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If Only She Were That Good...

When people are lighting up my inbox like a Christmas tree that the market is selling off because Meredith Whitney said something about selling the financials, you know people who don’t do macro are pulling at straws…


The New Reality is this: when the US Dollar goes up, everything priced in dollars goes down. So far this morning, the US Dollar is UP – and the market is DOWN. Sorry Meredith fans – if she were only that good…


Why is the US Dollar up on the day? Simple – the US jobs picture continues to improve. This is very straightforward in the chart below. This week’s jobless claims of 550,000 improved sequentially, dropping below the 4-week moving average (562,000).


As the jobs picture improves, Bernanke will be forced to remove this ridiculous “emergency” ZERO interest rate policy. As the bond market continues to discount rate hikes (higher yields across the curve), the US Dollar should at least stop going down.


As the US Dollar stops going down, stocks stop going up…


When good news is bad – that’s what this is – it’s not about an analyst making a call.



Keith R. McCullough
Chief Executive Officer


If Only She Were That Good...  - emplkm



As we expected, MELCO reported revenues and EBITDA below street expectations.  The revenue number was a little worse than we projected, as was the EBITDA loss.  Somehow, all the “miss” came from Altira… can someone say cost transfer? Anyway, not sure any of this matters with the carrot of commission caps, lower taxes and possible lifting of visa restrictions hanging in the wind.  The positive takeway is that CoD is still ramping, keeping the possibility alive that EBITDA can grow into the valuation.


MPEL 2Q09 Earnings call:


  • Good hold has continued into August
  • Overall market share into August has also continued to increased
    • Well, one week doesn’t make a trend
  • MPEL thinks that the Macau market will continue to strengthen and the 2H09 will be much stronger
    • “High quality supply leads to growth”
      • Sound familiar?
  • Fortunate to have China as an engine of growth … that’s true
  • Will find ways to run the property more efficiently
    • Moved 800 employees from Altira to CoD
  • Will open Hyatt in September, are short on rooms now
  • Altira strategy is to differentiate it from CoD, no signs of cannibalization
    • 22% of RC in Macau in July btw both properties
  • They have transitioned from a development company to one focused on operations – 100% focused on maximizing EBITDA
  • Excluding gaming taxes & commission, adds up to 1.3MM USD per day (including corporate office)
    • Will look for efficiencies
  • Have 190MM of closing out costs on CoD in 3Q09
  • 3Q09 guidance
    • 75-80MM D&A
    • Net interest: 12-14MM
    • Pre-opening expenses (Grand Hyatt): 10MM


