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American Ignorance

“If ignorant both of your enemy and yourself, you are certain to be in peril.”
-Sun Tzu

Sun Tzu was a heroic Chinese General who authored The Art of War. While the timing of Sun’s writings remains a debate, some of his strategies remain timeless.
 
Don’t worry, I am not going to impose career risk at year end and infuse my views of President Obama’s new military strategy. I know what I don’t know. I will, however, remind the President that he may not know what he doesn’t know about this country’s newly revealed weakness – our currency.
 
Currency is built on credibility. Currency is backed by trust. Currency is what allows you to gain leverage against your enemies. If you have political currency, that helps. But you better be damn sure you have credible economic currency standing behind it. Wars are financed.
 
Never mind the very high correlation between recently waning American Consumer Confidence readings and Presidential approval ratings (despite the stock market sitting just inside of YTD highs). Now is the time to take a long hard look at this Global Game of Risk and think through America’s newfound vulnerability. Timmy Geithner may not get this, but Americans do. The Buck is Burning.

The days of entering geo-political and military conflict as the CREDITOR nation are over. The United States of America is now the DEBTOR nation. If we think our enemies are ignorant of this New Reality, we are “certain to be in peril.”
 
The US Dollar got hammered again yesterday, breaking down to lower-YTD-lows. Lower-lows, in my risk management model, are very bad. The only lower-lows that the US Dollar Index have not breached are those that were a leading indicator for the 2008 global equity market crash.
 
I have been saying this while doing meetings in CA this week, and I’ll write it again this morning. At a price, DOLLAR DOWN is bearish. That price is anything with a 74 handle on the US Dollar Index or lower.
 
This morning the US Dollar Index is trading at $74.41. From here, why is Dollar down bearish? For starters, across hundreds of years of country currency history it has been. Sure, there have been plenty of currency devaluation (REFLATION) rallies in stock markets. These are the daily market battles we engage in today. However, there has never been a country who has torched their currency and come out the winner of a global economic war.
 
Given the economic Generals on his team (Geithner, Summers, Romer, etc…), my greatest fear about the world today is not some whack job who needs to be smoked out of his cave in Afghanistan – it’s the Perceived Wisdom of Washington on systemic US currency risk. I fear America is becoming ignorant of herself.
 
To find the most obvious signs of American Ignorance in our financial leadership, you just have to realize that Geithner has been at the Treasury and/or Fed since 1988. He is the system. Less obvious is Bernanke; but very obvious are the bubbles that he is willfully blind to.
 
As a reminder, here are bubbles, across durations, that He Who Sees No Bubbles (Bernanke) is ignoring:
 
1.      Immediate term = Gold

2.      Intermediate term = Short Term US Treasuries

3.      Long term = Government financed Banker Bonuses

 
Another immediate term bubble being created by American Ignorance is that in price of the Japanese Yen. Again, Geithner has never proactively managed risks ahead of any bubble he has been part of creating. So take his word for it right now when he says he sees no currency risk. He never has.
 
Dollar DOWN, at a price, has many unintended consequences. One is bubbling up the Yen to 14-year highs. As a reminder, when it comes to sovereign currency and debt – CURRENCY UP doesn’t get DEBTORS PAID. It gets them to blow up.
 
Japan is still the world’s 2nd largest economy. It is also an island economy with negative population growth. This, we know (I hope). What we don’t know is what exploding debt will look like if exploded upon mountains of debt. This ticking time bomb is levered.
 
In trying to arrest recent currency strength in the Yen, Japan’s latest bureaucrat leader, Hatoyama, has reverted right back to his predecessors longstanding view of Quantitative Easing. Put simply, the latest government solution in Japan is not unlike General Motors – zero percent financing to commercial banks – and if you didn’t know how that war ended, ask now ex-CEO of GM, Fritz Henderson, this morning. Now he knows.
 
Japan’s latest stimulus is for another 10 Trillion Yen. Let me put that in block letters in an attempt to take the numbness of it all away. TEN TRILLION YEN.
 
I know. I know. That’s only $115 BILLION DOLLARS. Heck, what’s a US Dollar worth anymore anyway?
 
President Obama, I’ll send that credibility question right back to your aide who is prepping my special tax audit. But remember, when it comes to the Global Economic War of the 21st century, the Chinese are watching your Burning Buck very closely.
 
My immediate term support and resistance lines for the SP500 are now 1082 and 1117, respectively.
 
Best of luck out there today,
KM

 


LONG ETFS

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).

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.

 
SHORT ETFS
 
FXY – CurrencyShares Japanese Yen
We took the opportunity to short a 14-year high in the Japanese Yen on 11/27.  The BOJ will definitely be intervening if the unintended consequences of a Geithner Buck Burning persists.

