Bloated Bear: SP500 Levels, Refreshed

This was, by all measures, a wonderful week. We picked up a pile of points being long the “Buy for a Trade” range that we established in the shaded green zone (see chart below). Cramer was taken down a few notches by the transparency/accountability rules of The New Reality (thank you Jon Stewart). And, generally speaking, the world just seems like a better place…

As volatility (VIX) has broken down, and volume accelerated, what we have accomplished this week is the formation of what I see as a very trade-able Bear Market range. In Bear Markets, rather than the Fast Money Bull ones, you simply buy low and sell high. No, you don’t need Donny Deutch’s mauve dress shirt and Charlie Gasparino’s IQ (check them out yapping at each-other on CNBC right now) to figure this out. Maybe the next bull market begins when GE’s financial comedians are off the air – definitely not now.

In the chart below I have shifted our buying range up to the 656-710 SP500 zone. The dotted white line at 710 is what we call the Shark Line – bad things happen to traders, depending on their being long or short, above/below that line. This week, the Shark ate the shorts.

The dotted red line up at 765 in the SP500 is the immediate term Trade line where the Bear Market Rally is Bloated. As we approach that pain threshold for the consensus short sellers (like we did this morning), I’ll be making sales. I re-shorted the Dow (DIA) this morning. I have dropped my Asset Allocation to US Equities down from 24% on Monday, to 4% today. On the way back down to 710, I might buy things back, but patiently…

Have a great weekend,

Keith R. McCullough
CEO & Chief Investment Officer

Question: Could DKS' Comp Expectations Have Bottomed?

Comp guidance is in for 2009, and FL is predictably unclear. I'm more interested in HIBB and DKS. Check out the gaping hole between comp trajectories for each of them on a 1 and 2-year basis in the charts below. My usual cynical self would point to HIBB being unrealistic. But the reality is that I think it is doable. That leads me to ask the question as to whether the gap between the two is justifiable? True that DKS has Golf Galaxy, which is dogging it. But that does not have enough juice to drag down the comp by 8-10%. I haven't been a fan of DKS in a long long time. In fact, I never have been. But could they finally have set the bar low enough to start beating again? I'm starting to think that the answer is Yes.

Think BRAC not BRIC!

We’re seeing our reflation theme heating up in Brazil, Russia, Australia, China (BRAC anyone?) as our global Macro factors line up with our US Dollar call, “breaking the buck”.

Our thesis on the USD is concise—if the Obama administration can devalue the dollar, global equities can break out to the upside and commodities can reflate from their bombed out lows. Commodity reflation will benefit commodity-rich BRAC countries, especially with geographic proximity to China to feeds its internal growth.

We’re already seeing confirmation this week that the buck is breaking. Over the last three days the USD is down -2.1%, the SP500 is up +10.7%, and commodities have received a material lift: oil had a huge move yesterday up +10.56% (etf USO closed at +7.34%) and copper has shot up 8.1% month-to-date, closing up 2.33% yesterday.

The Macro team has been stressing the importance of President Obama shaking hands with the client—China. After Geithner’s blunders in addressing the Client’s stance on its currency, it’s now clear that China wears the pants and therefore will set the Yuan at whatever level it sees fit versus the basket of major currencies.

In today’s Early Look, Howard Penney furthered this point, noting that the number one story on Bloomberg today says that the Premier of China, Wen Jiabao, is “worried” about China’s holding of US Treasuries and wants assurance that the investment is safe. Our assessment is that Wen Jiabao wants the USD to weaken to inflate assets domestically, which will make USD denominated debt more attractive to foreigners. Logical, non? If investors return to US Treasuries, bonds will rise and reverse the current uptick in yields.

If we return to Brazil, Russia, Australia, and China, these commodity-driven economies have the Macro set-up to benefit from US assets inflating for these countries will benefit on commodity reflation; and especially Australia and Russia with proximity to China can benefit in feeding the country the raw materials it needs for internal growth. On aggregate, this set-up on an intermediate Trend perspective (3+ months) will encourage global reflation. We’re getting incrementally bullish! But don’t be that guy/gal buying high and selling low. We have had a big run-up in prices here and suggest you wait patiently, for your entry point – that’s if you’re not already there!

Look for us to use the following ETF plays: Brazil (EWZ); Russia (RSX); Australia (EWA); and China (CAF).

Matthew Hedrick

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HIBB 4Q Interim Call Nugget

"I'm happy to report that first quarter to date has been very strong." Mickey Newsome.
This is one of the most upbeat calls I've heard this year.

