lower, as these internals are showing a very negative trend.”

While we can’t make money on calling Presidential approval ratings (at least not directly), President Obama’s approval rating is now solidly in the mid-50s as we forecasted a month ago. Additionally, in this Sunday’s Rasmussen Report, the Presidential Approval Index (difference between Strongly Approve versus Strongly Disapprove) registered +6, which coincides with an all time high in Strongly Disapprove of 31% and an all time low in Strongly Approve of 37%. So even though the total approval rating hasn’t broken to new lows (it was at 56% Sunday and first hit 56% about 8 days ago), the internals continue to deteriorate, which directionally suggests that a new low in total approval will be set in the next month or so.

As we have written in the past, President Obama entered office as an extremely popular President and so it is not totally surprising that his approval ratings have come back down to earth, especially in light of the controversy over the stimulus package and the missteps as they relate to his appointments. If we break his numbers down even further, President Obama is, not surprisingly, most weak with his two weakest constituencies. Specifically:

• While 37% of both men and women Strongly Approve of the President’s performance, 36% of men Strongly Disapprove and only 27% of women do; and

• Along party lines, 66% of Democrats Strongly Approve and 54% Strongly Disapprove.
Interestingly, on March 5th the Rasmussen poll indicated that 72% of Democrats Strongly Approve of the President, so the largest shift in the last two weeks for President Obama has actually come from within his own party. This shift of Democratic approval, as our Healthcare Sector Head Tom Tobin noted, also coincides with President Obama striking a more business and market friendly tone in the past couple of weeks.

Absent an external event, like 9/11, which shot President Bush’s approval rating to record levels, it seems likely that President Obama’s ratings will continue to deteriorate. And from an investment perspective, this might just be a good thing. The market sold off after Obama was elected, after he was inaugurated, and after his major speech to Congress, and now is rallying despite his new lows in approval.

Admittedly, we misjudged Obama’s impact on the stock market. Rightfully, we compared President Obama to FDR in terms of entering office with very high approval, entering office during time of serious economic duress, and taking over from an extremely unpopular administration. In reality, while both Presidents did share these characteristics, the reaction of the stock market to both Presidents has been markedly different. In FDR’s first 100 days, the stock market was up ~50%. Conversely, so far the stock market is down ~5.5% since Obama’s inauguration.

Ironically, while declining Presidential approval might be negative for broad confidence, historically it has a very strong correlation for inverse movements in the stock market. In fact, Ned Davis Research did a study of data from 8/21/1959 to 3/31/2006 in which they looked at the weekly return in the stock market when the Gallup Presidential Approval Poll is above 65, between 50 and 65, and below 50. The results of the study are outlined in the table below:

The punch line is that in the weeks where the Presidential Approval rating is the lowest, the stock market performs the best, and with a sizeable margin at that. So while to some it may be counterintuitive, President Obama’s approval rating breaking lower in the coming weeks may actually be positive for the stock market.

Daryl G. Jones
Managing Director

Crony Capitalism

"It is harder to crack a prejudice than an atom."
-Albert Einstein

The embedded human factors of Pride and Prejudice are what many societal models are built on. If you don't want to believe that, take a walk down to an Irish watering hole today and chirp something passive aggressive at someone with a Guinness in their hand, and let me know how that goes...

On this day in 1761, the first St Patty's Day parade was held in Boston. March 17th is a national holiday in Ireland and actually a bank holiday in Northern Ireland - never mind Barclays proclaiming their renewed mystery of "we're making money" faith yesterday, I can assure you that anyone having a bank holiday today is smiling. Them "profits" that them bankers are talking about aint what they used to be folks...

There is a great article this morning in the Financial Times outlining Ireland's Finance Minister's (Brian Lenihan) thoughts on outlawing what the Irish are appropriately labeling "Crony Capitalism"... gee, what's that Billy Ackman? Isn't buddy-ing up with corporate boards and waving how much stock you "own" (with other people's money) a tested and tried part of the American way? Maybe pre You Tube it was - hate to break it to anyone who isn't paying attention to the secular and societal TREND that the world is levering up long with right now: Transparency, Accountability, and Trust...

At the end of the day, President Obama can get on the box and whine about AIG bonuses... but the bankers will always find a way to "get creative" with compensation structures. He can try "compensation caps" .... He can lean on the moral compass associated with that little ole tax payer that Goldman alum Jimmy Cramer apparently is all of a sudden "standing up for".... It won't work.

The latest edition of Wall Street, by and large, has proven that it's not a repeatable business. Obama is going to have to unlearn that this Street isn't what Rubin tells Summers to tell Geithner it is ... it all comes from the same embedded prejudice - "making money"... and, sadly, for many of the said leaders of America's Financial System, it's not how you make that money - it's still all about how much money you make...

Like the free money leverage cycle, Crony Capitalism is going to die on the vine. Provided that you are forced to attempt not to lie, and be transparent about your business (all you Government State Enterprising Banks listen up), you will be You Tubed...

While the Russians and Australians are marching forward trying to find ways to service THE Client (China), American media moguls who have the conch are still allocating a ridiculous amount of time focusing on who made money.

Yesterday, Bloomberg allocated prime time TV to an "exclusive" interview with Billy The Kid (Ackman). No, this was not a time to focus on the 8% intraday turnaround in oil prices, or the potential investment implications of Geopolitical Risks heightening as the Russians renew their economic footing.... No, no, no - America needs to hear how Billy can take one last shot at a Billion...

