"It gets late early out there."
This business never ceases to amaze me. The behavior of certain classes of group-thinkers is becoming increasingly more predictable. My spending so much time observing this behavior is as critical a factor in my process as it has EVER been.
Whether it's Goldman getting all bulled up on China this morning, or whoever they have left on Fast Money talking down Yahoo's turnaround last night, we should all be thankful for their having an ability to actually have an influence on market prices. Without their help, I at least, couldn't sustain my batting average.
Of course, over time, the Dylan Radigans of the world go away (did he retire?) - but as sure as rain, CNBC will find another market yahoo to start chirping about whatever it is that a journalist who has never traded a market chirps about (sorry Mellissa Lee), and we go on, and on, and on... embarrassing the American flag with these non-sensical entertainers being YouTubed by everyone from China to the Middle East...
Seeing them be late is something that we market operators who get up early pray for every night before we go to bed. Afterall, it's a lot harder to pick off passes from competitors who are proactively prepared. Study these people while they are sleeping.
Understanding that it's a lot easier for even those with sleep jammed in their eyes to see that China's growth is real AFTER their stock market is up +40% year-to-date, we really need these yahoos at Goldman to stay in the game. 1-800-Hank Paulson - keep these lifelines open!
Having sold our long position in China means that I need to buy it back now - the only way I can do that is if there is a price disconnect versus expectations. On the heels of Goldman's renewed proclamation of faith in that place that they levered up long on at the top of the mother of all Global Equity Manias in 2007, then again via "Chinese Oil Demand" in 2008, what is a local Chinaman to do? Buy more? Uh, apparently not...
The Shanghai Stock Exchange took the "news" of America's Secret Government Society being long and ran for the exits. Chinese stocks closed down an abrupt -2.9% overnight, and broke what I had been monitoring as immediate term price momentum support. That breakdown/breakout line on the Shanghai Composite is 2503. Even the Fast Money folks know enough about a chart to understand that when a support line breaks down like this, its becomes formidable resistance.
No, this doesn't mean I am bearish on China all of a sudden. This simply means that I am bullish in my conviction that the yahoos are going to get plugged buying China into the vortex of an immediate term top. I see no reason why the Chinese stock market cannot correct at least -9% from the YTD high that it locked in earlier this week. When and if that happens, the only thing that will have changed is price and the level of frustration for those who chased it.
Within the construct of a multi-factor global macro risk management model, both price momentum and yahoo behavior are an interesting factors to study. So why not spend a minute using this 2-factor model looking at an American internet company with the ticker YHOO?
On this day in 1993, per Wikipedia, "the first version of Mosaic, created by computer programmers Marc Andreessen and Eric Bina at the National Center for Supercomputing Applications of the University of Illinois at Urbana-Champaign, was released, becoming the first popular World Wide Web browser and Gopher client."
Only 2 years later, a company called Yahoo was founded in Santa Clara, California. And 16 years after that (which is hardly a long time for those of you who understanding the scope of history), the once loved internet mo-mo stock has seen its price pounded into the tar sands.
On this day of 2008, YHOO's price was $28.54/share. Some simpleton math marks that price +98% higher than last night's close. Now I have seen stock markets from Russia to China collapse 70-80%. I have even witnessed peak-to-trough declines in somewhat more tangible American assets like, say, oil, fall even further... but down from $104/share when the likes of Blodgett had people mark this baby up into year-end of 1999 to $14.38 yesterday? Hoo-wah! Now that's a fall!
Being bearish on YHOO's price at this point is a place that we have reserved for the yahoos who sell low and buy high. Yahoo was the first stock that my Partner, and our new head of Technolohy Research here at Research Edge, Rebecca Runkle, had me add to our virtual portfolio back in February. We have a time stamp and price on this ticker of 2/24 and $12.53, respectively. No we didn't buy the bottom. But we think the stock is going a lot higher from last night's close... and we'll be thanking the fine folks at Goldman whenever they find enough rear view price momentum to upgrade it.
You see, whether it's selling China high, or buying YHOO low - it's all one and the same as not having chased Carl Ichan into YHOO high (like Fast Money did last year) or shorting China low in November. "It gets late early out there"... and that will never change.
It's never too late to buy low and sell high. My SP500 range is as narrow and trade-able as I have seen it since 2003. I know, I know... the yahoos want you to believe that we're overbought the whole way up here... and no one wants to buy anything every time the US market is selling off to a higher low... so make sales at the SP500 line of 877, and buy things that are on sale as we get closer to the 822 again... and thank your lucky stars that the yahoos on the other side of your trades are always going to be late.
Best of luck out there today,
EWG - iShares Germany-The DAX is up 8.9% month-to-date. We bullish German fundamentals, especially as a hedge against financially levered and poorly managed Switzerland. While the automotive industry is ailing, the strength of Germany's labor unions will preserve jobs and maintain a slower rate of sequential acceleration in unemployment. Compared to most of Western Europe, Germany has a positive trade balance and will benefit from Chinese demand, especially if the Euro can stay below $1.32. The ZEW index of investor and analyst expectations for economic activity within six months rose to +13 in April from -3.5 in March, the highest reading since June 2007. We're bullish on Chancellor Merkel's proposed Bad bank plan to clear toxic bank assets and believe the country will benefit from a likely ECB rate cut next month.
