The risk associated with governments piling on debt is not a new theme for us, however yesterday’s move by Fitch to reduce the Greek sovereign rate from A- to BBB+ was front page news. The chart below shows the yield on the 10-Y Greek Bond versus the perceived credit worthiness of the 10-Y German Bund. Clearly investors will expect a significant risk premium to own Greek debt on the longer end of the curve, which should continue to push up yields even if the Greek Finance Minister George Papaconstantinou said that there is “absolutely” no risk the country will default on its debt or seek an EU bailout.


With Greece pushing a government deficit of 12.7% of GDP this year (the EU mandates under 3%) and Greek banks facing more difficulty raising funds with a deteriorated credit rating, the government must bite the bullet and administer aggressive spending cuts. 


We’ll have our eye on potential ripple effects throughout the region. Just over the last 4 weeks we’ve seen yields on 10-year bonds from such countries as Ireland, Hungary, and Portugal blow out, while Germany and France have held steady and even come in. 


The Greek god responsible for earthquakes, Poseidon, is making financial tremors that are being felt in sovereign markets around the global.


Matthew Hedrick



Poseidon - GK vs DE


Being that CKR had already preannounced its fiscal 3Q10 sales and restaurant level margins last month, the most important news that came of the company’s earnings call was its full-year sales and restaurant level margin guidance.  Management guided to -3.5% to -4% blended same-store sales and a 20-40 bp decline in full-year margins.  Based on the sequentially decelerating top-line trends year-to-date, this sales guidance is not surprising.  The full-year margin guidance, however, implies about a 110-200 bp decline in the fourth quarter and breaks the company’s year-to-date trend of maintaining YOY margins despite top-line weakness.  We knew it was only a matter of time!


As I have said before, margins could not continue to move higher with comparable sales trends getting increasingly worse.  And, period 11 comparable sales (also reported yesterday) did just that.  Carl’s Jr. same-store sales decreased 8.1%, implying a 50 bp sequential decline in 2-year average trends from period 10.  Although Hardee’s same-store sales improved slightly on a 2-year average basis, it was not enough to offset the free fall at Carl’s Jr. and blended 2-year average trends declined 30 bps on a sequential basis.  The low end of the company’s full-year blended same-store sales guidance assumes that 2-year average trends deteriorate more than 50 bps in the balance of the quarter from period 11 levels.


Favorable commodity costs have helped to support restaurant level margins despite the significant demand headwinds with food and packaging costs as a percentage of sales declining 60 bps YOY in Q1, 140 bps in Q2 and 180 bps in Q3.  The company is still expecting some commodity favorability in Q4, though to lesser magnitude than in Q3, as CKR management pointed out (as did I last month) that food prices have bottomed and are moving higher.  Even with this continued favorability, margins should decline 110-200 bps YOY in the fourth quarter.  What is going to happen to CKR’s “industry leading” margins once food inflation returns?




CKR outlined some of its new sales building initiatives on its earnings call, which are included in the slide below, and I am not convinced that any of them will be the game changer the company needs to stem the declines at Carl’s Jr.  As far as I can tell, the only new idea on the list is the company’s strategic decision to focus more attention and advertising on its healthier options, including salads at Carl’s Jr.  Although salads are not new to the concept, the company has not advertised or upgraded them in the recent past because they did not appeal to its targeted “young, hungry guys.”  Management believes that this demographic is more health conscious now and that with digital media that it can more effectively market its newly upgraded salads to women without alienating its primary audience. 


First, I don’t think salads will prove to be a real traffic driver for Carl’s Jr’s “young, hungry guys”.  Second, and more importantly, salads typically carry lower margins and decrease add-on sales such as French fries.  Management stated that the lower incidence of sales of side items and combos meals is already largely to blame for the current comparable sales trends and though this problem is not unique to Carl’s Jr., salads will not help on this front.





Big Finger Point

The Walking Co filed Chapter 11, with the primary reason given being ‘uncooperative landlords’ in its effort to renegotiate rents and shed unprofitable stores.  C’mon guys… give me a break. Where’s your accountability? Do you think that just maybe the REAL reason is that your concept doesn’t really deserve the right to exist in the first place? We’ll see more of these n 2010.

Hedgeye Statistics

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

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

Retail First Look: China Sends A Scout to US Shores


December 9, 2009





I’ve been increasingly concerned that China flexes its muscle to become a bigger force in the US footwear supply chain as it increasingly exports content instead of only its cost of manufacturing. Li Ning is firing the first shot. Watch this everyone. It matters.



