Prepared For Pain

“One of life’s most painful moments comes when we must admit that we didn’t do our homework, that we are not prepared.”

-Merlin Olson


Same jersey for 15 years in the NFL. Same process every day. Same expected results. Merlin Olson played for the Los Angeles Rams for all 15 of those years. He made it to the Pro Bowl in every year but his last. He never missed a game.


For those of you who have played competitive sports, you know how impressive this man’s tolerance for pain must have been. Every morning, his feet were on the floor, expecting to play. No days off. No excuses. He was prepared for pain.


While we get compensated like them, we generally do not attack the professional game of investing like professional athletes do. Rarely, if ever, are our every moves You Tubed by an instant replay. This, of course, presents our daily exercise of debunking global macro a tremendous opportunity to be transparent.


A lot of people are giving lip service to transparency right now. They should. It finally matters. In principle, transparency is what is going to matter to The Client in this business going forward. Whether that Client is China or a high-net worth American, you had better do your homework or be prepared for pain.


What is it that you do? That’s the most relevant question of asset management for the foreseeable future. This market’s generational short squeeze is going to expedite The Clients getting some answers. We, as an industry, are evolving. This is good.


In the aftermath of Bernanke pandering in Jackson Hole on Friday and continuing to Burn The Buck, the US stock market hit another YTD high. At 1,026 in the SP500 we are now staring at a +52% rally from the March 9th, 2009 low. Let’s think about that return again: +52%!


In The New Reality, fact based context is going to be critical. While the manic monkeys made up stories as to why we were going to crash every day that we were down in the last 4 months, guess what – we didn’t. The only larger modern day stock market move that the Americans have seen since this +52% rally, was the crash of 2007-2008. That move was -57% from the peak. There is now only a 500 basis point spread between these two crashes versus consensus expectations. For some, both were painful.


The beauty of this game is that it waits for no one. The global market couldn’t care less if I’d like to spend time on the beach with my family. It is as interconnected as it has ever been, and it will mark itself to market every day. Per some pundits, China was “crashing to a bear-market low” – until we saw a cumulative +7.2% three-day move come with last night’s Shanghai Composite Index close, that is…


In the US, I hear a lot of talk about “low volumes”, but that doesn’t do The Client any good. In fact, that excuse, when considered next to the actual score of the game, has no relevance to The Client whatsoever. It’s an excuse. Can you imagine Merlin Olson explaining away the last game of his career (the NFC Championship game at Minnesota in 1976) as weather or volume related? C’mon, let’s get real here. By the way, Friday’s new high came on accelerating daily volume (+11% versus Thursday’s volume).


The New Reality remains. In the immediate term, when the US Dollar goes down (like it did on Friday), everything priced in those Dollars will continue to go up. In 6 out of the last 7 weeks, the US Dollar has been down. In 6 out of the last 7 weeks, the SP500 has been up. There is a deep simplicity to chaos theory. That’s math, not fiction.


Dominating inverse correlations in global macro like this aren’t perpetual. But you will experience the Pain Trade if you claim that they don’t matter while they are dominating. Understanding that when it’s sunny out, some people in this business will still say it’s raining. That is what it is. There is very little responsibility in recommendation any more.


Goldman Sachs is getting a little ribbing from their pals at the WSJ this morning for giving “tips” to preferred clients in what Goldman calls their weekly “Trading Huddle.” As with everything the house of the Almighty One creates, I am certain that there is a perfectly theoretical explanation for this. Rather than whine about it this morning, just look at their “conviction” buy list versus their other “buys” for what they are – this is what they do.


What I do is show everything I do real-time. No, there is no super secret sauce associated with my playbook. Every sale that I made into Friday’s strength (Germany (EWG), Canada (EWC), Healthcare (XLV), etc…). Every sale was probably a little early. Every time stamp is up there on our portal. It ticks, like a game clock and the score should.


What is it that I’ll be doing this morning? More selling. No, not because a squeezed man named Roubini is reminding me of some “L” or “W” shaped economic pattern. I’m selling because I know the value of realizing victory. I know the difference between a real W or an L. And I don’t need the other team’s “trading huddles” to give me a conviction play versus every other play I plan on running.


We’ll be running it straight up the middle this morning - selling and preparing for pain. The SP500 will be overbought as we approach my intermediate term TREND target of 1,041.


Best of luck out there this week,






EWZ – iShares BrazilPresident 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 reflation call.


XLK – SPDR TechnologyTech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.


QQQQ – PowerShares NASDAQ 100We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.


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.


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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient 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. 





XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.


DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21. 


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.



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.




