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Yesterday, the S&P 500 finished lower by 0.8% in a day of quiet trading, although a late-day selloff left the S&P 500 at the worst levels of the day!  For the most part the MACRO calendar was unkind to the RECOVERY trade. 


On the MACRO calendar, Initial claims fell 5,000 to 457,000 for the in the week-ended November 28th.  Importantly, the four-week moving average dropped to 481,000 from 496,000; the 13th consecutive weekly decline.   Continuing claims rose 28,000 to 5.46M, the first increase since August.  All eyes are on today’s employment report.   The consensus is for nonfarm payrolls to fall 125,000 and the unemployment rate is expected to remain unchanged at 10.2%.


Also, disappointing was the ISM non-manufacturing index which fell to 48.5 in November from 50.6 in October.  Consensus expectations were for an increase to 51.5. Lastly, November same-store sales were weaker than expected. 


Once again, the Financials (XLF) was the worst performing sector, declining 2% on the day.  Credit card and Banks were notable underperformers, as the BKX declined 3%. 


The three best performing sectors were Utilities (XLU), Technology (XLK) and Industrials (XLI).  The XLU has now outperformed the S&P 500 by 3.7% over the past week.  The XLK outperformed on a relative basis closing flat on the day.  The outperformance of the XLK was due to the semis, which rallied for a fourth straight day with the SOX up 1.2%.


The appetite for risk is waning as the VIX was up 6.3% yesterday and 9.7% over the past week.  The Dollar index was up slightly on the day.   


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 1.5% downside.  At the time of writing the major market futures are trading slightly lower.


Crude oil fell for a third day before a report forecast to show unemployment remained unchanged at a 26-year high in the U.S.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.18) and Sell Trade (78.37).


Gold fell for the first time this week as the dollar index is stronger in early trading today.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,186) and Sell Trade (1,224).


Copper is lower in early trading today, as inventories rose and most commodities are lower ahead of the U.S. jobs report.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.18) and Sell Trade (3.26). 


Howard Penney

Managing Director















We met with Genting management yesterday and have some takeaways.  We think the junket issue may be the biggest obstacle to a quick ramp.




  • Rules on junkets and other operations are due to be released any day now
  • Genting thinks that junkets will be important, but less so than Macau
  • The Singapore government wants more power to reside with the operators given the significant investment LVS and Genting have made
  • Tough regulations won't block the junkets out entirely
  • If they wanted to they could pay out up to 1.8-1.9% to junkets, but aren’t planning on going that high


  • In response to having direct VIP play if the junkets can’t get licensed: they still have the collections issue if players are from China - taking RMB out of the country and then collecting
  • A lot of the VIP play will still come from China but they also see India as a big untapped market
  • Expecting a significant number of players from South & South East Asia (Indonesia, Singapore, Vietnam, Cambodia, Thailand, Japan, etc) since there are tons of direct flights in to Singapore
  • Believes that VIP mix (Direct and Junket combined) will be 65% in Singapore


  • Sands will have approximately the same number of tables as them
  • Genting’s site is more of a resort destination/family-oriented spot, while Sands will more “businessy”
  • Genting will still attract a lot of MICE  business, however
  • With Universal Studios and their complex adding to the night safari and the existing volcano and beach attractions, Genting thinks that Sentosa will have the critical mass of “stuff” to become a destination location like Atlantis
  • $1BN of EBITDA from either Sands or Genting is unrealistic expectation.  Genting thinks $750mm in EBITDA is reasonable for them and for Sands
  • They will have 8,000-9,000 employees in Phase 1 and 12K when  Phase 2 opens
  • Genting doesn't believe Sand’s fixed cost base will be lower than it is at Venetian Macau


  • Cannibalization from Highlands - street 5-10%, stock implies more - thinks it’s not going to be that much because 90% of clients are Malaysian
  • ADR guidance: 250 Singaporean
  • Highlands VIP mix is 30%, of which 50% is junket

Oh The Weather Outside Is…

Oh the Weather Outside Is...


By now it’s apparent that November sales were largely disappointing across the board.  It’s also probably time to adjust expectations, not for the actual pace of sales or how the holiday season will ultimately play out, but for how volatile this critical selling season is going to be.  The consumer responded well to Black Friday and planned promotions.  Almost all retailers who participated in the weekend hype reported strong traffic.  But, in the wake of generally positive Black Friday reports, one key aspect was overlooked.  What about the rest of the month? 


