In contrast to last week, the housing data points over the last two days suggest that the housing market is still improving on the margin!


The most recent Case-Shiller data for the month of September suggests that home prices in 20 U.S. cities rose for a fourth straight month.   The Case-Shiller home-price index increased 0.27% the prior month on a seasonally adjusted basis, after a 1.1% rise in August.  Year-over-year, the index fell 9.4% from last September 2008, which represents the smallest year-over-year decline since the end of 2007.


The strength in the existing home sales reported yesterday, aided by government stimulus programs and a decline in mortgage rates are helping to stem the decline in home prices.


So where do we go from here…?  I continue to believe that home buying and consumer spending in general will be hampered by higher unemployment, which is closely correlated to increased foreclosure activity.  This will limit the improvement in sales and thus pricing trends as we head into 1H10.


Other issues to consider when thinking about how far prices can improve from here are the current inventory overhang, the level of shadow inventory, continued foreclosures, and tighter credit standards which require more money down...


For the second day in a row, from an equity perspective, the MACRO housing data is not confirmed by the performance of the homebuilders.  The Homebuilders finished lower yesterday and the stocks are some of the worst performing stocks in the XLY today. 


Howard Penney

Managing Director





The Tradeoff: Healthcare versus Approval Rating

“In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.” –Jeffrey S. Flier, Dean of Harvard Medical School


In staking his approval rating and perhaps even his and his party’s intermediate term political future (think mid-terms and 2012) on the healthcare debate, President Obama has clearly rolled the dice. To Dean Flier’s point above, this debate has become more than a debate about healthcare, but a strongly partisan debate about the future of American society and the use of government funds.  As David Brooks wrote yesterday in the New York Times:


“The bottom line is that we face a brutal choice. Reform would make us a more decent society, but also a less vibrant one. It would ease the anxiety of millions at the cost of future growth. It would heal a wound in the social fabric while piling another expensive and untouchable promise on top of the many such promises we’ve already made. America would be a less youthful, ragged and unforgiving nation, and a more middle-aged, civilized and sedate one.”


Perhaps as a newspaper columnist Brooks is being a bit melodramatic, but this debate does center around the trade off of a massive expansion of government versus potentially raising the standard of living for some segments of society.  For Obama, this tradeoff is between popularity and getting this landmark legislation passed.  To date, his approval has suffered brutally in this battle.  This morning, the Rasmussen Presidential Approval Index clocked Obama in at -13, which is the difference between Strongly Approve at +28 and Strongly Disapprove at +41.  This rating is consistent with the last two weeks in which the President’s Approval Rating has been the lowest of his Presidency.  The Real Clear Politics poll average verifies this point as well, which has the President Obama’s average approval rating at 50.4.  This is the lowest approval rating of his Presidency on that index as well.


Given where the economy is based on unemployment, President Obama is actually faring quite well versus his predecessors.  Specifically, Ronald Reagan had an approval rating that was closer to +35 when unemployment was over 10%.  (We have outlined this in the chart below.) The implication is likely that Obama’s predecessor is still being blamed for the current weak economy in the U.S. The acceleration of the healthcare debate and the growing criticism of the new bill has brutalized Obama’s approval rating though.  According to a Rasmussen Poll that was taken on November 21st and 22nd, a mere 38% favor the bill and 56% oppose the bill.  This delta of 18 points between favor and oppose was the worst spread by 6 points and consistent with his decline in approval.


President Obama’s approval rating seems to have somewhat survived the weak economy, at least based on historical perspectives.  The question remains whether it can survive the highly partisan and emotional healthcare debate.  So far, President Obama looks willing to roll the bones on that one.  But, undoubtedly, a failure of healthcare and its likely long lasting impact on his approval rating will limit any willingness to take political risks on a go forward basis.


As an early leading indicator, President Obama’s Afghanistan policy appears to be one that is positioned to take little political risk.  According to reports out this morning:


“President Obama is expected to address the nation Tuesday evening, 1-Dec on his new Afghanistan policy. The news comes after the President met with his national security team last night to finalize a plan to dispatch ~34,000 additional U.S. troops to Afghanistan. Reports indicate that the plan will call for the deployment over a nine-month period beginning in March and will contain points starting next June at which Obama could decide to continue the flow of troops, halt the deployments and adopt a more limited strategy, or begin looking very quickly at exiting the country.”