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.

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.


US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE?

WHAT A DAY! - The S&P rallied 1.2% yesterday; the DOW was up 1.2%, the NASDAQ up 1.5% and the Russell 2000 up 1.6%. The strength was broad based with every sector outperforming the S&P 500 except for the Financials (XLF), which was down for most of the day. 

 

The MACRO calendar benefited the RECOVERY trade, which dominated the mood of the market yesterday.  The reality is that the SAFETY trade outperformed.  The best performing sector was Materials (the RECOVERY trade), but Utilities and Healthcare outperformed too, which suggests a flight to safety.  In addition, the underperformance of the Financials suggests a move away from RISK.  

 

That being said, the market’s upward momentum was driven by data from the manufacturing sector, which was a key driver for the RECOVERY theme.  Over night the focus was on China, where the manufacturing sector expanded for a ninth straight month in November.  In the US, the manufacturing sector expanded for a fourth straight month in November.  Some additional support came from the 3.7% month-to-month increase in October pending home sales, which marked the ninth consecutive monthly gain and pushed the index to its highest level since March of 2006.  As a result, the XHB +2.2% (the homebuilder ETF), outperformed the S&P 500.

 

The appetite for risk accelerated with the VIX down 10.6% on the day.  The potential for a Dubai contagion is slipping into the past as the dollar sold off 0.69% to 74.36 yesterday.  The “broken buck” continues to have favorable implications for the RECOVERY trade as the Materials (XLB) was the best performing sector on the day, up 1.9%.  Within the XLB the outperformance was driven by steel, copper, aluminum, and paper and forest product names. 

 

As I mentioned above, yesterday every sector outperformed the S&P 500 except the Financials (XLF).   The Financials have been chronic underperformers over the past three months and over the past 5 trading days are down 0.2% versus the S&P up 0.3%.  The XLF continues to underperform despite the better-than-expected economic data and an increased appetite for risk.  Dragging the XLF down are the larger names in the index like JPM, GS, C and AXP.  What’s wrong with the XLF?

 

From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 35 points or 1% upside and 2.5% downside.  At the time of writing the major market futures are trading slightly lower.

 

Crude is trading down today after the American Petroleum Institute reported crude inventories rose 2.89 million barrels last week, while gasoline and distillate fuel stockpiles also climbed.   The Research Edge Quant models have the following levels for OIL – buy Trade (75.31) and Sell Trade (78.69).

 

Gold climbed as much as 1.4% to a record $1,213.88 per ounce in Singapore. The Research Edge Quant models have the following levels for GOLD – buy Trade (1,170) and Sell Trade (1,224).

 

Copper fell in London trading, erasing an earlier gain to more than a 14-month high.  Copper for three-month delivery on the London Metal Exchange fell 0.1% to $7,068 a metric ton.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.08) and Sell Trade (3.23). 

 

Howard Penney

Managing Director

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - sp1

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - usdx2

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - vix3

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - oil4

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - gold5

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - copper6

 


THE M3: NOV GAMING RECEIPTS, OCT CONSUMER PRICES

The Macau Metro Monitor.  December 2nd, 2009.

 

 

MACAU’S GAMING RECEIPTS RISE 60% IN NOVEMBER macaunews.com.mo

Macau’s casinos generated “a little more than” MOP 12 billion (US$1.5 billion) in gross gaming receipts in November, an increase of approximately 60% compared to November 2008, according to a source cited by The Macau Post Daily.  According to the source, gaming gross receipts during the first eleven months of the year rose approximately 6% compared to the same period of last year.  SJM remains the market leader with 35% market share, followed by LVS. 

 

 

 

MACAU OCTOBER CONSUMER PRICES FALL ON YEAR forextv.com

Consumer prices in Macau dropped 1.1% year-over-year in October, according to data released by the Statistics and Census Service.  On a month-over-month basis, consumer prices were up 0.3% in October.  In the first ten months of the year, the consumer price index grew 1.4% over the same period last year.


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MCD – Perspective on the executive changes

After the close, MCD announced that Ralph Alvarez has decided to retire as President and COO for health related reasons.  Importantly, Mr. Alvarez was the clear heir apparent to become the next CEO of MCD.  While I can personally sympathize with his orthopedic issues, his sudden resignation and stepping down from the board of directors seems somewhat odd.

 

To put this resignation in context there are some things to consider:

 

(1)    On December 8th MCD will report its second straight months of declining same-store sales in the USA.

 

(2)    I continue to contend that the largest new product in the history of the company (McCafe) is not going well, but it might be too early for someone to take the fall for this.  Think Don Thompson!

