Surprising Strength: SP500 Levels, Refreshed...

The US Dollar opened at its highs, and has proceeded to back off those highs. As a result, after opening weak, US Equities have since strengthened.


For short sellers of the REFLATION trade, this has been frustrating, but respect and understand that there are still a lot of funds chasing performance into mutual fund year end AND that mathematical correlations aren’t 100%, particularly on shorter durations.


High R-Squares of inverse correlations (like SPX vs USD) are never perpetual. The #1 risk to my current market view is that, as the Burning Buck becomes consensus, that this dominating 2009 inverse correlation starts to unwind. In the long run, I think raising rates is bullish for America’s balance sheet. And don’t forget that after the Australians raised rates earlier this week, their stock market went straight UP!


For now, the risk management setup is as follows:


1.       Immediate term TRADE resistance (dotted red line) = 1080

2.       Immediate term TRADE support (dotted green line) = 1047


A close above 1071 (the YTD high) would be very bullish for price momentum. A close below 1047 puts this market’s bullish TREND line of support in play. That line, however, is a lot lower, down at 990 (see chart below).



Keith R. McCullough
Chief Executive Officer


Surprising Strength: SP500 Levels, Refreshed...  - a1


US Strategy: Dollar Rhetoric



Yesterday, the S&P 500 closed at 1,065, up 0.7% on the day.  Day four of the S&P 500’s rally as the momentum behind the recovery trade continued into Thursday.  Also, earnings season got off to a solid start with AA, RT, and MAR and PEP all reporting better-than-expected results on the bottom line, while domestic demand trends are still an issue.


In addition, September same-store sales came in ahead of elevated expectations, rising for the first time in over a year; a number of companies in the retail space also raised EPS guidance. 


Four of the six best performing stocks in the Consumer Discretionary (XLY) were Household Durable names, with the LEN and DHI the top two.  The homebuilders were up on speculation that expectations that the first-time homebuyer's tax credit would be extended for another 6 months. 


The market also benefited from a larger than expected drop in initial claims.  Yesterday, initial claims fell 33,000 to 521,000 in the week-ended Oct 3rd; below consensus expectations of 540,000.  The four-week moving average fell to 540,000 from 549,000, the lowest level since January 2009.


Yesterday’s portfolio activity included buying EWT – Taiwan Index.  Coming in yesterday, Taiwan was down -1.4% over night, and I have been waiting here for a down day to buy into ahead of the Chinese stock market opening again.


The dollar index fell 0.7% to its lowest level since August 2008. Support for our “bombed out buck” is coming from all around the world today.  In particular key Asian central banks intervened heavily in the currency markets yesterday on fears that the appreciation of their currencies against the US dollar means that their exports could be losing ground against China. 


The VIX declined for the fourth straight day and is now down 15.7% over the past week. 

Yesterday four of the nine sectors outperformed the S&P 500, with every sector positive except utilities, which was flat on the day.  The three best performing sectors were Materials (XLB), Energy (XLE) and Industrials (XLI), while Utilities (XLU), Healthcare (XLV) and Financials (XLF) were the bottom three.  We are currently long the XLV. 


Today, the set up for the S&P 500 is: TRADE (1,050) and TREND is positive (988).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 8 of 9 sectors are positive from the TRADE duration.  The only sector not positive on TRADE is the Utilities.        



Howard Penney
Managing Director


US Strategy: Dollar Rhetoric  - S P500


US Strategy: Dollar Rhetoric  - s pperf


US Strategy: Dollar Rhetoric  - s plevels



The Wendy’s turnaround story will not be complete until it can find ad advertising message that resonates with the consumer.


Today WEN is launching its biggest ad campaign in years with a focus on product quality and a new bacon cheeseburger meant to take on competitors’ premium burgers.  The tag line for the campaign is "You Know When It's Real" as it attempts to emphasize fresh ingredients and in-store preparation.


