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Japanese Yen: We're Negative...

Summary investment conclusion


We are negative on the yen from a quantitative perspective with current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticipated support above 98.21.


From a fundamental perspective, Japan policy makers, as we outline below, really have no choice but to aggressively implement a weak Yen policy.




Media reports this morning predicted that the third stimulus program, which will be unveiled on Friday by Prime Minister Taro Aso, will total more than 15.4 trillion Yen as Aso and his LDP colleagues respond to the continuing downward slide in the Japanese economy and their plummeting approval ratings. With September elections looming, the public reception of the stimulus will be critical as it moves to the opposition controlled upper house for approval (it took nearly four months to pass the previous plan). The Japanese politicians face a problem common to their counterparts across the globe, not implementing a large enough stimulus package, fast enough to arrest a substantial economic contraction driven by concurrent external and internal factors of a magnitude not seen since the Great Depression.


Recent Background: Equities & the Yen


The relationship between the Yen and Japanese equities is uniquely interdependent due to the overlapping importance of export industries and the heavily concentrated equity exposure of the Japanese banking system. As such, the relationship is a two way street, with the yen showing a greater sensitivity to domestic equity market valuation than any other major economy’s currency.


Japanese Yen: We're Negative...  - f1


In January Finance Minister Kaoru Yosano announced that the government would inject liquidity into three regional banks to the tune of 121 billion ¥ and the option of direct purchases in the equity markets to arrest the fall in the Nikkei 225, which had tumbled to a 26 year low. This announcement came on the heels of  a proposed 100 billion ¥ preferred share purchase in three banks announced in December as part of a program to inject as much as 12 trillion ¥ into domestic banks in an effort to provide liquidity to the banks with the objective that they will extend credit to prevent corporate bankruptcies. In The wake of these announcement the equity markets continues to slide in the face of strengthening Yen.


It was only the initial announcement of the third stimulus program in March, combined with an increase in the BOJ program of Purchasing Treasury bonds, which reversed the equity markets slide. Since the second week of March the Nikkei had rebounded by more than 25% and the yen simultaneously weakened as this “shadow quantitative easing” helped inspire greater confidence in future export prospects and asset allocation eased upwards pressure on the Currency in turn.


Conclusion: Only One Path Out


The new stimulus program is heavily weighted towards inducements for increased domestic consumption. The prospects of reversing the savings trend and inducing the consumers back into market in the face of rising unemployment do not look promising. The Economic and Social Research Institute’s (ERSI) consumer confidence index continued its modest upward trend in February, rising to 26.7, incrementally higher than January’s 26.4 index but still hovering near the survey’s lowest reading on record, of 26.2 in December. Surveyed households, asked to provide their outlook, six months forward, of the four categories in the survey; overall livelihood, income growth, employment, and willingness to buy durable goods, registered levels showing that perceptions of income growth and employment continued to decrease for the month. With registered auto sales declining 32.4% Y/Y for March, the stimulus plan provisions for hybrid rebates seems particularly anemic –with prospects of making up the difference in domestic sales unlikely, let alone the drop off in external demand.


Prospects for the other major source of Japanese economic activity, exports, continue to look grim in the face of decimated North American and European demand. On an absolute Yen basis February exports, while a marginal improvement over January, still registered at levels lower than any pre 2009 figures since August 1996. Industrial production contracted by 37.66% Y/Y in February following months of extreme contraction in output as well as shipments and capacity utilization.


Japanese Yen: We're Negative...  - f2


The the modest uptick in machinery orders for February reported by the cabinet office today: up 1.37% M/M and -30.21% Y/Y ( a sequential improvement over January), seem to be an unconvincing sign of a bottom in production prior to confirmation by March export data.


Even is the stimulus program to be announced on Friday does accomplish increased in internal conumption, the heavy weighting towrads tax incentives and other government reveues rather than direct monetary injectiosn leaves a strong perception that the cupboard, at last, is bare. Japanese government leaders are now operating with the fact that any ability to implement more fiscal stimulus is restricted by a debt burden now estimated by the OECD at approximately 197.3% of GDP for 2010. A large and growing fiscal deficit, coupled with large sovereign debt obligations and credit agencies reeling from the ongoing perception of their ineptness, leaves us with the conclusion that the impact of increases debt levels going forward on Japan’s sovereign credit rating must be .


