“Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation. –KM 8/18/09



Today’s PPI release for August showed an increase of 1.7% month-over-month the fourth sequential monthly increase (a decline of 4.34% over last Augusts reading). Although this increase was driven primarily by rising fuel costs, so called “Core” prices increased by 0.2% for the month catching many observers off guard.



Keith wrote last month that the number released today would mark the low for the deflationary cycle and that the Reflation Rotation we have been predicting for Q4 would start develop; causing interest rate expectations to creep upwards and, ultimately, to moderate the trajectory of the dollar’s decline. As we wait for Tomorrow’s CPI reading looking for more confirmation we remain positioned for these expected shifts in both reality and sentiment with portfolio positions like our  long TIPs/short the 2 Year pair.




Andrew Barber




Sunny D(ays) for Obama?

President Obama’s approval rating has seen an uptick in recent weeks and is now near two month highs, which is coincident with Research Edge’s hiring of Darius Dale, our newest Junior Analyst. I was sold on Darius fairly quickly after his first interview.  Not only is he a Yale Athlete, all Ivy Football player, but he also called me Mr. Jones!  Darius, who is more commonly known as Sunny D by his former Yale Football teammates, is a resilient man (after all he works for Brian McGough, who is probably the hardest working Director of Research on Wall Street!). It seems the President may finally be experiencing some “Sunny D” type resilience in his approval.


We’ve outlined this in the chart below, but as of the most recent reading in the Rasmussen Daily Tracking Poll, President Obama is rated -4.  This poll is calculated by subtracting Strongly Approves from Strongly Disapproves.  While clearly no President should be content with a negative rating, and -4 is dramatically off the highs of the Obama Presidency, it is indicative of dramatic improvement from his lows, which troughed at -14 in the throes of the healthcare debate in mid-August.


So other than Sunny D joining Research Edge, what is helping the President? For starters, President Obama’s speech to Congress and broadcast nationally seems to have been at least moderately well received.   President Obama has been oft criticized for articulating his healthcare plan ineffectively, and it seems this appearance at least helped him make some headway in the regard.  According to statistics from Newsweek, President Obama has made public remarks (speeches, town halls, interviews, etc) 263 times since being elected.  Based on the same analysis, 123 of those appearances have had some healthcare content.  It seems that the 123rd appearance (his speech to Congress last Thursday) may have been the lucky one, at least for the short term.


Rasmussen summed up the volatility in President Obama’s approval and its relationship to healthcare last week, when he wrote:


“When the public debate over health care reform began in earnest in June, 50% of voters nationwide supported the legislative effort and 45% were opposed. By August, support had fallen to 43% and opposition had risen to 53%.”


As of this Monday, approval for the healthcare plan was back above 50%, at 51%.  Clearly, President Obama’s approval rating is very directly related the fortunes and/or perception of his healthcare plan.  His approval rating started to deteriorate as he introduced the plan and has ebbed and flowed based on the tenor of the national healthcare debate over the last two months.


Synching the information from Rasmussen with a Gallup poll provides an even more important leading indicator.  According to a recent survey by Gallup:


“Americans remain split on the issue of healthcare reform, and almost two-thirds (64%) say their representative’s position on healthcare reform will be a major factor in their vote in the next congressional elections.”


Thus, it is clear that the nature of the healthcare reform debate, and how representatives vote on it, will be critical as we start looking towards midterm elections in 2010.   It seems, at least based on the Gallup poll above, that representatives will be held directly accountable for their votes on this legislation.  This will also be a critical test for President Obama; while he is certainly seeing a bounce in approval, and this is positive, he has expended an incredible amount of political capital on the healthcare battle, which will shape the remainder of the first year of his Presidency. The first test will be whether the bill passes, in what form, and then how representatives are judged by their constituents.