  • Amax in City of Dreams?
    • Key is not to cannibalize the business between the two properties
    • Seeing really strong volumes despite the 1.25% cap that they have imposed on themselves
    • Have not opened all VIP rooms at CoD, so there is capacity to add more tables if needed
  • Commission caps? Sounds like the government will take charge - is the fine substantial enough to enforce it?
    • The association of the concessionaires has been very positive
      • “Gone are the days of ego”… I doubt that 
    • Process of formalizing the enforcement could take a few weeks or a few months
    • Unless they do more than $HK30BN of RC per month the commissions paid to junkets is 1.25% or less.. so at these volume levels .... there wouldn’t really be any impact
    • It’s not about the fear of the fine, its more the carrot of the higher margins from the cap
    • In addition to monetary fines, there will be additional consequences
    • Will be no impact at CoD, but will help Altira
    • No clarity on regulating the granting of credit
    • Although, with the lower volumes that the property is doing it probably won’t make a difference … maybe by 2 bps or so
  • Shift of business from Peninsula to Cotai, any other partnership initiatives with LVS?
    • Seeing an increase in conversion from visitation “looky –loos” to players
    • As they gather more data they can better manage the product mix and costs
    • Will push to increase the earnings now
    • Core inbound markets to CoD are Southern China and HK, see continued growth from South China
  • Trends in August
    • “Caution anyone to look at first few days worth of data”
      • But he opened the call taking about August… hmmm
    • 2% below the market leader in first week of August (in terms of share)
  • Potential policy changes under new CE
    • Was the Secretary for Cultural and Tourism programs, understands that Macau’s health depends on tourism which is driven by the gaming industry
    • 10th anniversary of the handover of Macau is a key date… “he may be bearing gifts”
  • Swine flu impact?
    • Peak period of concern was April/ May, not sure if there is any overhang at this point
  • What are they seeing from competitors to the opening of CoD?
    • Having seen a dramatic increase in the promotional environment
    • There is a school of thought that everyone will compete away “margins” in the competition for Mass business: they aren’t seeing any of that
  • Operating cash flow in 2Q09? Use EBITDAR is a good metric less preopening expenses + WC deposit
  • Availability under Credit Agreement - $50MM undrawn on R/C
  • All in commission rates at CoD?
    • 1.25% (blended btw junket and direct)
  • Most properties derive 85-90% of their VIP business from junkets, but given how wonderful CoD is – they have a higher ratio of direct play
  • CoD has already have some initial tweaks of MASS/VIP
  • Mass market growth in August?
    • Improvement continues sequentially
    • Hold in July was a little below 16% on the Mass side, over time Mass hold increases at properties. Because over time, people will play more as they stay at the property.  The longer players play – the higher the hold goes… can get as high as 21/22%
  • Bad debt write-off at Altira?
    • Related to direct play
  • Impact of Singapore
    • Government has had several conversations on the topic of the potential impact of lowering the tax rate. Currently, the rate is 35% + 4% for social contributions,  Singapore is lower (5% + 7% at the corporate level)
    • Advantage of Macau is the location
    • So hopefully the opening of Singapore will be positive resulting in lower taxes
  • Capex for Phase Three of CoD which includes theatre?
    • End of the first/ beginning second quarter 2010 – no incremental costs – already incorporated into Ph2
  • MPEL thinks that Greenfield projects will be able to be discussed again when the market and capital markets recover
  • Where are they putting premium Mass business? Rebates on premium mass
    • GinMen tables? Account for it in Mass Drop
    • Commission rates start at .3% range to .6% for Rolling Chip customers (Direct play) not a premium cash customer. There are very limited amount of tables dedicated to this
  • Impact of opening of Grand Hyatt?
    • Running on full occupancy in July- see significant upside in Sept/Oct
    • Retail/ Mass should benefit
    • Only 600 rooms, and 300 of those (Crown) are only for VIP … then the 300 at Hard Rock – spreading it from Retail demand and Mass players (so really only 150 rooms for sale).  The 800 more rooms will really help them assure that gaming floor stays busy from midnight – 4am
      • They believe there will be a 20% lift at least



06 AUGUST 2009




Today is officially same store sales day, but we should probably rename it “Earnings Revision Day”.  Of the 30 or so companies that reported, a full one-third took earnings higher.  It’s getting a bit repetitive but disciplined inventory control, low levels of clearance, a benign promotional environment, and strong cost controls continue to drive upside.  


By the time you read this, there will probably be all kinds of volatility on the open as traders position themselves to “play” the comps.  In reality, July was a continuation of trend we have seen for the past few months or so.  Absolute demand as measured by sales still remains negative for most companies.  Aside from the noise on a calendar shift, underlying demand as measured by traffic commentary was almost identical to last month.  As we expected, there were a number of positive pre-announcements this morning with many driven by gross margin upside.  In fact, TJX, ROST, KSS, BKE, CHS, and ARO were the only retailers that reported positive same store sales.   As it pertains to earnings, JCP, KSS, M, ROST, TJX, ARO, CHS, CTR, and GPS all raised guidance above prior expectations and current Street estimates. 


The key theme dominating the month was the calendar shift as it relates to the timing of back to school.  It appears that this shift universally impacted the teen retailers, all of which cited this as having a negative impact.  Yes, we all knew this was coming but it seems to have had a bigger than expected impact.   In the case of Aeropostale and The Buckle, results were below Street expectations.  In markets where back to school has formally kicked in, anecdotes suggest that demand is actually pretty good.  However, it’s still early and the next few weeks will be the most important to watch. 


