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YUM – U.S. COMMENTS FROM EARNINGS CALL

Same-store sales trends in Q4 to date are consistent with the overall trends in Q3 (same-store sales growth was -6%).  The company also expects U.S. restaurant margins to decline in the fourth quarter.  The company will be lapping its first quarter of positive margin growth in some time.  Management said that the U.S. division will not experience the same level of benefit from favorable commodity costs in Q4 as it did in Q3 and some pricing will also be rolling off during the quarter.  So, as we said earlier, there will be little follow through from the 18% reported operating profit growth in Q3.


PSS: YouTubing Analyst Day. SSS Nuggets

PSS: YouTubing Analyst Day. SSS Nuggets

OCTOBER 7, 2009

 

 

TODAY’S CALL OUT

 

Notable positive trajectory in the PSS story vis/vis last year’s meeting. Much is not news to us, or our above-consensus estimates. But the bullish EBIT growth contribution expectations from Sperry and Saucony definitely stood out.

 

PSS: YouTubing Analyst Day. SSS Nuggets - 1

PSS: YouTubing Analyst Day. SSS Nuggets - 2

 

 

LEVINE’S LOW DOWN

Some Notable Call Outs

 

  • In a blow to social media (mostly blogs), the FTC has ruled that bloggers and supposed “amateur” reviewers must disclose when they receive freebies or compensation. Essentially, once monetary consideration is made in return for a review or commentary a blogger is now subject to the same ethics and rules as a professional. While I think this even’s the playing field a bit for those in the traditional media world competing with the upstart social media marketers, it is very unlikely that these regulations will be effectively enforced. This reminds me of the effort to stop illegal downloading of music and we know how that has gone.

 

  • Despite an intense focus on price within the grocery channel, a recent IBM survey found that 72% of respondents are more concerned with quality than price. We suspect this bodes well for those retailers focusing on actually building quality private label offerings rather than simply becoming a low cost provider.

 

  • In an abrupt move, specialty retailer of ink, toner, and other small office supplies, InkStop closed its doors on Friday and laid off all employees until further notice. The 152 store chain told its employees the stores were temporarily closing while a restructuring plan was devised. However, employees were further told there would be no more paychecks or benefits due to cash constraints. At one point, the company raised $80 million in private equity funds with hopes of growing the chain to 2,000-3,000 stores.

 

  • Early peak at same store sales trends confirms positive expectations and what is likely a day of solid results tomorrow:
    • COST Sept comps were better than expected and marked the first pos comp for company in 12 months.  Gradual improvement there continues on the topline as compares now become very easy.  Trumping same-store sales however was the better than expected earnings of $0.85 vs Street at $0.77.  Ex a $0.02 LIFO benefit it was still a sizable beat.  Gross margin expansion was the key to upside.  On the expense side, SG&A remained under pressure due mostly to lack of top line leverage. Bottom line, a gradual but improving trend on the topline against easier compares and with a slight change in mix towards more discretionary purchases should continue to drive earnings higher.  The company conference call is the key to all details including guidance, balance sheet items, and key margin drivers so I’ll be listening closely to discern anything incremental.
    • FDO showed a big bounce back in same store sales for September, up 5% after reporting a disappointing comp for 4Q.  Recall that they pre-announced the 4Q comp of 1% (Street was looking for 3.6% at the time) citing difficult compares with prior year stimulus efforts.
    • WWW mentioned their 92 company owned stores posted a 4% comp in their 3Q.  I don’t have a compare for this one, but positive comps are still a rare occurrence…

 

 

MORNING NEWS 

 

Skechers partners with Winner Sports to enter Indian market - Skechers USA, Inc. (NYSE: SKX), one of the global leaders in the lifestyle footwear industry, today announced that it has signed a deal with Winner Sports Pvt. Ltd. – a wholly-owned subsidiary of Pantaloon Retail India Ltd. – to license and distribute Skechers footwear and apparel in India. <indiaretailing.com>

 

Twenty-Six New Stores for Target - Target will open 26 new stores nationwide on Oct. 11. The retailer's expansion sees the creation of 5,000 jobs. The openings include 21 general merchandise stores, 18 of which will have expanded food offerings. Five will be full-grocery SuperTargets. Locations include Alaska, California, Illinois, Oregon, South Dakota, Texas, Mississippi, Florida, Pennsylvania and Massachusetts. <licensemag.com>

 

Canada to Drop Textile Import Duties - The Canadian government plans to eliminate import duties paid on textiles used in apparel manufacturing in the next five years. Although the Department of Finance will consider requests for continued tariff protection for specific products, any duties that remain in place after consultation would be phased out over a period of five years. <wwd.com>

