Russia’s Monetary Bandwidth


Russia's central bank cut its refinancing rate 50bps to 12% yesterday, the second cut in the last month. 


We've had our EYE on Russia this year and have been in and out of the Russian etf RSX on the long side. (We currently do not have a position). The Russian stock market (RTS) has now moved to +50% YTD, overtaking China as the best performing stock market YTD across the globe.  


This year we've been cautious in pointing out the risk premium associated with owning Russia, yet assertive that Russia's commodity based economy stands to benefit greatly from commodity reflation and its ability to supply China with the resources it needs for domestic growth. Further we believe that Brazil, Australia, and Canada share in this thesis. Yesterday we bought Brazil via the etf EWZ and Australia via EWA. Last week Andrew Barber noted in his post "Meet The New Boss: China" that Brazil's total exports to China exceeded those to the US for the first time in March, with iron ore leading the charge. Clearly getting long countries that can feed China's appetite has worked this year. Brazil is up 30% YTD and Russia (especially mining companies) will push higher from increased Chinese demand, which is now being confirmed by copper shipments. 


And there's continued confirmation that Russia understands who the client is.  Yesterday President Medvedev met with Wu Bangguo, chairman of the National People's Congress, to discuss their "strategic partnership" and a number of meetings are scheduled for the two nations this year.


Yesterday's interest rate cut will help to arrest the deflationary environment Russia is experiencing and in theory decrease the cost of borrowing.  In the case of Russia, it is worth noting that the central bank has room to cut, unlike major economies such as the US, UK, Japan, Switzerland, Sweden, and ECB-countries, all of whom are hovering at or around zero percent.  For the commodity levered Russia, inflation is a double edged sword. On the one hand it increases the price of its commodity exports that drive growth, yet on the other puts extreme pressure on domestic prices. By some estimates, inflation could slow to 9% this year, down from the central bank's target of 13%. In any event, Russia enjoys the ability to cut rates due to the stability of the Ruble versus the USD and Euro in the last months.


Look for use to get in on the long side of Russia via RSX at the right price.


Matthew Hedrick


Russia’s Monetary Bandwidth  - russia

Bear Hunter Claims


This morning's jobless claims report was what it was - fundamentally bearish, on the margin.


Bearish for what? is the question however. If this acceleration in both the week-over-week and 4 week moving average (see chart below) is bearish for the US Dollar - then you know what that means for stocks - its bullish.


If this entire blow-off of the peak February Fear Factor on unemployment was a "head-fake", I will be surprised. That said, based on the latest fact, that probability is now back in play, and I'll call that for what it is. The only thing I can do from here is wait on next week's report.


One week doesn't a legitimate Depression redo make, but the Bear Hunters have every right to be back on the field here, armed with this chart and data point in hand. Bearish for what, will remain the question. Mr. Market is forward looking, and in early trading response telling us so far that Bear Hunters are better served being short volatility (VIX) and the US Dollar (UUP), rather than US Equities.



Keith R. McCullough
Chief Executive Officer


Bear Hunter Claims - employ

GIL: Smoke in Mirrors

Here's a statement you'll never hear a management team utter. "We have very little confidence that our largest customer will survive as an ongoing entity."  GIL stated the opposite on its call, which shot the stock higher despite abysmal results. I wonder why GIL managed receivables down to 7% of total for a 32% customer if it is so confident in solvency. Using every ounce of analytical objectivity, I simply can't get to a positive narrative here.


This is one story where you absolutely can't look at the name today without historical context .What we know in piecing together a longer-term narrative...

1) GIL used the multi-year financial windfall associated with a well-executed offshoring strategy to create an offensive weapon to dominate market share in its core business (55%-60% in T-shirts and Fleece).


2) That ended about a year ago, and GIL has since been attempting to grow into lower-margin businesses where the competitive landscape is steeper, the customer relationship is stacked against GIL, and it must compete more heavily on price.


3) The first foray was Wal*Mart and US mass channels. That has clearly not turned out as management planned.


