With Citigroup repaying TARP and Abu Dhabi bailing out Dubai, markets are rallying across the board.  The only green not on my screen is the NIKKEI 225, down small.  The Tankan index (confidence among Japan’s largest manufacturers) rose the least since the economy emerged from its worst postwar recession as the strong YEN will erode profitability.


Last week the MACRO calendar dominated the news flow.  On Friday the S&P finished higher by 0.4% on fairly quiet trading.  On the MACRO front sovereign issues and TARP repayments seemed to be top of mind, but on the margin there were a number of positive issues.  Last week the Dow rose 0.80%, S&P rose 0.04%, but the NASDAQ declined 0.18% and the Russell declined 0.40%. 


On Friday the Dollar index closed at 76.573 up 0.7% on the day.  The Dollar index was up three of the five trading days last week.


The RECOVERY theme gained momentum with the better-than-expected increase in Chinese industrial production.  In addition, the retail sales data and the U. of Michigan consumer sentiment data helped retail and Consumer discretionary stocks in general.  The Consumer Discretionary (XLY) outperformed the S&P 500 by 210 basis points last week. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). The breakdown in the inverse relationship between the dollar and risky assets is new. 


After falling early in the week, the retailers rallied strongly on Thursday and Friday.  Better-than-expected November retail sales and December consumer sentiment data created a positive underlying tone for the group. 


The notable underperformer on Friday was Technology (XLK) – the only sector to close down on Friday.  After being a star performer for two weeks the Semis have now become a headwind with the SOX down 1%.  BRCM was one of the weaker names in the group ahead of next Tuesday's analyst meeting.  Elsewhere, telecom equipment names were mostly weaker with JDSU, TLAB and CIEN taking the group lower.  Weaker-than-expected November NPD data weighed on most of the video game stocks, while the MOBILITY names were also under pressure. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 17 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading slightly higher.


In early trading today, crude oil is trading lower for the ninth day, and is poised for the longest decline since July 2001.  Declining on supply and demand issues crude is now down 15% since October 21 – the year-to-date high.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.79) and Sell Trade (74.30).


In London Gold is trading basically unchanged.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,090) and Sell Trade (1,147). 


Copper is up for a second day with dollar down and optimism that demand from China will be strong.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.26). 


Howard W. Penney

Managing Director
















The Macau Metro Monitor.  December 14th, 2009.



SJM Holdings will open Macau’s 34th casino tomorrow in an attempt to take a larger share of the mass market.  Following an investment of HK$1.5 billion, Casino Oceanus is set to open with 260 mass-market gaming tables and 560 slot machines spread over three floors and 32,000 square meters.  2,400 people will work at Casino Oceanus.  With no VIP service and no junket operators, and a direct connection to Macau’s main ferry terminal through a covered footbridge, Oceanus is, according to SJM chief executive Ambrose So Shu-fai, targeting “pure mass market”. 


Regional markets laid an egg in November with same store revenue down 7%, and that’s without the gas headwind.



We estimate that same store revenue in the regional markets declined 7% in November (only LA and MS haven’t reported).  November 2009 did contain one fewer Saturday but the comparison (-4%) wasn’t exactly difficult.  Combining October (one extra Saturday) and November yields a y-o-y decline of 4%.


Given October’s decent performance, many analysts are undoubtedly disappointed.  Other consumer sectors fared better in November – retail sales were surprisingly strong – which furthers the trend of gaming underperformance.  Gaming continues to face a combination of soft discretionary spending and a declining share of the discretionary wallet (see our 10/19 note “THE DOUBLE PCE WHAMMY TO GAMING”). 


Add a third negative factor to the mix:  gas prices.  As shown on the following chart, y-o-y gas prices will be up significantly in December and this headwind will persist through the first quarter at least.  Changes (y-o-y) in gas prices have historically been a statistically significant driver of gaming regional gaming revenues.  That’s bad news for the regional gamers already facing other headwinds.


AS EXPECTED, NOV DISAPPOINTED THE ANALYSTS - regionals vs gas projection


What does this mean for the stocks?  The regional gaming stocks have underperformed the market as can be seen below.  The stocks are not overly expensive but 2010 numbers probably need to come in.  Until they do, it’s hard to make a strong bull case for the group.



The Week Ahead

The Economic Data calendar for the week of the 14th of December through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wa14 1

The Week Ahead - wa14 2

Confidence Economics – THIS IS NEW

In the past month, we witnessed the DJIA holding above 10,000, President Obama’s new strategy for the war on terror, a "less bad" unemployment rate at 10.0%, and more than enough holiday commercials!


Surprisingly, confidence among U.S. consumers increased in December for the first time in three months.  However, current sentiment remains well below indices from more prosperous times.


The Reuters/University of Michigan preliminary index of consumer sentiment rose to 73.4 in December, from 67.4 in November.  The December figure exceeds the average of 65.0 for the first nine months of the year.


Contradicting some of my thoughts earlier in the week, the U of Michigan’s measure of CURRENT CONDITIONS (which reflects a slightly better job market) jumped to 79.1, from 68.8 in November and is the highest level since March 2008.   The index of EXPECTATIONS index also  increased to 69.7 from 66.5 last month.


As you can see from the chart below, confidence clearly appears to be settling in at a higher level.  This is just a preliminary number from the U. of Michigan survey, and the final number will likely be lower, but that is less important. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). 


The breakdown in the inverse relationship between the dollar and risky assets is NEW. 


Howard Penney

Managing Director


Confidence Economics – THIS IS NEW - um

China: Is That It?

Overnight we were issued a whole new round of Chinese economic data. Since equity markets in Asia have started to lose their upward price momentum this week, I am left asking myself whether that’s it? The leading indicator in answering this question (the Shanghai Composite Index) closed down on the “news”…


In the chart below Matt Hedrick and I contextualize what the Street is labeling as “better than expected” Chinese export data. While, on the margin, the export data continues to improve sequentially, all we have really observed here is a rally to lower-highs.


We understand that China is not all about exports (34% of GDP). On the internal consumption front, we actually saw monthly Chinese Retail Sales slow sequentially as well (from 16.2% in October to 15.8% in November).


The red arrow in the chart shows the series of lower-highs we have seen in Chinese Exports since export demand was white hot (2006-2007). You can look at this chart in two ways: 1. A rally to a lower high (bearish) or 2. A pending breakout to the upside (bullish).


While negative year-over-year export growth of -1.2% in November is not absolutely bullish, what has been bullish is what we have seen on the margin in China since her 2008 lows. However, in terms of export recovery, THE question remains: Is that it?


If the Chinese local A-shares were not making a series of lower-highs and if the H-shares on the Hang Seng Index were not breaking down from an immediate term TRADE perspective, I would give this Chinese Export chart the bullish benefit of doubt. For now, I am paid to be skeptical. Market prices don’t lie.


There are plenty more bulls in the China shop today than when we got bullish (December of 2008), to be worried about.



Keith R. McCullough
Chief Executive Officer


China: Is That It?  - chinaex

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.