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R3: Fila/Acushnet, JCP, Choo, & FL

 

R3: REQUIRED RETAIL READING

May 23, 2011

 

 

 

 

RESEARCH ANECDOTES

  • Calendar Watch: There are several investor conferences this week; including a ‘management access day.’ The usual characters will be participating.  We’re firm in our view that incremental margin news will be negative. The week ends with the Ira Sohn conference, where the hedge fund elite get to go and pitch their book. Do you think that Ackman just might pitch JC Penney a week after he was on the cover of Barron’s? This is a name we didn’t believe in his financial engineering at Target, and clearly don’t like it at JCP. This remains at the top of our list of shorts. See our note from Friday (JCP/TGT/GPS: Press the Call) for more details, as well as the reason for our newfound bullishness on TGT after being negative all year.
  • In a positive sign that one of management’s key initiatives is taking hold, the strongest comp gains at FL in the 1Q came in apparel up over 20%. While margins remain below footwear for now, the ramp in performance in the category is certainly notable. With little competitive distinction in footwear, the company is using apparel as a key differentiator at each of its banners such as Rocawear jeans at Footaction, technical product at Foot Locker, and licensed team apparel at Champs. While making progress here, there continues to be significant opportunity in apparel for FL that will provide an incremental boost to both top-line and margins.
  • Consistent with its peers, management of HIBB confirmed that they are beginning to see price increases coming through now in the 2Q. Footwear on the other hand, will not see increases until the 2H and then are going to be up MSD. Athletic footwear/SG retailers both expect to take pricing in select styles, typically premium product compared to broader-based increases. To date, management teams continue to be more concerned over cost inflation as it relates to 2012 than the balance of 2011.
  • Despite a sharp decline in toning sales in the 1Q, strength in running more than offset declines lead by the growing popularity of the lightweight category. Perhaps more notable is the fact that Shoe Carnival was able to post higher ASPs in the athletic footwear despite a 40%+ decline in toning shoe ASPs during the quarter. Also worth noting is the upcoming launch of SCVL’s e-commerce site in the 2H. While the company remains one of the few athletic retailers without a transactional site (HIBB is another), the company has been ramping its marketing spend to drive customers to its current platform where they can pre-shop product and print out discount coupons since BTS last year an effort that will help drive sales starting day one. While late to the party, the upside here is that the industry’s fastest growing channel will provide an incremental boost to the top-line when they’ll need it most.
  • A growing divide for product at ANN based on price is clearly evident in Q1 results. While sales below the key $50 price point at its LOFT concept accounted for 90% of sales in Q1 compared to 77% last year, the company noted that it can’t keep select novelty and suiting pieces in the store. To the extent price increases are expected to be taken in higher end items, fashion risk will elevate with less demand on mid-tier product.

OUR TAKE ON OVERNIGHT NEWS

 

Fortune Brands to Sell Titleist Golf Unit to Fila Korea - Fortune Brands Inc. (FO) agreed to sell its Titleist golf unit to a group led by the owner of the Fila sport apparel brand for $1.23 billion in cash, as part of its strategy to focus on liquor. Fortune Brands will realize proceeds of about $1.1 billion after taxes and expenses from the sale of the Acushnet business, which makes Titleist balls, according to a statement from the Deerfield, Illinois-based company. The deal is expected to close this year, it said. The sale is part of Fortune Brands Chief Executive Officer Bruce Carbonari’s plan to dispose of the company’s golf and home and security businesses by the fourth quarter. Fortune, the maker of Jim Beam and Maker’s Mark bourbon, Sauza tequila and Courvoisier cognac, said it plans to rename itself Beam. “This is obviously an important first step for Fortune,” said Jonathan Rouner, head of mergers and acquisitions for the Americas at Nomura Holdings Inc.  <Bloomberg>

Hedgeye Retail’s Take: The price came in in-line with what we expected to see for some of the best brands in golf as we highlighted in our 5/9 note (“Acushnet Bids Due Today”). The biggest callout here is that Adidas wasn’t the winning bidder – a positive for Nike – and that a Fila-lead consortium ended up victorious. Over the past year, Fila has taken material steps to becoming more relevant as a global player. The company launched its first basketball shoe in April of last year, then went public in the fall, and is now a major player in golf overnight. Given the popularity of golf in Korea, this is a great fit at what appears to be a good price for two of the most powerful brands in golf (Titleist and Foot Joy).

