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On Friday the UUP, which is the etf for the U.S. dollar index, was up 0.6%, putting the dollar back above the TRADE line.  As a consequence the S&P 500 got smoked closing at 1,036, down 2.8% on the day.  The S&P 500 has closed down four out of the five trading days last week and closed down 4% on the week. 


On a thematic basis last week’s decline was due to a move out of riskier assets and those sectors levered to an economic recovery and the U.S. Dollar underperformed the most; Financials, Energy and Materials were the worst performers last week. 


The return of the risk trade was more obvious, as the VIX rose 23.9% on Friday and 37.8% last week. Given the strength in the economy it’s rational to expect a slightly more hawkish tone out of this Wednesday's FOMC meeting. On the MACRO front, the Chicago PMI improved to 54.2 in October from 46.1 in September, ahead of consensus expectations of 49 and the highest level since September of 2008.


On Friday, the Financials were the worst performing sector, after posting their biggest one-day rally since July 13th the day before.  Life insurance companies and rumors about CIT and other riskier names were the big pressure points.  This morning CIT officially opted to seek court protection via bankruptcy.  Common stock holders will be mostly wiped out and the U.S. Treasury Department has indicated they won’t recoup much, if any, of their $2.3BN investment.   The lender funds roughly 1 million businesses (including some professional hockey teams!), so arguably this resolution may lead to loosening of credit, on the margin.


Capital markets activities softened last week as IPOs performed both poorly and, in the case of AEI, were postponed.  Both RailAmerica and Select Medical, which are private equity portfolio companies, reduced their offerings.  While AEI, which is a former unit of Enron, pulled it’s offering entirely.  With $4.2BN of private equity sales in the pipeline, there looks to be a future overhang of stock on the market and on private equity portfolios alike.


On Friday, Material (XLB) and commodity equities also underperformed with the dampened momentum surrounding the economic recovery theme and the accompanying strength in the dollar.  In the energy sector, E&Ps suffered their biggest one-day loss since June 22nd.


The three best performing sectors were Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU); all three sectors were the relative outperformers today with the defensive rotation in the market.  Although, it should be noted that all of sectors were down on the day. 


Today, the set up for the S&P 500 is: TRADE (1,031) and TREND is positive (1,021).   The Research Edge quantitative models have 6 of 9 sectors in the S&P 500 positive on TREND and 0 of 9 sectors are positive from the TRADE duration.  Materials, Financials and Utilities are all broken on both durations.  This is the first time since March 2009 that any sector was broken on both durations. 


The Research Edge Quant models have 2.5% upside and 0.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up small to the upside. 


The Research Edge MACRO Team.






Retail First Look: CIT??? Focus on Banker Bonanza

Retail First Look: CIT??? Focus on Banker Bonanza

November 2, 2009





I’ve had three emails thus far today asking for insight on CIT bankruptcy. Please excuse what may come across as a flippant comment, but any retailer that gets caught up in CIT going under is just flat-out irresponsible.


The filing noted $71 billion in assets and $64.9 billion in debts, with Bank of America as the largest of 100,000 unsecured creditors (BAC alone is owed $7.5bn). Bank of New York, the second largest unsecured creditor, is owed $3.2 billion. The next 75 unsecured creditors total about $35bn. Bank exposure is off the chart, while Retail exposure is minimal – which is a meaningful change from when these concerns first crept up in July.   Here’s an excerpt from our July 17th report on the topic that is important to revisit…


People are asking all the wrong questions about CIT - it's not about direct exposure to CIT - but rather derivative exposure to a) the small, non-public companies that will be hurt, and 2) the private equity portfolios that will be pushed to brink.

With CIT on the ropes, we're getting barraged with speculation related to which companies have exposure to CIT financed receivables.  In addition to the work we're recently published, there are a couple of facts to consider before making broad generalizations...