With all the weather excuses and rationalizations put out there this morning it’s easy to become overly skeptical on the remainder of the holiday season. Whether you buy into these excuses or not, the warm weather was clearly a callout but should not have been such a surprise.  Almost every company exposed to seasonal apparel indicated that October was boosted by the early chill and this morning my thermometer in the car read 68 degrees!  This is sales volatility at its best.  I’m not willing to write off the holiday just yet.  The early pull on seasonal demand, the still tight inventories, benign promotions (so far) and the calendar set-up (one extra selling day before Christmas this year) all suggest a better December.  Yes this puts more pressure on this month, but I suspect this was already expected and planned for by most retailers. 


November Recap:


Upside to expectations: LTD, ROST, KSS, JWN, PIR


Downside to expectations: TGT, FRED, BJ, FDO, SSI, SKS, JCP, M, DDS, BONT, WTSLA, PLCE, HOTT, BKE, ANF, CATO


- Eric Levine        



Oh The Weather Outside Is… - SSS Nov 2 yr

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PSS Blowout: More To Come


December 3, 2009





PSS proving why it is one of our favorites…



PSS continues to be one of our favorites. As always, there were many moving parts in the quarter, but the net results are tough to argue with. $0.61ps vs our estimate of $0.58 and the Street at $0.49. PSS beat on both comp and GM%, with a slight uptick in SG&A due to incentive compensation offsetting some of the upside. Sales were flattish, but inventories were down 14%. The impact on PSS’ position in our SIGMA chart is about as good as it gets. A cynic could argue that the inventory draw-down was due to the success of the Oprah promotion at the end of the quarter, which might borrow sales from next Q. Yes, it’s possible. But the sourcing story here is even coming in better than even our estimate.  We can slice and dice this story six ways til Sunday, but the bottom line is that next year’s estimates are low – by a country mile. We’re sitting at $2.00 in 2010 vs the consensus at $1.49. Please see our PSS Black Book for full details on our thesis.


PSS Blowout: More To Come - PSS S 12 09


Here are some notables from the call…



PSS 3Q FY09 Earnings Call


Quarterly Highlights:

  • Comps (+3.1%) improved on a 2Yr basis
    • Payless Domestic (+3.4%) and Performance + Lifestyle (SRR) down 0.7%
  • Marketing event with Oprah on the last day of the qtr (= ~$20mm in sales = ~2% sales growth & ~$0.02 in EPS)
  • SG&A incentive compensation made up more than the full amount of the $7mm delta.



P&L Notables:

  • Sales up 3% driven by:
    • Saucony and Sperry Top-Sider strength
    • Comp increase (+3.1%) driven by Payless Domestic
      • Payless +3.4%, PLG -0.7%
      • Payless Domestic +5.4%; Payless Int'l -7%
    • Marketing event with Oprah on the last day of the qtr (= ~$20mm in sales = ~2% sales growth)
    • Significant sales in boots
    • Strength in Sperry and Top-Sider strong


  • Gross margins up 180bps reflecting:
    • Lower product costs
    • Further improved occupancy savings through rent negotiations
    • Increase in gross margin was partially offset by litigation related to Crocs


  • SG&A up 3% ($7mm) down 5bps yy reflecting:
    • Higher incentive compensation related to company performance, as well as severance costs.
    • incentive compensation made up more than the full amount of the delta.


Payless Domestic:

  • Sales increase was driven primarily by a comparable store sales increase of 5.4%
  • Strong sales in boots, kid's, and women's
  • Oprah event and strong BTS also key drivers
  • Occupancy costs continue to come down


Payless Int'l:

  • Comps down 7%
  • decline was almost entirely offset by 28 new store openings in Colombia and the impact of the strategic marketing event in Canada
  • Operating profit declined due primarily to the sales decline and increased costs to comply with incremental tariffs in Ecuador, partially offset by reduced operating expenses
  • Philippines could be a 75 store opportunity - first store should be open mid 2010
  • 6 stores now in Middle East
  • Preparing for franchise openings in Russia next year
  • Ecuador tax impact



Performance Lifestyle Group (PLG):

