A Tough Visual To Argue With

Yes, Personal consumption stinks – but it reeks less than it has in prior months. Check out the chart below that Zach Brown whipped up – it’s a tough one to argue with. Personal consumption expenditures have bounced about half a percent off the bottom, but home furnishings and softlines are both up 2% over that same period. As this delta in spending gets better, and coincides with tight inventories, a favorable 300bp downshift in SG&A, and capex growth going from +12% last year to -8% in ’09. Now we've got some powerful shifts in China to kick start exports and open up capacity for lower-priced goods (esp shoes and apparel) by improving economics for local manufacturers. This shifts the balance of power back into the US supply chain as capacity opens up again, and bolsters my view that 2H09-1Q10 will show free cash flow growth revert from -80% today yy to +20%.

A Tough Visual To Argue With - American Consumer Chart

Names I like best in retail include BBBY, RL, LULU, PSS, LIZ, UA, and DKS. I don’t like those who are cutting into bone to print profit, such as Ross Stores, Gap, Iconix, Sears, Carter’s, and Jones.

For more detail, see my note from March 31 titled “Retail Narratives Don’t Get Much More Powerful Than This.”


For the times they are a-changin'.
Bob Dylan


The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 


How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!


All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 


Right now as I look at my screen the S&P 500 is at 839 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.


Howard Penney



The recent LVS news has been positive, as has our stance on the stock.  However, following the Bill Weidner and Brad Stone departures, it seems that Mark Brown, President of both Sands Macau and Venetian Macau, has been dismissed from the company.  We’re all for cost cutting but is the knife penetrating too deep?

We continue to believe LVS is worth more than where the stock is trading, even after the 200% move off the March 9th bottom.  However, the number of senior management departures is starting to trouble us a bit, especially as they come at a time when LVS appears to be turning a corner.  Asset sales and refinancing now looks more likely, LVS is outperforming in both Las Vegas and Macau, and Sheldon is putting his money where his mouth is.

Sheldon needs to communicate how he will replenish the management ranks to keep this positive momentum going.  The Venetian Macau and Sands Macau can’t run themselves, neither can LVS corporate.

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Breaking The Buck Can Break German Exports...

German plant and machinery orders for February were reported yesterday and the number confirms our negative outlook on Europe’s largest economy.


Orders fell -49% Y/Y, a sequential decline from the -42% reported in January on an annual basis. For the export-dependent economy (last year exports accounted for 47.2% of GDP), plant and machinery orders are a critical metric and this decline adds to the bearish fundamentals we’re tracking.


Unemployment in March rose to 8.1%, up 0.1% from February; inflation slowed to 0.6% last month (from 1.2% in February) and consumer confidence is ticking downward sequentially M/M.  We’re certain that Chancellor Merkel will be called to answer at the G20 meetings the status of the recovery for the Euro Zone’s largest economy.


Domestically Merkel and Co. are wrestling with the government’s purchase of a 8.7% stake in Hypo Real Estate and the outlook for German carmaker Opel, which GM is prepared to give up, yet neither Merkel nor a private buyer have come forward to foot the price tag. In the balance hangs upwards of 25,000 German jobs. Both decisions will weigh heavily on Merkel’s political prospects as she contends against Foreign Minister Frank-Walter Steinmeier for the Chancellorship in September. 


In the meantime, a broken buck will give the Euro a reflation bid – one that German exporters can’t afford to see…


Matthew Hedrick

Breaking The Buck Can Break German Exports...  - ager

Horror Shows Are Great For US Stocks

This morning’s jobless claims print in the USA was as horrifying as could be expected. Coming in at a new cycle high of 669,000 (see chart), and taking the moving average up to 657,000, this is really bad for the US Dollar – and in a perverse way, fantastic for the US stock market.


Fantastic? Oui oui, Monsieur Sarkozy. If we blow the American balance sheet and economy to socialized smithereens, ze US Dollar will lose its status as the world’s safety reserve currency – and, in turn (in the immediate term) REFLATE, everything that’s priced in bucks. We have been calling this Breaking The Buck.


Does it end well? Of course not – but I get paid to tell you what’s going to happen, not what it’s patriotic to want happen. What’s bad for the buck is great for US exporters who want to crush the French and the German exporters who also want The Client’s (China) orders.


Now that the US Dollar is down hard on the day, THE macro question remains – Will The Buck Stop Here?


Keith R. McCullough
CEO & Chief Investment Officer

Horror Shows Are Great For US Stocks  - bch





"I am a member of a team, and I rely on the team, I defer to it and sacrifice for it, because the team, not the individual, is the ultimate champion. "
-Mia Hamm

At 5 foot 5, from Selma, Alabama, Mia Hamm was the stud-ette of the United States women's national soccer team. This American winner scored 158 goals in international competition  - that's more than any other player (man, woman, or child) in the history of international soccer... and all she wants to talk about is her teammates. This lady doesn't need a "mark-to-model" or a bailout... she needs to be named CEO of the Bank Of America!

