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Game Time Change: SP500 Levels, Refreshed...

Yesterday, I stated plainly that I was not a buyer of weakness (provided that the SP500 remained below 1040). With the dominant driver of the REFLATION trade burning lower again this morning (US Dollar down -0.52% at $76.26), that obviously makes me wrong.


The best way to solve for being wrong, is to change the Game Time playbook. Here are the facts that have changed in the last 24 hours, to the bullish side for US Equities:

  1. The VIX is breaking down through its intermediate term TREND line of support ($26.16)
  2. The SP500 is making a charge for intraday breakouts above important immediate term TRADE resistance lines (1042 and 1047)
  3. The US Dollar is making lower-lows on the day

So – what am I doing? Definitely not shorting strength!


I am, however, tactically making long sales and taking down my US Equity Exposure. At the start of the day I had 23 longs and 11 shorts. Now I have 20 longs and 11 shorts (sold PSS, AMGN, and QGEN).


While the USD is down, its making a higher-low. While the SP500 is up, its making a lower-high (YTD closing high = 1071). If those facts change, I’ll change my Game Time playbook again. Risk Management is a real-time, multi-factor, exercise.



Keith R. McCullough
Chief Executive Officer


Game Time Change: SP500 Levels, Refreshed...  - a1




OCTOBER 6, 2009





A couple of months ago we introduced an analysis breaking down over a hundred retail-related companies by triangulating buy-side sentiment, a sell-side ratings factor, and the delta between insider buying/selling. The visuals clearly flag areas of both risk and opportunity. With very positive “anecdotal” sentiment heading into September sales, we’ve decided to revisit our quantitative sentiment screen to see how things have changed over the past 5 weeks.


Callouts and notable changes since the end of August through yesterday include:


  • Notable Negatives: LIZ, CAB, HIBB, and FL
  • Notable Positives: RL, GIL, PVH, DSW, GCO
  • Positive Sentiment, Low Short-Interest, but High Insider Selling: TGT, SPLS, GES, KR, GPS, LOW
  • Notable Insider Activity (Negative indicates selling): GCO [-8], TGT [-6], SPLS [-6], SKS [-6], FOSL [-5], GES [-4], DKS [-3], KR [-2], GPS [-2], VFC [3], DLTR [5]
  • Interestingly, overall short interest for the this universe was essentially unchanged only up 10bps to 7.8% this month.









Some Notable Call Outs


  • With NFL TV ratings off to a very a strong start, there is even more reason to keep an eye on an upcoming Supreme Court case that pits a sportswear manufacturer against the league. The root of the case asks the question of whether the National Football League should be considered a single entity or a collection of 32 businesses. If the court rules that the NFL remains a single entity, the league would be mostly exempt from antitrust laws. This in turn would allow the NFL to continue negotiating exclusive apparel licenses on a league-wide basis as well controlling other key topics like ticket prices and player salaries.


  • Add supermarkets to the growing list of consolidation and m&a. The parent company of Food Lion, Delhaize, has signed a letter of intent to acquire Bi-Lo ‘s assets for $425 million out of bankruptcy. The transaction is subject to court approval and is just one of a handful of proposals currently on the table for bankrupt chain.


  • In what is likely just the beginning of a massive opportunity to harvest data and ultimately monetize it, Facebook has launched an application called the “Gross National Happiness Index”. The index is developed from data that is collected from public and semi-public forums, with a particular goal of identifying terms that are most often used to express happiness and sadness. So far the results are simply plotted on a graph which then depicts such trends over time. However, we suspect it’s only a matter of time before key word searches and algorithms are used to target consumers and promote brands based on user generated “conversations”.


  • Almost 1yr to the day Sears and Kmart brought back the Layaway Plan, they introduce online layaway… what’s next, the giveaway plan?