A key callout on the non-apparel side of things was continued price deflation in food and consumables.  Severe price deflation is negatively impacting top line trends across the discount store and warehouse club sector.  Offsetting these trends are pronounced market share gains that continued in month of July.  It remains clear that the traditional supermarket channel is still losing ground in a meaningful way.






Some Notable Call Outs


  • One of the more interesting callouts from the RL conference call was the divergence in same store sales between the U.S. and Europe. Comps in the domestic full price stores were down 25%, while Europe were up slightly on a constant currency basis. The brand continues to resonate well, especially in the UK where tourism is benefitting from the weak Pound. With a higher margin structure in Europe than in the U.S., this trend bodes well for future growth and potential upside.


  • In a conversation with a private equity contact I was able to confirm that costs out of China continue to decline. As the owner of a tailored clothing business, this firm is seeing landed costs decrease by as much as 25% on recent manufacturing orders. The conversation then shifted to some insights on what the retailer will ultimately do with these savings. In this example, the company will sharpen price points to offer better values, while at the same time keeping a fair amount of the benefit in the form of margins.


  • In a press release, GameStop announced the appointment of a Head of Digital Media. As digital content grows, one of the most often asked questions about GameStop centers around the eventual transition away from physical game distribution. While there are still many years before video games are distributed predominantly online, the creation of this new senior position clearly shows that the reality of change is beginning to set in.




-BTS season might be too conservative with basics - With merchandise ready to hit the floors and marketing campaigns in place, retailers are hoping back-to-school can lift them out of the doldrums. After a disappointing b-t-s season last year and arguably the most difficult 12 months they’ve ever experienced, retailers are eager to reel teens into their stores and entice them with fresh trends, cutting-edge marketing strategies and in-store events. However, observers say many retailers are choosing to play it too safe this season by offering too many basics. Candace Corlett, president of WSL Strategic Retail, thinks smart retailers are closely watching teen and parent shopping patterns and applying it to their b-t-s expectations. “We are seeing that some are buying a little each week and spreading it out over several paychecks,” she said of shoppers. “But there’s also an equal percentage of people who don’t do their back-to-school shopping until right before school starts.” Based on results from the “How America Shops” survey, Corlett said shoppers’ mind-sets have certainly changed this year — likely due to the financial stresses many people are feeling from the recession. Corlett said she found it surprising that only about 12% of the adults surveyed said they actually enjoy shopping for their kids for b-t-s.  <wwd.com/retail-news>


-Outdoor June Retail Sales Recap - Retail sales for all core outdoor stores combined (chain, internet, specialty) dropped 2% compared to last June. Equipment and key footwear categories saw sales grow for the period. Across all three store channels, products related to camping, backpacking and hiking saw healthy sales in June. June was also an unusually cold and wet month across most of the US, possibly contributing to higher than average outerwear sales across all three store channels. Specialty stores lost 6% in total dollar sales compared to June 2008.  In chain stores, total sales were down 1% for the month of June. Sales continue to grow online, as the entire channel grew 5% in dollar sales this month and 6% YTD.  <sportsonesource.com>


-The once reluctant and skeptical denim industry is beginning to give its e-commerce operations a fuller embrace - Denim players such as Replay, Guess, My Lovely Jean and Le Temps des Cerises are expanding their online operations in a bid to capture a significant consumer segment that has fled the real-world retail environment for the virtual one.  While overall economic conditions remain challenging, a recent report from Forrester Research shows e-tailers are benefiting from a steady migration to online shopping. Online apparel sales in Western Europe are forecast to grow from 13.14 billion euros, or $18.92 billion at current exchange, this year to 19.88 billion euros, or $28.63 billion, in 2014. That hasn’t gone unnoticed by denim labels.  <wwd.com/retail-news>


