Sales Day Is Dead

WMT has put the lid on monthly sales reporting as of today.  Initial read could be negative, but in reality it's probably for the best.  With WMT pulling the plug, what's the incentive for everyone that competes with Wal*Mart to give out numbers? Yeah, there will be many specialty apparel retailers that will always need to report numbers in order to mitigate massive volatility at the end of the quarter and to facilitate conversations with investors intra-quarter by placating disclosure rules.  But for the most part, the vaunted 'same store sales day' just fell a couple notches on the market's event calendar.


From WMT's Press Release 

"At the start of this fiscal year, Wal-Mart revised its approach to providing guidance for sales. We went from providing guidance for monthly sales to forecasting a guidance range for our U.S. businesses for the full 13-week period," said Tom Schoewe, executive vice president and chief financial officer for Wal-Mart Stores, Inc. "Moving forward, we will no longer report monthly sales. We will provide comparable store sales results on a 13-week basis, along with guidance for the upcoming 13-week period. And, we will release this information during our scheduled quarterly earnings calls.

Beta Shifting - Down

"Chasing Performance is like driving while looking into a rear view mirror."
-Andrew Barber
Over the past week, a number of our Research Edge Macro musings have suggested that the data points being released on housing and jobs is like looking into the rear view mirror.  If you are just waking up to the good news today, after a +36% move in the SP500, it's already over. 
We are now preparing for the next 3-month move, not reacting to what is being released today.  In the halls of Research Edge, this Friday has become a pivotal day as it culminates the consensus thinking on three macro data points.
Two of the data points: retail sales and the results of the stress tests, will be out shortly.  The odds are that we will hear from the nation's retail companies that April same store sales benefited from the Easter shift, warmer weather and a bounce in consumer confidence.  In addition, we will get the official stress test results, most of which have been leaked to the market any way.  With the Financials (XLF) being the best performing sector over the past month, up 22%, is it any surprise that that we will see anything but a "reassuring"?
The third key data point is tomorrow's monthly jobs report.  Any potential concerns about Friday's jobs report evaporated when the ADP employment report was released yesterday.  This set a clear positive tone for the market yesterday and looks to me like more than a few people were chasing performance.
The "good news" has propelled the S&P 500 to 919 and prompted us to take the proactive step as risk managers to lower the beta of our virtual portfolio.  Yesterday, we sold some of our high beta, small illiquid small caps companies and on May 5th we bought gold and select Healthcare companies as part of this safety trade.  Right now the Research Edge quantitative models suggest that the market could selloff to 881 if good news isn't as good news gets anymore. 
On Tuesday of this week, there was a BIG positive divergence in the "safety trade" just as the Research Edge quantitative models flashed that every sector in the S&P 500 was positive from a TRADE and TREND perspective.  Yesterday, with the Financials and Energy outperforming, the safety trade may have been a one day wonder; not likely.  As a point of reference, on March 9th not a single sector was positive from a TRADE or TREND perspective. Back then, we moved to our highest invested position in US Equities - looking at Keith's sheets this morning, now he's at close to his lowest. Apparently even a hockey player understands how to buy low and sell high.
The two sectors that led the way from the March 9th lows, Technology and Consumer Discretionary, have been lagging as of late, though they still finished slightly higher yesterday. Working against the potential move to 880, is the decline in the dollar, as the dollar index finished down just over 0.4% yesterday. 
While I'm in sync with my team's thesis that with the dollar down, everything else REFLATES, it is slightly disturbing to think that a real break down in the dollar from here suggests a whole new set of problems. Be careful staring into the rear view mirror this morning - as we look ahead, "reassuring" is going to be as convincing as Tim Geithner's larger macro stress test will get.
Function in disaster; finish in style.
Howard Penney
Managing Director  



VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed.

EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months. With interest rates at 3.00% (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.


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.


GLD - SPDR Gold-We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  


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


EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/6. 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-the government cut its forecast for the fiscal year to decline 3.3%, and we see no catalyst for growth to return this year. We believe the BOJ's 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". 
EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. 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.
DIA  - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price. 
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.

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%.  


EWL - iShares Switzerland - We 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.

MCD – The Coffee Ads – Part 1

The McDonald’s bulls are counting on the McDonald’s marketing machine to work its magic on premium coffee.  I don’t think anybody in Seattle is shaking at the early commercials. 


I have seen two commercials, one geared toward men and one toward women.  The one where two women in a coffee shop get so excited about new McDonald’s lattes goes like this;


Woman - 1: Now we don’t have to listen to jazz all day long!
Woman - 2:
I can start wearing heels again.
Woman - 1:
Read gossip magazines! (tosses book away)
Woman - 2:
Watch reality TV shows…
Woman - 1:
I like television!
Woman - 2:
I can’t really speak French.
Woman - 1:
I don’t know where Paraguay is!
Woman - 2:


This is how McDonald’s wants to portray a woman willing go to McDonald’s to buy a premium coffee - stupid!   Yes, the average woman to want stop pretending to be smart so they can go to McDonald’s and be stupid again!


