Chart of The Week: Unemployment Read Through

Friday’s drop in the unemployment rate to 10% had a major impact on the short end of the US Treasury curve, the price of the US Dollar Index, and the price of Gold.


On a week-over week basis, these 3 moves were as follows:

  1. US Dollar Index +1.5%, closing above its immediate term TRADE line of $75.36
  2. 2-year Treasury yields shooting up +22% to close the week at +0.83% versus +0.68% in the week prior
  3. Gold prices dropped 6% from the intra-week highs, and down for the 1st week in the last 5

In the Chart of The Week, Matt Hedrick and I show what the currency and bond markets wanted Ben Bernanke to see. What matters here, as always, is what happened on the margin.


That big green arrow in the bar chart dropping from a +40bps sequential acceleration in the unemployment rate to 10.2% (October) to the minus -20bps monthly deceleration (November) is the largest delta we have seen on a month-to-month basis going back to when this crisis in US employment began.


He Who Sees No Bubbles (Bernanke) obviously saw some pop (gold and 2-year Treasuries) on Friday. Yes, they are both priced in US Dollars. No, they didn’t crash. But they did pop.


The Federal Reserve continues to maintain a policy of “exceptional and extended” that we (and now the bond, gold, and currency markets) , consider UNREASONABLE and UNSUSTAINABLE.


ZERO is not a perpetual rate policy. Just get it over with Ben, and raise by 50 beeps. The market is already discounting the move.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Unemployment Read Through - unemploy10


Chart of The Week: Unemployment Read Through - bpchange


YUM – What is wrong with this picture?

There is still no rational explanation for the decline in sales trends in YUM’s China business.


Given the sequential deceleration in same-store sales trends in China there are many unanswered questions as to WHY.


(1)    The trends suggest that there are bigger issues with the Chinese consumer or there may be issues with the concept.


(2)    YUM’s aggressive posture toward unit growth might be generating self inflicted issues that are complicating the country’s economic issues. 


With all three of YUM’s key business units now seeing declining same-store sales, 2010 will be a challenging year for the company.  The US business is in a free fall with same-store sales down 8% in 4Q09.  The issues in the US are obvious and will be very difficult to correct without a major investment by the company.  Given that management guided to 5% operating profit growth in the US in 2010, it must be relying on increased cost cutting to drive that growth so there does not seem to be much room for significant investment in the business. 


YRI’s comparable sales turned negative in 4Q09 as well, down 1%.  YRI is primarily franchised, but the top line still matters, just to a lesser degree.


This brings us to China and the question about why business is declining so rapidly.  YUM’s future is extremely dependent on China and continued growth in the country.  As the story goes, China has billions of consumers and can support tens of thousands of units.  Unfortunately, less than a ¼ of them can actually afford to go to the concept.  


To be clear – there continues to be unit growth opportunities for YUM in China.  The fact remains, however, that the company is growing too fast in that market.  Supporting the company’s claim that the slowdown in sales trends in China is attributable to the Chinese economy is the fact that McDonald’s is not doing well either.  In response to the changing tone of business in China, McDonald’s has slowed unit growth. 


I have been making the claim that YUM should slow its growth in China for the better part of a year and from where I sit, it’s more imperative now.  It does not matter if the decline in demand stems from YUM-specific issues or from economic pressures on the Chinese consumer.  Either way, declining sales suggest that the economic model is changing and so are returns. 


Senior management does not agree with my assessment of the growth related issues in China, and has said that I am too US-centric in my analysis.  I might just be a typical US restaurant analyst and I might not fully understand the China story.  That being said, I do understand the math behind declining same store sales!



YUM – What is wrong with this picture? - YUM China SSS



Retail First Look: Peak on Peak is Not Sustainable


December 7, 2009





EPS season is largely over. Macro season begins. Conviction (as measured by volume) is decelerating for retail – counter to what we see in the market. Add that to peak multiples on recovery earnings, and we’re setting up for a big bifurcation in 2010. That’s only 4 weeks away.



