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Charting Tail Risk: US Dollar Index Chart 1971-2009...


Re-accelerating Chinese Demand combined with the REFLATION trade have basically been the dominating global macro factors behind the bullish stance that we have held for the past 3 months. Everything was prefaced on our "Breaking The Buck" macro call, and for a generational short squeeze in most global equity markets our thesis worked.


Now the Buck isn't breaking - its crashing... so I am back to hunting from the bear camp. If we have an American currency crisis, very few things will work. I am long Gold (GLD) and TIPs (TIP), Healthcare (XLV), and Energy (XLE), China (CAF), etc... and there is no level of certainty that those will work either. Crisis are called crisis for good reason, and I do not use the term loosely.


After trying to resuscitate herself in the early morning, intraday you are seeing the USD break down to lower lows. This is bad. Treasuries are now selling off alongside the US Dollar (which is counterintuitive to people who think Treasuries are "quality"). If US Cash gets trashed, Treasuries are not the "safety trade" that they used to be. The Japanese are already selling Treasuries, and China's order is potentially pending...


My critical line of long term support (81.42) on the US Dollar Index is broken. If this downward spiral of US currency credibility holds, you're going to see a real life stress-test of Mr. Secretary of the US Treasury. This could be one that even the almighty ole boy network won't be able to figure out.


Perceived wisdom is a very dangerous element to this cocktail, particularly when you mix it up with some glaring levels of Washington/Wall Street groupthink. In the charts below, Andrew Barber and I have outlined the same chart flashing a light on 3 different realities: USD solo, USD since Euro, and USD's long standing 3-year moving average. I started this chart in 1971, because that's when Nixon abandoned the Gold Standard.


Think long and hard about these charts, and pass them around to your friends. Who knows, maybe President Obama will get a copy and figure out the point. He claims to "get" it on most things, and I have no reason to believe anyone who is allowed to be objective can't "get" this point. Post 1971 the US Financial System has been based upon the elimination of a post War gold standard and the accepted narrative fallacy of limitless credit creation based on that US Dollar as the world's reserve currency.


This is scary,



Keith R. McCullough

CEO, Research Edge LLC

New Haven, CT


Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us1


Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us2


Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us3


Claiming Confusion?


Confusion in markets can breed contempt. Maybe that's why I am quite satisfied to have sold US Equities prior to this morning's jobless claims report - when considering different points of duration, it was confusing.


This morning's print of 631,000 claims, while better on a week over week basis vs. last week's upwardly revised report of 643,000, still jacks us up ABOVE the 4-week moving average of 629,000 (see chart). Trading above the 4-week moving average puts the tail risk associated with a potential re-acceleration in unemployment trends in play.


At the end of the day, even though a few "strategists" have borrowed my lingo, what happens the margin is what matters most to my global macro model.


If the bulls are claiming confusion this morning, that's because they should be. I'll let them do that as I start to wander on over to my ole friends places in the bear camps. I wonder if I'll find anyone left standing?


Manage risk in the market that's in front of you, not behind...


Keith R. McCullough
Chief Executive Officer


Claiming Confusion? - emply1

Casual Dining – April Traffic Trends

April looks like March, but May is will be slower. There was a slight tick down in the April 2-yr traffic trends for Casual Dining. From what we are hearing month-to-date in May we will see another tick down.


Pricing continues to run ahead of inflation, so margins are holding - this will not last forever!


Casual Dining – April Traffic Trends - cdapril



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ROST: Officially On My Watch List

Quick take on ROST before the conf call.


ROST in line with preannouncement, but the interesting point here is the positive guidance.


This is the first company that I have seen that is taking numbers up meaningfully for 2Q and also addressing 2H.  Their 2Q goes to $.60-$.63 vs. Street at $0.53.  Full year up as well, $2.62-$2.72 vs. Street at $2.53.


Part of this was extremely conservative prior guidance but the other part is obviously more confidence in the sales trends.  Saying flat to down 1% comps for 2Q on top of the toughest compare of the year (+6%).


This may be the biggest surprise of the morning given the size of the company and the trend we have been observing which is to raise #'s one month at a time.  This is a case where the Street was still behind the curve on taking numbers above guidance.


Sigma showing tougher compares on the horizon, but the guidance mitigates this for now.  Comping on comps is a trend we haven't seen for a while.


