Success Is No Accident

"Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do."
It's great to be able to speak your mind!  When you speak your mind writing research, it's like working in a fish bowl - there is no escape and you are accountable for everything you say. 
I have been writing research my entire professional career and I have learned to take the good with the bad.  I like to take calculated risks; I'm not always right and being wrong when working in a fish bowl can be very painful.  However, the reward for knowing that you have helped someone else be successful is amazing.
It was a calculated risk to go to work for a start up, independent research firm in the midst of a financial crisis not seen in generations.  A year later we continue to take significant market share from broken business models.  The employees at Research Edge have one thing in common - we are students of the markets and love getting stocks right!  
Growing up I was a soccer player; a sport which most people think is boring.  The sport of soccer is actually a thinking man's game.  The best soccer players in the world are nimble and know where the ball is going to be before it gets there.  The same is true for the market and individual stocks; know where they are going before they get there and you win!  Play the game that is in front of you and you will be one step ahead of the competition. 
Keith McCullough had never worked in a research fishbowl until he started Research Edge and we all are painfully aware that he did not play soccer! But over the past six months he has definitely been nimble and has known where the ball was going! 
For 2009, the entire set up was prefaced on his "Breaking the Buck" macro call and for a generational short squeeze in most global equity markets.  I don't think there is another MACRO strategist on the street that made that call!  If there is, please let me know because I would like to tell him he should have been a soccer player too!

It is painful to watch those in charge of the country "react" to the buck breaking!  After the market starts to melt down on concerns about our AAA credit rating and the mighty dollar crashing, Treasury Secretary Timothy Geithner goes on Bloomberg TV and says "It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term."  His target is to reduce the gap to 3% of GDP from around 13% this year.  Who is he kidding?
I know this is Obama speak, but let's be realistic.  In the age of TRILLION dollar bail outs, the budget deficit is going up, not down.  One thing you can be sure of is "the medium term" will not be during his tenure as treasury secretary and potentially not during Obama's term as president.
As we have said all year, the most dominant macro factor at work has been the US Dollar down and stocks up.  For three straight days, it's been dollar down, stocks down; the dollar crashing is now a bad thing! 
The Safety trade and reflation are the only two themes that still have legs in this market.  The early cycle Consumer Discretionary and Technology name are breaking down, as we now only have 5 of the 9 sectors positive on both the durations of TREND and TRADE. 
While our Macro team has been on fire this year, the research team continues to score big too.  Today we are waking up to KeyBanc upgrading Autodesk (ADSK) from Underweight to Hold after the company reported better than expected numbers.  ADSK has been in the virtual portfolio since 3/23 and looking to provide 50% return in just two months!  Well done Rebecca! It's great to be on a real team again. Success is no accident.
Function in Disaster, finish in style
Howard Penney        
Managing Director



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 $1.3962, a four-month low for the Dollar. The USD is down versus the Yen at 94.1150 and down versus the Pound at $1.5848 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.

MW: Activism Brewing?

It seems to have slipped under many radars that Men's Wearhouse just added a change in control provision for its top five officers.  The language was strong enough for our affiliate Michelle Leder ( to flag for us, and her track record in spotting these outliers is notable. In addition, the short interest is high at 15% of the float, and the stock looks bullish from a TREND perspective on Keith's models. While we can make a pretty convincing case that the 10%+ margins of yesteryear are a pipedream for MW as unit growth, offshoring and department store destocking themes have largely played out, this is the sort of sleepy name at a trough point in the cycle where activism would not come as a surprise.



What prompted Mens Wearhouse to suddenly add change in control agreements with its five named executive officers on May 15? The company disclosed the new agreements in both the proxy and a separate 8K filed late Wednesday.


We can think of only two likely scenarios here: another company may be looking to acquire Mens Wearhouse or a large investor - think Pershing Square's Bill Ackman and his run on Target here -- might be contemplating a challenge to the company's board. Option A seems a bit more likely, not least of all because if there is an Ackman-like person out there, they've yet to surface.


What makes the filing really stand out is that Mens Wearhouse isn't a new company and change in control agreements tend to be pretty standard things. George Zimmer, for example, started the company over 35 years ago and none of the other top executives are new hires. Given that, why would the company suddenly enter into these agreements on May 15?


After a quick skim comparing the 2008 proxy to the one filed on Wednesday and throwing the 8K also filed on Wednesday into the mix, it seems pretty clear that something is going on here that's worth paying attention to.




  • Revenue is highly tied to low-fashion "business attire", of which tailored clothing accounts for 55% of core revenues.  This is a company whose core sales have been weakened almost step for step with the overall economy. 


  • With very little fashion risk in the assortment, revenues here to do not spike in good times.  However, they do see disproportional downside when unemployment is at historical highs.  A suit is the last thing the average male "wants" to buy.


