Chart Of The Week: Breaking The Buck

Suffice to say, the masses are beginning to figure out this inverse relationship. AFTER things really move, that's what revisionist historians do.


Over the course of the last 3 weeks, this REFLATION trade has really been amplified (see chart). While last week's down -2.5% week-over-week move in the Dollar probably created capitulation short covering in everything high short interest, that certainly doesn't mean that this inverse USD/SPX correlation will cease to exist.


If you're looking for lines in the USD Index that matter, here's what I'm using:


•1.       USD immediate term oversold = $82.69 (bounces from that line will create short term selling pressure in stocks)

•2.       USD immediate term TRADE resistance = $84.15 (all market selloffs should be bought/covered, provided that USD can't close above that line)

•3.       USD intermediate TREND resistance = $85.71 (that's the big line that matters; trading below it with the SPX holding above 861 will remain bullish)


Immediate term TRADEs and intermediate term TRENDs are what I am addressing here. No matter where you go in this market, these durations will dominate daily price action in everything on your screens.


In the long run, if the USD breaks down and closes below $81.11, this REFLATION party won't be so much fun anymore. Instead of smiling when I see a consensus short seller getting squeezed, I will be getting very weary of the US Financial System's long term viability. For now, whatever credibility this conflicted American system has left needs to be respected, above all else.


Rather than buying the SP500 (SPY) this morning, I re-purchased the Technology (XLK) and Healthcare (XLV) ETFs. On a relative basis, these 2 sectors need less financial engineering than others to survive any legitimate economic stress test. No, Timmy Geithner didn't have a US Dollar crash in one of his multiple choice test boxes.



Keith R. McCullough
Chief Executive Officer


Chart Of The Week: Breaking The Buck - chart12

Bah, Bah

"In order to form an immaculate member of a flock of sheep one must, above all, be a sheep."
-Albert Einstein
With all of the early cycle economic recovery facts largely in the rear view, it's actually getting harder to NOT chase the flock these days. On Friday, I started selling at 2:21PM, but the reality is that I had been selling too early throughout the week, so what do I know anymore?
Other than not translating my risk management decision of selling longs into shorting everything that ticks, I guess the only good news associated with my not waiting to sell everything at the highs on Friday was that I proactively predicted my own behavior. After all, my Early Look from Tuesday May 5th was titled "Selling Early"!
After a great March/April run, I've been taking down exposure to long positions that have worked. That exposure move and the recommendation to downshift the beta in your portfolio (buy healthcare, gold, etc...), was not an explicit signal to start short selling everything you see that's up. With the US Dollar getting hammered like it is right now, being short anything in size that could be the recipient of a more amplified REFLATION trade is borderline reckless.
In our virtual stock picking portfolio (see I have recently cut the number of long positions in the portfolio in half. At the beginning of May, I wrote about running with a 30-8 ratio of longs to shorts - now I'm at 17-9. Unless the SP500 breaks down and closes below the 894 line, I'll keep a long bias.
With the SP500 up 37.4% from the March 9th Depressionista freak-out low, am I interested in shorting stocks? Of course! I'm always interested. I love shorting stocks. I am as interested today as I have been every day in 2009 - but that doesn't mean I need to giveaway performance for the sake of feeling "smart" - smart is as smart does.
Having read more than a few of the "smart" money quarterly letters from Q1's end when the flock of sheep was telling you to lock hoofs with them and jump off the cliff, it will be fascinating to You Tube some of their mid-quarter updates. For Q2 to-date, the SP500 is up +16.5% to the strong side and the Russell 2000 is up a mind numbing +21.1%.
So, with the Stress and the Swine tests out of the way, what is a stock market operator to do this fine Monday morning? Now that earnings season has squeezed the brains out of the "oh, you just wait for earnings season" sheep, should we already be looking forward to next quarter? Should we stay long, or should we go short whatever and be wrong?
Being on the sidelines is a reasonably safe job, if you can get it. I don't especially enjoy riding the pine here as I watch other market participants collide head on, but I needed a break. With volatility (measured by the VIX) as oversold as the US Dollar is all of a sudden, I'm cool with watching, for now... the SP500 could easily drop 4% in a day, or over the course of 1-3 days for that matter, and I don't think a whole heck of a lot about this game will have changed. We'll keep making higher lows on selloffs.
For now, the most dominant macro factor playing out on the field of the US market remains Dollar DOWN and everything priced in Dollars UP. The US Dollar is broken across immediate and intermediate term durations. If the US Dollar Index breaks my long term duration line of 81.11, that's when I will stop talking about Breaking the Buck, and focus more explicitly on Breaking America's Back.
A country's currency is the confidence interval that the world has in her. Around the world, as either the commodity prices that they anchor on or The Client (China) they service goes, so do foreign currencies. Right now, as the US Dollar's Credibility Crisis moves into prime time, you're seeing breakouts in foreign currency markets from Brazil to Australia. These countries don't have the compromised and conflicted banking system that we have - or at least if they do, it isn't being You Tubed, daily....
As the world's sheep flock to perceived higher integrity pastures, what is a US stock market operator to do? Pray? Maybe - but what side of your book would you be issuing your most passionate cries for help - long or short? Are you an investor for the "long run" or a Depressionista who gets smoked in the short run?
I certainly don't purport to know the answer to any of these questions, but I do know that I won't be rubbing elbows with the likes of Bill Ackman as they find their way back onto CNBC to talk about being invested on a levered long basis. BEFORE the markets crashed to the downside, the sheep were blind. AFTER the markets had the most fantastic short squeeze in modern history, they remain, "above all, sheep."
Failing to close above the US market's January high of 934 will be bearish in the immediate term. Closing above it will be bullish. I have an immediate term upside target for the SP500 of 941, and a downside support level of 894.
Best of luck out there this week,