-Group Pressures European Retailers to Lift Wages - An Amsterdam-based advocacy group has said it will target Europe’s biggest retailers, including Tesco, Carrefour, Aldi and Lidl, this week as part of an international effort to raise the wages of garment workers in India and the Far East. The Clean Clothes Campaign said Monday that its partner organizations across Europe planned to call for “an immediate commitment by retailers to take steps to implement the living wage in their garment production supply chains.” CCC’s efforts are meant to raise awareness for the Asia Floor Wage Alliance, a worldwide consortium of trade unions and labor rights activists, which on Wednesday in New Delhi will launch an international campaign calling for a common minimum living wage for Asian and Far Eastern garment industry workers. <wwd.com>


-NRF Sees Holiday Retail Sales Sliding - Holiday retail sales will be down, but not as sharply as last year, according to the National Retail Federation. The trade organization on Monday predicted holiday sales would decline 1% this year to $437.6 billion. That’s well below the 10-year average of 3.39% gains, although far better than both last year’s 3.4% drop and the 3% decline in annual retail sales forecast for all of 2009. “As the global economy continues to recover from the worst economic crisis most retailers have ever seen, Americans will focus primarily on practical gifts and shop on a budget this holiday season,” NRF chief economist Rosalind Wells said. <wwd.com>


-Chinese Footwear Sales to Witness Over 7% CAGR - A new report “China Footwear Market Analysis” published by RNCOS provides extensive research and rational analysis on the Chinese footwear industry, giving an insight into the industry’s production as well as consumption trends. The report suggests that rising income levels and increasing number of fashion-conscious people will lead Chinese footwear market to post a CAGR of over 7% (in volume terms) from 2010 to 2013. As per the report, the footwear industry in China has witnessed robust growth over the recent years, both in terms of consumption as well as production. Our industry analysis identifies that footwear consumption in the country has been growing at an annual rate of around 6-7% since past few years. A number of factors such as increasing income levels and rising fashion-consciousness and brand awareness among Chinese populace, in addition to other consumer trends, are continuously boosting the footwear consumption. We anticipate the Chinese footwear market to swell at a CAGR of over 7% in volume terms for the period spanning from 2010 to 2013. <emailwire.com>


-ENI-JR286 Becomes Global Licensee for Nike Fitness Product - ENI-JR286, Inc., based in Redondo Beach, CA, has entered into a new exclusive long term relationship with NIKE, Inc.  As per the agreement, ENI-JR286, Inc. will become the global licensee for certain Nike’s fitness and sports equipment accessories. "This relationship allows our organization the ability to partner with the world’s largest and most innovative athletic brand and enable them to fully penetrate the global market with these accessories, thus providing the consumer a true head-to-toe offering," said Jonathan Hirshberg, President of ENI-JR 286, Inc.. <sportsonesource.com>


-FTC to Regulate Blogging, Testimonials, and Celebrity Endorsements - The Federal Trade Commission approved final revisions to the guidance it gives to advertisers on how to keep their endorsement and testimonial ads in line with the FTC Act. Under the revised Guides, advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. <sportsonesource.com>


-CIT Launches Restructuring Plan - CIT Group, the troubled lender to small to medium-sized businesses, launched a restructuring plan aimed at reducing $5.7 billion in debt. The company warned it could file for bankruptcy if it falls short of that goal. Under the plan, bondholders will be given the right to exchange their current notes for a portion of a series of newly-issued secured notes and/or preferred shares. <sportsonesource.com>


-Macy’s Gets Ellen Tracy Sportswear Exclusive - Macy’s Inc. confirmed Monday that it has forged a strategic alliance with Ellen Tracy owner Brand Matter LLC and its sportswear licensee, RVC Enterprises, to become the exclusive department store retailer of Ellen Tracy better women’s sportswear, beginning in spring 2010. <wwd.com>


-USTR Announces Small Business Initiative - U.S. Trade Representative Ron Kirk unveiled a new agency initiative on Monday to help small and medium-sized businesses in the U.S. The goal of the program is to assist companies in boosting their exports and grow jobs in the U.S., Kirk said. <wwd.com>


