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US STRATEGY – Burn Buck Burn

US STRATEGY – Burn Buck Burn


The S&P 500 has been up for five days in a row, rising 0.3% on Friday.  While a weaker-than-expected October employment report pressured the market early on, although the S&P 500 spent most of the day around the unchanged level.  


Friday’s nonfarm payrolls fell 190,000 in October vs. consensus expectations for a 175,000 decline; there was a net upward revision of 91,000 for the prior two months. In addition, the average work week held at a record-low 33 hours. The unemployment rate rose 40 bps to a 26-year high of 10.2%, fueled by a 589,000 drop in the household survey following declines of 785,000 in September and 392,000 in August.  The positive news came in the form of a better-than-expected 0.3% increase in average hourly earnings and a 34,000 gain in temporary employment.


At this stage of the current cycle the labor market is widely expected to be a longer-term recovery overhang, which will be the economic factor allowing the Fed to keep interest rates at all time lows and money free.  This Burning of the Buck has the perverse implication of strengthening U.S. equity markets, to a point.


Last Friday the VIX fell 4.9%, now falling for the fifth straight session.  In the past week the VIX fell 21.2% after spiking nearly 38% two weeks ago.


The three best performing sectors were the Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB).  The XLI outperformed, with the bulk of the strength coming from GE, which benefited from the sell-side getting more bullish.  The Transports also seemed to benefit from the recent decline in oil prices. 


The Consumer Discretionary sector was up due to stronger retail names.  Bank America upgraded the home-improvement retailers LOW and HD, while JPMorgan upgraded Macy’s.  AMZN also benefited from an upgrade at Bernstein. The second best performing name was SBUX on the back of better-than-expected 09Q4 earnings and 2010 guidance. The housing stocks were higher after Credit Suisse jumped on the bandwagon.


The worst performing sectors were Utilities (XLU), Energy (XLE) and Financials, all three sectors were down on the day.  The Financials were the worst performing sectors although it was up big on Thursday.  Consumer credit trends and the worse-than-expected October employment data seemed to be the biggest concerns, especially as it relates to the timing of a peak in the write-down cycle.


Today, the set up for the S&P 500 is: TRADE (1,065) and TREND is positive (1,030).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 6 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 


The Research Edge Quant models have 1% upside and 3.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up, with the U.S. Dollar down versus most major currencies.  We will be selling the strength domestically.  The Buck Burning is good, to a point.


The Research Edge MACRO Team.


US STRATEGY – Burn Buck Burn - S P500

US STRATEGY – Burn Buck Burn - s pperf



November, 9 2009






Risk/reward is looking ugly for the market. There is a bifurcation in retail. Food/Staples, Multi-line Retail, and Apparel looking particularly bad. Sporting Goods, Home Improvement, and to a lesser extent Auto Retail is looking safer.


Earnings season for the market in aggregate, is over, and ‘Macro Time’ begins.  This is when it gets fun. Unfortunately, the near-term setup does not look good. Check out Keith’s Early Look this morning – 3.5% near-term downside and only 1% upside – not a good risk reward. One of the key call outs is recent strength in the market on eroding volume statistics. Since volume = conviction, this too, is not good. Let’s translate this to retail, as there are clearly massive overlays.

We break out every publicly-traded retail stock into separate sub-industries – think of it like a broader view of the MVRX.  What we see is that the weighted price change for retail is strengthening while volume is rolling over.  A couple notables by sub-industry…


1. Negative Call Outs

    • Food and Staples Retailing: Volume eroding on relative strength.
    • Multi-line Retail (incl Dept Stores): Sequentially eroding volume over 1-day, 1-week and 3-week with strengthening price.
    • Apparel/Accessories and Lux: Similar to Multi-line, though not quite as severe.

2. Positive Call Outs

    • Sporting Goods/Athletic Specialty: Sequentially improving volume across durations on price strength.
    • Home Improvement: Same.


Pick your spots wisely as the year draws to an end.




Some Notable Call Outs


  • Late Friday it was announced that RadioShack/The Shack will begin selling the IPhone in select locations in the Dallas and new York City regions beginning later this month. In 2010, it is expected that the IPhone will be sold chainwide. While this has long been rumored, it is somewhat curious that the news was relayed late on a Friday with little fanfare. Ultimately this is likely to be a positive for The Shack, but it probably does mean market share losses for others already peddling the coveted device. With 4,470 stores, there likely few if any markets that don’t already have access to the IPhone.


  • In the most expensive retail real estate transaction in New York City since November 2008, an investment group purchased the retail square footage of the St. Regis hotel on 5th Avenue for $117 million. The purchase price equates to $4,737/square foot for the 25,000 square foot space. Whether the overall commercial real estate market remains to be seen, but the mid-town location is said be amongst the highest cost per foot retail spaces in the country and perhaps across the entire globe.


