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US Housing Is Finding A Home!

Everything has a price and housing is finding a home!

Increased access to credit lowers borrowing costs and the significant decline in prices are making home ownership more affordable. Today, sales of previously owned homes increased 5.1% in February to an annual rate of 4.72 million from 4.49 million in January. Also, the National Association of Realtors said today the median price declined 15.5% year-over-year; and distressed properties accounted for 45% of all sales.

The increase in home sales kept the months’ supply of unsold homes on the market at the end of February at 9.7 months; the same as in January. Every region in the country showed an improvement in sales and the median listing price rose in California in February for the first time in three years.

Today’s housing numbers support our view that the worst is over and 2Q ‘09 will mark a positive inflection point for the housing market. We have been very clear about our view on the consumer (think M.E.G.A) and the consequences of Chairman Bernanke’s actions that a weak US $ will inflate assets domestically where Americans need it most – in their 401ks and home values.

Trading intraday here at 801, the SP500 has re-flated +18.5% since the March 9th low and now housing is making a bottom. Stock market prices are leading indicators, don’t forget!

Not surprisingly, the industry is still very cautious. Ara Hovnanian, CEO of Hovnanian Enterprises, recently said, “We expect demand for all homes, both new and existing, to remain far below normalized levels.” The historic collapse in the real estate market raises questions about whether the Real Estate companies will ever again see the pace of sales it did a few years ago. The easy answer is no! The death of the consumer credit cycle will mean that there is a “new normalized level” of sales.

Just remember, don’t rely on the same corporate exec that missed housing’s top lead you to believe they know where we’ll bottom. They don’t do macro.

Howard Penney
Managing Director

Chart Of The Week: Bernanke's Buck

This past week, amidst all of the noise in the loser land of corporate malfeasance, Bernanke sided with us and broke the buck. He put the hammer down on the US Dollar and finally re-flated where Americans need it most – their 401ks and home values.

In the face of the US Dollar having its biggest weekly decline since the Euro came into being (EVER), US Equities locked in their 2nd consecutive week of gains. With the SP500 closing up +1.6% on the week, the cumulative 2-week advance was a rip higher of +12.3%. If you missed the TRADE, don’t get upset with me; the trough-to peak squeeze was the most expedited we have seen over the span of 2 weeks since 1939. Stock markets can crash versus expectations, both ways.

The chart below depicts THE macro inverse correlation that’s mattered most since we moved to 96% Cash in September 2008. If you made sales into the intraday highs of Wednesday March 20th, congratulations. That SP500 intraday high of 801 marked a +18.5% branding (trough-to-peak) on the foreheads of every Depressionista short seller of the March 9th, 2009 YTD low. If the US Dollar Index can’t sustain a close above 85.10, look for the SP500 to breakout above 801 to 807.

The only thing worse than a underperforming hedge fund trying to explain why they didn’t hedge on the short side in February is going to be attempting to explain why they can’t make money on the long side in March either… Don’t you find it odd that all of the Great Depression Bears who are out there writing books only have a risk management process that works on the down moves? I do… Re-flation is not inflation. Re-flation can be a one day or a one week affair. Children learn this phenomenon at a very young age when blowing into balloons – it’s not that complicated.

Alongside the US Dollar deflating, commodities (CRB Commodity Index) re-flated a nice +7% on the week. Oil led the charge higher, adding another +12.5% to its 5-week winning streak, taking the 5-week run to +41%! Got Alpha?

All the while, I keep getting notes from Jimmy Cramer’s “Alerts” telling me to buy low beta so that his lawyers at the Street.com can attempt to control the losses in that Charitably Deflating Trust that he attempts to be accountable with… word to the wise, Jimmy boy, when Bernanke breaks the bone, don’t buy MCD and KO - BUY high BETA - Booyah!
KM

Keith R. McCullough
CEO / Chief Investment Officer

Ever Is A Long Time

"I'm not known as a goal scorer, but I have found my role by doing other things. The nice thing about this team is that everyone contributes."
-Matt Nelson, Yale Hockey Captain 2009



In this weekend's ECAC Hockey Playoff semi-final, Yale was down by a goal with less than a minute and a half left in the game, and scored two goals in the span of 22 seconds to knock off St Lawrence. Westwood Massachusetts's Matt Nelson scored the game winner with 66 seconds left on the clock. Then our man with the Edge (soon be named CEO here if no one in the NHL signs him), Alec Richards, stoned Cornell - shutting them out in the Championship game and securing Yale's 1st ECAC title ever.

