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Game of Chicken: SP500 Levels, Refreshed...

When I was a kid, I used to play this game of chicken. Today, with the Dollar testing its YTD lows, it feels like the SP500 is playing the same…

 

The USD Index is down -0.29% at $75.90. The 2009 YTD low is 13 cents away from that print. Can the Burning Buck mark a lower-low as the SP500 tries its best to climb above its YTD closing high? That’s the game of chicken that the REFLATON trade wants to play.

 

In October of 2007 I wasn’t brave enough to stay in it on the long side until the bitter end. Thank God for that. Today, the risk management setup is far from similar, but it is October, and them chilly mornings can wake you up like they did with selloffs like we saw today.

 

I have only bought and covered positions today (bought Utilities (XLU); covered Darden (DRI). Since my 1054 line held, however low beta my buys may be, I’m definitely a better buyer on today’s weakness. Until this Buck stops Burning, the math will force us to play this US government sponsored game of chicken…

 

Today’s intraday US stock market recovery puts my refreshed TRADE lines of immediate term support/resistance at 1054 (dotted green) and 1089 (dotted red). In the Virtual Portfolio I now have 20 longs and 9 shorts.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Game of Chicken: SP500 Levels, Refreshed...  - chart1013

 


HST 3Q09 EARNINGS PREVIEW

In light of recent RevPAR trends and MAR's 3Q09 results, 2009 guidance looks too conservative. We still think Street estimates for 2010 need to come down.

 

 

We expect HST to beat the Street numbers and raise 2009 guidance when they report this Wednesday.  Our Q3 Adjusted EBITDA estimate of $140MM is approximately 6% above the Street.  For Q4, we are 8% above the Street's estimate of $233MM.  We think 2009 RevPAR will come in closer to 19.5% than the down 20-23% guidance from the 2Q09 earnings call.  If RevPAR comes in better than company guidance, operating margin compression should also be less severe than the guidance of down 600-650bps. 

 

Despite our belief that HST will beat and raise for 2009, we are still cautious on the stock and the lodging space.  HST is trading at almost 15x 2009E EBITDA and about 18x 2010E EBITDA - hardly attractive in our opinion.  The implied price per key of 189k is also not particularly "cheap", in our opinion.  Lastly, we are still below the Street on 2010 for both revenues and EBITDA. We believe 2010 will bring positive occupancy but will still have negative ADR as the industry seeks to recover the roughly 10 points of occupancy lost from peak to trough.  Until occupancy recovers meaningfully, we do not believe that hotels will have much pricing power.  In the meantime, costs should modestly rise, resulting in operating margin declines.

 

2010 Guidance?

Last year HST did not provide 2009 guidance on the third quarter release, so we do not expect them to address 2010 in the release since visibility hasn't markedly improved. However we do expect HST to give preliminary guidance related to 2010 on the call which we suspect will be highly predicted on GDP recovery.

 

 

3Q09 Preview Details:

RevPAR of -19.5% on NA hotels

  • Using a weighted average of HST's US city exposure for 6/20-9/5, we came up with a RevPAR estimate of -16.4%, which we adjusted downward given HST's exposure to Upper Upscale and corporate travel
    • This compares to Marriott branded NA operated RevPAR being down 19.8%
    • Estimate -7.5% occupancy and -13% ADR
  • F&B down 18% and other down 4%

Cost per Occupied room down 2% ; total property level expenses down 10%

 

FFO of $0.09

 

 

"Youtube" from 2Q09:

  • "The weakness in rate is not likely to abate until demand recovers, which will likely require the economy to stop shrinking and start expanding.  However, we have seen some progress in slowing the negative trends we experienced since the beginning of the year.  While the group cancellation rate for the quarter was still above our normal average, it represented less than half the rate we experienced in Q4 of 2008 and the first quarter of 2009."
  • "cancellation rate improved meaningfully through the quarter, suggesting this issue may present less of a problem going forward"
  • "We think the margins will decline more than we experienced in the first half of the year, as the RevPAR decline will be more weighted to declines in average rate and changes in the business mix, as well as lower food and beverage margins due to further declines in high profit banquet and audio-visual business"
  • "We expect an increase in hourly wage rates and in property insurance costs, as insurance rates have started to increase.
  • "if you look at the RevPAR range that we've suggested for the full year it tends suggests that the second half of the year somewhere between 17% and 20% decline in RevPAR. 