EWZ - iShares Brazil- Brazil continues to look positive on a TREND basis. 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 has managed its interest rate to promote stimulus. The Central Bank cut 150bps to 11.25% on 3/11 and likely will cut another 100bps when it next meets on April 29th. 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.
XLY - SPDR Consumer Discretionary-TRADE and TREND remain bullish for XLY. The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic. We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform. The XLY is a great way to play the early cycle thesis.
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. 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.
USO - Oil Fund-We bought more oil on 4/20 after a 9% intraday downward move. We 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.
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%.
VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. On 4/20 the VIX shot up 15.5% intraday, an overcorrection we want to be short as we believe US indices will make higher highs and the volatility is currently overbought.
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- 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.
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 down up versus the USD at $1.2939. The USD is down versus the Yen at 98.0620 and up versus the Pound at $1.4570 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 continues to underperform the SP500, yet the TREND remains positive. 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.
"It gets late early out there."
"Canada is the linchpin of the English-speaking world."
- Winston Churchill
Positions: Recently sold our long position in Canada via EWC, but have a positive bias...
The lack of correlation continues to resonate in global equity markets. While we can debate whether Churchill's quote above is still true, year-to-date Canadian equities have been the leaders versus their major English speaking counterparts, specifically the United States and the United Kingdom. As of yesterday's close, Canada's TSX was up +1.5% YTD, the SP500 in the U.S. was down -7.9%, and the FTSE 100 in the U.K. was down -10.0%, so we can accurately say that Canada is currently the linchpin of English speaking equity markets.
We recently sold our position in Canadian equities, which we owned via the etf EWC, for a 12.6% gain. This was a fortuitous sale as EWC is trading at $17.37, down 6.9% from last Friday's sale price. Clearly, when commodities deflate, as they did on Monday, with oil down ~-9%, it will be challenging for natural resource-rich Canada to outperform.
The Canadian economy is heavily levered to both natural resources and financial services, which is reflected in the holdings of the EWC. In the chart below, the top 10 holdings of the EWC are outlined - three are banks and six are resource-related companies. While the Canadian banks have suffered in the global economic malaise they are much better capitalized than their American counterparts and have substantially lower exposure to bad debt either through housing or leveraged loans. As a point of fact, no major Canadian bank has either gone bankrupt or been in any real risk of bankruptcy.
This morning the Bank of Canada followed their U.S. counterparts and effectively lowered interests to zero. The BOC noted in their statement that:
"Today's decision to lower the policy rate by 25 basis points brings the cumulative monetary policy easing to 425 basis points since December 2007. It is the Bank's judgment that this cumulative easing, together with the conditional commitment, is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2 per cent inflation target."
With the overnight rate at 0.25%, the Canadian government will have limited ability going forward to stimulate, which is not dissimilar to both the United States and the United Kingdom where the overnight rates are at all time lows. Canada though, in contrast to its two counterparts, has a much healthier balance sheet and seemingly better growth prospects.
According to the most recent data, Canada has $365BN in public debt, the United States has $11,152BN, and the United Kingdom is at $1,010.7BN. On a per capita basis, this equates to $11,012 in Canada, $16, 595 in the United Kingdom, and $36,709 in the United States. From a projected growth perspective, the IMF, which obviously is only one data point, projects Canadian GDP to decline at -1.2% in 2009, the United States to decline at -1.6% in 2009, and the United Kingdom to decline at -2.8%.
As always, everything has a price, which is why we sold Canada on Friday, but with a healthier balance sheet, better growth prospects, and a banking system that remains largely intact, we will be revisiting it on the long side, particular vis-à-vis its English speaking brethren.
Daryl G. Jones
As in Squeezy The Shark and the Meredith Whitney kind...
The financials are leading the market higher again intraday - this has basically been the tale of the tape since Meredith started her own firm under the flag of everything Depressionista. Financials straight up into the right, in classic contra indicator form. We appreciate the work you did Meredith, but is the bearish dogma perpetual?
My math has the bullish breakout line for the XLF (Financials ETF) at $9.31 (thick green line in the chart below), and TRADE lines of resistance up at $10.51 (we're a dime away from that chum line intraday here) and $11.69, respectively.
Keith R. McCullough
Chief Executive Officer
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Let's start with the bad news. Street estimates for 2010 are too high. Our database of new casinos and expansions shows that industry slots into this market will decline almost 50% in 2010 from a down 2009. Moreover, IGT's credit facility expires in November, 2010 and we believe the company will refinance by the end of this year at higher rates. These two factors lead us to a 2010 EPS estimate significantly below the Street, $0.82 versus $1.09, respectively. Lower EBITDA drives approximately $0.05-0.10 of the lower estimate with the remaining $0.17-0.22 generated mostly by higher interest expense.