  1. According to the American Apparel and Footwear Association, 60% of the factoring volume in apparel/footwear is exposed to CIT. Yes, this is a scary number at face value.
  2. But it's smaller than one might think when put into context. CIT disclosed that in 2007 its factor exposure to the footwear industry was $2bn. We also know that this is a $60bn industry at retail, or which about $35-$40bn is wholesale (here the exposure lies).
  3. Stronger companies with exposure to CIT have been shifting away from CIT over the past 3 months as they played offense given what was coming down the pike.
  4. These 'exposure' numbers thrown around are annual. Yet we should be thinking of them as a snapshot in time - and a snapshot in time taken at the beginning of summer, when working capital needs in this area of the supply chain are low.

One of the most important points we can't forget is that CIT operates BOTH a factoring business and a commercial lending business.  Some larger companies, including GIII, have revolving credit agreements that include CIT as part of their lending consortium.  However, this is quite different than having CIT as a "factor".  Factoring is a transactional based process which is conducted on an invoice by invoice basis.  In general, it is not cost effective for a larger company to use CIT for this service.  With that in mind, CIT has 300,000 small and medium sized customers of which the majority are producing annual revenues of $10m or less.

What does all this add up to? There's no company-specific call as it relates to individual exposure to CIT. But where the juice lies is related to 1) the rate of bankruptcies of small, non-public companies, and 2) the private equity hangover.  The first point is pretty simple. The second is more complex.

What do I mean by pe hangover? Take a look back over 4 years at all the LBO transactions in retail. These were done when cost of capital was falling, and halfway decent ideas made millions for Average Joe Private Equity Guy. Now private equity firms are saddled with many weak businesses that are barely profitable - and that's before paying interest expense in a rising cost of capital environment.  So what does this all add up to? We need to drill down on the portfolio of each major private equity player to assess the domino effect.  For example, Leonard Greene owns Sports Authority, PetCo and part of Whole Foods. If PetCo goes punk, then there's less of an appetite to invest in TSA, which ultimately raises the prospect of filing for protection. The derivative play would be a positive one for Dick's in the case of TSA, and PetSmart in the case of PetCo.  These are just illustrative examples, but I think you get the point.


This also plays into our ‘Banker Bonanza’ theme, which we outlined on our 4Q Themes and Outlook call on Friday. Please let us know if you did not get a chance to participate and would like to.




Some Notable Call Outs


  • There are two new players entering the hot growth category of online only, limited time sales.  Saks Fifth Avenue is now offering limited time offers on its website while popular newsletter, Daily Candy is launching SWIRL.  Both sites aim to mimic the success of Gilt and Rue La La. 


  • Zeta interactive is a research firm which monitors the mention or “buzz” of retailers across a wide range of social media sites and blogs.  According to the firms latest study, Amazon.com was the most positively mentioned e-commerce site, with a whopping 96% of all references polled coming in positive for the month of September.  Target and Wal-Mart rounded out the top 3 on the list.


  • Aside from using Twitter as a way to broadcast marketing messages to customers, Best Buy is using it to enable its workforce to answer customer questions and concerns.  Since July, Best Buy’s “Twelpforce”  has added 2,100 employees to its network that responds to customer Tweets (over 12,000 so far).  A quick check of Twelpforce website shows that consumers are extremely active in looking for product advice as well as technical tips (and impressively all requests are confined to 140 characters or less!).





-Sanofi-Aventis to Acquire Oenobiol - Sanofi-Aventis said it would acquire Laboratoire Oenobiol, the French maker of nutritional, health and beauty supplements. Terms were not disclosed. Founded in 1985, Oenobiol has annual revenues of 57.2 million euros, or $84.8 million at current exchange. Eighty-five percent of its business is generated in France, with the rest stemming from countries such as Italy, Spain, Belgium, Poland and Portugal. The deal is expected to close in the fourth quarter of this year. <wwd.com>


-China’s Exceed in Talks to Buy, Partner With Overseas Brands - Exceed Company Ltd., a Chinese sportswear company that began trading in the U.S. this year, is in talks about acquiring or partnering with brands to sell in the world’s most populous country. The company makes mid-priced sportswear, shoes and accessories under its Xidelong label in China and will use the proceeds from its U.S. listing to expand in the world’s most populous country, Lin said. It plans to add about 2,200 company owned and franchised Xidelong-brand stores through 2011 to the 3,400 now operating. New brands would be sold through their own single-label stores. <bloomberg.com>