Did anyone notice that Li Ning (top local brand in China) will be testing the US market in January with its first retail outlet and R&D center outside Asia in Portland (yes, Nike’s stomping ground)?  On one hand, I took a look at the choice of location and my initial gut baffled me. But the we probably have to think a bit more strategic about this… Yes, Li Ning wants to test the US market, but they’re doing this with the intent of the US being a much more meaningful part of its business 2-3 years from now.  Can someone give me a good reason why Li Ning could not get to 3-4% share of the $18bn US athletic footwear market? The only way to do that is to beef up talent. What better place to be than in the collective backyard of Nike, Adidas USA, Columbia, and a host of smaller brands that will all serve as a source of both market intel and talent as the years progress.


This is just the beginning, folks. People are so hyperfocused on US companies finding nickels and dimes by manufacturing their wares in China and then importing finished goods back the states. In fact, we’ve been all over those nickels and dimes. But let’s not lose sight of the fatter-tailed call here, which is a secularly-stronger Chinese currency giving Chinese content owners the opportunity to compete with US incumbents on their own soil at lower prices.


So let me get this straight…We’ve got an Asian company with a structural low-cost advantage, better access to capital and better cost of capital, that is making a shift towards exporting its content, instead of China simply allowing foreign brands to use its manufacturing assets. This product is competing against many over-levered marginal brands and retailers, and are being sold to US consumers who are collecting ZERO percent on their savings accounts and are likely devoid of any form of stimulus whatsoever.


This is not good. Not good at all…




  • Kroger suggested that in the last two months, both the deflationary environment for fresh food and grocery items and the competitive promotional environment intensified. Specifically in core grocery items, the category went from being slightly inflationary in Q2 to being deflationary by 1% in Q3. Management also noted that sales for November, including Thanksgiving, were below expectations. Until the economy improves, it appears that the competitive environment will remain intensified as all consumables retailers are fighting for market share in what is a low margin business to begin with.
  • In an effort to simplify its merchandising strategy and drive full priced sales Talbot’s management has been increasing the focus on key items. The result of these efforts has been a substantial reduction in clearance, substantial inventory reduction (down 40% over 2 years) and an increase in the penetration rate of key item sales to over 50% in 3Q. As a result, EBIT margins rose to 9%, even with same store sales down 16%.
  • At a conference, PVH management indicated that same store sales momentum in its retail business remains robust through the first week of December. Same store sales are trending up 6%, consistent with November. Black Friday weekend results were actually above the current run rate.
  • Autozone management noted that discretionary product sales were at the lowest percentage of the sales mix in the current quarter than they have been in the past three. Maintenance and failure products continue to grow at a faster rate as customers remain cautious with their purchasing patterns.




Iconix Renews Three Direct-to-Retail Deals - Direct-to-retail renewals have been signed by Iconix Brand Group for its brands, Candie's, Fieldcrest and Waverly. Candie's has renewed its exclusive multi-year license agreement with Kohl's. The retailer will continue to distribute Candie's-branded apparel, accessories and lifestyle products in U.S. stores and at through 2016. Candie's has been at Kohl's since 2005. Fieldcrest will continue to be sold exclusively at Target through 2015. The home brand touts bed and bath products. The brand has been with the retailer since 2005. Lowe's has also renewed its agreement with Waverly Home Classics paint, in which it will continue to hold the exclusive license. The home improvement retailer has carried the range since 2003. "These renewals demonstrate the strength of the Iconix brands and their continued importance to our retail partners," says Neil Cole, chairman and chief executive officer of Iconix. <>


Talbots Gets New Owner, Slashes Debt - One leader of the misses’ retail market has a new majority owner and a lot less debt. Shares of The Talbots Inc. rose more than 14 percent Tuesday after the specialty retailer reached a deal to end its 21-year relationship with its majority owner, the U.S. subsidiary of Japanese retail giant Aeon, retiring the $491 million debt it owes Aeon through a merger with special purpose acquisition company BPW Acquisition Corp., and agreeing to a new $200 million credit facility from GE Capital. Upon completion of the multifaceted transaction, BPW is expected to own 60 to 69 percent of Talbots’ outstanding shares. While analysts weren’t surprised Talbots would make a dramatic move to extract itself from its onerous liquidity problems, many were surprised the retailer managed a third-quarter profit, also announced Tuesday. <>


