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Roubini The Revisionist

"A more sober analysis suggests we're closer to the bottom; there is light at the end of the tunnel, but it's going to take a while longer, and..."
-Nouriel Roubini
"And..."... After flying around in helicopters and feeding the manic media with his Doctor Depressionista interviews for the past 3 months, the man, the myth, the legend has revealed himself this morning - Tah-Dah, its Roubini The Revisionist!
Not unlike most "economists", Roubini is susceptible to gravity. The gravity of marked-to-market prices that is. Prices don't lie; people do. "And..." a +34.6% move in the US stock market since March 9th will apparently "sober" up one's views. Well done Nouriel! You can now go back to being just another economist who made a big call.
"Making the call" is what we all get paid to do in this business. Sometimes we're right, sometimes we're wrong. Being really right can make you eight to nine figures, and being wrong, well... depending on who you work for... sometimes has no downside at all!
One of my passions in life is calling people out. Call it aggressive, or call it plain dumb - I am a hockey player by training don't forget, and that's just what I do. Whether its holding Hank The Market Tank Paulson or Roubini The Revisionist accountable, it's all one and the same. Someone may as well do it.
Revisionist historians have populated Wall Street for over a hundred years. Once we get through month's end, you can expect to see plenty of their writings from the hallowed halls of the once vaunted sell side "strategist" who is now parroting the 6 month old REFLATION call, to the buy side. This is what makes this game so entertaining to observe.
Right on schedule, after the US stock market put in another lower-high yesterday, you're seeing 74% of America's finest revisionists presciently predict that the US recession could end by Q3 (as in 6 weeks from now). How wonderfully late this reactive prediction is from the National Association of Business Economics. I'll spare the revisionist participants the embarrassment of reminding you what their "forecast" was in February (hint: it was closer to Roubini's)...
"A more sober analysis" suggests that the prior analysis involved what? A few cocktails? God knows what Roubini does when no one is looking, but assuming he is as careful with his words as one should expect a soothsayer to be, I'll take his word for it.
The New Reality is simply that very few analysts, strategists, or economists called the top of the 2007 US market move as well as the bottom of the 2009 one. Is that a surprise? Hardly. But Washington and Wall Street should be learning a very important lesson from this - reactive analysis provides performance paralysis.
If our Almighty Ones are now admitting to sipping from the ole Sapporo without a proactive plan to address what Breaking The Buck could equate to, how in God's good name should we entrust our children's futures with their latest predictions? At what point in the last 18 months would you have been well positioned if aligned with the consensus of 74% of "economists"?
An understanding of the difference between a US currency breaking down versus one that's on a crash course for a crisis would seemingly require one to have understood the REFLATION call from its inception.
As CNBC rolls out the revisionists, I think we are going to roll right into lower-highs. If the US stock market finds a way to break out to higher-highs in the face of a pending currency crisis, I'll be the first to admit that I had the latest leg of my 2009 market call wrong. As prices change, I will.
Here are some immediate-term domestic price levels to focus on:
1.      SP500 levels of 934 (January 6th) and 929 (May 8th)

2.      Nasdaq 1764 (May 4th)

3.      Russell 2000 levels 507 (January 6th) and 511 (May 8th)

I know, we're very close to some of these lines. But I'm also sober... and I have a process that is my own - ah the weaponry!
To be clear, I am not making a call that China or Gold won't make higher YTD highs. As our British philosophy Captain of the Revisionist League likes to say, I am "long of" both those asset classes "whilst" having very high conviction in them.
While everyone is getting jazzed up with our REFLATION call or the MEGA Consumer Squeeze call this morning, just take a deep breath, and take a good hard long look in that rear view mirror. These bullish calls aren't new.
All the while, remember that Roubini The Revisionist is now sitting beside you in the passenger seat - and he's not alone. This morning's weekly sentiment survey has Bulls shooting up to 41% (from the mid 20's in March) and Bears dropping like flies down to 28% (from the high 40's in March). Sentiment in this market is finally bullish enough for me to get out of the way on the long side. As I start to wander on over to the ole Bear camp again, I wonder if anyone is still left standing? The booze is definitely gone!
My immediate term upside target for the SP500 is 918, and I have downside support at 896. Trade the range.
Best of luck out there today,


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 closed-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.