The President is clearly intending to leave the door open on his Afghanistan policy.  Indecisiveness, as it relates to foreign policy, potentially also has approval related issues.



Daryl G. Jones
Managing Director


The Tradeoff: Healthcare versus Approval Rating - Obama


DLTR, FRED, & BKS: A Few Callouts from a Busy Morning

With several retailers reporting earnings this morning there are a few quick callouts that caught my eye.


DLTR:  EPS of $0.76 vs. the Street at $0.66, with upside driven by previously announced strength in same store sales (+6.5%) and better than expected operating margin expansion (almost equally split between gross margin expansion and sg&a leverage). Inventories appear to be well controlled, increasing 1% vs. a sales increase of 12.1%. EPS guidance is in-line with the Street while comp guidance of low to mid single digits does imply some deceleration from 3Q’s 6.5% increase.  Overall, with expectations still high for the deep-discount/dollar stores none of this should be terribly surprising. 


FRED:  Another disappointing result here, with 3Q EPS missing estimates by a penny.  Guidance for 4Q also below the Street at $0.17-$0.24 vs. $0.25.  Bottom line here is that the company continues to struggle with industry-wide deflation and its competitive positioning vis-a-vis Wal-Mart and other deep-value players.  Deflation and pricing pressure to some degree can be offset by economies of scale and/or a low cost structure.  Both of these key items are areas where FRED is disadvantaged.  As a result, FRED is being disproportionately hurt by pricing investments in an effort to drive traffic.


BKS:  While on the surface BKS’ 2Q EPS miss by $0.02 and its substantially lowered outlook is surprising, it’s not what caught my eye this morning.  It’s the reason behind the miss that is most interesting.  Management is citing the need to increase investment in production, people, and marketing to support the higher than expected demand for the company’s e-reader called the Nook.  This could be viewed as a longer-term net positive as it is certainly good to see the Nook being well received by consumers, even after Amazon’s Kindle has taken the early mover advantage.  However, I can’t help but remember all the capital BKS spent on after Amazon took the first mover advantage in online bookselling.  Now we’re in a similar situation and it’s abundantly clear that BKS is playing catch up already.  Yes the e-reader market is still in its infancy, but it’s still concerning to see BKS struggle with launch of the company’s first foray into the space.  History suggests that this won’t be the only quarter where the company struggles to get it right.  On the cusp of the most important quarter of the year, BKS is chopping its outlook in half before the Nook even ships one unit.  At the same time the company’s largest shareholder (Yucaipa) other than the founder, just doubled down its stake.


 - Eric Levine




DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - DLTR SIGMA 11 09




DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - FRED 11 09




DLTR, FRED, & BKS: A Few Callouts from a Busy Morning - BKS SIGMA 11 09



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 November 24, 2009





As the ‘lean inventories and higher gross margin’ trade is coming to an end in retail, CEOs can learn a thing or two from Bill Belichick and UC Berkeley’s David Romer. The bottom line is that winners take the shot – that is invest when others adopt a position of conservatism.



As a former defensive back, I questioned Patriot’s coach Bill Belichick’s call last week to go for it on a 4th and 2 on his own 28 yard-line with 2-minutes left.  Amongst other things, the call flew in the face of ‘conventional wisdom’ (unfortunately, the same can’t be said for Yale’s decision to go for it on 4th & 22 against Harvard last weekend). So, when I heard about a paper from a UC Berkeley Economists that provided empirical evidence to support Belichick’s call, I read it and was intrigued not only with its conclusion, but also with just how similar many of these same considerations apply to CEO’s in retail today.


The crux of the David Romer’s report is that coaches are more worried about job security than winning. If a coach takes the shot and fails, it’s his fault.  However, if he punts and losses, then he made the ‘right call’ according to conventional wisdom and the team takes the blame. This is akin to the economic concept of Prospect Theory whereby people tend to fear losses more than equivalent gains. As it relates to retail, companies are at the end of the ‘lean inventories and higher gross margin’ trade and are essentially faced with a 4th & short call of their own.


We’re now at the point where companies have to either 1) rely on a meaningful consumer rebound, or 2) take the shot. This could be either in the form of those companies that have been investing over the past 1-2 years in the best tools, processes, and brands to ensure that they have the clearest shot (UA, RL, PSS, DKS, KSWS and soon-to-be FL and NKE), or those that have a proactive plan to step up inventories and actually grow – profitably – while minimizing risk (KSS, BBBY, DECK). On the other hand, many CEO’s have followed ‘conventional wisdom’ electing to punt by cutting costs and adopting a wait-and-see approach before stepping up their spending (e.g. JCP, ANF, VFC, TRLG, CMRG).