First Look: ARO Setup Looking Sweet

ARO: Setup Looking Sweet

October 13, 2009

 

 

TODAY’S CALL OUT

 

I love when Keith throws me 90 mph fastballs like what he sent me last night… “ARO breaking down on what couldn't have been better news, TRADE line = 42.84.” As most of our subscribers know, our process here is one where our analysts focus on owning the debate on key issues with companies, industries and sectors, while Keith is focused on managing risk and timing/sizing across multiple durations (TRADE, TREND, and TAIL).  When we identify a critical uncertainty – as measured by price, sentiment, or financial performance, we collectively drill down on the answer. In that respect, ARO is an interesting budding idea. Consider the following…

 

Revenue growth has been solid – we can’t take that away. Kudos. But 900+ core stores, growth is reaching maturity.  ARO’s new concept, P.S. from Aeropostale, is moving from a test concept with 7 stores to a full fledged growth vehicle.  The P.S concept is aimed a 7 -12 year old consumer vs. Aero at 14- 17. The excitement around the success of this concept BETTER be justifiable. Also, remember that one of the key drivers to comp has been due to ARO making fashion a higher percent of the mix (ie skinny jeans and bling) and less of a fashion follower. This has pushed operating margins past peak levels. We’re all for upping the fashion component of a business. But the company needs to spend accordingly to sustain such growth, and mitigate the likelihood of a miss. We’re not convinced that’s the case here. Also, with the succession plan for a co-CEO structure (one person from Ops and the other from merchandising) it does not exactly scream ‘stability.’

 

Some other key factors we like to consider…

  1. Our SIGMA analysis for ARO is definitely not headed in the right direction. Yes, it is currently in the sweet spot where sales are growing faster than inventories and margins are up yy, but the sales/inventory spread is eroding, and margin compares get very tough in 1.5 quarters.
  2. Taking a longer term view, margins are beyond peak. Try finding another retailer where you can say that.
  3. Sentiment is generally positive. 55% buys, and only 7% sells. Price is deviating big time from $47 price targets (charts below). Analysts will pound the table or catch a falling sword. 15% of float is short – while that is higher than we like to see, it is less than half of where it topped out a year ago.
  4. Management does nothing but sell. Seriously…they were not even buyers a year ago at $13. 

 

Maybe it’s too early to short this one. I’ll leave it to Keith to drill down timing/sizing (and will be back to our subs accordingly). But the setup certainly looks good.

 

First Look: ARO Setup Looking Sweet - ARO SIGMA

 

First Look: ARO Setup Looking Sweet - 2

 

First Look: ARO Setup Looking Sweet - arosellside

 

First Look: ARO Setup Looking Sweet - aroinsider

 

 

LEVINE’S LOW DOWN

Some Notable Call Outs

 

  • Unless you are an avid Columbia Sportswear watcher you may have missed the company’s last two hires to come across the wires. First, on October 6th the company announced the addition of Kathleen McNally as creative director apparel. Kathy joins the company with experience at Nike, Lucy Activewear, and J Crew. Second, the company announced the addition of Adrienne Moser as general manager of apparel merchandising for the Columbia brand. Moser joins with experience from Lacrosse, Nau, and Patagonia. While we don’t personally know these two hires, we suspect there is a subtle message here as Columbia invests in upgrading its apparel offerings.

 

  • We have highlighted the success and intrigue with a number of U.S based members-only ecommerce sites selling fashion closeouts. One company we have not focused on is Vente-Privee, the French based predecessor to many of these stateside start-ups. Vente-Privee is said to be producing revenue of 650 million Euros annually and has now entered the rumor mill of potential acquisitions. While none of this can be confirmed, the valuation being thrown around suggests Vente-Privee is worth $1.5 to $2 billion! If true, it will not be long before a wave of IPO’s emerge across the membership-only space.

 

  • As talk of Black Friday begins to heat up, add Blu-ray DVD players to the list of items that are sure to be used as key traffic drivers in the consumer electronics department. Although there are several models currently priced under $200, it is now widely expected that the product will be promoted at the $100 price point aggressively throughout the holiday period.

