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Why Did We Cover our British (EWU) Short Position Today?

One, the EWU was down over -6%, and we cover on red meltdown days... Two, and more importantly, as bad as this morning's jobless claims # in the UK was (worst since 1992), the rate of change improved sequentially (i.e. less bad, see chart).

Everything that matters in our macro models occurs on the margin. Today's delta was an important one. Look for the British to cut interest rates again in the near future.

Paulson: Get The Guy Out The Door Already!

Hank "The Market Tank" Paulson strikes again. Just when I thought we were done with his lack of clarity, they cart him back onto that ole Bushy administration podium to remind us of this countries reactive management ghosts past.

Getting Paulson off of TV and back into whatever job he wants to take other than his current one could very well be the most bullish pending catalyst that US market investors can look forward to.

The Goldman Sachs that he left is the company that is seeing there share price go down every day. America has voted. Let's get on with it, and clean this mess up.

Trade VS Trend – MCD and EAT


Keith - MCD a tough one here ... but 2 up days in down tapes = + divergence... I am scared to short it until I see my $58-59

Howard – The top line trends for MCD are some of the best in all of consumer. The universal love for the stock is scary. Plus, don’t forget about the franchisee, they are the ones absorbing the losses from selling all that cheap food.


Keith - EAT has been eaten by the shorts ... way oversold, finally... a buy for a "Trade" under 8.30

Howard – My guess is there are a lot of names like this in casual dining – OVERSOLD TECHNICALLY. I have a hard time understanding the catalyst to buy any name. Here is an interesting tidbit - of all the casual dining chains that are covered in Knapp Track, Chili’s was the second best performing chain (after the Olive Garden) in October. For a pair trade I would be long EAT and short DIN in this market.

Early Look

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Beware Of The Squeeze

“Study the past if you would define the future.”

Being in a fishbowl and being the guy trying to proactively predict market moves isn’t easy – that’s why I like it. Studying the past gives my macro process a fundamental base from which I can step up and take shots. Am I going to miss the net sometimes? Of course… but a better question is can my team score more often than the competition? The answer to that question won’t be a lie – the score is up on our ‘Hedgeye Portfolio’ accountability board, daily.

On October 27th, I stepped up and slapped a title on the Early Look called “Buy’em” (www.researchedgellc.com , 10/27/08). No, that wasn’t in October of 2007 when I was about to leave Carlyle for being “too bearish” – that’s a 2008 print; you can ‘You Tube’ it.

Inclusive of yesterday’s -2.2% low volume selloff in the S&P500, the US market is +6% from that historical point. Not great, but not bad either. Since we have a global macro asset allocation model, which included a bullish call on China on that same date, it’s noteworthy that Hong Kong has gained +27% since 27th. No, no, no… that’s not October 27th 2007 where “they” called it “global this time!”

I’m going to keeping taking the shot here this morning and repeat that I think that a significant global trading bottom is in. Asian, European, and US indices will continue to make higher lows on down days until the facts in my macro models change. No, I am not calling this a “Trend” (intermediate term view, 3 months or more). This is a call on the “Trade” (immediate term, 3 weeks or less). Can a “Trade” morph into a “Trend”? Definitely. But I don’t have to take that shot until I see it.

Let’s strap on the “Macro” pants and take a walk down the path of my being bullish for the “Trade”. What are my 9 top factors?

1. Global counterparty risk (measured by the TED spread) has calmed for almost 6 consecutive weeks – TED is only 181bps wide this morning.
2. The US Yield Curve continues to steepen. The spread between 10’s and 2’s is now 250bps wide today. Borrow short, lend long. Liquidity is king.
3. Debtors (the levered long hedge fund community) are getting smoked out of their holes. Leverage is a disease when long rates ride higher.
4. Levered nations like Russia and Pakistan are being forced to raise interest rates this morning by 100bps and 200bps respectively. Now the USA can beat on them.
5. Access to capital is tightening and long term cost of capital is heightening – this expedites the blowing up of over-geared businesses that we don’t need.
6. Market share opportunities born out of the bankruptcy cycle are emerging (think BedBath vs. Linen’s N Things). GS, Thanks for BBBY the upgrade this morning!
7. Global Sentiment is bottoming (see Australian and German confidence readings this morning). The rest of the world actually likes Obama.
8. Inflation is deflating, domestically (CRB -47%, Oil -60% SINCE JULY!). GM’s Texas SUV plant announced they are running on overtime yesterday – huh?
9. US Consumer Discretionary stocks have been crashing for longer/further (peak to trough decline from 07’ is now -55%, and now the Street is bearish on spending!)

