Forecasters were surprised by Q2 GDP data released in the Philippines today as the island nation’s economy grew by 1.5% on a year-over-year basis driven in large part by government stimulus.




Incremental improvements in smaller South Asian economies like the Philippines, Thailand and Malaysia are sending clear signals that demand is strengthening throughout the region as low relative rates help coax increased consumer spending and capital investments despite continued malaise in many exports markets in the west. Resilient demand from China is also moving the dial as exports and re-exports bound for “The Client” make up an increasing portion of total foreign trade (see the chart below showing US & China bound Exports as a % of Philippine total shipments.




Although we do not take positions in smaller economies like the Philippines, we follow them closely looking for signals and confirmation for our regional investment thesis.


Andrew Barber



Today’s Initial Claims figure registered at 570K, down 10K from last week’s revised level but still higher than the four week moving average by almost 4k.


The rising trajectory of Claims figures since July has fueled increasing discussion of the “jobless recovery” thesis that many bears have been promoting.  We are not entirely opposed to this thinking: while unemployment and sentiment have improved sequentially as we had expected over the first half, we now believe that there is as high a probability that both will begin to deteriorate as there is of a continued improvement from here and, on the margin, this is both new and negative.


Note that from our view, the perverse mechanics of dollar degradation make it possible that converging negative factors like this can actually be a positive catalyst for US equities if they drive the dollar lower and foreign buyers take advantage of the discount.


Andrew Barber





Bullish German Data Points

A survey of German consumer confidence by Gfk indicated improving sentiment in its September reading. Sentiment increased to 3.7 from a revised 3.4 in August; economic expectations jumped to 8.8 from 1.8; and an index of consumers’ propensity to spend rose to 31.1 from 25.1.  This comes on the heels of yesterday’s announcement from the Ifo institute that its German business climate index increased to 90.5 from 87.4 in July, the fifth consecutive monthly sequential improvement.


These surveys suggest increased expectations for continuing recovery, which should translate into increased consumer spending in the near term. Retail Sales data continue to show a mixed picture however, with a separate survey from Markit Economics reported today that its German retail sales index, adjusted for seasonal swings, eased to 49.5 from 49.8 in July, the smallest rate of decline in over a year, yet under the 50 mark signaling contraction.


One consumer spending factor that is crystal clear is the impact of the cash-for-clunkers program on household expenditure. The Federal Statistical Office reported that Germans spent some EUR 36 Billion on purchases of motor vehicles in the first half of 2009, which represented a 23% increase compared to the same period a year ago. These purchases helped contribute to a rise of 0.1% in total household expenditure, which would have equated to a -1% decline in total consumption expenditure without the program.


Other German fundamentals continue to signal sequential improvement. On Monday EuroStat reported that German industrial production rose 4.6% in June month-over-month (+3.1% in Eurozone), after it rose 4.2% in May. We hold that Germany’s recent CPI and PPI figures represent a healthy short term deflationary environment. Today the National Statistical Office reported that August CPI is expected to remain unchanged (0.0%) on an annual basis, from -0.5% in July Y/Y. On the month comparison CPI rose 0.2%, due mostly to a rise in fuel prices, while food prices fell between 0.9% - 1.7% on the previous month.


It’s our expectation that this price environment in Germany will hold for the next couple of months and, as such, that the purchasing power associated with a strong Euro/ imported deflation (July import prices were down 12.6% Y/Y or -0.9 M/M) will be a net benefit in the near term for the consumer,  so long as the country can maintain a trade surplus.  In the intermediate (TREND) to longer term (TAIL) horizon, a weak Euro will be essential for any significant improvement in exports. The latest GDP report showed that German exports decline only -1.7% from the previous quarter, while imports fell -5.6%, yielding a trade surplus that contributed a significant +1.6% of price adjusted GDP growth. 


Despite these positive readings we remain cautious as the stimulus benefit associated with the cash-for-clunkers program winds down into year-end and as short-time worker contracts expire. Short term contracts have greatly contributed to stability in the unemployment rate, and both sentiment and spending could falter as unemployment rises. For now these concerns are only shadows on the horizon, as German sentiment appears strong following the +0.3% Q2 GDP number. 


