Confidence in the Slush

Today’s release of German Consumer Confidence from GfK yields two observations: Germans are neither overly optimistic, nor glaringly negative on current and future economic expectations. This rhymes with our call that macro headwinds are still bearing down on confidence in Germany, and throughout the Eurozone. The chart below shows that while consumers’ economic and income expectations rose for the December survey, the overall index of sentiment (January) and consumers’ propensity to spend deteriorated.


While one survey doesn’t make a thesis, it contributes to evidence that the threat of future joblessness is still weighing on German sentiment. And the trend appears similar throughout much of the Eurozone. Consumer confidence in Denmark fell to -3.6 in December from -2.4 in the previous month in a survey yesterday, which contributed to the underperformance of its equity market (OMX Copenhagen) in yesterday’s close versus an otherwise positive close for most Western European equity markets, including the DAX that climbed to a YTD high and today further inched upwards.


Although German labor market conditions improved in the Fall, which has helped to stabilize the unemployment rate, and despite Chancellor Merkel’s recent extension of state-subsidized part-time work program for another year, the survey suggests that other concerns, including expectations of price inflation, especially energy prices, persist. With major stimulus programs (including a robust cash-for-clunkers program) in the rear view, consumers may shun spending to increasing savings, which could diminish growth prospects from private expenditure next year. 


Although forecast for modest GDP growth next year, we expect German’s  robust industrial and manufacturing export base to lead Eurozone economies as its major trading partners heat up.  In recent weeks we’re seeing a trend of outperformance from the DAX over the FTSE.  At times this year we’ve traded Germany on the long side via the etf EWG and the UK on the short side via EWU.


We’re currently not invested in Europe and happy to stand out of the way of a fairly long list of countries (including Ireland, Spain, UK) whose future growth is threatened by ballooning debt balance sheets, among other structural issues; certainly Greece has made the most recent splashes on this front.


Matthew Hedrick



Confidence in the Slush - gfk


Burning Bubbles

“The process by which banks create money is so simple that the mind is repelled.”

-John Kenneth Galbraith


I finally got my family to Thunder Bay for the holidays last night, so I figured I’d use a Canadian-American economist for my introductory quote. John Kenneth Galbraith became an economics professor at Harvard in 1949 and then published one of his more famous works, ‘American Capitalism’, in 1952.


The definition of American capitalism in the 1950’s is certainly different than the one you are seeing today. It’s sad. Galbraith was a Keynesian, and all for the government having a hand in the economy, but I highly doubt he envisioned the socialization of losses at Wall Street banks like we are seeing now.


As Galbraith points out, the process by which banks create money is not complicated. All you have to do is watch the Piggy Banker Spread, and you’ll have a pretty good idea what the direction of banker bonuses will be. Watch what this spread does, not what Timmy Geithner says.


This morning, the Piggy Banker Spread (or the Yield Spread) is trading at its widest spread EVER. Yes, I am sure Galbraith would agree – EVER is a long time! The yield spread is the difference between 10-year and 2-year US Treasury yields. That spread has finally eclipsed its prior all-time record from June of this year (276 basis points), shooting up to +283 basis points wide this morning. Is this a bubble?


You bet your Merry Madoff it is. I have said it before, and I will say it again - there is a long term bubble forming in US banker bonuses. For all the bankers out there who are running this American outfit, here’s my advice: if you can borrow short from your starving citizenry on the short end of this curve, then plug them with higher rates on the long end… have at it piggies! Your boys at the US government set this up for you on the silver platter for the holidays.


I wrote about this yesterday, but it’s worth highlighting one more time - He Who Sees No Inflation (Bernanke) is taking a world class face wash (as in the Thunder Bay kind, when a kid buries your face in the snow bank when your parents aren’t there to bail you out) on the marked-to-market pricing front. The US Dollar is breaking out to the upside, trading above my intermediate term TREND line, and now chasing the long end of the US Treasury yield curve higher to new 4-month highs at 3.71%.


While Ben Bernanke seeing his economic forecasts fall behind the curve is nothing new, the Chinese were out there again overnight attempting to fan the fires of a credit bubble. Chinese stocks got pummeled again, trading down another -2.3%, taking their 3-week correction to -8.6%. Can a bubble be on fire?


After what we have witnessed in terms of government bailouts in the last 18-months, anything is possible. From alchemy to Burning Bubbles, we may as well keep making things up here as we go. Heck, the US government telling you there is no inflation out there so that they can keep feeding these Piggy Bankers is one heck of a story.