12.1 million people visited Macau during the first seven months of the year, 11.9% less than in the same period of 2008, according to official data released by the Statistics and Census Services.  Visitation from the mainland fell by 17.6% for the year through July for a 5.9 million people.  Visitors from Hong Kong, Taiwan and Malaysia also fell by 2.4%, 6.6%, and 30.1%, respectively.  The number of visitors from Japan increased 1.1% to about 194.7 thousand, while visitation from Thailand also increased by 3.8%. 





Guangdong residents making trips to Macau under the individual visitation scheme may soon be able to secure visas more often - once per month rather than the current limit of once every two months, according to the Macau Travel Industry Council. 

President of the MTIC, Andy Wu Keng-kuong, said that tour operators in Macau had been expecting Guangdong to relax visa restrictions following the October 1 National Day celebrations.  He stated that it is not typical for the authorities to make an official announcement, but a traveler may experience a different wait time for visa applications to be processed and accepted.  However, an employee of a Shenzen travel agency told the SCMP that she had not yet heard of any policy change.





eSun Holdings Limited announced that it is terminating its JV agreement with Taubman Centers Inc. to develop Studio City.  The statement, released last Friday, said that the agreement had been terminated due to a number of deadlines not being reached.

Sporting Goods: Inventory Building

With results out of DKS, FL, and HIBB, we got a nice snapshot into where this industry stands. Bottom line is that inventory is building across the board. Not good. Retailers are shifting to lower-price performance shoes, and are giving new brands a shot. KSWS, PSS and UA stand out on the positive side. Nike and DKS are Neutral to negative. FL and HIBB are scary.


Bottom line here is that inventories are growing too fast. Period. All three retailers had their respective sales/inventory spread go the wrong way. Yes, some look better than others – DKS better, FL horrible.  But this Street is not a good one. The single most notable call out is that the retailers are shifting towards lower price point product, and sound like they are giving smaller technical brands a shot at success. The only non-technical call-out of consequence is FL already making noise that they had cut too deep into their KSWS positioning. This plays into our thesis for KSWS. It also gets us more comfortable with PSS – not only because of Saucony and Sperry (which is doing well), but it validates PSS’ price point positioning (which these other brands still can’t touch with a 20 foot pole). All-in, this is a slight negative for Nike. Let’s not be sensationalistic here… US footwear is less than a quarter of the company’s business, and the recent trajectory is already weak (i.e. no surprise to anyone). But inventory building broadly in the channel, price points shifting down’, and Nike’s largest US customer changing the CEO guard (and likely to find a way to allocate more space to new brands), I still can’t justify being early on this one given the growth profile (or lack thereof).


Sporting Goods: Inventory Building - Sporting Goods SIGMA


Key Points:


Notable thematic trends:


Fashion vs. Performance: FW DKS noted the benefit of less exposure to fashion while FL & HIBB commented that they will be shifting their respective mixes towards performance given the dramatic slow-down in fashion demand.


High vs. Moderate Price: As higher priced shoes become increasingly stressed, all three retailers are focused on increasing offerings  at moderate price points.


Domestic vs. International:  With DKS and HIBB rooted domestically, FL was the only one of the three able to comment on international business, which outperformed in Q2.  While U.S. sales were down mid to high teens, Europe and Canada was down low single digits with Asia Pacific posting high single digit sales growth.


Lateral Call Outs:


KSWS (+): branded and typically more moderately priced (specifically mentioned positively by FL)

UA & NKE (+/-): thematic trend of focusing on performance/technical implies less of a hit for UA & NKE, however, this will be offset in part by a greater focus on moderately priced footwear. While UA has commented that it will produce shoes at broader range of price points, NKE’s AirMax remains the priciest shoe in the shop.

NKE (+): basketball continues to be the standout category in footwear

VFC/North Face (+): HIBB noted that it will be up measurably in back half and in many more doors y/y



FL: has the benefit of a new CEO taking the helm at a (another) low point in the company’s performance.

  • We’d have thought that Serra would have printed a better quarter as his tenure comes to a close – regardless of the environment. Our sense is that the ‘cleansing’ would not come until all the skeletons burst out of the closet after Ken Hicks has an offensive plan for the company. We can’t rule out that this is yet to come.
  • Based on Hick’s prior experience at JC Penney, we expect to see a revamped apparel program including much improved private label merchandise. That’s obviously not great for the incumbant brands.
  • Management commented that its posture on moderately priced footwear is officially under review along with the rest of the business. We suspect that it will take some time for Hicks to adjust the portfolio, but are confident that the proportion of lower priced styles and brands will increase next year.
  • FL has been pruning its store base, but we would be surprised if it got more aggressive given the success of other retailers in lowering lease costs.


