US Strategy – Last Man Standing

US Strategy – Last Man Standing


Only Consumer Staples remains positive on both TRADE and TREND.


On Wednesday, the S&P 500 closed at 1,042, down 2.0%.  Yesterday’s was the fourth down day in row for the S&P 500 and nearly every sector is broken on TRADE.  Once again the heightened volatility continued yesterday with the VIX up 12.4% and it has now moved 25.6% in the past week.  The VIX has been up for five straight days.  


The S&P 500 closed around the worst levels for the day, as the continued correction in the risk trade was fueled by concerns about the early steps on the part of global central banks to reduce some of the stimulus measures. The MACRO calendar is also working against the market, with the unexpected decline in September new home sales. 


The low beta defensive stocks outperformed yesterday.  Consumer staples were the best performing sector, with Tobacco stocks up on the day. 


Housing stocks underperformed again yesterday with the XHB down 4.9%, as new home sales fell 3.6% month to month in September to a 402,000 annualized pace, the biggest decline since last December and well-below the consensus of 440,000. In addition, August was revised down to 417,000 from 429,000.  The Homebuilders are rallying in early trading today; there is clear bipartisan support in Congress for extending the credit past Nov. 30 and making it available to more homebuyers.  What remains unresolved: just how far past Nov. 30, the size of credit and how many more buyers would qualify.


Yesterday, four sectors outperformed the S&P 500 and every sector was down on the day.   The three best performing sectors were Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP), while Energy (XLU), Financials (XLF) and Materials (XLB) were the bottom three. 


The Materials (XLB) continued to underperform today as the REFLATION trade unwinds, as the dollar is now up for five straight days.  The UUP was up 0.4% yesterday and is now up 1.8% over the past week. 


Today, the set up for the S&P 500 is: TRADE (1,028) and TREND is positive (1,017).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 1 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations is Consumer Staples.     


The Research Edge Quant models have 2.5% upside and 1% downside in the S&P 500. 


The Research Edge MACRO Team.


US Strategy – Last Man Standing - S P500


US Strategy – Last Man Standing - s pperf

US Strategy – Last Man Standing - s plevels



October 29, 2009





After what some may view as disappointing topline guidance from JNY yesterday, we now have two examples where the topline is both a source of upside and potentially a driver of increased visibility as we move into 2010. Both Hanes Brands and Timberland reported higher than expected 3Q EPS. A couple of highlights/lowlights for each:


HBI: Management quantified its growth opportunity driven by shelf space gains in the mass/mid-tier channel, which is now expected to generate a 5% increase in total topline growth next year (we were at 2%). In an environment where most are dependent on a pickup in consumer spending, this is clearly a net positive for HBI. On the flipside, bears will focus on the quality of the Q3 beat (which was primarily tax related) and a slightly weaker outlook for Q4 (although this likely driven by investment spend to support the company’s ramp in mass channel growth). Additionally, the company also announced a leverage target of 2x-3x Debt/EBITDA, which could be achieved as early as 2011. Management now believes it is the appropriate time to refinance their debt, a process which has been sidelined for several months as the credit markets remained tight.




TBL: With the conference call currently underway, the quick takeaway here is BETTER TOPLINE. The key source of upside was better sales from both US and International wholesale. The US actually posted a 2% increase (vs. our forecast for -8%) and International was -2% (vs. our forecast of -9%). Even more impressive was the growth in the US which was up against a 25% increase last year. Commensurate with upside on sales was better expense leverage, while gross margins were weaker than we expected. While we anticipated this would be a good quarter given very low expectations, we are surprised at the nature of the upside. Clearly a better topline is key to a recovery for TBL, a company which has now struggled for at least 3 years to generate incremental growth. We are careful not to extrapolate the reported results just yet, as we do need to clarify if orders were pulled forward into the quarter, a trend that has been common throughout the footwear industry this Fall season. More details after the call…






Some Notable Call Outs


  • Jones Apparel management highlighted strength in its footwear business and went as far saying the boot business is “exceptional”. Boots were also described as being “the clear fashion trend for the season”. We continue to believe the positive boot trend and the commensurate higher than average ASP’s bodes well for those with women’s fashion boot exposure.


  • While Black Friday garners more media attention and hype than it probably deserves, it’s still worth noting that Sears is attempting to one-up the entire retail industry by hosting its own “Black Friday” events every Saturday from now until Christmas. The events will take place from 7AM to 12PM and will attempt to replicate the “doorbuster” type promotions seen on the real Black Friday.