Earnings season is largely over, and now it’s Macro time through year-end. The Retail space is hanging right in there with the market – but where’s the conviction? S&P volumes (the best gauge of conviction) are flat to up, while Retail Sector volume is decelerating sharply. This is the first time we’ve seen this all quarter. On the same token, we’re looking at 20x p/e valuation on 20% consensus bottom-up 12-month forward earnings growth expectations. So let me get this straight… before the March 9th low, we had trough multiples on depressed earnings, and now we seeing peak multiples on recovery earnings. I’m not going to make valuation calls here, because the reality is that there are certain names that DESERVE to be expensive. But in maintaining the integrity of a bell curve, there are others that deserve to be cheap. That’s what we’re not seeing. I’m sticking with my view that we’ll begin to see a massive bifurcation in both cash flow trajectory and valuations intra-sector beginning in 2010.


Retail First Look: Peak on Peak is Not Sustainable - 1


Retail First Look: Peak on Peak is Not Sustainable - 2


Retail First Look: Peak on Peak is Not Sustainable - 3




  • As several of the companies we identified in our research on NOL Carry Backs on Nov 8th (i.e. TLB, CHRS, LIZ, & DDS) report earnings, the issue is becoming more impactful to results. CHRS reported last week and spoke in more detail about the NOL benefit and what they could expect to receive, and TLB reports tomorrow morning. With volatility amongst small-caps likely to remain high, this item is a positive ‘stocking stuffer’ for a select few that could use it. Other than LIZ, TLB is one of the more significant beneficiaries of this bill.
  • As the rumors continue surrounding Amazon’s potential purchase of European private-sale operator, Vente-Privee, a new site is gaining attention and investors. One Kings Lane has just landed an investment from Kleiner Perkins, adding to the growing list of private-sale operators attracting private equity and/or M&A attention. One Kings Lane offers discounted home furnishings over a sales period that usually lasts 72 hours.
  • The introduction of video games in Big Lots assortment during Q3 helped to drive an increase in the teens for the company’s electronics category. The company continues to expand its offering in electronics and is benefitting from increased SKU counts in televisions, DVD’s, and digital cameras.
  • More than half of all retailers are embracing social networking this holiday season in an effort to drive sales and brand awareness. This compares to only 4% of retailers using similar marketing techniques in 2007. Of those using social media, 76% are on Facebook and 50% are on Twitter.




Nike Opens Nike 6.0/Hurley/Converse Concept Store - Art and community combined with shopping at 225 Forest Thursday night. The concept store, which sells Hurley, Converse and Nike 6.0 products, hosted a release party for Munny World. Kids, teens and adults customized the faceless vinyl figures with permanent markers, stickers, spikes and fabric to create their own unique toy. Hosting events with a wide appeal is one way the store, at 225 Forest Ave., stands out from other surf or skate shops, said Adrian Nyman, senior vice president of branding for Hurley. "We really want to make this more about creativity," he said. Themes of art and community run throughout the store, which opened in July. The centerpiece is a painting that spans the store's two stories, created by artist Dalek with help from Laguna Beach High School students. Much of the materials used to build the store's interior are recycled. For Thursday's event, a DJ played records while locals shopped, crafted their new Munny or snacked on vegan cupcakes. "We want to have a relationship," Nyman said. "It's definitely a consumer experience." <>


U.S. Retail Hiring Rate Rose to Highest Level in 2009 - Hiring by U.S. discount, grocery, restaurant and specialty chains in November rose to the highest level in 2009, signaling that retailers may be anticipating a gradual recovery in consumer spending, a monthly survey found. In November, 3.87 percent of applications resulted in hires, the most this year according to seasonally adjusted figures compiled by software maker Kronos Inc. Job applications last month fell to 1.27 million, the lowest since March, after 10 straight months of increases, the closely held Chelmsford, Massachusetts-based company said today in a statement. While these are classic signs of a gradual, post-recession recovery, last month’s hiring increase might be a “spill over” from October, as retailers delayed the peak season for taking on employees, Robert Yerex, Kronos’s chief economist, said by telephone Dec. 4 from Beaverton, Oregon.  <>


U.S. Department Stores Add 7,500 Jobs in Nov. - Retailers increased payrolls in November in anticipation of the holiday shopping season as the U.S. unemployment rate dropped unexpectedly and employers cut the fewest jobs since the recession started. Department stores added 7,500 jobs to employ 1.52 million people, recouping part of the revised 12,400 jobs cut from payrolls in October, the Labor Department said Friday. Specialty stores added 900 jobs to employ 1.41 million workers, after a revised decline of 600 jobs in October and an increase in payrolls in September. The unemployment rate fell to 10 percent in November after reaching a 26-year high of 10.2 percent in October, and the economy shed just 11,000 jobs, following three months of job losses averaging 135,000 a month. Although losses continued in manufacturing and construction, the private services sector added jobs for the first time since December 2007. <>


