The Hard Way

“Tactics without strategy is the noise before defeat.”
-Sun Tzu
I’ve used this quote before. It’s one of my favorites. It’s taped on the insert of my trusty strategy notebook above a Sports Illustrated picture of one of my favorite winners in life, Tiger Woods.
Yes, I still use scissors, tape, and foil – ole school hockey (kidding about the foil). I have a cut out picture of Woods from the June 23, 2008 cover of SI, wearing his Championship Day red jersey, gritting his teeth, and pumping his fist, on a bum knee. The title says, “The Hard Way.”
What does Sun Tzu have in common with Tiger Woods? What role do tactics, strategy, and process play on a field of competitive battle or in your portfolio? Everything.
Yesterday’s SP500 close of 1052 was not only a higher-year-to-date high, but a stiff reminder that 55% moves in the US stock market can come The Hard Way. In 23 months, the SP500 has had a peak-to-trough crash of -57% and a trough-to-peak rip of generational proportions (+55%) to the upside.
No matter where you go this morning, there’s that score. It’s behind you. Today you are tasked with setting yourself up to earn an absolute return tomorrow. Whether you came out of this a winner or a loser, you surely gleaned something from this experience. I certainly have. Managing risk in an increasingly interconnected global marketplace of colliding macro factors can only be done one way – The Hard Way.
The Easy Way is to blame missing the market’s -57% collapse on Dick Fuld. The Easy Way is to blame missing the market’s +55% meltup on a Great Depression. The Hard Way remains not being beholden to your super “smart” friend’s consensus “ideas.” The Hard Way is beating your own path towards a repeatable investment process.
Last night, as I was flying back to New York I couldn’t help but appreciate the beautiful sun setting over the NYC skyline. One year after all of the noise, we can see who has been defeated. In hindsight, losing strategies are as crystal clear as a US Dollar inverse correlation.
I was meeting with investors in both Winston-Salem and Raleigh, North Carolina yesterday. On my flight home, I thanked God for having helped build a firm that provides me the opportunity to have constant investor feedback. If there is a variant view in the marketplace relative to the position I have taken, trust me, I see it. This has shown me that there is an Easier Way to win in this business. Being at the hub of an exclusive information network provides for better risk management.
As I look at this morning’s global macro setup and how it is most likely to translate to the US stock market, surprisingly, it’s more bullish than bearish. If I wanted to wake up trying to be a contrarian every morning, I wouldn’t allow myself to write that. Again, I have learned The Hard Way that being a mental mule doesn’t work.
So what’s changed? What’s working? What has my daily read-through make that call?
1.      The Buck continues to Burn (trading down another -0.34% this morning to another lower-low at $76.28)

2.      The SP500’s higher-high yesterday came on ACCELERATING daily volume (in the last 3 weeks, volume studies have been bearish)

3.      The VIX (volatility) remains broken across all 3 of our my investment durations (TREND line = $27.06; no support until $21.69)

Now that’s a simple 3-factor model, but it’s one that can dominate for longer than the super duper short seller can remain solvent. While I do think that a breakdown below the $74 level in the US Dollar Index puts this country’s citizenry (ABC/Washington Post Consumer Confidence dropped again last night to -49) and balance sheet in crisis mode again, until I see those real-time market prints, all I have is the monkey trade continuing (Dollar DOWN = everything priced in Dollars UP).
Three weeks ago, this 3-factor model gave the US market a head-fake (USD up + VIX up + accelerating stock market volumes on down days). That 4-day -3.5% selloff in the SP500 has been revealed as noise. The strategy that matters now is what has mattered for the last 6 months. Generational levels of groupthink (bearishness) are breaking down volatility as volume accelerates alongside everything priced in US Dollars making higher-highs.
So what are my immediate term TRADE risk management levels?
1.      SP500 support = 1029; resistance 1068

2.      Nasdaq support = 2047, resistance 2139

3.      Dow support = 9517; resistance 9778

So what if you don’t manage risk, daily? What if you don’t overlay the immediate term TRADE with an intermediate term TREND duration? How do you measure long term TAIL macro risks? What are your macro calendar catalysts - Fed Meeting next Wednesday? G-20 meetings next Thursday? Does macro matter?
These are all tactical and strategic questions that I try to find better answers to every day. The Hard Way is being mentally flexible enough to evolve.
Best of luck out there today,



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.



Stanley Ho’s SJM Holdings saw 1H09 profit drop 40.8% year-over-year despite growing market share. The decrease came after the company paid out higher VIP junket commissions to win business.  SJM’s profit dropped to HK$338 million during the first six months from HK$571 million a year ago, but increased by 50.2% when compared to 2H08.


SJM has implemented cost cutting measures that included the shedding of 1,038 employees between December and June.  The payroll reduction contributed to a HK$369 million drop in operating expenses in the first half compared to the same period in 2008.  However, payments to junkets were not offset by these cuts; marketing a promotion expenses rose to 38.7% of gaming revenue, up from 35.7% a year ago.   

Confidence and Clunkers Working in German Favor

We have had a bullish bias on Germany for most of the year. Today the ZEW Center for European Economic Research released its sentiment reports for September, and as we’ve seen over the last months (see chart below), this month’s reading shows an improving trend in the outlook  for Europe’s largest economy.  Its index of investor and analyst expectations, which aims to predict 6 months ahead, rose to 57.7 from 56.1 in August and current conditions rose to -74 from -77.2.  While future expectations came in under a forecast of 60, we believe the improvement rhymes with slow and steady growth for the remainder of the year and into 2010. Additionally, two economic institutes raised their forecast on the German economy today. The Halle-based IWH Institute said the economy will expand 0.9% in 2010 after predicting in March that it would shrink 0.2%, while the Essen-based RWI institute raised its forecast to 1.2% from a previous estimate of +0.2%.


Confidence and Clunkers Working in German Favor - a6


Secondly, the European Automobile Manufacturers’ Association said today that European car registrations, a measure of sales, rose 3% in August from the previous year, a gain on the previous month’s +2.8% reading. The data suggests that sales rose for countries that issued auto rebate programs (see table below). Germany led the charge at +28.4% annually in August, followed by gains in Italy (+8.5%), France (+7%), UK (+6%). To better quantify Germany’s August sales figure it’s worth noting that the German government set aside some $7 Billion for its program (Abwrackpraemie) that expired earlier this month, more than double the $3Billion the US allocated. Further the data clearly shows the lack of demand in Eastern Europe, a region that has been severely crippled under a cocktail of Western financial leverage and depressed demand from the Eurozone, its largest trading partner.


Confidence and Clunkers Working in German Favor - a3


Europe’s largest automobile manufacturer Volkswagen reported today a growth of 9.5% in August, citing a rise in demand domestically and in China and Brazil, and noting uncorrelated global demand with “very different market trends in various regions of the world.”  As we’ve stressed, China is an important and growing market for Germany.  Volkswagen said it delivered a third of its passenger cars in August to China alone, a rise of 69%.


We continue to like Germany as a slow and steady growth play, which we’ve traded via the etf EWG. With European and global fundamentals improving, we believe demand for German exports will buoy growth. Yet we remain cautious that much of the improvement, through stimulus measures such as the cash for clunkers, is now rear-view and short-time worker contracts, which have held unemployment steady, will be expiring coming into the end of the year.


Matthew Hedrick



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“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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