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Obama's Buck

"To be trusted is a greater compliment than being loved."
-George MacDonald
This week's collapse in the credibility of the US Dollar puts what used to be the unthinkable in play - the potential for an American currency crisis. We may very well look back on yesterday as being the inflection point in the American Financial system for many months to come. Breaking The Buck is one thing; crashing it is entirely another.
Does President Obama get this? Only time will tell...  
Can the man deliver on the promise of his rhetoric? Can he hear the voices of objectivity in America's financial ranks? Can he implement an inclusive financial risk management dialogue that isn't Goldman/Geithner centric? The answers to these questions will be paramount in the coming days, weeks, and months.
Dear President Obama,
Whether you hear me now or not, this Buck stops with you.
From the market's opening bell yesterday until 11AM, I was selling as aggressively as I have in all of 2009. I wasn't doing this to amuse myself. When the risk management siren starts ringing, just like my Dad and the boys at the fire-hall, my only task is to get moving.
With the Dollar weak, stocks were strong. This has been the dominating macro factor in the US market since December, so I was getting great prices. That however is far from the point. The point, Mr President, is that after being bullish for the better part of the last 3 months, your economic team has lost whatever trust I had left in their leadership. Without trust, the only thing a stock market operator can do is keep moving.
I know you probably watched it, and whether you liked the outcome of American Idol's choice last night or not, America has voted. Similarly, whether you think Geithner's made-up rules to a made-up test for his made-up Wall Street/Washington friends have this country "moving in the right direction again", the Global Economy has voted. This is life - there is always a winner and loser.
The loser born out of the Geithner's bankers winning is America's currency. She is now as conflicted as the country's financial system that houses her.
To be clear Mr. President, I am a capitalist. I am also not as stupid as your US Secretary of the Treasury appears to consider his fellow Americans to be. The bottom line is that rather than protecting America's currency, Geithner has predictably chosen to protect his ole boy banking club. The Chinese get it; I get it; and if the US Dollar continues to break down, we're all going to get it. This Buck stops with you.
This week I have cut my exposure to US Equities in our Asset Allocation model in half. In our stock/ETF picking portfolio I have take the number of long positions down from the mid 30's to 21. Most of those 21 positions are winners with large % gains that I have owned for the last 2-3 months. I also remain long Gold (GLD) and Treasury Inflation Protection (TIP).
This is the invisible hand of economics that guides me, Mr. President, not my politics. Markets are built on confidence, not conflicts and compromises. After making 14 consecutive sales in the Research Edge virtual portfolio, I don't think I can ask you to hear me in a more explicit way. Watch what people do with their money, not what they say.
Real stress-testing is a proactive exercise that the brave men and women of risk management express with capital decisions in markets every day. "Tail risk" is what we are always on the lookout for. As those risks move closer to the heart of the bell curve of higher probabilities, we hedge.
I don't give lip service to the word crisis. Plenty a braver political soul didn't listen to me when I went to 96% cash in September of 2008. My risk management process called for a probable stock market crash. You can call me lucky, or call me right - that's not the point either.
The point, President Obama, is that if I am right this time - an American currency crisis will be your Buck to bear. I can now only hope that you get that message before it is too late.
My immediate term downside support level for the SP500 is now 880.
Keith R. McCullough
New Haven, CT


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.


XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade. 
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 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  


EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands. 
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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.3799. The USD is down versus the Yen at 94.6220 and down versus the Pound at $1.5658 as of 6am today.
EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  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.
IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. Despite recent election results likely proving to be a positive catalyst, long-term 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%.  


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.



A smart client of mine (you're all smart) pinged me soon after I put out "IGT: A TALL PEAK OF EARNINGS".  He doubted that IGT could get back to 2007's peak EPS of $1.49, despite the cost cutting.  This is a legitimate question particularly since we are projecting only $0.94 in EPS for 2010. 