 

South African Textiles Strike Ends - Clothing workers in South Africa returned to work Thursday, two weeks after a nationwide strike organized by the South African Clothing & Textile Workers Union began, but problems persist for the industry. Union General Secretary Andre Kriel said both sides had reached an agreement, with the assistance of the Commission for Conciliation, Mediation & Arbitration. At a press conference, Kriel said, “The union has always said it is better to find a solution to this situation than to have a strike.” Some 55,000 workers had abandoned their posts at the factories and taken to the streets in protest against what was considered lower-than-acceptable wage hikes. <wwd.com>

 

Puma Goes Mobile - Puma has signed a licensing agreement with the French mobile communications company Sagem Wireless to launch a Puma mobile handset in the second quarter of 2010. The Puma phone is to be sold in Puma stores as well as through telecom operators, and will first be launched in Europe, with a global rollout to follow. Puma declined to reveal financial terms or sales projections. However, the German active sportswear company said the move is part of its strategy to expand into new categories that complement its footwear, apparel and accessory lines. <wwd.com>

 

Columbia Sportswear Names Director of Apparel Design - Columbia Sportswear Co. announced that it has appointed Kathleen McNally as creative director for apparel. For the past five years, she served as vice president of design at Lucy Activewear, which is part of VF Corp. McNally brings over 20 years of senior experience in apparel design with several global sportswear brands. At Lucy Activewear, she helped build the brand from a start-up in 2000 to a leader in the women's active lifestyle marketplace prior to the company's acquisition by VF Corporation in September 2007. <sportsonesource.com>

 

Clothing and footwear deflation increases to 5.7% - Shop prices have fallen on a year ago and were deflationary for the second consecutive month, according to the British Retail Consortium-Nielsen Shop Price Index. Annual non-food deflation was 1.4% in September, unchanged from August. Deflation in clothing and footwear and furniture and floor coverings accelerated compared with previous month. Annual deflation in clothing and footwear increased to 5.7% in September, from 5.5% in August.

The report said that it expected non-food deflation to continue to slow in the coming months until the reversal of VAT in January 2010. Overall, shop prices were down 0.1% year-on-year and remained unchanged from August. <drapersonline.com>

 

American Apparel gets temporary covenant waiver - American Apparel Inc (APP.A) said it received a temporary waiver of a leverage ratio covenant tied to its $80 million credit line from British private equity firm Lion Capital LLP. American Apparel, which got the waiver from Sept. 30 till Nov. 14, said in a regulatory filing that it might exceed the maximum leverage ratio permitted under the Lion Credit agreement for the year ending Dec. 31, based on its current operating plan for the rest of 2009.

American Apparel had said in March it planned to use the $80 million loan to reduce the balance of its revolving credit facility, to repay a portion of a shareholder note, fund its working capital needs. <reuters.com>

 

Hilfiger Sues Former Sock Licensee - Tommy Hilfiger has sued its former sock licensee for breach of contract, accusing the manufacturer of missing royalty minimums and threatening to dump merchandise to unauthorized sellers. In a complaint filed Oct. 2 in U.S. District Court in Manhattan, Tommy Hilfiger Licensing alleged that Mountain High Hosiery Ltd. had trouble meeting sales and royalties targets over the course of their agreement, which lasted from 2002 until earlier this year. According to the complaint, the relationship disintegrated in April after Hilfiger declined to approve another acquisition bid by slipper maker R.G. Barry Corp. The deal would have required the brand to reduce its royalty rate by 3 to 5 percent and waive minimum sales figure requirements. <wwd.com>

 

IT Holding Restructuring Deadline Approaches - After filing for the Italian equivalent of Chapter 11 bankruptcy protection in February, IT Holding SpA will learn its fate in a little more than a month from now, and its prospects look rosy — even if it doesn’t remain whole. Having invited letters of intent at the end of September, Andrea Ciccoli, one of IT Holding’s three government-appointed special commissioners, told WWD he aims to identify potential buyers for some or all of the fashion group’s assets in the next three to four weeks, ahead of submitting a restructuring plan to Italy’s minister of economic development for approval by Nov. 10. The plan may or may not include recommendations to break the group up, he stressed. <wwd.com>

 

FedEx extends home delivery service via the Postal Service to all retailers - FedEx announced yesterday it is opening up its SmartPost delivery deal with the U.S. Postal Service to smaller retailers. Previously, the program was only open to high-volume retailers that shipped several hundred packages a day. Now there is no minimum order requirement, and any retailer can request SmartPost service when they schedule a FedEx Ground pickup. Packages sent via the SmartPost program are picked up and sorted by FedEx, then handed off to the U.S.P.S. for delivery to consumers’ homes <internetretailer.com>