Daryl G. Jones
Managing Director


Sunny D(ays) for Obama?             - RASMUSSEN


Our healthcare analyst, Tom Tobin, flagged the following two CDC charts this morning.  The first chart shows that the flu season is starting early this year as it was virtually non-existent at the same time in the prior two years.  This chart points to an already bad flu season that is likely to get significantly worse come the winter months when the flu is more prevalent.  The second chart illustrates which regions of the U.S. are currently most affected.


Swine flu has infected more than 254,000 people since April and killed more than 2,800, according to the World Health Organization. The number of fatalities has more than doubled in the last month, with infections rising 10-fold since June.  Thus far, the swine flu has not been as deadly as past pandemics, but based on current outbreaks so early in the season, it is likely to be far more widespread.


Such widespread illness, even with only moderate symptoms, will affect people’s behaviors, and I would not be surprised to see an impact on restaurant demand.  Most obvious, people will not go out to eat if they are sick.  The bigger impact, however, comes from all of the people who choose to stay home out of fear of becoming infected.  From a geographic standpoint, it will be interesting to see how restaurant trends in Florida and the South Atlantic states have fared most recently as the flu is most widespread in those regions of the country.  Based on Malcolm Knapp’s data, both Florida and the South Atlantic have been outperforming the national average in recent months (through June) after consistently underperforming in 2008 and early 2009.  We expect to receive Malcolm Knapp’s July regional data and overall August comparable sales numbers in the coming week.





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Industry replacement demand still bouncing along the bottom but BYI is making deals.


This morning BYI announced that it sold additional hardware and software to Morongo Casino Resort Spa, an existing BYI systems client.  BYI will be installing 2,000 iVIEWs along with a suite of software that includes Business Intelligence, Bally Power Promotions and Power Winners, which together will allow the casino to offer floor-wide random progressive jackpots and chain-reaction rewards, and free play credits to slot machines on their floor.


Morongo also signed a contract with Cisco Systems to implement high-speed Ethernet on their floor. Ethernet will help optimize the use of iVIEW, allowing for faster streaming of bonusing games, promotions and other video content that the casino chooses to stream through the window.  We estimate that this contract will generate approximately $3.5MM of revenue and $0.02-$0.03 cents of EPS.  If the Ethernet enhances the Morongo’s ability to leverage iVIEW, we can expect further software upsales which will continue to enhance the recurring revenue stream that BYI receives from this system.



SEPTEMBER 15, 2009





Am I the only one who is surprised that retail has not melted down in the wake of the Goldman conference? I guess that after so many years of covering the space, I’m simply used to it.  In fact, over the past 6 years alone, there has not been a single year where retail (as measured by the MVR) has outperformed the S&P in the back half of September. I’m going to sing the same tune…the good ‘ol “sales and GMs are stabilizing over SG&A and Capex cuts” call will only take us so far.  This is especially the case given that we just saw a 39 point acceleration in the NTM consensus growth forecast – and that is now flattening out.  Bottom line = I’m less valuation sensitive here (if at all). Without meaningful upwards revisions and/or likelihood of M&A, my bias is on the short side.







Some Notable Call Outs


  • In a break from tradition and sign of the times, Doubleday is releasing Dan Brown’s, The Lost Symbol, simultaneously in hardcover and in eBook form. The first printing of the book is expected to put 6.5 million copies in circulation. For comparison, it took 53 printings and 14 weeks atop the NY Times best-seller list for The Davinci Code to get 6.8 million copies in print. To say that expectations are high for booksellers, retailers, and e-commerce would be an understatement given the sheer size of this launch.


  • Despite weak mall traffic, mall-focused ad networks are seeing strong growth in revenues. The digital and print signage directed to mall-shoppers is proving to be a viable and cost-effective alternative to newspaper circulars. Ad providers cite the contextual relevance of the signage as a driver of consumer purchasing behavior. Demographics are also attractive to this form of media, which is a direct way to target teens, young adults, and women.


  • The August NPD monthly footwear trends have been released and there are some notable brand callouts. Converse increased by 45%, Under Armour by 32%, Skechers by 12.5%, and Brand Jordan by 9.5% during the month.  Casual athletic and running were positive categories while basketball and skate were weak. 