-Junior girl’s footwear firm Penny Loves Kenny filed for bankruptcy in New York late last week - In court papers, the seven-year-old company, also known as Penny & Kenny Shoes LLC, reported assets of almost $900,000, with total liabilities equaling almost $4.9 million. According to the documents, filed on July 31, Penny Loves Kenny’s financial difficulties can be attributed to “general market conditions and the delivery of inferior product” from certain suppliers, as well as litigation against the company. As for the future of the company, court papers said it “intends to restructure its organizational abilities to decrease overhead and increase sales. Alternatively, [the company may] sell all or part of its business operations.”  <wwd.com/footwear-news>


-Sports Direct has conceded that it is not in line with corporate governance best practice and said that it is not taking any action to change that - In its annual report published yesterday, Sports Direct admitted that it did not comply with a number of the codes mainly concerning the number of independent non-executives on its board. It said that while it intends to appoint a further independent non-executive director to the board to make it compliant “no steps are currently been taken to achieve that”. It added that its was keeping its position under review. Sports Direct has been heavily criticised for its corporate governance stance since it floated in 2007. Ahead of its full year results last month, Investec challenged the retailer on key corporate governance and the disclosure of business information. <drapersonline.com>


-Quiksilver signs a deal with hotel to sell product - Co-branded board shorts and bikinis from Quiksilver will soon be available at The Standard Hotel chain through PC-enable automated dispensing solutions from Corona, Calif.-based AVT. The Standard Hotel has locations in Los Angeles, Hollywood, Miami and New York. <licensemag.com>


-Ross Stores agreed to pay civil penalty - Ross Stores Inc. has agreed to pay a $500,000 civil penalty to settle allegations that it neglected to tell the Consumer Product Safety Commission that it sold children’s hooded sweatshirts with drawstrings, which pose a threat of strangulation, the agency said Wednesday. The commission alleged the Pleasanton, Calif.-based retailer knowingly sold the products and failed to report it. Retailers, manufacturers and distributors are required under federal law to report to the commission within 24 hours after identifying that a product could be harmful. A company spokeswoman said the store did not knowingly sell products that violated consumer safety regulations and issued an immediate recall when it realized there was an issue. <wwd.com/business-news>


-For Barneys New York, it’s been an eventful year so far - Double-digit sales declines and a customer base hit hard by the recession sparked layoffs, expense cuts, jitters in the market and sharp downgrades by rating agencies. Not to mention the specialty store has been without a chief executive officer for 13 months. But amid the turmoil, the Barneys ship is still afloat and the waters — for now, at least — appear to have calmed. Parent company Istithmar World Capital has pumped $25 million into Barneys to release vendor shipments and ease liquidity concerns; there have been merchandise initiatives with designers to lower prices and provide greater value, and while there’s no talk of new leases being signed, the domestic expansion appears on track, with a flagship opening in Chicago last April, another set for Scottsdale, Ariz., in October, and Barneys’ first warehouse sale in San Francisco currently under way.  <wwd.com/business-news>


-Seven For All Mankind and Gap Inc. open pop-up shops - Seven For All Mankind and Gap Inc. are taking advantage of the wealth of empty storefronts around the country to open denim pop-up shops. Gap will open a pop-up store on Robertson Boulevard in Los Angeles on Friday featuring its 1969 selvage denim collection, while Seven For All Mankind unveils its Wash House temporary-shop concept on Boston’s Newbury Street on Aug. 14.  <wwd.com/retail-news>


-Benetton reports better deliver time of the fall-winter but profits decline - Benetton Group SpA remains upbeat for the second half of 2009 despite reporting a 63.1% decline in first-half profits due to the rescheduling of shipments and unfavorable currency fluctuations in emerging markets. “The combination of the good level of orders taken for the new fall-winter collection and actions currently in progress on the cost front thus allow reasonable optimism for the end of 2009 in respect of sales, profit and net indebtedness,” chief executive officer Gerolamo Caccia Dominioni stated Wednesday. Benetton said it moved the delivery time of the fall-winter 2009 collection to the third quarter to better match seasonality, provide improved service to clients and improve management of transport and logistics. <wwd.com/retail-news>


