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"The only blind person at Christmas time is he who has not Christmas in his heart."
-Hellen Keller

Like most countries in the Commonwealth, Canada has her own “Boxing Day” traditions. I would be remiss not to call out the most obvious, which is Day 1 of the World Junior Hockey Championships. This is the jersey that all little boys growing up in this country aspire to wear in front of their families on the day after Christmas.

“Boxing day”, of course, does not allude to athletics. Its origins date back hundreds of years to when the wealthy would take the day and seize it as an opportunity to give back to both their employees and people of their respective communities who were less fortunate. Rather than chasing CNBC for the “latest” holiday shopping stat this morning, one has to wonder where and when the Street went wrong over the course of time. Christmas is about giving, not taking.

Perhaps it takes a blind woman’s genius to boil this point down to its deepest simplicity. The aforementioned one by Hellen Keller certainly gets me there. This morning’s #1 Bloomberg news headline is “Holiday sales tumble…”, and I can’t help but take the other side of this building consensus of negativity.

Over a year ago, the US Consumer Discretionary stocks were trading 50% higher, and hopes were abound that the “activists hedgies” who bought over valued wares like “Tar-g-eh” were going to warm the hearts of the levered long community with cashmere sweater sets. Now that the real hedge funds (one’s that actually hedge), are starting to take market share, I for one, am thankful for that. Most of our clients stayed long Wal-Mart (WMT), and short Target (TGT) in 2008.

If you look at Target’s stock price as a proxy for all of last year’s “holiday sales” and “activist investing” punditry, the metaphor rhymes. I remember sitting here at my desk on Boxing Day of 2007, listening to the entertainers talk about “Target taking share in a different demographic”. The stock price, meanwhile, has lost -37% of its value since December 26, 2007.

“Activist”, Billy Ackman, either forgot or was unaware that the US Consumer spending cycle is cyclical. Ostensibly, if you thought 64 consecutive quarters of positive consumer spending in this country was an economic “Trend” that you could straight line out to forever, you probably felt pretty good about telling all of your friends to buy into these candy canes dancing in your head too. Don’t blame Billy – he has been You Tubed as one of the many who “don’t do macro.”

I bought the US Consumer Discretionary Index (XLY) in our virtual Portfolio on Christmas Eve. Not because I had Christmas in my heart – rather because proactively predicting the Street’s Boxing Day narrative is about as simple as “making a call” gets. When there is a lack of a narrative, the Street will make one up… and now that the US Consumer stocks are outperforming nearly every one of the 9 sector indices we follow, we think they’ll ultimately change the #1 headline to something more positive.

Stocks discount expectations of the future. They don’t really care about the past. While Target miserably underperforming the sector since its early December rally isn’t our problem (since December 10th, TGT is down -17%), we have to be asking ourselves why it is that a large population of investors being “short the consumer”, after the group has lost ∏ of its value, still makes sense.

George Bush has a few weeks left in office, and before he moves back to Texas, he may very well leave US Consumers with the most wonderful gift of all. With oil trading at $36/barrel, interest rates at ZERO, and a stock market that’s on track to have one of its best sale prices in the last 150 years, we have to tip our hat to the man who may be the world’s most misunderstood.

You see, rather than getting all caught up in his approval ratings, and that he’s still lookin’ to get that there credit thing “unstuck”, contrarians may be best served to be focused on the good intentioned Texan having had this master plan in his back pocket for the last 8 years. Remember, Bush has taken the Presidency as an opportunity to read books and stuff – maybe he is signaling a return to a Boxing Day of giving. If Americans were ever ready for that change, now is the time.

Enjoy the rest of your weekend with your loved ones,
KM

Long ETFs

SPY-S&P 500 Depository Receipts – Front Month CME S&P 500 contracts opened up slightly, trading as high as 866.5 before 7AM this morning.

XLY Consumer Discretionary SPDR - ShopperTrak estimates visits to U.S. retail stores declined 5.3% -a 24% percent Y/Y drop, during the weekend of Dec 19-21.

USO - U.S. OIL FUND – Front month NYMEX Light Sweet crude contracts traded as high as 36.9 before 7AM this morning as the market focused on reports of OPEC member production cuts in compliance with last week’s decision.

GLD -SPDR Gold Shares – Spot gold traded up slightly to $848.50 an ounce this morning on the Tokyo Commodity Exchange.

VYM – Vanguard High Dividend Yield- Commerce Department data shows consumer spending fell by 0.6% in November - less than forecast as cheaper gasoline helped fuel more spending.

DIA –DIAMONDS Trust Series – Front Month CBOT DJIA contracts opened up slightly at 8,430 this morning.

EWT – iShares Taiwan —The Taiex index closed up 0.3% at 4,425.08 this morning, a decline of 5.7% for the week.  

EWZ – iShares Brazil — Central Bank foreign currency inflow estimates showed a net of +$29 million in the first 19 days of December vs. $3.1 billion in all of November.

EWH –iShares Hong Kong – From the South China Morning Post: Hong Kong retailers experienced increased traffic over the holiday due to more visiting mainland shoppers than last year with some malls reporting more than 10% increases in shoppers Y/Y.

FXI –iShares China — The CSI 300 declined 0.5% percent to close at 1,862.10, down 9.3% for the week. The yuan declined 0.15% to 6.8414 this morning as NBS data showed Chinese industrial companies’ net income increased 4.9% in the first 11 months of 2008, the slowest pace of growth since the agency first began reporting the data.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust - The yen traded down to 90.47 USD/127.19 EUR this morning as Trade Ministry data showed  factory output for November decreased -8.1% over the prior month.

Keith R. McCullough
CEO & Chief Investment Officer