Taking all of this into account, the only logical policy left open to the Japanese government appears to be the pursuit of a weaker Yen despite all negative consequences.




As tactical investors, we balance our fundamental view with a quantitaive approach to near term market positions. Our current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticpated support above 98.21.


Andrew Barber


Japanese Yen: We're Negative...  - f3

Where There’s Smoke… Notes for the Week Ending Friday, April 10, 2009

Breaking the Buck

Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic -- Ambition, Distraction, Uglification, and Derision.

  - “Alice in Wonderland”


Andrew Donohue, Director of the SEC Division of Investment Management, addressed the Practising Law Institute this month.  Points of interest from his talk include the statistic that “The mutual fund industry…” with over 8000 funds, “is one that approximately 92 million investors have entrusted over 9 trillion dollars to.”  Donohue acknowledged the broad diversity of strategies and objectives, yet found it “surprising” that the divergences of performance have been so wide within sectors.


“For example, in the bond fund area, while the average high yield bond fund lost 26 percent on average, the range of performance was plus 7 percent to minus 78 percent. Similarly, with national tax-exempt bond funds, while the average fund lost almost 7 percent, the range in performance was from plus 6 percent to minus 49 percent.”


Sounds like the return from a mutual fund might be no more reliable than what you have been getting from your stockbroker, or from (gasp!) Jim Cramer.  “What”, asks Donohue, “is the value proposition in taking on the risk for this variance in performance?”




Interviewed in this Sunday’s New York Times Business section (“He Doesn’t Let Money Managers Off The Hook”), John C. Bogle – founder of the Vanguard Group and the Yoda of the managed funds industry – raises the issue of just how irresponsibly the mutual funds industry has discharged its fiduciary duty to the – did you read that number? – ninety-two million investors who collectively have entrusted them with over nine trillion dollars.  America, these are seriously big numbers.


The SEC has so far escaped criticism in the area of proxy voting, but that may change.  Donohue may not be aware of how large a mess has been swept under his Division’s carpet.  But he lifted the corner of the rug in his PLI address, so he is now Fair Game.


Hedge fund and mutual fund managers devote many pages of their compliance manuals to the procedures for proxy voting, and an entire industry has grown up to handle the proxy process for professional investors.  There is a small subset of managers who engage directly with the managements of companies in which they invest.  They are called “activist” managers, and there is something gamey, rough-and-tumble and perhaps not quite White Shoe associated with the moniker.  They hire lawyers and say nasty things at shareholder meetings and launch proxy fights.  Many managers state simply that they simply divest themselves of holdings in companies whose managements they are not prepared to back.


In fact, as reported in the Financial Times (6 April, “Mutual Fund Votes Helped To Boost Pay”) mutual fund managers have been major contributors to excessive executive pay in public companies.  According to the FT piece, “AllianceBernstein, Barclays Global Investors, Ameriprise, and Bank of America’s Columbia Management were the most consistent backers of management proposals to increase executive pay…”  The article reports that “In 2008, the 26 mutual fund groups included in the study voted in favour of management compensation proposals 84 percent of the time…”  One should not require the benefit of 20/20 hindsight to observe that this is an unconscionable record in an abysmal year.


If you are “professional” investor, and you do not engage with the management of the companies in your portfolio, then in what does your professionalism consist?  Are the thousands of managers running the thousands of mutual funds nothing more than a legion of Educated Guessers armed with such fearsome weapons from the arsenal of Modern Portfolio Theory as the Capital Asset Pricing Model and the Dividend Discount Model?  Indeed, they have led their investors lemming-like in a charge across the Efficient Frontier and into a never-never land of smoke and mirrors wealth. 


The President of the United States steps up as Mutual Fund manager-In-Chief and fires the CEO of a company in which he has taken a major stake with his clients’ money.  Should we demand any less from those Harvard MBAs and MIT PhDs to whom we have entrusted our trillions?


Donohue next said “the review of the money market fund model and its regulatory regime is one of our top priorities in the Division of Investment Management this year.”  Noting that there is some $4 trillion invested in money market funds, Donohue said the standard money market model has come under stress in the past 18 months, and investor protection concerns warranted a fresh look. 