  • A series of Youtube videos depicting a naked man running through the Streets of New York with running shoes, tube socks, and a fanny pack have been making the rounds across the internet. The videos, which appear to be homemade, have now been revealed as part of a viral marketing campaign for Zappos. The campaign is yet another push by the company to build awareness of its apparel offering. The company has been selling apparel since 2007, but is largely known for its shoes. As we have said before, we would not be surprised to see an increased focus on apparel given the size of the market and the company’s recent tie-up with Amazon.





-TPG’s Myer Valued at A$2.4 Billion in Initial Public Offering - Myer Group Pty, Australia’s largest department-store chain, sold shares in an initial public offering that values the company at A$2.4 billion ($2.2 billion), offloading its stock near the bottom of its forecast range. The shares were sold at A$4.10 apiece, Melbourne-based Myer, controlled by buyout firm TPG Inc., said in a statement today. That compares with the A$3.90 to A$4.90 range the company predicted when announcing the IPO on Sept. 28. The IPO prices Myer stock at 15.1 times forecast earnings. David Jones Ltd., Australia’s second-largest department store, is trading at 17 times earnings. <>


-Vitamin Shoppe launches IPO today with higher than expected stock price - Vitamin Shoppe Inc., a multichannel retailer of nutritional supplements, began trading on the New York Stock Exchange today at a share price of $17, up from a planned $14-$16 range. It plans to use net proceeds of about $121.2 million for the redemption of preferred stock and the repurchase of senior secured notes. Vitamin Shoppe raised a total of $154.6 million. The company, trading under the symbol VSI, offered a total of 9,096,077 shares of stock. That total included 7,666,667 shares of common stock, with the remaining 1,429,410 shares offered by selling stockholders. Vitamin Shoppe`s stock price reached $18 at the close of markets today, up 5.9% from yesterday. <>


-Bill Targets Barriers to U.S. Exports - Senate Democrats introduced a bill Wednesday that would give trade officials more authority to crack down on barriers to U.S. exports. The bill would reinstate the U.S. Trade Representative’s authority to require federal officials to identify and report on the most serious trade barriers to U.S. goods, begin consultations with a country and negotiate remedies. “This bill will hold countries accountable for violating our trade rules,” said Sen. Debbie Stabenow (D., Michigan). She said the bill does so by “identifying and prosecuting countries that cheat, and opening up foreign markets for our American-made products.” <>


-President Obama Signs Bill Boosting Customs Funding - President Obama signed a $42.8 billion bill Wednesday that boosts funding for the Customs & Border Protection agency and could potentially delay a 100 percent cargo scanning deadline. The measure provides funds for the Department of Homeland Security, which includes Customs, for the 2010 fiscal year that began Oct. 1. Retailers praised language in the bill that calls into question the feasibility of meeting the 2012 deadline to scan all U.S.-bound cargo containers at foreign ports to determine if they contain terrorist weapons. <>


-Struggling CIT Secures New $4.5B Loan - CIT Group Inc. secured a lifeline on Wednesday in the form of an additional $4.5 billion in financing from lenders and bondholders, its latest move to avoid a bankruptcy filing as it tries to obtain bondholder support for restructuring initiatives to reduce its debt load. According to CIT, the new loan matures in January 2012. In securing the loan, CIT rejected a $4.5 billion term loan offer from bondholder Carl Icahn on Tuesday. Icahn in recent days has stepped up his campaign to try to get bondholders to reject CIT’s proposed restructuring plan. <>


-Trade Groups Lobby Clinton on Honduras - A coalition of trade associations on Wednesday called on Secretary of State Hillary Rodham Clinton to increase pressure on the Honduran government to resolve a four-month-old coup before the textile and apparel industry deteriorates further. Seven textile and apparel industry associations sent their second letter in a month to Clinton expressing concern. The groups warned that if the current standoff continues, the textile and apparel sector in Honduras could be permanently damaged. <>


-Kohl’s Predicts Online Sales Will Grow at Least 30% This Year - Kohl’s Corp., the fourth-largest U.S. department-store chain, expects Internet sales to climb at least 30 percent this year as it boosts advertising through sites including “We have a lot of opportunity to grow” online, Chief Executive Officer Kevin Mansell, 57, said yesterday in a telephone interview. The chain’s Internet sales trail Macy’s Inc., the second- largest U.S. department-store chain, and J.C. Penney Co., the third-biggest, the CEO said. Sears Holdings Corp. is the biggest U.S. department-store chain. <>


