It's a shortened holiday week so volume and newsflow are naturally light. That said, no one seems to be paying attention to the fact that this morning's October home price data from Case-Shiller showed the first outright home price decline in six months.




Why is this a big deal? It was the decline in home prices that triggered the credit and liquidity crisis of 2007-2009, and the stabilization and modest improvement in home prices that played a major role in the rally since March. The following chart demonstrates.


In 1Q09 encumbered US home equity value approached zero. Zero. Since then, the modest advance in home prices coupled with a roughly 2% paydown in residential mortgage debt has pushed equity levels back to the mid-single digits. If we start to see home prices rollover again for a second dip (as the above chart may be an early indicator of), expect to see this razor-thin equity cushion pushed back to zero and the trouble to begin anew. Even though people are now paying off mortgage debt on a net basis, it is only at a 1-2% annualized rate - not enough to move the needle. Rather, it is home prices that drive where equity, and, by extension, credit go.




Josh Steiner




The Macau Metro Monitor.  December 30th, 2009




Macau’s Statistics and Census Service (DSEC) reported that the jobless rate dropped 20bps to 3.3% for the 3 months ended November 30, 2009.  The 3.3% unemployment rate marks an 11-month low on the 10th anniversery of the former Portuguese enclavess's return to Chinese rule.



According to Macau’s Statistics and Census Service (DSEC), the trade deficit widened to MOP 2.78BN in November from MOP 2.60BN last month. Exports plummeted 40.4% y-o-y to MOP 635MM, with domestic imports dropping 65.4% to MOP 195MM.  Imports edged up by 0.4% to MOP 3.41BN, which was driven by an increase in consumer durable imports.  YTD, the value of merchandise exports fell 53.7% y-o-y, while imports fell 16.9% for a total trade deficit of MOP 26.04BN.



According to the Las Vegas Sun, the departure of MGM's General Counsel Gary Jacobs earlier this month stemmed from NJ regulator's concerns about the way Jacobs handled MGM's Macau partnership.  During the state's investigation of the Macau JV, regulators found that Jacobs, who structured the deal and served as the company's go-to man in Macau, was not forthcoming with inforrmation about the deal and how it was vetted by the company.


Whether the investgation initiated by NJ regulators in 2005 eventually forces MGM to chose between exiting its interests in Macau or NJ remains to be seen.  However, the departure of Jacobs might pave the way for a more favorable outcome in the regulatory hearing, according to "familiar" sources.

Happy Freedoms

"Doing what you like is freedom. Liking what you do is happiness."

-Frank Tyger 


Sometimes I wake up in the morning to bullish market factors. Sometimes they are bearish. All of the time, I want to consider those risk factors and make a call on markets. Taking a stand and being accountable to my team and our clients is what makes me happy.


Sometimes people think my going after people like Larry Kudlow is mean. Sometimes they love it. All of the time, I consider protecting your money a full contact sport. I want to find a player on this proverbial market ice that we can beat. Getting out there and competing every day is what makes me happy.


Sometimes money makes people happy. Sometimes it doesn’t. Some people are never happy. Having been fortunate enough to have made enough money to not have to worry about it anymore, I can tell you this - genuinely liking what you do is happiness.


People say you can’t time markets. So I am on a mission to prove that you can call the probabilities of risk in markets every day. History will judge me not by the perceived wisdoms and be nice policies of this business, but by the score. I like history. It doesn’t lie.


Yesterday’s risk management call was to not chase the higher-highs being trumpeted by the perpetually bullish. Today’s call will be to buy longs and cover your shorts on weakness. Tomorrow’s call will become clear to me tomorrow.