 

 

MORNING NEWS 

 

-China protests extension of EU footwear tariff - The European Union has to decide whether to extent a 15-month tariff against Chinese and Vietnamese footwear for unfair competition. Chinese manufacturers and European buyers complain this will push prices up at the expense of consumers.

Beijing – A European Union plan to extend tariffs on Chinese and Vietnamese footwear by 16.5 and 10 per cent respectively for at least 15 months has sparked an outcry from China’s shoemakers. Led by the EU’s main shoe-producing members (Italy, Spain, France and Poland), the European Union has accused the governments of the two Asian nations of unfairly subsidizing their low-cost shoemakers. The EU first imposed duties in 2006 for two years claiming unfair competition. This was renewed in October of last year but, pending a review by the European Commission, tariffs should end on 3 January.

<speroforum.com>

 

-U.K. Retail like-for-likes rise 2.8% in September - Clothing and footwear sales grew in September, led by a strong performance from kidswear and back-to-school ranges. Autumn ranges were impacted by the mild weather at the start of the month, with winter footwear and clothing sales picking up towards the end of the month, according to the BRC-KPMG Retail Sales Monitor. UK retail sales values rose 2.8% on a like-for-like basis in September, compared with a 1.5% fall in September last year. However, the September 2008 reporting period was weak due to turmoil in the financial markets. The September 2009 period covered by the report also included the August Bank Holiday weekend. Total sales were up 4.9% on a year ago, versus a 1% gain in September 2008. <drapersonline.com>

 

-U.K. Inflation falls to five-year low - The level of inflation has dropped to its lowest rate in five years as falling energy prices continued to cut the cost of living, according to reports. The Office for National Statistics reported that the consumer prices index fell to 1.1% in September on a year-on-year basis, down from 1.6% in August. In the year to September, the retail prices index annual inflation fell by 1.4%, compared with a fall of 1.3% in August. The main cause of the fall was cheaper electricity and gas bills. Prices of clothing and footwear put upward pressure on inflation as prices rose by more than a year ago across a range of items. <drapersonline.com>

 

-IPO Climate Warming for Some Retailers - In the last 10 weeks, three retailers in North America have filed statements regarding their intent to go public — two in the U.S. and one in Canada. The two Form S-1 filings with the Securities and Exchange Commission in the U.S. were Dollar General Corp. on Aug. 10 and Rue21 on Sept. 18. Dollarama is the Canadian firm that filed Sept. 10. A fourth retailer, VS Holdings, which operates The Vitamin Shoppe stores, filed its Form S-1 on July 23, and is set to price this month. VS Holdings will be the first retail IPO in two years. And it isn’t only the U.S. IPO market starting to simmer. Last month, two retailers outside North America unveiled plans to go public. Italy’s online discount retailer, Yoox, said it plans to list on the Italian Bourse in the first half of next year. Australia’s largest department store group, Myer, said it will return to the Australian stock market before Christmas. <wwd.com>

 

-Wealthy Americans to Spend 5% Less This Holiday - Wealthy Americans will spend an average of 5 percent less on gifts this holiday season because of uncertainty about the economic recovery, a survey from the American Affluence Research Center found. Respondents with average incomes of $300,000 said they will spend $2,380 on average this year, compared with $2,505 last year, according to the survey. Nine percent said they won’t buy any gifts, 38 percent said they will spend less, 59 percent said their expenditures will remain the same and 3 percent said they will spend more. <bloomberg.com>

 

-Manufacturers Face Pressure on Sustainable Practices - Manufacturers will continue to face pressures to implement responsible business practices, as they balance cost controls and profitability with environmental and consumer awareness. Speakers at the first Sustainable Fashion Forum held here last week, which coincided with other events highlighting the issue, stressed its importance and complexity. Organized by APLF to coincide with the Fashion Access trade show, the event drew speakers and attendees from across the supply chain spectrum. <wwd.com>

 

-Puma Sports India looks to become a complete lifestyle brand - Shoes and sportswear maker Puma Sports India Pvt Ltd, a subsidiary of Puma AG Rudolf Dassler Sport, is moving from being just a sports and accessories brand to a complete lifestyle brand. The company has entered into an exclusive retail collaboration with Gini & Jony to enter the kidswear market. In India, Puma markets a range of lifestyle products, including shoes, apparels, accessories, watches and even sunglasses. While Puma will keep production and imports under its control, the distribution will be through Gini & Jony. <indiaretailing.com>