-Big and Little Retailers Join Forces to Stimulate Sales - Over the weekend, Gap and edgy Parisian boutique Merci wrapped up a month long project in which each hosted a selection of the other’s products in their New York and Paris stores. Also over the weekend, Parisian department store Printemps christened the opening of a Maria Luisa location within its recently revamped Boulevard Haussmann flagship here. Uniqlo recently set up shop in hip Paris concept store Colette as a teaser for the arrival of its Paris flagship, which opened last week. And Target is mulling a one-off collaboration with Britain’s Liberty to launch clothing and accessories bearing the store’s trademark flower prints. <wwd.com>


-Tesco Reports Smallest Profit Increase in 11 Years - Tesco Plc, the world’s third-largest retailer, reported the weakest first-half profit growth in 11 years after acquisitions added to financing costs and units from the Czech Republic to Ireland withered in the recession. Net income rose 1.3 percent to 1.03 billion pounds ($1.64 billion) in the six months ended Aug. 29, from 1.01 billion pounds a year earlier, the Cheshunt, England-based company said today. The median estimate of eight analysts surveyed by Bloomberg was 1.04 billion pounds. So-called trading profit increased 14 percent to 1.55 billion pounds, the retailer said. <bloomberg.com>


-Tesco Launches Separate Online Fashion Store - Tesco has launched its first standalone online fashion store at www.tesco.com/clothing, with some 3,500 product lines and 20 brands across kidswear, menswear, accessories and womenswear, including character lines. The retailer hopes the business will grow to account for 10 percent of its total clothing sales. The site features Tesco clothing brands such as F&F and Cherokee, as well as casualwear brand Henry J Finn, urban menswear brand Method, handbags by Mischa Barton, womenswear by Chupa Chups and fair-trade denim by Monkee Genes. <licensemag.com>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): KR


10/05/2009 10:18 AM


Credit Suisse adds it to their "focus list"... We agree. Investors should be focused on selling the stock as the risk management setup changes. KM


US Strategy: Irrationally Exuberant


Nobel Laureate Joseph Stiglitz is out this morning saying the stock market recovery is "ïrrationally exuberant" as it relates to an economic recovery.  Mr. Market seems to vehemently disagree with Mr. Stiglitz, as the futures are solidly in the green this morning across the board in the U.S.  While we certainly wouldn't disagree with Mr. Stiglitz's assessment that employment will be a drag on a recovery in the U.S. and that the market has moved very quickly, we continue to play the game in front of us.  So far the game is simply this, dollar down equals stock market up.

On Monday, the S&P 500 closed at 1,040, up 1.5% on the day.  Yesterday’s move was on very low volume, as the S&P 500 broke a 4-day losing streak.  For the S&P 500 the TRADE remains bearish, while the TREND is bullish.  


The MACRO calendar offered an upside surprise yesterday, as the ISM non-manufacturing index rose to 50.9 in September from 48.4.  This was the first reading of the ISM non-manufacturing index in the expansionary territory since September 2008.  Consensus expectations were for a reading of 50.  New orders jumped to 54.2 from 49.9 in August, the highest level since July of 2007, while business activity rose to 55.1 from 51.3.     


Monday’s portfolio moves included selling the EWA and shorting KR, BAC and DRI.  We also re-shorted the DIA.  We are shorting more of the financially leveraged old economy companies in the DIA, which remains the worst performing major equity index globally year-to-date.


The dollar index fell 0.4% on the day, as the inverse correlation between the U.S. dollar and U.S. equities continued to be the primary factor in equity market performance.  The VIX fell 6.4% on Monday and is now up 6.6% over the past week, but at 26.8 still remains solidly below the 30.0 level it broke in early July.

Five of the nine sectors outperformed the S&P 500, with every sector positive on the day.  The three best performing sectors were Financials (XLF), Energy (XLE) and Industrial (XLI), while Technology (XLK), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three.  We are currently long the XLV. 


The Financials (XLF) was the best performing sector on the back of Goldman raising its view on the group.  Goldman highlighted the earnings power at the large banks vs. regionals, upgrading WFC and adding COF to its Conviction Buy List.


