US STRATEGY – A One Day Delay

Yesterday, I wrote “on Monday there was no follow thru from the big move in the dollar on Friday.”    Well, we got the follow thru we needed to from the Dollar index (DXY) yesterday.   The DOLLAR index closed today at 76.19, up 0.6% on the day; over the last three trading days the DXY is up 2.1%.


The S&P 500 finished 1% lower on Tuesday, weighed down by the increased risk aversion resulting from renewed concerns surrounding both Dubai and sovereign credit ratings. The biggest impact of the risk aversion trade can be felt in the commodities and commodity stocks.  The Energy (XLE) and Materials (XLB) were the two worst performing sectors yesterday.  Increased sovereign concerns were highlighted by Fitch downgrading Greece's ratings to BBB+ and Moody's said that deteriorating public finances in the US and UK may “test the Aaa boundaries.”  Thanks for that!


There was an interesting divergence in the SAFETY trade as the Consumer Discretionary (XLY -0.8%) outperformed the Consumer Staples (XLP -1.1%).  The grocers presented the biggest drag for the sector as SVU (8.7%), SWY (6.8%) and KR (11.9%) sold off following weaker-than-expected Q3 results and reduced F09 guidance from KR. Reynolds American was another notable underperformer trading down 4.3% on the day. 


The biggest drag on the XLY was McDonald’s, which reported softer-than-expected November same-store sales.  Media names were the best performers in the XLY with GCI and IPG up 6.4% and 5.3%, respectively.   


The Industrials underperformed the S&P 500 by 0.5%, despite better-than expected earnings from FDX.  The company said that it expects fiscal Q2 EPS of $1.10, compared with prior guidance of $0.65-$0.95 and consensus of $0.85. Stronger volumes out of Asia were the primary drivers of the improved outlook. Surprisingly, UPS finished down 0.2% on the day.


The XLV also outperformed as the managed care group outperformed with the HMOs +0.7%; up for a third straight day. The group benefitted from continued reports downplaying the likelihood of the inclusion of a pure-play public option in the Senate version of healthcare reform legislation.


Technology (XLK) slightly outperformed the S&P 500 closing down 0.9% on the day.  The XLK benefited from the semiconductors with the SOX +0.1%. The index has rallied nearly 9% over the last seven sessions.   Yesterday’s performance benefited from XLNX, which raised its December quarter revenue and gross margin guidance.  The company cited broad-based strength across all of its end-market categories and geographies.


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  Today the range for the S&P 500 is 1% upside and 0.5% downside.  At the time of writing the major market futures are trading slightly higher.


Crude oil is trading above $73 a barrel, arresting a five-day decline.  The American Petroleum Institute said crude inventories fell by 5.82 million barrels last week. The U.S. Energy Department will release its weekly report today in Washington.  The Research Edge Quant models have the following levels for OIL – buy Trade (72.59) and Sell Trade (77.92).


Gold for February delivery declined for a fourth day, dropping as much as 1.3 percent to $1,128.70 an ounce in New York.   The Research Edge Quant models have the following levels for GOLD – buy Trade (1,130) and Sell Trade (1,185). 


Copper fell for a fifth day in London, posting the longest losing streak since July.  Japan’s economy grew less than expected in the third quarter and concern about Greece’s ability to meet debt commitments.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.12) and Sell Trade (3.26). 


Howard W. Penney

Managing Director


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In yesterday’s employment post there were three key words that I highlighted that reflect the trends in the labor market according to some recent consumer surveys  – DECLINED, WEAKENED and DETERIORATION.  Having said that, it should be no surprise that another index of consumer confidence (on the state of the U.S. economy) fell last week. 


After yesterday’s close it was reported that the ABC consumer confidence index fell to -47 in the week ending Dec. 6, down 2 points from a week earlier (a reading below zero means the number of negative responses is greater than the number of positive responses). 


The DOLLAR index closed yesterday at 76.19, up 0.6% on the day, and over the last three trading days the DXY is up 2.1%.  Also, the XLU has been outperforming by a country mile over the past week.  The SAFETY trade is in full force… 


Howard W. Penney

Managing Director




Last night’s release of the government G-19 data shows a consumer continuing to delever at an orderly, but unrelenting pace. Aggregate card debt outstanding declined $8 billion in October to $888 billion, making this the 13th consecutive month in which credit has shrank. Peak to trough decline is now up to 9% ($87 Billion).




The crunch continues to have two drivers: consumers pulling back voluntarily and banks stripping credit away from the bottom third of the borrower profile (FICO <660). The rate of decline in October was 9.3%, right in line with the monthly average over the last several months. Some might take comfort in the fact that the rate was down modestly from September (10.5%) and August (10.6%), but we think it's too early to call any sort of emerging inflection in this trend.




The G-19 data is a lagging indicator, as October-end data is just becoming available some five weeks after the fact. It's important, however, as it confirms trends unequivocally. If we see this number flatten out and reverse course we'll know that consumers (and banks for that matter) are returning to business as usual. If the trend continues, we'll know the "new normal" is becoming more and more real.


The next chart shows the monthly rate of change (annualized) going back about 40 years. The takeaway is that there's never been a period of credit contraction this sustained. We are in new territory here.




