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UK MORTGAGES

Floating lower, for now

In the UK, where fixed rate loans of durations over 10 years are not typically available, floating rate and variable mortgage products comprise a significant portion of the total. According to the Council of Mortgage Lenders, fully 49% of total mortgage debt in the UK is either variable, discounted variable (a variable rate with a  teaser) or a tracker, which follows the BOE rate in lock step.

As such, the current low rate environment is having a significantly larger impact on the UK consumer than their US counterparts. National Statistics Office retail price Index levels reported today registered at -1.07% on a year-over-year basis but at +1.58% Y/Y with mortgage payments excluded from the basket (see chart below).

Clearly the impact of changing rates will be felt earlier and harder by consumers in the UK than in the US.

Andrew Barber

Director

UK MORTGAGES - ab1

UK MORTGAGES - ab2


Squirrel Hunting: SP500 Levels, Refreshed...

Barber and I have re-run the math on today's intraday price moves enough times to drive myself squirrely. Good thing AB has a massive bag of Costco nuts on his desk!

When the US Dollar was down on the open and stocks REFLATED, that made sense. Intraday, the US Dollar has rallied, but remains down -0.57% at the time of this note. At the same time, all of the REFLATION trades have collapsed, leading the US stock market to its intraday lows - what gives?

Sometimes the answer is I don't know. Sometimes I just call it squirrely. All of the time, real-time prices end up discounting something that I can't quite see, yet...

Are we starting to discount the end of the inverse correlation between REFLATION and the US Dollar? At this juncture, that would be a very premature conclusion to make - we don't have anywhere near the amount of days or volumes in the data series to confirm anything other than what you see in front of you today. That said, extremely high r-squares like this aren't perpetual. When consensus hits its crescendo, correlations start to unwind.

Below I have outlined my immediate term TRADE line of support for the SP500 at 915 (dotted green line). At the time of my whacking these keystrokes, the SP500 is trading below that. In context, a drop down to the 904 line would be a 3-standard deviation move on the short term duration model I have been using. Those are hard to achieve - but when they do, something squirrelly is brewing.

From here, the market could go to 952 in a straight line and I wouldn't call that a squirrel. That's my immediate term line of upside resistance.

Confused yet? Have a nut.

KM

 

Keith R. McCullough
Chief Executive Officer

Squirrel Hunting: SP500 Levels, Refreshed...  - cos


US Housing - A Disconnect?

Finding a bottom always seems easy, in hindsight....

As measures by the NAHB Housing Market Index (HMI) home builders remain cautious and concerned about prospects for the housing market, but that was yesterday;  today's key data point was Commerce Department numbers showing that U.S. builders broke ground on more houses than forecast in May, another sign of a "bottom" that the manic media has leapt on.

Since the end of Q408, our call on housing has been that it would bottom in 2Q and today's news provides further validation for our thesis.  The 17% month-over-month increase in housing starts to an annual rate of 532,000 followed a 454,000 number last month, handily beating both consensus and our expectations.  Last month we described the housing start numbers as an industry "acting rationally". This month's number is not strong enough to indicate that home builders are acting irrationally, but one has to wonder if the demand is really improving. 

The divergence between starts and completions has narrowed by 35% from the high in November of last year -but at 280 thousand units the potential inventory overhang is still both significant and ominous.

While government tax incentives are helping to bring in first time buyers, the bulk of the benefit is in the rear view mirror.  Last week average 30-year fixed mortgages jumped 30 basis points to 5.6% percent, (the highest since November 26, 2008) which suggests that the trends could slow as we head into the summer.  At 5.6%, mortgage rates are 75 basis points higher since April, when the rates were 4.8%. Meanwhile, the Mortgage Bankers Association said total mortgage applications fell 7.2% last week. 

With unemployment at a 25 year high and likely headed higher more consumers are likely to hold off on purchases of big ticket items and the savings rate is on the rise.  The housing market has bottomed for now, that is for sure.  The next move on the margin is less clear, as there is enough cold water to throw on an accelerating rate of improvements.