  • Historically the business was successful as they took share from traditional tailored suit distribution channels (i.e department stores exiting the low turning, service intensive business).


  • As the top-line grow, margins expanded as well.  The company benefited greatly over the past few years from greater imports and direct sourcing shifting to Asia.  Remember that the tailored business was still being done domestically, but with also a fairly large Canadian and Mexican manufacturing base.


  • Additionally, the acquisition of the free-standing tuxedo business in April 2007 has provided a positive benefit to margins.  Gross margins for the tux rental business are 82% vs. core gross margins of 55-57%.  As the tux business continues to grow (expected to be up MSD 1H09) at the faster rate than the base (which is now barely growing with store growth cut to 10 stores, from 40-50 per year), there is a positive mix benefit here.


  • Offsetting the tuxedo business is a recent decision to aggressively promote the suit business through BOGO (Buy One Get One) offers.  This is a new strategy that began in 4Q08 and is expected to continue throughout '09 at the very least.  This is a departure from the company's historical EDLP strategy, and is one that will produce gross margin pressure at the very least through 2009.  This is one of the top factors as to why it may be unrealistic to see margins expand again in the near term.  Of course they can cancel this marketing program, but we know from the shoe business how long it takes to wean the consumer off of BOGO's.


  • Also as it relates to BOGO, if you don't need a suit because you're not employed, then you certainly don't need two!


  • In looking at the CEO Zimmer's health, he did have a surgical procedure in 2005 related to an infected abdominal aortic graft.  Since then however, there have been no public announcements related to his health.


  • Bottom line, the boom growth years appear to be over from a store opening/market share perspective.  As the economy recovers, men will resume suit purchases.  However, the duration of the recovery remains to be seen and it certainly won't occur over night. 

What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...


We have been fairly aggressive on our long copper call in 2009. In fact, on February 25th we sent the following note to a client when he asked us what we though about copper:


"This is like holding a massively inflating ball of air, under water - if it gets through 1.54, that's going to ring the bell of every short seller from here to Dubai...


Very simply,


  • 1. China buying on the LME now, direct - for their Strategic Reserve
  • 2. All of mining is cutting capex for Wall Street's sake - supply coming online in the out years coming down = commodity inflation in the long term
  • 3. Economic should and will continue to see a sequential acceleration from Q4 2008


We see this as a buy for a Trade at $1.49/lb and a breakout for a Trend (3 months plus) at $1.54/lb"


The rest as they say is history, but copper is now at a much higher price and some recent price action has us more cautions.  After all, even an early recovery indicator that The Client (China) needs, such as copper, has a price.


We have an expression (to be fair, we have many expressions) at Research Edge and we say, "She / He has the Conch", which effectively means that whomever has the conch has the voice or the floor to continue to own the debate.  When it comes to copper, China has the Conch.  In fact, in the year-to-date the correlation between the Chinese stock market and copper is 0.88.


In the chart below we've outlined the performance of the Shanghai SE Composite versus front month COMEX Copper YTD, which shows this relationship graphically as well.  Below that chart we highlight copper imports into China, which provide the underpinning of the fundamental case for copper from a demand perspective, which is that year-over-year imports into China are up in February by 45%, March by 55%, and April by 62%.


As is always the case with China, people debate whether the data is real or whether the commodity is being stockpiled versus used in actual economic activity.   To some extent, it doesn't matter in the short term as demand is demand.  Longer term it will certainly be more relevant.  The Chinese are many things, economically irrational, I don't think so.  They are buying copper either because they need it, or because it is cheap.


The recent move in copper (breaking down through our TRADE line of support of 2.08/lbs) may be actually indicating that demand from China may be peaking.  Regardless, and in the short term at least, watch the Chinese when it comes to copper because until the facts change, they have the conch.


Daryl G. Jones

Managing Director


What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...  - conch

UA’s Latest: Muscle Recovery Suit

While the focus for UA (and the Street) has clearly been on UA's footwear initiatives, the company is also keeping its foot on the gas in its apparel business as evidenced by the launch of its' new muscle recovery enhancing body suit (see below).  These garments (priced $89.99 for tops, and $99.99 for bottoms) serve the same purpose as taping a strained area of the body after a workout. The technical benefit is a combination of increased oxygen flow while at the same time expelling excess water out of muscles, and therefore accelerating recovery time.


Is this the answer to all the bears who are concerned about lack of growth in apparel? No, it's probably no more than a 5% boost to apparel sales growth based on my math (which ain't half bad). Also, this is a pure performance product which has a more limited audience than would a typical product by an active weekend warrior. But it is another tool in UA's arsenal to solidify its relationship with the high school performance athlete, which ultimately serves as a halo to grow its other businesses that have more mass appeal.


UA’s Latest: Muscle Recovery Suit - UA Recovery Suit

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

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