-After a fourth quarter in which profits fell 18% , Procter & Gamble Co. plans to add muscle to its marketing - P&G is teaming up with the National Football League in a major sponsorship deal that will kick off during the upcoming season. The arrangement, announced Wednesday but not a subject of the firm’s earnings call, encompasses more than a dozen P&G brands across male grooming, hair care, oral care and fabric care, and several of those brands will carry the “Official Locker Room Products of the NFL” logo. The move comes as P&G revs up plans to build its men’s care business (or in P&G speak, its “win with men” strategy). In June alone, the company acquired two high-end grooming brands, Zirh and The Art of Shaving. <wwd.com/business-news>


-American Sporting Goods announced that Tom O'Riordan, ceo and president, has resigned from the company - Chairman Jerry Turner will take the reins and continue to guide the company as it enters its 25th year in business.  ASG management, design, sales and distribution teams will remain unchanged.  "As we look to celebrate our 26th anniversary this year, I am confident that this new chapter will be a positive one for all brands in the ASG fold," noted Turner. "Our foundation remains strong despite the tough economic environment and we will continue to implement a multiple brand strategy that stays true to our goal of delivering the best product at the best value for our retail partners." Brands under the ASG umbrella include AVIA, And 1, ryka, Nevados, Yukon, NSS, APEX, Turntec and Triple Five Soul. <sportsonesource.com>


-Eastern Mountain Sports said that in order to facilitate future growth, it closed on new financing totaling $50 million - In addition to raising new equity from existing investors, EMS closed on a new, larger senior credit facility led by Wells Fargo Retail Finance.  <sportsonesource.com>


-Sport Chalet, Inc. sales decline 8.9% and comps slide 14.7% - Sales decrease 8.9% to $79.4 million for the first quarter of fiscal 2010 from $87.1 million a year ago. Comps tumbled 14.7%. The net loss was narrowed to $3.0 million, or 21 cents per share, compared to a loss of $4.5 million, or 32 cents, a year ago. <sportsonesource.com>


-Project571 announced the launch of the first line of college apparel - Project571 is proud to announce the launch of the first line of college apparel made with all eco-friendly materials and compensating providers according to fair trade practices. Colleges and universities all over the country are being graded on their own carbon footprints, their use of sustainable resources and adherence to Fair Trade practices. Project571 (five oceans, seven continents, one planet), a new Midwestern company, is working to fill a void by offering college-supporting organic clothing that is trendy, fashionable, fair and earth-friendly. All of Project571's products are made from organic cotton, recycled polyester, naturally occurring rayon or a combination, printed with environmentally friendly inks, and manufactured by Fair Trade certified wholesalers whose workers are treated and compensated fairly for their work. The result is college apparel that's superior in every way - soft, stylish and safe. <prweb.com>


-American Apparel's secret rummage sale to happen at LoftSEVEN - Rooftop pool party meets summer fashions at LoftSEVEN's designer sample sales. Held on the second Sunday of every month, LoftSEVEN's sample sale will be armed with an arsenal of designer duds, complimentary cocktails, and a chilled 25-person rooftop Jacuzzi. The August 9th sale will also be host to American Apparel's secret rummage sale, set high above historic downtown in The Haas Building. Guests will be able to shop summer looks from both established and independent L.A. designers, while enjoying live music and quenching their thirst with free beverages served by a staff of identical twins. Guests will also be allowed to cool off in the rooftop Jacuzzi should they choose to, whether they've bought or brought their own swimsuits.  With the summer heat wave in full swing, LoftSEVEN, has opted to provide some diversion to historic downtown L.A. residents who are in need of something to do. Since opening in May, LoftSEVEN has been host to several community events such as Rooftop Movie Night, Stand Up Comedy Night, and Art Walk. <prweb.com>




DBRN: Elise Jaffee, Senior Vice President, purchased 84,000shs ($295k) granted under the company’s stock option plan increasing total common holdings by less than 2%.