XLU - SPDR Utilities - We shorted Utilities on 5/22 as it is trading below the TREND line. As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

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.

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.

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.


With the political shift over the last few years it looks like we are going to give Keynesian economics yet another shot at success.  We've got a view on how that will end but in the meantime, state governments need more cash.  Legalized or expanded gaming is a surefire way to raise cash for the states.  There are almost always winners and losers among the operators when a state legalizes or expands gaming.  The slot suppliers always win.


Here are some of the opportunities:


  • Illinois - 45,000 machines? Probably not, but 30,000 looks doable. The video poker bill that passed the Illinois Congress and is likely be signed by the Governor is underrated in terms of its impact to IGT. These are video poker machine, not video lottery machines. The difference is important because IGT's video poker market share is probably 80%. The quick math says 80% of 30,000 is 24,000 machines at about $0.01 per 1,000 would yield $0.24 in EPS to IGT. Not bad
  • Ohio - It will happen eventually. MyOhio and PENN are supporting a measure that would allow for 4 casinos in the state with 20,000 machines in total. The votes appear to be there in Congress but Governor Strickland may be opposed.
  • New York - Aqueduct and its 4,525 machines looks like a go again and could open as early as 2011.
  • Maryland - Cordish Company has a bid for 4,750 slots at Arundel Mills Mall in Arundel County. Baltimore City Entertainment is looking to use up the full amount, 3,750, of slots available by state law in their proposed Baltimore City slot parlor. There is a bid in for 800 slots at Worchester County, with an option to expand to 1,500. Penn National bid for 500 machines at Cecil County, with an option to expand to 1,500. We don't expect these slots to come on line before 2012.
  • Massachusetts - The Massachusetts Senate recently rejected a proposal to add slot machines at racetracks but we remain convinced that an expansion of gaming, in one form or another, is on the way in Massachusetts. There is a dire need for revenue and the departure of anti-gaming former House Speaker Salvatore DiMasi of Boston is another major plus for gaming. Current Senate President Therese Murray has given strong indications that the Senate will likely debate gaming in the fall and has been cited, along with other prominent lawmakers in Massachusetts, as supporting expanded gaming. Mohegan Sun is proposing a resort casino in Palmer, MA and welcomes the rejection of slots at racetracks. They hope to win the gaming debate this fall.
  • Texas - Not this year but a huge potential market.


Bottom line is that slots could and should become a growth industry again.  Illinois could be the catalyst.  IGT should be the winner.  IGT typically gets a higher market share in the new/expansion slot market than replacements.  Illinois alone could add $0.24 to IGT's bottom line.  Even over 2 years, that number is meaningful to the current sub $1 run rate.  Throw in the other states over time and a normalizing replacement demand and the slots business starts to look growthy again.

ROST: The Perfect Tailwind is Easing

There's been no better time to be an off-price retailer than the past 12-18 months.  We've seen retail bankruptcies accelerate, consumer demand shrink rapidly, and the entire apparel industry has scrambled to right-size inventories.  This has created the perfect storm of high quality goods in abundant quantities at great prices (i.e. supply) coupled with a value focused consumer (i.e. demand) seeking to save on apparel expenditures.  ROST is the poster child for the kind of company that benefits from this phenomena.


Over the years, the Street has been overly focused on the day when "just-in-time" manufacturing and ERP systems would finally wreak havoc on the off-price model.   If you listen to any conference call with either TJX or ROST, there is always the obligatory question asking about the "availability of goods".  The answer is also always, "there are plenty of goods for purchase".  This holds now even truer than ever.  As long as consumer demand remains subject to change without notice and factories seek to run at high capacity levels, there will be a viable market for the off-price business.  However, there will not always be a perfect storm like the one we are currently exiting.