Macy's, Sunglass Hut Strike Eyewear Deal - Luxottica Group has signed an agreement with Macy’s Inc. for its Sunglass Hut unit to serve as the sole operator of the retailer’s in-store sunglass departments. Macy’s will be the only U.S. department store to house Sunglass Hut shops. Beginning this spring, Macy’s will open an additional 430 Sunglass Hut departments, bringing its total to 670 by spring 2011. The new locations will operate as leased units. “Through this agreement, Macy’s is able to offer a comprehensive assortment of sun eyewear, including brands not previously available in all Macy’s stores,” said Ron Klein, Macy’s chief stores officer. “Sunglasses are an important fashion and functional accessory for our customers. Going forward with Sunglass Hut, we will be able to offer a wider choice of styles, supported by the high level of service associated with Macy’s.” Through the partnership, Sunglass Hut wants to strengthen its presence in the U.S. The retailer operates in more than 2,000 locations worldwide, including the Caribbean, Europe, Australia, Asia, the Middle East and South Africa.  <>


Dave McTague Leaves Liz Claiborne - Dave McTague, executive vice president of the Partnered Brands division, left the company Friday. McTague is the latest to depart in the wake of the October deal to license the flagship brand to J.C. Penney Co. Inc. That move, which also shifted the Isaac Mizrahi-designed Liz Claiborne New York line to QVC, cost 115 Claiborne employees their jobs, although 15 were offered positions at QVC. “The operating strategy and landscape of the Partnered Brands portfolio has changed dramatically in the past two-and-a-half years,” said William L. McComb, chief executive officer. “In light of this, Dave’s departure and the new distribution strategy for the Liz Claiborne brand franchise, we are rethinking the management structure of the Partnered Brands business segment. I thank Dave for working so hard on behalf of Liz Claiborne Inc. during his tenure here and wish him well in the future.” <>


E-retailers offer plenty of holiday deals, but pull back on free shipping - Among the top 100 online retailers, 68 offered free shipping offers for the week of Monday, Nov. 30, a slight drop from 71 the prior week, according to a survey by Internet Retailer. In the comparable week a year ago, 66 offered free shipping. In addition, 62 retailers in the top 100 also presented major promotional displays on their home pages—many with discounts of up 50%—and more than 40 followed up with special e-mail offers to shoppers who had signed up for e-mail promotions. Five retailers introduced free shipping offers for the week, including QVC and Abercrombie & Fitch Co. Meanwhile, Apple dropped its $50 minimum order to qualify for free shopping, allowing free shipping on all items. Among the retailers that changed their free-shipping offers, several restricted the benefit. <> Offers an Actual World Catalog - A company that could be the model for Internet retailing success is peddling goods by paper as well as by pixels. Zappos Life, the catalog of the virtual seller of shoes, is also advertising handbags, jewelry, clothing and fragrances., the online seller of shoes and other merchandise that was recently acquired by Amazon, is mailing 750,000 copies of a printed catalog to consumers. The catalog, timed for holiday shopping, bears the title Zappos Life and has a fashion and designer focus, offering products like handbags, jewelry, clothing and fragrances in addition to the mainstay, footwear. Among the brands featured in the fashion catalog are Cole Haan, Guess, Calvin Klein, Lucky, Stila, True Religion and Stuart Weitzman. They can be bought on the Web site or by calling a toll-free telephone number. (The catalog can also be read at <>


Intimacy Chain to Open Second Manhattan Unit - Intimacy, an eight-store chain specializing in bra fitting, plans to open its second store in Manhattan on Dec. 18, said Susan Nethero, founder and chief executive officer. The boutique, located at 62nd Street and Third Avenue, is 2,500 square feet with 11 dressing rooms occupying about half the square footage. Intimacy’s existing unit at 90th Street and Madison Avenue is 1,100 square feet and has sales of about $3,000 a square foot, Nethero said. Other units average $2,500 a square foot. Nethero, who plans to have 25 stores by 2014, attributed part of Intimacy’s rapid expansion to “the Oprah effect.” She has appeared on “The Oprah Winfrey Show” five times in the past five years talking about “bra violations” and showing how a properly fitted bra can transform a woman’s figure and style.  <>