Using a graphic real-life example, Donohue questioned whether the notion of a $1 net asset value (NAV) should be reviewed and suggested that a $10 NAV or a floating NAV may address some of the problems associated with the current model. Donohue showed how, under current rules, an investor may be paying one dollar a share for shares whose actual NAV is $.9960 – taking an immediate unrecorded loss on their investment.


This effect is exacerbated by professionals who understand the money market funds’ regulatory structure.  The rules permit a 50 basis point (one half of one percent) fluctuation in NAV before the fund has to declare a NAV change.  In Donohue’s example, the big players withdraw 25% of the cash in a money market fund in a single day.  It is all paid out at the stated NAV of one dollar, when the actual NAV is $.9960.  The resulting imbalance, after the 25% drawdown, leaves the NAV at $99.47.  Under the current rules – did you guess right? – the fund must now Break the Buck and state its NAV at 99 cents. 


Fifty basis point tolerance.  Above half a cent, round up to the dollar.  Below half a cent, round down to $.99.  Thanks for playing.


For most retail investors, the real news is that money market funds are not banks.  They are investments, and they entail risk.  This is why the regulatory agencies require individuals who recommend money markets to investors be Series 7 Registered Representatives.  As with so much else that has emerged in the recent collapse of the global financial system, the big surprise came at the margin, with the once-in-a-century meltdown.  Your dollar is not guaranteed to stay at a dollar.  Who would have thought?  So in Whom do we trust? 


Donohue mentioned the idea of having money market funds state NAV at ten dollars per share.  Keeping the half-cent tolerance, this would make fluctuations in share value much smaller.  In the world of equities we call this a Reverse Split, and it ends badly.  Call us simple stock jockeys, but Donohue’s trial balloon looks to us like simple inflation.  It says that there is so much money in the system that we can no longer denominate our dollars in dollars.  Welcome to the Weimar Fund, where NAV is stated in wheelbarrows full of hundreds.


While we recognize the desire to address this situation, merely applying an orders-of-magnitude upwards ratcheting still leaves the fundamental issue unaddressed: investors always thought their money market fund dollars were going to be worth a dollar.  Moving the NAV marker up tenfold seems to buy time, without creating fundamental change.


Another matter Donohue touched on was leveraged ETFs that are marketed to investors as professional-style tools for capitalizing on moves in market sectors.  Anyone who bothers to apply basic arithmetic will quickly spot the risks, but most people, guided by their investment professionals, do not bother to add, subtract, multiply and divide before they invest.


A fund that promises 200% of the upside of a market index will use leverage to obtain that return.  When the sector goes down, the leverage exacerbates the downward move of the fund, which then must work orders of magnitude harder to recover.  It’s simple arithmetic.  A 25% down move requires a 33% upwards move to recover back to even.  Down 50% requires up 100%.  And so on.  When your investment is leveraged – and driven by the compounding factor of daily pricing – one quickly gets so far behind that, even with the indexes charging ahead, recovery is well nigh impossible.  Donohue referenced an instance of an index being up fifty percent, while the accelerator fund that tracked it, because of negative returns during the fund’s early stages, was down 21% during that same period.


In a snip of a story that, apparently, no one thinks is related, the SEC Division of Trading and Markets has permitted Legg Mason to stop sending monthly account statements to customers whose “only” transactions were reinvestment of dividends in money market funds underwritten by Legg Mason itself.  The reasoning is that, since the specifics of the funds are available on the internet, it is no longer necessary to send out a piece of paper.


Do we mistrust Legg Mason? Not in the slightest, though we have a less sanguine opinion of the SEC.  The bias towards Disclosure By Availability, and away from making the investor engage, feeds into the continued domination of the markets by those who create and sell product, and away from beefed-up protection for those who consume product.


Until investors are forced to face the reality of the marketplace, regulators will remain ineffective.  Who benefits from the write-up of money fund assets?  Is it the investor?  Or is it the fund managers, who will not have to adjust the way they manage risk?  It looks to us like the regulators’ approach to increased risk in the marketplace is to give market operators more latitude, when what they should really be doing is giving investors more education.  The simple solution?  Make any broker who wishes to sell products to investors take an investor-safety course.  Better yet, make the customers take it.


Motive, Means And Opportunity
European insurance companies…

- Sir Alan Greenspan

Lloyd Blankfein, CEO of Goldman Sachs, held the floor on the global stage last week for the very best possible reason: because he could.  For all the cynicism – those who believe he was giving mere lip service to corporate responsibility – it is clear that Goldman has top-drawer risk management.   One need not be a die-hard cynic to recognize that true risk management consists, not in making risks vanish, but in getting someone else to take them on.