We’ll continue to monitor Germany—especially with elections approaching in a month—and the impact of Europe’s larger economies on the periphery. We sold our position in Germany (EWG) for a tactical TRADE last week. Look for us to buy Germany back on a down move.


Matthew Hedrick



Bullish German Data Points - a1


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According to the WSJ, with SBUX trading at 23x consensus 2010 estimates, ”the company's stock price suggests that Starbucks will naturally start expanding again as consumers regain confidence.”


Naturally there are some things that I agree with in the article and some that I don’t, but nothing is new (the “people won’t drink pricey coffee” thesis is definitely not a new argument).


First, SBUX is much better off controlling the store assets than to sell off selected stores to improve margins.  Each store sold would be dilutive to EBITDA and not create shareholder value.  Very few restaurant companies have been able to sell stores and create value.  YUM did it successfully because its stores were severely underperforming, and therefore, the company benefited by getting them off the books.  I don’t believe this is this case for SBUX.


Second, SBUX does NOT need to start expanding again.  In fact that would be a mistake.  SBUX, unlike most companies, has the ability to grow globally, but the company would be better served to maintain its more recent disciplined level of capital spending.  Overtime, the company’s ability to grow globally will come to light.  Right now, the company is in the early stages of becoming better not bigger.  The opportunity for the company to generate more profits from its existing store base is massive.  That being said, it will ultimately need to get more customers in the door, which means the company needs to generate positive same-store sales.  The company’s national advertising campaign and new value combo offerings should help with this but increased consumer confidence and lower unemployment is needed for a real turnaround in sales growth (as is the case for most restaurant companies).


Third, I have to dispute the idea that “the mainstay cafe business [is] in doubt.”  This seems to suggest that the business is going away, which is just not the case.  Yes, SBUX’s earnings growth has slowed, but the company achieved double digit operating margins in the most recent quarter with same-stores sales down 5%.  Additionally, the company generated over $500 million dollars in free cash flow in the last 12 months.  The company will definitely benefit from an improved economic environment and positive same-store sales growth, but in the meantime, this company has improved its business model and is not going away.



Terence Watanabe, a Japanese-American gambler who lost more than US$110m in Las Vegas casinos is asking that a Las Vegas court dismiss charges against him that he defaulted on gambling debts.  He is accused of writing thirty-eight bad checks to pay debts of US$14.7m. His legal team offers two reasons why the charges should be thrown out. 

First, they allege that he was plied with alcohol and prescription drugs by the casinos while he was gambling.  Disciplinary action can be taken against casinos that allow visibly intoxicated people to gamble or supply them with alcohol.  Secondly, and more importantly for the gaming industry and how courts handle gaming debt cases, his lawyers contend that the terms of the credit agreement he signed with Harrah’s allowed him at least 60 days to repay markers – terms which made them more akin to loans and therefore he should have more leeway in paying them.  The Clark County district court has scheduled a hearing today to consider the motions filed by Mr. Watanabe.



Eighteen hotel projects were under construction in Macau at the end of the second quarter, one more than at the end of the previous quarter, according to data released by the Lands, Public Works and Transport Bureau.  The projects will add 22,800 guest rooms to the local hospitality industry.  Another twenty-four hotel project applications were being processed by the bureau.



Macau is investing £3.3m boost meetings after its event market grew in 2008.  The Macau Government Tourist Office has launched the Strategic MICE Market Stimulation Programme to offer a range of packages and incentives for meeting organisers and event planners that book events by 31 December.  In 2008, corporate meetings bookings grew by 12% and trade shows and exhibitions grew by 54%.

Ball Underwater

“Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.”



Last week, when addressing the selloff in China, Andrew Barber wrote a fantastic Early Look titled, “The Present” – and no matter where you go this morning, here we are. Don’t get excited. Don’t freak out. Take a deep breath and a sip of your coffee. It's time to grind with the newly issued facts on your screens.


