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US STRATEGY – The next two days will be telling

For the Balance of the week the MACRO calendar heats up with Initial Jobless claims today and Retail sales and the U. of Michigan consumer confidence on Friday.  The consensus has the December preliminary confidence reading improving to 68.8 from 67.4.  I don’t see how that is possible. 


The S&P 500 finished higher by 0.4% on light volume yesterday.  Looking at yesterday’s sector performance it was difficult to find any obvious theme running thru the market.  The Materials (XLB - proxy for the RECOVERY trade) was the best performing sector, up 1.2%.  Two other sectors that benefited from the RECOVERY trade, Energy (XLE) and Consumer Discretionary (XLY), were the worst performing sectors. 


One problem the market is continuing to deal with is less appetite for the RISK, with recent sovereign concerns surrounding Dubai and Greece.  While there does not appear to be any real current threat for meaningful contagion, uncertainties prevail.  The takeaway from this is DOLLAR bullish!


The MACRO calendar had an upside surprise with the unexpected increase in wholesale inventories; wholesale inventories rose 0.3% month to month (the first increase since August of 2008) and a net positive for Q4 GDP growth.  Consensus expectations were for a 0.5% decline. Increases in petroleum and farm products, which were largely driven by higher prices, were responsible for the bulk of the upside.   Also, there was the largest increase in mortgage applications since 2-Oct. 


For the fourth straight day managed care stocks moved higher (HMO +0.5%) on news that Senate Democrats reached a tentative deal to scrap a pure-play public option from its healthcare reform legislation.


OIL is trying to tell us something! Oil Crude for January delivery settled at a two-month low of $70.67, down 2.7%.  Oil is now down six days in a row, declining 7.8%.  While the recent bounce in the dollar has been a headwind for crude, bearish inventory data seemed to be the big driver of yesterday’s decline.   


Tech outperformed the broader market yesterday despite a muted reaction to the upbeat mid-quarter update from TXN.  The star in Technology continues to be the SOX, which finished higher for an eighth straight day and eleven of the past twelve.  The MOBILITY sector also did well with RIMM and AAPL up 4.9% and 4.2%, respectively. 


A major reason for Consumer Discretionary underperforming yesterday was the Retail sector; the S&P Retail Index declined 0.7% on the day.  The top three contributors to the decline in the XLY were Amazon, Nike and Target.  It appears the market is starting to take notice that Nike’s big investment in Tiger Woods might not help them in 2010.  


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 25 points or 1.5% upside and 1.0% downside.  At the time of writing the major market futures are trading slightly higher.


In early trading today, crude oil is trading near two-month lows on supply and demand issues.  The Research Edge Quant models have the following levels for OIL – buy Trade (70.61) and Sell Trade (74.30).


In London Gold declined for the fifth time in six days, dropping 0.5% to $1,123 an ounce.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,113) and Sell Trade (1,144). 


Copper fell for a sixth day in London, the longest losing streak in a year.  The culprit is the supply and demand issues.  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 next two days will be telling - SPX1


US STRATEGY – The next two days will be telling - USDX2


US STRATEGY – The next two days will be telling - VIX3


US STRATEGY – The next two days will be telling - OIL4


US STRATEGY – The next two days will be telling - GOLD5


US STRATEGY – The next two days will be telling - COPPER6


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Long of Brazil

Position: Long Brazil via the etf EWZ


Q. What is the native language of Brazil?

A. Brazilian? Spanish?


Or so goes the popular grade school brain teaser.  In fact, the native language of Brazil is Portugese, as Brazil is a former colony of Portugal.  There is a lot that is misunderstood about this South American powerhouse, including her growing economic power base.


Brazil’s Finance Minister announced today that the government will extend tax cuts on computer sales and purchases of capital goods, inject $45.4 billion into the state development bank, and cut taxes on the petrochemical industry.  The nature of these stimulus measures is in interesting contrast to some of its global counterparts, like the U.S., as these measures involve tax cuts and direct investment into development.  Interestingly, Brazil has also avoided cutting interest rates to an emergency level with the Selic base interest rate currently at 8.75%.


One concern is that inflationary pressures are slightly higher in Brazil versus some of its global peers with the 12-month rolling rate coming in at 4.22% in November versus 4.17% in September, but this is still below the government’s target rate of 4.50% and at a reasonable level given the high expected future GDP growth rates.


Brazil has also continued to grow its way up the GDP food chain as it gains competitiveness globally. According to the World Economic Forum:


“Brazil was the top country in upward evolution of competitiveness in 2009, gaining eight positions among other countries, overcoming Russia for the first time, and partially closing the competitiveness gap with India and China among the BRIC economies. Important steps taken since the 1990s toward fiscal sustainability, as well as measures taken to liberalize and open the economy, have significantly boosted the country’s competitiveness fundamentals, providing a better environment for private-sector development.”


We like Brazil for her growth trajectory, relatively managed inflation, and capitalist stimulus.  She also has some positive attributes versus our other emerging market favorite, China. Specifically:

  • Brazil is a Democratic nation and in fact voting for those between the ages of 18 and 65 is compulsory;
  • As is widely documented, China has an old population base that is only accelerating in terms of age due to the One Child Policy;
  • China is much more dependent on exports at ~35% of GDP versus Brazil at ~14% of GDP; and
  • Brazil is long natural resources, while China is short of them. In this instance, China is the client for Brazil’s resources.

As we look into Q4 2009 and 2010, GDP comparisons look favorable, as both Q1 2009 and Q2 2009 were negative growth quarters in Brazil, which should lead for strong reported growth out of the South American powerhouse.  Being long of the fastest growing and most competitive democracy globally is a position we like.


Daryl G. Jones
Managing Director

Long of Brazil - brazil


Sports Apparel/Footwear: Rebounding from (not so) Hot November

After an unseasonably warm November, the most notable change this week is the return of positive growth in apparel. As a result, apparel and footwear sales improved in unison on a trailing 3-week basis for the first time since the end of Q3. The chart below comparing November to historical norms is a compelling illustration of just how significant a factor temperature was last month. Meanwhile, athletic footwear is continuing to trend up and has had positive growth each of the last two weeks giving us further confidence that 2010 will mark the year that athletic footwear outperforms. Good for FL, FINL, NKE, KSWS and UA. With demand returning and temps beginning to normalize, the weak comp guidance thrown out there by some of the sporting good retailers (e.g. DKS) appears to be less likely than trends suggested just a few weeks ago – better on the margin for DKS, COLM and VFC.



Sports Apparel/Footwear: Rebounding from (not so) Hot November - FW App Industry Data 12 9 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Sporting Goods Channel 12 9 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Nov Temp 12 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Dec Temp 12 09


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

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