Thinking back to the initial success of the McDonald’s “I’m lovin it” slogan and Burger King’s rejuvenation of “The KING,” both advertising campaigns were critical in successfully driving incremental customers.  To date, Wendy’s has not benefited from the money it is spending on advertising and marketing.  For reference, Wendy's spent $305 million on ad time and space in the U.S. last year while McDonald's spent $820 million, according to TNS Media Intelligence.


Yesterday’s move in RT was interesting – the upgrade helped – but it’s over done.  For RT, the biggest red flag continues to be food costs.  Even with better reported sales than I was modeling for the quarter, food costs as % of sales were up nearly 300 bps with favorable YOY commodity costs!


RT’s company same-store sales were surprisingly good relative to the industry.  RT’s outperformance relative to Knapp Track grew to 4 points in Q1 versus 2.4% in 4Q09 (though softer prior year comparisons account for some of this outperformance).  RT’s traffic outperformance grew to 9-10% during the first quarter from 8-9% in Q4 so the company’s average check continues to be under increased pressure. 


Management addressed the issue of its lower average check and stated that it is focused on increasing its average check to the $12.50 to $14.50 range from its current mid-$11 range with some benefit expected as early as the second half of fiscal 2010.  Specifically, management thinks it will have some ability to take price in 2H.  The company is relying on this menu price increase combined with new products, changing menu mix with more appetizers and dinner items (dinner entrees have moved to 45% of sales from 25% last year) and reducing incentives as the company overlaps promotional efforts from January to help boost check going forward.  I was surprised by RT’s sales performance this quarter so the company could continue to surprise me but taking price in this environment without hurting traffic will prove difficult.  To that end, management stated on its earnings call, “I think what's most important is we want to drive traffic, it's most important to us right now and we will continue to drive positive traffic at whatever cost that represents.”  So despite the focus on average check, getting people in the restaurant continues to be the company’s primary focus.


Franchise same-store sales growth was weak in the quarter while SG&A was a little lower than I was modeling.  Contributing to the decline in SG&A were reduced advertising costs as marketing dollars were shifted from television to promotion and lower supervisory labor as RT increased the span of control for both regional and area supervisors.  RT increased its span of control about 6-9 months ago so the associated decline in SG&A was nothing new, but this type of cost savings initiative is concerning in the long-term as it often impacts the customer experience.







This habit is hard to kick!



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OCTOBER 9, 2009





With all the noise from SSS having passed, let’s see what it REALLY means as it relates to the underlying trend in consumer spending. As a reminder, let’s keep in mind that Personal Consumption is about $10 trillion. Retail sales is only $3.7 trillion. Chain store sales is about $500 billion, and yes that number continues to shrink as more retailers opt out of reporting monthly numbers to the National Retail Federation. While this is hardly an original thought, the bottom line is that underlying trends are getting better on both a one and 2-year basis. The latter is particularly important given that it blocks out noise associated with weather, fashion, etc… In looking strictly at the math – which has not been a bad bet of late – we’ve got another three months of this. Then we need a stronger consumer to keep the trajectory going. Are you willing to make that bet? I’m not. I’m sticking with those companies that are proactively managing their businesses to win regardless of the underlying consumer climate. That’s when the winners will be more apparent. I continue to believe that there will be a meaningful quality/junk bifurcation trade in 1Q10.






Some Notable Call Outs


  • Absent in yesterday’s partnership announcement between JC Penney and Liz Claiborne was any mention of the small, but high profile menswear collaboration with John Bartlett. While the line was well received by the fashion world, it too will be shuttered as the Liz Claiborne and Claiborne wholesale brands convert to a licensed model.


  • Earlier this summer we passed on a blog post from Fashionista suggesting that LVMH was shopping DKNY. Now the same blog is suggesting the company has had enough with its smaller, money losing fashion brands, Celine, Loewe, and Kenzo. Supposedly DKNY is also still for sale but so far there have been no serious offers. We have no track on this French luxury powerhouse, but with media power shifting to the blogosphere we can’t rule this one out.


