Selling Early

"If you want to succeed in the world, you don't have to be much cleverer than other people. You just have to be one day earlier."
-Leo Szilard
Today is Cinco de Mayo in Mexico; its Liberation Day in Denmark, Ethiopia, and the Netherlands; and it's Children's Day in Japan and South Korea. Yesterday, here in the USA, was the day that I started selling as aggressively as I have since January. No matter where you go in this interconnected world of global macro today... or where you went yesterday... there you are.
Here I am this morning, staring at my greatest weakness which, at times, can also be my greatest strength. Selling early is what I do. As I evolve as a professional in this game, my challenge is to narrow the gap between the time that I hit those sell/short buttons and immediate term peaks. People have always told me that you can't "time markets" - so I have made it a personal challenge to have my feet on the floor early enough every morning to prove that I can do that better than they can.
For me, being a global markets operator is a risk management exercise. I am tasked with not losing capital first, and then earning a risk adjusted absolute return where I see fundamental opportunities. Every morning I have a stare down with these arthritic hockey knuckles of mine and this keyboard. There is nowhere to run - and I wouldn't run away from being held accountable for my actions if there was. I play this game for these moments.
On balance, for the better part of the last 2 months I have been bullish. Notwithstanding that context, being wrong, on my scorecard at least, is not a relative exercise - everything is absolute. After all, in order to sell too early, one must already be in possession of something to sell. I sold my long position SP500 position (SPY) yesterday at 10:21 AM at $89.78. The SPY's gapped up into yesterday's market close, going out at $90.88 (SP500 907). That makes me wrong by -1.2%, so far...
When I made my decision to start selling yesterday, it had nothing to do with calculating how far we had run from the Depressionista low. It had everything to do with the moment that markets were in. I play the game that's in front of me, not the one that's behind me. I said that I was selling the SP500 because it was "overbought at the 896 line." The time and my reasoning has a time stamp on our web portal.
Understanding that most of the said savants of money making in this business can (and should) poke holes at what I do and when, I rarely see the time stamps on every decision they make... and I doubt I ever will...The point here isn't to belabor what it is that other people do. My simpleton advice is to focus on doing whatever it is that you do.
What I do is use a multiple factor global macro model that spans countries, asset classes, and companies. Everything is marked-to-market, and real-time prices rule the timing of my decisions. Understanding that I have not been of the "overbought" camp until yesterday, here are the assets prices in my model that remain clearly overbought on an immediate term basis as of last night's close and overnight trading:
1.       China's Shanghai Composite Index
2.       Hong Kong's Hang Seng Index
3.       India's BSE Sensex Index
4.       London's FTSE Index
5.       Russia's RTSI Index
6.       Brazil's Bovespa Index
7.       West Texas Crude Oil
8.       Copper
9.       The USA's SP500
For me, the immediate term means today. Every day, as prices change. I do. While I thought the SP500 was overbought when I started selling yesterday, as prices rose, so did my upside targets. Now I see the SP500 overbought line at 903. My name is McCullough, not Madoff - and only the former would be provide one the investment opportunity to be right no matter what prices do.
In conjunction with the aforementioned 9 factors being overbought, the Volatility Index (VIX) is oversold, so I bought the VXX yesterday as well. Too early? We will have to see, won't we. My positions are all live and ticking, real-time, on the portal.
In credit land, the Fed's Senior Loan survey reminded us of what we have been seeing on the margin since the beginning of March. Only 40% of the senior lending officers in the quarterly survey said they had tightened lending standard - that was the lowest percentage reported since the January 2008 survey. Was this new news to the market? Apparently to those who have been running late in covering their shorts it was, indeed.
Much like being accused of waking up too early, selling too early is the kind of criticism that I want to be beating myself up with. The Alternative Investment solution, of course, is being late.
My downside support level for the SP500 is now 867. Look for me to be data dependent on the way down, but proactively preparing to buy back what I sold as we continue to make higher lows.
Best of luck out there today,



VXX - iPath VIX-The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed.


EWC - iShares Canada- 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 resourcerich Vancouver should provide a positive catalyst for investors to get long the country.   


EWA - iShares Australia-EWA has a nice dividend yieldof 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.


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.  


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%.


EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. 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.
DIA  - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price. 

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.


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 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 $1.3376. The USD is up versus the Yen at 99.1540 and down versus the Pound at $1.5072 as of 6am today.

