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Misguided

"Perceived perception, misguided conception."
-Anonymous

I can't, for the life of me, understand how the manic media still clings to Ben Bernanke and Wall Street strategists for guidance as to what is in store for the US Financial system's future. The #1 risk that remains in this market is the pervasiveness of groupthink.
 
Never mind Bernanke's batting average on inflation forecasting for the last 3 years. YouTubing that would be too embarrassing. Now we are supposed to believe in the perceived wisdom of a man who allegedly knows more about the Great Depression's history than God himself. I have a fond appreciation for history professors - I just don't want them anywhere near managing the risk associated with my family's hard earned capital.
 
Bernanke's perceived perceptions never cease to amaze me. Yesterday, in addressing the potential for reflation to morph into inflation, he talked down Mr. Market's prowess as a leading indicator. He said that as he looks at long term US Treasury rates, "I don't think the financial markets are indicating a great deal of concern about inflation." Yes, fellow commoners - the willfully blind now refers to us non- rear view mirror prognosticators as "misguided."
 
Let's get back to reality here and get 3 things straight when it comes to the market's interpretation of interest rates:
 
1.      Bernanke has the political power of the Almighty to set rates on the short end himself - that's not a market rate
2.      The long end of the curve is marked-to-market
3.      The spread between the short end and the long end = the yield curve; it's also marked-to-market, not Madoff
 
Mr. Bernanke, Given that you and Greenspan have completely politicized the short end of this financial market curve, the only way to monitor the market's concern for reflation/inflation is to look at the spread. The spread between 10-year and 2-year US Treasuries is as wide as it has EVER been. You know this. C'mon man.
 
I will be dedicating the rest of my professional career to You Tubing the perceived wisdom of Wall Street and all those who are hostage to its conflicts and compromises. This is getting so bad, that I have to say it that way. If I were on the ice with Bernanke yesterday, he'd have his jersey pulled over his head.
 
The real people who are "misguided" are those who missed both the -57% peak-to-trough crash in the US stock market from Q407' to Q408', then called for a Depression (at the bottom), and now missed the +41% Q109' to Q309' generational short squeeze. I refuse to put in the reps to play this globally interconnected game and not use that genius technology that every other profession other than Wall Street seems to use called the replay button. I have said my piece.
 
Our Range Rover call was for the SP500 to trade in a range for Q3 of 871 to 954. We are 22 days, or 25% of the way, into Q3. The closing low for the SP500 for Q3 to-date was 879 (July 10th) and the closing high came yesterday at 954.
 
If the SP500 closes above 954, I will guide you to 955... then 956... and yes Mr. Bernanke, you can do this too - then you should stand up at the Senate today and call for 957! Waive your arms and stuff - get a little nuts like a hockey player for the camera maybe. Your seriously misguided conceptions of reality are wearing on me.
 
Many people write off Ron Paul for being a little nutso - and maybe they should. He's a pistol and he definitely doesn't fall in line with Groupthink Inc. While he may be too alarmist at times, he often makes one very simple point - what is it that gives you confidence in your economic predictions and why should we trust you? Fair question Mr. Paul - as a fiduciary of financial recommendation, I think there is responsibility in explaining one's analytical process. History will judge my accuracy.
 
History, of course, is not written by CNBC. The long term tail of this country's economic history is looked back upon long after the fact. In the moment, its our human nature to dismiss evolution. In the moment, the best job security is issued to those who fall in line. In the moment, we allow some of the most reckless abuses of political power that we can never imagine. The long term's unintended consequences of our perceived financial wisdom are what are most often "misguided."
 
Morgan Stanley is out with a call telling you to sell everything today. Then again, that's what their management team has been saying for the last +41% up...
 
Best of luck out there today,
KM


LONG ETFS

CYB - WisdomTree Dreyfus Chinese Yuan-
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


SHORT ETFS

 
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.

XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ - iShares Japan -We're short 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.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

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.


THE MACAU METRO MONITOR

WYNN RESORTS FILES FOR HK IPO OF MACAU UNIT scmp.com

Wynn Resorts has submitted an application to list its Macau unit on the Hong Kong exchange, hoping to raise between US$500 million and US$1 billion.  Wynn’s plans come as LVS prepares an IPO of its own Macau division.  No decisions have been made regarding the timing or terms of any offering or whether the subsidiary will proceed with the transaction.

 

MACAU AIRPORTS PASSENGERS DOWN 22% IN 1ST HALF YEAR macaunews.com.mo

Macau International Airport’s passenger traffic was down 22% for 1H09, compared with the same period last year.  A statement from the Macau International Airport Company said that “there is the need to prepare for the after-crisis, and CAM has been proactively promoting the airport to airlines in target markets and developing strategic alliances with other airports”.  There is also a planned new service between Macau and South Korea due to start “after the summer”.

 

MACAU’S INFLATION IN JUNE THE LOWEST IN 5 YEARS macaunews.com.mo

Macau’s composite consumer price index rose just 1.1% in June. It was the lowest year-over-year growth rate in five years, according to the Statistics and Census Service (DSEC).  The average consumer price index for the first half of this year grew 2.54% on the same period of last year.  The composite CPI is intended to reflect the impact of price changes on the general population. 

 

MACAU’S GAMING TAX PAYMENTS DROP 10% IN FIRST HALF YEAR macaunews.com.mo

The government income from taxes decreased 10.3% y-o-y to MOP18.51 billion in the first six months of the year. Direct gaming taxes accounted 72.5% of the government’s total revenue in 1H09.  The Gaming Inspection and Coordination Bureau announced a 12.4% decrease y-o-y to MOP51.42 billion in 1H09.  The number of casino licenses – not necessarily all operational – held by Macau’s six gaming operators stood at a record 32 at the end of June.