As opposed to some of these Johnny-come-latelies out there who are now professional bubble watchers, at least I put a time stamp and a price on them before they start to burn. While I continue to feel shame for missing the YTD highs here in the SP500 (again! we hit 1114 last night), I can say that we called out the following bubbles in the first week of December:


1.       Gold – immediate term

2.       Short Term Treasuries – intermediate term

3.       Banker Bonuses – long term


Now, if you want to be in the business of calling things on the short side, particularly bubbles, you probably don’t want to start with one of Morgan Stanley’s latest financial innovations: “short term tactical” recommendations. As my retired firefighting Dad would say, never hire a banker to put out a fire.


From an immediate term TRADE perspective (3 weeks or less), the gold price bubble is burning. Since the US Dollar bottomed in the last week of November, the gold price has corrected -11%. We sold plenty of yellow rocks up there to the latest hedge fund artist turned alchemist, and I’ll be looking to buy back what is turning into a mother of a pain trade into year-end closer to my intermediate term TREND line of support for gold, which is at $1071/oz.


We shorted the SHY (1-3 year Treasury) ETF after we called short term Treasuries out as intermediate term bubbles. Since the He Who Sees No Inflation (Bernanke) lows were established in that prescient 1st week of December, the yield on 2-year Treasuries has locked in its intermediate term bottom. After taking a look-see at 0.66%, 2-year yields have tacked on a +35% move in the last 3 weeks. Ah, now we see Burning Bubbles


Since I used my longest term duration (the TAIL, 3 years or less) to make my bubble call on banker bonuses, I guess we’ll have to see how the next 3 years pan out. The Chinese are definitely getting a head start on Burning Credit Bubbles and the Asian banker bonuses embedded therein.


Last night, Chinese central bank Governor, Zhou, reminded his top 10 banks that he is going to tighten reserve ratios. The Shanghai Property Index got clocked again overnight and is now down -11% for December alone. Gold and Chinese property stocks down the exact same percentage over the exact same duration. Burning Bubbles? Ah, now that sounds like a story the Wall Street bubble watchers can poach.


My immediate term TRADE support and resistance lines for the SP500 are now 1102 and 1118, respectively.


Best of luck out there today.





VXX - iPath S&P500 Volatility
For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

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.

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 YuanThe 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 TIPSThe 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.



RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  

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 IndustrialsWe 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.

SHY - iShares 1-3 Year Treasury BondsIf 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.


R3: Grounded Consumerism


December 22, 2009





Based on a recent survey, a surprising number of Americans indicate that the recession has actually had a positive impact on their lives.  In the wake of such an eye opening response, there is likely a longer term impact on how retailers and their customers think about the new reality of “grounded consumerism”.



We don’t often read too much into consumer surveys, however a recent study caught my eye.  The Context-Based Research Group recently released its findings from a 1,000 person survey (arguably a small sample) aimed at examining the changing attitudes and behavior of American consumers in the wake of the recession.  Sounds like a bunch of touchy-feely stuff, but I have to admit the results are very interesting and worth thinking about as we contemplate an eventual economic recovery.


The study, which is a follow-up to a similar one conducted one year prior, discovered that the recession has actually had a positive impact on people’s lives.  Amidst all the job loss, housing turmoil, and heightened stress, 43% of respondents indicated that the recession has actually been a positive. Huh?  Even more interesting is that those who have been most impacted by the recession feel the same way as those that have been least impacted.  Score one for what Context-Based Research calls “grounded consumerism”.


The simple fact is that consumer shopping habits and  social habits have shifted over the past year.  The obvious changes come in the form of fewer trips to the mall, buying private label, and cutting back on luxury purchases.  However, the less obvious consumer changes are coming in the form of more altruistic acts, be it spending more time with family and friends or actually engaging in volunteerism.  I’m not writing this as a call to arms for everyone to quit their day jobs and head to a soup kitchen, but rather to suggest the floodgates of retail and consumerism may not re-open as fast as we might think to the extent that this survey is representative of the US Consumer at large. 


Job creation will most certainly go a long way and there is no doubt more cash in consumers’ wallets will help to rebalance the playing field between value, moderate, and luxury retailers.  Mall traffic will pick up and discretionary products will sell once again.  However, the winners in the future may no longer be as obvious.  Retailers will have to be more strategic and less “in your face” in an effort to reduce their “transactional” images and to enhance their positive social messages. Price may not ultimately be the key driver of demand.  At the end of the day a retailer is always going to be focused on the next sale, but a little understanding that the consumer of tomorrow may no longer be all about consumption, consumption, consumption may ultimately be the best strategy. 