-EU: Anti-dumping shoe tariffs engender disharmony among Member States - The EU Member States are gearing up for a tough round of discussions in upcoming Anti-Dumping Committee meetings, especially the one planned for 19 November 2009, with the proposal of extending a 15-month anti-dumping duties on Asia footwear ranking high on the agenda. The  existing rates anti-dumping duties on footwear with leather upppers from China and Vietnam are 16.5% and 10% respectively. Despite that fact that global footwear retailers such as Adidas, Puma, Sebago and Timberland all said to oppose the extension of duties, the Member States are likewise fiercely divided, with the usual leading protectionist Member State, namely Italy, pushing for the measures. <fashionnetasia.com>


-Walmart.com leads in e-commerce traffic growth - Walmart.com saw a 10% jump in traffic last month compared to a year earlier, Nielsen reports. Verizon Wireless, however, saw the biggest traffic growth increase for the month. Its traffic rose 14%. Once again, eBay and Amazon battled for the No. 1 slot in terms of traffic to retail sites for the month. In September, Amazon beat eBay with 51.51 million visitors. EBay posted 50.61 million unique visitors. <internetretailer.com>


-Estée Lauder Posts Profits of $140.7M - The Estée Lauder Cos. Inc.’s fiscal year got off to a strong start, leading the company to raise its guidance for the rest of the year. Cost cuts helped push Lauder’s first-quarter profits up more than 175 percent, beating the beauty firm’s expectations. Lauder registered profits of $140.7 million, or 71 cents a diluted share, on a 3.7 percent decline in net sales to $1.83 billion, helped by the sell-in of new products and gains in travel retail. Selling, general and administrative expenses for the quarter ended Sept. 30 fell more than $161 million, or 12.3 percent, from a year earlier. <wwd.com>


-In Brief: Jenna Lyons Awarded $1M Cash Bonus - Jenna Lyons, creative director of J. Crew Group Inc., has been awarded a one-time cash bonus of $1 million in recognition of her service to the company. She would be required to return the full bonus if her employment with the firm ends before Oct. 27, 2011, and half of it if she were to leave between that date and Oct. 27, 2013, unless the separation were a result of termination without cause or departure for good reason, as defined by her employment contract. J. Crew has weathered the recession better than many of its specialty store competitors and this month raised its third-quarter guidance by about 50 percent, to a range of between 54 cents and 59 cents a diluted share. <wwd.com>


-Kidswear most resilient sector in recession - Kidswear has been the most resilient clothing sector during the recession, according to a report from market analyst Verdict. The report also said that the closure of Woolworths late last year released £250m of market share for competitors. The largest growth in market share has been seen by the supermarkets and value retailers such as Asda, Tesco and Primark. 

Verdict estimated that the kidswear market will be worth £4.63bn in 2009, down 0.1% on 2008, whereas the clothing market as a whole is estimated to drop 0.6% in 2009. <drapersonline.com>


-Louis Vuitton, Gucci Tap New Japan Chiefs - Both Louis Vuitton and Gucci have made some management changes at the helm of their Japanese businesses. Frederic Morelle, the former head of Vuitton's business in Latin America and South Africa, became president and chief executive of Louis Vuitton Japan as of Oct. 13. <wwd.com>


-Vuitton Opens Dallas Flagship at NorthPark Centre - Louis Vuitton is making a grand statement with its new flagship in NorthPark Center here, and not just because it’s the brand’s biggest store in the city and the first to carry watches. The airy space features a two-story glass wall that faces the serene formal garden in the middle of the mall. It’s the first store to make the most of its proximity to the 1.4-acre park, which transformed a former parking lot when the mall expanded three years ago. It’s also one of only three U.S. stores to feature a significant work of art, a sinewy bronze sculpture called “Suitcase in Exile” commissioned from French artist Vincent Dubourg. <wwd.com>




RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): XLY, ROST


10/30/2009 10:18 AM


Re-shorting Howard Penney's view on the US Consumer Discretionary stocks. The sector is finally broken, from an immediate term TRADE perspective. KM


10/30/2009 10:28 AM


McGough and Levine are going to discuss this short thesis on their Retail Strategy call at 11AM. Shorting green here today. KM




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…


  • Friday's losses were felt across all retail sectors on positive volume for most, leaving every sector negative across all three durations with the exception of internet/catalogue and family footwear retailers who are the only positive sector on the 3-week.  Apparel, accessories and luxury goods and food and staples performed better than the market while family footwear and sporting goods underperformed.  Food and Staples stands out on the negative side with losses accelerating on each duration supported by strong volume. 
  • HAR, APP, and DFZ are the only stocks that have positive gains across all three durations, each is supported by volume.
  • After spending three weeks on the list of worst performing retailers, APP has been making gains on positive volume across all sectors to be one of three stocks to be positive on all durations with volume confirmation.   
  • TBL stands out as the best 1 week performer after beating earnings expectations. 
  • The worst looking stocks from Friday are ZLC, DDRX, FLWS, CHRS.  The top 9 worst performing stocks of Friday all had strong volume.   
  • CONN and CWTR are significant underperformers on all three durations with positive volume.  These two stocks have been at the bottom of retail for at least two weeks. 
  • Keep an eye on CROX heading into earnings on Thursday.  CROX flashed negative on all 3 durations with volume support. 

Retail First Look: CIT??? Focus on Banker Bonanza - 1


Retail First Look: CIT??? Focus on Banker Bonanza - 2


The Macau Metro Monitor. November 2, 2009



UNEMPLOYMENT DOWN 0.1% macaudailytimes.com.mo

For the July-September period, the unemployment rate decreased by 0.1% to 3.7%.  Information released by the Statistics and Census Service also stated that Total labor force was 328,000 during the same period, with the employed population decreasing by 3,000 from the previous 316,000.   The real estate and business, hotel, and restaurant industries all registered increases in employment.  Gaming registered a decrease.





China plans to convert a sparsely populated island next to Macau into an international tourist and technology hub.  Officials have revealed that they want the population of Hengqin to go to 200,000 by 2020 from 4,000 today.   Commentators have welcomed the move to attract a different type of tourist to the region.  Business development manager if architectural firm Arquitectonica, Courtney Davis, was stated as saying, “Unlike Las Vegas, Macau is not a family place. Hengqin could offer other forms of tourism, like theme parks and hiking.” 




An update on LVS’ IPO has cited documents and emails sent to investors as sources for details on the upcoming listing.  Sands’ share sale may be 25% bigger than what president Michael Leven had indicated in July.  Pricing of the shares will be fixed on November 19 and trading may start November 30. Documents sent to investors also stated that the company is selling an unspecified number of shares equivalent to a 15% stake in its business in Macau and that the funds will be used to repay loans.





Las Vegas Sands Corp said its Four Seasons apartments in Macau had drawn interest from Japanese and South Korean buyers.  In May, Sheldon Adelson stated that the company was pursuing “public or private” options to boost liquidity and included the sale of the Four Seasons apartment hotel as a possibility.  During a conference call last week, Adelson and president Michael Leven indicated that contact has been made with a “number of people in Japan and Korea” regarding a possible deal.





Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Pascal's Extremes

“Two extremes: to exclude reason, to admit reason only.”
Blaise Pascal was one of the most influential mathematicians of the 17th century. He is most commonly known for his contributions to mechanical calculators, but his work on the arithmetic of triangles still finds its way into our investment meetings here in New Haven.
Pascal’s Triangle is of interest to risk managers because it really provides a basis for measuring probabilities. Our Gaming guru, Todd Jordan, doesn’t come down to my office to play online poker, but Pascal’s conclusions were actually born out of his friend’s interests in gambling problems.
Pascal died at the age of 39, but left this world “in search of the truth.” This, unfortunately, had him go off the deep end of religion from time to time, but at the end of the day, I do respect his quest for making people accountable using Geometry. I can’t imagine today’s Washington/Wall Street listening to him any more than they do Paul Volcker. Stick the math guys in the corner and let the storytelling politicians suck the oxygen out of the room.
The science of mathematics isn’t trivial. Whether it’s a Pascal binomial coefficient or today’s dominating global macro inverse correlation embedded in the price action of the US Dollar, it’s all one and the same. Impossible to refute, after the fact.
Friday’s smack down close of the SP500 (down -2.8% on the day) came on another breakout to the upside of the US Dollar above my immediate term TRADE line of $76.20. Call it alchemy. We math guys just call it the math. REFLATION trades led the market lower (Financials -4.7%, Basic Materials -3.6%).
On the week, the Bombed Out Buck closed UP for the first week in the last four. For the week, the US Dollar was up +1.1%, and virtually everything priced in Dollars was down. On a week-over-week basis, here was the math associated with giving the Buck a Bid:

1.      SP500 -4%, Nasdaq -5.1%, Russell 2000 -6.3%

2.      CRB Commodities Index -3.6% (Oil -4.3%, Copper -2.6%, Gold -1.5%)

3.      Volatility (VIX) +38%!

Again, we know what happens when the US Dollar goes up. There is no need to be extreme about this in any way. Being too bullish when the Dollar is down can hurt you as much as being too bearish when the Dollar is up. We want to avoid being extreme Macro strategists right now. People who missed both the crash and the recovery are being plenty extreme enough. We simply want to watch the US Dollar and make risk management moves accordingly.
Some would argue that last week’s down move in the US stock market was extreme. The math supports that claim. It was the worst week for US equities since May. Others, who either “exclude reason” or “admit reason only”, will have you believe they timed this perfectly and have had this right all along.
Alan Abelson at Barron’s is  a fantastic writer, but his extreme bearishness is as predictable as the sun rising in the east. Right on time, he titled his weekend missive “Going to Extremes”, and went on to quote one of the Depressionistas, David Rosenberg, saying things like “if companies, both financial and non-financial are big believers in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists so excited… why are they still cutting back…”
These guys are funny. They think that they are the only analysts of this American Gong Show to “admit reason.” Sorry guys, Howard Penney and I haven’t been extreme about anything other than not shorting the lows and getting suspiciously quiet at the YTD highs. Reasonable analysts understand that these GDP prints are not going to be sustainable. Your opinions are much further from unique as your missing a +62% stock market move was.
Another extreme view was issued this past week by Bill Gross at PIMCO. I have learned a great deal from this great investing mind over the course of my career, not the least of which is that great players can be wrong. Gross wrote, “my sense is that nominal GDP must show realistic signs of stabilizing near 4% before the Fed would be willing to raise rates.” How convenient for Gross – he runs some of the world’s largest bond funds!
Extreme and self perpetuating views fuel the art of writing about and managing money. After all, the art of managing money Mr. Gross, is having money to manage, right? Since Rosie, Abelson, and I will all agree with your view on the un-sustainability this US economic recovery, should we keep rates for our citizenry at ZERO and create the last mother-load of a bubble in US Treasuries? I’m sure your asset management fees will perform well in that scenario.
I don’t want to be on the sell side or the buy side of extremes unless extreme circumstances call for it (September 2008). Those extremes are usually revealed by the math. It doesn’t have to be Pascal’s, but I’ll surely ask for his model’s mathematical outputs before I start asking for those of perceived Wall Street sages.
In terms of US equities, I have maintained my low exposure. US Equities has the lowest invested exposure in our Asset Allocation Model at 6%. I am long US Healthcare (XLV) and Utilities (XLV), and short the higher beta Consumer Discretionary etf (XLY). I have immediate term TRADE levels for the SP500 of 1031 and 1065, respectively.
Best of luck out there this week,



 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. TRADE and TREND bearish.

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.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is finally broken, from an immediate term TRADE perspective.

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.

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.

Research Renegades (Bloomberg Cover Story)

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