  • Saucony & Sperry Top-sider strong
    • Women's showed strength - becoming larger portion of business
  • Keds beating plan
    • Seeing
  • CLI is seeing more interest in brands Internationally
    • Vision streetwear apparel and accessories in Japan
    • Airwalk fw and apparel in Argentina and UK


  • Expect product costs to be down ~10% in FY09
  • Stores:
    • 9 new Collective Brands (6 Payless; 3 PLG)
    • Closed 26 Payless (relocated 5 - 4 Payless, 1 PLG)



Balance Sheet:

  • Generated $242mm FCF YTD
    • Improved working cap and lower CapEx
    • CapEx $61mm YTD (vs. $108mm yy)
  • Net debt of $471mm
  • Inventory down 13.8%
    • Aged inventory down  in both dollars and units



  • Tax Rate mid-to-high teens
  • D&A of ~$145 in 2009 (was $140)
  • CapEx of $85mm in FY09
  • Net store closures of 55 (was 60)




Payless - Product Allocation by Gender:

  • Enough space to support women's initiatives, should take away from mens


Marketing Extended Size Initiative:

  • Campaign hit on every channel of distribution


Oprah Effect:

  • Benefit to gross margin was not material
  • Sold more than 1mm pairs of shoes in 1-day
  • Sales were at 50% off storewide so helped to reduce inventory levels
  • Some sales were pulled forward from Q4 (sale was on the last day of the qtr) - will have an impact in early December sales


Pre-order vs. at-once Cadence:

  • Response to Sperry offering very strong - excited about women's opportunity
  • Keds
  • Retailers are still buying tighter



  • Pipeline will start to build at quarter end
  • Lower at inventory then they would like to be right now


Product Categories:

  • Boots - will ride trend for only a little longer - rather miss out on tail end and stay fresh than run it too long


Occupancy Cost:

  • Leases renew every ~5-years


Wal-Mart Effect - Reducing Participation in Footwear:

  • Side-stepped this question completely



  • Other retailers posting higher comps - implies potential loss of share
  • Mgmt noted not supported by industry data




  • In an attempt to grow the outerwear-centric brand, Andrew Marc, GIII is expected to open a few concept shops to display the brands expansion into new categories. While a dress line has already been produced, sportswear and accessories are expected to follow. The plans are clearly in the works to create a lifestyle brand out of this former men’s outerwear company.
  • If there was one category that ARO management wishes they had more inventory in, it’s woven tops. While the company has historically been more of a knit destination, this year’s fashion-trend has left a little bit of an untapped opportunity on the table.
  • Target continues to push ahead with clever promotion. The company is launching a 3 city event (NY, San Francisco, and Washington, DC) which lasts from December 11-13th. The pop-up store/event is expected to be more like an outdoor holiday fair. Customers can choose to purchase pre-wrapped gifts from a list of 50 choices. Previews of the product and the concept are also available online in advance of the event.
  • A quick glance in the ShapeUps showroom at Skechers revealed a substantial increase in the number of SKU’s carrying the ShapeUps iconic extra-thick, curved sole. It appears the company has developed an entire line of footwear ranging from fur lined boots to sandals for the Back to School season. Think UGGS meets ShapeUps.




Fleming: Amazon Stores a Threat to Wal-Mart - Wal-Mart Stores Inc. might feel ready to take on all comers in the retailing landscape it dominates, but one possibility makes it cringe: Amazon.com getting into brick-and-mortar retailing. “It’s a threat. It’s a problem,” John Fleming, executive vice president and chief merchandising officer of Wal-Mart U.S., said of the possibility, while speaking Wednesday at the Fashion Group International economic outlook seminar at the New York Hilton, titled, “The ‘New Normal’ Is ‘Old Hat’ for Winners.” Fleming said after the seminar that Amazon is considering stores in Japan and the U.K. in collaboration with retail partners. He said he could see a scenario whereby Amazon opens “depots” in dense urban areas “close to consumers,” enabling them to pick up what they order online rather than wait for delivery. An Amazon spokesman declined to comment. No wonder Wal-Mart is worried: Amazon offers almost every product category found in a Wal-Mart Supercenter, from discount books to toys, electronics to housewares, apparel to sporting goods — and is often as price-competitive as the world’s largest retailer. Wal-Mart, meanwhile, has begun beefing up its Web site to be competitive with Amazon. <wwd.com>