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.

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.  

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.

WRC: Getting Easy To Not Like It Again

I struggle with this one. My model has the company missing the quarter by a nickel due to weaker top line and gross margins (see below), and visibility on any stability is six months away at best. I still don't think that the margin structure is sustainable without any temporary help from the Obama administration breaking the buck. In fact, the consensus is looking for flattish EBIT margins at 10% during the upcoming year as well as in 2010. Maybe that's doable, but I can't get to upside - even with sourcing savings on the docket.


But would I be shocked to see them beat the quarter? No. WRC has posted an average 40% variance each quarter over the past 5-years. In fact, this company beat for the last 11 quarters until dropping the bomb in 4Q (just after management sold the most stock since emerging from bankruptcy). Since then the company has not given explicit guidance to the public, but set low general hurdles, and has subsequently worked the conference and 1-on1 circuit meaningfully. Would it have done so in advance of a big miss? Probably not. If another big miss happens, this name will be in 'sentiment purgatory' for a long long time.


But it's certainly not there now. 80% of sell-side ratings are 'Buy' and only 4% of the share are held short. As noted, management timed mass sales magically before the last big miss in 4Q.  But with the stock dropping to $12.60, you would think that management would have jumped back on board, huh? Not quite. Not a single purchase from $13 up to its current $28. Maybe the senior management team is as weary of the current multiple as I am.


Our Model

Our WRC model is coming out at $0.68 for the quarter, $0.05 below the Street consensus of $0.73.  The key difference in our model vs. others lies on the top-line coupled with a slightly more negative forecast on gross margins. 



Revs are decelerating as square footage growth in CK cannot fully offset declines in all other divisions, comparisons extremely tough, and unfavorable FX(-9)%.


Revenues decelerating on a 2 yr basis throughout the year and will decelerate in 1H on a 1yr basis.  Compares ease a bit in 4Q, as this was the first quarter that WRC reported a substantial slowing in sales momentum at any point over the past 9 quarters.


Square footage growth of 20% (up 25% in F08) for CKI will continue to help drive sales in the sportswear and intimate (CK retail) segments.  The most recent data point given at a March B of A conference was that comps were running 10% for retail. While still robust, this was down from a 12% run rate in 4Q.


Timing of swim shipments may have an impact on 1Q as retailers continue to shift receipts closer to need.  Also given the short selling season for swim, it is possibly that wholesale accounts remain extremely conservative on inventory commitments given the inherent margin risk associated with the category.