The good news is that IGT has taken out $115 million in costs out of production (see our note from earlier today "IGT: COST CUTTING POTENTIAL") and could reduce SG&A and R&D by a total of $130 million if you believe they can revert back to 2006 levels. IGT is manufacturing at about 35% capacity and with the leaner cost structure, the incremental flow through on accelerating replacement sale should be huge. The question is when will replacement demand accelerate? The North American slot floor is as old as it's been in 10 years. Casino operators' balance sheets need to improve and distressed assets need to be turned over to better capitalized owners before demand picks back up. We believe that won't happen until 2011. By that time, pent up demand could generate huge increases in box sales.
In the following analysis, we attempt to provide a core earnings power estimate for IGT assuming:
- 1) the leaner SG&A/R&D cost structure
- 2) the $100 million of production cost cuts is sustainable
- 3) "normalized" replacement demand
- 4) IGT's market share normalizes at 40%
- 5) IGT refinances its credit facility at an all in rate of 6.5% and raises $500 million in new notes at 8.5%
As can be seen from the analysis, IGT has quite a bit of earnings power. Given the pent up demand, IGT has the potential to "over earn" above the $1.40 for a couple of years should there be a v-shaped recovery.
Investors playing the long-term recovery card could be handsomely rewarded but they may have to be patient. Our 2010 estimate of $0.82 is well below the Street at $1.09. Numbers need to come down before they go up.
POSITION: Long Germany via the etf EWG
Despite GDP projections of negative 4-5% growth for Germany this year, we're bullish on the stimulus measures Chancellor Merkel and Co. have passed and believe Germany plays well as a long versus our short position on the financially levered and poorly managed countries of Switzerland (via EWL) and the UK (via EWU); the latter we just covered today.
Look for Germany to benefit from an uptick in export demand from China, especially if the Euro can stay below $1.32, and from Eurozone and US demand as the global recession moves out on the recovery curve. In addition, the stimulus package may lead to economic growth that exceeds these dire expectations.
German investor confidence unexpectedly rose this month and the DAX is up 9.8% month-to-date, signaling that the pace of contraction is easing and the worst may be over, yet buyer beware.
The ZEW Center for European Economic Research said its index of investor and analyst expectations for economic activity within six months rose to +13 from -3.5 in March, the highest reading since June 2007. Yet ZEW's gauge of current conditions fell to -91.6, the lowest since September 2003, from -89.4 in March.
Certainly the German economy looks to be improving, yet is not out of the darkness. German industrial production fell 3.2% M/M in February, compared with a decline of 2.3% in Euro area, and improved sequentially over January's contraction of -5.9% M/M, according to Eurostat. The country's trade balance stood at +7.2 Billion EUR in January; exports declined 23% and imports fell 15% on an annual basis.
Although Germany's trade surplus is severely depressed from the previous year's surplus of 17.1 Billion EUR, the positive take-away is that despite declines in exports globally, Germany posted a positive balance. In contrast, the UK posted a trade deficit of -8.9 Billion EUR in January and the majority of the EU came in with negative balances.
German PPI yields a slightly unclear picture when examined on a monthly versus annual basis. The Federal Statistics Office said today that PPI declined 0.7% in March M/M and fell 0.5% Y/Y, after gaining 0.9% in February Y/Y. The numbers do help to confirm that inflation is slowing (as is the case across the EU) and that companies are either able to extend reduced energy costs to consumers or are forced to cut prices in response to waning demand. As PPI (and CPI) fall they'll put upward pressure on unemployment, which has risen sequentially on a monthly basis, currently at 8.6% These fundamentals, especially from the Eurozone's largest economy, may help prompt the ECB to cut its interest rate from 1.25% when it meets next month.
Today Merkel met with finance and economic ministers to discuss a German "Bad" bank plan, which may be especially geared to its state banks (*Landesbanken). Proposals to clear some $1.1 Trillion of toxic assets from banks will be discussed in the next few days, which on the balance is positive. As is often the norm, the Germans will take a "slow and steady" approach to a decision, with a government spokesman stating a decision could come shortly before parliament's July 3rd summer recess.
Rate cuts in India have not yet created real liquidity ...
The reserve bank reduced benchmark rates by 25 basis points today, the 6th cut in 6 months. Although the timing of the cut was a surprise to most economists, collapsing wholesale inflation and declining production levels had clearly left the potential more cuts by the central bank baked in.
At this point, the big question is not when there will be more rate cuts, but rather when that liquidity will pass through to the real economy. To date, the spread between average commercial rates and RBI benchmarks have hardly contracted while growth of commercial credit continues to decline on a sequential year-over-year basis.
To date, our opinion on prospects for India's recovery has diverged wildly from Street consensus because of a fundamental difference in how we interpret internal demand there: While our competitors see strength in India's lack of export dependence, we see weakness in a dependence on an agrarian sector which currently keeps over half the population employed on a bare subsistence level. One thing that both they and we can agree on however is the need for credit liquidity to help drive internal demand.
With the election cycle in full swing (a complex, manual process that will take weeks to conclude) political tail risk takes precedence in our model, but we will continue to watch the Indian market closely for signals that government measures are having an impact. Until we see some confirmation of that, we will retain our short bias on the India equity markets.
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