New Look appoints advisors for IPO - Fast-fashion chain New Look has appointed a trio of investment banks to advise on its planned return to the stockmarket next year. The retailer has taken on banks Credit Suisse, Deutsche Bank and J.P Morgan Cazenove to examine the possibility of an IPO in early 2010. A public listing is unlikely before next year as New Look’s owners wait to see how Christmas trading fares before making a decision. Private equity firms Permira and Apax Partners took New Look private with New Look founder Tom Singh for £800m in 2004. New Look was put up for sale two years ago with a price tag of £1.8bn which failed to attract a buyer after a lukewarm response from investors. <drapersonline.com>


Japan’s Companies Cut Capital Spending at Record Pace - Japanese businesses cut spending at a record pace last quarter, indicating they aren’t yet confident that the recovery from the country’s deepest postwar recession will be sustained. Capital spending excluding software fell 25.7 percent in the three months ended Sept. 30 from a year earlier, the largest drop since the government began the survey in 1955, the Finance Ministry said today in Tokyo. It was the 10th decline. The report adds to concerns about an economy that’s already under threat from deflation and the yen’s gain to a 14- year high against the dollar, which is eroding earnings at exporters such as Toyota Motor Corp. The Bank of Japan this week unveiled a 10 trillion yen ($115 billion) credit program, and the government plans to release a spending package to fight price declines and the surging currency. <bloomberg.com>


Cross Company Buys Majority Stake in Thom Browne - Japan’s Cross Company has acquired majority control of Thom Browne’s business. A spokeswoman for the New York-based designer confirmed the transaction. Financial details, including the size of the stake, were not disclosed. The men’s designer, known for his cropped pants and lean tailoring, first teamed up  this Cross this summer when the Japanese company took a 20 percent stake in his company at an undisclosed price. At that time, Cross president Yasuharu Ishikawa said he would be open to eventually increasing his company’s stake in the business. Browne and Cross also established a new company called Thom Browne Japan to oversee the brand’s business here. The two partners plan to open a Thom Browne flagship in Tokyo next year. <wwd.com>


Asda wins rights to sell official FIFA World Cup merchandise - Asda has won the rights to sell official World Cup products next summer after its parent Walmart struck a deal with FIFA’s worldwide master licensee. The agreement with Global Brands Group will see FIFA branded shops in selected stores and official merchandise such as hats, bags and T-shirts on sale. The deal is likely to mean rivals Tesco and Sainsbury’s are unable to sell FIFA products, giving Asda an advantage over the summer. During the 2006 World Cup in Germany, Britain’s high streets got a £1.25bn boost in sales of merchandise. Walmart International senior vice president John Aden said: “We want soccer fans around the world to participate in the world’s most spectacular sporting event by giving them access to exclusive FIFA World Cup merchandise at a great price. <retail-week.com>


Beige Book Hints at Modest Economic Improvement - Economic conditions and consumer spending across the U.S. strengthened modestly for most regions in the country in the six weeks through the end of November, but retailers continued to tightly manage inventory and staffing levels leading up to the holiday season, according to the Federal Reserve’s Beige Book report released Wednesday. Reports based on anecdotal evidence from across the country indicated sales were up slightly or mixed for most regions. Atlanta, Cleveland, Kansas City, New York, Philadelphia, Richmond and San Francisco all reported an uptick in sales, while retailers in Boston, Chicago, Dallas and Minneapolis said sales were mixed. “The latest Beige Book corroborates our view that real growth is losing some momentum at the end of 2009 and in early 2010. Businesses are playing the recovery on the conservative side,” said Brian Bethune, chief U.S. financial economist with IHS Global Insight. The Fed said reports from its districts “noted that retailers were holding leaner inventories this holiday season, though some indicate that retailers have recently become more optimistic about the holiday season outlook.” <wwd.com>


Target Holiday Pop-Up Shop Heading to Manhattan - Manhattan still doesn’t have a Target, but it will soon have a Target-To-Go. Target-To-Go, at Gansevoort and Washington Streets at the entrance of the High Line, isn’t a store or technically even a pop-up shop. It’s a facade and only a facade, with a list of different products to choose from, much like a menu. And like fast food outlets, shoppers will request products by number at the ordering window, saying, for example, “I’ll have a number two.” They will then go to another window to pick up their purchases, which will be wrapped and ready to be placed under the tree. Target To-Go will run from Dec. 11 to 13, operating between the hours of 10 a.m. and 8 p.m.  Similar Target-To-Go events will be held at Mint Plaza in San Francisco, and Georgetown in Washington D.C., “areas where you’re not in close proximity to a Target store,” said a Target spokesman. “It’s where people are starved for time and trying to make the most of their budgets.”  <wwd.com>