Whether it be 4th & short, or investing at a time when ‘conventional wisdom’ dictates that conservatism should prevail, the bottom line is that winners take the shots. This will play out as the bifurcation between the winners and the ‘rest of the pack’ widens in 2010.



Here’s a link to Romer’s paper:




Casey Flavin





  • While most view Black Friday as the traditional kick off to the gift giving season, a recent survey suggests otherwise. According to the Consumer Reports Holiday Poll, 66% of shoppers who make it out to the stores on Black Friday will be purchasing something for themselves.
  • The deflation continues with this year’s annual Farm Bureau survey of the Thanksgiving Meal. This year’s survey indicates that a traditional holiday meal for eight will cost $38.53, $3.84 less than last year. All items in the meal survey showed decreases except peas, sweet potatoes, and pumpkin pie filling.
  • According to Wal-Mart’s blog, the company will be offering a Sony Blu-ray DVD player for $118 on Black Friday. While that in itself isn’t noteworthy, the way in which the pricing information is presented caught my eye. A Wal-Mart employed blogger suggests that the actual item is advertised for $148 in the printed ad (circular) but it will actually be sold for $30 less . Is this part of a strategy to offer incremental “value” in-store without the consumer even knowing it or is Sony getting cold feet and throwing in some vendor support at the last minute?




U.S. Senators Pressure Obama on China Currency Issue; Citing a Competitive Disadvantage for U.S. Manufacturers - After a conciliatory tone struck by President Obama, U.S. senators are pressing the administration to take a more aggressive stance on currency reform in China. Obama’s meeting in Beijing this month with Chinese President Hu Jintao produced no new agreements and led to a fresh round of criticism in Congress. In addition, the Treasury Department has failed to cite China as a currency manipulator in two semiannual reports this year, although Obama pledged during the campaign to crack down on China’s currency. Opponents argue that China deliberately manipulates its currency, the yuan, by pegging it to the dollar instead of letting it float freely on the market in order to gain a trade advantage with cheaper exports, putting U.S. manufacturers at a competitive disadvantage. Lawmakers have introduced several bills, all of which have stalled, levying varying degrees of penalties against China for undervaluing the currency. <>


European Industrial Orders Increase for Sixth Month - European industrial orders advanced for a sixth month in September, led by capital goods such as machines, as the euro-region economy pulled out of its worst slump in more than six decades. Orders to industrial companies in the 16-nation region rose 1.5 percent from August, when they increased 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast a gain of 1 percent, according to the median of 19 estimates in a Bloomberg survey. In the year, new orders dropped 16.5 percent after declining 23.2 percent in August. The euro-region economy returned to growth in the third quarter after governments pledged billions of euros to fight the crisis. The Organization for Economic Cooperation and Development doubled its global growth forecast for 2010 on Nov. 19. Still, the euro’s ascent is making exports less competitive, threatening to curb the pace of growth. <>


French Consumer Spending Climbs on Car Incentives, GDP Growth - French consumer spending rose more than expected in October as government incentives boosted car sales and the economic expansion that began in the second quarter continued. Spending on manufactured goods advanced 1.1 percent from September, Paris-based national statistics office Insee said in an e-mailed statement today. Economists expected a 0.4 percent gain, according to median of 19 forecasts in a Bloomberg survey. Spending rose 3.5 percent from a year earlier. French households, grappling with rising joblessness while also benefiting from state stimulus measures and the end of the deepest recession in more than half a century, have spent erratically this year. Spending gained in five and fell in four of the first nine months, a volatility set to continue even as growth in unemployment slows, economists say. <>


S&P Lowers Foot Locker's Debt Ratings - Standard & Poor's lowered the debt ratings of Foot Locker Inc. one notch to B+ from BB-. The rating agency cited operational challenges due to poor same-store sales and eroding credit-protection measures. "The downgrade reflects the moderate operational challenges due to persistent negative same-store sales and decline in the company's credit protection measures," said David Kuntz, an S&P credit analyst. The ratings agency noted that the company is likely to experience "ongoing performance difficulty" over the near term. The outlook is stable.  <>