Not only on my own investment bench, but on our clients - I have both the pleasure and privilege of working with the best all-around research team that I have ever encountered in this business. In an increasingly interconnected world of interacting global macro factors, the only way to consistently win on the international stage is to collaborate.

One of our European clients sent me a note last night hammering home this New Reality. In his benchmark of competing funds, he's one of only TWO United States funds domiciled somewhere large in Western Europe (I can't say where!) that put up an absolute positive return in Q1. He says we helped him get there - I say he's just pumping our tires. Either way, we have learned quite a bit from his ever so presciently timed research questions.

There is ONE question I have that matters for the US stock market right here and now: Will the Buck Stop Here?

In sharp contrast to Larry Kudlow's view last night that the US needs a "strong dollar", I continue to believe the opposite. At the end of the day, Larry has very politically biased economic views (he considered running for the Republican seat in the CT Senate!), while my views, when it comes to helping protect and preserve your hard earning capital, are simply grounded in the math.

While I am certain that Kudlow and his bank bailout cronies haven't run the math on the inverse correlation between USD and the SP500 in 2009, that really only means one thing - we can all continue to pick off alpha points on this daily playing field. Larry can follow the leaders of The New Reality from the bleachers.

There is a definitive line in the sand here for the US Dollar Index at 84.93. That's what our power users call the intermediate TREND line. If the US Dollar can break down again and close below that line, the SP500 will bust out to higher immediate term highs (immediate term upside target is 825, then 843). Conversely, if the buck stops going down, right here (trading this morning at 85.18), I think the SP500 will see a swifter -5% boat of downside than John Kerry's political career.

Last month is over. So is last quarter. So is yesterday... What we do today is the only game that matters. Without reading Mia Hamm's book, "Go For the Goal",  the Cliff Notes on her winning advice would be to focus on where the ball is going next, not where it's been.

With the US futures indicated up and everyone from Larry to anyone stuck with some of these horse and buggy whip banking stocks praying that FASB changes the rules on "marked-to-market" accounting, remember one thing - prayer is not an investment process!

For the week to-date, the US Dollar is now on the verge of being DOWN again. Don't forget that the 3 straight weeks that we saw of US stocks getting squeezed had the underpinning of Bernanke "Breaking the Buck." The week of March 16th, 2009 was the worst down week for the US Dollar basket, EVER - and yes, ever is a long time.

For the week to-date, the SP500 is on the verge of being UP again. Don't forget that the SP500 started the week at 815 (it went out at 811 on yesterday's close). While I was surprised that we didn't hold onto yesterday's opening SP500 low of 786, and I mistakenly didn't cover any of our shorts into those low bids, that certainly doesn't mean we can't go right back down there today, tomorrow, or next week for that matter. The SP500's immediate term fate will be decided by where the US Dollar goes from here.

The Chinese are doing their part to support a weak US Dollar policy. Never mind the politically charged rhetoric coming out of the G-20 meetings - the Chinese clearly didn't go to these meetings today to make enemies. Ever sit across the table from a Chinese businessman? I have - many times - and no matter what they are thinking, they're always smiling right back at you. Watch what they do, not what they have their translator say.

What the Chinese are doing this morning in global currency markets, while our politicians are sleeping, is of major consequence. The Chinese are providing swap lines, based in Chinese Yuan, on the order of $95B (650B Yuan), to the following countries: South Korea, Malaysia, Indonesia, Argentina, Belarus, and Hong Kong. Why? The Chinese have clients too - and they want those importers to be able to avoid buying le Chinois in ze US Dollar, eh...

I wonder if ze Nicola of de Sarkozy understands dat math? I doubt it. And don't ask Kudlow to run the excel sheets for the French or our moonlighting President of everything rock star Obama either. These guys are big government interventionists - they don't get it.

Thankfully, Ben Bernanke does get it, and he's doing his best to contribute in Breaking the Buck. As China gets the job done on the playing field rather than at the G20 tables of head nodding, Heli-Ben has his nose in the scrum buying back US Treasury Bonds. This, of course, dampens the US Dollar's bid, and also allows assets, from stocks to commodities here in the USA to REFLATE!

Don't let the Depressionistas focus your mind on inflation yet - there will be a time for that, and it's not now. What we have here in the USA is a failure to communicate - a failure of polarized and partisan wanna be economists to articulate The New Reality. From your American home to your 401k, what we have here is DEFLATION - and the only way out is to REFLATE, by not letting The Buck Stop Here!

May the best research teams who continue to collaborate win,


RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle via a quicker decline in asset prices. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.  

USO - Oil Fund- We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.  

EWC - iShares Canada-We bought Canada on Friday (3/20) into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.   

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.  

XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks.  Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing.  Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment.  As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.

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.

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

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


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 $1.3296. The USD is up versus the Yen at 99.5890 and down versus the Pound at $1.4616 as of 6am today.

EWL - iShares Switzerland - We shorted Switzerland for a TRADE on an up move Wednesday (3/25) and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials. Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".

DIA -Diamonds Trust-We shorted the DJIA on Friday (3/13) and Tuesday (3/24).

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- Consumer staples was the third worst performing sector yesterday. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.

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.

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