Howard W. Penney

Managing Director

 

US Housing - A Disconnect? - cha1

US Housing - A Disconnect? - cha2


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PNK: SUGARCANE BAY OPTION > SUGARCANE BAY

As reported by the American Press, CEO Dan Lee intimated that PNK may begin construction of Sugarcane Bay by August.  The Lake Charles sister property to L'Auberge is now expected to cost $407 million, up from $350 million.  The improving credit markets were cited as the catalyst to resume construction.

Now, there is a lot to like about PNK.  Lumiere Place is ramping faster than expected, no doubt aided by the removal of the $500 loss limit in Missouri.  The company maintains significant exposure to Louisiana which has been the strongest performer among the gaming states.  The valuation at about 6.5x EV/EBITDA is reasonable and the FCF yield of almost 15% is attractive.  Last but certainly not least, PNK management has shown uncharacteristic restraint in terms of capital deployment, until recently.

My issue is not that Sugarcane Bay will be a disaster.  It's just that levering up to build at 8x EBITDA (maybe even higher if there is cannibalization of L'Auberge), when the incremental cost of borrowing will fall in the 7-10% range, doesn't seem to make sense.  We calculate only $0.09 in free cash flow accretion per share from Sugarcane Bay.  PNK could generate that level of accretion from the repurchase of only $50 million worth of stock.  PNK's cost of borrowing is going higher anyway - making the 15% FCF unsustainable - but pursuing Sugarcane Bay will expedite and elevate the hike.

PNK: SUGARCANE BAY OPTION > SUGARCANE BAY - pnk sugarcane bay 

Given the higher incremental cost of capital, exercising any development options would seem to detract from the company's value.  A story of harvesting cash flow and open development options seems like the better story for now.


Performance Tension

"Tension is who you think you should be.  Relaxation is who you are." 
~Chinese Proverb
 
A considerable amount of predictable tension was revealed in yesterday's global market trading. With the US Dollar up +1.5% on the day, the interconnectedness of global asset flows was revealed. Dollar up = lots of stuff that's priced in Dollars down.
 
After one US market down day from the YTD high, should we all freak out and run for the exits? Some tried. But managing money hysterically on the first day of the week (after global markets hit fresh 2009 highs last week) isn't going to get you paid. Price action was obviously negative across global currency, commodity, and equity markets, but it came on extremely light volume and nothing other than the noises people make when they don't understand macro correlation.
 
Relaxation is what you can thank your Asset Allocation to cash for. Tension is what you get when you're choking on a "fully invested" mandate AT THE YTD high for the SP500. Did I have a down day in the Asset Allocation Model Portfolio yesterday? Sure. When the market's breadth is 16% advancers to 82% decliners and you don't have shorts, you're not going to have an up day! That's what Asset Allocation is - it's not a hedge fund.
 
Post registering those YTD highs, hedge funds have been snagging a lot of headlines as of late. People in this business love to talk about performance, especially when it's good - and they should. This is a game where we keep real-time score. But don't forget that in the last 18 months that many a hedge fund manager has proven to be nothing but a glorified levered long investor.
 
Inclusive of yesterday's "oh my God - the market is going to crash again" calls to arms by the manic media, for the quarter to-date (Q209') the Dow is +13.2%, SP500 +15.8%, Nasdaq +18.8%, and Russell 2000 is +21.1%. Even a clanging monkey like me can make money on the long side in this environment!
 
So if you're having a great quarter - congratulations. Riding the REFLATION trade has been nothing short of bliss. I get that, and I fully support the message. What I don't get is the perpetual tension associated with anything that goes red. Just relax, and buy them when they are down. The next narrative of a "Great Depression" will be reserved for those who haven't come to grips with The New Reality: Buy red, sell green, and remember that calling for crashes AFTER they occur doesn't work.
 