  • While sales in early September were expected to and did get a boost from Labor Day timing, it’s also worth noting that week 5 was also a strong week. Most retailers reported strength at the end of month, which likely coincides with the beginning of the extreme volatility (weakness) that began to permeate the malls at this time last year.





-Yohji Yamamoto Inc., a Japanese distributor of mens and boys clothing, has filed for bankruptcy protection with the Tokyo District Court - Japanese investment company Integral Corp. released the news Friday by issuing a press release stating that it will finance the fashion house’s restructuring efforts. Yohji Yamamoto, which was rumored to be suffering, has called a press conference for Friday evening in Tokyo. A spokewoman declined to comment at press time. <>


-US Retail Sales See First Rise In a Year - US retail sales have seen the first rise since the financial crisis of September 2008. September’s sales were up 1.1% on the same month last year, according to the Retail Metrics comparable sales index. The rise was attributed to stronger autumn fashions, more aggressive promotional activity and a particularly weak comparative performance when the markets collapsed last September. Fashion retailers that beat expectations included Limited Brands, owner of lingerie chain Victoria’s Secret, which saw a 1% rise in sales despite analysts predicting a 2.4% drop. Teen clothing chain Aeropostale saw a 12.7% sales rise. The US luxury market is still in decline with department stores such as Neiman Marcus and Saks reporting double digit declines. <>


-Obama Allies Continue Laying VAT Groundwork - Despite President Barack Obama's "firm pledge" not to raise "any form" of taxes on families making less than $250,000 per year, the President's advisors and Democratic allies continue to float the creation of a Value-Added Tax (VAT). "It's getting more and more obvious that President Obama and Democrats in Washington, D.C. are laying the groundwork for a VAT," said ATR President Grover Norquist. "Apparently not content with violating his tax promise several times during the healthcare reform debate, President Obama now wants to tax every purchase made by every American -- including those earning less than $250,000." <>


-Levi’s Third-Quarter Profits Fall - Falling sales in the U.S. and European markets coupled with rising costs led Levi Strauss & Co. to a 41.2% earnings slide during the third quarter. For the three months ended Aug. 30, the San Francisco-based denim giant saw earnings decline to $40.7 million, compared with earnings of $69.2 million during the same period a year ago. Selling, general and administrative expenses rose $7.4 million, or 1.9%, to $396 million. <>


-Skechers USA Inc. announced that the company is expanding into Mexico - The Los Angeles-based company has entered into a deal with Leon, Mexico-based footwear company Grupo Charly to exclusively license and distribute the brand in Mexico. Grupo Charly will use its manufacturing resources in Vietnam to produce the collection, according to a statement. Men’s and women’s shoes will hit key retailers in Mexico this year, and children’s product will debut in 2010. Additionally, Grupo Charly plans to open a minimum of 10 Skechers retail stores in Mexico by 2014, with the openings beginning next year. Pushing a major expansion initiative, the brand announced earlier this week its upcoming move into India, and other deals for distribution in Chile, Malaysia and Brazil have already been inked. <>


-Gap Inc. plans to move its Man­hattan offices downtown without downsizing the staff - The San Francisco-based retailer is consolidating its two New York creative offices into a 200,000-square-foot space at 40 Worth Street in TriBeCa, putting the creative teams from the Gap and Banana Republic divisions — including designers, technicians and production personnel, as well as some business functions that support the corporate office — under one roof. The teams will be phased into the new site starting next year and finishing by the end of 2012. Gap says there are financial benefits in combining in one place over the long term but the short-term, however, will incur costs associated with the move. <>