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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Waking Up

“I hear and I forget. I see and I remember. I do and I understand.”
Managing risk up here on the high-wire of a global US Dollar Devaluation move is what it is – a daily and athletic exercise of doing. I hear the American commoner’s disgust. I see the bankers getting paid. I trade around everything I see and hear, as I try to understand.
Trying to make sense of an interconnected global macro system of colliding dynamic factors isn’t for everyone. Neither is trading. Or at least doing macro and managing risk weren’t given parts of the investment process in years prior to 2008. That’s when a long/short stock picking hedge fund monkey like me could make money in a market that went straight up alongside access to capital. That’s changed.
Every day we wake up to slug it out with a global macro consensus. Sometimes consensus isn’t bullish enough. Sometimes it’s so nauseating that you can only fade it. Sometimes it isn’t bearish enough. Consensus is the backbone of the market’s being. Embrace it, daily, and you begin to understand.
My daily risk management process includes the measurement of ranges, deltas, and spreads. If there is something we can attempt to quantify on those 3 scores, we do.
One of the weekly sentiment indicators that was shining bright red on my screens yesterday was the Institutional Investor sentiment survey. The spread in that survey was one of the most bullish we have measured in well over a year. The spread between Bulls to Bears widened to +21 points (for the Bulls).
The most interesting part of the math was how bombed out the Bears were. Less than 4 months ago almost 50% of the respondents in that II survey were outright bearish (at the bottom). In this week’s report, only 26% of investors admitted they are bearish anymore (at the top).
My understanding here is quite simple – and it’s no longer that investors aren’t bullish enough – investors aren’t allowed to be bearish! When your director of research or master of the hedge fund universe PM rains down on you every morning for missing the latest daily market move, you end up in a box. You end up with embedded rules that govern your analytical output – it’s called career risk management. Sometimes you just aren’t allowed to be bullish or bearish. That’s obviously a problem.
So with the Chinese and US stock markets pinned up here at YTD highs and people not being allowed to be bearish anymore, what do you do? I think the best option is to wait and watch. All the while, keep measuring your ranges, deltas, and spreads. Patience provides opportunity.
I know, for Mr. Qualitative Research Superstar… this part of the investment process probably makes you laugh. Trust me, there are a lot of people out there just like you. I used to be one of them. Evolving your investment process should be a perpetual exercise in doing.
So let me take you through some of my basic training global macro calisthenics this morning and flash you some US market factors:
1.      I have the SP500’s daily range of price probability at 43 points = tight and trade-able (bullish)

2.      I have immediate term TRADE support/resistance for the SP500 at 989-1,010 = risk barely outrunning the reward (bearish)

3.      I have the daily spread for the VIX at 3.15 points = volatility remains broken across durations (bullish)

4.      I have the daily delta for NYSE volume expanding = 1st day in the last 14 where that came on a market down day (bearish)

5.      I have the daily spread of the US market’s breadth deteriorating = one day does not a TREND make (bearish)

6.      I have 9 out of 9 SP500 sectors in my quantitative model signaling positive TRADE and TREND = (bullish)

Now let’s flip over to a cross section of asset class and geographical considerations:
1.      China closed down another -2.1% overnight, taking its 2-day decline from the YTD high (+92%) to -3.3%

2.      Australia shot up another +1.4%, 2-days AFTER signaling that their next move in interest rates is UP

3.      Germany is up +0.4% again this morning and continues to lead mature western European economies despite a 1.44 Euro

4.      Turkey, a beacon for emerging market growth, is flashing a big daily negative divergence this morning, trading down -2.5%

5.      The US Dollar made a new low yesterday trading below 77.50 on the US Index

6.      The CRB Commodities Index made a new YTD high yesterday, trading up to 268

So where does this all wash out? You tell me. We all have different investment styles. We all have different durations. I don’t wake up in the morning trying to be everyone’s banker or politician. I don’t wake-up trying to be bullish or bearish. I wake-up trying my best to do, and to understand.
Best of luck out there today,


EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here. Buying red.

CAF – Morgan Stanley China Fund A closed-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.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global 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 - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


XLF – SPDR Financials
Gotta love the backward looking guys at AXP. Freakout and fire people at bottoms, then talk up the market at bottoms. Shorting hope.  