EVER is a long time. Said American leaders from Washington to Wall Street could learn a lot from this young American Captain's aforementioned winning attitude and quote. After making one of the biggest plays in his college's history, all he wanted to do was talk about his teammates.

Winning is contagious. So is losing. From the Sunday talk shows to the protests in front of residential lawns in parts of Connecticut I, for one, am done with associating myself with people in our industry who have done the wrong things when no one is looking. Pointing fingers is what losing teams do. Losing is not what Americans do.

If you want to start winning, get up and just be the change you want to see in this business. That's what we're doing here in New Haven, CT. That's why I am not buying into this ridiculous notion that we are in a Great Depression. This is a Great Recession, and there are no doubt plenty of losers out there in it who are rightly depressed.

EVER is a long time. In the face of the US Dollar having its biggest weekly decline EVER (since the Euro came into being), US Equities were a big winner again, locking in their 2nd consecutive week of gains. With the SP500 closing up +1.6% on the week, the cumulative 2-week advance was a rip higher of +12.3%. If you don't trade or you missed the TRADE, don't get upset with me; the trough-to peak squeeze was the most expedited we have seen over the span of 2 weeks since 1939. Stock markets can crash versus consensus expectations, both ways.

The US Dollar versus the US stock market is THE macro inverse correlation that's mattered most since we moved to 96% Cash in September 2008. If you made sales into the intraday highs of Wednesday March 20th, congratulations. That SP500 intraday high of 801 marked a +18.5% branding (trough-to-peak) on the foreheads of every Depressionista short seller of the March 9th, 2009 YTD low. I think the SP500 is going to close above that line at some point in the next 3 weeks. My immediate term target is 807.

Intermediate term Bear Market tops and bottoms are processes, not points. I understand and appreciate that some investors have been preaching that they don't "trade." I understand that no one is supposed to be able to be a "market timer." That's the narrative fallacy of an industry that wants everyone to believe that mediocrity is an acceptable outcome. Matt Nelson wasn't supposed to score that goal Friday night either...

EVER is a long time. When it comes to finding evolutionary investment processes that can capitalize on where the investment game is going rather than where it has been, I never say never. The year-to-date stock market performance score is now China +28% YTD, USA -15% YTD. Americans better start taking a good hard long look in the mirror, because there are another 5.75 Billion people in this world who are chomping at the bit to prove that they can do what they aren't "supposed" to be able to do. Darwin's rules have NEVER had geographical boundaries.

Overnight, China took our "Break The Buck" baton from Ben Bernanke and assured the world that they see US Bonds as an "important element" of the Chinese "investment strategy." This is what winners do. They lead - understanding that others will follow the leader, or simply get be forced out of the way.

The Russians and Australians are all following the leader, and starting to get paid for it! Alongside China closing up another +2% last night, Australia added another +2.3% to its recent gains and is now breaking out from an intermediate TREND perspective. Australia has both the economic proximity and trusting respect of THE Client. In a part of the world where handshakes still matter, this is important.

Russia is currently trading up another +4.5% this morning, taking it's cumulative 5-week reflation to +41%! Guess what else has reflated to the tune of 41% in the last 5 weeks - that winner would be the price of West Texas Crude Oil!

Whether it's the Russian stock market being up +15.3% for 2009 to-date, or all of the winning TRENDS we are seeing for investors in copper to Brazil, it's all one and the same to those of us who understand what forever means...

Forever and EVER, is a long time - and so is the American dream to be on the winning team. I've taken my Asset Allocation to Cash down to 59%, and I am getting invested in winners.