Prime minister proposes funding for small businesses - A growth capital fund to boost investment in small businesses was proposed by Gordon Brown yesterday. Speaking at the CBI conference in London, the prime minister responded to an independent report that found small businesses have suffered a “structural” lack of investment during the recession. The Rowlands report called for the government to help small businesses to obtain funding of £2m to £10m and said that the shortage of venture capital for small businesses was a permanent rather than a cyclical problem, with investors concentrating on investments above £10m. <>


South Africa Economy Expands 0.9%, Ending Recession - South Africa’s economy returned to growth in the third quarter, ending the first recession in 17 years, as manufacturing rebounded and the government invested in roads, railways and stadiums for next year’s soccer World Cup. Gross domestic product rose an annualized 0.9 percent, compared with a contraction of a revised 2.8 percent in the previous quarter, Statistics South Africa said in a report released today in Pretoria, the capital. The rand erased an earlier 1 percent loss after the release of the data. Manufacturing recovered in the third quarter as the global recession eased and demand for exports improved. Murray & Roberts Holdings Ltd. and other construction companies have also benefited as South Africa spends billions of rand to build a high-speed rail-link and renovate stadiums for next year’s soccer tournament, the world’s most-watched sporting event. <>


CIT Gets OK for $500M in Financing - A bankruptcy judge on Monday gave CIT Group Inc. the go-ahead to borrow as much as $500 million to operate while in Chapter 11 proceedings. The approval gives the commercial lending giant, a primary lender to many small and midsize businesses, the ability to issue letters of credit to back its debt. In a court filing last month, CIT said it would use the letters of credit to support its own obligations and commitments as well as those of its subsidiaries. A group of lenders led by Bank of America Corp., which will serve as administrative agent, provided the loan. Judge Allan Gropper signed off on the arrangement in U.S. Bankruptcy Court in Manhattan. CIT had obtained an interim order of the court earlier this month that allowed it to borrow $125 million of the loan.  <>


Fiber Price Sheet: November 24, 2009 - Prices listed reflect the cost of one pound of fiber or, in the case of crude oil, one barrel.


RETAIL FIRST LOOK: 4th & SHORT - Fiber Price Sheet




China's Textile City Grows in Stature - Whether the garment label reads Made in China, France or the USA, there’s a good chance the fabric originated in a relatively unknown textile region: Shaoxing. In the 20 years since Keqiao Town in Shaoxing County was designated China Textile City, tax breaks and political support have helped boost its development as the main textile hub in the world’s largest fabric-producing country. However, its standing remains under the radar, especially to the West. Keqiao manufactures 10 percent of all the cloth in China, and dyes or prints, one-third. It is home to 19,000 trading companies, more than 10,000 textile producers, 3,500 international purchasers and scores of other players in the textile supply chain. <>


Inter Ikea May Invest Up to $1.2 Billion in China - Inter Ikea Centre Group, the mall developer part-owned by the world’s biggest home-furnishings retailer, plans to invest as much as $1.2 billion in China over the next five years. The company will build two shopping centers in China, John Tegner, Inter Ikea Centre’s managing director, told reporters in Beijing today. It has 22 mall projects to be developed over the next three to four years in Europe and China, he said, without providing a breakdown. “It makes a lot of sense,” Richard Perks, a retail analyst at Mintel in London, said by telephone. “The market is growing very fast and there is no reason why someone like Ikea shouldn’t succeed. It is a brilliant business.” Ikea is expanding in the world’s third-biggest economy after recessions damped demand in the U.S. and Europe. The company’s sales grew at the slowest pace in more than a decade in the year ended August, rising 1.4 percent. Inter Ikea Centre develops shopping malls that feature the outlets of the home- furnishings retailer. <>


US: Five US retailers join forces with Better Work - The US Council for International Business (USCIB) has announced support for Better Work by five of the biggest US apparel companies including Gap, Levi Strauss & Co., Nike, Walmart and the Walt Disney Company, all of which will contribute over USD $1 million to Better Work through the USCIB’s foundation. The programme will use contributions to support the development of labour standards compliance assessment and training tools, benefiting the companies’ supplier factories among others. "Better Work is a perfect example of a public-private collaboration with measurable benefits." stated Peter Robinson, President and CEO of the USCIB, in announcing the decision. "By bringing all stakeholders together in a collaborative approach, Better Work is helping to create sustainable change." <>


