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China's largest lender says beware...

I remember sitting on a NYC trading desk at around this time last year watching the hedge fund community jockey for allocations on "white hot" Chinese IPO's. How telling the times were...

In July of last year ICBC (Industrial Commercial Bank of China) was assigned a $250B market cap, and the world was in love with everything "Ch-India".

This is not CNBC's lead story, but this morning the ICBC is warning that inflation will remain through 2009, and to expect stock market "see-sawing" (per Xinchua reports) into 2010-2011.

Interestingly, the ICBC is flagging the possibilities of more short term "temporary liquidity shortfalls", and this fits the contours of my morning note today in terms of addressing that supply shocks remain more relevant to inflation than Wall Street's newfound bullish narrative of "demand destruction" to lead commodities lower.

The Chinese government's stated inflation target is under +5%. Using June/July commodity prices as a proxy, they are running close to 2x that right now.

Global Stagflation is here. Beware...

KM

US Market Performance: Week Ended 7/4/08...

Index Performance:

Week Ended July 4th:
Dow Jones (0.54%); SP500 (1.3%); Nasdaq (2.1%); Russell 2000 (3.5%)

2008 Year To Date:
Dow Jones (14.9%), SP500 (14.0%), Nasdaq (15.3%), Russell 2000 (13.1%)

MORE MACAU TRAVEL RESTRICTIONS

Potential gamers were already turned away from the Zuhai border gate this weekend. Apparently, on Thursday, the Chinese government reduced Macau visitation rights for Mainland Chinese mass market customers from one visit per month to one visit every two months.

You live by the sword, you die by the sword. Macau Bulls hoping for a government imposed restriction on junket commission rates next week must now grapple with a potential government induced mass market slow down.

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PENN: THIS PUBLIC EQUITY WILL SHOW PRIVATE EQUITY HOW IT'S DONE

The publisher of Matthew Maccoby's The Productive Narcissist summarizes Maccoby's view that most innovative leaders are not consensus-building bureaucrats but are productive narcissists with an interrelated set of skills -- foresight, systems thinking, visioning, motivating, and partnering referred to as strategic intelligence. Productive narcissists are best suited to lead during times of rapid social and economic change.

Trivia question: What gaming company has generated the highest increase in shareholder value over each of the last 5 year (excluding WYNN which was not public for the full period), 10 year, and 15 year periods? I'll give you a clue. This company just terminated a merger that was priced 126% higher than Thursday's close, and still managed to create more relative value over the periods. The answer of course is Penn National led by an incredibly productive narcissist, Peter Carlino.

I remember when PENN was a racetrack company and the growth story was Off-Track Wagering in Pennsylvania. The 1997 purchase of the Charles Town Racetrack and the successful push for legalized slots in West Virginia put the company on the gaming map. Look at the stock chart to see what they've done since. Carlino and team generated 3500%, 1500%, and 180% over the 15, 10, and 5 yr periods, respectively.

Research Edge has been highly critical of private equity's performance, particularly in the gaming space. Eventually they may sell higher but they certainly didn't buy low . Check out the last few private equity deals in gaming:

Columbia Sussex bought Aztar - quite possibly the worst gaming acquisition ever. Most of the former Aztar is now in bankruptcy
Colony and the Fertittas took Station Casinos private - they top ticked this one. Great for shareholders.
Fortress tried to buy PENN - who did the valuation work here? The stock is trading at $29 vs deal price of $67. PENN's value is Peter Carlino. Tell me how Fortress was going to add value? What have they got now? They are poorer by approximately $1.5bn. Give PENN credit for recognizing the top.
TPG and Apollo bought HET - Actually not a bad deal at the time. Decent multiple that only looks expensive now after the bottom fell out of casino stocks. The deal will probably will make money but over a significantly longer duration than originally anticipated.

The Emperor has no clothes. During this decade private equity has been considered the smart money. I'd rather put my money with the old smart money. PENN's wealth creation has been nothing short of astonishing. Here is a management team that has made value-creating move after-value creating move. Negotiating $1.5bn in zero interest liquidity was another brilliant deal.

PENN has been the premier deployer of capital in the entire space. Multiples are back at levels where Carlino can go to work. Unlike private equity, PENN has the skill, smarts, and liquidity to make it happen. Remember PENN was a seller at the top and now look to be a buyer much closer to the bottom. Who else in private equity or industry for that matter, maintains this level of liquidity and can capitalize on these opportunities? Nobody.

Denmark: The EU's 1st Bearer of "Recession"; Where's The Gospel?

I wrote about this on Tuesday, but I think worth revisiting for a minute as it does bear consideration that stocks on the Copenhagen 20 Index underperformed European trading throughout the day again today, closing down another -2%, taking Denmark's decline to almost -22% from its October 11th highs.

The textbook folks define recession as two consecutive quarters of negative growth. While I am a fan of reading economic textbooks, they should not be considered gospel. That said, everything is relative here, so Denmark's 1st mover advantage bears monitoring.

Trichet raised the ECB benchmark rate again this morning, and seems cool with testing the bounds of perceived notions that hawkish monetary policy drives recessions and depressions.

Since the 1st Nobel prize in economics wasn't issued until 1969. It's very difficult for me to believe that anyone out there has a macroeconomic process worthy of being called gospel, altogether.

KM

(chart courtesy of stockcharts.com)

Thank You: One Of the Best Emails I Received Today...

In reference to another client response I received this morning, one of my best friends in life pointed out, "well, you're making a market out there!"...

That is the goal of building a business on cummulative knowledge, indeed. Although I have been more right than wrong this year, we're looking for the right answers over here, and those certainly won't always be my answers.

Here's the note - enjoy; especially the Grantham link - definitely on the required reading list for the objective seekers of truth out there.
Cheers,
Keith

_________________

Keith,

"Although Ben takes a lot of heat and should pull a Volcker (btw, I find it interesting that Volcker is on Obama's advisory board - or inner circle of advisors or whatever you want to call it) - regardless, it was Greenspan that got us in to this mess. Ben has the toughest job on the planet right now and is not doing us any favors by trying to nice to everyone. Raising rates will crush everything people say. My response is "we are going there anyway" To me, it's simply "get it over with rather than dying a death by 1,000 paper cuts." Nobody like a guy who spoils the party, which is why Volcker lasted a short time and Greenspan, conversely, lasted a long time. Ben seems to be trying to be somewhere in between. But he needs to pull a Volcker (so I can make a ton shorting these stupid fertilizer stocks).

anyway, Avery signed with the Stars, the Tour de France starts this weekend and the Olympic swimming trials continue. The market is incredibly inefficient right now. Quality assets are for sale. Ben needs to do the right thing and correct Greenspan's mess. If he doesn't, a hot dog (believe me, I know protein fundamentals real well) will cost $30 next July 4. Viva la Pig.

www.gmo.com

read the last newsletter (1Q2008 letter to clients midway down the screen). this is outstanding work, even if there are no hockey analogies."

Best regards,

A Friend Of Mooner's
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