MCD – The Coffee Ads – Part 1 - mcdads



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.

Squeezy Is Resting: SP500 Levels, Refreshed

As of 2PM EST, I have re-run the math on Squeezy's appetite. He's had his fill and is done jumping (at least for 300 basis point moves higher).


I have outlined Squeezy The Short Squeeze Shark's resting zone in the green shaded waters below. Dear Depressionista, don't doubt that he's down there for one second. There is a meaningful level of intermediate TREND line support now between 815 and 851 in the SP500.


Above that shaded green buy/cover range you have a line that Squeezy will snap at - that's the green dotted line at 880.  I think this market will definitely find some volatility between where its currently trading and my refreshed top end of the immediate term TRADE range (dotted red line) at 920 in the SP500.


What are the catalysts for 920? More of the same. What are the catalysts for a selloff to 880? Selling on the news...


Between now and Friday's market open we will have 3 community's issue "news":


1. US Retailers (same store sales)
2. US Bankers (stress)
3. US Employment Report


All 3 of these constituencies will be spinning their wheels trying to tell you why Squeezy has been chomping on the shorts since March the 9th. Come Friday morning, all of this will be news that's in the rear view mirror.


Keith R. McCullough
Chief Executive Officer


Squeezy Is Resting: SP500 Levels, Refreshed - squeezy1

SBUX – Starbucks, Capitalism and Prosperity!



The Washington Post recently reported that a new Starbucks opened in Warsaw and there were lines around the inside the store, out the door, and up and down the street! 

So much for a company in trouble!  While some in the investment community might have the perception that the Starbucks brand is tarnished in the US, in Central Europe, the arrival of Starbucks has been greeted with “undiluted enthusiasm.” 

Globally, many US consumer companies with strong brands provide a certain status symbol to a particular county.  It’s interesting that the author of the article noted that “the arrival of McDonald's in Warsaw in the early 1990’s signified for many the arrival of capitalism in Poland.  The arrival of Starbucks in Warsaw signifies the entry of Central Europe not just into the capitalist world but also into the world of 21st-century-style prosperity.” 

Starbucks and prosperity!  Sounds good!  


Prosperity in Poland is a far cry from the dark days of communism and it appears that Starbucks is the brand Poles associate with prosperity!  The coffeehouse culture is a tradition in Europe, especially Central Europe; as coffeehouses became meeting places where people gather.  Has Starbucks brought the coffeehouse culture full circle in Central Europe? Seems like a strong bet to make.


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.  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.   


Starbucks Coffee, Warsaw Poland

SBUX – Starbucks, Capitalism and Prosperity! - sbuxwarsaw


Meet The New Boss: China

Brazilian exports to China surge ahead of those to the US


With Beijing's stimulus program kicking into gear it now feels as if the whole world has jumped on board the China-Bull bandwagon. The latest export data from Brazil will no doubt help convince even more buyers to pile in now AFTER a 42% YTD run.


Demand for Brazilian commodities helped total exports to the Ox exceed those to the US  for the first time in March. Data issued yesterday showed that Chinese exports topped those headed to the US again in April, with the gap almost doubling to just under $900 million.


Meet The New Boss: China  - braz1


Iron ore has led the charge -with China customs reporting a 46% Y/Y import increase to 52 million tons in March and Transport Ministry estimates for April coming in just under 54 million tons. For Brazilian producers, the convergence of Beijing's stimulus with decreasing capacity from exhausted domestic Chinese mines has been a bonanza.


From a currency perspective, the Real's performance on a Yuan basis has not diverged from the Australian dollar significantly enough to impact the near term competitive landscape; but  the way "O Cliente" is throwing money around suggest that, for now, there is plenty to go around. 


Meet The New Boss: China  - braz2


If you were reading our work in January you know that two of our primary themes for Q1 were the Chinese stimulus program driving their economy back into motion and commodity reflation as that momentum drove demand for basic materials to rebound. Now that "O Cliente" is firmly in the house, it seems that Brazilian exporters have provided indisputable confirmation of the second point.


One of the problems with predicting the stimulus impact going forward is the concentration factor: like a shot of adrenaline for a body without a pulse, the impact of stimulus needs to be massive and sudden to kick start the heart.  This sudden, jerky capital deployment could well lead to significant volatility in economic  data reports, making it dangerous to overreact to any single one.


We are long the Australian equity Market via the ETF EWA, and will look for opportunities to go long Brazilian equities via the ETF EWZ at a lower price. As the Chinese stimulus thesis is now consensus we will be taking risk management cues from price action, and will keep you posted on our thoughts.


Andrew Barber

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