RBA Governor Glenn Stevens sent a clear message today by raising the benchmark rate by 25 basis points despite no evidence of inflationary pressure on the near horizon and stubbornly high unemployment . That message is simple: with the Australian economy still standing firmly on its feet, the time for emergency measures has passed. Unlike the state of “permanent emergency” that Japanese bankers operated under in the first half of this decade, and in which the US appears to be hunkering down for an extended stay, the Australian central bank’s approach has been surgical.  The equity markets responded approvingly to the action, with the ASX All Ordinaries rising by 40 basis points while the Australian dollar, already up nearly 28% against the US greenback, rose to USD 0.8914.


There is no question that leaving rates lower for a prolonged time could only encourage Australian consumers to keep spending, as well as help the still recovering real estate markets, but the discipline that Stevens and his team are displaying now is admirable.  Perhaps overseeing an economy that is so sensitive to commodity price fluctuations due to robust mining and agricultural export makes Stevens particularly focused on avoiding inflation.  Or perhaps seeing his nation avoid recession due to the hard-line policies of the past (recall that his rate raises in 2008 had some political hacks calling for his head) has provided him with the confidence to make choices looking towards the future rather than politics of the present.  Whatever the sources, his professional integrity and proactive stance sits in stark contrast to many of his G20 peers.


Although we sold our position in Australian equities yesterday, we continue to rate the market there as one of the most structurally sound and will remain focused on opportunities to go long again as dictated by price action.


The week ahead may well provide us with several catalysts for entry points.  This evening Housing Finance figures for August will be announced, while tomorrow night the unemployment rate for September will be published  --with consensus forecasts anticipating a 20 basis point increase to 6% over August.  Stevens has already signaled a willingness to raise rates into rising job losses but, with the overhang from lost construction and real estate jobs and a strengthening currency to weigh on exports, some investors may get cold feet. We will not.



Andrew Barber






RT is scheduled to report fiscal first quarter 2010 results after the close tomorrow.  At the risk of sounding like a broken record, my expectations for RT are similar to what I expected out of DRI last week.  Revenues are likely to come in below expectations.  Earnings should be in line with the street’s estimate of $0.09 per share.  Full-year EPS consensus numbers could be at risk but management’s full-year EPS guidance of $0.50-$0.65 will likely remain unchanged.  RT is the second best performing casual dining stock over the past three months, up nearly 27%.  It’s unlikely that performance will continue.


For the last two quarters, RT’s same-stores sales growth has improved rather significantly on a sequential basis, and the company even outperformed the casual dining industry as measured by Malcolm Knapp during its last reported quarter.   Even if this outperformance continues, RT’s same-store sales growth is likely to slow sequentially in Q1 as the industry on average decelerated 150 bps during the quarter.  If investors are anticipating another quarter of sequential improvement, they are likely to be disappointed.  The street is estimating that company same-store sales will be down 3.7% versus -3.2% in Q4, which points to a slight slowdown on a 2-year average basis, but based on industry trends, I would expect that sales could come in below that number. 


During the last two reported quarters, RT has also delivered substantial YOY EBIT margin growth (in the 250 bps range).  Like its peers, RT has been able to offset its declining sales in the back half of FY09 by cutting costs in other parts of the P&L. Specifically, the company reduced its annualized costs by $45-$50 million, with the bulk of these cost savings implemented during 3Q.  These cost saving initiatives will continue to benefit the company on a YOY basis during the first half of 2010, but the comparisons get much more difficult beginning in fiscal 3Q.  To that end, EBIT margins should continue to improve during Q1, but I would expect this trend to reverse as early as Q2.  The magnitude of EBIT margin declines, however, will be much greater come Q3.


The biggest red flag for RT continues to stem from its increased discounting.  As RT’s CEO Sandy Beall stated last quarter, the company's first priority is to "get bodies in seats.”  RT’s recent same-store sales growth outperformance has been driven by traffic growth.  Although it is important to get people in the restaurant, RT’s average check and restaurant margins are coming under increased pressure.  Despite favorable YOY commodity costs, the company’s cost of sales as a percent of sales increased more than 240 bps in fiscal 4Q09.  Going forward, the company expects this trend to continue and is guiding restaurant margins down 50-150 bps as a result of RT’s value promotions and its impact on food costs.  Again, this is despite management’s expectation that actual food costs should remain favorable for the year. 


So, same-store sales are getting less bad and food costs are coming down.  This typically points to increased profitability for a restaurant operator.  In RT’s case, restaurant margins are still coming down.  What will happen if same-store sales growth decelerates and food costs become less favorable?  Based on what we are seeing, same-store sales could easily get worse in the near-term.  RT is locked in on 95% of its costs through the first half of 2010 and will soon extend its contracts for the remainder of the year. Although actual costs may not move higher this year, RT is training its consumers to come in for low-priced meals and food costs will eventually move higher.


On a more favorable note, RT will likely have continued to strengthen its balance sheet during the quarter by paying down more debt after already reducing its total debt by $112 million during fiscal 2009.  The company expects to pay down $80-$100 million of debt during fiscal 2010.  This number is easily achievable and could move higher, particularly following the company’s announcement of a common stock offering.  The company plans to use proceeds to pay down debt.



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. <>


-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. <>


-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. <>


-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.. <>


-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. <>


-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. <>


-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. <>


-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. <>


-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. <>


-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. <>


-Tesco Launches Separate Online Fashion Store - Tesco has launched its first standalone online fashion store at, 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. <>



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



“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.





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