DKS: is showing signs of its former self – kinda. Results are still horrendous on an absolute basis, but they are trending far better than the group.  Easing inventory and gross margin compares don’t hurt.

  • DKS stands out as one of the only players in this space that is taking up investment spending while others pull back. The company is accelerating West Coast expansion both in acquiring former Joe’s stores and increasing penetration in Southern CA), investing in e-commerce, and building out marketing/merchandising IT infrastructure (originally postponed in ’09) to drive future growth.
  • We debate here amongst our team as to whether this is good for DKS or not (McGough more negative, with the rest of the team positive). We all like when companies spend when the environment is telling competitors to stop writing checks. But Dick’s has a horrific track record of generating any kind of ROI on either acquisitions or organic investment.
  • In addition to the signal of increased confidence in the top-line, we know that pressure from Golf Galaxy clearance activity is expected to subside after Q3 at the same time that gross margin compares get progressively easier (down 190-230bps) over each of the following three quarters.


HIBB: is more clouded as credibility and volatility are now keys to this story.  Even with the rebound in 3Q results, a sustainable improvement in trend remains less clear.

  • Consistent with FL, HIBB appears to be setting the bar low given their commentary that they “want to be absolutely conservative.”  . 
  • Upside is not a given, however, as it would require comps at the high end of the range (flat) in addition to gross margin expansion at the same time the company is shifting to lower priced product.3Q comps are  currently running at a –LSD decline. About 10% of stores should still benefit from a tax free shopping holiday, which could help get to numbers in aggregate. But this is not a slam dunk.
  • On a relative basis, sounded like performance footwear fared better than fashion.  Go forward focus will be continued on performance and more on price.  Fashion appears to be where the risk lies.  More dollars will be allocated to the technical piece going forward vs. fashion (where sell-throughs have slowed).  - KSWS is becoming more performance oriented and FL specifically noted that they need to step up purchasing of the brand.
  • Markets with back to school in full force are showing less price resistance.  Customers willing to pay for what they need.
  • Technical running is being planned up and will get more “open to buy” orders. –Good for KSWS, UA and even Saucony (PSS).


Sporting Goods: Inventory Building - SG CompTable 8 09


Sporting Goods: Inventory Building - SG CompChart 8 09


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“Bad” to “less bad” to “stability” to “recovery”, the progression of sentiment encompassed a 155% trough-to-peak move in regional gaming stocks this year.  Unfortunately, the stocks may still be reflecting “recovery” sentiment without a supporting fundamental backdrop.



We think the trough to peak move of 155% in regional gaming stocks was driven by three distinct phases of investor sentiment.  First, the perception that business trends were turning “less bad” explained the first big move up off of the March 9th low.  Following some consolidation, the upward trajectory resumed in early April for more than a month, reflecting a “stabilization” view, in our opinion.  Finally, the largest and steepest move began in late April and peaked only a week later on May 5th.  We call this the “recovery” phase.




So are the regional gaming fundamentals actually in a recovery phase and, more importantly, will they be over the next quarter or two?  The price level of stocks indicates that they should be as the index is squarely in the middle of the “recovery” bounds.  Unfortunately, the fundamentals likely have not caught up to the stock moves, nor will they do so any time soon.


We think the best indicator of marginal business trends is our delta chart.  The delta chart below clearly shows negative year-over-year gaming revenue trends.  Not much of a recovery there.  Furthermore, the 3 month moving average line does little to alleviate concerns.  In a recovery mode, we would expect a steep, upward trajectory of the line.  Yet, despite a favorable July calendar and an easy comp, the line is well below the recent peak in March, and barely off the June low.




Right now, the best indicator of upcoming gaming revenues may be gas prices.  The less-than-stellar monthly data occurred despite a pretty massive gas tailwind.  This is a pretty scary thought:  negative revenues for 6 out of the 7 months in 2009, with gas prices down between 50% and 75% all year long.  Remember that in our 6/22/09 post “REGIONALS COULD RUN OUT OF GAS", we showed that every 10% move in the price gas inversely impacts regional gaming revenues by 1.5%.   As can be seen in the following chart, the gas tailwind reverses into a major headwind beginning in November assuming current prices continue, climbing to over a 50% increase by the end of the year.  If the historical statistical relationship holds, December revenues face roughly a 7.5% hurdle from gas alone.  Ouch.




The week of the 24th through the 28th will be eventful. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on. Germany and Japan, two economies that we follow closely, will have a particularly heavy calendar of releases next week.  