  • Just hours after Adidas dropped its sponsorship of UCF because Michael Jordan’s son wore Air Jordans in a game, a Facebook boycott has emerged. The Facebook Group, “Boycott of Adidas after they dump UCF over ONE pair of Nikes”, now has 386 members. It seems like this negative publicity is on track to cause Adidas far more damage than the $3 million the company is saving by cancelling its UCF partnership. Yet another reason why companies and brands must stay on top of the latest social networking trends.





2 IPOs planned for the week of Nov 9 - Dollar General, a KKR-backed small-box discount retailer with 8,700 stores in 35 states, plans to raise $750 million by offering 34,100,000 at a price range of $21.00 to $23.00. At the mid-point of the proposed range, Dollar General will command a market value of $7,672.40 million. Dollar General, which was founded in 1939, booked $11,127 million in sales over the last 12 months. The Goodlettsville, TN-based company plans to list on the NYSE under the symbol DG. Citi, Goldman Sachs, and KKR are the lead underwriters on the deal. Rue21, a value-focused teen fashion retailer with over 500 stores in 43 states, plans to raise $115 million by offering 6,765,437 at a price range of $16.00 to $18.00. The Warrendale, PA-based company plans to list on the NYSE under the symbol RUE. BofA Merrill Lynch , Goldman Sachs, and J.P. Morgan are the lead underwriters on the deal. <renaissancecapital.com>


Global Cotton Subsidies Grow in Year - Global support to the cotton industry, including direct subsidies, border measures, crop insurance subsidies and minimum support price regimes, more than doubled in 2008-’09 to $5.9 billion compared with $2.7 billion in 2007-’08, with more than 50 percent provided by the U.S. Bernard Hoekman, World Bank director of international trade, told a forum of World Trade Organization diplomats and experts last week that total U.S. support to cotton production increased to $3.1 billion in 2008-09, up from $888 million in 2007-08, or an equivalent of 50 cents per pound of production. <wwd.com>


Wal-Mart kicks off DVD price war; looks to open 40 new stores in India - Just as shoppers are getting closer to their peak holiday shopping days, Wal-Mart Stores Inc. this week escalated the online price war it set off last month with books, offering pre-ordered DVDs priced at $9.98—down from list prices close to $30—and free shipping at Walmart.com. Amazon.com Inc. and Target Corp. countered with their own, slightly less generous, offers on their e-commerce sites. Wal-Mart Stores Inc, the world’s largest retailer, plans to open 40 more cash and carry stores in the country, the Commerce and Industry Minister, Mr Anand Sharma, said here today. In India, Wal-Mart has a wholesale joint venture with the Bharti Group. The first wholesale store was opened in Amritsar on May 30 this year. <internetretailer.com> <indiaretailing.com>


Designer Dresses Available Through Netflix Model - For many women, a $1,000 dress is something they admire in the pages of a glossy magazine or see draped on the frame of a celebrity — not an item hanging in their closet. But a nascent Web site called Rent the Runway is hoping to make high-end fashions much more accessible and almost as easy as renting a movie from Netflix. The mail-order service, which finishes the testing phase on Monday, allows women to rent dresses from notable fashion designers like Diane Von Furstenberg, Hervé Léger and Proenza Schouler for roughly one-tenth of what they would cost to buy in a retail store. The rentals run $50 to $200 for a four-night loan and are shipped directly to the customer’s doorstep. <nytimes.com>


Judge Approves Fred Leighton Purchase - A bankruptcy judge has signed off on the sale of Fred Leighton to a group of investors that includes former Barneys New York principal Bob Pressman and jewelry firm Kwiat Enterprises. The approval paves the way for the $25.8 million deal to close this week. Kwiat, Och-Ziff Capital Management Group and Pressman’s Triton Equity Partners submitted their bid for the jeweler last month with the backing of Merrill Lynch, Leighton’s largest creditor. Fred Leighton Holding has been in Chapter 11 proceedings since April 2008, when then-owner Ralph Esmerian filed for protection to halt an inventory auction sought by Merrill Lynch. <wwd.com>


China's Non-wovens and technical textile industry bounces back - Despite a decline in exports due to the financial crisis, industry adjustments, government action and product innovation has kept China's textile industry solvent in the first half of 2009. Entering 2009, China's macroeconomy showed some improvement, including an expansion in the scale of loans and an increase in the purchasing managers index (PMI). The Chinese government increased the ratio of tax refunds on exported textiles and apparel by three times and introduced a series of structural adjustments and revitalization plans for textile industries. These policies have stimulated China's textile economy, which at midyear appeared to be bouncing back. Compared with other parts of the textile industry, nonwovens and technical textiles are recovering more quickly. <fashionnetasia.com>