 

Labelux Group Acquires Jimmy Choo - Labelux Group, which on Sunday announced its purchase of Jimmy Choo, said the London-based brand has miles of unfulfilled potential —and nowhere more so than in Asia.The group, whose holdings including Bally, Derek Lam, Zagliani and Solange Azagury-Partridge, bought Choo from TowerBrook Capital LLP for an undisclosed price.  It beat competitors including TPG Capital and Jones Group Inc. in a deal sources say valued Choo at 549 million pounds, or $889.4 million. The sale to Labelux comes 10 years after private equity owners Equinox, under the guidance of industry investor Robert Bensoussan, first purchased Choo, valuing the company at 20 million pounds, or $32.4 million. Jimmy Choo has changed hands twice since then, its size, geographical reach and valuation spiraling each time. Labelux is Choo’s first industry, non-private equity, partner. All figures have been converted at current exchange. <WWD>

Hedgeye Retail’s Take: JNY’s shareholders should be thrilled that the company lost the bid. This was a disaster waiting to happen. Still, the fact that it likely bid something in the $700mm range is unsettling for a company with JNY’s cost structure and balance sheet.

 

PPR is in No Rush for Acquisitions - PPR, the parent of Puma, said it will take its time in deciding whether to buy and sell assets, with the focus being on creating value for the company. It recently reached an agreement to acquire skate and surf apparel group Volcom. Volcom will be the first brand outside Puma in PRR's new Sport & Lifestyle Group, which is being headed by former Puma CEO Jochen Zeitz.  The group is also currently selling some retail assets (catalog sales division Redcats and electronics retailer FNAC) while focusing on its luxury brands such as Gucci and and acquiring additional sports & lifestyle brands to join Puma. Speaking at PPR's annual shareholder meeting, CEO Francois-Henri Pinault noted: "We will take the time necessary to select brands to join us and to sell our retail activities under the best conditions." <SportsOneSource>

Hedgeye Retail’s Take: The first sign to suggest that PPR may actually take time to integrate its recent acquisitions. Hats off to ‘em. For shareholders’ sake, let’s hope they stick to it.

 

Brand Growth Key to J.C. Penney's Growth Strategy - J.C. Penney Co. Inc. thinks it can increase sales by focusing on accessories and jewelry in its stores’ “center core” and accelerating its rollout of branded shop-in-shops, said Myron “Mike” Ullman 3rd, president and chief executive officer, during the company’s annual meeting Friday at its headquarters here. “By enhancing the sense of discovery in our central core, there is a substantial upside, including increasing sales-per-square-foot and reinforcing J.C. Penney as a style destination,” he said. Call It Spring fashion footwear by Aldo Group and MNG by Mango boutiques will both extend to 500 doors by fall, Ullman said, up from 100 and 292, respectively. Sephora, with 254 locations now, will be in 305 stores by the end of January. Call It Spring and Sephora are both generating sales-per-square-foot about three times the company average of $210, a spokeswoman noted. In addition, the chain’s spring rollout of licensed Modern Bride jewelry collections to all 1,068 stores has spurred “strong gains” in the bridal business, Ullman noted. <WWD>

Hedgeye Retail’s Take: Mango and Sephora are critical initiatives for JCP, but the retailer isn’t the only one fighting for traffic. One of the key concerns here is the retailers’ ability to pass pricing through with a relatively smaller portion of premium branded product something Penney’s peers are likely to use to their advantage when it comes to drawing traffic in the 2H. More importantly, JCP’s locations and sheer box size mean that it needs to be viewed as a destination – ie incremental customers have to go out of their way to shop there. This takes real dollars to market and promote the brand. In other words, it is something that would likely make margins go down before they go up.

 

Macy’s Pushes Innovation Agenda - Risk-taking and retailing aren’t exactly kindred spirits. But for Macy’s Inc., the time is right to test new concepts and for “encouraging a higher level of risk-taking across all functions,” Terry Lundgren, Macy’s chairman, chief executive office and president, said. “We have to try new things — all kinds — and if one of them doesn’t work, that’s OK,” Lundgren said. During Macy’s annual meeting and press conference here Friday, Lundgren and other Macy’s executives outlined initiatives and tests in the works, in an effort to portray a culture of innovation at the $25 billion, 850-unit department store operator. Decades ago, Macy’s did have a reputation for innovation, with marketing extravaganzas like the Fourth of July fireworks and launching The Cellar in San Francisco in 1971, though the image was lost in the following years as the company got sidetracked by bankruptcy, a takeover, consolidations and management restructurings. <WWD>

Hedgeye Retail’s Take: Being in the position to take shots on new initiatives is one of the byproducts of significantly outperforming your competition. Taking risk heading into the 2H is about as counter-consensus as it gets at the moment, but to the extent Macy’s can uncover a few new successful concepts, this is exactly what will keep the company out in front in retail. That said, we want to see all companies take shots when they should – not when they can. There’s a difference. When a company ‘can’ is usually towards the peak of its cash cycle. Incremental returns rarely look good thereafter.