Go Yale Hockey in the East Regionals this weekend!
KM


LONG ETFS

EWC - iShares Canada-We bought Canada on Friday 3/20 into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's socialist past, and believe next year's Olympics in gold-rich Vancouver should provide a positive catalyst for investors to get long the country.   

RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.  

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.  

XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks.  Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing.  Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment.  As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.

EWZ - iShares Brazil- The Bovespa is up 6.7% YTD. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil cut its benchmark interest rate 150bps to 11.25% on 3/11 and will likely cut again next month to spur growth. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.  

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.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +27.7% 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.

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


SHORT ETFS

VXX - iPath S&P500 VIX - Volatility raged up +5.06% on Friday (3/20). We're off our manic highs of the VIX at 80 from November '08 and expect volatility to continue to break down as US equities TREND upward.

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%.

EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".

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.

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-The negative TREND for consumer staples remains. It  traded 2 cents from the Shark line again on Friday. Should it break-watch out below.

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.


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MACAU SUPPLY RELIEF

There are three major tenants to the Macau short thesis: excessive visa restrictions, dissipating junket credit availability, and too much supply. Unfortunately for the bears, the recent deltas for all three are positive.

As we wrote about last week, mass market visitation appears to have ticked up in recent weeks, possibly indicative of a loosening of the visa restrictions. Even if that ends up not being the case, we believe Beijing will indeed loosen later this year ahead of the new Macau Chief Executive taking over. On the credit side, we don’t see any evidence that more credit is being offered to the VIP players. However, we are only 5 months away from a potentially positive year-over-year comparison in the Rolling Chip business. We can see the light at the end of the tunnel.

This weekend we got a favorable supply catalyst. SJM, controlled by Stanley Ho, announced the company would no longer pursue a mega casino hotel complex in Macau. This should ease the supply concerns considerably, leaving only MPEL’s City of Dreams (spring 2009) and WYNN Encore (earyl 2010) as the only definitive supply increases in the market.

Macau should be looking more and more attractive to investors.

AT LEAST THE LAWYERS ARE GETTING RICH

The following list details the recent gaming debt restructurings and defaults. Given the significant financial leverage in the sector heading into the downturn and the material drop in cash flows, it shouldn’t be surprising that the list is long.

The list of actions taken by each debtor to avoid bankruptcy is also long, which brings us to our main point. Even though there are some other seemingly dire situations out there such as MGM, and potential covenant breachers (LVS, PNK, WYNN, BYD), there are many remedies. However dire some of these situations may be, the fact is, the banks do not want to own the assets, and will not likely foreclose on the assets, at least not anytime soon. The MGM saga is likely to drag out for some time and, meanwhile, the equity will trade like an option. The other potential covenant breachers are likely to find their banks fairly aggreeable to amendments and waivers.


SUMMARY OF GAMING RESTRUCTURING/COMPANIES IN DEFAULT
  • HARRAHS:

    December 2008 private exchange offer: selected old notes of Harrah’s Operating Co. (“HOC”) for new 10% senior secured notes due 2015 and 2018; offer closed as of December 24, 2008; reports indicate debt load reduced by $1.14 billion.

    March 2009 private exchange offer: selected old notes of HOC for up to $2.8 billion of new 10% second priority senior secured notes due 2018;

    March 2009 private cash tender offers—
    – by Harrah’s BC Inc. (sibling of HOC) for Priority 2 notes issued under March 2009 exchange offer;
    – by affiliates of Apollo and TPG for 10% senior secured notes due 2015 and 2018 issued under December 2009 exchange offer (and potentially under March 2018 exchange offer);
    – by HOC for Retail Notes held by certain holders.

    Banks and bondholders organizing, retaining restructuring professionals; high probability of chapter 11 filing in 2009.
  • STATION CASINOS:

    Private exchange offer for selected Old Notes, to refinance debt and cure looming loan defaults, terminated in December 2008 due to lack of sufficient participation.

    Retained restructuring professionals to engage in negotiations with banks and secured lender groups, resulting in modification of loan terms, contribution from sponsors and an agreement by secured lenders to support a Prepackaged Plan of Reorganization.

