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Heli-Ben's Buck Breaking Mission Remains


Today the Fed announced that they've purchased another $3B worth of US Treasuries. These were all bonds with 2010 and 2011 maturity dates. One of the ways that Bernanke can Break the Buck is by buying Treasuries. After the Fed's announcement, the US Dollar rolled over and is currently trading down on the day down at $85.14.


Not surprisingly, as the buck breaks down, US Equities are testing the short selling community here right at the breakout line. The SP500's breakout TREND line remains 822, while the USD's breakdown TREND line remains 84.87.


In yesterday's Q2 Macro TREND conference call I walked through the theme of The Queen Mary Turning (cost of capital breaking out to the upside). While the likes of Timmy Geithner doesn't get this, I am certain that Heli-Ben does. Now that he has cut rates to zero, the only way Bernanke can stop the upward inertia in the chart below (10-yr yields), is to buy Treasury Bonds.


(chart courtesy of stockcharts.com)

Heli-Ben's Buck Breaking Mission Remains  - 10yr


When it comes to SBUX, most investors have been focused on the company's significant number of store closures, particularly in the U.S, and rightly so because SBUX was growing too fast!  Just last quarter, management increased the number of anticipated closures by 300, bringing the running total to 961, including the 61 closures in Australia (800 in the U.S.).  SBUX may announce further closures as it continually evaluates its stores' performances, but at the same time, it is important to remember that SBUX is still growing, largely outside the U.S.  To that point, SBUX announced the opening of its first store in Poland today.  The store is being opened through a joint venture with AmRest Coffee, Sp. zo.o, a partner that was responsible for opening SBUX's first store in the Czech Republic and operates nine stores in the country and is already a joint-venture partner in the Hungarian market. 


SBUX has highlighted that one of its key initiatives going forward will be to "focus on disciplined global store expansion in key markets."  Note the mention of "disciplined" growth as management will unlikely forget the mistakes it made in the U.S.  Importantly, much of SBUX's growth internationally stems from licensed store and joint-venture growth (as is the case with the new store in Poland).  Licensed and joint venture stores make up about two-thirds of all SBUX's international stores versus less than 40% in the U.S., and SBUX plans to open 360 net new licensed stores internationally in FY09 relative to only 70 net new company operated stores.  This licensed growth strategy lessens the risk to SBUX as it allows the company to rely on its partners' capital while still benefiting from increased royalties and licensed fees.  The company's growth in other markets, like Poland, will also decrease SBUX's relative international exposure to Canada and the U.K., which currently make up about 77% of SBUX's international comparable sales growth and have been largely responsible for the slowdown in international same-store sales growth.   

The Golden Rule

"I followed a golden rule, namely, that whenever a published fact, a new observation, or thought came across me, which was opposed to my general results, to make a memorandum of it without fail, and at once."
-Charles Darwin
You can take Darwin's rule, or any repeatable objective process for that matter, to the bank when it comes to managing risk in markets.
On the topic of risk management, in his speech yesterday, Goldman's current CEO, Llloyd Blankfein, did the best job I have yet seen a horse and buggy whip driver do in the last 18 months. As the published facts change, its encouraging to see that some of the said leaders in our financial system have the ability to evolve their processes.
Ex-Chairman of Goldman Sachs, Robert Rubin, maintains as close to the opposite of what I (and now seemingly Blankfein), consider an objective and proactive risk management process. Mr. Rubin spoke at Yale last night, and apart from being late for his lecture (a metaphor for where he was throughout this financial crisis while at the helm of Citigroup), he proved to be what he is - a lawyer and an actor, who simply doesn't do global macro.
Lawyers are cool - I have nothing against them - but I just don't want one being the Overlord thought leader of the US Financial System (Larry Summers and Tim Geithner are his disciples). While I was impressed enough with Blankfein yesterday to stop shorting GS stock (see my note on the Portal titled "GS: Some Love For Lloyd"), once I caught wind of Brian Moynihan potentially being the successor to Ken Lewis as CEO of Bank of America, I had to re-short BAC.
Moynihan, like Rubin, is also a lawyer. Not having a global macro risk management process in what Blankfein himself echoed as what we have been calling the "global interconnectedness" of markets is basically unacceptable. Never mind not taking ANY accountability for the financial mess America is in, last night Rubin proved to me that not only does he not do macro - the man doesn't do math.
I know, it's sad and alarming altogether... and plenty a Yale Law School student was saying as much in the hallway last night after Mr. Rubin finished dancing around their questions. He reminded them that what was once considered the financial wizardry of some Wall Street billionaires is nothing more than a story we all know too well - the Wizard of Oz.
I am certainly no Robert Rubin and, as I was having dinner with my wife last night, I thanked God for that. There is no amount of money you can give me to break my Golden Rules. Call them cheesy, or not worthy of whatever it is that matters to people where the only aspiration in life is compensation and being in the club - that's cool with me. My name is Keith McCullough, and I am a Risk Manager.
Yesterday, my Golden Price Rules took me to a place where I was forced into risk management mode. As the US Dollar broke out through my critical TREND line resistance level of $84.87, almost everything that I was long stood a chance to DEFLATE. I immediately cut my Asset Allocation Model's position in Commodities from 21% to 15%. I took down my exposure to International Equities from 10% to 6%. When intermediate TREND lines like the SP500 and the US Dollar are penetrated, the Golden Rule remains - manage your market exposures!
With the SP500 down -3.2% now on the week, my decision to drop my US Equity exposure down to 4% three days ago looks less bad than my decision to stay long oil. Now I am in a position to buy more. Everything has a time and a price. In a market that's dominated by the interconnectedness of global macro factors, prices are, in and of themselves, catalysts. When you have a marketplace full of actors who are lying and hoping, the only published facts that really matter are those that are marked-to-market.
While Rubin had this sweeping diatribe last night that "no one could have seen the confluence of forces" at work within the cosmos of everything but what his 2003 book didn't miss, we men and women who have navigated the last 18 months of these markets profitably know better than to trust a politicians crutch speech. Yale's Economist, Robert Shiller, was in that room last night - if I only You Tubed the look on his face. The New Reality is that from both a behavioral and mathematical perspective, proactively predicting fear and greed is getting less trivial by the day.
Yesterday, I proactively predicted that a fall down in the SP500 through the 823 line would create further selling pressure - particularly if the US Dollar holds its bid. Now my SP500 downside target is -4% lower at 784, and provided that the buck can't breakout and close above $86.33 in conjunction with that downside test, I think the US market is setting up to make another higher low.
On the margin is that bullish or bearish? I don't know. My goal isn't to be either - it is to be right. What I do know, is that you need to approach every day with a plan. And the plan is that the plan can change. All the while, stress test your models and risk/reward matrices. If your mind and investment process has the ability to evolve, your place in history will most likely look a lot more like a great Trader named Blankfein than one Greek Philosopher slash Actor named Robert Rubin.
Best of luck out there today,


XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done).  The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide.  There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLB - SPDR Materials -Materials was the third worst performing sector yesterday (4/07) and has a tough time when the USD is up. It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis.  Domestically, materials equities should also benefit as the stimulus plan begins to move into action.

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. 

GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

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

EWL - iShares Switzerland - We shorted Switzerland yesterday (4/07) 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.

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 down versus the USD at $1.3217. The USD is down versus the Yen at 99.8530 and up versus the Pound at $1.4664 as of 6am today.

EWJ - iShares Japan -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 used our third bullet to re-short the DJIA yesterday (4/07).  We believe this "blue chip" industrial based group of companies will underperform in a market decline.

XLP - SPDR Consumer Staples- Consumer Staples looks negative as a TREND and positive as a TRADE. 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.

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Our Home Furnishings Call Is Getting Tough To Argue With

Great quarter from one of our favorite names - Bed, Bath and Beyond, which crushed my above-consensus estimate by over 15%. The SIGMA chart below speaks a thousand words here. We're seeing both inventory/sales spread get more favorable while gross margins are coming in ahead of expectations. With compares for the upcomming few quarters increasingly easy and the trajectory looking good, I continue to like this one.


Our Home Furnishings Call Is Getting Tough To Argue With - BBBY Edited SIGMA


Rather than go on about the merits of BBBY's quarter, I want to hit on a few thematic notes, as well as company-specific divergences within the Home Furnishings space.


Looking at retail sales and personal consumption, we're seeing a positive inflection point in each (keep in mind that ‘less bad' is good in our model). There is a bullish call to be made in this space based on the emerging macro-economic trend of employment turning and a housing bottom. No, we're not saying you should run out and buy Toll Bros. Quite the opposite, actually. We like companies that will benefit from consumers staying put in their existing homes, with plans of doing so for a while. That usually means sprucing up one's home, and catching up on deferred capex.


Who will capitalize? If you listened to any conference calls on the fourth quarter, you heard some good mixed with the bad on the home furnishings front. JC Penny, Williams-Sonoma, and Wal-Mart mentioned the increased time spent at home eating and entertaining as a cause for less bad home furnishing sales. Then others like Target (that can't seem to get out of its own way) highlighted the risks they face as well as the efforts they are taking to consolidate SKUs to fix the business. .


Here's an overview of what different management teams had to say about the home furnishings space this quarter.


"There is one major behavior change we have seen during the past year that has had a significant impact on our home business. Families are definitely eating more often at home. While we expect this to have a positive impact on grocery, we also have seen increased comps in home categories for cooking, dining and entertaining at home," Eduardo Castro-Wright - WMT Vice Chairman - Q4 CC.


"From a merchandising perspective, we had negative growth in all key categories, although bakeware, electrics and cookware were less pronounced. Exclusivity and perceived investment value continued to drive these categories as people are eating out less and entertaining at home more," Dave DeMattei - WSM Group President - Q4 CC.


"Another bright spot was our home business that has experienced stability over the last few months," Ken Hicks - JCP President, COO - Q4 CC.