Decelerating along with sales after huge gains over the past 2 years.  1H especially tough with GM's up 600+ bps total over prior 2 years.


SG&A expected to be down but at a slightly lesser rate than sales. 


$70mm in cost cuts announced for 2009 and more recent headcount reductions are expected to the keep SG&A dollars down for the year by 8%.


Capex/Working Capital

CapEx should be down slightly in 09, $40mm vs. $42mm in 08.  Square footage growth down slightly to 20% from 25%.  Keep in mind that this rate of growth is in the top 5% of retailers in this climate. Why not ease back with capital commitment and hold out for better terms on properties (i.e. LULU, URBN, HIBB, COH).


Inventory position will be the first metric I check when numbers are released. WRC has done a solid job over the past three years with consistently growing inventories ahead of sales. This was when FX was a benefit, growth came disproportionately from International ops, and they sold off low-turning intimate and swim businesses. The extent to which WRC can hold this will be the key to Gross Margin volatility in 2H.



WRC: Getting Easy To Not Like It Again - 5 10 2009 8 38 34 PM


WRC: Getting Easy To Not Like It Again - 5 10 2009 8 29 43 PM


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Macau table revenue fell 10% y-o-y, very similar to March's 9% decline.  The breakdown was also similar with the decline driven by a 14% decline in Rolling Chip revenue, partially offset by a 1% increase in Mass Market.  Once again, Rolling Chip continues to face tough comparisons with the liquidity driven, massive growth last year.  Those tough comparisons will end in September.  Despite the tighter visa restrictions, Mass Market revenue is holding in.


The following are some observations about the property level numbers:


  • Wynn: Down to 12.3% from an 12 month average of 16.3%
    • Some of the drop on Wynn's share is due to lower hold % in month, but Rolling Chip was also down materially, as was Wynn's Mass Market share
  • LVS: Flat from March at 26%
    • Rolling Chip was up 5% y-o-y for LVS's properties on a combined basis (Sands was down but Venetian was up)
  • MPEL: Crown's market share increased to 9% from 8% last month
    • Hold was weak in both March & April, so the share gain was based on better rolling chip volumes
  • MGM: Down to 8.4% vs 9.8% last month
    • Bad hold was responsible as Rolling Chip was up y-o-y
  • Galaxy: Up 2% sequentially from March levels to 12.6%
    • Some of the lift is due to better hold
  • SJM: Up to 31.7% from 30% in March


Y-o-Y Win comments:

  • LVS:
    • Sands up 30% driven by an 85% increase in RC with Mass down 11%
    • Venetian & FS up 14%
    • Total table revenue from Macau + 20% at $253MM
  • Wynn:
    • Down 36%, with VIP down 38% and Mass down 27%, total table revenue: $120MM
  • Crown:
    • Down 54%, total table revenue $89MM
  • Galaxy:
    • Up 17%, with VIP up 30% and Mass down 29%, total table revenue: $123MM
    • Growth driven by Starworld which had table revenues grow 49% to $84MM

APRIL SIMILAR (NOT) TO MARCH - macau april total bac rev shr

APRIL SIMILAR (NOT) TO MARCH - Macau April mm rev shr

APRIL SIMILAR (NOT) TO MARCH - April Macau RC turnover shr

Exports: What Germans Do Best (…or Second Best)


Marginal fundamental improvement leaves us cautiously optimistic


Exports rose 0.7% in March on a monthly basis from February, the first positive month-over-month change since last September, according to data released by the Federal Statistics Office today. The delta here is critical to note. We could only focus on the annual percentage change in exports (see chart below), yet we're of the camp that the incremental improvement of fundamental data points on a sequential basis is confirming that Germany's recession is waning.  Is Germany out of the dark? Certainly it is NOT, however we're bullish that the country's recovery will come sooner and outperform many of its Western European peers, especially if it can get its strong side, exports, moving.