Men's Wearhouse to Continue Promotional Posture - The Men’s Wearhouse Inc. is keeping the promotional pedal to the metal for holiday, putting the bottom line at risk. In posting a 35 percent increase in third-quarter earnings, the 1,274-unit, Houston-based retailer said it expects business to remain challenging in the fourth quarter and will answer that with continued aggressive promotions. It also said Tuesday it anticipates a fourth-quarter loss of 15 to 19 cents, versus analysts’ earlier expectations of a 1-cent profit, leading shares down sharply in after-hours trading. On its analyst conference call after the market closed on Tuesday, chief executive officer George Zimmer said: “Until we have clear signs that the consumer is spending freely without promotion, we are guaranteeing that we’ll get our business by marketing heavily and promoting heavily.”  <>


Walking Company Files Ch. 11 - The Walking Company Holdings Inc. has filed for voluntary Chapter 11 bankruptcy protection, citing, in part, the lagging economy, as well as its recent rapid store expansion. The firm, which filed in Santa Barbara, Calif., on Monday, said it hopes to emerge from Chapter 11 in early 2010 and that it seeks to shed its unprofitable stores.“This action is an unfortunate but necessary and responsible step to preserve The Walking Co.’s value for its secured creditors, vendors, landlords, additional creditors and employees in light of the ongoing challenging retail environment,” Andrew Feshbach, CEO of The Walking Co., said in a statement released Monday evening. “We believe our business model is sustainable in today’s world, despite declining consumer spending and mall traffic at present. However, the unfortunate timing of our rapid expansion caused us to enter into lease commitments at what now appears to be the high water mark for retail space. The chapter process will allow us to shed our unprofitable stores and go forward as a financially viable retailer.” <>


Walmart Mexico Acquires 519-Store Affiliate - Latin America's largest retailer Walmart Mexico plans to acquire the operations of Walmart Central America from its parent company Walmart Stores, Inc. The not-yet-approved acquisition will see Walmart Mexico gaining an additional 519 stores and expanding its territorial reach into Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica. In the 12 months through September 2009, Walmart Central America had sales of $3.3 billion.

The expected $2.7 million deal will be submitted to a shareholder vote on Dec. 22. <>


Hudson's Bay in Li & Fung Deal - The Hudson’s Bay Trading Co. beginning next year will utilize Hong Kong-based global consumer goods exporter Li & Fung Ltd. as its sole sourcing agent for the Zellers, The Bay, Home Outfitters and Lord & Taylor divisions.  “Li & Fung will bring design, technology and market expertise and expedited shipping to the Hudson’s Bay Trading Company,” said Jeff Sherman, chief executive officer of HBTC. The move is expected to save HBTC costs via a partnership with one sourcing company instead of several around the world. HBTC has been doing much direct-to-factory sourcing on its own while also working with sourcing agents around the world.  <> finds a taker for its home and children’s gifts business - After discontinuing its operation last summer, Inc. has a buyer for its home and children’s gifts business. 1-800-Flowers has agreed to sell the business, which includes,, and, to PH International LLC for $17 million. PH International is a manufacturer and wholesaler of home décor and garden products headquartered in Richmond, VA. Under the agreement, which is expected to close by the end of January, PH International will acquire the Plow and Hearth, Problem Solvers, Wind and Weather, HearthSong and Magic Cabin brands, as well as the division's offices and warehouse facility in Madison, VA. The deal includes another distribution center in Vandalia, OH.  <>


Supply chain specialists GXS and Inovis announce a merger - Each with a large presence among retailers and consumer products manufacturers, GXS Inc. and Inovis Inc. plan to combine their complementary offerings designed to help retailers and their trading partners share information and conduct online commerce. Terms were not disclosed. The merger, which is subject to regulatory review and expected to close early next year, would bring together two companies with long histories in serving business-to-business operations, including synchronizing product data, transmitting electronic purchase orders and invoices, and providing supply chain visibility. Among GXS’ offerings is its Internet-based GXS Trading Grid, a B2B e-commerce platform or portal through which retailers and their suppliers can conduct business using GXS’ hosted software applications.  <>


Global Brands Liquidates - After mulling more than 150 potential deals over its two-and-a-half years, Global Brands Acquisition Corp., the investment firm founded by Joel Horowitz, Lawrence Stroll and John Idol, is liquidating and returning its funds to shareholders, according to a filing with the Securities and Exchange Commission. The New York-based venture, a special purpose acquisition company, raised $287.5 million in a public stock sale in December 2007 and used interest from a trust holding that capital to evaluate potential targets. Under Global Brands’ charter, the company had to close its doors and return remaining funds to shareholders if a deal wasn’t consummated by Sunday. Last month, the firm laid out plans to transform into a real estate investment trust under an agreement with Gerrity International. Shareholders were set to vote on that arrangement at a special meeting Friday, but the parties terminated the deal and the meeting was canceled.  <>