XLI – SPDR IndustrialsWe don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares Italy Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don’t want to be long of.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3, which is finally overbought.

EWJ – iShares Japan –We’re short 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.

XLY – SPDR Consumer DiscretionaryAs Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9, 7/22, and 8/3.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

Early Read on July Same Store Sales

With a handful of companies reporting July sales so far, the results are generally in line with expectations.  On the upside, Urban Outfitters reported better results for its second quarter with overall same store sales decreasing by 6%.  Still an absolute negative but on track with their sequentially improving trends.  On the downside, cult rocket-ship (stock) retailer The Buckle reported what appears to be a huge disappointment.  Results were up 2.8% with expectations for a 10% increase.  Given the large calendar shift which impacts teen retailers disproportionately, this may explain some of the deceleration from prior months. 

Our main call out comes from Costco, which had interesting comments on its category performance.  Management mentioned that the overall trends were very similar to last month, with the exception of non-food categories which showed a slight uptick in trend.  Office, sporting goods, small appliances, domestics, and mens/womens apparel produced a same store sales increase of 10% excluding currency effects.  With overall traffic up 3.5%, it appears market share gains and perhaps a bottoming in the more discretionary categories is beginning to occur.  This trend warrants more data points before we can make a definitive call, but the positive tone is certainly noteworthy.

MCD - July Sales Preview

MCD is scheduled to report July comparable sales on Monday.  MCD said on July 23 in its 2Q09 earnings release that it expected to report July consolidated comparable sales similar to or better than June.  Specifically, management stated on its 2Q earnings call that July sales trends in Europe and APMEA were running better than June.  For reference, MCD’s June same-store sales growth was 1.8% in the U.S., 4.7% in Europe, 0.3% in APMEA and 2.6% on a consolidated basis, which represented a slowdown in 2-year trends in each geographic segment. 


Given that MCD had visibility on nearly 3/4 of the month when it gave its outlook on July sales trends, there is little chance that July results will vary too greatly from its guidance.  That being said, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be good, neutral, or bad results based on 2-year average trends. 


U.S. (company increased coffee giveaways, facing a tough 6.7% comparison from last year)

Good: +2.5% or better would signal a re-acceleration in 2-year average trends.


Neutral: +1.8% to +2.5% would signal an improvement in 2-year average trends, but is somewhat expected given the company’s guidance.


Bad: < +1.8% would come in below management guidance.  Anything below -1.3% would signal a continued sequential slowdown in 2-year average trends.


Europe (Germany was weaker in June due to less couponing YOY, rest of Europe continues to be strong)

Good: +6.0% or better would signal a return to the strong level of 2-year average trends that was present earlier in 2009.  Europe really only faced one month (June) of softness in 2–year trends.


Neutral: +5.0% to +6.0% would signal an improvement in 2-year average trends from June levels, but again is somewhat expected given the company’s guidance.  Although MCD’s guidance said similar or better than the 4.7% number in June, management said it was trending better than that so I think a better than 4.7% number is already built into expectations.


Bad: < +5.0% would come in below management guidance and built in expectation.  Anything below +3.0% would signal a continued sequential slowdown in 2-year average trends.


APMEA (Japan and China were responsible for June slowdown, Japan had improved off of June levels, China continued to be negative but was more negative in June than it had been for prior 5 months)

Good: +4.0% or better would signal a marked improvement on a sequential basis from June’s 0.3% number.  +7.0% or better would signal a return to the strong level of 2-year average trends that was present earlier in 2009.  Like Europe, APMEA really only faced one month (June) of softness in 2–year trends.


Neutral: +1.7% to +4.0% would signal that APMEA trends have stabilized with 2-year average trends flat with to slightly better than June levels. 


Bad: < +1.7% would be better than management guidance and would show a sequential improvement from June on a 1-year basis, but would signal a continued sequential slowdown in 2-year average trends.  Again, management had already stated that APMEA July trends were running better than June’s 0.3% number so some level of sequential improvement is built into expectations.


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