-CIT Group survey says a majority of vendors expect revenue growth to resume next year - A majority of vendors expect revenue growth to resume next year, even though a significant number of retailers don’t expect consumer spending to return to pre-recessionary levels until 2011 at the earliest. Among the vendors queried, 29.8% of whom work in apparel and accessories, 17.3% expect significant growth in their revenues next year and 42.3% expect some growth. However, expectations differed widely based on company volume and size with  22.6% of large firms expecting significant growth versus 11.8% of small firms. More than half the vendors will pursue aggressive pricing to support growth. Despite upbeat expectations for their own businesses, 57.7% don’t believe economic growth will return until after 2010. As for the upcoming holiday season, 67% said they will stock less inventory than last year, while 66% will offer greater discounts.  <>


-The U.S. and China have stoked the fires of a potential trade war over the past three days and the stakes for the fashion industry are high - While these actions haven’t involved apparel and textile products, many feel they could soon join the fray. Evidence of such can be seen as retail stocks followed the broader markets lower on Monday amid concerns about the prospect of a trade war between the U.S. and China, where retailers from Wal-Mart Stores Inc. to J.C. Penney Co. make some of their goods. The S&P Retail Index (RLX) fell 0.7% to 369.71. After President Obama revealed a decision late Friday night to impose punitive tariffs on imports of Chinese tires, China fired back with a complaint against the U.S. at the World Trade Organization on Monday. The Obama administration said it will apply higher duty rates to tires imported from China for a period of three years under a China-specific safeguard mechanism — a provision China agreed to when it joined the WTO in 2001. In addition to the existing 4% duty, passenger vehicle and light truck tires imported from China will be subject to an additional duty of 35% the first year, 30% the second year and 25% the third year. The increased tariffs take effect Sept. 26. In invoking the safeguard, Obama upheld a petition filed by the United Steelworkers Union on behalf of U.S. workers in the tire industry. <>


-The American Apparel & Footwear Association issued a statement encouraging Obama to avoid protectionism - The American Apparel & Footwear Association (AAFA) issued a statement claiming protectionism would cause more trade disputes and hurt the U.S. economy's recovery efforts. The statement followed President Barack Obama' s Friday decision to impose punitive tariffs on tires imported from China. <>


-UK retailers hit by EU sanctions on Sri Lankan factories - Retailers including Next, Marks & Spencer and Tesco could soon lose access to affordable clothing manufacturing in Sri Lanka as the EU looks set to withdraw funding from the country. Clothes have been imported tax-free to the UK from Sri Lanka over the past four years in a scheme set up to aid the country’s recovery after the tsunami in December 2004. However, the benefits could soon be withdrawn as punishment for the Sri Lankan Government’s alleged human rights abuses during the recent civil war. The move could add up to 10% to the cost of the clothing, forcing retailers to source elsewhere. Next has a factory in Sri Lanka that produces jersey pieces, Tesco reportedly produces parts of its Cherokee range in the country and Marks & Spencer manufactures parts of its lingerie and school uniform ranges there. Conditions for workers at the factories are reported to be very good and the move could threaten the livelihoods of 250,000 workers employed in hundreds of factories across the country. The EU has reportedly given the Sri Lankan Government until tomorrow to respond to a human rights report alleging war crimes. <>


-Turkey’s fashion industry launches Istanbul Fashion Days - Turkey’s nascent fashion industry has found something to celebrate during the economic downturn: the launch of Istanbul Fashion Days, the country’s first fashion week. The organizers’ goal for the $1.5 million event is for it to eventually hold a place among the world’s major fashion happenings. With high-quality cotton and low labor costs, Turkey has long been a production hub for some of the best known brands, from Marks & Spencer to Gap. Technological advances in fabrics and competition from Southeast Asia have pushed manufacturers to begin developing their own brands, starting with casualwear. Turkey’s manufacturing background is a boon for designers because companies are already well positioned to produce and deliver with fast turnaround. <>