NYC Counterfeit Raid Yields Big Haul - A monthlong investigation yielded a trailer’s worth of seized counterfeit goods in Manhattan’s Chinatown neighborhood Tuesday. Investigators covered 30 stalls in 10 buildings on the four-block stretch of Canal Street between Broadway and West Broadway, said Jason Post, a spokesman for the Mayor’s Office of Special Enforcement, which conducted the operation. The raids started late Monday night and lasted into Tuesday morning, as investigators seized knockoff perfumes, handbags and other accessories, Post said. The confiscated goods bore the marks of Gucci, Tiffany, Chanel, Coach, Juicy Couture and Cartier, those with knowledge of the operation said. No arrests were made during the sweeps and the counterfeit items were turned over to the New York Police Department, according to the mayor’s office. Authorities had not placed a value on the seized merchandise as of press time. <>


Visuality E-Mail Program Boosts Fashion Orders - Visuality, a simple Web-based e-mail program with pictures, is increasing sales for fashion brands and changing how they sell. An e-mail with a photo of every item a retailer has purchased and pictures of suggested updates and new items can easily replace more cumbersome spreadsheets, reports and attachments. “Someone who is absolutely at the kindergarten level of Internet use just opens it up,” said Bud Konheim, chief executive officer of Nicole Miller. “You send them an e-mail, and there’s a message with the pictures. One phone call and you’re doing business.” “It definitely has affected our bottom line with incremental sales,” said Annette Mathieu, president of sales and marketing for Cynthia Steffe. <>


CIT Expected to Exit Ch. 11 Thursday - CIT Group Inc. said Tuesday that it expects to emerge from bankruptcy proceedings on Thursday following a Manhattan bankruptcy court’s confirmation of its prepackaged plan of reorganization.  “CIT’s successful emergence establishes a strong foundation for the future of the company,” said ç, chairman and chief executive officer, who noted the company now has a stronger capital structure and an improved liquidity profile. Last month, CIT posted a $1.07 billion third-quarter loss, due mostly to higher reserves set aside for credit losses from a year ago. CIT became the fifth-largest bankruptcy in U.S. history — after Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom Inc. and General Motors Corp. — when it filed its Chapter 11 petition on Nov. 1. As expected, the filing was just by the holding company, leaving operations such as its factoring group to proceed without interruption.  <>


Retailers Get $1.1B Payment in Antitrust Case - An estimated 634,000 retailers will share a holiday windfall of $1.1 billion, the final payment in a landmark antitrust case against Visa and MasterCard over debit and credit card practices. The merchants will start receiving checks this week as part of the 2003 settlement of their $3.4 billion class action lawsuit. The National Retail Federation, International Mass Retail Association (now the Retail Industry Leaders Association) and 20 chains, including Wal-Mart Stores Inc., Sears and The Limited Inc., filed a lawsuit against Visa and MasterCard in federal court in New York’s Eastern District in 1996, alleging the companies violated federal antitrust laws. The lawsuit specifically cited the “honor all cards” rule, which required merchants that signed contracts for the use of Visa and MasterCard credit cards to also accept their debit cards. For every transaction on a credit or debit card, retailers pay a fee to the card companies. <>


Simon Property Buys Prime Outlets - With outlets tracking better than other store sectors, Simon Property Group Inc. has seized the moment. The nation’s largest developer on Tuesday revealed a definitive agreement to buy Prime Outlets in a deal valued at about $2.33 billion, including the assumption of Prime’s debt and preferred stock. Under the agreement, Simon will pay $700 million for the owners’ interests in Prime Outlets, comprised of 80 percent cash and 20 percent in SPG common operating partnership units. The acquisitive Simon Properties has also been said to be considering a bid for some assets of General Growth Properties Inc. For major developers, growth through acquisitions is increasingly important considering the country’s already filled with too many shopping centers leaving little opportunity or reason to build new ones and funding new projects in the tough economy is also challenging.  <>


Facebook, Twitter Influence Holiday Gift Buying, Survey Shows - Social media has influenced 28 percent of U.S. holiday shoppers in gift-buying decisions this year, according to a survey by ComScore Inc. Shoppers were most swayed by product reviews written by other consumers, the Reston, Virginia-based research firm said yesterday in a statement. “We are getting our first real glimpse at the impact social media will play on commerce as we enter the next decade,” ComScore Chairman Gian Fulgoni said in the statement. J.C. Penney Co. and Eastman Kodak Co. are using Facebook Inc., the world’s largest social-networking site with more than 350 million users, and Twitter Inc., a site that lets its more than 58 million users send 140-character messages, to lure shoppers searching for bargains online.>


