"Genius is nothing but a greater aptitude for patience."
On the second hole of the playoff last night at Augusta, the man they call "El Pato" emerged victorious. Angel Cabrera is no Tiger - "El Pato" actually means The Duck! He is the first Argentinean to win the Masters.
Americans are starting to get used to foreigners beating them not only on the golf course but in financial markets. The global economy is as interconnected as it has ever been, and those who have patiently and proactively prepared for their opportunities are seizing them.
Irrespective of the +26.6% melt-up from the March 9th lows in the SP500, the US market is still down -5.2% on that index score card for the year-to-date. Sure, the Nasdaq is up +4.8%, and if you've been long Technology like we have been (long the XLK etf) that probably makes you feel a little better than Kenny Perry did last night after watching The Duck emerge with a par from the bushes... but that's not the point - the point is that the USA's global score just aint what it used to be.
While it will probably take less time than people with a US-centric view to see a Chinese born golfer win a US major, there is no need to be patient in having China show us the stock market money here in 2009. Last night, with most International Equity markets closed, the Shanghai Composite brought home The Green Jacket, fortifying its lead as the Master of global equity markets, closing up another +2.8% at 2513.
After being all bearish on China last month, I know Barron's curmudgeon Alan Abelson won't be walking you through The New Reality that China is now hitting new YTD highs at +38.1% for 2009 to-date. Never mind missing some of the best stock market rallies from China to the USA in the last 75 years, this weekend Abelson's perpetually negative genius reminds us that US housing has yet to bottom - gee, thanks Alan.
Alan is a fantastic writer, but he, like many an old pro of this American country club game is still playing with wooden shafts. It's not his fault - he just doesn't do global macro, and Barron's couldn't afford the analytical weaponry required if he wanted to. George Soros, on the other hand, does - and he, like Whitney Tilson at T2 Partners (who Abelson cites for his profound housing views), is very much trying to sell his latest book that the Great something of Depressionista cometh.
Maybe Tilson's book is more about housing, and Soros' is more about how good a year he had last year. I actually have no idea - so call me all reckless and stuff for not having wasted my time this morning reading about yesterday's news. The shotgun start for this morning's US market Open is in t-minus three hours here, and I need to be going through the paces of my pre-game fact gathering routine.
With most Western European markets closed overnight, I imagine stock market operators in that part of the world are giving thanks. They are the only worse performing players on the 2009 fairways of international equity competition than Americans. With a Euro pinned up at 1.32, unfortunately the outlook for shipping China something they actually need doesn't look good either.
In Russia however, things look rather spry all of a sudden. While the Ruskies may never have an entrant win the Masters, I should remind myself to never say never. The whisper has it that old Vlady Putin has traded in his Bengal tiger hunting rifle for a Big Bertha. Lord knows what a little cash and golf lessons can do to a man's game.
The Russian stock market is up again this morning, taking its YTD gains to an impressive +29.8%. Like Angel taking his stroll into the woods last night, Russia reminds us that what we aren't paying attention to can quite often be the most threatening. While oil prices traded down for the 1st week in the last eight last week (down 50 basis points on a week over week basis), the petro dollar game is back on the table just as much as that old school one called Geopolitical Risk.
Virtually everything that the Chinese need is REFLATING. From copper prices (now +48% YTD) to Russian handshakes and energy deals, the wins are starting to pile up for those who understand that owning what China NEEDS versus what Americans want them to need (financial services) is where this game is at.
American Eagles of thought processes past beware - The Ducks are coming. As uncomfortable as it may have been last night to watch Angel Cabrera need a translator in accepting the coveted American Green Jacket last night at Augusta, there it is... There is one more reminder that America needs to evolve, or The New Reality of a world that's catching up will start to pass her by.
The SP500 has broken out from an intermediate TREND perspective and now needs to hold 821 for that winning momentum to remain intact.
Best of luck out there this week,
EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months. With interest rates at 3.00% (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.
XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks. As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done). The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide. There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.
TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
XLB - SPDR Materials -It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis. Domestically, materials equities should also benefit as the stimulus plan begins to move into action.
USO - Oil Fund-We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.
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 large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.
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.
GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
SHY - iShares 1-3 Year Treasury Bonds- 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.
EWU - iShares UK - We shorted the UK yesterday (4/08). 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 to attain its 2% inflation target as inflation has slowed considerably. GDP declined 1.5% in Q1, unemployment is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.
EWL - iShares Switzerland - We shorted Switzerland on 4/07 and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials. Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.