-Indonesia's demand for textiles and clothing in the domestic market has seen growth of 15-20%- Demand in domestic markets for textiles and articles of textiles has reached US$5.4 billion but there has been a decline in demand for imported textiles is apparent in markets of Tanah Abang. The local manufactured textiles and clothing demand for imported products have dropped from 20% to 10-12z5, benefited the local sector, said Ismy. To further enhance the competitiveness of the domestic textiles, the government will offer more incentive support such as tax holidays and reduction in electricity tariff. <>


-Chinese car sales has seen a surge of 90% year-on-year in August to reach record vehicle sales - China is likely to surpass the US to become the world's biggest auto market in 2009 due to months of stronger than expected growth in auto sales. In terms of light vehicles such as mini-commercial vehicles, China looks set to pull ahead of the US for the first time despite passenger car sales in the US will remain higher than China's. August's 90% growth was contrasted with the very weak August 2008, when the Beijing Olympics and the onset of the global financial crisis, with sales down by 6.2 per cent, the first decline in three years. <>


-Report says outdoor retailers score higher with customers - For the second year in a row outdoor retailers were viewed highest in the eyes of the U.S. consumer when shopping for sporting goods.  Based on survey feedback compiled in the most recent Where America Shops report, full-line sporting goods and discount/mass merchant retailers had higher awareness levels and scored more in-store visits than the outdoor segment as a whole, but when it came to rating the shopping experience, it was the outdoor specialists that scored higher across almost all categories versus other trade channels. The survey, which was conducted via the Internet in late June as part of the broader Where America Shops report, sampled a cross-section of the American population ages 13 and older.  When respondents were asked to rate the retailers they have visited specifically for sporting goods, it was the outdoor retailers that dominated the ratings of many of the attributes measured throughout the survey.  Other than having low prices and convenient store locations an outdoor retailer was as the top of the list. Cabela's received the highest average ratings from their consumers than any of the other retailers measured. Cabela's received the highest ratings for having a variety of product offerings and having products in stock.  When thinking about the customer service respondents who have visited Cabela's in the past year ranked only L.L. Bean higher. Cabela's fell slightly below REI and L.L. Bean when respondents were asked to rate quality of products that each of the retailers carry. In the battle for Full-Line Sporting Goods retailer supremacy The Sports Authority outranked Dicks Sporting Goods in every category with the exception of carrying quality products.  The greatest difference in the average ratings was in the perceived price of the products sold. Sports Authority received an average rating nearly a full point higher than that of Dicks Sporting Goods. <>


-Report says retailers have opportunity to convert web shoppers in-store - Dick's Sporting Goods' recent move to take more control of its Internet sales and The Finish Line's recent decision to structure its Web business as a separate unit are just two recent examples of how retailers see the Internet selling opportunity as a more mature business proposition.  Based on the survey retailers should pay very clear attention to how consumers are using their Web sites for research and purchasing. In a reflection of a weaker economy, 38% of the respondents that had purchased sporting goods (including footwear and apparel) online in the last year, said they had purchased less than the previous year.  The report found that 54% purchased 'about the same' and 9% purchased more online.  Of the respondents that mentioned purchasing less online this year compared to last year, 42% indicated the Have Less Money/Economy reason as the driving factor limiting their purchasing, 17% said the decline was due to the inability to Try On or Demo Products and 12% said the decreased online activity was due to Shipping Costs. Of the respondents that said their online purchasing has increased this year compared to last year, 36% said that Cost/Better Price was the reason for the increased purchasing, while 20% indicated Convenience as the primary factor and 17% said the Internet shopping experience provided Greater Selection and Variety of Products. <>