Phoenix Footwear Secures $4.5 Million Credit Revolver - Phoenix Footwear Group, Inc. said it has entered into a new two year, secured revolving credit facility with First Community Financial, a division of Pacific Western Bank. The facility replaces the company's previous credit facility with Wells Fargo Business Credit 9NYSE: WFC). The new credit facility provides for a line of credit up to $4.5 million, subject to a borrowing base limit, and as of December 4, 2009, has $2.0 million in borrowings, net of cash, outstanding under the new facility.  <>


China to Maintain Policies, Boost Consumption in 2010 - China’s top leaders pledged to maintain a “moderately” loose monetary policy stance and “proactive” fiscal policies next year to bolster growth in the world’s third-largest economy. The government will ensure policy continuity, boost consumer spending and adjust growth models, the official Xinhua news agency reported, citing the annual central economic work conference between Dec. 5 and today in Beijing. President Hu Jintao and Premier Wen Jiabao attended the meeting, Xinhua said. Chinese policy makers are weighing the potential threat from inflation and asset bubbles against the need to maintain stimulus measures to create jobs and sustain the nation’s rebound from the slowest growth in almost a decade. The Communist Party’s Politburo said last month that existing monetary and fiscal policies would be maintained in 2010 and Premier Wen rebuffed calls for the yuan to strengthen. <>


How social network investments can boost natural search results - While social media results currently account for only about 7% of the search engine listings of 1,000 branded keywords reviewed in a recent study, that percentage is likely to grow significantly in 2010, making social media a significant opportunity for brands seeking to show up more prominently in search results, according to the study, “The State of Search,” from digital marketing agency 360i. That opportunity stems from the fact that most current search results listings draw from social media venues that are not controlled by the brand, according to 360i. The report found that 77% of the YouTube, Twitter and Facebook listings that appeared for brand searches in a cross-industry review of the top 100 U.S. brand advertisers were controlled by a party other than the marketer.  <>


Stride Rite Children's Group Appoints President - The Stride Rite Children's Group (SRCG) unit of Collective Brands Performance + Lifestyle Group announced that it has appointed Sharon John as its unit president. John will lead SRCG and its expanding portfolio of brands including Stride Rite, Robeez, Saucony Kids, Sperry Top-Sider Kids, Keds Kids, Jessica Simpson Kids, Tommy Hilfiger Kids, and more. SRCG said John has extensive experience in Children's brands, marketing to moms and kids, and strong licensing, product development and innovation expertise at such companies as Hasbro, Inc. and Mattel, Inc., among others. John will begin in her new role in late December and report to Gregg Ribatt, president and chief executive officer of the Collective Brands Performance + Lifestyle Group. She will head up all functions of the SRCG team including product creation, sales, marketing, merchandise planning and distribution, as well as retail which includes retail merchandising and operations of more than 350 Stride Rite stores. <>


John Lewis reports best-ever week - John Lewis has recorded its best-ever week, with sales in the week to Saturday December 5 £1m ahead of its previous record week set in 2007. Sales at John Lewis during the period were £102.4m, 13.8% up on the same week last year. The figure also represents a 6% rise on the equivalent week in 2007, when figures were not impacted by the turbulent trading conditions seen in 2008 following the banking collapse. Records were smashed in departments including gifts and online arm reported its highest sales for one week. John Lewis said that this week is the earliest time in the Christmas season that the department store recorded a figure in excess of £100m. John Lewis added that branches across the country revealed that shoppers are buying gifts and preparing for a family Christmas at home. <>


German Manufacturing Orders Unexpectedly Declined in October - German factory orders unexpectedly fell for the first time in eight months in October, led by a decline in export demand. Orders, adjusted for seasonal swings and inflation, dropped 2.1 percent from September, when they rose 1.3 percent, the Economy Ministry in Berlin said today. Economists expected a 0.8 percent gain in October, according to the median of 38 estimates in a Bloomberg News survey. Orders were 8.5 percent lower than a year earlier. Germany’s economic recovery may slow as the impact of government stimulus measures, such as the now-expired cash-for- clunkers program, dissipate and the stronger euro erodes export revenues. Daimler AG, the world’s second-largest maker of luxury cars, said last week that it will shift production of its best- selling Mercedes-Benz C-Class model to Alabama to reduce its reliance on German factories and take advantage of the cheaper dollar.  <>


