Hurling Diatribes

“I never met anybody who said when they were a kid, ‘I wanna grow up and be a critic’”
-Richard Pryor
I don’t like to be negative or judgmental. I’m not perfect.  I make mistakes too.  We all do!  Keith is known to hurl a few diatribes in his Early Look every once in a while - sometimes it’s funny and sometimes it just seems mean.  So what!  
It’s a cruel world out there and in this business you need to be critical to survive, stand up for what you believe and be factually correct!  Most importantly, people want you to “make a call.”  That is what we do every day!
I agree with Keith that Ben Bernanke is completely compromised and Tim “Timmy” Geithner is out of his league and should never have been appointed in the first place.  At the same time they are the two people in Washington that have “inside information.”  
During this past week Ben had already said the US economy faces “formidable headwinds“ and then yesterday, we learned that the Treasury Secretary notified Congress that he is extending the Troubled Asset Relief Program through October 3, 2010.  Why?  What do they know that I don’t? A lot, because they have “inside information!”
I don’t have inside information, but I have the RE Macro Models and this is what I do know…..
(1)   The US Dollar is establishing itself a new level of support with the TREND line at 76.41 – The BUCK is BOTTOMING and is still a SAFE HAVEN.
(2)   The Semis are rallying – The SOX is up 11 of the past 12 days – Talk to Rebecca Runkle about this one!
(3)   OIL is falling – It’s currently trading at a 2-month low – The reality of supply and demand!
(4)   Gold has fallen just over $100 (9%) in a week – Just a bubble?
(5)   Copper has fallen for six straight days (the longest losing streak in a year) – The reality of supply and demand!
(6)   Financials have underperformed the S&P 500 by 660 basis points over the past three months – This could be trouble!
Seeing the Financials dramatically underperform is unnerving and could be a leading indicator of things to come.  Whether or not Ben and Tim know something that I don’t about the health of our financial system, Mr. Market is trying to tell us something.  The Banks are not lending and the FDIC continues to close more doors, while the “son of sub-prime” is going to hit with another wave of defaults in 2010. Ben can’t raise rates and the Treasury Secretary is going to need TARP in 2010!    We are in a very bad situation.  
Have the Financials truly absorbed all of the asset deflation in the system and are the current capital ratios real?   
To help guide us through this mess, we have recently announced that Josh Steiner has joined Research Edge as head of the Financials Team.  Josh and Keith will be hosting a financials conference call tomorrow at 11am.  If you are interested in listening, please contact us at .
As for me, I believe Technology, Utilities and Healthcare are part of the new SAFETY trade.  Utilities have yield and growth - a stealth play on Green technology.  Healthcare is safe from the perils of Washington (that is NOT Tom Tobin’s official Research Edge Healthcare call) and selected Technology names are beneficiaries of deflation.  
The daily missives from Keith and the Research Edge team are here to stay.  Any guesses on which group thinker we will take on next?
Finish in Style; function in disaster
Howard Penney
Managing Director

EWZ – iShares BrazilAs 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).

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.   

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 – 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


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 80.45%
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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

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