There is no question that ROST has managed its business well against a very challenging backdrop.  Inventories have declined for the past six quarters and guidance suggests that they'll remain lean over the remainder of this year.  SG&A expenses have been in check, only rising 28 bps since 2005 despite inflationary pressures including healthcare, payroll, and energy costs.  Additionally, gross margins have expanded dramatically over the same period, up nearly 100bps while most other retailers have seen margins erode from peak levels.  In fact, ROST is now on pace to report its highest operating margin (8%) in six years! 


It's tough to knock this name right now given that they are seemingly doing everything right. In fact, ROST was the first company to meaningfully increase guidance with confidence in both the current quarter and remainder of 2009. (Betting that 'this is finally the end' has led to plenty a face-ripping for shorts over the past 2 quarters).


But this brings us to where we're focused for the remainder of the year as it pertains to ROST:

  • High expectations coupled with comparisons on the gross margin and SG&A line that become increasingly difficult.  GM's were up 128 bps in 2Q08 and 70 bps in 3Q08. Check out our SIGMA chart below.


  • Top line compares remain tough in the current quarter as ROST cycles last year's stimulus checks.  Same store sales were up 6% in 2Q08.  Keep in mind that annual same store sales for ROST have only ranged from -1 to +6% at any time over the past 6 years. 


  • CA, its largest market, just reported a 4% comp increase for 1Q vs. 3% for the chain.  We have been hearing more frequent discussions of a "relapse" in CA on the foreclosure front which may create a headwind in the coming months.


  • Management has been talking positively about the recent success of the lower-priced, lower-income targeted DD's Discount concept.  With all due respect, shouldn't this concept be doing great in the worst consumer downturn since the Great Depression?


  • I have no doubt that there will be an abundant supply of goods for ROST, forever.  However, I just don't see how the "quality" of the goods at very favorable purchase prices can be as beneficial in the next 3 quarters as it was in the prior three quarters.  Inventory metrics for both the manufacturers and retailers show that supply has diminished materially over the past year.  This should have an impact on gross margins going forward.


  • Year over year comparisons on gasoline and transportation costs are no longer as beneficial.  Additionally, prices at the pump have actually moved higher ($2.99/gallon over the Memorial Day weekend in NY) and may begin to impact both the cost and demand side of the equation.


At this point, the winds are changing and the extreme tailwinds that have favored ROST are easing.  With the stock within 10% of its all-time high, heightened earnings expectations, peak margins, and the unlikely scenario in which the inventory glut of 2008 is repeated anytime soon, the fundamental risk here far outweighs the reward at this stage. 


Eric Levine



ROST: The Perfect Tailwind is Easing - ROST 1


ROST: The Perfect Tailwind is Easing - ROST SIGMA


ROST: The Perfect Tailwind is Easing - ROST 2

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Fading Fast Money: SP500 Levels Into The Close...


For the past 3 months, I have been using Squeezy The Shark to amplify my point on levels for the pending short squeeze. Today, I'm putting Squeezy to bed and I'm going to start fading the Fast Money. I think the giant moves in this market (up and down) are behind us for now. Sorry.


Below I have outlined my new trading range. Be forewarned, it a boring one. I'm selling SP500 (dotted red) at or above the 916 level, and buying the 885 line (dotted green). Into month end, there are plenty of reasons for the bulls to support/defend 885 support. They better - it's the critical immediate term TRADE line. The Depressionista short seller of everything Q2 has plenty of explaining to do come Friday's close, and you can bet your Madoff that there will be plenty of window dressing before it's all said and done. There is no such thing as marking your shorts "to model" (at least not yet).


Note the lower-highs that we have seen in the last few weeks. The closing high of 929 on May 8th was an important one. That was a lower-high than the January 6th closing YTD high of 934. Be careful out there.


Keith R. McCullough
Chief Executive Officer


Fading Fast Money: SP500 Levels Into The Close...  - MC

Peaking Sequentially?


When it comes to confidence, this is as good as it gets, for now...