-Amazon pulls the cork on plans to sell wine - In a communication to wineries lined up to support its planned entry into wine sales, Amazon Inc. this week announced it is cancelling those plans. “I am very sorry to let you know we have recently decided not to resume shipping. As you know, we were excited to work with you to build the AmazonWine business. For that reason, this was a very tough choice for us,” read the letter, which regional managers for Amazon Services sent to wineries in their areas. Amazon Services provides third-party services, including fulfillment, to other online merchants. <>


-Versace Eyes 25% Cut in Staff, Return to Black in 2011 - After only three months in the job, Gian Giacomo Ferraris, chief executive officer of Versace SpA, has launched an extensive reorganization plan aimed at returning the company to profitability in 2011. After forecasting an 18.8 percent drop in 2009 sales to 273 million euros, or $405.6 million, and an operating loss of 30 million euros, or $44.6 million, Versace will cut 350 jobs, which is about 25 percent of its workforce. <>


-Madden Signs Apparel License - Steve Madden is expanding his brand’s fashion range and getting into the women’s apparel business for spring under a licensing agreement with L’Koral Industries. L’Koral, headed by chief executive officer Jane Siskin, will design and market the line to better department and specialty stores. <>


-Yoox Looks to Grow - When Federico Marchetti set up Yoox Group in 2000 in a small workshop near Bologna, Italy, there were plenty of skeptics who said he wouldn’t be able to sell high-end clothing and accessories online. Not anymore. After reporting revenues of nearly $150 million in 2008, the founder and chief executive officer of the fashion e-tailer plans to drive home his first mover advantage by listing on the Milan Stock Exchange before yearend, despite the fragile state of the financial markets. <>


-Charlotte Russe and People's Liberation Sue Each Other - An exclusive three-year deal between mall retailer Charlotte Russe and premium denim brand People’s Liberation came to a contentious halt this week as the firms accused each other of breach of contract. The dueling suits stem from a December agreement that called for Charlotte Russe to carry the People’s Liberation line starting with the 2009 back-to-school season. Shortly after the firms made the deal, Charlotte Russe put itself up for sale and, this month, Boston-based private equity firm Advent International Corp. took the company private for $380 million. <>


-Henkel Profits Slip 1.5 Percent - German consumer products giant Henkel reported a slight dip in third-quarter adjusted operating profit, and warned that fourth-quarter results may be weak. The Düsseldorf–based firm - maker of brands including Schwarzkopf, Dial, Fa and Taft -said sales in the quarter ended Sept. 30 fell 2.5 percent to 3.49 billion euros, or $4.99 billion. That figure, part of preliminary results released late Wednesday, is down from the previous year’s 3.76 billion euros, or $5.38 billion, a decrease of 2.5 percent when adjusted for foreign exchange and acquisitions and divestments. <>


-Preshrunk Prices: Designer Jeans Fad Rescinding - THE $300 pair of designer jeans is now, courtesy of the recession, the $200 pair of designer jeans. “It was all just a fad,” said Jeff Rudes, a founder of the hot-denim-label-du-jour J Brand Jeans and an astute observer of the suspiciously inflated prices of fashion’s most eternally reinvented staple. Like any commodity that becomes overpriced, there eventually comes a market correction. And denim’s day of reckoning was long overdue. <>


-Fashion's Night Out to Be Repeated in 2010 - Fashion’s Night Out, the global shopping event that gave retail a much-needed kick last month, is due for an encore in 2010. Today, Mayor Michael R. Bloomberg, Vogue magazine, the Council of Fashion Designers of America and NYC & Co. will unveil the return of the event on Sept. 9 — and the plan is to make the second one bigger and better than the first. <>





COH: Monda Keith, President & COO, sold 46,000 shares for a gain of $1.6mm.