Until the crescendo of consensus crushes it's R-Square, the most dominant global macro factor across asset classes will remain the US Dollar Index. Keep it dialed up on your screen - maybe play some classical music as it gyrates. It's one quote. It's easy to see. It's your massage table. Take deep breaths...
 
The US Dollar Index is trading down -0.79% this morning, and global equity, commodity, and currency markets are stabilizing again as a result. Asia's overnight equity market selloff came before we saw this morning's US Dollar weakness. Europeans woke up to the predictable, which was Russian rhetoric going back to beating the drums with their "colleagues" (the Chinese) and comrades about a new world currency reserve.
 
Putin Power broker, Dmitry Medvedev, took the conch to kick off the BRIC (Brazil, China, Russia, India) Summit in Russia this morning. What his finance minister (Kudrin) rattled people's cages with yesterday was a one-day, immediate term, TRADE. The Research Edge, intermediate term, TREND is the one that matters. The US Dollar remains broken across durations and it will remain the target of what we have been calling Replacement Rhetoric, for months and quarters to come.
 
The US Dollar's Credibility Crisis is what we get for paying off American Bankers, Politicians, and Debtors via the REFLATION trade. The world gets it, and with every tick on your screens on Dollar up days, most of the "I don't do macro" guys get it too. Don't stress about it. Just deal with it. "Tension", when it comes to "who you think you should be" isn't productive. Until the US Federal Reserve and Treasury systems lose their political polarization, the US Financial System will be as credible as the bed that said leaders of this system have made it to be.
 
My immediate term downside support for the SP500 is now 917. If that line were to break alongside a US Dollar Index breaking out to the upside above $81.89, I'll start making some sales. Otherwise, I'm going to stick with what's been working for the last 6 months, and get "longer of" REFLATION  on market weakness as the US Dollar rallies to lower-highs.
 
Best of luck out there today,
KM


   
LONG ETFS  

SPY - SPDR S&P 500 - The S&P500 corrected on 6/15 from the YTD high on low volume.  The S&P 500 is positive from both a TREND and TRADE duration. This is a market that has a very predictable range, one we'll trade with a bullish bias.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 as a better way to be long the US market than the SP500. The index includes companies with better balance sheets that don't need as much financial leverage.

FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet. 

XLV - SPDR Healthcare -Healthcare looks positive from a TREND duration and moved to negative territory for a TRADE. We bought XLV on 6/08 to get long the safety trade. 
 
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 British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We bought Energy on 6/05. 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. 

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. 


SHORT ETFS

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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic. 

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. 
 
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.


THE RE DAILY MACAU MONITOR

RECORD STAKES AS MAINLAND POLICE SMASH GAMBLING RACKET scmp.com

Mainland police have smashed an online gambling racket in Hubei, China.  Police believe that 50bn yuan was wagered on soccer matches, horse races, and other events nationwide through the operation.  The racket allowed people to gamble without having to travel to the casinos in Macau and elsewhere outside the mainland.  Online gambling is proving to be a difficult problem for the authorities.  Xinhua reported that gambling websites in Taiwan, Macau, Myanmar, the Philippines, Singapore, and Malaysia had all made money from mainland gamblers.

 

CIRQUE DU SOLEIL AT THE VENETIAN scmp.com

The Zaia show in Macau tonight is part of a global celebration of Cirque du Soleil.  The acrobatic group has been entertaining for 25 years.  The Venetian Macau, where the group performs, will be hoping that the occasion this evening will help to boost visitors.

 

WYNN MACAU CONSIDERING LISTING MACAU BUSINESS ON HK INDEX?  scmp.com

Talk of Wynn Resorts listing their Macau business on the Hang Seng has resurfaced, almost a year from the initial speculation in July 2008.  Given current market conditions, compared to last year, it would seem more likely to happen at this stage.  While the sustainability of the current upturn in the market is yet to be seen, it is clear that Wynn stands to gain significant funds via share sales.  This is far from a sure bet, but could have serious implications should it go through.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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