2010 Investment Guide: Healthcare Boomer Bust

Manic Depressionistas, Be Careful...

This morning’s weekly jobless claims release was the least-toxic we have seen this year.


At 466,000 claims, this was better on both a sequential (week-over-week) and a 4-week moving average basis. In the chart below you can see these points. Last week’s claims were 505,000 and the 4-week moving average (yellow line) is 496,500.


What does it mean? Well it is probably not enough to make the November monthly jobs report much better, but it definitely isn’t something that’s going to make it worse. Manic Depressionistas, be careful. An 11% unemployment rate is not going to be in the cards – not this or next month, at least.


What’s perverse about this (and not being read through in this way by Mr. Macro Market today) is that anything that remotely resembles a less-than-toxic US Employment picture is bad for the stock market, in the immediate term. Why? Well, that’s easy – that would be US Dollar Bullish.


Which leads me to asking myself another question. Is today’s jobless claims report marking the YTD low for the Bombed Out Buck?


He Who Sees No Bubbles at the Fed once claimed to be “data dependent” – this week’s housing and employment data points, combined with last week’s Consumer Price Inflation report are plenty good enough to NOT be holding interest rates at this ridiculous “emergency” level of ZERO percent.


There is an immediate term bubble in Gold and an intermediate term bubble in short term US Treasuries.


Given the recent data, the Fed’s policy of “exceptional and extended” remains unsustainable and unreasonable.



Keith R. McCullough
Chief Executive Officer


Manic Depressionistas, Be Careful...  - claims


Consumer Confidence Wanes on Both Sides of the Atlantic

As one indicator of sentiment that we track, the GfK released its December German Consumer Confidence report today. In contrast to yesterday’s release of the German Ifo Business Confidence Survey that showed a measurable increase in the business climate (93.9 in November versus 92.0 in October), today’s consumer report falls more in line with our overall intermediate outlook for the Eurozone’s largest economy, and the region itself.


Consumer confidence fell to 3.7 in December from 4.0 in the previous month, while the sub-surveys of economic and income expectations declined significantly and consumers’ propensity to spend was flat. More broadly, the data has been trending downward over the last months (see chart below).


We continue to expect the rate of improvement in broader fundamentals to slow sequentially into year-end and in 1H ’10 for Germany, and many Eurozone countries, with mild growth next year. That said, one bullish indicator for Germany has been its rate of unemployment, which has held steady ~8.1% over the last four months. And today the government announced that its program (subsidy) of shortened work hours or part-time jobs, known as Kurzarbeit in German, which was set to expire at year-end and by all measures was the substantial crutch in maintaining employment, will be extended by another 12 months. The decision by Chancellor Angela Merkel’s government means that the state will pay up to 67% of a worker’s salary for a period of up to two years to keep workers across industry “employed”. Recent data suggests that some 1 million workers were covered under the program.


While prolonging Kurzarbeit should hinder joblessness, on the TAIL we’re left to wonder if striking jobs now would be a better solution, both limiting government expenditure and encouraging companies to right-size their labor force...


Irrespective of the government’s extension of short-time work, we still expect joblessness to be a major concern for the consumer in 2010. Neither Eurozone PMI data out this week (See Topping Off on 11/23) nor German private consumption Q3 figures suggest the consumer is ready to spend, and the stimulus associated with the country’s cash for clunkers is now rear-view. Additionally, today’s news from the Bundesbank that German banks may need to further write-down another 90 Billion Euros of bad loans won’t add confidence in the broader economy.    


While we see bearish fundamental headwinds for Germany ahead, and as an extension for Eurozone countries that rely on the stronger economies of the region like Germany and France for trade, we are on balance bullish on the German economy versus some of its European peers as we believe that global demand should melt up to support Germany’s industrial and manufacturing base.


Matthew Hedrick



Consumer Confidence Wanes on Both Sides of the Atlantic  - GfK


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With Thanksgiving upon us and the Holiday season right around the corner, there are many challenges and distractions ahead.  With 2009 looking to be a much better year for most market participants versus 2008, it does not feel like there is going to be a melt-up or down in the market before year-end.  Feelings are not an investment process, but everyone has them.


Confidence is falling…  How many times have you read over the past two months that “job losses threaten to limit spending heading into the holiday shopping season”?  Today it was reported that the University of Michigan “final” index of consumer sentiment decreased to 67.4 in November from 70.6 in October.  The final reading was slightly better than the preliminary reading of 66 reported in early November.


Another smaller but equally important measure of consumer confidence is how people feel about treating their families to a night out to eat.  On this measure, things are not improving either.  Malcolm Knapp reported that October casual dining same-store sales declined 4.9%, with traffic down 4.4%.  Given what we have from a handful of casual dining restaurant operators about trends in October, it’s not surprising that October improved sequentially from September when comparable sales declined 6.4% and guest counts came in -5.3%.  


If you look at 2-year average trends, however, the October numbers do not provide any reason to be optimistic as both same-store sales and traffic trends continued to decelerate from September.  Demand in October was not as bad as last December when trends bottomed, but on a 2-year average basis we are not that far from it with the October comparable sales 2-year trend down 5.5% relative to -6.7% in December 2008. 