Famous Footwear exec steps into expanded role - Brown Shoe Company Inc. announced that John Mazurk will assume the role of senior vice president, consumer and retail business development, with oversight for the direct to consumer area, including and other branded e-commerce sites. In the role he will spearhead the creation of a dedicated digital and social media competency. is No. 162 in the Internet Retailer Top 500 Guide (a PDF version of the company’s financial and operating profile can be ordered by clicking on its name). Mazurk, who joined the company in 2002 as Famous Footwear senior vice president, retail sales, was named senior vice president, specialty retail, in 2005. <>


NRF Sees 134 MM Black Friday Shoppers - According to a preliminary Black Friday shopping survey, conducted for the National Retail Federation by BIGresearch, up to 134 million people will shop this Friday, Saturday or Sunday, higher than the 128 million people who planned to do so last year. According to the survey, 57 million people say they will definitely hit the stores while another 77 million are waiting to see what retailers are planning before heading out the door. “Regardless of what we’ve already seen these last few weeks in terms of promotions, retailers still have a few tricks up their sleeves to excite Black Friday shoppers,” said Tracy Mullin, NRF President and CEO. “With retailers fully aware that shoppers are looking for incredible deals, Americans can expect huge sales on popular items like toys, electronics and apparel.”  <>


Burberry Shakes Things Up on Madison Avenue - Burberry has brought its new London and Brit attitude to Manhattan. The brand is opening two stores under those names today at 444 Madison Avenue at the foot of its Manhattan headquarters, which was inaugurated in May with the lighting of three neon Burberry signs atop the building. These aren’t just another pair of store launches for Burberry, which has 62 units in the U.S. and Canada. The two stores, which flank the headquarters entrance, mark the first Burberry Brit and London stores in the world, and highlight a branding strategy initiated by chief executive officer Angela Ahrendts and chief creative officer Christopher Bailey. The move clearly delineates the Burberry business into the Prorsum, London and Brit labels. Prorsum representing runway fashions, London the tailored, wear-to-work portion, and Brit its casual, weekend lifestyle aspect.  <>


BCBGeneration Adding Jewelry - BCBG Max Azria Group is launching jewelry under its youth-focused BCBGeneration label, in a licensed partnership with Trebbianno LLC. Hitting stores next fall, BCBGeneration jewelry is designed to complement the brand’s assortment of apparel, handbags and footwear. The collection will comprise earrings, bracelets, rings and necklaces ranging in at retail from $28 to $100. The jewelry line will be overseen by Joyce Azria, who last June joined the family business as creative director of BCBGeneration. Azria oversees the design, creative strategies and marketing for the line’s apparel and accessories.  <>


Gucci Brothers Launching To Be G Handbags for Spring - There’s no sign of the famous family name in the label two Gucci brothers are launching for spring. With To Be G, a handbag collection by Guccio and Alessandro Gucci, great-grandsons of Guccio Gucci, who founded the Gucci brand in 1921, the brothers are set on carving out their own niche, while avoiding any trademark infringement. “We are not doing this because our name is Gucci, nor do we want to try and replicate what the Gucci brand is doing,” said Guccio Gucci during a tour of his Scandicci, Tuscany, manufacturing plant. “We have our own vision.”  <>


JCPenney's Invites Shoppers to Turkey Tailgate - This Black Friday, JCPenney's is touting a 15 percent increase in special discounts over last year. The retailer also plans to open stores at 4 a.m. for its "Turkey Tailgate," the day after the holiday. Beginning today, JCPenney's is revealing a sneak peek of its doorbusters at A number of licensed goods will be discounted, including I "Heart" Ronson women's fashions beginning at $5.99, Cindy Crawford Style sheet set for $44.88 and Discovery wonderwall video projector for $68.88. Customers will also receive a free 2009 Disney snow globe while supplies last. "We know this season's Black Friday will be more promotional than ever and that our customers will be expecting outstanding value," says Mike Boylson, executive vice president and chief marketing officer for JCPenney's.  <>


Blacks Leisure Creditors Support Rescue Plan - Creditors of Blacks Leisure Group, the outdoor retailer based in the United Kingdom, voted overwhelmingly on a rescue plan that should allow the company to stay in business. The company, which runs the Blacks Outdoor and Millets chains, said its proposal for a company voluntary arrangement (CVA), an insolvency process, was supported by over 97% in value of creditors who voted at meetings on Monday. That was well in excess of the 75% figure required for the proposal to succeed. Under the terms of the CVA, landlords of 101 closed or closing shops will accept reduced payoffs. If the landlords had not passed the CVA, Blacks would have missed out on bank funding and would have had to enter administration. A pot of £7.25 million (U.S. $7.25 mm) has been set aside to compensate just over 100 landlords of retail stores and other sites, equivalent to around six months' rent each. <>