Today, the set up for the S&P 500 is: TRADE (1,021) and TREND is positive (983).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 4 of 9 sectors are positive from the TRADE duration.  Yesterday, the XLE, XLF and the XLY moved back to being BULLISH on the TRADE duration.   
Right now the Research Edge models suggest that there is 2% downside and 1% upside in the S&P 500.  At the time of writing, the futures pointed to a meaningfully higher open with Dow +72, Nasdaq +14, and S&P+9.  
Howard Penney
Managing Director





US Strategy: Irrationally Exuberant - S P500


US Strategy: Irrationally Exuberant - s pperf


US Strategy: Irrationally Exuberant - sectorlevels


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“Inconsistent ... just when things seem to be settling a bit, a new set of pressures develops."

ISM Survey - Retail Trade


Yesterday the S&P 500 rallied 1.5% on the back of the ISM survey.  The improvement in the ISM numbers, though impressive, was very narrow with just 5 industries reporting growth in September and 13 industries reporting contraction. 


The quote above is from one of those industries not reporting growth.  That is exactly what we are hearing from restaurant operators we are talking to.  There is no consistency to sales trends.  Tonight YUM will likely confirm the same findings.  I know the financial press had a favorable article about YUM yesterday, but the stock was up 5.1% on a 126% increase in volume.  YUM’s IR team is the best in the business so they are not whispering in anybody’s ear, but it sure seems like somebody knows something.  We will see how today pans out for the stock.


RT reports on Wednesday and that stock was up 5.8% yesterday, but volume was down 26% - not a big RED flag there.  Due to RT’s real estate portfolio is a cheap stock, but it is trading at 8x NTM EV/EBITDA versus 6.6x the group average.  Sales trends really need to improve for the stock to work from here, which seems unlikely.  I’ll pass on that trade for now.





Rosie Xie

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”

I was on a flight to Denver, Colorado last night. Whenever I am flying, I enjoy a tremendous amount of focus time on my research. As my long time associate, Tanya Clark, will attest, I have relatively aggressive stacks of books, papers, and magazines that board these planes.
My goal is to lighten the load, materially, before I land. Mission accomplished last night. Tanya will have the next stack waiting for me wherever I am flying to next. This is the grind. There is always something new to study. There are always opinions and histories to consider. If you want to fly these global macro markets independently, you better not be sleepy.
The most interesting read of last night’s flight was Andy Xie’s “Why One Bubble Burst Deserves Another.” It was cross asset class and thoughtful. Calling out the US Federal Reserve and the US Financial System for what it has become is at least finding the mainstream now. That’s progress.
Xie’s nearest term “call” is actually for the US Dollar to strengthen. His view is that “when the Dollar reverses, the short squeeze could cause a global crisis.” Knowing a thing or two about the dominant inverse correlations currently associated with a Burning The Buck, I’d agree with that.
Tactically, from an immediate term TRADE perspective, the US Dollar is getting washed out. In our upcoming Q4 Macro Strategy Call, I will be calling this quarterly investment theme the Bombed Out Buck. Both on our Macro Morning Call and in our intraday Macro Notes, I have been signaling this for the last few weeks, so this won’t be a surprise to most of you. There are always very important Macro TRADEs to consider within the confines of opposing TRENDs. This is risks management.
My favorite central banker in the world (Glenn Stevens at the Reserve Bank of Australia) is Acknowledging Reality this morning by becoming the 1st major central banker to move away from the Bernanke Doctrine of Currency Devaluation. Stevens RAISED rates by 25bps to 3.25%, and the Australian stock market went UP!
Australia’s leadership provides a stiff reminder to both The Client (China) and the world that issuing a real rate of return will both strengthen a country’s currency and attract foreign investment (Australia’s stock market is +26% YTD ). Unless they’d like to imitate Japan, the US Federal Reserve should not perpetually maintain an interest rate of ZERO for America’s citizenry of savers and foreign investors alike. As the Fed signals this change in rate rhetoric, the Buck should stop Burning.
If Dollar Down got the Debtors, Bankers, and Politicians paid, it’s going to be fascinating to watch US Dollar Denominated Creditors (American and Chinese alike) take back some of that REFLATION for themselves. Both the VIX (breaking out from a TREND perspective) and Gold price (hitting new highs this morning) are telling me that could happen sooner than consensus expects. Dollar UP is going to wreak some serious havoc in most things priced in Bombed Out Bucks.
Heck, even ole Rosie, who provided the most entertaining reading of last night’s flight, should finally start getting paid again on his bearish US Equities stance. He now claims to be “neutral” on equities despite calling them “25% overvalued” – whatever that means. David Rosenberg’s recent Special Report titled “The Case for Commodities, Credit and Canucks” might need a little re-working. There is no Cowboy Up for Alberta’s Oil price if that Buck starts to go up!
Rosie is an ex-Merrill Man, and he gets a little annoyed when we real-time risk managers call him out. He opened his missive stating that “I stand accused of having missed the turn…” Canadian newsflash: Rosie, you aren’t being accused of missing it – you missed it!
If short the US Dollar proves to finally be the consensus that Xie purports it to be, and the Buck stops Burning, a lot is going to change in global capital markets. That has not happened yet, but if it does I think both Rosie and Roubini are going to start looking genius again. They’ll be all over the wires and TV’s, and I doubt they’ll be saying they are “neutral.” Canucks who own bank and base metal stocks are not going to be smiling either.
So that’s my Rosie Xie scenario analysis. Now back to the grind…
This morning, no matter where I go, here are those darn live market prices again. I can’t hide behind a 22 page revisionist treatise on how I really never make mistakes – nor do I want to. Wall Street and Bay Street may not like this thing called YouTube, but it’s here for good. Professionals are now accountable to the replay.
This morning, the US Dollar Index is trading down -0.44%. Therefore it’s not surprising to see the US Equity futures indicated up. Again, Dollar Down = things priced in Dollars up…
At $76.30 however, that’s another higher-low for the US Dollar. On the margin, that’s a less bearish position than the Burning Buck has been in for the past 6 months (a series of lower-highs and lower-lows). As the facts change, I most certainly will. If the US Dollar continues along this socialized path to Japanese bureaucracy, breaking down through the $75.80 line again, I will be very wrong in having only a 3% Asset Allocation to US Equities (after selling into yesterday’s strength) and short oil.
Top 3 reasons for the Buck Burning lower this morning:
1.      The Chinese are at the IMF meetings in Istanbul reminding the world that they want a “Super Sovereign Reserve Currency”