 


WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS

Margin Debt Approaching Prior Pre-Crash Highs

Today we are introducing the NYSE Margin Debt level as a component of the Risk Monitor.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (in millions).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  Currently, we are very close to that level.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through March.  We will update this analysis monthly when the new data is released.

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - mgn debt

 

This week's notable callouts include Greek bond yields making another new high and mortgage insurer swaps widening. 

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 3 of 11 worsened / 6 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - summary

 

1. US Financials CDS Monitor – Swaps mostly widened across domestic financials, widening for 18 of the 28 reference entities and tightening for 10. 

Widened the most vs last week: PMI, MTG, RDN

Tightened the most vs last week: ACE, CB, GNW

Widened the most vs last month: GS, PMI, MTG

Tightened the most vs last month: ACE, ALL, GNW

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe widened last week.  36 of the 38 swaps were wider and only two tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - euro cds

 

3. European Sovereign CDS – European sovereign swaps rose last week, climbing 24 bps on average.  Greek CDS led the way higher, rising 141 bps or 11.1%. 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates remained flat last week, ending at 7.12 versus 7.14 the prior week. A data error or methodology change appears to be the cause of the step function in the Bloomberg series.  We are awaiting clarification on this shift.  

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index ticked down very slightly after several weeks of treading water, ending the week at 1618 versus 1621 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - lev loan

 

6. TED Spread Monitor – The TED spread continued to decline off its high last week, ending the week at 21.7 versus 24.0 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index bounced along the bottom, gaining 1.9 points versus the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 113 bps versus the prior Friday.

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - greek bond

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  Last week spreads were flat at 104 vs 105 the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows.  Last week the series reversed its decline mid-week, rising 43 points by Friday.

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - baltic

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 1 bp to 263 bps. 

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.2% upside to TRADE resistance, 0.6% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: MI SWAPS, EU SWAPS & NYSE MARGIN DEBT AT DANGEROUS LEVELS - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: MCD, SBUX, KKD, PZZA, TXRH

TALES OF THE TAPE

 

  • Subway Says It Will Open 2,000 Stores in North America This Year - Bloomberg
  • Some Restaurants Shunning Daily Deal Sites - Restaurant Finance Monitor
  • SBUX - Lady Gaga has teamed with coffee giant Starbucks for the release of Born This Way after it was announced that Gaga and Starbucks will offer free downloads of the new Gaga single "Edge of Glory".
  • BEEF PRICES - The number of cattle being fattened for beef rose by more than expected last month while meat in cold storage surged, data showed on Friday, as a severe Southern drought forced ranchers to sell stock quickly - Reuters
  • KKD - reports Q1 EPS $0.13 vs Reuters $0.09; Company store comps +5.8% vs. +3.4% y/y; Domestic franchise comps +4.6% vs. +2.7% y/y
  • CPKI - was a positive outlier on Friday 
  • PZZA - announced the appointment of W. Kent Taylor to the company’s Board of Directors.
  • SBUX - Borders Group Inc plans to end a pact with Seattle’s Best Coffee and to begin operating its own in-store cafes as it restructures and tries to become profitable.

TALES OF THE TAPE: MCD, SBUX, KKD, PZZA, TXRH - qsrTALES OF THE TAPE: MCD, SBUX, KKD, PZZA, TXRH - fsr

 

Howard Penney

Managing Director


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Temporary Safety

This note was originally published at 8am on May 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”

-Benjamin Franklin

 

In “The Road To Serfdom”, F.A. Hayek ends an excellent chapter titled “Security and Freedom” with that very American quote from Benjamin Franklin in 1755. Compare and contrast that thought with this quote from America’s central planning elite last night at the Harvard Club:

 

“Fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength… and the country’s ability to protect our national security interests.” –Tim Geithner

 

Notwithstanding that Geithner has been a Government Gopher since 1988 (when he joined the Treasury department), the man has since blossomed into a full-fledged storyteller of fear mongering.