 

Fitness Equipment Sales Curtailed by Economy - For the first time in 20 years, overall sales in the fitness equipment industry took a ‘hit,’ but it was not due to any lack of interest in the fitness/exercise category.  According to the Sporting Goods Manufacturers Association’s (SGMA) recent analysis of Tracking the Fitness Movement (2009 edition), the major reason for the dip in sales of fitness and exercise equipment can be attributed to the struggling U.S. economy. While activity at the cash register suffered, participation rates were stronger.  Of the 28 aerobic, conditioning, and strength activities listed in Tracking the Fitness Movement, 17 of them showed an increase in participation from 2007 to 2008.

<sportsonesource.com>

 

Barneys to Feature 'SNL' in Holiday Windows - Live from Barneys New York, it’s Saturday Night. For the holiday windows of its Madison Avenue flagship, Barneys is presenting various tableaux depicting memorable “Saturday Night Live” moments culled from more than three decades and filtered through the kooky lens of creative director Simon Doonan. The retailer is hoping that partnering with “SNL” as it celebrates its 35th anniversary will give it a boost. <wwd.com>

 

Versace to Close Japan Stores, Will Review Strategy - Gianni Versace SpA will close its Japanese stores and review its entire business strategy, as demand for luxury goods declines in the world’s second-largest economy. “The Versace boutiques in Japan no longer represented the brand image and it was felt to be more advantageous for the company to close them and start with a clean slate,” Milan- based Versace said yesterday in a statement. The fashion company has three stores in Japan, according to the Web site. <bloomberg.com>

 

Nat Nast to sponsor UFL coaches apparel - Nat Nast, which cut its teeth as a bowling shirt brand, has switched allegiances. The company, which has morphed into a luxury men’s wear collection, has inked a deal with the newly launched United Football League to dress its head and assistant coaches. The UFL’s inaugural season kicks off on Thursday. The coaches will wear shirts, pants and shorts from the Nat Nast fall and resort collections that will sport both the UFL logo as well as Nat Nast’s lion emblem. <wwd.com>

 

Primark improves commitment to living wage for overseas workers - Primark has made improvements to its commitment to paying overseas workers a living minimum wage, according to the third Let’s Clean Up Fashion report published by pressure group Labour Behind the Label. Labour Behind the Label’s annual Let’s Clean Up Fashion report scores fashion retailers based on submissions they make to the not-for-profit organization detailing measures they are taking to ensure overseas workers in their supply chains are not exploited. Primark joined Gap, Marks & Spencer, Monsoon, New Look and Next in scoring highly. All of these retailers demonstrated a systematic approach to wage increase. <drapersonline.com>

 

 

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

 

10/06/2009 10:03 AM

SELLING PSS $18.54

McGough called out buying into a lower price ahead of the analyst day and here we are, higher, into the analyst day! Selling high. KM

 


US Strategy: Life Down Under

Yesterday, the S&P 500 closed at 1,054, up 1.4% on the day.  The S&P 500’s 2 day rally comes on accelerating volume and a TRADE line breakout - the S&P 500 is now bullish on TRADE and TREND.  

 

Relative to consensus, a surprise rate hike out of Australia put pressure on the dollar, which put a bid under commodities and commodity stocks.  As Andrew Barber said yesterday “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.”  Commodity equities were among the best performers yesterday with renewed momentum behind the REFLATION theme – The XLE and XLB were the two best performing sectors. 

Yesterday’s portfolio moves included selling our long positions in QGEN, AMGN and PSS.   

The dollar index fell 0.5% on the day and the VIX fell 4.2% and is now flat over the past week. 

Four of the nine sectors outperformed the S&P 500, with every sector positive for the second straight day.  The three best performing sectors were Materials (XLB), Energy (XLE) and Technology (XLK), while Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three.  We are currently long the XLV. 

Yesterday, the XLK moved back to positive on both TRADE and TREND. The XLK benefited from the M&A tailwind as EMR agreed to acquire AVCT for $1.2B in cash. In addition, Semis were another bright spot with the SOX +2.1%.

 

Today, the set up for the S&P 500 is: TRADE (1,042) and TREND is positive (985).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 7 of 9 sectors are positive from the TRADE duration.  Yesterday, the XLI, XLK and the XLB moved back to being BULLISH on the TRADE duration.   
 
Right now the Research Edge models suggest that there is 1% downside and 1.5% upside in the S&P 500.  At the time of writing the futures pointed to a higher open. 