TAG Signs Factoring Pact - Total Apparel Group, Inc., a master distributor and licensee of international trademarks in the branded apparel, footwear and accessories sectors, entered into a receivables factoring agreement with Coral Capital Solutions that will expedite the cash flows of the company and provide collection services, while reducing credit risk. <>


Awake Apparel owner gets 35 months in prison - The owner of the Londonderry clothing retailer Awake Apparel has been sentenced to 35 months in federal prison on charges involving fraud and unauthorized use of credit cards, federal prosecutors said. Adrian Fijolek, 23, is a citizen of Poland and will be deported there once he completes his sentence, prosecutors said. His crimes took place between November 2007 and July 2008. They involved obtaining fraudulent credit cards and automobile loans, depositing valueless checks in bank accounts, and conducting fraudulent retail credit sales for Awake Apparel. Prosecutors list $669,000 in funds improperly obtained and used. <>





SHOO: Edward Rosenfeld, CEO, sold 33,000 shares after exercising options to buy 16,000 shares for a net gain of $1mm.


BBY: Richard Schulze, Chairman, sold 550,000 shares for a gain of $21.5mm.



  • Tom Kartsotis, Chairman, sold 49,000 shares for a gain of $1.6mm.
  • Donald Stone, Director, sold 7,500 shares after exercising options to buy 13,500 shares for a net gain of $125k.



  • Richard Hayne, President, sold 728,000 shares for a gain of $24mm.
  • Freeman Zausner, CAO, sold 50,000 shares after exercising options to buy 50,000 shares for a net gain of $1.4mm.
  • Harry Cherken Jr., Director, sold 15,000 shares after exercising options to buy 10,000 shares for a net gain of $460k.


NILE: Dwight Gaston, Senior VP, sold 1,500 shares after exercising options to buy 1,500 shares for a net gain of $72k.


WMT: James Breyer, Director, purchased 5,000 shares for a cost of $270k.


ICON: Yehuda Shmidman, EVP, purchased 75,000 shares for a cost of $900k.


TJX: Ernie Herrman, SEVP, sold 10,000 shares after exercising options to buy 10,000 shares for a net gain of $170k.

Math Monkeys

“There are whole fields, like the financial world, where scientific thinking hasn’t greatly penetrated. It is mainly about assertion, personality, and salesmanship.”
-David Harding
David Harding runs London based hedge fund, Winton Capital Management. He is a British entrepreneur. He is a math guy. He is a market timer.
In 2009, Harding has not been getting the embarrassing Octopussy headlines of the Galleon crowd. He doesn’t need a woman in hiked up attire posing as an analyst to be his aggregator of executive Wall Street “edge” either (Bloomberg article: “Woman Who Sank Galleon Was Beauty-Queen-Turned-Analyst Insider”). His Research Edge involves anticipating market direction, mathematically.
People say they can’t time markets. Take their word for it – they probably can’t. I understand that it’s not ok for a hockey head who gets up early every morning calling markets to say that. However, it is ok to say that if you run a $12 Billion dollar hedge fund. This is the way that our sometimes disillusioned business of perceived wisdom works. It’s about how much money you make that makes you a real man on Wall Street, right?
On the compensation score, Harding is plenty real. He made $250 million for himself last year. No, he didn’t need the almighty “one-on-one” with an executive management team or a government bailout to earn his bonus. All he needed was us - the monkeys of consensus.
Are you a monkey? Did you call the 2009 bottom forming? How about the 2007 top? Tops and bottoms are processes, not points. From the Top, to The Bottom, and Back Again (maybe a good name for a book), they can be proactively managed towards, mathematically, as opposed to being reacted to, emotionally.
Let’s grind through some math. Yesterday, as the US Dollar Index burned -0.75% lower, the SP500 was up another +1.4%. The most powerful mathematical inverse correlation affecting the daily movements of global markets continues to prove itself out (the r-square is still 0.8). This won’t last forever. Correlations that are this high are never perpetual – but fighting them while they are this dominant is for men and women with salesmanship that’s far more impressive than mine.
The antichrist of market timing is the Alan Abelson (Barron’s) love story with David Rosenberg (Gluskin Sheff). Abelson was at it again this weekend, all perma-beared up and bitter for missing another massive meltup, citing Rosie’s views. Using a Monday Night Football one liner, all I have to say is “C’mon Man!” Rosenberg is the Toronto Maple Leafs and Abelson the Washington Redskins of their respective 2009 seasons – but they won’t admit the score!
This is sad and funny, all at the same time. That’s why a lot of these cats would get run-over in a real-life arena of professional sport. If you aren’t into the sports/accountability analogy, I still don’t think that the rest of the Great Depressionistas would fare too much better in a math combine this year either.
Here’s the 2009 score since March:
1.      US Dollar Down -16%