Overstock.com piles on the holiday discounts and promotions - Overstock.com Inc. is offering more holiday discounts and contests than ever before and the strategy has produced a return to positive growth, says CEO Patrick Byrne. He wouldn’t share numbers but noted that this Monday, also referred to as Cyber Monday, was the company’s biggest sales day ever, eclipsing its previous record — set just three days earlier on the Friday after Thanksgiving—by 13%. In contrast, the sour economy caused sales around the Thanksgiving holiday in 2008 to decline on some days by about 20%, he says. With an eye toward more aggressive promotions and a constant stream of new incentives, sales so far this holiday season are looking up. “Promotions have been good for us, and we switched to free shipping for the whole season,” Byrne says. “We’ve never done this much discounting before.”  <internetretailer.com>


Joe Montana Becomes Endorser for Shape-ups - Skechers USA has signed a worldwide endorsement deal with Pro Football Hall of Fame quarterback Joe Montana in support of Shape-ups fitness footwear through 2010. The endorsement deal will span all media, including print, television, and outdoor. Montana will be seen in territories around the globe wherever men’s Shape-ups are available. "I truly believe in this product, which is why I’m looking forward to working with SKECHERS and sharing my Shape-ups experience with the world," began Joe Montana. "I spent 16 years on a football field -- it was an amazing time, but also pushed my body to its limit. Since I started walking in Shape-ups, I have noticed an improvement in my core strength, and the pressure on my back and knees has eased." <sportsonesource.com>


K-Swiss Opens First U.S. Running Store - K-Swiss has opened its first U.S.-based running retail store in Santa Monica, CA. The new store will leverage the brand's presence leading up to and during the LA Marathon in March 2010 as the race's official footwear and apparel sponsor. "The Santa Monica store will play a key role in our partnership with the LA Marathon, especially since the finish line is less than a mile away from the store," said David Nichols, executive vice president of K-Swiss. "With product, experienced staff, and coaching advice, we see the store as a go-to destination for runners as they train for this big event." <sportsonesource.com>


General Growth Files Reorganization Plan - General Growth Properties Inc. said Wednesday it filed a plan of reorganization in which lenders have agreed to restructure $9.7 billion in secured loans. The $9.7 billion in restructured mortgage loans exceeds the $8.9 billion announced last month. The Chicago-based mall operator said the restructured loans involve 92 of the 166 regional shopping centers, office properties and related subsidiaries that filed Chapter 11 along with the real estate investment trust in Manhattan bankruptcy court in April. Thomas H. Nolan Jr., president and chief operating officer of General Growth, said, “Our successful completion of agreements in principle with additional mortgage lenders shows our continued progress. We will continue to work with our other secured mortgage lenders and are hopeful that we will reach additional consensual agreements quickly.”  A hearing in a Manhattan bankruptcy court to confirm the plan is set for Dec. 15. <wwd.com>


Private Brands a Bright Spot for Men's Retailers - Private brands have become the silver bullet of the men’s wear business, helping retailers battle the economy’s malaise. In a few short months, Saks Fifth Avenue’s newly launched Men’s Collection has grown to around 15 percent of its men’s sales. Black Brown 1826, the Joseph Abboud-designed brand exclusive to Lord & Taylor, already accounts for 20 percent of the business after only three seasons. Bloomingdale’s revamped private brand — The Men’s Store at Bloomingdale’s — is expected to double its sales over the next few years. Nordstrom is testing the waters with a new men’s collection named Napoli di Nordstrom that made its debut in stores and online for fall, and Macy’s, long a leader in this category, has made no secret of the fact that its private brands have been a bright spot this fall. The reason for the newfound success is that private brands, long viewed by retailers as an opening price point classification business, have undergone a transformation. Instead of just slapping a house brand on a lower-priced dress shirt or sweater, retailers are creating full collections and devoting considerable resources internally to ensure their success.  <wwd.com>