Finally, you might wonder how the individual companies are faring amidst this downturn. The answer: not much better. Take a look at Capital One's managed consumer loan growth - it practically mirrors that of the industry, and in fact, of late, has been accelerating to the downside.



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Please join us Wednesday evening for a Holiday get together.  See the invite below.



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.



Research Edge Consumer Team,

Todd, Anna, Brian, Eric, and Howard


Last Friday, the Labor Department reported that employers in the U.S. cut the fewest jobs in November since the recession began, and the unemployment rate fell to 10% from 10.2%.  Shockingly, payrolls fell by 11,000 as compared with the median forecast for a 125,000 decline (in a Bloomberg News survey of economists).  How could so many “smart” Economists be that far off?  Maybe they are right and we need to look into the source of the data! 


The data reported by the government is not supported by other independent data sources that would have suggested a greater jobs loss than the consensus estimate. 


First, the Conference Board reported some conflicting trends in November with those claiming jobs are “hard to get” hitting 49.8%, an all time high for the index (up from 49.4% in October).  On the other hand, it also reported that the labor market outlook was slightly less pessimistic.  The November survey said that those anticipating MORE jobs in the months ahead DECLINED to 15.2% percent from 16.8%, but those expecting fewer jobs decreased to 23.1% from 26.1%. As an aside, the proportion of consumers expecting an increase in their incomes decreased to 10.0% from 10.7%. 


Second, according to the Monster Employment Index, the outlook on U.S. employment conditions WEAKENED in November.  The Monster U.S. employment outlook index fell to 119 from 120 in October. The Monster index measures overall employee demand from online recruitment activity.


Third, the November ISM purchasing managers survey showed DETERIORATION in employment conditions.  The November manufacturing survey saw the diffusion index drop to 50.8, down from 53.1 in October, which, in turn was up from 46.8 in September.   A reading below 50.0 indicates outright jobs contraction. 


It should also be noted that new claims for unemployment insurance have been declining over the past several months, but I don’t believe that that this data correlates perfectly to a turnaround in the employment picture.   At best, we are seeing the beginning of a bottoming process, but the weakness in help-wanted advertising and other non-government data points confirm the downside pressures in hiring.  


Is it true that people in Washington can make up the numbers? I thought they only did that in China!  Is it true that the Bureau of Labor Statistics (BLS) has the ability to make the headline numbers look better than reality?  Unfortunately, TRUST and WASHINGTON are two words that do not go together!


If this is at all true, it would help to explain why Federal Reserve Chairman Ben Bernanke said yesterday that the “U.S. economy faces formidable headwinds.”  I would bet that the Chairman has inside information on the real numbers.  I continue to be cautious on the CONSUMER going into 2010 and we are still short the XLY.


Howard Penney

Managing Director  





Doing The Contango

“Takes two to tango two to tango
Two to really get the feeling of romance
Let's do the tango do the tango do the dance of love.”

-Dean Martin


As we noted earlier this morning in our Morning Call with subscribers (if you don’t have access please let us know), two recent fundamental factors give us pause as it relates to the prices of oil.  The first is the weakness of the Ruble over the last three days, and down 1.5% overnight.  The Russian economy, absent perhaps Saudia Arabia, has the most leverage to the price of oil, so when her currency weakens it is worth noting as a potential leading indicator for the price of oil.  The second is the continued weakness of the stock markets of the United Arab Emirates, while we understand there are non-oil issues at play here, core Middle Eastern stock markets were down another 5%+ overnight, which once again suggests there may be another culprit.


The futures markets also often give us signals about the future of the front month price of oil.    One month ago the spread on January oil futures, from Janaury 2010 to January 2011, was ~$6.00.  That spread has now widened to more than $9.00 in less than a month.  In futures parlance, this is what the floor traders call, Doing The Contango.  In instances where the futures curve is sloped upward, this is referred to as contango.   It is a normal state given that there are carrying costs to store oil, or any commodity for a period of time, but when the futures curve exceeds the carrying costs, the market is sending a direct signal. In effect, the curve is signaling that in the short term, there is more than enough oil above ground, which is a bearish short term price signal.


We are also starting to see some posturing ahead of the 155th OPEC meeting in Angola on December 22nd.  Saudia Arabia’s Oil Minister, Ali al-Naimi, said the following while speaking at a meeting of various Arab states:


“Everything is so good now, we don't have to think very hard….The market is stable right now, volatility is minimum and everybody is happy with the price. It is in the right range.”


The Saudis are either quite complacent at the moment, quite happy at the moment, or attempting to signal that they do not think there should be any change in production, which is perhaps in their best interest, but not the other participants.  It is also interesting to note that five non-OPEC members have been invited to this meeting, including Mexico and Russia, who combine to produce close to 15% of the world’s oil.


We currently have no position in Oil, but do continue to have a bullish view in the TAIL, which is three years or less, based on supply and demand dynamics that favor a longer term tightening of supply.  In the TRADE and TREND, less than three weeks and less than three months respectively, the data points outlined above give us pause as it relates to being bullish on price.  In addition, as we’ve outlined in the chart below, we have started to see a marginal decoupling in the correlation between the U.S. dollar and oil, which has been the primary factor driving price this year.


While we aren’t ready to be short of oil, we do know that when oil is Doing The Contango, it is probably not the “dance of love” for the oil bulls.


Daryl G. Jones
Managing Director


Doing The Contango - nah


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

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