Eric Levine





  • Walgreen’s management believes that consumers are waiting longer than ever to make holiday/seasonal purchases. As a result, the focus on the this week is more important than ever, with the bulk of sales still to come. Walgreen is one of the few retailers open for business on Christmas Day.
  • In an effort to reinforce the retailer/customer relationship, JCrew has once again sent its best customers a personal gift. In the past, the company has been known send a small item in appreciation for their business. This year’s gift is a day planner, which was sent out last week. While most retailers are looking to cut costs, this certainly stands out as an example of one retailer that is investing the future. The ability for JCrew to create one on one relationships with its core consumer is in fact eye opening in today’s world of retailing.




Uniqlo Ramps Up Growth in Europe - In central Paris, where Uniqlo opened a 23,000-square-foot flagship on Oct. 1, which that month rang up the most sales of any of its doors worldwide, the brand plans as many as six other locations. Taking into account the city’s outlying neighborhoods, some 10 doors in all are expected, each measuring at least 22,220 square feet, said Charlotte Bouvier, marketing director of Uniqlo France. Uniqlo also has its sights set on other major European cities, such as Madrid, Barcelona, Milan and a city in Germany. It’s possible the retailer will expand in London, where it has 14 boutiques, Bouvier said. Such moves are part of Uniqlo’s goal of being a global force. It intends to open 100 to 200 stores a year outside Japan, as part of a plan of its parent company, Fast Retailing Co. Ltd., to grow sales from 685.04 billion yen, or $7.12 billion at average exchange, for the year ended Aug. 31, to 5 trillion yen, or about $54.85 billion at current exchange, by 2020.  <>


Zungui Haixi Completes Initial Public Offering - Zungui Haixi Corporation (TSX VENTURE:ZUN), a China-based manufacturer of sportswear and casual footwear, is pleased to announce the successful closing today of its initial public offering. 11,500,000 common shares were sold for gross proceeds of $37,375,000 by a syndicate of underwriters led by CIBC World Markets Inc. and including Canaccord Financial Ltd., GMP Securities L.P. and Research Capital Corporation. The underwriters have an over-allotment option exercisable for a period of 30 days from closing to purchase up to an additional 1,725,000 common shares at the offering price of $3.25 per share. Zungui Haixi intends to use the net proceeds of the offering to expand its retail and distribution network in China, increase production capacity, invest in marketing and promotional activities and for working capital and general corporate purposes. <>


S&P Upgrades Burlington Coat's Debt - Burlington Coat Factory Warehouse Corp. won a ratings upgrade from Standard & Poor’s based on its plan to reconfigure its $800 million asset-based credit facility. S&P raised its rating on BCF’s secured debt to “B-minus” from “CCC-plus” while maintaining the Burlington, N.J.-based off-price retailer’s stable outlook and overall “B-minus” corporate credit rating. BCF intends to extend the maturity date of $600 million of its revolving credit facility to January 2014 and pay off $200 million upon its May 2011 expiration. In addition, it is seeking to extend the maturity of $550 million of its $865 million term loan, due in May 2013, for two years. The upgrade moves BCF’s rating up one notch and, while still in speculative territory, implies the issuer “has the capacity to meet its financial commitment.”  <>


Bluefly Gets $15M Boost - Bluefly said Monday it will receive $15 million from Rho Ventures, giving the troubled company more working capital with which to buy inventory and acquire customers. The 10-year-old online purveyor of off-price goods has never turned a profit. In its most recent statement, filed in November for the quarter ended Sept. 30, the company had an accumulated deficit of $147 million and said it was working under a “streamlined” business plan intended to help Bluefly meet its expenses. The plan called for reductions in marketing, hiring and buying new inventory. The company said in the filing it believed it had enough cash and credit to continue operating for at least 12 months. However, the filing was not audited. Net sales decreased by 14 percent to $17.1 million for the three months ended Sept. 30 compared with the same period in 2008, the filing said.  <>


