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Research Edge 2, Gartman 0


I know, I know, this guy McCullough and his colleagues at Research Edge are very cocky.  They talk about being right, but they aren't running real money.  We've heard it all and, in fact, some of the criticisms are fair, but the fact of the matter is we endeavor to generate money making ideas for our clients and we have done that.  Since inception we have been right 87.4% of the time on our short calls and 83.2%  on our long calls.


Some of those ideas were short term and some of those ideas were in illiquid names, but, by golly, that is out of 472 positions!  Our whole business model is to try and deliver high probability ideas to our clients and the facts suggest we have delivered, despite our many faults. And we do have many faults.  In fact, I'll call our CEO out on one his faults, when he gets in at 515am every morning, he's grumpy.  That's a fault.


Earlier this week, we introduced a new scorecard to measure ourselves and it was versus Dennis Gartman, aka Garty.  We think he is a good guy who finds interesting nuggets, but we are just not convinced he can beat us consistently.   


On May 17th in our Early Look note entitled ""Short Of" Garty?", we wrote:


"This does not mean, however, that I need to subscribe to the panting dog nodding that CNBC's Fast Money's producer must force his Traders" to look into the eye of the camera with when listening to the Gartman gospel. Someone has to hold the members of this circus act accountable. The American Financial system is being You Tubed by the world, daily, and it's just too embarrassing to know that The Client (China) thinks that this is what US investors do.


So Garty, let's slap the ole red, white and blue accountability pants on and take a walk down the path of a few positions that you are currently "short of", The Dow and Gold:


1. I have also been "bearish of" the Dow via the DIA etf, but covered my position on Wednesday's weakness


2. I am long Gold via the GLD etf, and remain "bullish of" it


Garty, like you, I'm in it to win it here and I want to see you keep winning man. If the Dow is down, at a bare minimum, just cover your short. As for being "short of" gold, well, I know that you know that I'm right on this, so... cheers to changing as the facts do."


In the last few days, Garty capitulated on both Gold and U.S. equities and while we salute him for being flexible as the facts have gone against him, the score remains: Research Edge 2, Gartman 0.


The puck drops again tomorrow at 930am.  Keep your head up Garty Fans. . .


Daryl G. Jones
Managing Director


Research Edge 2, Gartman 0 - hansonbros




German Investor confidence leaped forward yet we remain cautious on fundamentals there...


German investor confidence, as measured by the ZEW Center for European Economic Research to predict economic development six months ahead, soared to 31.3 in May from 13 in the previous month.  While forward-looking confidence has improved sequentially over the last seven months (see chart), ZEW's gauge of the current situation continues its plunge, falling to -92.8 from -91.6 in April.


In our last German post on 5/8 entitled "Exports: What Germans Do Best (..or Second Best)" we presented the country's mixed fundamental outlook. In the next two weeks we should have a better picture from April data; we continue to believe the country won't start to see positive GDP growth until early Q1 of next year, yet believe the export-led economy will have a larger upside than its Western European peers as global appetite for exports (specifically engineered industrial products) increases over the balance of this year and into 1H '10.


The German DAX is up 3% YTD and +34% since its March 9th low.  We'll get in on the long side of Germany again via the etf EWG at the right price. Stay tuned. Generally, we like to buy things when they are down, not up.


Positive confidence among domestic investors has turned decidedly bullish.


Matthew Hedrick



ÜBER CONFIDENCE - germanychart

Squeezy Spawns: SP500 Levels Into The Close...


Squeezy never left the waters folks; he was spawning.


In the chart below we have outlined the short seller beware waters of TREND line support for a stock market that continues to sell off to higher lows. We have called the Consumer Discretionary segment of the S&P the Suckerpool Chart, and we have refrained from shorting anything in the Financials out of sheer respect for the momentum embedded in Squeezy's potential math. Now the only question that remains is can the SP500 make a higher YTD high?


That closing high price of 934 was established on January 6th. At that time, we didn't have 2 core components of our bullish Consumer MEGA Squeeze call on the tape for the Depressionistas to swallow: 1. housing deteriorating at a lesser rate and 2. unemployment accelerating at a slower pace.