The quick answer involves cost cutting, lower share count, and "normal" replacements.  People may forget that the replacement cycle was well into a downturn following the wide implementation of ticket-in/ticket-out technology.  IGT only sold 21,000 replacement units that year versus our normalized estimate of 35,000.  IGT earns over $0.01 per share for every 1,000 units sold.  On the cost cutting front, IGT will have cut at least $75 million ($0.14 per share) out of its SG&A structure by the end of next year.  Of course, there are offsets such as higher interest expense, lower play levels in gaming operations, and lower expected international sales.


Here is the full analysis:


IGT: BRIDGING 2007 TO $2 - IGT bridge to  2


Taking it a step further, we've indicated that if the replacement market makes a V-shaped recovery, particularly in the Reel Spinning segment, IGT could earn $2 for a couple of years.  We get there the same was as above, except that replacement units could accelerate to 75,000 for IGT which would provide an additional 40,000 machines to our normalized estimate above, or an incremental $0.50 in EPS.  Presto, $2.00 in EPS.

BKC - Lacking the marketing MOJO

Keith keeps hitting me up wanting to short BKC. I keep thinking; where is the down side shorting a franchised business model trading at 12.2x NTM EPS? That is of course the earnings numbers are too high! It's hard to get back the marketing MOJO once it's gone!

Right now Business week running a story on BKC "Burger King's Big Misstep" - CEO John Chidsey wrested control of marketing from his franchisees; now he's losing business to McDonald's

As a point of reference I also had this on the portal a month ago - 4/20:

Last week Burger King said its EPS results were negatively impacted by significant traffic declines in the month of March, resulting in lower than expected margins.

Importantly, Germany (BKC's second largest company-owned market) and Mexico (the only company-owned market in Latin America) experienced the largest declines in traffic. The same trends hold true in the US and Canada, where same-store sales were 1.6%. With 3%+ pricing, the decline in traffic is significant.

In the mature QSR market, a successful advertising strategy is critical to driving incremental customers into the stores. Rarely, will a QSR company or stock do well without a successful advertising campaign. Over the past few years the resurgence of the "King" as a marketing icon was critical to Burger King's success.

From an advertising standpoint, Burger King has recently made two critical missteps with its edgy advertising tactics. First, critics are up in arms about the suggestive new SpongeBob "square butt'' commercial that juxtaposes a beloved children's character with sexy women dancing suggestively. Why would the company take a children's cartoon character, SpongeBob, and combine it with the backs of well-toned female dancers, wearing SpongeBob's brown pants with phone books in them to make them "square butts"; all set to the tune of Sir Mix-a-Lot's 90's hit, "Baby Got Back"?

Today, I learned that Burger King had to apologize to Mexico after Mexico's ambassador to Spain alleged that the company's new Texican Whopper advertisement released in Europe demeans his country's national flag.

Burger King's advertising issues are nothing compared to poor Domino's. I think it will be very difficult for anybody to order a sandwich or a pizza from Domino's without imagining a curl of cheese being stuck first in the cook's nose, or worse thinking about an employee hawking a loogie into your Cheesy Bread! At Burger King, the judgment of some of those in the marketing department needs to be questioned.


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Oil’s River Card


RESEARCH EDGE POSITION: We are "bullish of" oil and are currently long the XLE, SPDR Energy etf


In our note on crude oil from yesterday we wrote:


"The price of oil appears to be signaling one of two things:  either demand will at some point in the near future accelerate or that there is a geo-political event on the horizon that will reduce supply."


This morning, the river card was revealed in the way of an announcement from the Islamic Republic of Iran.  According to a newswire article:


"The defence minister (Mohammad Mostafa Najjar) told me today that we launched a Sejil-2 missile, which is a two-stage missile and it has reached the intended target," Ahmadinejad said.


The missile was launched from here in Semnan," he added to cheers from the crowd.


I was told that the missile is able to go beyond the atmosphere then come back and hit its target. It works on solid fuel," he added, without specifying the missile's range."