-New York Times Fashion & Style: A View of the Sporting Life - The Y-3 sportswear collection has never seemed so focused than in this elegant vision of the Beautiful Game. The Adidas footwear, especially the high-shine sneakers in vivid colors, were as inventive as ever. But Mr. Yamamoto’s spirit came through especially in the use of mesh in both the men’s and women’s clothes. As airy effects on T-shirts or as sinuous mermaid dresses, the Y-3 collection caught that particular Yohji Yamamoto blend of energy and romance. Thom Browne has a disconcerting way of veiling his imaginative designs with tricksy effects. But in his collection, there were fine pieces, especially a new loose, round-shouldered jacket, in contrast to his signature shrunken tailoring. New, too, was a focus on revelation, either as an ankle-length raincoat in translucent nylon or, more dramatically, as peek-a-boo holes punched into a tailored coat. <>


-High-profile departures at PVH's furnishings division - Both Lee Terrill, president of PVH neckwear, and Mervyn Mandelbaum, founder of Superba, which PVH acquired in 2007, plan to retire, according to an internal memo acquired by WWD. Terrill joined PVH in 1972 and spent most of his career in the company’s dress shirt division and was named president of the branded dress shirt group in 1998. In 2007, he moved to the newly formed neckwear group, where he served as its president. Terrill will retire from the company at the end PVH’s fiscal year, or Feb, 7. Marc Schneider, president of the dress furnishings division, will assume Terrill’s responsibilities on an interim basis. Reached on Monday, Schneider confirmed the changes but declined to comment further. Mervyn Mandelbaum, who founded Superba/Insignia neckwear in 1978 and grew it into the largest tie manufacturer in the country, will step down as chief executive of the PVH neckwear group, which was formed after PVH acquired Superba, at the end of fiscal year 2010. The memo also detailed the promotion of Mitch Lechner to president of the dress shirt group, effective Oct. 1. He previously served as the president of the division’s designer shirt business, which includes the Calvin Klein and DKNY brands. In his new position, Lechner will now oversee the division’s larger volume businesses — including the Van Heusen and Arrow brands — which had previously been headed by Steve Correia. Correia, who will stay with the company, is relocating to Los Angeles, where he will serve as the executive vice president of sales and marketing with responsibility for company’s midtier dress shirt business. Correia has been with the company since 1990. <>


-Quiksilver Inc. has named Anton Nistl as president of its DC skate and snowboard brand for the Americas region - Nistl was previously senior vice president of sales at Vida Shoes International, a licensee of fashion footwear brands, including Baby Phat, Phat Farm, Pastry, Run Athletics, Esprit and OshKosh. In his new job, Nistl reports to Craig Stevenson, president of Quiksilver Americas. Nistl replaces Nick Adcock, who left the company in August and moved to Ibiza, Spain, a company spokeswoman said. Quiksilver, which was carrying debt of $1.04 billion as of July 31, considered selling the DC business this year, but after a refinancing in June, decided to retain the brand and move forward as a unified company. <>


-Coldwater Creek CEO resigns - The company did not provide a reason for Griesemer’s departure and did not return calls seeking comment. Pence cofounded the Sandpoint, Idaho-based missy retailer in 1984 and served two prior stints as ceo: from 1984 to 2000 and again from 2002 to 2007. Griesemer, a veteran of Federated Department Stores Inc., now Macy’s Inc., and Gap Inc., joined Coldwater Creek in October 2001. He was promoted to president and chief operating officer in March 2007 and took the reins as ceo after Pence retired from the position in October 2007. “It is my firm belief that this brand, now 25 years of age, has significant opportunities for substantial growth,” Pence said in a statement. “The board of directors has asked me to return as our leader in order to accelerate the timelines for this growth, and for a return to long-term profitability, which our shareholders so rightfully expect.” The company has struggled recently as the missy market proved particularly vulnerable to the recession and accompanying slowdown in consumer spending. <>