Eric Levine



ROST: Officially On My Watch List - ROST SIGMA

Obama's Buck

"To be trusted is a greater compliment than being loved."
-George MacDonald
This week's collapse in the credibility of the US Dollar puts what used to be the unthinkable in play - the potential for an American currency crisis. We may very well look back on yesterday as being the inflection point in the American Financial system for many months to come. Breaking The Buck is one thing; crashing it is entirely another.
Does President Obama get this? Only time will tell...  
Can the man deliver on the promise of his rhetoric? Can he hear the voices of objectivity in America's financial ranks? Can he implement an inclusive financial risk management dialogue that isn't Goldman/Geithner centric? The answers to these questions will be paramount in the coming days, weeks, and months.
Dear President Obama,
Whether you hear me now or not, this Buck stops with you.
From the market's opening bell yesterday until 11AM, I was selling as aggressively as I have in all of 2009. I wasn't doing this to amuse myself. When the risk management siren starts ringing, just like my Dad and the boys at the fire-hall, my only task is to get moving.
With the Dollar weak, stocks were strong. This has been the dominating macro factor in the US market since December, so I was getting great prices. That however is far from the point. The point, Mr President, is that after being bullish for the better part of the last 3 months, your economic team has lost whatever trust I had left in their leadership. Without trust, the only thing a stock market operator can do is keep moving.
I know you probably watched it, and whether you liked the outcome of American Idol's choice last night or not, America has voted. Similarly, whether you think Geithner's made-up rules to a made-up test for his made-up Wall Street/Washington friends have this country "moving in the right direction again", the Global Economy has voted. This is life - there is always a winner and loser.
The loser born out of the Geithner's bankers winning is America's currency. She is now as conflicted as the country's financial system that houses her.
To be clear Mr. President, I am a capitalist. I am also not as stupid as your US Secretary of the Treasury appears to consider his fellow Americans to be. The bottom line is that rather than protecting America's currency, Geithner has predictably chosen to protect his ole boy banking club. The Chinese get it; I get it; and if the US Dollar continues to break down, we're all going to get it. This Buck stops with you.
This week I have cut my exposure to US Equities in our Asset Allocation model in half. In our stock/ETF picking portfolio I have take the number of long positions down from the mid 30's to 21. Most of those 21 positions are winners with large % gains that I have owned for the last 2-3 months. I also remain long Gold (GLD) and Treasury Inflation Protection (TIP).
This is the invisible hand of economics that guides me, Mr. President, not my politics. Markets are built on confidence, not conflicts and compromises. After making 14 consecutive sales in the Research Edge virtual portfolio, I don't think I can ask you to hear me in a more explicit way. Watch what people do with their money, not what they say.
Real stress-testing is a proactive exercise that the brave men and women of risk management express with capital decisions in markets every day. "Tail risk" is what we are always on the lookout for. As those risks move closer to the heart of the bell curve of higher probabilities, we hedge.
I don't give lip service to the word crisis. Plenty a braver political soul didn't listen to me when I went to 96% cash in September of 2008. My risk management process called for a probable stock market crash. You can call me lucky, or call me right - that's not the point either.
The point, President Obama, is that if I am right this time - an American currency crisis will be your Buck to bear. I can now only hope that you get that message before it is too late.
My immediate term downside support level for the SP500 is now 880.
Keith R. McCullough
New Haven, CT


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.


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

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.

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.  


EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands. 
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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.3799. The USD is down versus the Yen at 94.6220 and down versus the Pound at $1.5658 as of 6am today.
EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  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. Despite recent election results likely proving to be a positive catalyst, long-term 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.



A smart client of mine (you're all smart) pinged me soon after I put out "IGT: A TALL PEAK OF EARNINGS".  He doubted that IGT could get back to 2007's peak EPS of $1.49, despite the cost cutting.  This is a legitimate question particularly since we are projecting only $0.94 in EPS for 2010. 


The quick answer involves cost cutting, lower share count, and "normal" replacements.  People may forget that the replacement cycle was well into a downturn following the wide implementation of ticket-in/ticket-out technology.  IGT only sold 21,000 replacement units that year versus our normalized estimate of 35,000.  IGT earns over $0.01 per share for every 1,000 units sold.  On the cost cutting front, IGT will have cut at least $75 million ($0.14 per share) out of its SG&A structure by the end of next year.  Of course, there are offsets such as higher interest expense, lower play levels in gaming operations, and lower expected international sales.


Here is the full analysis:


IGT: BRIDGING 2007 TO $2 - IGT bridge to  2


Taking it a step further, we've indicated that if the replacement market makes a V-shaped recovery, particularly in the Reel Spinning segment, IGT could earn $2 for a couple of years.  We get there the same was as above, except that replacement units could accelerate to 75,000 for IGT which would provide an additional 40,000 machines to our normalized estimate above, or an incremental $0.50 in EPS.  Presto, $2.00 in EPS.

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