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Cowboy Up

“I don't like Bull Riders... They're little men with big egos. Besides, he's got one of them skinny butts like the rest of em'.”
-Kellie Frost

One of my favorite movies of all time is “8 Seconds” (1994), the story of rodeo legend, Lane Frost. Kellie Frost was, of course, Lane’s wife… and in the beginning, she didn’t like bulls anymore than the bears like me right about now.

We aren’t mincing words. We remain bullish for the “Trade” here. I am so bullish that for Halloween I am dressed up like a cowboy at the office. I have my highest allocation to Equities in 2008. I am all bulled up, snake skin boots on and all. My friends up in Calgary, Alberta might not find it to be much of a costume, but if I pranced down to a New York City trading floor, my guess is that I would get a few of them looks that I was getting at about this time last year when I was a raging bear.

Larry Kudlow and I haven’t agreed on much in 2008, but since the man is perpetually bullish, that puts him and I in the same camp all of a sudden. Last night he was chirping about being a “cowboy capitalist”, or something like that… Larry, this morning’s note is for you, buds!

I know, I know… the futures are down pre-market open here in the US, and Larry’s friends on the CNBC desk are talking about bears, Octobers, hedgies, etc… Be thankful for their contribution to this sentiment driven rally. Yesterday was the 3rd consecutive day in US trading where we saw positive breadth (advancers outpacing decliners on the NYSE). This, alongside European stock markets locking down their 3rd consecutive up day is a new new thing. Most of the guys and gals making the “I’m in cash” call are now staring at what should be the 2nd positive week out of the last 3 for the S&P500. Wait, wait… don’t tell the fund of funds that. We are all supposed to be underperforming because of the Great October 2008 Depression, aren’t we?

This is not a Depression folks. We’ve had a great October, and we are looking forward to a blue skies in November. Barrack Obama is going to be the President of the United States, and much like Q3 earnings season in this country, the end of the election line is a positive catalyst now, simply because it is going away. Stocks are discounting mechanisms of future events, not trailing ones… don’t forget that when someone is trying to focus you on the rear view mirror. In this tape, “8 Seconds” of not looking straight ahead might cause you a serious November headache.

Earlier this week we wrote a bullish intraday note to our RE Macro clients titled “Eye on Credit: Signs of a November Thaw?” (www.researchedgellc.com, 10/27), and that remains one of the most glaring fundamental reasons for our newfound “cowboy capitalist” view. The other is the continued steepening of the yield curve. If you are liquid and long cash, you are going to crush the levered long investor who needs long term debt financing. Call us cowboys – we’re dressed up like them today, and we’re cool with that.

The US Federal Reserve seems to be cool with dropping cash from those new USS “Heli-Ben” choppers. In the immediate term, free money is bullish. This week, the Fed initiated its commercial paper program, and this was another bullish catalyst, on the margin. In our macro models everything that matters happens on the margin. The Fed has already bought over $146B in commercial paper this week. Ole Bushy wanted to get this credit freeze “unstuck”, and if there’s ever a day where that Texas lingo rhymes with Research Edge’s reason, our Halloween dress up day is it!

After 25 years of trying to thaw their economic tundra of stagnation, the Japanese reminded us last night that they just don’t get it. The Bank of Japan’s polarized and politicized head of socialism, Shirakawa, broke a split committee vote and moved to cut interest rates last night from 0.5% to 0.3%. If this isn’t embarrassing, it’s just plain funny. These guys are the clowns of the global capitalist rodeo. Investors took the news and chased “wanna be” Japanese stock market bulls right out of the stadium, taking the Nikkei down another -5% overnight.

The media is calling the US futures being down a function of that Japanese selloff. “Hello, bull riding fans,” take your eyes off the clowns and watch the rest of Asia ride them broncos overnight: Taiwan +4%, Thailand +2%, Indonesia +7%, India +8.7%, Philippines +4.6%, Vietnam +3%. This was a bullish session and week in Asian trading. You don’t even need a You Tube to get that. Just look at the math.

The inconvenient truth of the math here in the US (if you went to cash in October that is) is that the S&P500 has ripped the shorts for a +12.5% up move since Tuesday of this week. The immediate term target level for the S&P500 that we issued on the portal yesterday afternoon was 1007, and we’re sticking with that bullish view here this morning. Have the facts changed? Definitely. On balance, they are more bullish today than yesterday.

Halloween pop quiz from the cowboy capitalists: Can you afford to miss a +19% rally in the US market (S&P 500 848 to 1007) and ask your clients for 2 and 20? America will vote on that in “8 Seconds”.

