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Resenting Success

"America should be lifted up by our desire to succeed, not dragged down by the resentment of our success."

-Mitt Romney


In what I thought was the most progressive Strong Dollar, Strong America speech I’ve heard in the last 3 years last night, Mitt Romney hammered that Red, White, and Blue point home like maybe only Obama could. Strong.


Romney was alluding to crushing the “Most Popular” (most read) story on Bloomberg yesterday titled “Gingrich Attack Film Shows Romney As Ruthless Rich.” I don’t know one person (whose financial industry expertise I respect) who considered that Bain commercial anything short of a Michael Moore production. Apparently the State that says “Live Free, Or Die” agrees.


To be clear, I’m not a Republican or a Democrat. I simply want to get this country’s economics right. Clinton should have provided as much inspiration to President Obama to balance a budget as Reagan may have inspired Romney’s great hair. When it comes to the economic policy in America, Keynesian Academic Dogma failed both Bush and Obama. It’s time for change.


Can Obama be the change that Ron Paul is with the Youth/Change Vote in this country? Yes He Can. Will he? I have no idea. He’s certainly not going to get any non-groupthink ideas on economics from Tim Geithner. As of this Romney win in New Hampshire last night, this ½ Clinton ½ Reagan race to the US Presidency is officially on.


Back to the Global Macro Grind


Game on. I love this. I really do. I’m going to light up our 11AM EST conference call line like a Christmas tree this morning as Big Alberta and I officially roll out our Q1 Global Macro Themes for 2012.


Our clients already know what our Q1 Themes are, but if you’re new to this Canadian-American tire pumping game, here they are:


1.       Strong Dollar = Strong Consumption

2.       Deflating The Inflation, Part Deux

3.       Growth Slowing’s Bottom


Yesterday’s breakout in US Equities confirmed a lot of what we have been signaling for the last 3-4 weeks. We’ll go through this in depth (45 slides) on our call this morning, but the data doesn’t lie – perma-bulls forced to perma-change their bullish theses do. A Sustainably Strong and Stable US Dollar provides a coincident benefit to Employment, Confidence and Consumption.


That’s the fundamental research view – our quantitative risk management view supports this fundamental shift:

  1. SP500 closing above its October 29th, 2011 closing high of 1285 yesterday (1292 close) puts 1363 in play
  2. US Equity Volatility (VIX) is already down -11.6% for 2012 YTD (bearish TRADE and TREND)
  3. US Equity Volume studies are starting to change (up +31% day/day on yesterday’s up move, down on down moves)

Backcheck, Forecheck, Paycheck – that’s a PRICE, VOLATILITY, and VOLUME win in my model – and my model has not changed.


People who didn’t see our team make the shift from bearish to bullish on US Equities in early 2009 are still insecurely scrambling to put me on their Top 10 People Not To Listen To List of 2012 (some journalist from the Old Wall yesterday at Marketwatch). Why? They want to (or should I say need to) put me in the perma-bear box in which they need to think.


Thinking inside of a box is no way to live. Being perma bullish or bearish doesn’t work. What works is having a repeatable process that allows you to make money in both up and down markets.


What would make me go back to bearish on US Equities?

  1. President Obama not engaging in the ½ Clinton ½ Reagan strategy and imposing more of what didn’t work in 2011
  2. Ben Bernanke implementing a QE3, stoking inflation
  3. Geithner convincing his cronies of some socialized “mega refi” idea for US Housing (blowing up the MBS market)

Our desire to succeed in this country is based on having prior successes. If you’ve won a few games in your life, but have not yet won a Championship, you’re not thinking about the standard of success I am. America has an opportunity to be great again.


My economic strategy message should resonate as much with Democrats as it does Republicans. Both the US Currency and Equity markets are getting fired up about change in this country. That’s what real winners in real-life do. They don’t Resent Success.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1, $111.91-116.01, $1.26-1.29, $80.55-81.53, 2, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Resenting Success - Chart of the Day


Resenting Success - Virtual Portfolio

Weekly Latin America Risk Monitor: Argentina’s Making Noise

Conclusion: Our dominant TREND-duration themes remain largely intact throughout the region from a high-frequency data perspective. In the context of this “quiet” week, we’ve interpreted recent market signals as an opportunity to look under the hood of Argentine policymaking – specifically with regards to a potential currency devaluation.