IGT: CITYCENTER MAY NOT BE THE POSITIVE CATALYST

The SBG system seems to be having some technological difficulties at CityCenter. We’re also not sure IGT will get its typical new casino market sure.

 

The casino at CityCenter is expected to open in December of this year.  Our sources indicate there are numerous technological difficulties associated with the Server Based Gaming (SBG) system.  Apparently, the system’s compatibility with non-IGT games has been inoperable.  We’ve also heard from other sources that SBG trials at tribal casinos have lacked functionality.  If so, what exactly would casinos be paying for?

CityCenter would be the most important test yet of SBG.  SBG has long been promised as the future of the slot machine business.  Serious operational issues could further delay widespread SBG implementation by years.  IGT needs to get the house in order quickly by fixing the problems and offerering some meaningful applications.

The second potential issue with CityCenter, as it relates to IGT, is slot market share.  Even as its overall market share has declined, IGT has maintained a 50-60% or so ship share into new casinos and expansions.  Unfortunately, IGT may struggle to obtain a 45% share at CityCenter.

We’ve been on the right side of IGT the last few months and still believe that we are about to embark on an extended slot bull market.  However, the near term looks to be pretty rocky.  IGT will report its fiscal Q3 on Thursday and we, like a lot of investors, think they could miss the Street consensus of $0.18.  Other than potential for new markets (Ohio, video poker in IL and PA, and more casinos in IA), there probably won’t be a lot of positive data points discussed on the conference call.  Given the lack of near-term visibility, we don’t expect strong earnings guidance from the company, either.

As we said in our 7/20 post, the right strategy might be to fade the optimism ahead of earnings. 

 


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UA: Comfortably Numb?

The data is pretty clear -- negative reports on near term trends at UA are indeed having less of an effect on UA shares (best measured as relative to the MVR index). The first chart represents the performance of UA shares relative to the MVR over the 2-day period after a negative research note. Tough to miss that relationship. As you can see from both the trendline as well as the higher lows, the market is increasingly shrugging off incremental bearishness.

 

Casey Flavin

 

UA: Comfortably Numb? - UA Market Reaction to NegReports 7 09

 

UA: Comfortably Numb? - UA Reaction to SS


SBUX - Onward and Upward...

First, it’s safe to say MCD is not hurting SBUX.  U.S. same-store sales declined 6%, in line with my expectations and 200 bps better than Q2.  Traffic was down 4% in the quarter, which showed a sequential improvement from 1Q and 2Q when transactions were down 6% and 5%, respectively.  International same-store sales declined 2%, better than the -3% number in 1H09 and consolidated same-store sales improved 300 bps on a sequential basis from Q2 to -5%. 

Management commented on its earnings call that same-store sales improved on a sequential basis throughout the quarter in both the U.S. (as indicated by my May “Grass Roots” survey) and internationally, reflecting better traffic trends.  In the prior three quarters, SBUX had attributed the soft international same-store sales trends to weakness in the U.K. and Canada, which make up about 80% of the comparable sales store base.  Today, management stated that the U.K. market, like the U.S., has stabilized and is improving on a sequential basis. 

The strong operating model returns.  SBUX 3Q EPS came in at $0.24 versus my estimate of $0.22 and the street at $0.19.  SBUX reported a return to double digit operating margins and the U.S. segment’s first quarter of margin expansion following 12 quarters of decline.  Consolidated operating margin came in at 10.6%, excluding restructuring charges, with the U.S. segment posting a 13.4% number (up 460 bps YOY). 

Going forward, the company’s operating margins will continue to benefit from its cost savings initiatives.  That being said, the company delivered $175 million of savings in Q3 versus its $150 million goal and now expects to implement $550 million of cost savings in FY09, exceeding its prior $500 million target.  This reduced cost structure will result in an excess of $700 million in annualized cost savings in FY10 and beyond.

As a result of stabilizing sales trends and increased cost savings, SBUX now expects FY09 EPS of $0.74-$0.75, excluding restructuring charges, versus the street at $0.71.  The company is guiding to 13%-18% non-GAAP EPS growth in FY10 with U.S. segment operating margins growing 150-200 bps.  Management stated on its earnings call that SBUX should take a meaningful step in FY10 toward achieving mid-teen operating margins in its U.S. and international segments.  For reference, that is relative to the 13.4% and 8.1% operating margins reported in Q3 in those respective segments.  SBUX did not provide any same-store sales guidance for FY10 but its FY10 margin guidance is based on a continuation of the current soft sales environment.  Achieving mid-teen operating margins will ultimately rely on positive comparable sales growth.

A strong cash flow story.  I knew SBUX would pay down debt in the quarter but the company exceeded my expectations on this measure as well by reducing its short-term borrowings to a zero balance at the end of Q3.  The company expects the balance to remain below $50 million for the remainder of the fiscal year.  SBUX again lowered its FY09 capital spending needs to $550 million from $600 million, thereby improving SBUX’s free cash flow position.  The company continues to expect its FY09 free cash flow to exceed $500 million. 

Advertising.  CEO Howard Schultz stated that he is seeing an unprecedented level of investment in coffee advertising by a host of companies, the likes of which he has never seen.  He thinks this increased level of spending around coffee builds awareness and trial for the entire category and has benefited SBUX, particularly following the launch of the company’s own national advertising campaign in May.  To me, this means that MCD’s increased spending around its specialty beverage platform is not hurting SBUX as so many people had expected.  Instead, it is increasing trial at SBUX.

 


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