Bidding For A Bernanke Buck?

Until they finally let Volcker speak on May 20th, Ben Bernanke is literally the only person that the US Government  can put on the You Tubes right now with the end result of the US Dollar arresting it's decline.


The more we see the likes of Timmy Geithner, Hank Paulson, Kenny Lewis, etc... (basically anyone who is conflicted and compromised by their long standing membership in de Club) the lower the US Dollar will go.


Today, Bernanke is back on the Tube, issuing the world some long awaited American credibility. As a result, the US Dollar stops going down, and stocks stop going up.


I know, its perverse... and I know, every time I write this I get the customary "that doesn't sound right" feedback... But know this - the inverse correlation between the US Dollar and US stocks is as relevant in 2009 as any inverse correlation in global macro.


Can Bernanke Break the Buck? Sure - he needs to buy a mother load of bonds though in order to accomplish that from here because the Chinese don't look to be as excited about "investing alongside" the USA as they used to be... would you be?


China selling Treasuries (or not buying them) and Bernanke buying them back are not 1:1 offsetting factors either. This is very complicated and will continue to be as long as the Chinese continue with this US Dollar Replacement Rhetoric. Rhetoric and reality are often two very different things...


Economic recovery, and the associated raising of interest rates here in the USA can also provide the Buck a bid. For now, on the American side of the ledger at least, I am not comfortable saying that this morning's ISM Non-Manufacturing recovery (see chart below) is going to be sustained through the summer months. 


Where does this chart and the US stock market go from here? I am, data dependent. As the facts roll onto the tape, fully loaded from moves in the US Dollar to the yield curve, I will adjust my positioning. For now, the best position is to have sold yesterday's rally, and wait...


Keith R. McCullough
Chief Executive Officer


Bidding For A Bernanke Buck?  - bus

China's Crystal Clear Rear View...

The Ox isn't fast enough to beat Mine That Bird, but once in motion it is hard to stop...


Position: We recently sold our CAF (China Fund) position into proactively predictable news, but remain positive on fundamentals.


CLSA PMI data released yesterday provided continuing confirmation that the stimulus package adopted by Beijing has prodded the Ox into motion, and that the recovery is being felt in ever broadening swaths of industry. At 50.1 the index turned positive for the first time since last September, driving equities higher in Shanghai and across the region as "The Client's" suppliers anticipate increased demand.


For now, this isn't about deltas anymore - this is positive as an absolute. Selling into that news is just what we do. Market prices move on what's going to happen next, not what's in the rear view.


China's Crystal Clear Rear View...  - china12


The primary focus of market optimism in Shanghai is the here-and-now, with metal fabricators and refiners trading upwards as the markets anticipate that "big-dig" infrastructure projects in central and western regions will drive demand for the heavy industrials.  Meanwhile Taiwan has seen the floodgates open for investment from the mainland as "panda diplomacy" draws the estranged siblings closer, paving the way for joint ventures that can feed consumer demand for technology products by the middle class which, with March retail sales registering at 15%, still represents massive growth prospects.


We remain positive on Chinese recovery in the intermediate term and will look for entry points to go long again. This is not to say that we are jumping on board with the mindlessly bulled-up Mobius mob; we continue to recognize significant potential negative factors like credit quality and asset bubbles that may develop as the recovery kicks into full swing.


Remember that stimulus, by nature, is a kind of emergency procedure -like a shot of adrenaline for a patient whose heart as stopped: the risks and complications may be outweighed by the outcome, but they are still real.  To that end, as the recovery cycle matures over the coming months we will seek to manage risk by focusing on sector and industry specific opportunities as well as broad indices.


Andrew Barber


Not a great quarter out of WYNN when "luck" is taken out of the equation.  However, in this market with the momentum surrounding the sector, no quarter is a bad quarter.  We were not impressed, however, and WYNN may face a more difficult Q2 than some of the other players.  Here are some preliminary thoughts.


  • WYNN did better in Las Vegas than we thought but still below the Street. Slot hold % was higher than normal. Table hold percentage of 18% appears low, but in this environment 18-20% is probably normal, not 21-24%. If we give them credit at a table hold of 20% and normalize the slot hold %, LV EBITDA would've been $53 million instead of the actual of $44 million
  • Macau was strong but the hold % was pretty high on both the Rolling Chip and Mass Market business. EBITDA of $114 million would've been $20-25 million lower assuming a normalized hold percentage, below the Street at $103 million.
  • In LV, WYNN is very reliant on room rates and his have farther to fall than the rest of the Strip.
  • In Macau, WYNN maintains large exposure to the Rolling Chip business which is the segment most under pressure.
  • We are assuming the discussion surrounding Las Vegas will center around a "less bad" thesis, similar to MGM.
  • WYNN lost 3-4 percentage points of market share in Macau in April. It will be interesting to see how this is addressed on the call

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The online travel company Expedia put up a good quarter last week.  Here are some broader takeaways from the call:


  • Leisure travelers have responded to better value
  • Ticket sales up double digits for the March-April period y-o-y. January and February sales were down 9% y-o-y. 
  • International transactions were up 16% internationally but the two countries looking the weakest were the UK and Germany
  • Aggressive fare sales from air carriers were partly responsible for the uptick in demand 
  • EXPE expects bookings, revenue, and free cash flow to decline y-o-y for 2009 
  • Based on the economic conditions, etc., consumers were becoming more price sensitive and that is why promotions on the air booking fees [and other booking fees] made sense 
  • "On the other side of the equation, for example, London as a destination for us has been very, very strong. So again, that's another response to FX rates as far as where consumers are going. As far as a booking window goes, we do see some compression there, and as a result unfortunately our visibility is not what it used to be." 
  • "The OPEG channels continue to be very strong. Hotwire unique visitors are up very nicely, transactions were up 30% or so in Q1 so that's a continuing trend that hasn't changed. I'd say one other trend that has changed is that U.S. consumers are starting we're seeing some increase in U.S. demand going into Europe because of the strength of the dollar." 
  • Leisure market has been stimulated by the aggressive actions of suppliers 
  • The effects of the swine flu are yet to be determined but momentum was even stronger before the breakout occurred.



MGM's Q1 was likely good enough to keep the rally going.  We are not going to bore you with property by property revenue and EBITDA analysis.  We'll leave that to the 15 sell side analysts covering the name.


Similar to other gaming earnings reports, MGM's Q1 was light on revenues but heavy on cost cutting.  Margins were better than we projected.  We don't find that particularly interesting.  What we found interesting were the tremendous margins at MGM's non-core properties of MGM Detroit, Beau Rivage, and Monte Carlo.  Coincidentally or not, these three properties are also for sale.  MGM Detroit and Beau Rivage are officially on the block, while MGM appears to be in negotiations for the sale of Monte Carlo.


Check out the chart below.  These properties blew us away on EBITDA and it was all from margin.  Monte Carlo increased its margin by 2,460bps YoY and was 2,400bps above our estimate.  Can cost cutting alone explain 2,400bps of margin?



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.

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Keith R. McCullough
Chief Executive Officer