 Additional data points that have come in this week show a mixed fundamental picture:


  • Industrial Production held steady from February's contraction of 3.4% on a monthly basis or fell 20.4% on an annual basis
  • Manufacturing Orders increased 3.3% in March on a M/M basis
  • Retail Sales (excluding autos) fell 1.0% in March M/M
  • Trade Surplus increased to 11.3B EUR in March from 8.6B EUR in the previous month

Not included in retail sales is the success of Germany's auto rebate program. According to the VDIK Association of International Motor Vehicle Manufacturers new car registration in Germany was up over 30% in April year-over-year, and anecdotally the program has been a huge success. The program incentivizes individuals to trade in their old cars (9 years+) and receive 2,500 Euros towards a new car that meets certain emission standards. As we discussed in a post on 4/24, "Germany's Lifeblood Das Auto", the automobile industry has remained relatively resilient despite severe global demand destruction. But the numbers don't lie.  BMW beat Q1 expectations, yet still recorded a net loss of 55M EUR before taxes and depreciation and Daimler reported that revenue fell by 25%, adjusted for exchange-rate effects. GM's German Opel division still hangs in the balance as it looks for a buyer. Increasingly Italy's Fiat looks like a strong candidate.


While the ECB trimmed the interest rate 25bps to 1% yesterday, the cut was largely baked in. We've been harping on the ECB's lethargic call to action to cut for the better part of this year. Yesterday helped to confirm that ECB monetary policy can only go so far, especially as it runs out of room to cut. We've highlighted the positive fiscal stimulus measures issued by countries like Sweden. Additionally we believe that Norway will roar higher due to its leverage to the price of oil. We're oil bulls on a TREND (3 month or more) duration. 


The ECB decision yesterday to pump some 60B EUR in the Eurozone economy through its purchase of euro-denominated covered bonds will help put wind in Europe's sails. Importantly for Germany and Chancellor Angela Merkel, who is fighting for reelection in September, there will be a focus on offsetting the negative sentiment associated with a burgeoning unemployment rate, which currently stands at 8.3%, and getting domestic deals done, like an owner for Opel. Importantly, German confidence indices (ZEW and IFO) have improved in April. Confidence, according to a distinguished Yale professor of European Union Studies that we recently had the pleasure to meet with in our office, is a measure not to be overlooked.


As always, price rules. With the appropriate entry point we'll be considering the etf EWG on the long side.


Matthew Hedrick



Exports: What Germans Do Best (…or Second Best) - germany1



Research Edge Position: Short Indian Equities via IFN


Weekly Wholesale Price Inflation data issues by the Indian Ministry of Commerce today rose for the third consecutive week on a year-over-year basis.  While still well below 1%, inflation has clearly signaled a bottom inside positive growth territory.  For the politicians jockeying for position in the final stages of the National Election, the critical question is how much impact the wholesale decline in the past 8 months has had on the cost of living for the lower economic classes. 




CPI data is released by the Labour Bureau on such a time lag that we do not have a clear view of how significantly prices have contracted in urban or rural areas, but fertilizer prices released today as a component of WPI registered at over 4% Y/Y providing some clues. As a critical component of the cost overhead for the massive portion of India's population laboring as subsistence farmers, we have been watching fertilizer prices carefully. Despite the increase in farm subsidies (including those on fertilizer) as part of the stimulus packages, the price of some basic agricultural products is still higher than many Congress Coalition incumbents from rural states would like. While there has been no indication of any major upsets yet, the opportunity for leftist hardliners to pander to the anger of the rural poor -the 700 million people that have seen the quality of their life improve little (or even erode) during the miraculous economic growth of the past decade, are real and could force a coalition realignment.


We have maintained a negative bias on the Indian economy since launching our firm early last year. Our short bias on Indian equities yielded spectacular results throughout last year, but we were bloodied a bit by a nasty little hit last month after we battled the India Bulls unsuccessfully. Now as the election draws to a close and the markets shake off the impossible promises of the campaign to focus on core issues, we expect the equity market to contract.


With global commodity reflation, slim prospects for increasing internal demand for high tech goods and services sufficient to offset US market share loss and the looming spectacle of the Satyam trials (which may well underscore basic concerns about accounting standards and regulatory controls) there are lots of near term drivers that could prove us right.  As always we will take our cues from price action and change our positions as the data dictates but, for now, we are comfortable being contrarians and shorting the Indian market.


Andrew Barber


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