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Respect The Fans

“It's impossible to work under conditions where they confused negativity with objectivity. You can't fool the fans.”
-Marv Albert

As Washington and Wall Street become one and the same, politicians and bankers are having a very hard time fooling the citizenry. Americans are not stupid. The fear- mongering associated with maintaining a ZERO percent rate of return on American savings is a tax. Borrow from the people to pay the bankers? The fans don’t like it.
This morning’s Bloomberg National Poll saw those who see this country headed in the right direction drop to 32% in the first week of December. That number was 40% back in September and continues to fall, despite the stock market’s climb. Timmy Geithner thought that Burning The Buck would get the Debtors, Bankers, and Politicians paid. The score there ends up being 2 out of 3. There is a bubble in Big Government. The politicians are losing political capital.
Only 26% of respondents rated the Treasury Secretary “favorably.” That’s bad. I’ve said this before and I’ll say it again this morning: I think Geithner should either resign or be fired. Replace him with Paul Volcker, or someone with credibility. Sustainably strong markets are built on confidence. America’s is waning.
On Friday, we are going to get the University of Michigan Consumer Confidence report. Our head of US Strategy, Howard Penney, continues to be as right as the sun rising in the East on his consumer confidence forecasts. The short term highs we saw in American Confidence readings are now in the rear-view. We have already seen the Michigan survey drop from 73.5 in September to 70 in October to 67 in November. December will be another lower-high versus September.
In our macro models, lower-highs are bad. We aren’t just seeing this in America’s Confidence readings (this week’s ABC/Washington Post reading dropped to minus -47!). We are seeing this across global commodity and equity markets. We are seeing confidence in certain Sovereign Debt markets implode. What we are seeing is a Minsky Moment, of sorts. Piling debt, upon debt, upon debt … and socializing the losses of economic systems has a price. “You can’t fool the fans.”
Some people were fooled into thinking that credit issues from Dubai to Greece were one-day trading events. That couldn’t be further from the truth. I see no irony in the timing of between the world’s reserve currency collapsing to lower-lows (October and November) and the popping of sovereign debt bubbles. Never underestimate the power of 63% of this world’s debt being denominated in US Dollars. Crashing that currency has many unintended consequences.
Stock markets in the Middle East and Europe have two things in common – a price and a date. On October 14th, both the Athex Index in Greece and the DFM Index in the United Arab Emirates put in their highs for the year. Since October 14th, here’s what prices have done:
1.      UAE (inclusive of trading down another -6.4% this morning) = DOWN -35%

2.      Greece (inclusive of trading down another -2.4% this morning) = DOWN -27%

CNBC might tell you that these aren’t risks. Apparently the local fans from Dubai to Athens are on the other side of that opinion. By any mathematical consideration, over a 2-month duration, these are called stock market crashes. “You can’t fool the fans.”
Now the fun part. As the US Dollar rallies, all of these levered up REFLATION trades start to really unwind. If a Burning Buck got the DEBTORS paid. A Bottoming Buck calls in those chits. This is why I raised my Cash position into November end. In the immediate term, Dollar DOWN and Dollar UP were going to be bearish.
Across the board, here are the REFLATION markets that have all of a sudden broken what we call our immediate-term TRADE line of support:
1.      Japan’s Nikkei

2.      Hong Kong’s Hang Seng

3.      Australian stocks and dollars

4.      Canadian stocks and dollars

5.      Russia’s RTSI Index

6.      UK’s FTSE Index

7.      US Financial stocks (XLF)

8.      The CRB Commodities Index

9.      Oil

So if you didn’t know that there was a high inverse correlation between US Dollars and most things priced in Dollars, now you know.
The fans definitely know. I had dinner with some of the more thoughtful investors in Boston last night. The weather was crisp. Their thoughts were sharp. These guys are far less bullish than consensus has recently become. I guess it’s only fitting that last week marked the YTD low on the bearish side of the Institutional Investor survey (at the market top). These Boston boys are apparently allowed to be bearish.
Importantly, these investors are not Crash Callers. These are simply market craftsmen who were smart enough to sell some of their REFLATION P&L before it started to unwind. Everything has a time and price. In the end, a strong currency is what these Americans crave. For now, we just need to respect and understand that the math associated with the REFLATION score is proactively predictable.
After moving my Asset Allocation to ZERO on the International Equity side a few weeks back, I put my first toe back in the Brazilian waters yesterday, buying back our bullish long-term TAIL position in the Brazil ETF (EWZ). I have dropped my position in US Cash down from 67% last week to 58% this morning. I feel like taking my time. So I will.
Respect the fans. They set marked-to-market prices. They vote real-time.
My immediate term support and resistance levels for the SP500 are now 1085 and 1101, respectively.
Best of luck out there today,



EWZ – iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

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).

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.

– 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 – 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


US STRATEGY – A One Day Delay  - sp1


US STRATEGY – A One Day Delay  - usdx2


US STRATEGY – A One Day Delay  - vix3


US STRATEGY – A One Day Delay  - oil4


US STRATEGY – A One Day Delay  - gold5


US STRATEGY – A One Day Delay  - copper6




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



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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.




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