Judge Halts Macy's-Calvin Klein Chocolate Giveaway - A federal judge halted a Macy’s-Calvin Klein chocolate giveaway on Monday, granting an Oregon sweet shop’s request for a restraining order. In a lawsuit filed Friday, Eugene, Ore.-based Euphoria Chocolate Co. alleged that a promotional box of chocolates that Macy’s has given to customers who buy the Calvin Klein fragrance Euphoria infringes on its own trademark rights. According to Macy’s Web site, the candy is a gift to shoppers who spend $65 or more on the scent. Along with the complaint, filed in U.S. District Court in the confectioner’s hometown, Euphoria Chocolate also filed a motion for a temporary restraining order and preliminary injunction. Judge Ann Aiken signed the order Monday.  <>


Private equity bidders offer £800m for Pets at Home - Four private equity firms have each submitted offers of more than £800m for specialist retailer Pets at Home. The business is being prepared for a sale or float in the new year by owner Bridgepoint. Apax, Bain, KKR and TPG are all interested in acquiring Pets at Home, the Daily Telegraph reported. The retailer appointed JP Morgan Cazenove to advise on options in October, and a ‘dual-track’ process – which could result either in an IPO or sale – is under way. The store group has been one of the retail winners during the recession as shoppers proved reluctant to rein in spending on their pets. Last year Pets at Home’s profits rose by 29%. Bridgepoint bought Pets at Home for £230m in 2004. The business has since been refinanced four times, generating more than £120m for investors. <>


Potential buyers circle U.K. Department Store Liberty - Big names are running the slide rule over department store Liberty, but a “serious offer” remains to be tabled. Robert Bensoussan’s Sirius Equity, which backs LK Bennett, and distribution and retail giant Li & Fung are said to be among potential bidders. However, a source familiar with the situation said that interest received so far did not yet amount to “serious offers” and did not know whether the process would lead to the tabling of fleshed out proposals. Liberty, which is backed by property firm MWB which last week unveiled a £25m share placing to avoid breaching banking covenants, appointed advisors Cavendish Corporate Finance and Global Leisure Partners in July to advise on finding new investors or partners as it seeks to expand internationally. However, the fundraising also attracted interest from parties interested in buying the whole of Liberty. <>


Gabriella Forte to quit D&G - Gabriella Forte, who joined Dolce & Gabbana USA in 2002 as president and licensing director is to leave the Milanese fashion label. During her time at D&G, Forte has served in a number of high-profile roles and was most recently executive adviser to the the board and to the founders, Domenico Dolce and Stefano Gabbana. Forte was responsible for the expansion of the brand in the US during the three years she held the post of president. Forte leaves D&G on January 1 and a successor has not been appointed. <>


Outsourcing on Rise as Stores Cut Costs - Outsourcing doesn’t only take place in India — it’s also happening at the local mall. Apparel companies are increasingly looking to third parties to help stock, merchandise and sell goods on the department store floor as they seek new and cost-effective ways to entice shoppers. Merchandising responsibilities in the past fell to the retailer. More recently, brands themselves shared some of the burden, assembling in-house merchandising teams that fanned out across the country, descending on department stores where they ensured sizes were stocked, presentations were neat and signage was up to standards. But in lean times, in which retailers have reduced sales staff and vendors are closely scrutinizing operational costs, outsourcing some or all merchandising jobs to retail service companies has come into vogue. <>


Online retail sales set a single-day record by topping $900 million - Last Tuesday was the biggest sales day in the history of online retailing, says web measurement firm comScore Inc. E-retail sales totaled $913 million on Dec. 15, making it the first day ever to top the $900 million mark, comScore says. It followed a disappointing Monday, when sales were 1% below last year. But Tuesday through Thursday were all strong online sales days, comScore says. “In fact, each day through Thursday December 17—the last day that many online retailers would guarantee free shipping in time for Christmas—saw at least $800 million in spending, which suggests that savvy consumers may have been waiting for those last-minute deals,” says comScore chairman Gian Fulgoni. For the holiday season, online retail sales are up 3.7% to $24.757 billion from $23.873 billion last year, comScore says. That covers the period from Nov. 1 to Dec. 18. MasterCard Worldwide reported today even stronger online growth, estimating e-commerce <>