Billy's latest reactive master plan for Target is fully loaded with Crony Capitalism. During the interview Margaret Popper asked him how many new Board members he was proposing for Target (as in his "activist" investment position that reportedly lost -93% of its value). Now Billy is in his early 40's and is by all measures (according to anyone he offers a brokered commission) really "smart" - but the poor guy wasn't very sharp on his answer: "four, I mean five..." - you see, when he said 4, he realized that he forgot to include himself!

What kind of America is this where a hedge fund manager who has never run a Main Street business in his life can blow up his second hedge fund (Gotham was his first fund, and it went away), and continue to get the googly eyes from our manic media because he's allegedly "smart" and "connected"? I don't get it...

What I do get is that some (not all) hedge funds aren't businesses. Much like some investment banks, they are compensation structures. If Americans want to sign off on the cronyism associated with socializing their losses and capitalizing their gains, I'll take my ball and go home. This isn't free market capitalism. This is ridiculous.

Into the apex of a Bear market short squeeze that we called for, the bankers did what they do, right on time - they came back! After last night's close we saw secondaries and convertible offerings slapped on the tape from Wynn Resorts to that cyclical that some "hedgies" bought at the top calling it a "paradigm shift" (Alcoa) - the timing of brokered offerings was impeccable. At the same time Goldman is allegedly offering loans to something like 1,000 employees who are losing money in Goldman's "elite" funds... now that's "creative"...

Having lived on this Street for long enough to know what not to do with my life, allow me to give you 2 more cents of my advice - if a Wall Street guru says "its time to get creative" with either his compensation or ownership structure in whatever it is he is talking about - run...

I did. As of yesterday's close, I have taken down my exposure to US Equities in our Asset Allocation Model to 3%. I have a 3% position in Australian Equities, a 4% position in Chinese Equities (both closed up +3% In Asian trading), and 75% Cash. In this ETF only Asset Allocation Portfolio, I am up for the YTD, and happy to watch Wall Street execute on their predictable prejudices - as Einstein said, prejudices are "harder to crack than an atom." This remains a Bear market, and fixing Crony Capitalism will take time.

My immediate term upside/downside targets for the SP500 are 765 and 711, respectively.

Happy Saint Patrick's Day,


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.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +21.8% 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%.


EWU - iShares UK -The UK economy is in its deepest recession since WWII. We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go in the face of severe deflation. Unemployment  is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month, which will hurt the export-dependent economy.

XLI - SPDR Industrials - This group was up yesterday largely because the USD was down. We shorted XLI into strength; it ranks among the top three worst sectors in the market.  From a fundamental perspective, industrials are typically later cycle stocks and so should continue to underperform their early cycle counterparts.

DIA -Diamonds Trust-We re-shorted the DJIA on Friday (3/13) on an up move as we believe on a Trade basis, the risk / reward for the market favors the downside.

EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD.  Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

IFN -The India Fund- We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit. Trade data for February paints a grim picture with exports declining by 15.87% Y/Y and imports sliding by 18.22%.

XLP -SPDR Consumer Staples- Third best performing sector yesterday, but remains broken. We shorted PG yesterday and think this group is bearish.

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 $1.2993. The USD is up versus the Yen at 98.5050 and up versus the Pound at $1.4046 as of 6am today.


ASCA announced today that it had negotiated covenant relief. More restrictions were put in place but the main cost was 125bp increase the rate and $9 million dollar amendment fee. In return, the banks raised the senior leverage covenant by 0.50x to 1.25x depending on the quarter. Per our model, this puts ASCA in the clear at a modest price, about $0.20 in annual EPS.

Due to the leverage step down in Q2 and again in Q3, we had ASCA tripping its senior leverage covenant in Q2. Now, ASCA would seem to have ample room as seen in the first chart. Investors must be cognizant, however, of a new covenant that requires ASCA to maintain minimum consolidated trailing twelve month EBITDA of $275 million. We are currently projecting 2009 EBITDA (per the covenant calculation) of $328 million. Other, less important, changes include a smaller basket for dividends and share repurchases.

While Street EPS estimates need to come down to reflect the higher interest cost, Street EBITDA estimates look too low. Yes, I actually stated that a gaming company is likely to exceed EBITDA estimates. Favorable regulatory changes in Missouri and Colorado and stabilizing demand in most of the regional markets. For once, the analysts were conservative enough. ASCA is really starting to capitalize on the $500 loss limit removal. Look for more effecting marketing efforts to drive incremental demand and better margins. The Street may be over $10 million too low on 2009 EBITDA.

With only two more quarters of development Capex, ASCA has got the makings of a cash machine. The second chart details free cash flow and free cash flow yield on a TTM basis. Net free cash flow should turn positive in Q3 2009 and escalate from there to almost $150 million annually. The FCF yield could exceed 20%.

Gaming is a strong cash generative business with high barriers to entry. Demand is less sensitive than most consumer discretionary sectors. Most gamers egregiously exploited the easy money era and many won’t survive the current environment. The survivors will face less competition, higher cash flows as Capex has been scaled back, and consequentially, higher valuations. ASCA looks like it has entered the survivor pool.

ASCA maintains significant cushion under the new leverage covenant
Significant free cash flow potential

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