  • EQUITIES Median: +1% wk/wk; High: Argentina +10.3% wk/wk; Low: Mexico -0.5% wk/wk; Callout: Argentina +15% YTD;
  • FX Median: +0.5% wk/wk vs. USD; High: Colombian peso +2.6% wk/wk; Low: Argentine peso -0.1% wk/wk; Callout: Mexican peso -10.5% YoY;
  • S/T SOVEREIGN DEBT (2yr) High: Brazil +8bps wk/wk; Low: Colombia flat wk/wk; Callout: Brazil -30bps in three months;
  • L/T SOVEREIGN DEBT (9-10yr) High: Brazil +25bps wk/wk; Low: Mexico/Colombia -7bps wk/wk; Callout: Mexico -56bps in six months;
  • SOVEREIGN YIELD CURVE High: Brazil +17bps wk/wk; Low: Mexico -9bps wk/wk; Callout: Mexico -23bps in one month;
  • 5YR CDS Median: -0.3% wk/wk; High: Peru +3.4%/+6bps wk/wk; Low: Argentina -3.6%/-34bps wk/wk; Callout: Peru +15.5%/+24bps in one month;
  • 1YR O/S RATE SWAPS Median: +0.8% wk/wk; High: Chile +5%/+22bps wk/wk; Low: Brazil -0.2%/-2bps wk/wk; Callout: Colombia +3%/+15bps in six months;
  • O/N INTERBANK RATES Median: -0.4% wk/wk; High: Chile +0.4%/+2bps wk/wk; Low: Mexico -0.7%/-3bps wk/wk; Callout: Argentina -13.7%/-160bps in two months;
  • CORRELATION RISK The MSCI Latin America Equity Index has gone from -67% correlated to the U.S. Dollar Index on a six-month basis to +24% correlated on a three-week basis.

Full performance tables can be found at the conclusion of this note.



With the potential for a peso devaluation in 2012, Argentine monetary policy remains a key risk factor in the region.


Financial repression has been supportive of peso deposit growth and lower ARS deposit rates:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 1


The issue (capital flight ahead of a pending devaluation) which necessitated the latest round(s) of Big Government Intervention, while less dire on the margin, remains:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 2


This is due to the likelihood that the peso may be devalued by over 20% in order to meet a 2012 dollar debt service payment using “free-and-available” FX reserves:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 3



Growth Slowing’s Bottom:

  • Brazil: Manufacturing PMI accelerated in DEC to 49.1 vs. 48.7 prior.

Growth Slowing:

  • Brazil: Export growth slowed in DEC to +5.8% YoY vs. +23.1% prior. Trade Balance growth slowed in DEC to -$1.5B YoY vs. +$291M prior. Industrial Production growth slowed in NOV to -2.5% YoY vs. -2.2% prior.
  • Mexico: Global Economic Indicator (proxy for GDP) slowed in OCT to +3.7% YoY vs. +4.6% prior.
  • Mexico: Both Manufacturing and Services PMI readings slowed in DEC to 52 (from 53.5) and 54.1 (from 54.4), respectively.

Deflating the Inflation II:

  • Brazil: CPI slowed in DEC to +6.5% YoY vs. +6.6% prior, allowing the central bank to avoid breaching the upside of its FY11 inflation target (+4.5% +/- 200bps). At +6.5% for the whole of 2011, Brazil just closed out its fastest year of price increases since 2004. Our models do point to further downside in 1H12, however, as does the market. Brazil’s 2013 breakeven rate has fallen -70bps to 5.75% since peaking on SEP 21.
  • Colombia: CPI and PPI slowed in DEC to +3.7% YoY (from +4%) and +5.2% YoY (from +6.8%), respectively.