Luxury products no longer being manufactured in Europe - Just as the US leather goods manufacturer Coach manufactures in China and India, Calvin Klein subcontracts in Asia: Tommy Hilfiger and Ralph Lauren polo shirts are sewn in Indonesia. Amongst the Italians, Prada has some of its leather goods made in Turkey and Armani outsources in Eastern Europe and China. The British Burberry company makes its raincoats in the UK but its T-shirts in China. Businesses in the US and the Italians do not have any problems recognizing that they manufacture in other countries. Foreign manufacturing is tending to accelerate especially in prêt-a-porter and accessories. However, for the French this topic is very taboo. <fashionnetasia.com>


U.S. Opportunity for Foreign Luxe Firms - The U.S. market still has untapped potential that European luxury goods companies could unlock in their quest for growth markets. So says a research report published Thursday by investment house Bernstein, arguing the U.S., thanks to its sheer size and favorable demographics, provides an “attractive, if not straightforward” opportunity for European luxury companies in the short and medium term. The U.S. luxury market is worth around 44 billion euros, or $65 billion at current exchange, and remains a large fixture on the global luxury landscape, although it presents challenges such as a dispersed resident population, reliance on wholesale distribution and consumers’ appetite for discounts. <wwd.com>


Global Retail Rollout for Justin Timberlake’s William Rast Label The brand has launched an aggressive global retail expansion. The premium denim and contemporary sportswear brand, cofounded by Timberlake and his friend Trace Ayala, unveiled its fusion of a Hollywood lifestyle with Tennessee roots in three California stores that opened Nov. 1, heralding the launch of 40 to 50 units by 2012. <wwd.com>


La Perla to close nine brands - Italian lingerie firm La Perla is to rationalise its brand portfolio and lower prices in a move it claims will boost its market share. La Perla is to close lingerie and swimwear brands Malizia, Glamour, Anna Club, Aquasuit, Joelle, The Black Label, Limited Edition and Bridal from autumn 10. The La Perla brand portfolio will comprise three brands; La Perla, La Perla Studio and the newly launched Villa Toscana. Villa Toscana forms part of La Perla’s strategy to focus on cosetry with modern twists including laser-cut lace. The Villa Toscana range draws its inspiration from La Perla’s archives and includes pastel colour palettes and flower patterns on innerwear, beachwear and loungewear. <drapersonline.com>


Victoria's Secret Opens Sprawling Flagship on Broadway - Victoria’s Secret has amplified its presence on Broadway in SoHo with a new 24,000-square-foot flagship, nearly five times the size of the store it’s replacing one block south. That space will be entirely devoted to Pink. The flagship had a soft opening on Friday. The space for the VS flagship at 591-593 Broadway was assembled by putting two retail properties together: 593 Broadway, formerly a 16,000-square-foot Lounge boutique, and an 8,000-square-foot Eastern Mountain Sports unit at 591 Broadway, in a deal said to be worth more than $100 million. <wwd.com>


Burberry Launches Social Networking Site - Burberry will today unveil its own social networking Web site, Artofthetrench.com, an homage to the brand’s trenchcoat. According to creative director Christopher Bailey, the Burberry site is not commercial, but is aimed at engaging the brand’s fans and tapping into their passion for trenchcoats, old and new. <wwd.com>





VLCM: Rene Woolcott, Director, sold 20,000 shares for a gain of $332k.


NFLX: Michael Schuh, Director, sold 600 shares after exercising options to buy 600 shares for a net gain of $33k.


GPS: Marka Hansen, President-Gap Brand, sold 18,800 shares after exercising options to buy 18,800 shares for a net gain of $164k.

Smell Those Burning Bucks

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
-John Maynard Keynes
The inspiration that the world’s economic leaders derived from Timmy Geithner at this weekend’s G-20 meetings in Scotland must have been profound. The US Dollar continues to crash this morning.

Trading down a full percent in a day, for any currency (never mind the world’s said reserve currency), is a really bad day. This morning marks the largest one-day drop in the US Dollar since July 31st. The Buck is Burning

Why? Take your pick:

1.      Bernanke - pandering to the political wind last week, keeping rates at an “emergency rate” of ZERO percent

2.      G20 – no one trusts Geithner or his suggestion that countries “take a chance again on the American economy”

3.      US Employment – that was a nasty report on Friday

I’ve belabored the Credibility Crisis that our perceived economic savants are suffering from, both domestically and internationally, for the better part of 2009. I wake-up trying my best to not go off on this, but the severity of the US government’s negligence just keeps heightening.

I re-shorted the US Dollar a few weeks back because I didn’t think consensus was Bearish Enough. Let’s go through that and focus on the aforementioned point #3 - US Employment. Suffice to say, Friday’s report of 10.2% unemployment for the month of October was awful.