"We're seeing a little bit of life in the home business as we start the spring season. I think that may be the bottoming effect of home furnishings over the last two or three years. We may be seeing a better trend going forward. Although until the housing crisis is more or less fixed on a macro basis, it's going to be hard to see great increases," Mike Ullman - JCP CEO - Q4 CC.


"In our retail segment our results were characterized by a fundamental change in consumer spending patterns that negatively impacted both our traffic and sales, particularly in higher margin discretionary categories like seasonal, apparel and home," Gregg W. Steinhafel- TGT CEO - Q4 CC.


"On the highly discretionary side in home and [...] we're looking at mid double digit comp decreases [for 2009]. We are very conservative in apparel, home and seasonal categories where there is significant markdown risk," Gregg W. Steinhafel- TGT CEO - Q4 CC.


Zach Brown

Our Home Furnishings Call Is Getting Tough To Argue With - Home Furnishings SIGMA
Our Home Furnishings Call Is Getting Tough To Argue With - Home Furnishings Sales Chart


Russia: Reward Outstrips the Risk

Position: Long Russia via the etf RSX

Everyone's aware of the geopolitical risk associated with Russia.  Below are negative and positive factors for framing this debate; we believe reward outstrips the risk. As always, price rules.


  • Russia has a massive amount of debt to refinance this year (~$100 Billion)
  • Siberian Services (an oil drilling company) defaulted on $100 Million of debt today. This is the second case of default in Russia this year (Finance Leasing Co.)
  • Volatility of Medvedev and Putin Government remains a constant
  • Inflation at 14% in March Y/Y
    • Volatility in the Ruble (despite intermediate stabilization) is always a credible threat. Should inflation extend itself, it will put further pressure on the price of imports


  • Russian stock market (RTSI) is up +36% since March 1st or +17.2% YTD
  • Russia benefits from Commodity Reflation
    • Economy is levered to basic materials and energy commodities
    • In Q408 natural gas and oil accounted for 46% of total export revenues.  (Down from over 50% in 1H08)
    • Credit Suisse upgraded Russian stocks today, citing stabilization of oil prices
  • Proximity to THE client, China
    • Russia has what China needs-Oil.  Russia did a major oil deal with China in mid- February '08. In return for 300,000 barrels of crude a day for 20 years, China loaned $15 Billion to Russia's Rosneft (oil firm) and $10 Billion to Transneft (oil pipeline co.). The loans will help capitalize their balance sheets and promote expansion
  • Increased Ruble stabilization versus its trading band
  • Early cycle in mark-to-market prices to expedite its purge
  • Putin issued a $90 Billion stimulus package yesterday
  • International reserves up last week $2.7 Billion to $388 Billion, third largest in the world

We're currently long Russia via RSX, which we bought for a second time this year on 3/27.

Matthew Hedrick

Russia: Reward Outstrips the Risk - ruskie



Now we know why EAT's CFO Chuck Sonsteby was so bullish about margins!  EAT preannounced its 3Q09 earnings and even with same-store sales slowing from 2Q09 to -5.6% from -4.5%, management expects EPS of $0.44-$0.45 versus consensus at $0.29.  Based on this guidance, operating margins will likely improve by 180-200 basis points year-over-year following five quarters of year-over-year margin declines.  Management attributed these better than expected margins to cost of sales favorability, lower preopening expenses and better control of labor and G&A expenses.   And, as I said last week (please refer to my April 3 post titled "EAT - Is There A Paradigm Shift in Casual Dining?"), there appears to be more fat still left to cut, largely related to the company's recently announced organizational changes and decision to have Todd Diener, serve as the president of both the Chili's and On the Border brands.  This will lead to more management cuts across the two concepts.  That being said, EAT's press release stated that management expects its current margin momentum to continue into fiscal 2010. 


Some of EAT's margin favorability was offset by weaker than expected same-store sales growth in 3Q09.  Despite the sequential slowdown in same-store sales on a year-over-year basis, EAT's blended 2-year average trends improved slightly in 3Q09 to -2.3% (from -3.3% in 2Q09).  Chili's same-store sales growth declined 5.2% in the quarter but on a 2-year average basis, decreased 1.8% (from -3.3% in 2Q09).  Traffic trends at Chili's worsened in the third quarter, declining 9.6% versus -5.5% and -5.8% in 1Q09 and 2Q09, respectively. 


EAT's recent same-store sales and traffic trends reaffirm my view that it is unlikely we will see a significant improvement in casual dining sales trends in calendar 2Q09 from the -3% to -5% levels.  The issue facing all operators will be the impact on the P&L from discounting in an effort to drive customer counts.  As of yesterday, Chili's started its "10 meals for under $7" deal (not reflected in the 3Q09 numbers).  In 3Q09, Chili's price and mix increased sequentially on both a 1-year and 2-year basis while traffic declined.  Going forward, Chili's could see a tick up in traffic as it promotes its $7 menu options at the expense of price and mix.   In today's environment, I think this is the way casual dining is headed - less is more.  And EAT has and continues to proactively adjust its margin structure and business model to outperform in this environment.


EAT – LESS IS MORE - Chili s 3Q09 Price Mix Traffic

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