-Ferragamo Plans to Open Stores in Mongolia, Turkey in 18 Months - Salvatore Ferragamo SpA, whose shoes are worn by Jennifer Lopez and Zhang Ziyi, plans to open stores in Mongolia, Turkey and Egypt to tap rising demand for luxury goods in emerging economies. The Florence, Italy-based company may start stores in those locations in the next 6 to 18 months, adding to planned ones in China and the U.S., Chief Executive Officer Michele Norsa said in an interview in Hong Kong. The board meets today to review 20 projects that may lead to the opening of as many as 10 stores globally next year, he said. <>


-Majestic Athletic Airs First Network TV Commercial - With the start of the MLB (Major League Baseball) Divisional Series, Majestic Athletic will be airing its first network television commercial.   Majestic’s spot is one of few product ads that feature actual MLB on-field footage. The ad promotes Majestic's new replica jerseys launched early this year.  The new replica offers a significant improvement by incorporating official fonts for player names and numbers. <>


-Dina Lohan launching her own line of footwear called 'Shoe-han' - Another member of the Lohan clan is getting into fashion. Last week, Lindsay Lohan made her debut as "artistic adviser" for the French fashion house Emanuel Ungaro. Now, according to, her mother Dina will sell her own line of foot wear. The forthcoming, and very affordable, collection will be known as Shoe-han. No, this is not a joke. The shoes represents a collaboration between one of the world's most controversial stage mothers and a Long Island-based company called "I Love My Shoes." <>


-Christian Lacroix, which is in administration, receives a formal purchase offer from Ajman sheikh - The offer from Al Hassan Bin Ali Al Nuaimi, in cooperation with the couturier, must still meet the approval of the commercial court here. However, the Paris administrator told Agence France Press it is “likely” to meet approval because it would preserve jobs and pay third-party debts. A date for a hearing has yet to be fixed, but is expected around Oct. 20. It is understood Bernard Krief Consulting and Financière Saint-Germain also have submitted bids. <>





LIZ: Doreen Toben, Director, purchased 5,000 shares ($25k).


NILE: Diane Irvine, CEO, sold 6,000 shares ($366k) after exercising the right to buy 6,000 shares, roughly 16% of total common holdings.


PETM: Jaye Perricone, SVP Real Estate, sold 10,000 shares ($220k) after exercising the right to buy 10,000 shares, nearly 24% of total common holdings.


GIII: Deborah Gaertner, President of Women Sales, sold 4,000 shares ($64k) after exercising the right to buy 4,000 shares, nearly 14% of total common holdings.


PETS: Bruce Rosenbloom, CFO, sold 3,000 shares ($60k) after exercising the right to buy 3,000 shares, roughly 12% of total common holdings.


PERY: Cory Shade, General Counsel, sold 2,000 shares ($34k), roughly 31% of total common holdings.






The “Golden Week” that began with the celebration of the founding of the People’s Republic of China had seen “okay” traffic through Macau’s casinos until last Sunday when, according to DM, it seemed as though “the entire population of China…stormed the Gongbei border crossing into Macau”.   DM says that the Lisboa and the Venetian were particularly full and media were suggesting that revenues could be up as much as 40% on Golden Week last year.  While it will be a tall order to top the 53% year-over-year growth of September, October looks to be off to a very strong start.






Wynn Macau was expected my many to fall on its debut, seen as expensive and as having all the upside priced in.  Today, its first day of trading, it closed at HK$10.78 (up 6%).  This is good news, of course, for Wynn Resorts but also for Las Vegas Sands.  Wynn’s rival is planning to list the Venetian Macau Limited's operations in Hong Kong in the near future.  LVS has a more pressing need for cash than Wynn; debt covenant pressure and the restarting of Lots 5&6 mean that LVS needs a successful Hong Kong IPO.





Oceanus is on track for a December 18th opening, although the date hasn't been finalized. Oceanus is directly opposite Sands and will have roughly the same number of gaming tables (300-350), but has the advantage of being connected by footbridge to the ferry terminal.  Frank McFadden will be in charge of Oceanus.  He has an impressive track record, having worked with Sands Macao from it’s opening until 2006 when he began working for Stanley Ho, starting at the Grand Lisboa.  Sands is now ran by Pete Wu, another impressive operator who has revitalized the property since he came on board.  The fact that Oceanus has a footbridge connection to the ferry terminal is undoubtedly an advantage for Oceanus, but Sands has 300 hotel rooms to Oceanus’ zero.  DM says that the Sands vs Oceanus battle will be one to watch. 



