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Chiang Mai Time

“Don’t look back. Something might be gaining on you.”

-Leroy Satchel Paige

 

Satchel Paige was an American baseball legend who played ball from 1. He was the 1st player from the Negro Leagues to be elected to the Baseball Hall of Fame. He was one of America’s great winners.

 

The saddest part about Paige’s success is probably that it took America too long to realize it. The man didn’t play his first game in Major League Baseball until he was 42 years old. American Groupthink isn’t new. It’s always been a part of our culture. We are human. So are the Chinese.

 

This morning the Chinese are reminding us that: 1. they are still wearing the pants in this relationship and 2. they aren’t leaving this new game of global financial risk anytime soon. China is heading into 2010 with a full head of political and economic steam. If America and Europe don’t let her into the major league of global finance, China may very well just start up her own.

 

This morning, the Association of Southeast Asian Nations (ASEAN), plus China, Japan, and South Korea, have announced that they are moving forward with the Chiang Mai Initiative and forming a $120 billion foreign-currency reserve pool. In a joint statement, the countries said the move was intended to “strengthen the region’s capacity to safeguard against increased risks and challenges in the global economy.” In Mandarin, that means protect against American crashes.

 

Chiang Mai is a city in northern Thailand that sits strategically on the Ping River. This is where plenty of Asian trading has been done over the last few centuries. This is where Asia’s new economic powers decided to lock arms and play some red rover with Western leaders of Perceived Financial Wisdom.

 

Like MLB ignoring Satchel Paige, Westerners ignoring The New Reality of Asian economic power doesn’t mean it ceases to exist. The Asians have been working on forming their own economic safety nets since the Japanese tried to form the Asian Monetary Fund in 1997. The Chiang Mai Initiative was formed in May of 2006. Today is simply a recognition that the proactively prepared have a plan - and they are executing on it.

 

An analyst at Banker of America is revealing to his squadrons of consensus callers this morning that China could see her property bubble “pop.” Hello, McFly – the Chinese property stocks peaked in July of this year and have been popping for 3 months! Understand that many sell-siders on this side of the pond really don’t know what they don’t know…

 

China’s Premier, Wen Jiabao, is very aware of his liabilities. Unlike Bush and Obama, he seems to actually know what he doesn’t know. He, and his financial leadership team, have been explicitly targeting the property and loan markets for the last 3 months. They are not behaving as willfully blind as we were.

 

This morning, here’s what Wen told Xinhua, the Chinese News Agency: “Property prices have risen too quickly in some areas and we should use taxes and loan interest rates to stabilize them”…

 

Unlike the US, who keeps interest rates at ZERO to fuel debt fueled asset price speculation, at least China has a plan to both generate savings amongst her citizenry (with a savings rate of return greater than ZERO) and, at the same time, show some respect for the cost of capital.

 

On the currency front, Wen said that China will “absolutely not yield” to the Western calls for currency appreciation. He explained that the plan will remain the plan, and that China will move both her currency and interest rate policies whenever she darn well pleases. Sound familiar? It should. That’s what we do.

 

2010 will be here by the end of this week, and so will China overtaking Japan as the world’s second largest economy. For a long time Americans and Europeans could see this economic and political juggernaut coming. For a long time some of us chose to ignore the power of their self-directedness.

 

As America moves the YouTube dials to another populist debate (whether or not we should re-institute Glass-Steagall like regulation in her financial markets in 2010), be certain that the Chinese are going to be moving forward at their already decided pace.

 

After closing up +1.5% overnight, the Shanghai Composite Index closed at 3188. Despite the SP500 closing at a higher-YTD-high on Christmas Eve, it’s only up 24.7% YTD. Relative to China’s +75.1% gain, that’s puny. Kind of like how Satchel Paige made 20-year old men look with a curveball coming out of his 45-year old arm.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1112 and 1129, respectively.

 

Best of luck out there this week,

KM

 


LONG ETFS

VXX - iPath S&P500 Volatility
For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWZ - iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

GLD - SPDR GoldWe bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB - WisdomTree Dreyfus Chinese YuanThe 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.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

 
SHORT ETFS
 
RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  


EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

XLI - SPDR IndustrialsWe shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY - SPDR Consumer DiscretionaryWe shorted Howard Penney's view on Consumer Discretionary stocks on 10/30 and 12/2.

SHY - iShares 1-3 Year Treasury BondsIf 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.


US STRATEGY – GOING OUT ON A HIGHER HIGH

The S&P 500 finished higher by 0.53% in light, pre-holiday trading on Thursday.  The positive tone for the day and week overall was set on the back of strong global markets and generally upbeat economic data points.  As expected the volume was very light, but the breadth was positive.

 

On the MACRO calendar, jobless claims fell 28,000 to 452,000, well below the 470,000 expected by a Bloomberg survey.  This was the lowest reading since September 2008.  Additionally, the November durable goods data further lifted sentiment as orders ex-transportation increased 2.0%, above expectations for a 1.1% gain; while total orders came in at 0.2% and were slightly below expectations of 0.5%.  The durables data offered more support to the global RECOVERY trade. 