Don’t let the bears, futures, and goblins scare you into cash today. That call is a few months late. Have a great weekend,

Long ETFs

VYM – Vanguard High Dividend Yield ETF – S&P announced yesterday that 786 rated corporate borrowers are on watch for possible downgrade; an increase of 28 more than September and 136 y/y.

JO – iPath Coffee – The Phillipines Department of Agriculture announced spending measures as part of a program to end coffee import dependence by 2015 through improved growing methods.

EWG – iShares Germany – Retail sales came in at -2.3% m/m, +1.2% y-o-y on a seasonally adjusted basis, which was lower than economists forecasts.

FXI – iShares China – China’s State Reserve Bureau may postpone plans to buy copper from overseas on speculation a global recession may push prices even lower.

EWH - iShares Hong Kong – The Hang Seng is down -2.5%, but is a relative outperformer versus the Nikkei which is down -5.0%.

Short ETFs

UUP – U.S. Dollar Index – The USD is rising into month end as foreign investors are likely buying USD to reset hedged equity portfolios.

EWU – iShares United Kingdom – U.K. consumer confidence levels dropped in October to the weakest level since 1974. Barclays is rising $12BN from Abu Dhabi and Qatar sovereign funds. The pound is on course for its largest monthly decline versus the USD since 1992.

Keith R. McCullough
CEO & Chief Investment Officer


PENN’s announcement this afternoon put to rest yet another short fairy tale. Some of these people are shameless. We aren’t afraid to make short calls here at Research Edge but we do so with analysis and research, not fabrication. The PENN shorts had people believing that first, Fortress was going bankrupt before the payment, and when that didn’t work they said Missouri wouldn’t approve the transaction. Well, PENN got the $775 million from Fortress which solidifies it as the strongest company financially in gaming.

Keith shot me an email today that PENN look the most attractive in gaming on the long side from a trade perspective. Despite a nice move the last couple of days, the stock still looks very cheap, which defies its strong balance sheet and liquidity position. I like the odds of betting with Carlino and company.
I personally own shares of PENN

SP500 Levels Into the Close...

Volume is solid out there today. Volatility is coming in hot (VIX is down another -8%). Equity breadth continues to broaden as credit spreads continue to narrow.

We we're bullish this morning. We are bullish into the close. My name is Keith McCullough, and I support this message. Our levels are below:

BUY aggressively = 840.67
BUY on pullbacks = 921.86
SELL the "Trade" = 1007.19


Early Look

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German Bulls!

Our German COO, Michael Blum, never thought he would see the day... but here it is! We are long and getting longer German equities via the EWG etf.

Here are the 2 economic data points that mattered most for Germany this week, begetting our bullishness:

1. German Consumer Price Inflation (CPI) moved lower this month, both sequentially and on a year over year basis (see chart below). Importantly, Germany's inflation rate is amongst the lowest in first world countries right now, testing 2% y/y.

2. German Unemployment ticked down today to 7.5% vs. 7.6% last month. Pardon? Yes Dear Macro money makers, there are some domestic economies that do not tick on crackberries and Goldman's share price.


Crisis of Confidence or Bearishness?

We minced no words this morning. We hope our bullishness hit you like Mohammad Ali's right. We are the new bulls (for a “Trade”). Its global this time, and man is it bearish!

The European Union confidence charts are pretty straightforward. Buy Low.

The European Union confidence charts are pretty straightforward. Buy Low.

Yield curve: Steep and Steepening

As of yesterday there was a 235 basis point spread between 2s and 10s. This is great for the capitalists who have cash.

We thought we would front run CNBC and Fast Money by a few weeks and make a call out on the yield curve, which Keith has been highlighting in our morning meeting. In one sentence - it is steep and steepening.

We are not ready to call the end of recession (it has just begun), but, as many of you know, typically a steep yield curve will foretell an improving economy as demand for capital expands with growth. In the shorter term, the implied margins for a bank are inherently higher as they borrow short and lend long, which should lead to an easing of current credit market tightness. This is one indicator only, but it is on the margin positive, and worth highlighting. Everything in our macro model occurs on the margin.

The yield curve today, from 1-year ago, and from 1-month ago is highlighted below. Internally, we focus on the spread between 2s and 10s, which have steepened dramatically. As outlined below, the spread was at 60 bps 1-year ago, as of 1-month ago it was 191 bps, and today is at 235 bps.

Daryl G. Jones
Managing Director

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