Reflation's Gravity

“Gravity is a contributing factor in nearly 73 percent of all accidents involving falling objects.”
-Dave Barry

The top 2 stories on Bloomberg this morning have the following headlines: 1. “Dollar rises most in two months against Yen as Bernanke signals exit plan” and 2. “Bernanke says Fed will be ready to tighten policy when economy improves.”…
Now let’s understand where these headlines are coming from. This is what Bernanke said last night at the Board of Governors conference in Washington:


“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period”…“At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

Then, this is what Larry Summers said at a Bloomberg Forum:
“He made it very clear that our commitment is to a strong dollar based on strong fundamentals…”
So, no matter where you go this morning, there the change in rhetoric is. The long awaited shift in US monetary policy is in motion. No, these are not explicitly hawkish comments on rates. But, on the margin, this is an important shift from only dovish and ignoring a Burning Buck, to at least recognizing gravity. Maybe $1049/oz Gold or a Russian Stock market +111% YTD focuses the mind. ZERO percent interest rates in America is NOT a perpetual policy. This is progress.
Or is it progress? For a lot of investors, the answer to that questions has multiple durations and perspectives. My answer is Australian. Raising rates to levels in line with at least those of the BOE (0.5%) and ECB (1%) is the only option for America, unless we’d like to become the world’s funding currency.
Until most recently, the Japanese Yen has been that carry trading currency. After hitting a 9 month high versus the US Dollar earlier this week, the Yen is getting pounded this morning, trading down a full percentage point. Yes, in FX trading, that’s a lot!
We are short Japanese Equities via the EWJ etf. From an immediate term TRADE perspective, a weakening Yen doesn’t help drive continued alpha points in that short position. But being short of US Dollar denominated REFLATION positions does. I am short Oil’s curve, via the USO. I am long China via the CAF closed end fund. China doesn’t like Burning Bucks. China’s stock market voted yes on US rate hikes last night, closing up +4.8% - it’s largest move in 5-weeks.
I have been looking for two fundamental factors to drive a Bombed Out Buck here in Q4:
A Q4 sequential acceleration in reported inflation (Reflation’s Rotation from the lows of reported y/y Deflation)

2.      A Q4 signalling from the US Federal Reserve that we no longer have Great Depression like growth and the need for “emergency” rates of ZERO percent

The only two things that matter to US Federal Reserve policy SHOULD be growth and inflation. Understanding that this is the most politicized US Federal Reserves in modern history, however, reminds me that SHOULD doesn’t equal and objective will to obey the laws of gravity. That said, however marginally less dovish these comments from Bernanke and Summers are, this is progress.
The US Dollar was down -0.66%, yesterday at $76.03. That was another higher-low for 2009.
The SP500 was up +0.75% yesterday at 1065. That was another lower-high for 2009.
Lower-highs and higher-lows are what they are in my macro models. In the immediate term, they are not bullish for everything priced in what were Burning Bucks. We currently have everyone from The Politico to Glen Beck chirping bearish on the US Dollar. That consensus gravity, and the perpetual ring tones from the manic media over at CNBC, make being short the US Dollar at higher-YTD-lows a position I am no longer willing to take.
I respect that bottoms are processes, not points. I respect that being early with my macro calls can equate to my being wrong. I respect gravity.
My immediate term downside support levels for the SP500 are 1050 and 1044. A breakdown through the 1044 line, combined with a US Dollar Index breaking out above the $76.92 line, will be very bearish in the immediate term for everything REFLATION. Risk managers beware.
Best of luck out there today,

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

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.

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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