Today, with plenty of shark jumping in the rear view mirror, the only thing I can tell you is that it won't pay to be a hero here and swim where Squeezy and his newborn remains. This remains a global stock market squeeze of generational proportions.


Will I be making sales on the way up? Sure. After all, I bought them lower with a proactive plan to do so.


Keith R. McCullough
Chief Executive Officer


Squeezy Spawns: SP500 Levels Into The Close...  - asharky

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If you take a classic economist's view on the recent Commerce Department figures on housing you are missing the point on the housing recovery story.  An old school economist will tell you that the decline in home building will continue to act as a drag on investment and overall output in the economy in 2009. 


In sharp contrast to that view, ours is that the only way the economy is going to get back on a growth trajectory is for the U.S. to work through the excesses of the past-and that means housing inventory. 


According to the Commerce Department, housing starts declined 13% to an annual rate of 458,000, which was led by a 46% decline in multifamily starts.  Also, building permits, a sign of future construction, fell 3.3% to a record low pace of 494,000.  On this news the futures sold off immediately, a classic reaction to a traditional government statistic.  It was almost like the traders in the futures pits are reacting to headlines without perspective.  Intraday, those pre-market losses were recovered and those who shorted the opening lows are once again feeling shame.


Given the supply of unsold homes and the number of homes in foreclosure, is it any surprise that builders broke ground on the fewest homes on record in April?  If you are a builder this is bad news, which is why we don't think the best way to play a housing recovery is to buy home building stocks.  As an aside, the insider selling at Toll Brothers Inc has been massive!  Since March 16th the Toll Brothers have collectively sold $45 million worth of stock. 


If you are Home Depot or any of the second derivative housing names you are indifferent at this point to the housing start number.  Right now the second derivative names are looking for the increase in housing turn over, so we can work through the supply of homes.  This is the first step in the housing recovery story!  The growth in big ticket items will come later!    On May 5th, 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.  Importantly, the index is 1.1% higher than in March 2008.


What has been occurring over the last two months could be the leading edge of a turn in the housing market.  As we said in our 4/24/09 post - HOUSING - Which way is up? -  affordability is at a 40-year high when looking at median home prices, mortgage rates, monthly mortgage payment, and median family income.   


As we work through supply, the decline in home prices will slow! Not until then will homebuilders start to build more homes.  Chances are when this happens the S&P 500 will be few hundred points higher!


Howard W. Penney

Managing Director




For the second time in as many years Mill Road has made a bid for Kona Grill (KONA). The first offer in March 2008 was at $10.75 a share. On Monday, Mill Road offered $4.60 a share, up from the May 15 closing price of $2.29.

Based on where KONA is now trading relative to other casual dining companies and my EBITDA estimate for 2010, I would take nothing less than $5.50

In documents filed with the SEC Mill Road said: "The recent departure of the company's chairman and CEO has placed Kona at a crossroads. The company and its employees are facing a very difficult operating environment for restaurants without the leadership and vision that a permanent CEO should provide. ... We strongly believe that Kona has a significantly better chance of successfully addressing the competitive, leadership and capital issues as a private company."

It was not too long ago that senior management at OSI Partners Inc. made the same statement about being a private company. Given the trouble they are in, I don't think they would make that statement today!

More to come!



In our 4/21/09 note "IGT: PLENTY OF EARNINGS POWER FOR PATIENT INVESTORS", we highlighted recurring earnings power of $1.40-$1.50 assuming normalized replacement demand of 35,000 machines annually. 


Since that analysis, we've also reached the conclusion that pent up demand, especially for Reel Spinners, could lead to a V-shaped recovery, much to the benefit of IGT.  Assuming 38% of the 950,000 slot machines in North America are Reel Spinners and they are replaced in an accelerated cycle over three years, IGT could sell almost 60,000 Reel Spinners annually with a 60% share.  Throw in another 15,000 Video Reels (33% share) and IGT would be selling 75,000 machines annually over a three year V-shaped recovery scenario.  Per my complex math, 75,000 is a lot more than normalized 35,000, which is a lot more than our 2010 projection of 15,500.




At 75,000 replacements, IGT could generate north of $2 per share in EPS for a few years, more than double our 2010 estimate of $0.94.  Not bad for a $15 stock.

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