 Visit for more.

Keith R. McCullough
Chief Executive Officer


Gaming stocks are rolling.  The opening of the credit markets suggest they may continue to roll.  We've fielded a lot of questions lately on Boyd Gaming and why this stock has outperformed.  Sure we've gotten the calls on LVS and MGM, which have actually done better than BYD since the March lows.  Those stocks were essentially stock options back in March so the fact that they have outperformed is not surprising.


The BYD analysis is instructive because there were a lot of misunderstood and moving parts and, more importantly, more oil left in those parts to keep this engine humming.  Here were and are the drivers in order of importance:


  • Unsustainably high FCF yield - On our numbers BYD traded at a free cash flow yield approaching 50%, in part due to number 2 below. BYD still has upside to over $16 to reach a 15% FCF yield and quantitatively/technically can go to $18 pretty easily per our Quant/Macro guru Keith McCullough.


  • Understanding BYD's "misunderstood" financial leverage - Their credit situation is an asset not a liability. We tried our best to focus investors on the details behind BYD's seemingly high leverage of 6x. The market is beginning to understand that with $2 billion of availability on the credit facility, an incremental borrowing rate of just 2% above LIBOR, and an insignificant amount of Capex, BYD is in great shape financially. The only potentially derailing factor would be a covenant breach but the company has enough levers to get through 2009 to 2010 when the maximum leverage covenant actually steps up. It is not fully reflected in the stock price yet but BYD has a phenomenal asset in its credit facility that doesn't mature until 2013. By that time, BYD could be only 3-3.5x levered.


  • Opening of the credit markets - I don't want to totally re-hash our 5/1 note, "CREDIT MARKETS OPEN FOR BUSINESS", but suffice it to say, the opening of the credit markets allows the companies to improve their liquidity position and shore up their balance sheet. Multiples expanded because they should. FCF is more believable and the bankruptcy discount is fading.


  • Cost cutting - Every gaming company that has reported Q1 earnings has shown significant evidence of meaningful and sustainable cost cuts. BYD should do the same.


  • The rotting of the "LV Locals is a tough market" thesis - The LV locals is in for a tough 2009.  Yeah, we get it.  So does everyone else.  Let's talk about 2010 and how there is still population growth, and new projects are boosting employment.  Housing is affordable and retirees still want to come to Las Vegas, and so do people who don't like paying taxes.


  • Strong regional Q1 EPS - PENN, PNK, and ASCA all blew out earnings. The regional markets have stabilized and some are even showing growth. BYD is a regional gaming operator with exposure to some attractive markets. I'm not necessarily making a Q1 earnings call on BYD, although I do think the margins will look impressive.


  • Takeout rumors - I'm throwing this one in there because the rumors are out there. I don't have any insider information but I don't need it to see that the FCF yield is 25%, despite the run, which leaves significant upside to a target yield of 15%.




Nobody wants to believe that the housing market has turned.


If you are just generally bearish, it's centered on the consumer's inability to buy anything.  The theory goes that the consumers are not going to go out to eat, buy new clothes and certainly not going to buy a new home.    Even the greatest investor on the planet Warren Buffett said this weekend, "There's no sign of any real bounce at all in anything to do with housing, retailing, all that sort of thing."


Today, the National Association of Realtors, said the Pending Home Sales Index, (a forward-looking indicator based on contracts signed) increased in March by 3.2% to 84.6 from 82.0 in February.  Surprisingly, the index is 1.1% percent higher than March 2008.


While two months is not a trend, what has occurred over the last two months could be the leading edge of turn in the housing market.  As we said in our 4/24/09 post - HOUSING - Which way is up? -  affordability conditions is at a 40-year high when looking at median home prices, mortgage rates, monthly mortgage payment, and median family income.   In addition, a government $8,000 tax credit has the ability to increase buying power where there are special programs offered that allow buyers to use it as a down payment.


It was just two weeks ago that we learned the sales of new homes are also showing indications that the housing decline may be near a bottom.  The Research Edge MACRO process is built around changes at the margin.  While Mr. Buffett and others might not see what is happening on the margin to the housing market, the turn is gaining momentum. Looking at the market 2.5% move today; market prices don't lie, people do. 


The market is confirming that the US Housing bottom will be in the rear view soon.