 

-New CEO at Converse - Nike Inc. announced Monday that Michael Spillane will move up to CEO at Converse, taking over from Jack Boys after his retirement at the end of the year. Boys had been CEO of Converse, a wholly owned subsidiary of Beaverton, Ore.-based Nike, since 2001. In 2007, Spillane joined Nike as Converse’s president of North American footwear shortly before becoming president of North America and global product. His prior experience includes CEO roles at Polartec and Malden Mills, in addition to senior positions at Tommy Hilfiger and Jockey. Under his new title, Spillane will report to Eunan McLaughlin, president of Nike Inc. Affiliates. <wwd.com>

 

-CEO Golden Leads Turnaround at Hampshire - The company named Heath Golden its new president and chief executive officer in August, following a turbulent period that saw a failed merger bid in April with NAF Holdings II LLC, an investment vehicle controlled by Efrem Gerszberg, brother of Ecko Unlimited co-founder Seth Gerszberg. Golden — an attorney by training, who was elevated from the chief operating officer position — has reorganized management and is overseeing the final stages of a restructuring plan, which began in 2008. The plan has reduced head count at the New York-based company by 50 percent and is on course to save Hampshire $12.4 million in annual selling, general and administrative costs. Hampshire, whose business is comprised of 60% sweaters and 40% sportswear, has seen top-line sales decline 25% since 2005, from $322.4 million to $240.9 million in 2008. <wwd.com>

 

-JJB Sports Plans to Raise 100 Million Pounds in Equity Sale - JJB Sports Plc plans to raise £100 million ($161 million) in a share sale. The U.K. sporting goods chain said it reviewed a range of options to provide additional capital and confirmed it is completing arrangements for an equity issue. <sportsonesource.com>

 

-M&M's Rock with Kiss at Walmart - Mars Direct, a division of Mars Snackfood U.S., has stocked My M&M's Kiss Blend on Walmart shelves. For a limited time, the iconic faces of the band are appearing on M&M's chocolate candies. The range includes four customized packages with band members Gene Simmons, Paul Stanley, Tommy Thayer and Eric Singer featured. The candy rollout coincides with the release of Kiss' latest album Sonic Boom, only available at Walmart. <licensemag.com>

 

-Amazon UK to offer free delivery on all products for Christmas - Amazon UK will offer free delivery on all of its products in the run up to Christmas. The retail giant has scrapped the £5 threshold customers used to have to cross to qualify for free deliveries. It will be available for all items shipped by Amazon until January 1 2010. Amazon UK managing director Brian McBride said: “Christmas is coming and so it’s the perfect time to offer customers free shipping on every item available from Amazon.co.uk.

<retail-week.com>

 

 

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

 

10/12/2009 02:58 PM

COVERING AZO $144.77

The Auto-Repurchase-Zone continues to underperform, but its making a higher low here. I'll cover red and re-short it on an up day. McGough and Levine remain bearish. KM

 

 

INSIDER TRANSACTION ACTIVITY:

 

JCG: Tracy Gardner, President: Retail & Direct, sold 19,000 shares ($760k) after exercising the right to buy 19,000 shares, nearly 13% of total common holdings.

 


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THE MACAU METRO MONITOR

MACAO CASINO OPERATORS BACK GOVERNMENT’S CALL TO REGULATE GAMING DEVELOPMENT English.cri.cn

WYNN SAYS MACAU GAMBLING LIMITS WIL BENEFIT CITY’S CASINOS Bloomberg.com

The six licensed casino operators in Macao voiced their support for local government’s intention to further regulate the development of the local gaming industry.  The operators agree with the government’s aim to prevent over-expansion without restriction.  Executive representatives from all of the concessionaires attended a meeting with officials from the Macao Special Administrative Region government, discussing issues concerning the gaming industry.

