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Asian Central Banking: Ben Bernanke, Take Notes...

Weakness in Asian currencies was one of the stealth leading indicators of their 2008 economic growth slowdown. This week that “Trend” has started to reverse itself. The Indian Rupee has recovered, predictably, since Singh surviving a political confidence vote. Meanwhile the Philippine Peso had its biggest one day move in the last 7 years overnight, trading +1.3% to back up to the 44 level.

Central bankers in Asia have been proactively hawkish, fighting the good fight on the inflation front. With commodities correcting this week, they’re getting rewarded for their travails. The head of the Philippines central bank came out with explicit comments overnight that he needs to raise rates further. His domestic stock market and currency liked that, and rallied. South Korea’s new President has recently done the same. Korean equities traded up another +2% overnight.

Ben Bernanke, I hope you’re taking notes.

KM

FOUR SEASONS MACAU DELAYED AGAIN

Las Vegas Sands will now try and open the Four Seasons Macau by October 1, 2008. The most recent date I had was August 28th, 2008. Hopefully, the impact of the delay on the budget is limited. No word yet on whether Sheldon’s August birthday party will still be at the property.

Four Seasons Macau under construction

CRI: Why Swing At Such A Bad Pitch?

The main reason I pulled a 180 and got positive on CRI on 6/12 was my view that a long-needed CEO change can get the senior team refocused on actually investing in its brands instead of robbing them of capital and realigning its org chart to facilitate growth – even if it is at the expense of near-term margin. I was pretty confident, in that regard, that new CEO Mike Casey would take advantage of his first quarter out of the box to take down margins by 2-3 points (a level where I think CRI needs to revert to in order to sufficient brand investment capital in place). The 2Q earnings beat certainly proves me wrong there, as Casey printed a decent quarter (and a solid one relative to expectations), when he could have easily tanked the quarter and/or outlook with little recourse.

Does this new team ‘get it’ that it has to play catch-up in investing in its brands to stimulate growth at a consistent rate? This raises an interesting decision tree for me.

If the answer is ‘Yes’ then the timing is still too early on CRI, as there is another guide down to come. Perhaps the sheer magnitude of the changes to come take longer than the 6 weeks since the change was announced. I’m in this camp, and can completely see why it should take time to build the plan – especially given that this plan is likely to not include several senior managers at the company (i.e. Casey needs to walk on eggshells while he cans some colleagues).

If the answer is ‘No’ then this story is back to one where it will rally repeatedly on false starts – only to fundamentally stall due to lack of horsepower to compete. I don’t think this is the case, but tonally – it is THE KEY thing to watch out for. If Casey’s agenda (regardless of how it is discussed on the call) is about ‘tweaks’ to the model instead of material changes in strategic direction, then I’m going to eat crow on this story and head for the hills.


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Don't Be Short, Yet...

In the face of ugly “Tech” earnings outlooks yesterday, the Nasdaq opened weak, but failed to “crack” at my code red support level. Instead, the market found its footing again, rallying smartly into the close. As the facts change, I do. The US market “Trade” facts remain bullish as a result, and it looks like the 1 range that I’m in print with is going to be reached. Now what?

Now that the sharks have bloodied the crowd of “hedgie” seals in the short selling waters, and US Financials have been squeezed for a +31% move in 5 trading days, we can recalibrate our sights. Right on time, after the market close, Fast Money’s “Commodity King”, Dennis Gartman, comes out bullish on the Financials “buying the bank index”, and Larry Kudlow cheered him on, like only one of the Hanson Brothers could. This is AFTER a +31% move – gee, thanks Dennis. He should stick to commodities where he has an admirable investment process.

Alongside them, self professed macro savant, Don Luskin (Strategist for Trend Macro), said on Kudlow last night, “absolutely – summer rally… “we have a recovery on our hands…”? This guy must live in a house with no accountability mirrors. He’s been long and wrong for all of 2008, and he still has the audacity to talk down to everyone on Kudlow whenever we have an up day. The only “Trend” I see in Trend Macro’s call is mental inflexibility.