Howard Penney
Managing Director



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VFC Acquisition Comments Live From Lunch

Very actively looking. "very busy" looking. Action sports and outdoor top priority, comtemporary not at the top of list given challenges there in marketplace. Got a chuckle from CFO when directly asked about an action sports deal. (ie DC Shoes).

China, Australia, India, Pakistan: An Update...

Facing the rise of China as a power and the descent of Pakistan into Chaos

Saber Rattling in Canberra


Last week an Australian government white paper titled "Defending Australia in the Asia-Pacific Century; Force 2030" outlined a program of spending that will ultimately exceed $72 billion and bring 12 new nuclear submarines, 100 fighter planes, upgraded destroyers and frigates  and a plethora of other ordinance online over the coming decade.  This document follows the Australian Strategic Policy Institutes December report and largely draws the same conclusions (although it reflects the present administrations desire to keep defense costs lower).


For US observers, the rise of China as a military power is a fascinating and complex situation on the horizon. For the Australians it is a more nerve wracking development in their backyard. 


With a country a little smaller than the lower 48 states, but a population of only about 21M, the land down under has always faced uniquely insurmountable defense issues which are exacerbated by their undisputed role as the beat cop for the entire Southern Pacific. They simply do not possess the manpower to defend the space they inhabit and police. Historically they have offset this through alliance (particularly with the US) and a military tradition that has won them the reputation as some of the most tenacious and respected soldiers on earth (witness the inscribed words of  Mustafah Kemal at ANZAC cove).


The rise of Chinese military presence in the Pacific region, coupled with increasing diplomatic and economic clout raises a variable that is   a bigger challenge than the Australian military faced during the cold war, and now that the US is curtailing defense spending and recovering from the demoralizing Iraq actions they are increasing feeling alone.  This new spending will not make the Australian military self sufficient in the face of a threat from a major power, but it goes a long way towards closing the gap. Critically, this sends a clear message to the Chinese and they will not like it. 


From a political standpoint, Australia asserting its strength appears uniformly positive to us as a regional balance, and the residual economic impact of increased defense spending should be long term positive for Australian contractors brought in on projects.


Pakistan: Nobody Wins


As the Indian elections continue, most parliamentary candidates across the political spectrum walk a tightrope between displaying resolve in response to last Year's Mumbai attacks and shrill antagonism for Pakistan. This doesn't represent a new found desire for peace and cooperation as a much as a pragmatic attempt to remain removed from the increasingly chaotic mess that Pakistan's internal security is becoming; an unwelcome acknowledgement that a fractured Pakistan may ultimately be more dangerous for India than a strong Pakistan.


 The Mumbai terror brings home the threat to the Indian government, but they are far from alone. US, Australian and NATO governments are monitoring the increasing weak looking post Musharraf regime with almost as much alarm as the deteriorating situation in the tribal regions controlled by the Taliban.  The re instatement of Justice Chaudhry has appeased the PML somewhat, but in a nation where indecisiveness equates to weakness even rational diplomacy carries risks.


The perception of some observers that president Zardari ultimately retains power solely at the pleasure of the army, the only truly functional government force in Pakistan, may not be entirely accurate. Never the less, the military leadership remains the most powerful single political force in the country by virtue of their strength, and they have their own agenda entirely separate from the government.


We see Pakistan as the biggest wild card in Asia, quite a statement if you consider the current issues in Thailand, North Korea and Sri Lanka. Despite all of the threats lurking elsewhere, the unique threat posed by Pakistan's nuclear arsenal (Pyongyang's mastery of photoshop not withstanding) changes the complexion of the turbulence there entirely, essentially forcing all powers in the region to attempt intervention in the event of a complete collapse of government. Among the many things that keep us awake at night, Pakistan's internal situation is near the top.


Stocks in Pakistan closed down -1.8% overnight amidst nothing short of a meltup across the rest of Asia. Canary in a coal mine? Stay tuned...


Andrew Barber

'You Tubing' VFC At Analyst Event

-Initial price points coming down for holiday. Price investement achieved with lower fob's. Not dropping benefit to bottom line.


-SKU rationalization evident. Building 80 pct of the biz on key items with total skus down 50 pct over the past couple of years


- Lots of talk about how macys centralization is driving more focus on replenishment biz, which should double over next few years. Focus appears to be more on basics and less on risk/fashion. Seems to me that this brand is heading for more competition on price than ever. Haven't heard too many fashin brands heading in this direction.


More to come from lunch which is in a little bit and should be more VF Corp focused.

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