 

The long-term aim of the local government is to have a diversified economy in Macau.  This year the government has already moved to regulate the VIP gaming market by bringing in a junket commission cap.  The SAR government is also said to be drafting new laws and rules concerning the age limit of persons entering local casinos and the location of slot machine halls.  The proposed bill will preclude persons under the age of twenty-one from entering, or working at, local casinos, and gaming operators will also be forbidden from setting up new slot machine halls in local neighborhoods.  Plans to limit the number of tables in the market, subject to an ongoing government review of the number of tables in Macau, are also in place.  Steve Wynn views the policy as “a good idea”. 

 

 

 

ISLAND OF QUEMOY MULLS TAIWAN’S FIRST CASINOS scmp.com

Quemoy is considering building Taiwan’s first casinos.  A petition was collected by the head of Quemoy’s Democratic Progressive Party, calling for a referendum on the issue.   The opportunity being pitched by pro-gambling lobbyists is to transform the island from an undeveloped island controlled by the military and into a tourist destination for millions of mainlanders just 20 nautical miles away.

 

There is certainly not consensus on the issue in Quemoy.  The debate will be as heatedly contested as it was in Penghu, where voters unexpectedly rejected a proposal to allow gambling.  Even if a referendum is called and the people vote in favor of gambling, the decision would then go to the Taipei government, which is also divided over the issue.

 

 

 

MACAU VISITOR ARRIVALS DURING NATIONAL DAY GOLDEN WEEK asiatraveltrips.com

During the China National Day Golden Week, from October 1 to October 7, the average occupancy rate of three-to-five star hotels in Macau reached 87.3%, 5.6% higher than the same period of 2008.  The average room rate of three-to-five star hotels was 1,226 patacas, up 15.5% y-o-y.  The number of mainland visitors coming to Macau during the National Day Golden week was 420,000, a 2.12% increase y-o-y.


US Strategy – More of the same

On Monday, the S&P 500 closed at 1,077, up 0.4% on the day; day six of the S&P 500’s rally, but the last three the volumes have been shockingly low. The six day rally is the longest streak since June 2007.  The market attention has shifted squarely to a few earnings releases due out over the next few days.  In Healthcare and Technology, JNJ, ALTR and INTC all report today.  Other notable companies reporting today are DPZ and CSX.  .

 

Friday’s portfolio activity included shorting more USO and covering our short in AZO.  Yesterday, WTIC Oil was trading just north of our overbought line. With the US Dollar hitting another higher-low this morning, we are shorting more of oil's curve. 

 

Yesterday’s market action was another “Outside Reversal” (See Keith McCullough note “Another outside Reversal”).  An Outside Reversal is an intraday breakout to new YTD highs, followed by an intraday reversal (selloff), and a market closing price that sits below the prior YTD closing high.  After we saw the Outside Reversal in the S&P500 a few weeks back, the index corrected by over 4% in the days that followed that reversal.

 

The dollar index was down 0.2% in very quiet trading.  The VIX has declined for the sixth (0.5%) straight day and is now down 14% over the past week. 

On Monday, five of the nine sectors outperformed the S&P 500, with every sector positive except the Industrials (XLI).  Within the XLI, Ryder (R) climbed 9.9% after the company said it would pay a cash dividend of $0.25, while the Aerospace and Defense names were notable weak on the day. 

 

The three best performing sectors were Energy (XLV), Utilities (XLU) and Financials (XLF), while Industrials (XLI), Materials (XLB) and Technology (XLK) were the bottom three.  We are currently long the XLV. 

 

Today, the set up for the S&P 500 is: TRADE (1,053) and TREND is positive (992).   Day 2 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.

 

Equity futures are currently trading mixed with the S&P 500 trading 1.25 points below fair value; NASDAQ trading in line to fair value and the DJIA trading 12.52 points above fair value.


Howard Penney
Managing Director

 

US Strategy – More of the same - S P500

US Strategy – More of the same - s pperf

US Strategy – More of the same - s plevels


Napoleonic Heights

“My downfall raises me to infinite heights.”
-Napoleon Bonaparte
 
The history of The Emperor Napoleon losing his proverbial clothes is one of my favorites. If the British and Americans aren’t careful with their respective financial systems and currencies, they might start looking a little 19th century French, à la 1815 Waterloo, sometime soon…
 
Unlike poor Bernie Madoff (who apparently got into a prison brawl in yesterday), Napoleon spent the last 6 years of his life under British supervision on an island.  He wasn’t a fraudster, so they went easy on him, I guess…
 