Thus, on the occasion of his knighthood, Alan Greenspan was able to smile serenely as he told his hosts that the European insurers had taken the beating on the implosion of derivatives, synthetic securities, and plain old common stocks that had come in the wake of the “dotcom” bust.


Thus, on the eve of floating a public offering that will finance their paying back the TARP funds (you didn’t think they were going to use their own money?) Blankfein has one of the few legitimate claims to the title of Last Man Standing.


We recommend that all our readers replay Blankfein’s speech.  Forget the big pink banner (no, fellow journalists, Blankfein was not “upstaged” by the giant pink banner reading “we want our $$$ back”).  The philosophical takeaway fits with what we perceive as President Obama’s view on market regulation.  By retooling compensation across the board, Blankfein is suggesting a significant duration shift in Wall Street’s outlook.  The change from instant gratification, to long-term greed, is likely a very healthy notion, and certainly one whose time has come.  It used to be the way of the world, until technology partnered up with greed and allowed local petty thieves to morph into Robber Barons.


The Obama Administration appears to be pushing for longer-term perspective in the marketplace, and the regulatory structures they are putting forward are part of this outlook.  SEC Chairman Schapiro’s proposed reforms are generational changes, in that they will not truly take hold until much of the existing Old Guard has been flushed out of the system.  We think the industry is also being pressured to change its outlook.  Goldman Sachs is driven by the profit motive, while regulatory agencies are driven largely by the desire of vast armies of ineffectual employees to keep their jobs and pensions.  We take it as no coincidence that Blankfein’s perspective dovetails with much that emanates from the new Administration. 


Look to Wall Street to take the lead with major changes in the marketplace.  It is the only player that can, and it has every reason to do so.  Where Goldman Sachs leads, the SEC will, perforce, follow.


iShared, iSaw, iConquered
The hurrieder I go, the behinder I get.


We admit to being conspiracy theorists, and we like very few things as well as a juicy story that connects the dots and emerges with a sinister global cabal. 


Our latest offering is a two-way cabal: it has a major market player perpetrating an apparent fraud on the world markets, and the fraudster itself stands to be dealt a crippling blow by a counter-fraud that lurks like a depth charge in its path.


Barclays Plc has given the markets two things they have been hungering for: a Really Big Loan from a Really Big Bank, as well as a Really Big Profit Number for a Really Big Company.


This week, Barclays announced that CVC is the winner of the bid for its iShares operation.  The purchase is being funded with one billion dollars in equity, and a $3.1 billion loan, issued by none other than Barclays itself.  This will be a relatively simple transaction.  From a logistical point of view, Barclays will simply convert the loan into a revenue number.  In anticipation of the profit it stands to book, Barclays shares rose significantly in last week’s trading.


The details – where the devil is said to lurk – include half a billion dollars to be paid later, based on a projected high level of profitability of the operation for its new owners.  (We think the wording is “if, and only if…”)  Also, for some reason that is perceived as boosting the credibility of the deal, Barclays has undertaken to hold the loan on its own books.  Some have speculated that the loan might be difficult to syndicate, while others – more cynical? – posit the reason is that Barclays will have to make some rather ugly concessions, as the iShares business is not as profitable for its new owners as it was for the Bank.  We add to this the notion that, as the business starts to unravel under the stewardship of CVC, no one wants to see a troubled $3.1 billion loan spawn an untraceable daisy chain of CDS betting against it.

But wait.  What’s this? 

Chinese company LIMMT Economic and Trade Company Ltd., was sanctioned in 2006 by the U.S. Department of the Treasury for providing material support for Iran’s missile program.  Now Manhattan District Attorney Robert Morgenthau has announced a 118-count indictment against the company, alleging the LIMMT sent and received dozens of illegal payments through U.S. banks in the two years after the OFAC sanctions were imposed. 


These payments, made through alias accounts and shell companies, were facilitated by some of the biggest names in global banking.  Prominent among them are Lloyds TSB Bank Plc, Credit Suisse, and Barclays.  These banks were themselves said to have illegally – and possibly knowingly – structured payments from Iran in such a way that the US counterparty banks could not tell their true point of origin. 