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends…


  • A negative day for both the market and retail.  The divergence between the MVR and RTH can be explained by WMT's outperformance yesterday with an improvement of 0.1%.  6% or 14 out of 241 retail stocks were positive yesterday.
  • 6 out of the 14 sectors declined by more than 4%, leaving food and staples retailers as the best performing sector with a loss of 0.6% yesterday on down volume.  The only sector that is positive on the 1-Week and 3-Week durations is internet and catalogue retail which is due in part to AMZN's 26% gain on Monday.
  •  Outperformers with volume confirmation on all three trends include NTRI, STMP, and DFZ.  CRI had a bounce back from yesterday's significant declines due to the cancelation of the Q3 09 earnings report on Tuesday evening.  Although  micro stocks, RCKY and DLA deserve callouts for significant outperformance on the 1-Week and 3-Week durations.
  • UA, GOLF, BZH, RGR, and CROX were the 5 worst performing stocks in retail yesterday.  ANN flashed negative with significant losses on all 3 durations backed by volume.  CMRG has taken over the lead from CONN as the worst performing stock because it has been one of the biggest losers in all 3 durations while CONN has decreased its losses on the 1-Week and 3-Week trend.






With BKC reporting some disappointing numbers today, we have updated our BIG 3 chart. 


The 3Q09 number for WEN reflects our estimate of flat same-store sales growth for the quarter.  WEN reported that comparable sales growth was up 2% in July.


The trends for MCD continue to slow; MCD finally admitted that high unemployment has had "some impact" on its breakfast business.  According to senior management, “the impact has been inconsistent, reflecting the uneven path of unemployment across the nation.” 


Yesterday was an ugly day, but yet, not an unexpected day for the restaurant industry.  The small cap stocks were down on a big increase in volume, but this was consistent with the Russell 2000’s 3.5% decline, underperforming both the Dow and the S&P 500.


We are definitely looking for an entry point in some of the better positioned names, but I am not optimistic about how Q4 is going to shake out.  I would like to feel confident that expectations for Q4 are already discounted in the stock prices.


CHUX reported in line numbers, but there is nothing there to get that stock moving to the upside with any meaning.






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Walk The Line

“The key to change is to let go of fear.”
-Rosanne Cash
If you ask the Kudlow “King Dollar” crowd, US Cash is king. I agree. But that notion definitely doesn’t apply across durations to the stock market. In the immediate term, what we have learned in the last 4 days speaks for itself. Dollar up = everything priced in dollars down.
Do the perma-bulls want to believe that if rates on our cash go up, that everything priced in cash will keep going up? Are we ready to let go of the short term fear in exchange for the longer term fix? Are we ready to Walk The Line?

Admittedly, after a -57% stock market crash from the October 2007 peak to the 676 low, then a +62.3% rip to the October 2009 high, no one is really too sure what kind of cash they are looking for. Maybe the answer is the Johnny or Rosanne kind!
By virtue of the 48% position I have in US Cash in our Asset Allocation Model, I could pretend that I felt fine about yesterday. I didn’t. Yesterday we saw the US Dollar walk what we call the TRADE line.
The lines that matter from an immediate term TRADE perspective in the US Dollar versus SP500 inverse correlation are:
1.      SP

2.      US Dollar Index $76.20

If you don’t think those lines matter, look at the data again. Look at the expediency of the breakdown you saw in the US stock market the minute that the US Dollar Walked over that Line.
Yesterday, the Bombed Out Buck closed up another +0.5% on the day at $76.51. As a result, the SP500 waited for no one and chased the bulls right out of the building for the 4th straight down day, closing down a full -2% at 1042. The cumulative correction in the SP500 from the YTD high is now -5%. The key to this change in market momentum is not to fear it, but to understand it.
We are Walking the only line that really matters. Can the US Dollar hold these gains? Will Bernanke fade like a fall flower on signaling a rate hike next week? Are we brave enough to slap handcuffs on more insider traders? Can we re-build the credibility side of America’s currency and hold the longer term lines of support for the SP500? For now, I think we can – provided that the US Dollar doesn’t breakout above its TREND line.
The intermediate term TREND line for the SP500 and US Dollar, respectively are 1017 (-2.5% lower) and $77.89 (+2% higher). Understanding the difference between a TRADE and a TREND here is critical.
Best of luck out there today,

EWZ – iShares Brazil President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

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.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

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.

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.

UUP – PowerShares US Dollar
We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

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.


The Macau Metro Monitor. October 29th, 2009.





The State Council in Beijing has approved a feasibility report on the construction of a bridge linking Hong Kong, Macau and Zhuhai, Guangdong Province.  An official statement released after an executive meeting of the State Council, chaired by Premier Wen Jiabao, said that the construction of the bridge will forge stronger economic and social ties in the Pearl River Delta.


The bridge is expected to cost 72.6 billion yuan (US$10.63 billion).

McCullough Sees Pressure on Hedge Funds to Seek `Edge'

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