-To get in front of the young, city-dwelling customer—the target for its Timberland Mountain Athletics line and pinnacle-green Earthkeepers styles—Timberland is incorporating mobile media, TV, online and out-of-doors applications for fall. On the mobile front, the brand partnered with PR firm Mullen's Mediahub and Ansible Mobile to create an application called "Expedition Timberland" that features both the TMA and Earthkeepers lines while giving guides to hiking trails, walks and other outdoor activities in New York, L.A., Chicago, Boston, Denver and Minneapolis. The iPhone version of Expedition Timberland is available now, and a Blackberry version will launch on Sept. 21. On the television front, a new spot called "Bait," promoting TMA, will begin airing in the U.K., Italy and stateside (focusing on the Denver, Boston and Minneapolis markets) this month. The campaign will be supported online, with sponsorships on Hulu and customizable Pandora radio stations, and externally, using guerrilla marketing techniques in select locales. Jim Davey, VP of Global Marketing for Timberland, said in a release, "This combination of social and digital media, combined with innovative advertising and public relations, creates a meaningful conversation with our young consumers and demonstrates Timberland's commitment to integrated marketing around the world." <>


-Delta Apparel, Inc. announced they have entered into a new licensing agreement with Jordan Outdoor Enterprises, Ltd. to be the exclusive marketer and producer of Realtree Girl® and Realtree Outfitters® casual apparel and headwear. The Realtree Girl and Realtree Outfitters collections will feature a broad range of fashion apparel providing outdoor enthusiasts with trendy casual clothing. Realtree Girl was launched in 2006, offering endless options that reflect her love of the outdoors. A full line of Realtree Outfitters casual apparel and headwear is being introduced this fall for adventurers and outdoor sportsman. These collections will be sold through a wide range of distribution channels including outdoor retailers, sporting goods stores and department stores. The agreement also gives Delta Apparel, Inc. non-exclusive use of the Realtree and Team Realtree® brands for casual apparel and headwear. In addition, the Company is assuming fulfillment responsibilities for Realtree’s e-commerce store, RealStore. <>


-Glassware and gifts brand Designs by Lolita is unveiling a home accessories collection by Avanti Linens this fall at Macy's stores. The line includes beach towels ($24.99) and other accessories for bath, kitchen, bed, bar and beach. The beach towels, which feature a fiber-reactive print on the front and has a drink recipe on the back, will first hit in November at Macy's stores in South Florida. A nationwide rollout will follow in the spring. More product release dates and retail partners will be announced in October. Designs by Lolita's other licensing partners include Candles in the Wind for candles and C.R. Gibson for wine bags, as well as paper party goods and bunco, a dice game. The brand is currently seeking deals for categories such as wine and spirits, apparel, jewelry, fragrance and stationery. Jack Morrow of Calabasas, Calif.-based Out of the Box helped broker the deal between Lolita and Avanti Linens. <>


-The Derek Jeter Yankees hit record was thought to not be a big deal until a couple weeks ago - Now his passing of Lou Gehrig as the Yankees All-Time Hit Leader is being celebrated everywhere. First at Modell's, where Jeter commemorative hit T's have been flying off the shelves. Now, it's the folks at Steiner Sports, who are having Jeter sign baseballs ($599), Yankees home jerseys ($999) with his new record and model bats ($999). To some people, it's just a team hit record. To others, it's Jeter and the Yankees. “Presales on have been amazing and website traffic has more than doubled," said Steiner Sports chairman Brandon Steiner, whose company has had a deal with Jeter since 1996. "We’ve seen interest from not only diehard Yankee fans but from athletes and sports fans across the country." Jeter broke Gehrig's 70-year-old record of 2,271 hits on Sept. 11. <>


-Measured training programs have become a nice cottage industry for the youth sports business -  We’ve been impressed with SPARQ, which Nike aligned with, and the skill tests that they’ve done across the country in a variety of sports. Under Armour has done similar combines, well aware of the great branding opportunity that comes with grassroots training complete with athlete scoring. There is another company called 94Fifty. The company has tested the basketball handling skills of thousands of players by using a special ball that has accelerometers and angular rate gyros sensors. The sensors pick up the most important parts of ball handling, such as the amount of time the player has the ball in their control and the speed the ball is traveling. That information is put through an algorithm that spits out a meaningful score. The idea is the brain child of Mike Crowley, a former Division II basketball player who was discouraged by the lack of ball handling skills from that he observed from the high school level all the way up to the Olympic teams. Those who want to be tested, can’t buy the ball for themselves. It’s not for sale. Crowley’s team charges a $10 registration fee per player to bring his system to groups such as leagues, camps, towns and AAU programs, with a minimum of 50 players. <>



Dollar Down, Stocks Down?