4) This happens at the same time when Broder (1/3 of sales) is on the ropes, and its status as an ongoing entity is in serious jeopardy. Even if it does not go under, it is a mess.


5) So what's next? Yes, the company is looking at Asia (China) to be over 40% of its business within 2-3 years.


6) It is restating prior year's results, reclassifying depreciation, and cutting existing capacity to boost utilization due to weak demand.


So let me get this straight... This is a company that is currently the low cost producer of an unbranded commodity that is looking to grow into Asia. It manufactures almost 100% of its goods in Honduras and the Dominican Republic. So it would be competing with the likes of Li&Fung and thousands of existing local factories that can make product cheaper, would not be subject to import duties, and have a far deeper understanding of the Chinese consumer. This smells so wrong to me in so many ways.


On the flip side, I look at the potential for GIL to boost its capacity utilization by putting Chief Jay Strongbow's 'Sleeper Hold' on existing production and shuttering capacity. Most investors don't remember what leverage this can add to a pure vertical apparel manufacturer given that there are only 1 or 2 that still exist (as opposed to the 1980s where this was the standard). That's something we're clearly researching and will be back with some insight. Also, GIL has a great balance sheet, and that we can't ignore.


But the bottom line for me is that unlike other troubled companies like Crocs, Eddie Bauer, and Warnaco or industry standards like VF Corp, PVH, and even Hanesbrands, I can argue that GIL does not need to exist. If some (unwelcome) act of nature wiped out its major manufacturing facilities, there would be another manufacturer that would step in GIL's place in a heartbeat. With no brand value, the residual value here would be ZERO. I repeat, there is NO call option on monetizing brand value. That factor grows in importance in a climate like this.

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With this coupon Chili’s has effectively taken its $7 price point down to $4.50…..  I’m having a hard time seeing how this can be good news!  If the consumer was inspired by the $7 price point why would you need to provide further incentive!


If you noticed yesterday Keith bought EAT for a TRADE.    It’s consistent with his view of the Consumer Discretionary (XLY) and the market in general.


I continue to be cautious on the early cycle casual dining names!








Trading Bad News

"Formula for success: rise early, work hard, strike oil."
-J. Paul Getty
It doesn't take much to remind you we are in a recession. If you are looking for bad news, it's not that hard to find it. Things are no longer "less bad" - but they are still just bad. US Retail sales unexpectedly fell in April for the second straight month and there continues to be an unsettling rise in home foreclosures.
On this "news" the market was down for a third straight session, finishing near the worst levels for the day.  Things are definitively less bad but the economy is not bouncing back as quickly as some hoped.  Hope is not an investment process. This I understand - every investment decision has a time and a price - adjust and move on.
What struck me as really bad news yesterday, was that Obama administration may be contemplating a major change to  the compensation practices in the financial services industry and possibly moving beyond banks to include hedge funds and private equity firms.  Is there anyone in the current administration that thinks that a hedge fund manager is going to buy toxic assets in partnership with government and accept limits to his/her compensation?
While its unlikely to happen, if it does, it's a real bad sign! Obama has reason to be confident in what he does with an approval rating that stands at 63%, but trying to tell the financial services industry what its employee's can make is border line supercilious and appears if the administration will try to get away with anything.  While there were clear excesses in the past, socializing the pay structure would be devastating over the long run.  Let capitalism run its course!  
The formula for success at Research Edge: rise early, work hard and be thankful we don't have politicians breathing down our necks!  I would like to strike oil, but that is hard to do at the William Howard Taft Mansion in New Haven!  (I know J. Paul Getty was given his oil, but that is not the point).
With the S&P 500 down 2.6% over the past week, the only two sectors that are up over the same period are Consumer Staples up 0.2% and Healthcare up 1.3%.  The rotation out of the higher beta sectors continues, as the worst two performing sectors over the past week are Financials (XLF) down 6% and Consumer Discretionary (XLY) down 5.8%.  As I said earlier, things are no longer "less bad" they are just still bad ... and that favors what we have been calling the "Safety Trade."
Within the construct of Keith McCullough's global macro factors there continues to be positive price momentum across global equity markets on both immediate and intermediate term durations.  The setup is clearly not to repeat the catastrophe that happened in 4Q08.  To that end, yesterday as the market was closing on the lows of the day, Keith was buying select Consumer Discretionary names for a TRADE.  We are now back on the long side of the XLY (Consumer Discretionary ETF).  The MEGA Consumer Squeeze was a block buster call we made in December, and it ain't over till it's over!  Just remember to keep a TRADE a TRADE!
Keith has built an incredible track record keeping a "TRADE a TRADE", but when I put on my industry analyst hat, I'm slightly more suspicious how long the momentum will continue. There are just a few minor changes on the margin that I can't stop thinking about.  
The Research Edge commodity team has a view that oil could have a meaningful upside as the re-flation trade continues to play out, especially with a weakening dollar.  As we have seen over the past month, gas prices at the pump are on the rise.  At some point, the sequential rate of change (week to week and month to month) will begin to impact the consumer somewhat more than the absolute year-over-year decline.  In addition, the consumer related data points from retail sales to disposable personal income will continue to show a sequential slow down as we lap the Bush stimulus program from last year.
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 3.00% (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.