 


Howard Penney
Managing Director

 

 

US Strategy: Life Down Under - S P500

 

US Strategy: Life Down Under - s pperf

 

US Strategy: Life Down Under - sv oct 7


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RESTAURANTS TODAY

BKC is talking today about a major new remodel program.  The new look “epitomizes the new design with a contemporary industrial palette of metallic and black accents, complemented by finishes that resemble brick and concrete.”  Over time, the company will remodel its restaurants globally toward a more "sit-down" experience.  The remodels are expected to cost around $300,000 to $600,000 per restaurant. 

 

In the US, this will be nearly impossible to achieve given that most franchisees can’t afford to spend that kind of money if they can’t get credit!

 

RESTAURANTS TODAY - qsr

RESTAURANTS TODAY - fsr

 


YUM – SO GOOD IT’S TROUBLING

In a difficult demand environment, YUM’s 3Q EPS numbers look like they are immune to reality.  Yesterday, YUM reported 3Q EPS of $0.70 (excluding special items) versus the street at $0.58.  In short, when demand for your core products is declining at the pace YUM saw in 3Q, the only way you can beat numbers to this degree is by pulling the goalie (financial engineering and reducing G&A aggressively).

 

I actually had a client say to me (who had no ax to grind on the stock), do you think they did this just to “rub it in” to those that are negative on the company – of which I am one.  When you dig deep into the trends of the quarter, it’s hard not to come to that conclusion.

 

YUM reported a 3Q EPS that was over the top, given the magnitude of the miss in top line sales.  US same-store sales declined 6% versus a consensus decline of 1.9%, but restaurant levels margins rose 3.2% (given the fixed cost nature of this business, this is nearly impossible to do).  China same-store sales were flat (implying a 250 bp sequential decline in 2-year average trends) and YRI same-store sales were flat relative to consensus expectations of a 2.3% increase.  YRI’s 2-year same-store sales trends declined 50bps from last quarter.  Despite the top line miss in same-store sales, on a consolidated basis, restaurant level margins rose 3%. 

 

Every restaurant operator on the planet is looking at these numbers in amazement or with a healthy degree of skepticism.  I understand the company benefited from a decline in food costs, but discounting and the negative leverage on declining same-store sales should mitigate some of the benefit.  Helping margins has been the 10 consecutive quarters of declining payroll and benefit expense as a percent of sales (6 quarters in the US).  This consistent decline in payroll as a percent of sales in the US is unheard of, particularly when sales are declining.  This is not a sustainable trend.

 

More to the point, despite beating the street by $0.12 this quarter, they only raised guidance by $0.04.  That alone speaks volumes to the real trends that YUM is seeing.  The company’s new guidance implies YUM will earn $0.46 per share in the fourth quarter, $0.10 below the street’s estimate going into the quarter.  The strength of Q3 is offset by the weakness in Q4.  If 3Q was such a great quarter, why is there no follow through into Q4?  Unfortunately, we now know that the company’s “quarterly” guidance must be taken with a grain of salt.  Should we read into this that Q4 is going to be another blockbuster quarter?     

 

Over the past two years, YUM has been unable to sustain any sales momentum at any of its brands in the USA.  In the current quarter, Pizza Hut’s 13% decline in same-store sales is disturbing (blame-the-ad-agency once again).  While YUM did not disclose the performance of KFC and Taco Bell, we can only take from that to mean that those concepts are not meeting expectations either.  I am interested in learning on the earnings call if there is any follow through on the trends at KFC given all of the hype over the new grilled chicken product introduced earlier this year.

 

Using the company guidance of just three months ago, we were modeling a 27% tax rate for the quarter (to get to the guided full-year 25% tax rate).  They came in at 20%!  I know this number can be very fluid, but again the magnitude of the divergence is massive (added at least $0.05 to 3Q EPS relative to my estimated 27% tax rate).  This is definitely financial engineering at its best.  Lower taxes make it easier for management to raise guidance for the year and safely beat the 10% EPS target needed to get paid bonuses.

 

Lastly, in Q2, the company lowered its full-year US operating profit growth guidance from 15% (including G&A savings of about 9%) to high single digit growth, which implies all of the growth is expected to come from cost saving initiatives.  If management maintains this guidance, YUM’s U.S. operating profit growth will be down to up slightly (I am currently forecasting -5% given the positive comparison from 4Q08), which again points to no follow through in the coming quarter off of this 18% growth.

 

 


Make The Turn

“The bend in the road is not the end of the road unless you refuse to take the turn.”
-Anon

Macro markets bend, big time. They can bend up into the right. They can bend straight down. Refuse to make the big turns, and they can bend you right over.
 