So is the US stock market up (the SP500 is up for 5 days in a row, and futures are indicated up again this morning)? That’s easy an easy answer: The US Dollar. The US Dollar was down for the fourth week out of the last five. It has lost -16% of its value since March.

What’s negative for the US economy is negative for the US Dollar. What’s negative for the US Dollar is positive for most things priced in dollars. If you didn’t know about this perverse relationship between the price of the US Dollars and everything else, now you know.

Put another way, since the US Federal Reserve’s Pander Program hinges on lagging “data”:

  1. Bad economic data = Fed stays at ZERO
  2. Good economic data = Fed signals their 1st hike

That’s why I am so focused on this dynamic relationship between the Fed, the Dollar, and the US Financial System’s Credibility. The politicization  of the Fed perpetuates US Dollar weakness. So does the mother of all Global Diversification trades away from Burning Bucks into everything else (Gold, Euros, etc…). This is not new, but it has yet to be faced by the willfully blind in Washington.

I think your average American with common sense understands that Geithner’s smug approach is not to be trusted. Now, if we pile on some massive payouts to Wall Street, this could actually get quite ugly. The citizenry against the bankers? Not good President Obama, not good…

This morning Michael Moore (the Bloomberg reporter) walks through the scheduled bonus payouts for the top 3 government sponsored US investment banks: Goldman Sachs, JP Morgan, and Morgan Stanley. His math has those 3 banks (comprising of 119,000 Americans) paying out $29.7B in bonuses in 2009. Never mind that being up 60% year-over-year, according to Moore that’s UP versus the prior peak (2007) of $26.8B!

Creating an “US vs. THEM” society in this country is not cool. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” China gets this. They have seen this movie all over the world before. Being Too Big Not To Pay isn’t going to end well for 99% of America.

With Bernanke and Geithner politicizing the short end of America’s yield curve last week, the Piggy Banker spread (or Yield Spread, which is 10-yr UST yields minus 2-yr UST yields) has shot up to +266 basis points wide this morning. That’s only 10 basis points shy of the widest spread EVER. Ah, if we commoners could only have a sip of that government sponsored elixir. Free moneys from the heavens, for a select few…

Whether it be via the Yield Spread, M&A, or the latest dog from the land of Private Equity coming to an IPO near you, this is what we have labeled as one of our top 3 Macro Themes here in Q4 – The Banker Bonanza. Americans get this, and they definitely don’t like the smell of it.

Never mind that smell of Burning Bucks. Don’t fight it, or get upset about it. “Take a chance” and take Timmy’s word for it.
The immediate term risk/reward scenario I see starting to build in the US equity market has turned decidedly negative in the last 2 days of this low volume rally. I see -3.5% downside in the SP500 to 1030, versus less than +1% upside to 1077. I’ll be selling strength again today.

Best of luck out there this week,



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 on 10/20. TRADE bearish and TREND 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.   


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.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery. TRADE bullish, TREND bullish.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.


XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

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. There continues to be 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.

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The Macau Metro Monitor. November 9th, 2009.



LVS seeks to raise up to US$3.4 billion through an initial public offering of shares in its Macau business, in what could be the world’s fourth largest offering of the year.  The top end of the range is higher than the roughly US$2.5 billion the market had been expecting.  The offering consists of 1.87 billion shares, a 23.4% stake in the company, priced between HK$10.38 and HK13.88 per share.  The sale values Sands China at as much as HK$111 billion, or 16.6x next year’s EBITDA.

Bill Critical for Ailing Retailers

The President signed a bill Friday that includes an important provision for struggling retailers that likely flew under the radar since it’s more broadly recognized for extending the home buyer tax credit. The primary difference for retailers compared to the original stimulus package in February is that 1) larger businesses (above $15mm in revenues) are eligible and 2) it extends the loss carryback from 2 to 5 years for losses suffered in either 2008 or 2009. A quick screen reveals nearly two-dozen retailers that could benefit from this legislation; however, the cash realized will be material only to a select few. Given the lack of clarity of the exact accounting of the bill, we are not attempting to quantify the exact cash infusion anticipated, but merely flag those who are likely to benefit the most.


The companies that have been lobbying Congress for the loss carryback provision since February such as Liz Claiborne, Pier 1 Imports, and Office Depot are some of the retailers poised to benefit. Based on our screen of companies with either substantial losses in 2008, or over the LTM, and substantial earnings and therefore tax expenses paid from 2003 to 2008 we have identified several others including DDS, CHRS, TLB, ZLC and CROX.


Again, these aren’t the only companies that will benefit from this new legislation, but given recent liquidity concerns are likely to benefit the most from this added stimulus.



Casey Flavin





Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%