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SP500 Levels Into The Close...

Using 3PM EST prices to refresh our models, here's where we wash out on the SP500:

Negative "Trend" Line resistance = 886

SELL "Trade" = 833
BUY "Trade" = 747

Provided that the VIX closes above 64.58, the US$ closes weaker, US Treasury yield curve continues to flatten, and the SP500 closes under that 833 line, watch out below. You have -10% downside from here.
KM

The Flattening Global Yield Curve...

On this morning's call, we highlighted that the US yield curve is starting to flatten again. This, on balance, is one of the primary reasons why I have a zero position allocated to US equities.

Primarily, this flattening is a function of the long end of the curve coming in hot in the last week. Today 10yr yields in the US are making new lows, trading all the down to 2.69%. Financial models work when the yield curve is steepening (borrow short, lend long), not flattening. Financial liquidity builds from a base of real savings. Real savings do not appreciate when the return on that capital is cut to zero (Japan).

Take a look at the nominal interest rates at Europe below: 1. they are higher than the US rate, and 2. monetary policy has not been neutered yet (they can still actually cut rates and have it matter on the margin).

The balance of global economic power is shifting. The world is gaining what the compromised American central bankers are giving up. The US stock market got clocked yesterday for a lot of reasons. This is one of the big ones.
KM

Trading Gold?

See the playbook below. We are long gold via the GLD etf, and trading it with an upward bias. Our immediate term upside target is $854/oz. We think you make money buying it when the yellow rocks are on sale down around the $754/oz level.

This iteration of the Federal Reserve is going to cut rates to zero. One of our most recent Investment Themes is "Re-Flation". This is, at its most basic level, the best way to be long that Theme.

Keith R. McCullough
CEO & Chief Investment Officer

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Eye On European Prices - Down, But Not Out...

Crashing commodity prices are driving down PPI, this is marginally positive –but only marginally…

Eurozone PPI data released today showed the largest single month decline since 1987. This is good, though hardly unexpected, news for the EU business community -with collapsing commodity prices, the cost of materials was bound to swan dive. The room that the drop gives the ECB to cut rates further was enough to help spark a rebound in European Stock indices with the STOXX 600 rising 0.6% from earlier lows of over -2%. European rate cuts are on the tap for Thursday.

We remain negative on the EU markets in aggregate. Lower inflation will not do much to help the EU in itself, consider the full picture:

• Eurozone Unemployment for October increased by 0.1% to reach 7.6% (inclusive of Germany, where unemployment remained flat)
• Economic Confidence for October dropped to 74.9 from 80, with both consumer and industrial confidence reaching -25 for November.
• PMI data from NTC dropped to 43.61 for October, the lowest level in over a decade
• Industrial production in September declined by 2.4% year-over-year, the largest drop since 2002.
Taken in the aggregate, the glass-half-full crowd’s bullish reaction to PPI seems premature. With the Euro currency collapsing, imported inflation remains a very relevant factor to model – this is one of the reasons why nominal European inflation remains elevated. With no catalyst for resumed growth on the horizon for many of the region’s major economies, the impact of further rate cuts can only help to stabilize the trajectory of the decline.

Although we are long Germany’s Stock Market via the ETF EWG, and will opportunistically buy into the markets of other EU nations that have well managed economies, we won’t be a buyer of the Union as a whole unless some truly positive data emerges. We remain very bearish on the UK, and we remain short that market via the EWU etf.

Keith McCullough
CIO

Andrew Barber
Director

COLM vs. VFC: A Revealing Quiz

This is part quiz, part narrative – a great tale of two stories.

Company ‘A’ is gaining market share, Company ‘B’ is losing on the margin.

‘A’ has 15% of its balance sheet is cash, while ‘B’ has 35% debt

‘A’ has an improving sales/inventory trajectory with increasingly easy Gross margin and SG&A compares – the inverse of ‘B.’ (See SIGMA charts below -- they are vita to understand the fundamental profitability and cash trajectory. Let me know if you need explanation).

‘A’ has 35% of its float short, while ‘B’ sits at just 3%.

‘A’ has seen the beginnings of management buying, management at ‘B’ is selling.

‘A’ has no exposure to India, ‘B’ has a 60% interest in the largest textile mill in India – by far the most unstable major country on the globe right now.

‘A’ trades at 3.2x EBITDA. ‘B’ is nearing 6x.

If you guessed that ‘A’ is Columbia Sportswear and ‘B’ is VF Corp, then you’re a winner (and you’ve probably been buying COLM and selling VFC).

Some of my Partner Keith’s levels on each stock…
COLM is a layup buy down at 27.85
if VFC misses another #, it’s going to 37

Keep Your Head Up

“Question every premise, challenge conventional wisdom, and never accept the truth of something merely because everyone else views it as obvious.”
-Albert Einstein

Suffice to say, this market continues to deliver crushing body checks to those without a proactive risk management process. Our virtual portfolio was up on the day yesterday. Don’t get upset with me – this is not my religion, it’s just my performance. Since we had a zero position in US Equities on the long side, the math behind that success wasn’t that complicated.

What is complicated is figuring out the investment process of those who were bearish at SP500 752, then bullish at SP500 896. There is absolutely no reason to be paying people to freak out at bottoms and pat each other on the butt at peaks. The game of momentum chasing is over. If you want to reconcile buying high and selling low as the new new thing, let me introduce you to a 220 pound defensemen from Alberta, Daryl Jones. Your head is down, and you are in his trolley tracks. If you set yourself up like this enough times, you’ll be checking yourself into the clinic for post concussion syndrome.