 

Whether it’s been Geithner serving as:

  1. 1998-2002 - Squirrel hunter and yes-man in chief of the Robert Rubin/Larry Summers’ era of ‘we’re bigger than markets’
  2. 2003-2009 – President of the Big Broker Club at the Federal Reserve Bank of New York
  3. 2009-2011 – US Treasury Secretary who has overseen a US Dollar Index decline of -16% since he assumed office

It’s no secret that I disagree with Geithner on many scores, but I wholeheartedly agree with him on this - the political strategy of scaring the hell out of whoever he can. With his track record of contributing to this country’s fiscal problems, you should be afraid – very afraid.

 

How we got here and why it’s not going to change where we are going anytime soon has been compiled in my Early Looks since I decided to start writing about real-time risk management matters 3.5 years ago. Of all the fundamental conclusions I have had about Big Government Intervention, here are two that have achieved the deepest simplicity:

  1. It shortens economic cycles
  2. It amplifies market volatility

“It”, being Big Government Intervention… and the Government Gopher being the last man standing who is dumb enough to fundamentally believe that it’s the American public that’s too dumb to understand what’s going on here.

 

Now when you call someone “dumb”, the elitists who are concerned with titles and resumes dismiss you – but I care as much about their opinion as I do someone who says there should be no fighting in hockey.

 

Dumb is as dumb does – and if they want to suit someone up in a Ph.D. in Economics dress and send them on over to 111 Whitney Avenue in New Haven, CT to tell me that what Geithner has been doing since 1988 has been smart, I’ll be waiting for them.

 

“It” is the Big Government Intervention. “They” are the bureaucrats. We are The People.

 

Back to this Global Macro Grind

 

Stocks, Bonds, and Commodities all reminded us yesterday of one fundamental reality that virtually the entire sell-side has had wrong for the past 5 months – GROWTH IS SLOWING. So let’s go through that:

 

1.   Stocks – closing down for the 3rd consecutive day, the US stock market has been down for the last 3 weeks. The rest of the world’s stock markets, started going down a few weeks before that – immediately following The Bernank’s pandering to the central planning elite to remain what we have coined as being “Indefinitely Dovish” (Q2 Macro Theme).

 

2.   Bonds – US Treasury Bonds in particular have been ripping to the upside (see Chart of The Day) ever since The Bernank reminded the world that both his growth and inflation forecasts were wrong (again). Growth Slows As Inflation Accelerates. We remain long Long-term US Treasury bonds (TLT) as a way to play the “Indefinitely Dovish” Macro Theme. We’re also long a US Treasury Flattener (FLAT).

 

3.   Commodities – May has been a mess. And a mess is what you should expect the likes of the Gopher to do to The Correlation Risk that’s imputed in daily US Dollar moves. You cannot experiment with blasting your currency to all-time lows and not assume unintended consequences. Temporary Safety, Mr. Geithner, this is not.

 

The good news here is that The People get it. They get the principles of individual freedom and national security. They also get that this is the only time in this country’s 235 years of economic history that some central planner has been able to politic on the platform that the markets are “national security” issues.

 

Geithner has spent the last 23 years of his life working on this. He’s only 49 years old. Imagine spending 47% of your life contributing to the “foundations” of America’s fiscal problems. Trust him – he knows his stuff.

 

Institutional money managers don’t trust the US stock market rally as much as they did while the stock market was going up – shocker. This week’s Bull/Bear Sentiment reading (Institutional Intelligence survey) saw the spread between Bulls and Bears narrow – big time.

  1. Bulls dropped from 51% last week to 45.6% this week
  2. Bears inched up to +18.5% last week to 19.6% this week
  3. Spread (Bulls minus Bears) narrowed from 32.5 points last week to 26 points this week 

I certainly make my fair share of mistakes, but I generally don’t pose a “national security” issue to our country and I certainly don’t make a habit of chasing markets at YTD highs. That’s where we were 3 weeks ago when the Bull/Bear Spread was +38.5 points wide and I shorted US stocks.

 

Please don’t let America’s central planning storytellers promise you Temporary Safety in exchange for their long-term job security.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are $1472-1497, $94.91-99.67, and 1319-1336, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Temporary Safety - Chart of the Day

 

Temporary Safety - Virtual Portfolio



Serving The End

“The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everyone believe in those ends.”

