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Fed likely to go 50 (Another look at China, India, Las Vegas Sands, and an introduction to Taiwan)

January 30th, 2008 Michael McDonough
This mornings GDP reading of +0.6% will outweigh the positive ADP number and lead to an additional cut of 50bps at today’s meeting. However, if the Fed were to cut by only 25bps we would expect a large sell-off in the US and global EQ markets; leading to in our opinion to another good buying opportunity. Fundamental economic data in the US is still not pointing towards a US recession, but both the EQ and FI markets continue to price one in. Our view is that the housing problem continues to be just that, a housing problem. We would need to see a clear spill-over into consumption before we began to worry. Keep in mind housing wealth is only a small component of consumption, with financial wealth and income making up the rest. Financial wealth and housing wealth tend to have a lagged and marginal effect on consumption verses income whose effect is both strong and immediate. Meaning, so long as we continue to see good employment (claims below 350K, etc..) and growing income levels we do not expect to see a recession. The way we see it is that we are still in the midst of a good buying opportunity and remain bullish on China, India, and Las Vegas Sands.

As an aside, we are now looking into the Taiwanese EQ market. The recent parliamentary elections in Taiwan provided the China ‘friendly’ party with a landslide victory; a result which is likely to follow in the March 22nd Presidential elections. Once the new administration takes power they will likely strengthen ties with China and Taiwan will begin to share in China’s economic success, from which it has remained mostly isolated. To take advantage of this market we are looking into the ETF ‘EWT’, which attempts to track the braod Taiwan EQ market.

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