Beating the Bear

"What's right isn't always popular. What's popular isn't always right."
-Howard Cosell

Howard also said "The ultimate victory in competition is derived from the inner satisfaction of knowing that you have done your best and that you have gotten the most out of what you had to give."  

We are in the midst of a global crisis, the magnitude of which has not been seen in generations, and here at Research Edge, we are trying to build a "New Reality" financial services firm; therefore we must give everything we have to our clients, at all costs!  

In the past 12 months, Research Edge has grown from 3 employees to nearly 30, and not a single employee is sitting on his hands, we are giving "it our all, at all costs...."  This means (1) making calls and (2) making calls that are not going to be popular, but are going to be right.

As the S&P was making new lows on March 9th we were increasing our allocation to US equities, right in the face of consensus saying "it's courageous to be buying when everyone is selling."  On March 11, 2009, the Research Edge sector view and Keith's "Dancing with the Shorts" intimated the following - "Yesterday, the S&P 500 closed at 719.16, up 6.4%; its biggest one-day gain since late-November.  After yesterday's move, 'The Battle of the Bulge' goes to the bulls, and consistent with the Research Edge Macro intraday note 'Beta Shift' note, 755 is next significant resistance level."  

Yesterday, the S&P closed at 750.74; the bear market rally is running out of steam.  As of the close last night we are up 4.5% month-to-date in our virtual portfolio versus the S&P's 2% increase, and in our asset allocation model, we have reduced our US equity exposure down to 4%.  Bear markets can be traded!

Also on March 9th Nouriel Roubini was all over the press calling for 600 on the S&P 500, as we were buying US equities.  Since March 9th, the S&P is up 11% and the financials have rallied 30%.  Now Mr. Roubini is saying that "Americans lived in a Bernie made-off and Ponzi bubble for a decade or even longer."  This is coming from a man who is globetrotting around the world with the rich and famous, taking helicopters when he does not want to sit in traffic.  Who is living in a bubble now?  I would love to see an Intrade contract tracking Nouriel Roubini's irrational exuberance!

Nouriel Roubini is a side show to the Premier of China, Wen Jiabao.  The number one story on Bloomberg today says Wen is "worried" about China's holdings of Treasuries and wants assurances that the investment is safe.  Of course the investment is safe!  This guy is not dumb; this is exactly what he should be saying.  The Chinese have us with both hands tied behind our back, and he knows it.  President Obama needs to get to China ASAP and make good with what should be our best friends.  More importantly, the Chinese are going to likely strong arm the administration to "break the buck."

One of the most important calls we have been making this year is based on the relationship we see between stocks and the US Dollar, which we have referred to as "breaking the buck!"   

It's been our contention that for most asset classes to re-flate in this current environment, the dollar needs to weaken. Guess what the Chinese want today?  Wen wants the US$ to weaken to inflate assets domestically, which will make US$ denominated debt more attractive to foreigners.

The current administration is relying on China to sustain its buying of Treasures to fund billions spent on the economic-stimulus package.  Year-to-date, the Chinese have lost money on what they have bought so far.  I don't even need to look at the futures to guess they are probably higher right now...  

After a strong performance in the S&P 500 this week, the Research Edge immediate term Trade model shows -6% downside and only 1-3% upside.  It was not popular to be buying stocks on March 9th, but ironically, today after a +11% move in the S&P in a week, more people feel better about the market and are buying.

Function in disaster; finish in style.

Howard Penney
Managing Director


EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level. OPEC announces on Sunday if it will cut production or not.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +16.9% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.

TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.


EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD.  Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

IFN -The India Fund- We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit. Trade data for February paints a grim picture with exports declining by 15.87% Y/Y and imports sliding by 18.22%.

XLP -SPDR Consumer Staples- We re-shorted XLP yesterday as the market was cooling off its up move. XLP continues to perform terribly.

LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.2915. The USD is up versus the Yen at 98.2910 and down versus the Pound at $1.4030 as of 6am today.

HIBB Quick Take: I Like The GM

Trendline comp trends were right in line with competitors (if not slightly better). SG&A was a bit above my model -- as is often the case with HIBB (one of my lingering concerns with the company). The 25% boost in D&A did not help either -- but I'll take that given the capex spent on JDA and DC build-out as those two items should start to help Gross Margin. Interestingly enough, the 159bp boost in Gross Margin is what made this quarter.

I like the square footage growth here, as well as the gross margin story in conjunction with cape rolling over. Tough to find that in retail these days. My lingering concern is SG&A control. If I can gain comfort that this won't eat into cash, I'll get more excited.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.