    Currently soliciting votes on the Prepackaged Plan, in conjunction with a second exchange offer for notes; both still pending.

    Recently, Boyd Gaming has expressed interest in purchasing Stations, reportedly for $950 million in cash, either as part of or after a Chapter 11 reorganization. To date, Stations has rejected Boyd's offer, but Boyd continues to pursue a potential acquisition.
  • TRUMP:

    Delays in asset sale and continued financing expenses for expansion:
    – Agreement on sale of Trump Marina Hotel Casino reached for $315m in May 2008 but renegotiated (lower price and waiver of financial commitment letter);
    – Scheduled May 2009 closing, but w/o financial commitment in place;
    – Planned opening of Chairman Tower to generate more cash flow, BUT additional construction required cash outlays.

    Missed $53.1m interest payment on December 1, 2008 on Senior Secured Notes due to liquidity issues. Failed to cure within 30-day grace period.

    Commenced chapter 11 bankruptcy on February 17, 2009.
  • BLACK GAMING:

    Missed coupon payment to senior secured bond holder in Jan 2009 which triggered cross-default provisions on its Senior Secured Credit Facility and Sub Notes

    Also tripped several financial covenants on its Senior Secured Credit Facility in Jan 2009, and are now in technical default

    Obtained limited forbearance with banks and bondholders, which have since expired

    Most probably outcome will involve takeout of Senior Bank Debt (only $15MM facility), equitization of significant portion of Senior Secured Bonds, and essentially “flushing” Sub Notes
  • TROPICANA:

    Breached leverage covenants in late 2007 after decline in earnings.

    Subsequent downgrades due to deteriorating financial conditions.

    Revocation of New Jersey gaming license due to inadequate operation levels, leading to EOD under loan agreements and takeover by state.

    Various attempts to resolve liquidity issues before bankruptcy:
    – Appeal of decision revoking gaming license;
    – Attempted sale of Tropicana AC to various investor groups;
    – Further downgrades and inability to cure EOD impeded out-of-court resolution.

    Retained restructuring counsel and financial advisor.

    Commenced chapter 11 bankruptcy on May 5, 2008.
    – Proposed plan of reorganization calls for senior secured debt to be converted to common stock and unsecured debt to receive warrants. Common stock and other equity interests are to be eliminated without distribution. Disclosure statement was approved in early March 2009; solicitation of votes next.
    – Case appears to be in flux/stalemate
    – Decline in earnings starting in 2007, leading to difficulty meeting financial covenants.
    – Downgrade of corporate rating and issued debt after missed loan payment in early 2008.
    – Several attempts to secure liquidity and avert bankruptcy:
    – equity infusion from sponsor group;
    – forbearance agreement with lenders until August 2008;
    – concessions sought from state on tax rate, attempted muni-bond raise;
    – high probability of chapter 11 filing in 2009, de-levering by converting secured debt to equity.
    – Retained restructuring counsel and financial advisor.
  • TWIN RIVER:

    Decline in earnings starting in 2007, leading to difficulty meeting financial covenants.
    - Downgrade of corporate rating and issued debt after missed loan payment in early 2008.
    - Several attempts to secure liquidity and avert bankruptcy:
    o equity infusion from sponsor group;
    o forbearance agreement with lenders until August 2008;
    o concessions sought from state on tax rate;
    o high probability of chapter 11 filing in 2009, de-levering by converting secured debt to equity.

    Retained restructuring counsel and financial advisor.

US Market Performance: Week Ended 3/20/09...

Index Performance:

Week Ended 3/20/09:
DJ +0.8%, SP500 +1.6%, Nasdaq +1.8%, Russell2000 +1.8%

March to-date:
DJ +3.1%, SP500 +4.6%, Nasdaq +5.8%, Russell2000 +2.9%

2009 Year-to-date:
DJ (17.1%), SP500 (14.9%), Nasdaq (7.6%), Russell2000 (19.9%)

Keith R. McCullough
CEO / Chief Investment Officer

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