Stores Push to Recoup Lost Sales - Retailers have no illusions about miracles in the final stretch of a mostly muted holiday season. Markdowns likely will accelerate, more ads will be placed, but generally strategies are set, and there’s little to do to make up for the estimated $2 billion in losses from the weekend snowstorm that blanketed the Northeast and Mid-Atlantic states. Despite the pressures, retailers don’t seem to be panicking, citing greatly reduced inventories, rising online sales and an extra day of shopping compared with last year’s disastrous season. Projections are holding steady for flat to slightly positive or negative comparable-store sales for holiday. A clearer read will emerge Jan. 7, when December comps are reported. “Most of the sectors are showing improvements in their growth rates since Black Friday,” said Michael McNamara, vice president of research and analysis at SpendingPulse, an information service of MasterCard Advisors. “In terms of the latest performance figures, the electronics, men’s apparel, footwear and furniture and furnishings sectors are all showing positive or flat year-over-year growth rates since the Black Friday weekend. E-commerce continues to be one of the stars of the season with a season-to-date growth rate of 13 percent. <>

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US STRATEGY – DAY 2 – Dollar up, Stocks up

The S&P 500 finished higher by 1.1% in light, pre-holiday trading yesterday.  The news worthy items in focus yesterday were the amended healthcare reform legislation out of the Senate, continued M&A activity and the sell-side generally getting more bullish at the end of the year. 


Yesterday, Sanofi-Aventis agreed to acquire Chattem for $1.9B in cash.  In addition, TreeHouse Foods gained 12.3% after announcing that it had signed a definitive agreement to acquire Sturm Foods, a private label manufacturer of hot cereal and powdered soft drink mixes. 


For the second day in a row the Dollar index was higher and stocks followed.  Yesterday, the Dollar index rose 0.3% to 78.03.  Every sector was positive on the day with the high beta Financials, Materials and Consumer discretionary leading the way.  Utilities and Consumer staples were the two worst performing sectors.   


The Healthcare (XLV) underperformed on a relative basis, but managed care stocks were among the best performers with the HMO index up 3.0%. The performance was driven by developments out of Washington as Senate Democrats reached a deal on healthcare reform legislation.  The news of the demise of the elimination of the public option was welcome news.  Also showing strong relative outperformance were the PBMs such as CVS +3.6%, ESRX +3.3% and MHS +1.7%.


The Materials (XLB) was the second best performing sector yesterday despite the continued bounce in the dollar. Upbeat sell-side commentary provided support for the steel and fertilizers sectors. 


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 16 points or 0.5% upside and 1.0% downside.  At the time of writing the major market futures are slightly higher.


In early trading crude oil dropped after OPEC agreed to maintain production targets at a meeting in Angola.  OPEC will hold total production quotas at 24.845 million barrels a day.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.71) and Sell Trade (74.31).


Gold declined $15.00 to 1,097 in Hong Kong; gold is trading at its lowest level in six weeks.    The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,090) and Sell Trade ($1,151). 


Copper fell in London as stockpiles expanded to almost a seven-year high, signaling demand related issues.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.08) and Sell Trade (3.14).


Howard Penney

Managing Director


US STRATEGY – DAY 2 – Dollar up, Stocks up   - sp1


US STRATEGY – DAY 2 – Dollar up, Stocks up   - usdx2


US STRATEGY – DAY 2 – Dollar up, Stocks up   - vix3


US STRATEGY – DAY 2 – Dollar up, Stocks up   - oil4


US STRATEGY – DAY 2 – Dollar up, Stocks up   - gold5


US STRATEGY – DAY 2 – Dollar up, Stocks up   - copper6



The Macau Metro Monitor.  December 22nd, 2009.




In an interview in Singapore yesterday, Las Vegas Sands Corp Chairman Sheldon Adelson forecasted that Sands China may generate revenues of $4.5 billion to $5 billion next year.  Sands China had revenues of $3.05 billion in 2008.  Recently, record new loans in China have boosted spending and a recovery in visitation to Macau has led to gaming revenue to climb 6% in the first 11 months of 2009, according to the news agency Lusa.  Adelson also said that he does not expect its Singapore operations to cannibalize Macau’s mass casino market




Sheldon Adelson has said that LVS could finish “all the [Cotai] properties easily within five years”.  The five projects, including two that are half way through construction, will complement the company’s two existing casinos in Macau.  Sands has said that it expects to open phase one of the two half-constructed projects on Cotai by June 2011. 




Harrah’s Entertainment Chairman and CEO Gary Loveman wants to bring the Caesars Palace brand to Macau.  While Harrah’s owns a golf course in Macau, entering the gaming market would require working with an existing operator because the government limits the number of licenses to six.  A spokesman for MGM Mirage said that he was “unaware of any contact with Harrah’s about Macau”.   Spokespeople at other Macau operators were unavailable for comment. 

Google, Apple Eroding Microsoft's Dominance