The two best performing sectors over the past month have been defensive ones - Health Care and Consumer Staples - rising 7.7% and 4.3% respectively.  This compares to the S&P 500 up 2.4%.  Research Edge’s Healthcare maestro, Tom Tobin wrote today.  “If the outperformance in Healthcare has been due to the fading regulatory threat, the most interesting chart is in the Kaiser Family Foundation Poll on Health Reform.  It appears the public is losing interest, or sees what Wall St. sees.  Maybe it’s like turning off the game when your team is down and the clock is ticking down.  Do the people polled simply have other things to worry about like Thanksgiving dinner and keeping a job?”


Consumers are feeling the pinch in a number of ways and it’s hard to see a light at the end of the tunnel.  While I always look forward to the start of a new year, I’m nervous about what 2010 has in store for us.   


Howard W. Penney

Managing Director




Bubbly Gold: Selling Some...

We have been bullish, as our competitor Dennis Gartman, likes to say “of Gold” for a long time. In fact, YouTube fans will recall that we wrote an Early Look strategy piece titled “Short Of Garty” on 5/15/09, emphasizing our bullish long term view.


For old time’s sake, here’s an excerpt of that note:


"Thinking well is wise; planning well, wiser; doing well wisest and best of all."- Persian Proverb

Of course I am not "short of" the man. As all Early Look titles go, we have to have some fun at these un-Godly hours of the macro morning. Dennis Gartman is one of the great grinders of the early morning gridiron. The investment community is a better place with him in it.

This does not mean, however, that I need to subscribe to the panting dog nodding that CNBC's Fast Money's producer must force his "Traders" to look into the eye of the camera with when listening to the Gartman gospel. Someone has to hold the members of this circus act accountable. The American Financial system is being YouTubed by the world, daily, and it's just too embarrassing to know that The Client (China) thinks that this is what US investors do.

So Garty, lets slap the ole red, white and blue accountability pants on and take a walk down the path of a few positions that you are currently "short of", The Dow and Gold:

1.      I have also been "bearish of" the Dow via the DIA etf, but covered my position

2.      I am long Gold via the GLD etf, and remain "bullish of" it



Today I am selling ½ of the position we currently hold “long of” gold in our Asset Allocation Model. No, we are not “bearish of” gold. But we are “bearish of” the crowd when they bubble an immediate term price up like this into month end (Monday).


Our immediate term TRADE (overbought) line for Gold is in the chart below ($1190/oz). You can buy it back in the shaded green range we have highlighted below ($1103-$1142). Gold is finally getting Bubbly.



Keith R. McCullough
Chief Executive Officer


Bubbly Gold: Selling Some...  - Gold


American Gratitude

“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.”
–John F. Kennedy

Every morning since I left the Carlyle Group’s hedge fund, I have woken up on a mission. My mission is to prove myself – not to them, but to me.
I want to prove myself worthy of the opportunity that this great country has provided me. Freedom of thought. Freedom of speech. These are freedoms to live by.
This American Thanksgiving is very special for my family. My wife, Laura, is expecting our second child. My son, Jack, is getting ready to skate. The highest appreciation I can give to them, is to live for them.
When I drive up 95 to New Haven every morning, I think of them. Then I express whatever I have in these arthritic hockey knuckles to you. All I have is 45 minutes of writing time, then edits. I know I’m not always the easiest person to agree with. Nor am I the easiest to always like. So, I’d like to take this brief opportunity to thank all of you.
Thank you for your time. Thank you for your patience. And, most of all,  thank you for providing me the resources to build a wonderful American firm. We have hired 34 people in the past 18 months. I live by them too.
Before I thank one more core constituency who makes every morning missive possible, I’ll take a moment to address something my Macro Team always gets asked for throughout the day - our intermediate-term TREND lines.
Here are my top 12 country levels – refreshed for this morning’s prices:
1.      SP500 = 1051 (bullish)

2.      Nasdaq = 2089 (bullish)

3.      US Financials (XLF) = $14.61 (bullish, barely)

4.      Chinas’ Shanghai Composite = 3051 (bullish)

5.      Japan’s Nikkei = 10,169 (bearish)

6.      South Korea’s KOSPI = 1626 (bearish)

7.      UK’s FTSE = 5049 (bullish)

8.      Germany’s DAX = 5563 (bullish)

9.      Russia’s RTSI = 1261 (bullish)

10.  Brazil’s Bovespa = 60,894 (bullish)

11.  Canada’s TSE = 11,161 (bullish)

12.  Australia’s All Ords Composite = 4607 (bullish)

Finally, I’d like to thank our troops.
They watch over us every night. They ensure that guys like me can run my mouth, and that gals like you can hit me back. These are the men and women that make our Thanksgivings possible. They do not “utter words”. They “live by them.”
Best of luck out there today.

VXX – iPath S&P500 Volatility With the market hitting its YTD high on 11/23 we bought volatility.

XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

EWA – iShares Australia We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

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.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

EWY – iShares South Korea
South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.

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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