 

In Washington, the Senate's passing of a healthcare reform bill dominated headlines.  As a result, Healthcare (XLV) was the worst performing sector on Thursday.  Consumer Staples and Consumer Discretionary rounded out the bottom three.   

 

The positive Economic backdrop gave support to a modest return of the REFLATION trade, as Materials was the second best performing sector on Thursday (+0.8%) and for the week (+3.8%) as a whole.  The best performing sector last week was technology (+4.2%), which benefited from continued M&A activity and better-than-expected earnings. 

 

While Financials (XLF +0.9%) was one of the best performing sectors on Friday; it remains the only sector that is broken on both the TRADE and TREND durations.

 

The range for the S&P 500 is 17 points or 0.5% upside and 1.0% downside.  At the time of writing the major market futures are slightly higher.

 

The futures are benefiting from a positive tone in Asia and Europe.  Last night the Nikkei rose +1.33%; Hang Seng declined 0.17% and the Shanghai Composite was up +1.51%.  In Asia volume remained thin, but optimism about prospects for the global economy continues to be in focus.  China’s strong performance was on reports that the economy is growing faster than expected.

 

In early trading crude oil was little changed after reaching its highest price since Dec 1st as colder-than- normal weather in the U.S. is helping demand.  Crude oil for February delivery traded at $78.26 a barrel, the highest since Dec. 1.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.45) and Sell Trade (78.29). 

 

Gold is trading higher for a third day in London on speculation that a bottom might be in after a 12% from a record high.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,071) and Sell Trade ($1,151). 

 

Copper in Shanghai climbed to the highest price in 16 months on optimism demand is improving in the US and China.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.16) and Sell Trade (3.32).

 

Howard Penney

Managing Director

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - sp1

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - usdx2

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - vix3

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - oil4

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - gold5

 

US STRATEGY –  GOING OUT ON A HIGHER HIGH - copper6

 


The Week Ahead

The Economic Data calendar for the shortened week of the 28th of December through the 31st 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 - wk28 1

The Week Ahead - wk28 2

 


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MORE IMPROVEMENT IN ROLLING CLAIMS

Joshua Steiner, our new Financials sector head, takes a look at today's release of US Jobless Claims:

 

The 452k print this morning marks a step forward from the unrevised 480k print last week, and gets things back in line with the 457k and 462k levels three and four weeks ago, respectively.

 

The rolling average claims improved this week to 465.5k from 468k last week - an improvement of 2.5k, roughly half the slope of 5.3k/week since March (8.5 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders. It’s worth mentioning that claims do experience some seasonality, as people are, on the margin, less likely to file around the holidays, so it is normal to see rolling improvement through mid-January followed by an upswing thereafter. If claims fail to rise post the normal seasonal January improvement this will be a particularly strong sign that the jobless environment is continuing to improve. 

 

MORE IMPROVEMENT IN ROLLING CLAIMS - ClaimsJS

  

For those wondering how to interpret a possible inflection in rolling claims in coming weeks, should there be one, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 490-495k as a near-term rolling upper limit based on the downward channel that's been in place since March.


THE SLOT DATABASE

Slot units shipped to new casinos and expansions will be down significantly in Q4 2009 and 2010.  Here is the detail.

 

 

NORTH AMERICAN

 

The following chart details quarterly slot unit projections into new and expanded casinos. 

 

THE SLOT DATABASE - slot shipments

 

Coincidentally, we project Q4 and 2010 slot unit sales into new and expanded casinos to both decline 49%.  Analysts continue to project positive growth in overall slot sales in 2010.  Considering replacements comprised approximately 50% of total units in 2009, replacement sales will have to explode in 2010 to keep units flat.

 

THE SLOT DATABASE - slot schedule 12.23

 

INTERNATIONAL

 

We haven’t forgotten about the international market.  The following table lists the international casino openings and expansions.

 

THE SLOT DATABASE - international slot schedule


MORE IMPROVEMENT IN ROLLING CLAIMS

The 452k print this morning marks a step forward from the unrevised 480k print last week, and gets things back in line with the 457k and 462k levels three and four weeks ago, respectively.

 

The rolling average claims improved this week to 465.5k from 468k last week - an improvement of 2.5k, roughly half the slope of 5.3k/week since March (8.5 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders. It’s worth mentioning that claims do experience some seasonality, as people are, on the margin, less likely to file around the holidays, so it is normal to see rolling improvement through mid-January followed by an upswing thereafter. If claims fail to rise post the normal seasonal January improvement this will be a particularly strong sign that the jobless environment is continuing to improve.

 

MORE IMPROVEMENT IN ROLLING CLAIMS - 1

 

For those wondering how to interpret a possible inflection in rolling claims in coming weeks, should there be one, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 490-495k as a near-term rolling upper limit based on the downward channel that's been in place since March.


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