Cart out Gartman, Kudlow, and Luskin, and buy US Financials today at your own risk. I’ve been running net long for this US market “Trade”, but I will not mistake it for a “Trend”, yet… I need to see more cards… but bears beware… the ones that are showing face up on the tape this morning are bullish. We had a big volume day yesterday, with solid breadth, and a breakdown in volatility (VIX). Commodity country tapes like Russia, Brazil, and Saudi Arabia, are breaking down, alongside US Treasuries. I like what I am seeing for once.

On the heels of the Philadelphia Fed’s Charles Plosser talking up the US raising rates intraday, the almighty inflation river card continued to show expeditious deflation. So far in July the CRB Commodities Index down -11% from its high, and the US Dollar is starting to base as a result. You do not want to be short this hand of macro factors. I moved to +49% net long into the close, my most bullish position on the long/short equity side of my book in well over a year.

Rather than chase the aforementioned consensus crew into a group that’s already moved +31%, I like the idea of being long Asian ETFs and related companies. I splurged and bought the Chinese ETF yesterday (FXI), and I think that’s where you want to be ahead of the Olympic catalyst in August. I am still long back door plays on the Olympics like DWA (Kung Fu Panda), and DELL. I have been bearish on Asia since November, so this is a material shift. We called out China and India yesterday as breaking out on short term momentum indicators (see the portal for charts). This morning you see the “why” as India ripped the shorts closing +5.9% on the session after PM Singh won a political crisis confidence vote. Fortuitously I am out of my India Fund (IFN) short position.

On a relative basis to the US, Asia has sober monetary policy combined with legitimate organic economic growth. Only part of the stock market value proposition could change for me here in the US if Bernanke goes ahead, provides some leadership, and raises rates. On the US economic growth front, I am still begging for scraps as to where we’re going to find it, sans the “Blue Magic” Wall Street leverage. Heck, even George Bush is calling out Wall Street as being “drunk” at this point. When Bushy finds the fundamentals, it means they are not trivial anymore folks.

A +6.5%rally in the S&P 500 in 5 trading days is not going to bring back easy “Access to Capital”. As 10 year yields tick up again this morning to 4.14%, “Cost of Capital” continues to rise; meanwhile, the worrisome sound of “Re-regulation” of the US Financial system is in motion. So tread carefully up here on the momentum “Trade” high wire. Long Financials? Not here. But don’t be short this market, yet…

Good luck out there today,
KM




HE’S BAAAACK!

Wyomissing, PA is certainly not the most convenient place for a management meeting but it was well worth the $50 in gas to spend time with these value creators. For those of you who don’t know, Chairman and CEO Peter Carlino has generated more shareholder value per share in the last 10-15 years than any other management team in the gaming business. If I had any doubts about his desire to charge forward following the merger termination, they were quickly squashed. Now, armed with $1.4bn in new liquidity "wrestled away" from Fortress and Centerbridge, PENN can capitalize on an environment that appears ripe for some more value creation. Assets and gaming companies (including PENN) are cheap and there is literally no competition on the buy side. I’m not sure that sellers will be lining up to give away assets at fire sale prices. However, this is a patient management team that will not rush to spend its new found largesse just because it's burning a hole in its pocket. Creativity may be the key to “wrestle assets away” from unwilling sellers. There are a few companies that may soon have a gun to their heads to sell assets. You can be sure PENN will be there to “help” them out.

I’ll have more posts on this topic and a few other others regarding PENN coming soon to a portal near you.

Aussi Inflation Abating

Australian wholesale inflation came in significantly lower than anticipated yesterday at 1% vs. a median forecast of 1.6%, sparking a market rally in advance of the CPI number on Wednesday. This is one of the main reasons why Asia acts better than Europe. Rates hikes have been more vigilant across the region, particularly by Aussi central banking head, Glenn Stevens.

Reported inflation in July could come in lower than consensus expectations, globally. I think this is one of the primary reasons as to why the shorts are being continuously squeezed this past week, and why the top side of my short term trading range can be achieved.

KM
Chart by Andrew Barber, Research Edge

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