-F.A. Hayek

 

That’s the first sentence of Chapter 11 titled “The End Of Truth” in F.A. Hayek’s “The Road To Serfdom” (page 171). “And the most efficient technique to this end is to use old words but change their meaning.” (page 174)

 

As they did in using the old techniques of dollar devaluation and debt monetization in the 1970s, messiahs of the Keynesian Kingdom continue to shop us their central planning policies. But that doesn’t mean that the rest of us have to follow.

 

Whether it’s the center-right Popular Party crushing Zapatero’s Socialist party in Spain this weekend or watching America’s political class go after Paul Ryan for having a spine on debt/deficit reform – no matter where you go out there this morning, there they are – The People.

 

The People get the storytelling. The People know when someone is lying to them. The People will protect their capital against the bureaucrats.

 

In the last 4 weeks, I have protected my family’s hard earned capital by moving to a 61% position in Cash. Since we do in fact keep score at Hedgeye every day, you’ve seen me hold myself accountable to these asset allocation decisions in real-time. I moved to a ZERO percent allocation to US Equities last Thursday as people were bucking up to get Linked-In.

 

This is not to say that I haven’t made my fair share of mistakes in 2011. Neither is it to suggest that I won’t buy back some US Equity exposure if I see my intermediate-term TREND line of support hold (SP500 = 1321). This is simply a reminder that I have an outstanding research team here in New Haven, CT that’s had an outside of consensus view in 2011 – and we’re sticking to it:

  1. Q1 2011 – Growth Slowing As Inflation Accelerates
  2. Q2 2011 – Deflating The Inflation

These two research views did not support chasing Equity or Commodity prices into their respective 2-year highs in April. As Global Macro Risk Managers, we are tasked with getting the slope of A) Growth and B) Inflation right. If we can do that, we take out a lot of risk.

 

In terms of what that means in the Hedgeye Asset Allocation Model, here are the moves I made week-over-week:

  1. Cash = 61% (down from 52% last week and 34% at the end of April)
  2. International Currencies = 18% (Chinese Yuan – CYB)
  3. Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. International Equities = 3% (Germany  - EWG)
  5. US Equities = 0%
  6. Commodities = 0%

Of course, anytime I move to a ZERO percent asset allocation to anything, I get a lot of questions. Most of the questions surround how much conviction we have that The Bernank isn’t going to stop gravity.

 

With gravity being Growth Slowing

 

What’s most interesting (but least surprising) about recent week-over-week moves is that the US Dollar Index continues to drive The Correlation Risk in asset prices. Typically, DOWN DOLLAR would equate to big “REFLATION” trades in everything US Equities. Not so much last week. After “REFLATION” becomes The Inflation – don’t forget that Deflating The Inflation comes next!

 

My longest of long-term base cases about Fiat Fool policy is that:

 

A)     It shortens economic cycles

B)      It amplifies market volatility

 

Therefore, it stands to reason that once you have debased your currency (3 weeks ago, the US Dollar was down -17% since Obama/Geithner took over in 2009) the stock market pops turn into drops.

 

And from what I can tell, all this popping and dropping is making The People tired…

 

After a 2-week +3.8% pop, last week’s US Dollar Index move was only down -0.2% to $75.65. Here’s what everything else did:

  1. SP500 = DOWN -0.3%
  2. Russell 2000 = DOWN -0.7%
  3. Euro = FLAT at $1.41
  4. CRB Commodities Index = UP +0.9%
  5. WTI Crude Oil = UP +0.5%
  6. Gold = UP +1.0%
  7. Copper = UP +3.5%
  8. Volatility (VIX) = UP +2.1%
  9. 2-year UST Yield = DOWN -3.7%
  10. 30-year UST Yield = DOWN -0.2%

So what does our Chaos Theory model tell us about these moves? What’s the deep simplicity of Mr. Macro Market’s messaging?

  1. GROWTH - Growth Slowing (stocks and UST bond yields falling for 3 consecutive weeks in unison)
  2. INFLATION - Deflating The Inflation (commodities are bouncing to lower-highs on low conviction rallies)

How does this all end? Well, if it means that we’re going to sustain anything that remotely resembles The Stagflation of the 1970s, that’s really bad for the market multiple you’ll pay for peak-cycle earnings (in 1974 the SP500 traded to 7x). As to how the storytellers will be Serving The End, like Europe’s proverbial pigs, we’re not sure this decade’s version of the Keynesians will fly.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $95.58-$101.13, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Serving The End - Chart of the Day

 

Serving The End - Virtual Portfolio


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