One of our top performing clients is a swimmer. While there is no secret that I have a confirmation bias for athletes, that certainly doesn’t mean everyone on my Research Edge Team had to have been a good one. Barber is one of our best players - ask him how fast he can run 100 meters!


My point here is a simple one. And it’s one that my client made to me last night. She just finished swimming a mile and wrote, “it settles my mind.” Simple is as simple does. Rinse and repeat. She is a testimony to that discipline – her track record ranks her at the very top of all Mutual Fund Growth and Income Funds. No, super duper momentum Fund of Funds dude, not last month - over the cycle of the last 5 years, when plenty an emotional PM was set out to sea.


From the Top, to the Bottom, and Back Again. We’re looking to learn from those who have successfully swam both with and against the current of consensus. Up or down, side to side. Being a successful investor in The New Reality requires a settled mind that does “not dwell in the past” or “dream of the future.”


Dreaming of becoming a billionaire or waking up with that on your mind doesn’t register with me as good pre-game prep. So, let’s do up our chin straps and get ready to settle our minds into the dirty stuff. Ranges, deltas and spreads – risk management style. This next part of this market’s move is going to be all about the grind.


The SP500 hasn’t budged this week. On a closing basis, over the course of the last 3-days, it has traded in a 0.30% range. It’s a grind. So settle your mind, and deal with it.


When we grind like this, we’re setting up for a big move. You don’t need to be a swimmer to get the analogy that I like to use with my team – the grind is the time where we’re holding a Ball Underwater.


The question here is which Pain Trade is going to explode out of this grind? The answer, as you’ll probably guess, lies with one global macro factor – the US Dollar.


Dollar up = everything priced in dollars down. Dollar down = everything priced in dollars up. If you don’t like getting dirty, get wet – and rinse and repeat this inverse correlation until you are soaking with alpha.


While the SP500 was dead flat yesterday, the componentry of the US market was very much anchoring on this dominant inverse correlation. Consider the following 3-factor setup of closing prices:


  1. US Dollar Index up +0.35% to $78.60
  2. US Financials (XLF) down -0.27% to $14.58
  3. US Consumer Discretionary (XLY) up +0.57% to $36.55


If Dollar down gets the Bankers, Debtors, and Politicians paid. Dollar up gets the American Consumers and Creditors paid. Yesterday gave us a sneak preview of what a Dollar rally scenario could look like.


This will sound counterintuitive to the legions of hedge funds that remain short the Pain Trade (short the US Consumer), not because of the math – more so because anything that doesn’t rhyme with what gets them paid is sometimes hard to reconcile. Trust me, I have tried shorting these consumer stocks for the last 3 months – I understand pain.


As bearish as I have been for the last 9 months on the US Dollar is as bullish a breakout it can have if that’s the Ball Underwater that we are going to have to deal with. In the last 3 weeks our call on the US Dollar has definitely morphed into consensus (Buffett, PIMCO, etc…). Consensus groupthink can be a scary place.


Not surprisingly, of the four SP500 Sectors in our Sector Views Risk Management product that were down yesterday, the aforementioned Financials (XLF) were one of them, and so were Basic Materials (XLB). These are two of the highest beta sectors in the market. Both are REFLATION sectors. So, AFTER, the most expedited short squeeze in US stock market history, we’re now forced to deal with a scenario that is potentially much different than the lay-up we have had for the past 6 months.


Bernanke now has his job security. On the margin, that means he doesn’t have to pander as much. Less political pandering = less US Dollars for sale. Why? When reported inflation accelerates in Q4 (it will), he will start to move to where the bond market is already headed – HIGHER THAN ZERO on the Fed Funds rate.


Rates up = Dollar up = REFLATION trades down. Most will probably agree with me on that. I have the immediate term TRADE breakout line for the US Dollar 8 cents (and 8 seconds) away from breaking out. That line is $78.62. That’s The Present. That’s your Ball Underwater.


I have immediate term TRADE resistance for the SP500 at 1041, and immediate term downside support at 1009.


Best of luck out there today,






EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  


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. 


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.  


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. 





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 that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


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.

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