According to other reports, this was Iran's second test of the Sajjil-2 missile, with the first test occurring approximately 8-months ago.  This missile purportedly has the ability to reach targets 2,000 kilometers away with great accuracy.  A quick google map search indicates that the walking distance from Jerusalem to Tehran is 1,559 kilometers and presumably the missile distance is as close.


Now we certainly do not want to be alarmists and this is a test comparable to the one the Iranians performed 8-months, so it's not an example of new technology.  That said, the timing of the test is noteworthy in that it comes only two days after President Obama met with Israeli Prime Minister Netanyahu.  While President Obama was not willing to be nailed down on an artificial deadline, he did note the following  after the meeting:


"Foreclosing a range of steps, including much stronger international sanctions, in assuring that Iran understands that we are serious.""


While Obama does seem to be continuing to pursue a diplomatic approach to Iran, this statement had the appearances of a tougher tone with the Iranians.  Recall that one of President Obama's first major foreign policy moves was an address to the Iranian people on March 20th in which he called for "a new beginning" of engagement with Iran.


As a prospective client emailed us today, the missile test appears to be a "message to Obama", which was a play off the popular Police song, "Message in a Bottle", whose lyrics are as follows:


"I send an SOS to
I send an SOS to
I hope that someone gets my...
I hope that someone gets my...
I hope that someone gets my...
Message in a bottle... Message in a bottle..."


While we don't know for sure if Iranian President Ahmadinejad is a Police fan, he does seem to be sending a message to both Obama and the World.  The immediate reaction to this missile test was that Italian foreign minister Franco Frattini cancelled a planned trip to Iran, primarily because Ahamadinejad wanted to meet in Semnan, instead of Tehran.


From an investment perspective, the idea of geo-political risk was reintroduced full force back into the price of oil today and oil is trading up ~2.5%, which of course is on the back of a ~35%+ move in the year-to-date, despite negative "fundamentals"...


Iran is very relevant in terms of the global oil market.  According to the most recent data, Iran ranks third in the world with ~136 billion barrels of total reserves (second excluding Canada's non-traditional reserves), which is ~10% of the world's reserves.  Iran is the world's fourth largest producer and OPEC's second largest, after Saudia Arabia.  


Increased tensions with Iran rightfully support a bullish case for oil.


Daryl G. Jones
Managing Director

UA: Compression Delta Remains on Upswing

I don't live and breathe by any of these weekly sports apparel and footwear numbers, but I need to point out a consistent trend for UA. Since its bottom during the week of March 9th, the delta in UA's compression apparel biz has been getting steadily better. While there are much more notable factors that I think matter here (footwear, Int'l, etc..) the Street is so hyper-focused on UA's supposed inability to grow anymore in this perceived 'core' business. The datapoints are going against the bears.


UA: Compression Delta Remains on Upswing - 5 20 2009 12 08 20 PM

The Chart That Not Only Smells Like A Rat; It's A Rat...


This is the intraday chart that I cited in this morning's Early Look. For your viewing displeasure, we shine a flash light on the portion of the Bank of America (BAC) chart's volume and price action that should sadden any American investor to the core. After the close, BAC unloaded 1.25B shares of stock in order to raise $13.25 billion dollars.


The said leaders of this country are overseeing the compromise of the American Financial System's credibility, real time.


Timmy Geithner,


Your political smirk insinuates that post your made-up rules to a made-up test, that all is well in the land of nod. The US Dollar being marked-to-market on its lows today should provided you a stiff reminder that being the Secretary of the US Treasury has other responsibilities other than just pandering to your boys club of conflicted bankers.


While I have been bullish on America and her stock market for the last 3 months, I have started selling aggressively today. This BAC chart is one of the main reasons why.


Shame on the rats who trade on inside information. They are un-American.



Keith R. McCullough
Chief Executive Officer


The Chart That Not Only Smells Like A Rat; It's A Rat...  - bac


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