 

(3)    If he was such a great asset to the company why is he leaving the board?

 

(4)    There is a big void to be filled by his potential replacement!  I’m betting on Denis Hennequin, President of McDonald’s Europe!

 

(5)    MCD accelerated unit growth in Europe and MCD’s Europe Chief Financial Officer Jerome Tafani  said, "the trend in sales

we have seen up until October is not going to change in the coming months." 

 

Despite Ralph’s personal headwinds the timing and magnitude of this move does not completely rest comfortable with me. 

 

We will have our estimates for MCD November sales trends out shortly.   


CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS

Nearly every restaurant operator is benefiting from lower food costs, so what is the differentiator to any given stocks’ outperformance – top line sales!

 

In the second half of 2009 to date, the casual dining stocks as a group have declined 7.6%, excluding Landry’s performance, which is up nearly 150% as a result of CEO Tilman Fertitta’s purchase offer and Pershing Square’s subsequently taking a 9.9% stake in the company.  Outside of LNY, the top performers since June 30, 2009 have been (in order of best to worst) CBRL, BWLD, CAKE, PFCB and BJRI.  These are also the only names in the casual dining group that have posted positive stock performance thus far in 2H09, which represents a big shift from the first half of the year when only LNY’s stock declined from December 31, 2008 with the group, on average, up nearly 84%. 

 

When I looked at this list of outperformers in 2H09 to date, the first thing that jumped out at me was the fact that three of the names have a high concentration of their restaurant base in California with CAKE at nearly 20%, PFCB at about 16% and BJRI at over 50%.  Based on what we have heard about recent trends in California, particularly as it relates to the 12%-plus unemployment rate in the state, it is somewhat surprising that these California-centric names have outperformed.

 

The more important similarity among the group is, however, that despite some of these companies’ exposure to California, all of these names, except for one, have outperformed the industry benchmark on a comparable sales basis as reported by Malcolm Knapp in the most recent quarters (as shown in the attached charts below).  We all know the industry performance is not good, but having less bad results points to share gains and helps to explain, for the most part, the companies’ relative stock performance.

 

CBRL, which is up nearly 35% since June 30, continues to widen its gap to Knapp, outperforming by more than 6% in it last two reported quarters.

 

BWLD’s (up 22.8% over the same timeframe) gap to Knapp has come in somewhat in the last couple of quarters but the company still posted same-store sales trends that were 7.6% better than the industry average in 3Q09.

 

CAKE, up 8.8%, has not outperformed the industry average by the same magnitude as CBRL and BWLD, but the company has performed better than the average in each reported quarter of 2009 (by an increasing amount each quarter) after underperforming the average for all of 2008.

 

BJRI, up 1.2%, has maintained its 5%-plus gap to Knapp in the last two reported quarters despite the sequential decline in its same-store sales growth trends on both a 1-year and 2-year average basis.

 

So who does that leave out?  PFCB is up 1.7% in 2H09 to date and is the only casual dining name (again outside of LNY) that has posted positive price performance since June 30 with same-store sales trends at its main concept (the Bistro) that are underperforming the industry benchmark.  And, that underperformance increased by about 150 bps in 3Q09 on sequential basis from 2Q09.  Same-store sales growth in 3Q09 decelerated sequentially from 2Q09 on both a 1-year and 2-year average basis. 

 

Some might point to the improved margin trends at Pei Wei and to the concept’s recent same-store sales outperformance to explain the company’s relative stock performance, but it is important to remember that the Bistro still accounts for about 75% of total company sales.  There is no reason to believe that Bistro trends will turnaround prior to the industry so I do not think it is reasonable to believe that PFCB will be able to maintain this stock price outperformance much longer. 

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - CBRL gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - BWLD gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - CAKE gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - BJRI gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - PFCB gap to knapp


HOLIDAY PARTY INVITE

The Research Edge Consumer Team is hosting a Holiday Party on December 9th

 

 

Please join the Research Edge Consumer Team for Holiday cocktails in Midtown on December 9th.  It’s hard to believe another year has almost passed and as a result it’s time to celebrate!  In appreciation of your support throughout the year, we look forward to seeing you at Bar 44 (located in the lobby of the Royalton Hotel, 44 West 44 Street b/t 5th and 6th).  Please stop by at any time between 6:30-8:30pm.  We will have an area reserved on the right side of entrance across from the lobby bar.

 

If you are able to join us, kindly RSVP by Dec 7th. We look forward to seeing you next week.

 

 

Research Edge Consumer Team,

Todd, Anna, Brian, Eric, and Howard


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