“Man has made some machines that can answer questions provided the facts are profusely stored in them, but we will never be able to make a machine that will ask questions. The ability to ask the right question is more than half the battle of finding the answer.”
-Thomas J Watson
The Research Edge client base is constantly peppering us with questions on numerous topics every day.  The challenge of addressing them helps to build the quality of the Research Edge team and the product we produce.  
Yesterday, we were asked the following; “At what point does a burning buck get to the point that it's just BAD for everything, especially the equity markets?  What are you watching to gauge this risk, and what could be the potential tipping points that kick the correlation the other way...Down Buck, Down Equity Markets?”
The question is very topical but also a very scary one.  While we are very happy to have coined the phrase “burning the buck,” the real world implications of a BURNING BUCK are not good! The bottom line - a “burning buck” can only end badly for every one!
We have been saying for months that the most dominant driver of the market is a simple two factor model - the US dollar down and Chinese demand up - REFLATION.  Much to my dismay, these factors have trumped any fears of a weak consumer here in the USA.   
Yesterday was a classic two-factor day.  We saw the US Dollar once again lose its early morning bid!  As the dollar lost ground, the S&P 500 recouped most of the day’s losses and finished around the best levels of the day.   
This relationship can’t go on forever so what are we watching to gauge this risk that the correlation might end?
(1)    A breakdown to the $72-74 range for the US Dollar index only has one precedent (a US stock market crash in Q3 of 2008), so watch for that

(2)    Volatility (VIX) breaking out above the $27.13 level combined with an expanding TED spread (haven’t seen either yet)

(3)    A breakdown in the SP500 below the TRADE line at 1014 combined with the Nasdaq cracking 2,008

“What could be the potential tipping points that kick the correlation the other way?”  That is a much harder question to answer because we could easily see the dollar up and stocks down as we head to Q4 and our REFLATION ROTATION theme continues to play out.
We need to look to the Chinese as a critical factor to understand if we will see “dollar down and stocks down.” Right now Washington is doing everything possible to make the Chinese officials hate us more than they already do.  Despite the administration’s moves over the weekend, President Obama said yesterday “we are not going to see a trade war.”  He is right there will not be a trade war because we can’t afford it.  
While there may be “rules on the books” that sparked the recent trade issues, the Chinese have us over a barrel when it comes to more important issues like funding our deficits.  
I understand that the president is a politician first, and that he needed to throw the UAW a bone to help pass his healthcare reform plan, but this is not a good situation.  Clearly, this is a dangerous road the Obama administration is going down and I’m very surprised that it has not set off a correction in the equity markets.  
On the contrary to the market selling off yesterday, the Research Edge quant models moved back to a perfect nine of nine sectors positive on both TRADE and TREND.      
What do you think will happen to the dollar and the markets if the Chinese send another message next week at the G20 meeting that they are “worried” about the safety of its investment in U.S. debt, as the BURNING BUCK erodes the value of their holdings?  That’s right there is no trade war!
Keep the questions coming!
Function in Disaster; Finish in style
Howard Penney


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.   

FXC – CurrencyShares Canadian Dollar
With the USD continuing to Burn we added to our International FX exposure (we’re also long the Chinese Yuan) on 9/14 via the Canadian Dollar.


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong
The 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.  

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.

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.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. With the FTSE reaching a YTD high on 9/9, we shorted EWU.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

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.

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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