Japan Firms May Buy More Overseas Assets as Yen Gains - The yen’s surge to a 14-year high may encourage Japanese manufacturers including auto-parts makers and pharmaceutical companies to accelerate acquisitions overseas, said bankers and analysts. Gains in the currency are also likely to increase mergers at home as Japanese exporters seek to cut costs to offset the rising price of their goods abroad, said Koji Hirai, chief executive officer of M&A advisory Kachitas Corp. Japanese companies have already taken advantage of the yen’s 30 percent gain against the dollar during the past two years to make more than 800 acquisitions overseas worth $90.8 billion, according to Bloomberg data. Accumulated profits of Japanese companies totaled $3.2 trillion at March 31, up 4 percent from a year earlier, according to a Ministry of Finance survey of 2.8 million firms. <bloomberg.com>


European November Manufacturing, Services Expansion Accelerates - Europe’s service and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession since World War II. A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area increased to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was in line with an initial estimate released on Nov. 23 and the highest since November 2007. A reading above 50 indicates expansion. The European economy is gathering strength after global governments spent billions on stimulus measures to encourage spending. While European economic confidence rose to the highest in more than a year in November, the euro’s strength is making exports less competitive just as rising unemployment undermines consumer spending, threatening the recovery. <bloomberg.com>


And-1 Re-Launches Website; Establishes Social Media Program  - And 1 has re-launched AND1.com with an integration of social media services including Facebook, Twitter and Youtube. The company said these key technological upgrades allow both consumers and retailers to more effectively connect with the brand through traditional web and social media methods, as well as through the introduction of The Prophet, a fictitious character who combines one-part sage, one-part baller.  Upon landing on the AND 1 homepage, visitors can play a Prophet- narrated AND 1 video that introduces the viewer to the brand's major product campaign spanning fall/holiday 2009 thru spring 2010, the Tai Chi Trilogy. The relaunch comes as the sneaker brand has recently reissued the iconic Tai Chi Mid, the best selling performance shoe in brand history. <sportsonesource.com>


Yesterday, the S&P 500 was essentially flat on the day but six of the nine sectors declined.  For the second day in a row the Utilities (XLU) was one of the best performing sectors.  Also, for the second day in a row there was no overriding theme that dominated trading.


Ahead of the November sales data the Consumer discretionary (XLY) was the third best performing sector, improving 0.3%.  The gains were driven by SNA (3.4%), MDP (3.3%), RL (3.0%) and WHR (2.8%).  GME was the worst performing stock trading down 8.3%.  Deflation still rules with WMT cutting prices by 20% on the top 25 video games.


Yesterday’s MACRO calendar included some mixed employment data.  The ADP private employment fell 169,000 in November, weaker than consensus expectations for a 150,000 decline.  The absolute decline is the smallest drop since July of 2008 and the eighth consecutive monthly deceleration in job cuts.


While Materials (XLB) kept the RECOVERY trade alive yesterday, the Energy (XLE) sector was the worst performing sector on the day.  Weakness in OIL following bearish inventory data and geopolitical concerns surrounding Iran seemed to be the biggest drag on the group.   January crude settled down 2.3% at $76.60 a barrel.  The government said crude stockpiles rose by 2.09M barrels in the week-ended November 27th, compared with consensus for a 400,000 barrel decline.


I can’t help but to think that the underperformance of the Financials are not foreshadowing some more MACRO drama on the horizon.  Yesterday, the Financials (XLF) underperformed the broader market.  The high quality financial institutions were among the laggards for the second day in a row.


Despite yesterdays mixed performance, the appetite for risk accelerated with the VIX down another 3.6%. 


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 33 points or 1% upside and 2% downside.  At the time of writing the major market futures are trading higher.


In early trading today, crude oil rose above $77 a barrel as the dollar weakened.  Oil rebounded after losing 2.3% yesterday as the U.S. Energy Department reported that stockpiles swelled to the highest level since August.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.61) and Sell Trade (78.88).


China’s central bank views gold prices as very high and will be wary of “bubble” assets, according to the Apple Daily.  The story citied Hu Xiaolian, a deputy governor at the People’s Bank of Chin!  Regardless, gold rose to a record $1,218.25 an ounce in the morning “fixing” in London.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,176) and Sell Trade (1,224).