Saturday/Sunday/Monday August 24


US: The Jackson Hole Fed event concludes over the weekend with Bank of Canada Governor Carney presenting on Saturday.  


Europe: The Eurostat Eurozone Industrial Orders figures for June will be released on Monday morning.


Asia: Thailand releases Q2 GDP on Sunday evening. Singapore CPI data for July will be released on Monday morning, as will Taiwanese Export Orders and Industrial output figures for July. With all eyes on potential declines in new credit facilities in China, any indication of weakening demand from the mainland in these rear view Taiwanese order figures will be scrutinized intensely.  


Tuesday August 25


US: Case-Shiller data for June and Q2 will be released at 9 AM on Monday. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released that day. The treasury will hold a 2 year note auction at 1PM.


Europe: Germany releases a slew of critical Q2 data points on the 25th, including 2nd release GDP figures, Trade data, Private Consumption, Construction Investment and Government Spending. In the UK, BBA Mortgage data for July will be released on Monday morning.


Asia: Monday will be full of critical data points for Asia with both Hong Kong and Japan releasing Trade data for July (HK in the morning, Japan in the evening) as well as Taiwanese M2.


Wednesday August 26


US:  July Durable Orders and Shipments data, as well as July New Home Sales, will be released by the Census Bureau on Wednesday morning. Weekly MBA Mortgage application data will be released on Wednesday morning, as will EIA oil gas and distillate stock levels. At 1 PM the Treasury will auction 5 year notes.


Europe: German Import price Index figures for July and IFO business sentiment indices for August are due on the 26th.   


Asia:  Singapore releases Manufacturing Production figures for July on Wednesday morning while Australian Private New Capital figures for Q2 will be announced in the evening. Two Asian economies that we follow but do not report on –Malaysia and Philippines, will be announcing Q2 GDP on the 26th as well.


Thursday August 27


US:  Q2 second report GDP and Corporate Profits will be published at 8:30 AM, while weekly Initial Claims, EIA Natural Gas Stock and Fed M2 figures will be also be released through the day at their normal times. At 1 PM, the Treasury will auction 7 year notes.


Europe: German GFK Consumer Confidence and CPI for August will be released on Thursday morning. Italian and UK Consumer Confidence measures for August will also be released that morning, as will UK Business Investment for Q2 and final Spanish Q2 GDP.


Asia:  Japan has several major data points releases on the schedule for Thursday including August CPI, July unemployment personal Income and PCE and August PMI.  With the general election only 3 days away, these employment earnings and inflation data will be topics of intense interest. Weekly Indian Wholesale Price Index data will also be reported on Thursday. 


Friday August 28


US: July PCE and personal Income data will be released at 8:30 AM on Friday, while final Michigan Sentiment figures for August will be published at 9:55.  


Europe:   EC Eurozone Confidence measures for August (Consumer, Industrial, Economic, Retail and Construction) will be released on Friday morning as will Italian PPI for July and Spanish CPI for August. The UK will have a busy day for Q2 economic data points with second release GDP, Private Consumption, Fixed Capital Formation, Government Spending and Foreign Trade data on the schedule.


Asia: Japanese housing Starts and Construction orders for July are scheduled for release on Friday morning.



Andrew Barber


The Big Get Stronger

We’ve been hitting on improved fundamentals in Europe in recent posts and today’s European PMI numbers continue the positive trend we have been watching develop.  Critically,  PMI readings for the German service and French manufacturing sectors released today for August crossed the 50 threshold, which indicates expansion.  According to Markit Economics the German service sector rose to 54.1 from 48.1 (far exceeding forecasts of 48.6) and French manufacturing rose to 50.2. German manufacturing and French services also improved sequentially but stayed in contracted territory at 49.0 and 48.9 respectively. 


As we’ve been reiterating in recent weeks, we believe that the improvement in Europe’s larger economies will greatly benefit other parts of the region due to the interdependent of trade within the EU. Clearly the improvement in German and French PMI as the Eurozone’s largest economies that each posted Q2 GDP growth of +0.3% quarter-on-quarter helped lift the composite Eurozone PMI to a 15-month high at 50.0.


Today Keith made a tactical sale of our position in Germany (EWG) in our model portfolio, with the ETF up ~3.9% as the DAX traded at ~1.8% at the time of the sale. European indices reacted positively to the PMI numbers, up 2-3% across the region. Despite the improved fundamentals we still see slow growth across Europe ahead, with relative winners and losers on a country basis. Our bullishness on Germany remains in the intermediate term; look for us to buy back Germany on a down day.


Matthew Hedrick


The Big Get Stronger - a1


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