I missed out on the upside associated with yesterday’s market turn. I was too early in introducing my call of a Bombed Out Buck. Too early, in hockey at least, is called being offside. In Asset Management, it’s called being wrong.
 
I’m in Pittsburgh this morning. I’ll be at the Penguins/Coyotes game tonight. NHL referees will have whistles at the game. I blew one on myself yesterday. Once the SP500 successfully broached my immediate term TRADE line (1042), and the VIX broke my intermediate term TREND line of support (26.13), my proactive plan became that the plan needed to change. Resistance, as we real-time risk managers like to say, became bullish support.
 
As the Buck Burned to a fresh 2-day low, US Equities REFLATED to fresh 2-day highs. We’ve been staring at this road map for US Equity returns since March. The inverse correlation between US Dollars and most things priced in Dollars remains crystal clear. That wasn’t the turn I missed.
 
The turn I missed was onto a road that currently doesn’t exist, yet…  
 
That turn is onto the long hard road of a US Dollar breaking out above my immediate term TRADE line of $77.07. If that happens, the 2-day REFLATION rally you just saw in US stocks is going to quickly revert to something that resembles the 4-day correction that preceded it (down -4.3% from the SP500 YTD high).
 
The simple change of plans yesterday was to stop shorting stocks and ETFs. “Let the fire breathe”, as my Dad would say. With the SP500 trading below its YTD closing high of 1071 and above my prior resistance level of 1040, that road’s bend is not over. It’s one that needs to keep bending before we can see what’s around the corner…
 
Yesterday’s SP500 closing price of 1054 is a lower-high. The US Dollar Index current price of $76.21 is a higher-low. On the margin, the bend in this road is bearish. Lower-lows for the Burning Buck and higher-highs for the SP500 would bend me back to the bullish side. From here, I’ll need to be mentally flexible enough to bend both ways.
 
So what was yesterday’s change of plans? As I said, I didn’t make any short sales, but I did continue to sell down my gross long exposure. I don’t manage money anymore, so there are really two ways that I expressed that:
 
1.      I raised my position in US Cash in the Asset Allocation Model to 66% by cutting my 10% position in Gold down to 4% (being long US Dollars here is the idea)

2.      I sold 3 long positions in our Virtual Portfolio, taking my total number of long positions down from 23 to 20 (I maintained 11 shorts)

 
I’m not going to be too hard on myself. In an up market, my risk management in 2009 on the short side of the Virtual Portfolio has been solid. Currently, out of my 11 short positions I only have 1 that has gone more than 4% against me (USO is -4.07% versus where I shorted it late last week).
 
In preparation to Make The Turn, here are some risk management points to consider in terms of US market internal factors:
 
1.      Volume: flashing +16% on my daily volume study, it was a solid reading. Not hyper bullish, but definitely not bearish.

2.      Volatility: VIX breakdown of the aforementioned TREND line (26.13), but closed above the immediate term TRADE line (25.32); tough spot…

3.      Range: down to 50 SPX points versus 58 points 2 days ago is, on the margin, bullish (tightening ranges generally are)

4.      Spread: the Yield Spread continues to test the lowest levels it’s seen since May; compression is bearish, on the margin, for Financials (BAC down yesterday)

5.      Breadth: the week-to-date change in our S&P Sector studies has been bullish, moving 7 Sectors out of 9 back to  bullish TRADE and TREND

6.      Risk/Reward: the daily setup moves to the bullish side with SP500 upside to 1071 and downside at 1042 (+1.5% vs. -1%)

 
What will perpetuate a bottoming process of the Bombed Out Buck?
 
1.      Consensus: being on the road can be painful, analytically, because some hotels only have CNBC (everyone on the manic channel gets the Burning Buck now)

2.      Fed Heads: rhetoric is slowly shifting to the hawkish side (see the Kansas City Fed Head’s comments last night)…

3.      Higher Prices: with Gold hitting new YTD highs, and the Russian stock market up +105%, Bernanke can’t call this perpetual deflation with a straight face

 
Despite fear-mongering the American people into group-thinking that we had to move to an “emergency rate” of ZERO percent, Ben Bernanke and his US centric politicized mandate still refuses to Make The Turn that Glenn Stevens and the Australians did yesterday.
 
ZERO percent is not a perpetual return on investment that either the American citizenry of savers or the Chinese government will continue to bend over for. “The bend in the road is not the end of the road, unless you refuse to take the turn.”
 
Mom and Dad, Happy Anniversary.
 
Best of luck out there today,
KM

 

 

LONG ETFS

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.

 
SHORT ETFS

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.


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