But will the world’s central banks go easy on the British Pound and the Burning Buck? The answers to these questions aren’t at all clear. What countries say for political purpose seem to be quite different versus sales they are making in the market. For the last 9 months, I have been spending an inordinate amount of time bantering about Breaking it and Burning it, but that time could have equally been focused on Pounding it – Pounding the Pound that is…
 
Consider the French versus the British this morning, straight up on one economic score:
 
1.      France Consumer Prices (CPI) for September came in at -0.4% year-over-year

2.      British CPI for September came in at +1.1% year-over-year

 
In Europe, not unlike Napoleon when standing alongside other military leaders of his time, one of these things is not like the other. Their heights.
 
Alongside the Pounding of the Pound comes heightened levels of domestic inflation for British consumers. The Eurozone, on the other hand (which maintains a strong currency policy that’s actually pseudo credible), imports deflation for their citizenry,
 
I know, I know. These differentials aren’t monstrous, but neither were the competitive advantages that took down Napoleon in 1815 at Waterloo. The New Reality is this: The Chinese have a lot of money that they can invest, wherever they want, and interest rate and currency price differentials matter to them.
 
My loving Mom’s maiden name was Thiboutot. I went to French-only school until the end of the 5th grade, so please don’t send me nasty-grams about not liking the French!  However, to be clear, next to Italy, France is one of the last places in the old G7 that I would be investing capital right now.
 
When I look at the G7 countries today (Canada, France, Germany, Italy, Japan, UK, and USA), the opportunities on the French Canadian side look more palatable than on the Parisian side. Canada reported a much improved unemployment rate of 8.4% this past month (down from 8.7% prior), and looks poised to play an Aussi Rules rate game in the near future. If you show me a rate of return that is greater than ZERO, I’ll call my Chinese boys in to give you a look-see.
 
Alongside the CRB Commodities Index hitting its YTD high yesterday, so did the Canadian Loonie. As America and Britain Burns and Pounds their respective currencies into the political sands of Capitalism Lost, the world is still open for Global Currency Diversification business.
 
If you were (or are) Chinese, and tomorrow you read the following two headlines, what currency would you buy?
 
1.      Brown’s Bank of England (BOE) expands asset and bond purchase programs

2.      Shirakawa’s Bank of Japan (BOJ) withdraws corporate debt and commercial paper programs

 
This isn’t that complicated folks. This is the increasingly interconnected world financial system that you live in. There are countries like Japan that have new political leadership for the 1st time in 55 years that could actually change their longstanding and compromised monetary policy, while those countries like America and Britain take Japanese like politicization of monetary policy to Napoleonic Heights!
 
I am sure some of the smartest Wall Streeters on the planet can explain to me exactly why the Japanese Yen going up “isn’t fundamental.” At the end of the day though, the price of the Yen is at close to a 9 month high for more reasons than those that explain a portfolio managers revisionist performance problems.
 
If the Japanese say “No-Morah” to limitless lending, the New Heights for Japan’s currency are still ahead of us. Particularly if the British Pound and US Dollar move to New Lows…
 
Yesterday, that ole Buck was Burning again. Most things priced in bucks hit New Heights, as a result. While the Nasdaq had an Outside Reversal day (breaking out to new YTD highs intraday, then reversing intraday to close at a lower-high), the SP500 closed up for the 6th day in a row to a New Height of 1076.
 
I’ve been wrong in missing most of this move in US Equities for the last 6 days. I’ve been right in being long the associated protections against currency imported accelerations in inflation expectations (I’m long an 11% position in TIPs, and still have a 4% long position in Gold).
 
I’m waiting to see if the US Dollar can continue to make higher-lows. I am waiting to see if the US Federal Reserve has a spine in seeing these New Heights in marked-to-market leading indicators (oil, TIPs, gold, copper, Russian stocks, Chinese demand, JPM earnings, etc…). I’m waiting to see if this Global Asset Allocation Diversification is both America and Britain’s Currency Waterloo…
 
My immediate term support/resistance lines for the SP500 are now 1053 and 1086, respectively.
 
Best of luck out there today,
KM

 

LONG ETFS
 
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.

 
SHORT ETFS
 
XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

USO – US OIL Fund WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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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