For the past two weeks we have seen consumer confidence come in much better than the Depressionistas expected.  Last week the University of Michigan was better than expected and today's conference board index number reflects two months of significant improvement; the index is now at its highest level in eight months (Sept - 08, 61.4).


Markets are built on confidence - this round trip in US consumer confidence (see chart below) has equated to a generational short squeeze in the US stock market. But where does the market go from here, now that all of this is in the rear view?


While consumers are considerably less pessimistic than they were earlier this year, and the trends in the labor market are less bad, we have likely seen the bulk of the gains in consumer confidence. 


It appears that we are more likely to see the numbers begin to PEAK sequentially. This is a very important call for Research Edge to be considering, given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did.


The market reaction to today's numbers is obvious-early cycle stocks are rocking ahead.  We believe that we are headed to sequential peaks in our US Consumer MEGA Squeeze call from earlier this year.  The acronym MEGA - (M)oney (E)mployment (G)as and (A)ssets - is our metaphor for how we view the prospects for the consumer.  The trends in these MACRO factors help to influence consumer confidence, which appears to be peaking sequentially AFTER the factors have led them to.


This thesis is also being played out in the Case-Shiller home-price index where there was a slight month-to-month acceleration in the decline of home prices. Unfortunately, that data point is somewhat stale (it's a March number).


Everything that matters in our macro model happens on the margin. Sentiment peaks can occur at lower price peaks. Inclusive of today's US market strength, what you're observing here today is simply another lower high.


Howard Penney

Managing Director


Keith McCullough



Peaking Sequentially? - conf1


Peaking Sequentially? - conf2



Taiwanese export orders and industrial production improve sequentially on Chinese demand...


RESEARCH EDGE POSITION: Long China (via the CAF fund)


Tuan Tuan and Yuan Yuan, the two giant pandas which arrived in Taiwan in the last week of 2008 as a gift from the People's Republic to the Island they still consider a prodigal state; bear names that are a naked reflection of mainland desires. Smash the two names together and you get the word "Tuan Yuan" which translates to "reunion" in Chinese.


Mainland dreams of reunion have propelled negations forward rapidly year-to-date as last year's Panda diplomacy has given way to the newly opened floodgates of direct investment and direct trade  -all at a critical time when Taiwan desperately needs a friend. 


For the island nation, the collapse of export markets in North America and Europe has set them on course to get cozy with "The Client" (China) despite profound misgivings on the part of many leaders inside the KMT as well as the opposition DPP.


China has yet to make any concrete indication that it intends to respect the political or human rights of their own citizens (let alone those of subjugated territories) while continuing to expand its military strength; so it is easy to understand why a future as a satellite in its orbit is not a uniformly appealing thought.


In the here and now, the Panda's bear hug is propelling Taiwanese export industries back into motion in a big way, as evidenced by export order and output data released by the Ministry of Economic Affairs yesterday.


While Export orders for April declined by almost 21% Year-over-year, the numbers still reflected a sequential improvement and beat economists' forecasts significantly. Orders for Electronic goods, a critical component that accounted for just shy of 25% of total orders for the nation in April,  were even stronger at -14.76% as Chinese demand for consumer electronics continues to rise in the wake of stimulus measures aimed at rural consumers. Production data showed similar sequential improvements.







Yesterday also saw the debut of notebook-computer hardware manufacturer Ju Teng International on the Taiwanese Stock Exchange, which decided to launch its latest capital raise in Taiwan rather than Hong Kong as appetite for mainland investment opportunities increases with thawing relations.


This increased order flow is yet more confirmation of increasing consumer demand on the mainland, but it would be a mistake to read too much into it with respect to the Chinese economy: The true measure of Chinese recovery will come in the form of increased output domestically, not in orders for subsidized notebooks and flat screen TVs from abroad.


For the Taiwanese the political tightrope of increasing trade dependence without being forced to compromise politically will continue as economic ties draw the two nations closer. We have traded the Taiwan equity market on the long side in the past and we continue to believe that they will be among the primary beneficiaries of increasing demand for high tech goods on the mainland.


Andrew Barber

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