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Strong Side: Australian Jobs

The job market down under has been remarkably resilient so far … this morning’s unemployment report hammered home another win for Glenn Stevens and co., who continue to manage monetary policy the way that the objective economists out there admire.

The Australian markets received a bullish surprise in October’s employment numbers which saw a 34,000 increase while official Unemployment registered unchanged at 4.3%.

With a cooling global market for metals and energy commodities, no one seriously expects that unemployment levels won’t rise in the coming months. In a statement today Deputy Prime Minister Julia Gillard acknowledged the positive job data but cautioned that "while we are better placed than most other countries, Australia is not immune from the global financial crisis. The global crisis will impact on growth and employment here, and the government does expect to see unemployment rise."

We are long Australia via the EWA ETF. Despite the reality of slowing demand for commodities and a volatile currency environment we continue to think that the market there is among the strongest in the developed world.

If you have been reading our work since we started, you know that we have been fans of central bank chief, Glenn Stevens, for a long time now. Under Steven’s management the Reserve Bank held rates high while the Australian economy experienced the biggest market boom in decades. Now, with metal and energy prices slashed back to 2007 price levels, Stevens has room to maneuver that poorly prepared market students like Ben Bernanke do not. So far, his recent rate cuts appear to be providing a soft landing down under.

Keith McCullough & Andrew Barber
Research Edge LLC

Eye On the UK: Shock Therapy!

British housing numbers that were released today didn’t surprise anyone with a pulse, but the BOE’s reaction did!

The BOE’s 150 basis point cut today, took the benchmark rate to its lowest level since Winston Churchill’s second term as Prime Minister. We attached a long-term chart of Rates and GDP growth below to put the present situation in context.

Mervyn King is not the only central banker pumping liquidity into the system today – both Switzerland (which we are long via EWL) and the EU cut rates today by 50 basis points each, but he does appear to be the most desperate. The British economy has been reeling under the weight of worsening data: HBOS housing numbers declined by almost -15% year over year, the worst performance since 1983, while yesterday’s industrial production numbers confirmed that manufacturing contracted in August, adding to the longest losing streak since 1992.

In a theme which is echoed in other markets where lawmakers have rushed to bail out failing banks, Gordon Brown’s administration is exerting increasing pressure on banks who participated in the government recapitalization program to begin actively lending again and pass lower rates through to borrowers rather than hoarding capital.

We continue to be short the UK via the EWU ETF. As one of the more levered and poorly managed economies in Europe we anticipate relative weakness there for the seeable future.

Andrew Barber
Director

Shippers Need Their Cash Too!

One of the great advantages that is emerging from our growing (exclusive) network of research contacts, are the daily insights. Below is a data point from one of our contacts in Asia on shipping, liquidity, cash, etc...
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Keith,
just spoke to a few friends of mine in the commodity contract shipping business in the south pacific/australia region.

most of them allow 90 days for payment for shipping services rendered
- and tomorrow's the day that a significant number of accounts on the "shippee" side are due. according to them, something like half of their clients have already said they won't have the cash to pay up on product that has already been shipped, and are thinking that bankruptcy is their only option.

guess they're sitting on inventory they bought 90 days ago - often on revolving credit lines - and can't recoup their costs thanks to a huge dip in both demand and prices.

they're actually calling tomorrow "black friday".

so heads up.
-Friend of the Research Edge Network

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Schwarzenegger: "We'll Be Out Of Cash By February"

No, that's not good! That's "we" as in the Golden State of California...

If that's not the most bearish headline of the day, I don't know what is.

Cost of long term capital will continue to increase as access to cash continues to tighten.
Be careful out there,
KM


WRC: A Balloon Can’t Stay Underwater Forever

This was perhaps the earliest (and often most painful) call of my career. But you can only hold a balloon underwater for so long. WRC is finally being exposed for what it is. A massive over-earner.
A colleague shot me an email this morning saying “Warnaco finally pulled a Warnaco!” How true. I’m not going to waste your time or mine giving the run-down of what they said on the call, or what happened. The bottom line is that this has largely been a FX-induced margin story as the company printed too much FX benefit, and understated the impact to the Street. Check any of my past posts for the math. I won’t bore you with it now.

So what’s in the stock now? That a 10% margin is not sustainable after all without FX tailwind. 7% is closer to reality. But what happens if a new Obama Administration takes up rates in '09 and the dollar along with it? Then FX turns into a headwind, and there is no reason margins cannot go back to the low/mid single digit range. That’s when cash flow gets to a point where we need to start to look at debt covenants again.

There will come a time to buy this stock. But even with a 30% hit from yesterday – and 2/3 off its 1-year high, we’re not there yet.

The Consumer Needs Prozac

Not a shocker that spending continues to decelerate across the board. What happens in Nov/Dec when unemployment is 1% higher vs. year-ago, and we comp a negative ’07 personal savings rate?

I didn’t see much in this morning’s sales numbers that change my prevailing view on the consumer. In fact, fundamentally I have to admit that the yy decline at many retailers is accelerating faster than even I’d have thought – and per my Oct 12 Consumer Spending Analysis, I think we’ll see a $170bn decline in consumer spending in 2009. A few points…

While we can hardly call what we’re seeing today a blanket positive stock reaction with 1 only in 5 retailers on my screen up for the day – it is interesting to note that the positive moves are largely in larger liquid names like JCP, KSS, M, JWN, COST that posted horrible numbers.

Let’s try to ex-out all the Oct noise for a minute. Every sector of retail that reported comps showed a sequential decline in trends on a 1, 2 and 3-year run rate by an average of 200-300bp. Sure, there is share shift within each segment and each company. Both the overriding trend is big.

What’s next? A massive question mark. November of last year was big across the board. When adjusting for calendar shifts and looking at Nov and Dec together, we’re still looking at 2% trend-line spending heading into holiday ’07. On the plus side, gas prices are lower than the year-ago period. But unfortunately, it does not come close to the magnitude needed to offset 1% higher unemployment, and the fact that during holiday ’07 the personal savings rate went below zero to help fuel spending that shouldn’t have happened. That’s not repeatable.

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