2.      SP500 Up +64%

For those who say this rally hasn’t been on “fundamentals”… once again, I submit a basic question – isn’t math fundamental?
Our industry is finally going to flush out the weak and make the strong, stronger. The Wizard of Oz storytelling is over. It’s about time. We still have way too many monkeys jumping on the bed. The math associated with client returns over the last 24 months will hopefully expedite the curtailing of asset management supply.
Admittedly, I have been getting ready to join the bearish camp for the last month. Our firm’s views from September of 2008 seem so long ago. Recently, I have taken down my invested exposure in the Asset Allocation Model, but I have yet to short the SP500. Timing - dear Rosie, matters.
Here are some smoke signals that came out of the Hedgeye math machine overnight:
1.      The SP500 had an Outside Reversal yesterday, making a lower-high on the close at 1106 (the prior closing high was 1110)

2.      The US Dollar made another higher-low yesterday, and is recovering +0.22% this morning to $75.22

3.      Volatility (VIX) was almost 2.5 standard deviations oversold yesterday, and looks to be setting up to lock in an immediate-term low

4.      Volume/price/volatility studies, when using them as a 3-factor model, continue to flash bearish

5.      Japanese equities were down another -1% overnight, taking the correction to -11.6% since they peaked in August

6.      South Korean equities were down another -0.8% last night and remain broken from an intermediate term TREND perspective

7.      Chinese stocks had their worst down day in the last 3 months last night, closing down -3.5% on fears of banks issuing equity

8.      Russia cut interest rates by 50 bps to 9%, and equities backed off hard on the news, trading down -1.5%

9.      The price of oil, in US Dollars, is starting to break down across our immediate term TRADE lines with the most important line being $79.09/barrel

I use a multi-factor macro model. It’s all math. It’s weight adjusted. It changes dynamically as R-squares and real-time prices do.
What does that mean? Well, quite simply – it means that as the facts change, I do, because I believe that prices rule as leading indicators and people are constantly lying about why prices are doing what they do.
Chaos Theory submits that there is a deep simplicity that governs all patterns of behavior within a dynamic ecosystem. Since this is the most relevant mathematical discovery since relativity, I study it. I know that it is barely applied yet to the most dynamic of all systems – global markets. David Harding is early.
Before I sign off this morning, here’s a very simple 2-factor correlation model to have front and center on your screens.
1.      US Dollar Index = $75.51 or greater

2.      SP500 = 1083 or less

If those lines confirm one another, my submission is that Abelson, Rosenberg, and whoever else has been bearish for this entire move up will finally start being right. Until then, throw them a banana. When it hits them in the noggin, call that feeling “fundamental.”
Best of luck out there today,


VXX – iPath S&P500 Volatility With the market hitting its YTD high on 11/23 we bought volatility.

XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

EWT – iShares Taiwan We see a pending trade pact with the Chinese as the next positive catalyst. We bought back the bullish TREND position we continue to fundamentally see in Taiwan on 11/20.

EWA – iShares Australia We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

XLU – SPDR Utilities
We bought low beta Utilities on discount on 10/20.

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.

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.

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 We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

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.

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.  November 24th, 2009.


Macau has eased entry requirements for Hong Kong residents, according to the government there.  A memorandum signed by Hong Kong Financial Secretary John Tsang Chun-wah and Macau Secretary for Administration and Justice Florinda da Rosa Silva Chan will “facilitate travel convenience between Hong Kong and Macau”, according to a government official.  From December 10th, holders of certain Hong Kong identity cards do not need to fill out arrival and departure cards when passing through immigration.  Hong Kong residents will also be allowed to enter Macau through e-channels after pre-registering at ferry terminals.

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