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 down versus the USD at $1.3183. The USD is up versus the Yen at 100.6280 and down versus the Pound at $1.4705 as of 6am today.
EWJ - iShares Japan -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".
XLP - SPDR Consumer Staples- Consumer Staples looks negative as a TREND and positive as a TRADE. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.
"Genius is nothing but a greater aptitude for patience."
Check out the 17% decline in exports out of China for the month of March – the fifth month in a row of export erosion. The chart below showing the 3-month moving average is ominous, showing the sharpest drop in, well…ever.
Even if you’re in the camp that China makes up these numbers, the trend here is pretty tough to ignore. This plays right into my theme that China’s efforts to relax VAT taxes and other price restrictions will swing the margin pendulum back into the hands of the US apparel/footwear supply chain. Add that to SG&A cuts, capex cuts, the delta on sales and gross margins getting ‘less bad,’ and what I think are estimates that have largely bottomed. That makes it tough for me to NOT be exposed to US retail. Check out my 3/31 post entitled ‘Retail Narratives Don’t Get More Powerful Than This’ for full detail as well as my favorite names.
“I think there’s a bias in the government to get a pound of flesh. There’s a meanness against business. The [Obama] administration has a sense of anti-business because of the excessive things that were done on Wall Street” – Steve Wynn
Steve Wynn has a strong case against the anti-capitalist sentiment growing out of Washington. Wynn Encore created 4,000 new jobs last year in a bad economy. That’s a huge number, but a mere pimple on the face of Wynn’s historical contribution to the local, state, and national economy. The man has employed 10’s of thousands of people and is most responsible for turning Las Vegas into a giant economy in and of itself.
Betting against Wynn is never a smart long-term decision. Short-term might be a different situation. While we expected Macau to perform better than expected, and it has, Las Vegas was pretty much a disaster for the WYNN properties. We are projecting $33 million combined for Wynn Las Vegas and Encore, well below the Street at $60 million. Unfortunately, $33 million may be too aggressive.
The poor Las Vegas performance will pull company EBITDA below the Street estimate of $151 million. Indeed, we are projecting $129 million with Macau strength partially offsetting the big shortfall.
With the stock up 95% off the March 9th low, there may be some room to fall. Wynn may lose the Q1 battle but he’s never lost a war.
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I’m looking for a very strong Q1 from ASCA. The Street is projecting $0.32 and $78 million in EPS and EBITDA, respectively, which look too low. We believe the numbers could be as high as $0.38 and $82 million.
The loss limit removal appears to be having a greater revenue and higher margin impact on ASCA St. Charles and Kansas City. ASCA seems to have figured out the marketing fairly quickly which should be on display in the Q1 results. Importantly, they are probably only in the fourth or fifth inning of the full impact from the removal of the loss limit. Q1 should also benefit from significant cost cutting with total annualized cost savings at $45 million already achieved by Q4 2008. We estimate EBITDA margin will expand 80bps year-over-year despite flat revenues and new completion in Vicksburg, Council Bluffs, and of course, East Chicago.
There is an interesting twist to Q1 earnings. ASCA may be in the market to float some high yield bonds or extend its credit facility so there is incentive to pry open the credit markets. Recently, the company obtained a favorable amendment to raise the maximum senior leverage ratio in its covenant. The next issue they must tackle is the maturity of the credit facility in November 2010.
Gaming debt seems to trade at a discount to similarly leveraged sectors. However, the regional guys such as ASCA, PENN, BYD, and PNK are in much better shape than the Harrah’s, Station, LVS, and MGM’s of the world. Yet, there seems to be no differentiation between the better credits in the space as the taint of bankruptcies and potential bankruptcies are forcing up yields for everyone. Therein lies the incentive to post a good quarter to narrow the discount and possibly pave the way to hit the credit markets.
Look for a very good looking quarter from ASCA.
It's 2:45PM here on the Eastern seaboard - what a beautiful day to watch our Sharky jump at the shorts (see chart below).
After wrestling above and below the Shark Line throughout the week (thick green line), I think we have ourselves the 3-day confirmation of the TREND that I was looking for here in the SP500. It's a bull Shark!
Technology (XLK), Consumer Discretionary (XLY), and Basic Materials (XLB) have been signaling a TREND line breakout throughout the week. The US market is now proving that it can hold higher lows no matter what the Financials (XLF) do. When those Financials get squeezed (like they are today), there isn't much left but a Pain Trade.
On an immediate term basis, my next line of SP500 resistance (red dotted line) is 861.
Have a great weekend,
Keith R. McCullough
Chief Executive Officer
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