2.      Fed Heads (Fisher and Dudley) came out dovish on rate hikes yesterday

3.      The Australians raised rates, reminding the Chinese that they’ll take all that Chinese investment capital away from the US that they can get

Reflection, imitation, and experience. These are the things that make this macro game so great. I am grateful for an industry that perpetuates piles of required reading material. Every opinion should be heard. Every voice should have the opportunity to be right or wrong. That’s what makes flying with stacks of papers, books, and magazines so much fun.
The three most critical lines in my macro model this morning are: SPX 1048, US Dollar Index 77.14, and VIX 26.15. Dollar down -0.57% was US Equity bullish yesterday (SPX +1.5% on staggeringly low volume), and it will be again here on the open. As prices change, my risk management moves will. I have immediate term downside support for the SP500 at 1021.
As for Rosie, Xie, and Me, the best we can do is admit the bitterest of lessons when we are wrong. Experience can only make us all more right.
Best of luck out there today,



EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

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.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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.


USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

DIA  – Diamonds Trust 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.



Macau’s trade deficit for the first eight months of 2009 widened by 1.4% over the same period last year to MOP 17.98 billion or US$2.28 billion.  According to figures released by the Statistics and Census Service (DSEC), the total value of merchandise exports dropped by 55.3% year-over-year to MOP5.11 billion or US$647 million, of which the value of domestic exports and re-exports declined by 69.5% and 32.1% respectively.  The exports/imports ratio decreased by 17.1% year-over-year to 22.1% for the period.




City of Dreams and Altira have joined Asia Miles.  From now on, Asia Miles members will earn 500 miles for every eligible stay at City of Dreams’ Crown Towers and Altira Macau.  For every eligible stay at City of Dreams’ Hard Rock Hotel, members will earn 250 miles.  Miles can also be earned at the properties through spending certain amounts of money at retail outlets, restaurants, and bars at the resorts.

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