Brazil ends the year with a sharp fall in exports - In November Brazilian leather exports grew by 11% compared to the same month of 2008. Consolidated figures from January to November show a fall of 42% with US$1.028 billion exported in leather and hides compared to US$1.782 billion in 2008. In other words, Brazilian tanneries did not manage to sell a total of US$754 million in leather internationally. After registering falls which in their worst moments reached 60% the sector has been gradually recovering. In October, the decline was limited to a somewhat better 18%. Nevertheless, with only one month to go before the end of the year the data available clearly illustrates the difficulties experienced by the sector this year. The December figures will round off the final result of 2009 and give the definitive shortfall compared to 2008, when US$1.88 billion were exported. <>

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Geithner Groupthink Inc.

“When your work speaks for itself, don’t interrupt.”
-Henry Kaiser

Now that one economic crisis is out of the way, it is time to proactively manage toward not perpetuating another one. This morning we are being reminded that risk management is a daily and global exercise. Gold, Greece (down -3%), and the United Arab Emirates (down -6%) are getting rocked.
If there is one thing that Americans should realize by now, it is that reactive risk management doesn’t work. Today, our immediate-term focus should be on the economic leadership being provided to President Obama by his Wizards of Perceived Financial Wisdom. These guys impose serious systemic risk.
For starters, within the first 3 minutes of Tim Geithner’s Friday interview with Bloomberg’s Al Hunt, take his word for it:
1.      “I’m not an economist.”

2.      “Economists don’t know much about the future.”

3.      “Personally, I wouldn’t associate myself with any estimates on what these things might actually do.”

Ok. Maybe you shouldn’t take his word for it. You definitely shouldn’t have taken his word for it when it comes to filing his own taxes. I guess he’s not really an economics or a tax guy. He’s just the head of the US Treasury and former head of the New York Federal Reserve (2003).
At one point in Friday’s interview, when asked about what grade he would give himself, Geithner proclaimed “I am a very tough grader.” Then he suggested we grade him “by the policies we create.”
Uh, ok…
Not to be “very tough” on you Timmy, but if I only started with the policies that you helped established post 2003 at the New York Fed, this would be embarrassing enough. You know, some of the bigger policy moves, like signing off on the elimination of leverage ratios for the 5 major levered long banks. Timmy, you don’t want us to audit all of the policy you have signed off on or been a part of creating since you joined the Treasury in 1988 do you?
Here’s some advice. Stop blaming Goldman for compensation practices that you signed off on, and resign. This will save the US some credibility before it is too late. You are now trying to save your political career by throwing bankers under a bus that you drove. You are now arguing that “we want to see fundamental constraints in how senior executives are paid.” I just want fundamental constrains on how you were able to empower the system to pay them.
Need more history on Geithner other than where he worked and what policy he implemented? Look no further than one of his mentors - Larry Summers. Rather than take my (Jack Meyer’s) word for it, just read the Boston Globe article by Beth Healy last week titled, “Harvard Ignored Warnings About Investments.” That will get you up to speed on how a forefather of Geithner Groupthink Inc. (Summers) thought about managing risk.
In that article, Harvard professor, Harry Lewis nails my overall point on the matter right on the head in saying, “Whether or not anyone in particular made a mistake in this situation, it shows a fundamental structural problem. The power is just in the hands of too few people with too little accountability.’’
Geithner called this an “era of irresponsibility in high bonuses.” I call it an era of unbelievable incompetence. That’s all I have to say about that.
This morning, away from waking up to a reminder that interest rates on the short end of the US Treasury curve cannot stay at ZERO forever, we are being reminded that things priced in dollars, including petrodollars, go down when the price of dollars goes up. Fancy that.
I called 3 things bubbles last week. All 3 had different durations:
1.       Gold = immediate term