King Dollar:

  • Mexico: The peso, which is down nearly -15% vs. the USD over the last six months, is contributing to an increase in Mexican CPI alongside a domestic drought (via lower food supplies). CPI accelerated in DEC to +3.8% YoY vs. +3.5% prior, the fastest rate in 12 months.
  • Argentina: As a result of financial repression via capital controls and new FX regulations designed to stem record capital flight ($18B through 3Q11), Argentina’s peso-denominated time deposits are growing at a record pace (+4.7% MoM) as domestic savers are robbed of alternatives to store their wealth. Additionally, the central bank is building FX reserves at a record pace (+$2.5B MoM in DEC). The build-up/reversal of declines has been supportive of sovereign dollar debt (2017 yields down -313bps since OCT 4 to 9.54%; Argentine dollar debt up +3.3% YTD after being the worst EM sovereign performer in 2011) as the country plans to tap its FX reserves to make a +$5.7B debt service payment next year. Per Argentine rule (always subject to whimsical change), the government can only tap “free-and-available reserves” in excess of the monetary base and current calculations leave the government with a -$5.4B deficit. To get to a +$5.7B surplus, the peso needs to be devalued by -24% assuming a constant monetary base. USD/ARS forward markets are pricing in a -16.7% devaluation in the coming year, up from a trough of -25.9% in early NOV.


  • Chile: Economic Activity Index (proxy for GDP) accelerated in NOV to +4% YoY vs. +3.4% prior. CPI also accelerated in DEC to +4.4% YoY vs. +3.9% prior.


  • Brazil: The government’s aggressive capital controls proved successful (relative to their stated objectives) in 2011. Foreign investment flows increased +168% YoY to $65.3B – with roughly 92% of that being the preferred FDI.
  • Mexico: The sell-side is bullish on the peso, forecasting at ~5% gain through June on the heels of a -25% reduction in the number of economists predicting a Banxico rate cut per their latest survey.
  • Argentina: Mark Mobius, Head of $45B Templeton Emerging Markets Group, is bullish on Argentine equities. “Although the political environment is not very good, the companies are very cheap so we’re looking closely… We continue to add selectively as more money comes into the fund.” The threat of a big bid like this in such an illiquid market has forced intense short covering in the Merval Index (up +15% YTD).
  • Argentina: Tax revenue grew +31.8% YoY to ARS540B in 2011; when coupled with public-sector salary increases > +20% earlier in the year, it’s easy to believe private economist estimates of inflation running north of +20-25% YoY vs. official statistics of +9-10%.

Darius Dale

Senior Analyst


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 4


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 5


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 6


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 7


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 8


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 9


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 10

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We expect an in-line but low quality quarter with a substantial quarterly share loss.



We estimate that IGT will report an in-line quarter and maintain the high end of their guidance when they kick-off the gaming earnings season on January 24th.   While an in-line quarter is neither here nor there, investors may be a little spooked by IGT’s large sequential share drop and a flat to slightly down year-over-year replacement number for the market, as we wrote about in “REPLACEMENT REVERSAL" (12/2/11).  We believe that IGT’s NA ship share will be between 27-30% in the December quarter, down from 40% in the September quarter and that market replacement orders were down about 5% YoY.  However, management should be pretty bullish about the remainder of 2012.





We estimate that IGT will report FQ1 EPS of $0.22 and $488MM of revenue.


Product sales of $208MM at a 54% gross margin:

  • NA product revenues of $118MM at a 57% gross margin
    • North American box sales of $59MM
      • 4.1k North America new shipments
        • 3,450 replacement units and 675 new and expansion units          
        • New units include shipments to Twin Arrows Casino in AZ and Miami Jai Lai
    • ASPs down 3% YoY but up 1% QoQ
  • Flat YoY NA non-box sales
  • International product revenues of $90MM at a 50% gross margin
    • $67MM of box sales
      • 4k new shipments at an ASP of $16.6k
  • $24MM of non-box sales
    • Entraction sales will be in non-box sales

Gaming operations revenue of $280MM at a 58% margin

  • Average install base of 54.6k units at an average win per unit of $55.70
  • Increase in install base due to Aqueduct units and to a lesser extent CAGE placements
  • Game ops D&A of $42MM

Other stuff:

  • SG&A: $88MM
  • D&A: $18MM
  • R&D: $49MM
  • Net Interest expense: $17MM
  • Tax rate: 37%


We expect IGT to be quite bullish about the March quarter given shipment to 3 large casinos (Cleveland & Toledo and Revel) and their seasonal improvement in market share.  IGT will surely address the implications of the DoJ’s reversal of opinion on the application of the Wire Act on online gaming.  The Entraction platform will help IGT garner some market share when poker comes online – although we’re a little more pessimistic on the timing than the Street.  The DoJ opinion also opens up the possibility of WAP jackpots across state lines – which means bigger jackpots and should lead to a lift in win per unit for IGT’s gaming operation business.  We’re currently at $1.04 for FY12 and $0.28 for FQ2.

Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Long Utilities (XLU)


I said that if the SP500 continues to hold my long-term TAIL line of support (1267) that I’d title my notes Bullish TAIL.


That doesn’t mean that I won’t make sales and/or call out immediate-term TRADE overbought as it appears in my model. It just means I’m sticking with the risk management process that had me make the bullish turn on US Equities in 2009.


Across all 3 risk management durations, here are the lines that matter to me most right here and now: 

  1. Immediate-term TRADE overbought = 1299
  2. Immediate-term TRADE support = 1273
  3. Long-term TAIL support = 1267 

As we pushed higher towards 1299 this morning, I sold my Consumer Staples (XLP) long because that’s the Sector ETF of the 3 I was long coming into today that I like the least. There are no rules against buying it back on red.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Bullish TAIL: SP500 Levels, Refreshed - SPX

LIZ: A Gift


For those of you who think you’ve missed LIZ, here’s your shot.


Classic LIZ. Not even a full quarter elapses since the company reset expectations on the sale of JCP back in October and management is taking its EBITDA outlook for F12 down by $5-$10mm. But there’s more here than meets the eye.


We think there are two key factors that make this time different; 1) sales aren’t the issue (unlike the last THREE years), and 2) it is a cost budgeting issue, and LIZ is making headcount changes accordingly as the CFO is leaving the company.


To be clear, there is no change to our underlying thesis, which is that this is a 180 degree shift in the characteristics of the company. It is rapidly moving from an unfocused, unprofitable, capital intensive portfolio of marginal brands with meaningful risk of bankruptcy where people stick to price/sales or EBITDA valuation metrics; to being a super-focused portfolio of premium brands, with significantly lower capital requirements, higher margins, and global growth opportunity. In the end, we think that investors will shift meaningfully in sentiment from valuing LIZ on a Sales and EBITDA basis to looking at raw earnings power over a multi-year period.

  1. No company in their right mind would make a revenue call this early in the year. This is all about shared costs as 5th & Pacific kicks off its first year.
  2. The corporate expense line is $70-$75mm as of the last month with ~$15mm in reductions earmarked for next year. Roughly $10mm of that was associated with Mexx and expected to be cut on the front end so the remaining $5mm or so appears to have hit a snag and is either taking longer than expected or is no longer available. We’re fairly confident it’s not the later. This is the element of the equation that management is supposed to have greater visibility on; however, forecast accuracy on the cost side of its business clearly continues to be a challenge.
  3. Therein enters the second half of the announcement that after four years Andy Warren will be stepping down as CFO in March. Our sense is that the transition is a bit less abrupt than it appears in the press release. Simply put, McComb cannot afford for a CFO to be pushed out abruptly. Keep in mind that his own contract comes up for renewal in six months. The last thing he can afford is for the wheels to be falling off the story at that time because six months earlier, a CFO who is long gone left problems tucked away in the closet. McComb needs a nice, peaceful easy smooth transition. One thing is for certain, it will certainly be easier for LIZ to attract quality talent then is was just 4-months ago.

We’re not going to go through the fruitless exercise of what the stock will do today. We’ll let the price speak for itself.

The post-market activity (-8%) puts the stock where it was six days ago (when the re-branding was announced) – before the Street started to bake in the low likelihood that a negative release was not coming at ICR.

In looking at valuation, the $5-$10mm change in F12 EBITDA most likely reflects a delay in execution rather than any real structural change to the underlying fundamental opportunity for $20-$30mm of cost saves over time. That said, we need to acknowledge the reality that it could be $0.50-$1.00 in valuation that is lost forever.

But one thing that is vital here is that THIS IS NOW A GROWTH COMPANY. We are not going to beat up a growth story for averting cost cuts. The only way that Kate can double, then double again, then double again is to invest capital. Same as it relates to taking Juicy global, and continuing to fix Lucky.


Would you rather be JNY, who lowered guidance again today and offset a big revenue miss with SG&A cuts? No way. That WILL catch up with them, I can promise you that.

So the bottom line is that if the market freaks out over this, then we say ‘let it.’


For the people who have seen this name slip between their fingertips and think that ‘they’ve missed it’, here’s a late holiday gift.

Happy New Year!


LIZ: A Gift - LIZ 1Yr Comps


LIZ: A Gift - LIZ 2Yr Comps



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