The good news is that if you are on our side of the bench, it may be all of a sudden be “cool” to be wearing the same jerseys as that “cocky guy” named McCullough. When I played hockey, no one ever accused me of not chirping the competition. On Friday, you can ‘You Tube’ me – I wrote, “I am now warning you of an up +1%, down -15% setup” in the SP500. In hockey speak, I could have just as easily yelled from the bench, “keep your head up!”… this isn’t being cocky – this is called being a team player.

For all of 2008, Hank “The Market Tank” and “Heli-Ben” have been on the losing team’s bench wallowing in their own reactive approach. While everyone scurries to the revisionist historian water cooler, looking for reasons as to why the US market tanked intraday again, keep it simple and watch the replay. There isn’t a worse line that the USA can put on the ice than George Bush, Hank Paulson, and Ben Bernanke – they all had ice time after lunch yesterday. They all spoke. They all reminded us that they need to just stop talking.

Bush repeated that America needs “bold action to prevent another Great Depression.” Bernanke reminded us that he will be flying Japanese B-52’s instead of choppers, dropping free moneys from the heavens. Paulson confirmed that he is indeed clueless. It was truly an embarrassing and sad day for American Capitalism. Thank God it’s over. Get Obama on the ice centering Volcker and Summers. It is almost humanly impossible to play worse than the current lineup has.

The crisis of confidence associated with the loss of the American Financial System’s credibility re-entered the game yesterday. Volatility shot straight up with the VIX breaking out through our critical resistance line of 64.66, closing +23% on the day at 68.51. Volume wasn’t October like, but it definitely picked up the pace, as it usual does, when Paulson gets a shift on TV. Technical stops losses kicked in across the system of the major US indices. For the SP500, the 838 line was an important one per our short term momentum models. Now that support becomes resistance, and my SP500 downside target to manage risk around is 749.

On this day in 1961, a radical by the name of Castro adopted Communism. On this day last week, a new terrorist organization asserted themselves in Asia. The US Financial media should be ashamed for not calling out this new found river card of geopolitical risk onto the table on Friday. The facts were there – this cross border attack from Pakistan to India was not a trivial one to consider. The financial network media simply chose not to highlight it. I’ve said this plenty of times this year, and I’ll say it again this morning – just because the perpetually bullish ignore facts does not mean that those facts cease to exist.

If some of my critics want to call me cocky, overconfident, or whatever it is that they call someone on the other team that just won’t go away, I am cool with that. My goal, like my Dad’s is at the fire hall, is to wake up to this world, ever day, to serve and protect. If I sound snarly, or moody, or too matter of fact, you should try making small talk with a firefighter after his night shift. I guess this all comes with the baggage; I’m just a hockey player from Thunder Bay, Ontario, after all – cut me some slack.

My guess is that all fiduciaries of other people’s money want an investment research firm to stand up at the blue line, and tell them what they may not want to hear in the early morning (particularly if consistently proves to be right). As Churchill said, “if you have an important point to make, don’t try to be subtle or clever… use a pile driver.”

Although CNBC loses track of what narrative fallacy it is that their “money honeys” should be following, we cannot blame them. They have “macro men” who are just as clueless. This isn’t a gender thing. This is a process thing. When there is no leadership, there is no room in organizations to “question every premise and challenge conventional wisdom.” That, fortunately, leaves the door wide open for our best players, like “Big Alberta.” Boom!

This isn’t a new behavioral reality. It has just found its way into the first genuine global mass market media mania in economic history. We can all profit from this, of course. Just remember – have a process, and keep that head up.

Best of luck out there today,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold spot prices rose by 0.4%in trading this morning as the Bombay Bullion association released estimates showing a 26% month-over-month decline in Indian imports following the attacks in Mumbai.

OIL iPath ETN Crude Oil –Light Sweet Crude futures fell as low as 47.36 this morning, testing the lowest levels in 3-years.

EWG – iShares Germany  -- The DAX rose as much as 1.3% to 4,449.6 today, led by an over  6% gain in Volkswagen AG  (EWG: 13.6% )share price.

FXI –iShares China – The Yuan official reference rate was set at 6.8527 today vs.  6.8505 Yesterday, the lowest level since before the last meeting between Secretary Paulson and Chinese envoys this summer.

Short ETFs

IFN iShares India – The Rupee declined as low as 50.45 per USD today in the third consecutive down day for the currency. The Sensex, fell by as much as 315.48, or 3.6 % in trading this morning in a broad market sell-off  with  Infosys Technologies (IFN: 8.43%) down over 3% and copper producer Sterlite Industries down over 6.5%  (IFN:0.57% ).

EWU – iShares United Kingdom – Supermarket Tesco PLC (EWU: 0.619%) beat analysts forecasts with Q3 sales buoyed by discounted staple food pricing,  driving the stock higher by more than 8% and helping the FTSE partially recover from earlier lows.

UUP – U.S. Dollar Index – The pound dropped for the third consecutive day to to 1.4807 USD this morning.

EWJ – iShares Japan –The Nikkei 225 declined 6.4% in trading today to close at 7863.69. BOJ will begin accepting corporate debt rated as low as BBB as collateral for loans to banks. Nippon Steel (EWJ: 1%) is attempting to negotiate the cancelation of contracts to purchase coal and Iron ore with suppliers in light of declining prices and slumping demand.

FXY – CurrencyShares Japanese Yen Trust – The yen traded as high as 92.89 USD this morning -the highest level since Oct. 28.


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