2.       Short Term Treasuries = intermediate term

3.       Banker Bonuses = long term

Since gold and 2-year Treasuries are down -6% and -27% since we made that call last Wednesday, Geithner can grade us with an A in proactive risk management. Yes, Timmy - proactive means before risk is revealed, not after.
This morning the Treasury is going to proclaim its mystery of faith suggesting that the “cost” of the TARP is $200B lower than where they thought it would be in August. These flailing politicians are also going to try to convince Americans that these are “savings” and that they are going to help either create jobs or pay down the deficit. Are you kidding me? This is the problem with Geithner Groupthink Inc. – these guys think Americans are that stupid.
Timmy, we know you are not an “economics” guy, but here’s how the math really works. Keeping interest rates at ZERO has funded massive spreads in what we affectionately call the Piggy Banker curve (or Yield Curve). Bankers with the special privileges (that you and the Fed have signed off on) borrow short on the cheap and lend long at some of the highest Yield Spreads EVER to the American citizenry. Then they keep all the moneys, and pay you back with it.
The real “cost” of these Banker bonuses comes out of Americas savings accounts. Geithner helped underwrite his own grading system. It’s not Goldman’s problem. It’s the Savings Rate Stupid. You created the rules of the system. The bankers are doing exactly what you empowered them to do.
My immediate term support and resistance levels for the SP500 are now 1088 and 1117, respectively.
Best of luck out there today,


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.

US STRATEGY – The data no longer supports a weak currency

Taken together - the labor market, the trade picture, corporate profitability and the Fed's free money policy – do not support a weak dollar.  Importantly, the two sectors that have benefitted the most from a weak dollar are signaling that changes are coming.  The Energy (XLE) in BROKEN on TRADE and the Financials XLF is BROKEN on TRADE and TREND. 


On Friday, the S&P 500 finished higher by 0.6% and closed up 1.3% on the week.  The S&P 500 made a lower-high on an outside reversal; TRADE and TREND are bullish.  On Friday the MACRO calendar was more supportive to the RECOVERY trade. 


Friday started off with a bang as the market rallied sharply following a significantly better-than-expected November employment report, with some much needed support for the RECOVERY trade.   Nonfarm payrolls fell 11,000 in November, compared with expectations for a 125K decline.  Last month's decline was the smallest since December of 2007. In addition, there were significant upward revisions to the prior two months, while temporary employment, rose 52,000 in November.  The unemployment rate fell to 10% from 10.2% in October as household employment rose by 227K and the labor force declined by 98K.


While the S&P pushed to another new high for the year, the market could not ignore the sharp bounce in the dollar and the reality that the Fed may have to start unwinding its free money policy sooner than expected.  On Friday the dollar index (DXY) closed up 1.7% to 75.91. As a result commodities and commodity stocks were hit the hardest by the move in the dollar. 


The Materials (XLB) and Energy (XLE) were the two worst performing sectors on Friday.  Within the XLB, precious metals stocks were among the worst performers - DD (7.2%), FCX (4.7%) and NEM (4.3%) were the notable decliners. 


The three best performing sectors were Financials (XLF), Industrials (XLI) and Consumer Discretionary (XLY).  The XLF was the best performer sector after being the worst on Thursday.   The three best performing stocks were MCO +7.7%, PFG +7.0% and KIM +6.5%.  The improvement in the labor market was supportive of a move in the Professional Services (MWW +15% and RHI +11%) and Airlines (which helped the XLI outperform) and other select consumer discretionary names.


Semiconductor stocks finished higher for a fifth straight session Friday with the SOX +2.1%. The latest round of gains was fueled by the strong Q3 earnings and Q4 guidance out of MRVL, which was up +9.3% on the day. 


Volatility got crushed last week, with the VIX down 5.4% on Friday and 14.1% for the week.   


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 is dropping for a fourth day in a row (trading below $75 a barrel) as the dollar is stronger on speculation the Fed will raise rates.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.25) and Sell Trade (78.52).


Gold fell for a third day in Asia after the dollar’s rally hurt gold on Friday.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,134) and Sell Trade (1,187).


Copper is lower for the third day in a row as the dollar is stronger.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.26). 


Howard Penney

Managing Director


US STRATEGY –  The data no longer supports a weak currency - sp1


US STRATEGY –  The data no longer supports a weak currency - usd2


US STRATEGY –  The data no longer supports a weak currency - vix3


US STRATEGY –  The data no longer supports a weak currency - oil4


US STRATEGY –  The data no longer supports a weak currency - gold5


US STRATEGY –  The data no longer supports a weak currency - copper6


McCullough Calls Geithner's Goldman Remarks Political: Video

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