So where’s your head at? Is it where I made the call to leave the Street a year ago, or is it with me here and now covering and buying stocks today? Don’t get mad at me – get in the fishbowl and take a swim with me and the aforementioned facts. Consensus calls can definitely take markets higher and lower than we can all remain liquid, but so can contrarian ones. I am not being contrarian here for the sake of being on the other side of consensus. I am data dependent, and the river cards lay on the table here as you see them.

Domestically, the macro calendar is lining up for a massive squeeze. November 15th is the final date for hedge fund redemptions, so next week you won’t have to attempt to trade this market around said hedge fund “selling” or “blowing up”… guess what – they’ve been blowing up since the leverage trade has - this is not new! In conjunction with that fear morphing out of our melons will be next week’s US inflation reports (CPI and PPI) – they will be bullish for equities. Finally, earnings season will have ended, and that’s a catalyst in and of itself. Why? Well… because it’s history.

Studying history provides us context. Studying history stokes our fears and hopes. Studying markets is what I do in order to proactively prepare you for tail risks. With -2% downside left in the S&P500 (my buy level is 879) and +30% upside, the tails are growing into those books who think they have now mastered the art of short selling. I have moved our US Cash position down from 96% (September) to 51% this morning. Beware of the squeeze.

Good luck out there today,

Long ETFs

JO – iPath Coffee –The Indian Commerce Department has launched a program aimed at increasing Indian market share for US Robusta consumption.

EWL –iShares Switzerland- Swiss Life Holdings (EWL: 0.52%), the largest Swiss life insurer abandoned prior profit targets and halted a share repurchase on investment losses driving the stock price down by as much as 18%. The company can no longer guarantee that dividends will not be cut.

EWA –iShares Australia- The Bureau of Statistics seasonally adjusted wage-cost index declined for Q3 to a growth rate of just under 1% q-o-q or 4% Y/Y suggesting that wages are trending down with the cooling commodity markets.

EWG – iShares Germany – Euro zone industrial production decreased 2.4% y-o-y, the lowest level of growth since 2002. The “wise man” group recommended that Chancellor Merkel should expand a 50 billion-euro stimulus package in their annual report.

FXI – iShares China – October Retail Sales figures came in at 22% y-o-y, a slight decrease from September.

EWH –iShares Hong Kong –The Hang Seng has declined by 5.5% in the past two sessions on increasing concerns about slowing mainland industrial production.

VYM – Vanguard High Dividend Yield ETF –Pelosi’s support for a GM puts pressure on the Bush Administration -automakers had asked for access to an additional $50 billion.

Short ETFs

UUP – U.S. Dollar Index – Bank of America strategists issued a report anticipating a dollar decline into Q1 09 on lower rates and credit market concerns.

EWW – iShares Mexico - Banco de Mexico sold as much as $85 million dollars yesterday as they attempted to stem a selloff in the Peso spurred by the Fitch downgrade, which declined over 1% for the day. Since October the foreign reserves have been reduced by $13.6 billion in such transactions.

EWJ – iShares Japan The cabinet office consumer confidence survey level for October was 29.4, the lowest ever for the Index. Societe Generale issued a report stating that banks may be forced to purchase more than as $100 billion in Yen to hedge currency derivatives heavily marketed in recent years.

EWU – iShares United Kingdom – Unemployment increased at the fastest pace in 16 years in October with claims rising by 36,500 to 980,900, the highest level since March 2001. ILO Unemployment for September registered at 5.8%.