EWZ - iShares Brazil- Brazil continues to look positive on a TREND basis. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.

XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.   

XLY - SPDR Consumer Discretionary-TRADE and  TREND remain bullish for XLY.  The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic.  We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform.  The XLY is a great way to play the early cycle thesis.

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLK - SPDR Technology - Technology looks positive on a TREND basis. Fundamentally, the sector has shown signs of stabilization over the last eight weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (and the game changing ORCL-JAVA deal). The other big potential catalyst is that Technology benefits from various stimulus packages throughout the globe - from China to USA. Technology will benefit from direct and indirect investments.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.

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.

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.

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.

Taking The Other Side Of Garty: We Are Long Of Gold


Research Edge Position: We are currently long of gold via the etf GLD


Keith and I have been readers of Dennis Gartman's (aka Garty) in the past and have enjoyed his ability to uncover interesting data points, even if his timing is sometimes suspect.  This morning, though, we are drawing the line in the sand, while Garty may be short of gold, we are long of the glittery metal. 


 A client inquired to us this morning as to our view of gold and referenced that Gartman was negative due to a negative technical position for gold versus its 50-day moving average.  We have serious questions about the predictive ability of simple moving averages like the 50 and 200-day, but do enjoy finding opportunities that arise when investors arbitrarily anchor to them.  When it comes to gold, we currently see both a compelling quantitative set up combined with a supportive demand back drop.


In the chart that is attached, we have outlined our key levels on gold. Our TRADE level is $894, our TREND breakout level is $912, and our TRADE sell level is $941.  Currently, we believe gold is positive from a TREND perspective, which means we like it for 3-months or more. We had previously made a short call on gold in February, which coincided with the peak of the end of the world trade on gold and was highlighted by Greenlight Capital's David Einhorn emphasizing it as one of his larger holdings.  Obviously the facts have changed since then, most particularly the price of gold, but also a number of fundamental factors.


Some key recent fundamental demand data points include:


  • Based on the most recent reports from the Xinhua News Agency, China now owns 1,054 metric tons of gold, which is the fifth largest reserves of any country. (Italy is first based on most recent reports of 2,451 tons.) In addition, April retail sales from China were reported last night and sales for silver, gold, and jewelry were up 10.4% y-o-y.


  • Indian importers bought 30 metric tons of gold in April, which is a 25% y-o-y increase and was driven by the Akshay festival and domestic fears of inflation.


  • In terms of domestic demand, a great proxy is the amount of gold held in the SPDR Gold Shares, which we are long and trades under the ticker GLD. On January 2nd, this etf held 25,085,095 ounces of gold and currently holds 35,497,611 ounces, which is a 41% increase YTD.


We will continue to evaluate real time data points, but the combination of real demand, a great quantitative set up, and increasing threats of inflation make us bullish of gold, at least until the facts change.


Daryl G. Jones
Managing Director


Taking The Other Side Of Garty: We Are Long Of Gold - gold

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