Copper futures in Shanghai advanced for a fourth day to the highest level in 15 months on global economic optimism.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.17) and Sell Trade (3.25). 


Howard Penney

Managing Director














The Garbage Man

A guy walks up to me and asks 'What's Punk?'. So I kick over a garbage can and say 'That's punk!'. So he kicks over a garbage can and says 'That's Punk', and I say 'No that's trendy! <http://thinkexist.com/quotation/a-guy-walks-up-to-me-and-asks-what-s-punk-so-i/348460.html> ”
–Billie Joe Armstrong, Singer, Green Day
Keith is flying back from California this morning, so I’ve been handed the pen on the Early Look.  The title Garbage Man has many implications as it relates to investing and careers.  For me, it was actually my first job.  Yes, this former hockey head and now Macro Analyst started his working career as the Garbage Man back in his home town.  I’m not sure I learned a whole lot about investment analysis while digging through the garbage barrels back in Bassano, Alberta, but what I did learn is that as you dig through all that garbage, every once in a while you find a little treasure.
As I sit here drinking my second cup of coffee, listening to Pandora (that’s what the Millennials use to get music these days!), and reviewing the global macro news streaming on to our floor here in New Haven, there are a few little treasures that are emerging.
1.      The Chinese central bank is noting this morning that they view gold prices as very high and they will be wary of “bubble” assets.   It is interesting that the so called “Communists” see bubbles before He Who Sees No Bubbles (Bernanke) and the purported free marketers at the U.S. Fed do.  From a fundamental perspective, this is negative for gold demand in the intermediate term as China is potentially a large buyer of gold to diversify her reserves, though presumably not at bubble prices.

2.      In stark contrast to concerns over Dubai’s debt issues, both Latvia (whose GDP declined by 18.4% in Q3) and Senegal are marketing bond offerings this morning, which suggests the market for emerging market debt is strong and open.  Additionally, the spread between U.S. treasuries and emerging market debt is at 315 basis points, which is in line with levels before the Dubai restructuring was announced.  The implication is obviously that, for now, Dubai appears to be a blip on the radar screen and credit markets continue to open globally even for weak economies like Latvia. Free money and easy credit continues to flow.

3.      The less traditional gauge of employment, the Monster.com employment index, which is a monthly gauge of online job demand fell one point sequentially to 119 in November.  However, on a year-over-year basis it declined 17%, which is actually the lowest rate of annual decline since September 2008 (so a positive on balance). Interestingly, the occupation that gained the most in terms of “Top Industries Looking for Employees in November” was Transportation and Warehousing. On the margin, this report does look positive and y-o-y compares will look great starting in January.  Accelerating year-over-year employment number should also be additive to inflationary pressures, as will emergency level interest rates . . .

Another topic I want to discuss this morning is China, which we refer to as The Client.  As many of our faithful readers know, we’ve been all bulled up on China this year and rightfully so given her massive stimulus program, high growth, and low inflation, but I thought it might be interesting to lay out the bear thesis on China.  This thesis comes from well known short seller Jim Chanos.  A short seller is sort of the Garbage Man of global investing, if you will.  He or she is always sniff sniff sniffing for that company, or in this case an economy, that doesn’t quite smell right.  With a batting average of 85.1% on shorts since inception, we too know a fair bit about the dark art of shorting.
Chanos’ thesis on China, according to reports, is as follows.   First, given the enormous size of the stimulus of China, $900 billion, versus the size of the economy, $4.3 trillion, Chanos and the China bears postulate that the Chinese reported GDP expansion of 8.9% in Q3 is actually less than should be expected. Second, there appears to be some disconnect in official statistics coming out of China.  As one example, while the growth in car sales is massive, as we have noted, Chanos and the bears are noting that there is no commensurate increase in gasoline sales. Finally, they theorize that there is massive over capacity being built in many Chinese industries.  An example given is in the cement industry, where there is an estimated spare capacity of 340 million tons, which is more than the consumption in U.S, India, and Japan combined.
As of yet, we have not changed our bullish stance on China, but we are concerned about the potential for a H1 2010 slowdown in China. And certainly, any bull should know which garbage pails the bears are pawing around in before they become “trendy”, or worse before their long positions get “punked”.
Good luck out there today,
Daryl G. Jones
Managing Director


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.

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 -0.3%. 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 and 12/2.

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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