Dozens of illegal transactions were allegedly processed through Bank of New York Mellon, JP Morgan Chase, Wachovia, American Express, and Citigroup.  Our experience in the world of anti money laundering compliance is enough to tell us that US domestic entities have the right to rely on other financial institutions, if those counterparties are, themselves, subject to a recognized AML regime.  Thus, while we suspect the story is far from over, the U.S. banks have so far not been charged with wrongdoing.  Bloomberg.com (7 April, “Chinese Firm Indicted For Misusing Banks, Aiding Iran”), quoted Morgenthau as saying “Our banks have high standards and sophisticated systems to stop these transactions, but this conduct was specifically designed to defeat their systems.”


Morgenthau achieved a $350 million settlement with Lloyds TSB Bank, announced in January.  Credit Suisse and Barclays have both said they are cooperating with Morgenthau’s probe.


And if they don’t?


We wonder what part this deceit played in the US’ recent attack on Swiss bank secrecy.  We think the US Government would consider it wholly appropriate to strong-arm the government of Switzerland to open up its banking sector to scrutiny, once the Iran / China connection came to light.


We have been watching developments in the ETF markets, and we still believe there will be a regulatory comeuppance for their issuers.  The Senate has not finished with efforts to rein in speculation in the commodities markets, where much of the ETFs are based, and legislative attempts to place similar restrictions on the equities markets may be in the offing.  Remember, SEC Investment Company Division Head Donohue just spoke to the PLI about the broad disparity in ETF performance.  Could he be testing the waters for new regulation?  Have you ever known a regulator to show up on the rubber chicken circuit for anything else?


Last week, we theorized that the iShares transaction might be a way for the US to exert pressure on Luxembourg to prevent tax fraud, bringing them in from the cold.  This week, the picture gets bigger, better, and more connected. 


Barclays may simply be raising a bundle of cash the best way it knows how, in anticipation of writing a very large check to Mr. Morgenthau.  But there is a rub – indeed, more than one.


First, there is always the likelihood that the deal collapses on its own.  We detect a note of panic in the fine print surrounding how, and on what basis, Barclays actually gets its money and is able to get rid of the gigantic loan it has self-guaranteed.


Failing that, we are left with the following scenario: a major global bank which defrauded the US banking system has put up $3 billion of its own money in a self-guaranteed loan to a private firm in a country suspected of being a haven for tax fraud.  The bank has done this in order to book a quick profit – which it can report, but not spend, as it is still far from being actual money – in hopes that it will not have to dig deeper into its own pocket to bail out the buyer when serious regulatory problems blow up in their face.


Just speculating, folks.  But remember: you read it here.


Moshe Silver

Chief Compliance Officer


State of Emergency: Thailand...

The eighth largest economy in Asia is teetering on the brink of anarchy, again…

The Baht swooned in trading overnight as Thai royal army units reportedly fired hundreds of live rounds into crowds of pro- Thaskin protesters in Bangkok streets, falling to levels below .0281 per USD earlier today -a decline of more than 2.6% YTD.  


For the Abhisit administration the past five days have been a series of humiliations.  Over the weekend the ASEAN summit was canceled due to the protests –including a special meeting that was to be led by Chinese premier Wen Jiabao to discuss the Yuan denominated swap program which has already been implemented in Hong Kong and is slated to begin for ASEAN members to help prop up regional liquidity.  Meanwhile, comments from Moody’s analysts indicate that the deteriorating political situation may lead to a downgrade on sovereign debt ratings in the near future.


For Thailand’s major trading partners, the potential for interruption of production and transportation is more pronounced than productivity lapses during protests last year due to the more volatile profile of the current unrest. Official news agencies have reported that the military is securing ports, airports and rail stations to prevent disruptions; we will provide updates if we secure any information regarding specific productivity impediments.

State of Emergency: Thailand...  - cheche1


We do not have an investment opinion on the Thai markets currently, but would encourage any subscribers that have exposure there to contact us with specific questions.



Andrew Barber

State of Emergency: Thailand...  - che2






Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Beware Of The Duck

"Genius is nothing but a greater aptitude for patience."
-Benjamin Franklin
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.

More Good News For Retail Supply Chain

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.

More Good News For Retail Supply Chain - 4 13 2009 7 20 24 AM



“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.