IFN – The India Fund – Industrial Production data for September showed a slight increase to 4.8% y-o-y from the prior month decade low of 1.27 on seasonal pressure as factories increase production in advance of upcoming religious holidays which curb production.

Keith R. McCullough
CEO & Chief Investment Officer

LIZ: Dismantling an Empire

In 1986 Liz Claiborne became the first woman to be CEO of a Fortune 500 company. She revolutionized an industry. The current team is making a mockery of it.

I hate having to take time out of my day to react to poor earnings reports. But for LIZ, I’m making an exception. For starters, I liked this name $5 higher. Keith and I debated this one a ton. He consistently waited for a better price. I had too much blind faith in my fundamental view and did respect the math. I welcome you to YouTube my past comments on our Portal – I’m not going to hide from them. Whenever I am wrong I’ll be my own harshest critic.

Did I like the business? The strategy? Positioning? Portfolio? No, no, no and no! I liked one simple thing -- my confidence that this management team would meaningfully reign in spending, fix an egregiously bloated SG&A structure, and cut capex to a rate that more suitable for this business.

I like the capex cuts a lot – but the rate of change has not intensified since the last call – though the positioning of the business has. I wish I appreciated sooner how flat-out bad this management team is.

One of the selling points of our model is that our content is only available to our clients. I’m tempted to send this note to the Board.

I am increasingly viewing this story as binary, and I am therefore modeling as such. Here’s what I get based on my ‘incompetent management model’ and my ‘bull by the horns management team’ models…

‘Incompetent’ Scenario: Stay the current course. Consistently play defense as $1.6bn in Partner brand business bleeds by 10% annually after a 30% hit in ’08. Direct brands grow mid single digits, but not enough to leverage occupancy cost inflation. Gross margins trend down with the industry, and SG&A cuts are to the tune of 2-3% in absolute dollars. Working capital builds after a year of improvements. Capex is down, but still runs at 2.5-3% of sales in an attempt to grow Direct business. LIZ is faced with a constant overhang of a dividend cut due to the $410mm revolver that needs to be refinanced in Oct ’09. This model gets me to EPS losses through 2012, a dividend cut in ’09, and Chapter 11 could not be ruled out. All in, the company is playing defense in a game it is destined to lose.

‘Bull By The Horns’ Scenario: Cut Capex to 2% of sales – or sub $100mm. Take remaining Partner brands and go exclusive with each one to select major retailers (i.e. Macy’s, Dillard’s, Target, etc…) and major sourcing partners (Li & Fung, etc…), thereby mitigating quarter-to-quarter volatility and start working in a true partnership fashion. Get rid of Mexx. It does not work. Fess up to a bad call and fix it. Cut SG&A across the board. Employee productivity is too low, and dollars invested over the past 2 years are not paying off. It’s time to unwind. In this scenario, despite a 20% hit in CFFO, I’m getting to Free Cash Flow of $250mm, or about 35% better than ’08. This also means no dividend cut overhang, and far less refinancing risk. At that level, 3x EBITDA and 6x earnings sounds a bit more appetizing to me.

I’m sticking with the incompetent model until I gain conviction otherwise.

S&P500 Levels Into the Close...

If you sold stocks at today's intraday low (885 SP500), that doesn't sit well with our risk management model (the tail risk now resides on the side of a massive short squeeze). The range in this market is narrowing as volume is drying up - this is not a time to dress up and play short seller.

We are buyers on red down at the 880 line in the S&P500 (see chart), and looking for this market to breakout, for a "Trade", on a close above the 945 line. Otherwise, trade the ranges.

November 15th is the final date for hedge fund redemption notices... if there is one rumor that I heard most often today (and yesterday) it's that fund XYZ is "selling" and "blowing up"... enough of the narrative fallacy already guys. Lead, follow, or get out of the way (Thomas Paine quote, not mine).

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 80.48%
  • SHORT SIGNALS 78.35%