Property/Casualty Benefitted From Investment Returns In 2Q

Markets remain rocky; Asia looks appealing


Consistent with our thesis, confidence among U.S. consumers fell more than the consensus forecast this past month, reflecting higher unemployment and higher gasoline prices.  The Reuters/University of Michigan preliminary index of consumer sentiment index for July came in at 64.6 compared the final reading of 70.8 for June (see chart below).  The consensus had been expecting decrease to a reading of about 70.0.


Currently consumers are focused on job security and, if they do have a job, how much it's going to cost to get back and forth to work.

 EYE ON CONFIDENCE - OR THE LACK THERE OF….. - HP mortage data.xlsx

Despite rising prices at the pump, the Michigan inflation survey saw fears of rising prices in the near term decline from last month's levels but longer term inflationary concerns increased marginally, something of a wash.   Meanwhile the current conditions survey declined from 73.2 last month to 70.4. The message from the consumer is clear, the economy may be bottoming, but it's also not really getting much better. 

We are currently positioned to express our belief that confidence has peaked for the intermediate term through short positions in Consumer Discretionary (XLY) and Consumer Staples (XLP).  In addition, Keith recently shorted McDonald's (MCD) and CKE Restaurants (CKR) in the portfolio.  

For the time being, malaise seems to be the order of the day and we will fade the US consumer accordingly.

Howard Penny

Managing Director

Andrew Barber


Burning The Consumer: SP500 Levels, Refreshed...

After making the MEGA Squeeze call on US Consumer Discretionary stocks (1H09), we have reverted to the short position that we held for the better part of 2007 and 2008. No, this isn't the end of the world type call that we made back then, it's simply assuring you that everything has a price - and the price of Burning The Buck will be paid by America's Main Street.

When you burn your currency, in the short term you pay the holders of debt and assets. In the intermediate term, that reflation starts to morph into inflation. In the long term, if you're not careful, you wind up with a German Reichsbank situation of the early 1920's that is completely politicized beyond repair.

Anyway you look at it, the consumer loses - particularly as you shift from the intermediate term to the long term (i.e. Q3 into Q4). Our intermediate term view (3months or more) remains that the US market won't crash or get squeezed like we saw in 2008 or Q2 of 2009. Instead, the US market will trade in a range. We call it Range Rover, and the lines are painted in the chart below (871-954).

My new line of immediate term TRADE resistance (dotted red line) = 898. We're short the Dow (DIA) and the US Consumer (XLY and XLP). We're long the Nasdaq (QQQQ) and Healthcare (XLV).

Buy low, sell high. Manage your risk around the range.


 Burning The Consumer: SP500 Levels, Refreshed... - burn

Chinese Trade Data: Continued Improvement

Research Edge Portfolio Positions: CAF, EWZ

June trade data released by the National Bureau of Statistics today showed a modest sequential improvement in exports with the total registering at a decline 0f 21.3% on a year-over-year basis (see chart below). This represents the eight consecutive declining months on a year-over-year basis, and despite the earnest efforts of Beijing to pull all levers to soften the landing for export dependant industries, there is still no indication that there is any light at the end of the external demand tunnel. Remember, the US and the UK are a mess.

(continued text post chart)

Chinese Trade Data: Continued Improvement - china1

Imports on the other hand, showed a marked improvement with a significant sequential uptick to -13.2% year-over-year as stimulus driven demand continues to chug along (see chart below).

Chinese Trade Data: Continued Improvement - china2

Imports of key industrial commodities continued to expand. NBS estimates for iron ore inputs, an input measure we follow closely, registered at the second highest monthly level ever at 55.3 million metric tons, a year-over-year increase of 46.3% (see chart below). Although on the margin we continue to collect anecdotal reports that could support buying driven in part by speculative bubble formation and transport bottlenecks we continue to regard the commodity signals as overwhelmingly positive for continued production levels driven by infrastructure development and consumer demand for durable goods.

Chinese Trade Data: Continued Improvement - china3

The clear winners in the race to provide The Client with what he needs are Brazil and Australia, who by NBS estimates have seen shipments rise to levels near 2008 highs after a tremendous rebound from January's lows (in the case of Brazil, June's total exports  to china represented a 277% increase over January's shipments on a USD basis). We remain long Brazil via the EWZ ETF and continue to be positioned to trade Australian equities opportunistically on the long side based on price action.

Chinese Trade Data: Continued Improvement - a1

We have been hammering home our message about the tactical situation for Chinese equities in recent days, and this bullish data does nothing to change that: We continue to be cautious in the face of such an extended rally. Strategically this data continues to confirm our thesis -but also intensifies our desire to search for any marginal data that could indicate asset specific bubble's forming.

In short, the data is decidedly positive and we remain decidedly confident.

Andrew Barber


Restaurant Industry – Feeding the Homeless

Any concept can drive strong top-line results with increased marketing initiatives that are focused on communicating the concept's compelling value proposition. Nearly 100% of the time, the increase in same-store sales does not come without cost - increased traffic with its value message at the expense of average check and restaurant margins. While the increase in sales might be good for the Franchisor, the operational complexities associated with extreme discounting can be a net negative.

The recent Kentucky Grilled Chicken promotion from KFC is a classic example.

What do you think McDonald's can expect with its new Mocha Mondays promotion? McDonald's is offering a complimentary 7 oz. Iced Mocha or indulge in an 8 oz. Hot Mocha each Monday from 7 a.m. to 7 p.m. at participating McDonald's restaurants from July 13 through August 3.

According to McDonald's "This is one of the largest sampling initiatives we've taken on as a company." It's going to be very interesting to see how this plays out for MCD.

Burger King Holdings Inc. (BKC) appears to be headed down a similar road. The Burger King operators shot down a plan to sell double cheeseburgers for $1 nationwide. Those operators understand the consequences of this move.

The marketing muscle behind these value messages by the larger chains will hurt the little guys more. In this context, CKR will continue to see pressure on its industry leading margins.

Restaurant Industry – Feeding the Homeless - mochamonday

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