Industry Gives Obama Thumbs-Up For Job Proposals - Business groups reacted favorably to several tax break proposals President Obama outlined Tuesday to help jump-start small business investment and job creation as part of a broader strategy to stimulate the private sector and staunch massive job losses that have driven the unemployment rate to decades-high levels. Obama proposed a broad package of stimulus and job measures that focused on deeper tax breaks for small businesses, new spending for infrastructure projects and tax breaks for people who make their homes more energy efficient. The pace of job losses slowed slightly in November and the unemployment rate dipped to 10 percent, but millions of people remain out of work, which continues to depress economic activity. Kevin Burke, president and chief executive officer of the American Apparel & Footwear Association, called Obama’s proposals a “step in the right direction,” but warned the administration and economy “still have a long way to go.”  <>


U.K. Consumer Confidence Stays Unchanged in November - U.K. consumer confidence stayed close to the highest level in 1 1/2 years in November as shoppers became more hopeful for the economy’s prospects in 2010, Nationwide Building Society said. The index of consumer sentiment was at 73, the same as in October and one point lower than September’s reading, the customer-owned lender said in an e-mailed statement today. The proportion of shoppers expecting the economy to worsen in six months fell to the lowest since the survey began in 2004.Chancellor of the Exchequer Alistair Darling, who will present his pre-budget report today, said this week he would rather suffer criticism for removing economic support too late than too early. Bank of England policy makers are judging if Britain has escaped the recession as they spend 200 billion pounds ($326 billion) on bonds to aid growth.  <>


OECD: International investment activity collapses - International investment activity has been more than halved by the global financial and economic crisis, with both developed and emerging economies suffering sharp declines, the OECD said on Tuesday. It said overall international mergers and acquisitions were expected to tumble 56 percent this year -- the biggest annual slide since 1995. In a statement released in the sidelines of an international investment conference, the Paris-based Organisation for Economic Co-operation and Development said the slump largely involved its 30 mostly developed economies but was also evident in racier economies such as China and Brazil. The conference emphasised the big role emerging economies have been taken in the realm of international investment. "This (overall) fall is largely due to the 60 percent decline in value of cross-border merger and acquisitions (M&A) by firms based in the OECD area, from over USD1 trillion in 2008 to USD454 billion in 2009," the OECD said in a statement, adding that the forecasts were based on analysis of data up to Nov. 26. <>


Tiger Woods' Image Problem -Tiger Woods may be reaching a tipping point as a multimillion-dollar marketing juggernaut. The golfing great’s negative buzz is soaring and his likability rating is ebbing. Marketers have not televised any Woods commercials in prime time on the five major TV networks or on 19 cable channels (excluding the Golf Channel) since Nov. 29 amid a drumbeat of allegations about extramarital affairs since he crashed his Cadillac Escalade near his Florida home, according to The Nielsen Co. Woods was also absent from commercials on sports programs last weekend, including NFL games, said Aaron Lewis, communications director at Nielsen. A 30-second spot for Gillette Co., on the Nov. 29 telecast of NBC’s “Football Night in America,” was the last to appear in prime time featuring Woods. PepsiCo Inc.’s Gatorade is the first brand aligned with Woods to blink. Even as it continued to show full-motion images of the 33-year-old athlete at Tuesday night, the sports nutrition drink company said it was dropping its Gatorade Tiger beverage. It said the decision was made before Woods’ SUV crash.  <>


The Macau Metro Monitor.  December 9th, 2009



It was disclosed yesterday that Macau will have a light rail system connecting the peninsula with Taipa Island and the Cotai Strip in four years.  Construction on the system will start soon and there is a plan to eventually link the LRT system to the future Hong Kong-Zhuhai-Macau Bridge.  Macau transport infrastructure office consultant Michael Lan Soi-hoi has said that the first phase of the LRT project, costing MOP7.5 billion, will be completed in 2014.  Passenger capacity will reach 14,000 at peak hours in 2020 and fares are expected to range between four and six patacas. 




Stanley Ho’s Sociedade de Jogos (SJM) announced Tuesday that is will open its Casino Oceanus at Jai Alai on Tuesday of next week.  SJM Chief Executive Officer Ambrose So Shu Fai said that the Oceanus “provides another anchor to our business on the Macau Pennisula, the principal gaming and entertainment area of Macau”.   The casino will have a staff of 2,400, according the announcement. 




Melco Crown Entertainment does not plan to raise equity, but will refinance its debt through bonds and bank loans by mid-2010, its CFO said on Wednesday.  CFO Simon Dewhurst also said that Melco Crown could “carry comfortably” $US1.5 to 2 billion of debt on its balance sheet.

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.

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