In the US stock market, here are some important lines of immediate term support and resistance to manage risk around:

  1. SP500 support 1115; resistance 1136
  2. Nasdaq support 2247; resistance 2323
  3. Russell 2000 support 622- resistance 644

In global equity markets, here are some important moves that we have seen change the game in the last 24 hours:

  1. China’s Shanghai Composite Index has shot back up, above its immediate term TRADE line of 3216, closing up +1.6% overnight
  2. HK’s Hang Seng continues to underperform, closing down again last night, and remains broken from an intermediate term TREND perspective
  3. Japanese stocks lost -0.86% last night on legitimate bankruptcy concerns surrounding Japan Airlines
  4. European Sovereign Debt issues continue to shake select European country indices: today Greece is -0.6%; Austria -0.7%; Spain -0.6%
  5. Russian stocks are down for the second day in a row, trading down more than -1%, and breaking their immediate term TRADE Line
  6. Brazilian stocks were up for the second day in a row, breaking out above my immediate term TRADE line on the Bovespa of 67,735

In global commodity trading, here’s what’s new:

  1. Oil has taken geopolitical risk associated with terrorism quite seriously and has broken out above its immediate term TRADE line of $75.37/barrel
  2. Gold is a broken TRADE (that line of resistance = $1147/oz), but continues to look like a long at the right price ($1071/oz is the intermediate TREND line)
  3. Copper is breaking out to higher-highs this morning at $3.33/lb

So what does all of this mean? Well for me at least, it means that today is going to be a good one. We’re long Brazil (EWZ). We’re short Russia (RSX). We’re are carrying a 68% position in cash in the Asset Allocation Model and we’re ready to go shopping for some post Christmas sales.


Why is it that Kudlow and Company only like to buy things on the way up? I have no idea. Maybe there was something in the snow I chewed on growing up in Thunder Bay that makes me this way. Maybe I’m just normal and don’t like to pay up for anything (or eat yellow snow). Who knows…


What I do know, is that the summary of all of the aforementioned global macro risk factors in my model are leading to one thing – an earlier than expected rate hike from the US Federal Reserve.

He Who Sees No Bubbles (Bernanke) is getting a Northern Ontario style face wash in the snow-bank by the bond market. The short end of the Treasury market is getting buried, as 2-year yields are breaking out to the upside, across all 3 of my key durations (TRADE, TREND, and TAIL), acknowledging the bullish intermediate term TRENDS in everything from the price of Copper to American, Chinese, Brazilian stocks, and global bond yields.


Bernanke has been completely politicized, but marked-to-market prices, are doing what they like. That’s called freedom. And I, for one, feel blessed to live in this country under the watch of America’s bravest, having mine. God bless Freedom of Speech.


Best of luck out there today,





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

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.

GLD - SPDR GoldWe 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 JapanWhile 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 DiscretionaryWe 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.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

US STRATEGY – Running in Place

Yesterday, the S&P 500 finished the day with a modest loss, the first one is six days.  Again, the internals of the market continue to be characterized by very low volume and volatility trading near the lows for the year.  The Dollar index traded up 0.14% yesterday and is trading higher again today.  


Yesterday, five of the S&P 500 sectors declined, while four advanced.  Of the sectors that outperformed, Consumer Discretionary (XLY) was the best performing, followed by Industrials (XLI) and Consumer Staples (XLP).   The XLY and the XLP outperformed on media reports that retail spending held up well during the holiday season and the December consumer confidence reading at 52.9, which was in line with consensus at 53; the November reading was revised upward to 50.6 from 49.5.  It should be noted that after the close the ABC consumer confidence number ticked down to -44 from -42 the week before.  


With most people out for the holidays no one seems to be paying attention to the fact that yesterday October home price data from Case-Shiller reported the first outright home price decline in six months.  The October Case-Shiller was 146.58, roughly in line with the 147 consensus and down 7.28% year-over-year and down from 146.65 last month.


The Airlines continue to be the big losers, with the XAL down 2.2% over the past two days. 


The range for the S&P 500 is 21 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are slightly lower.   There appears to be very little corporate news again today.  On the MACRO front, MBA Mortgage Applications are due at 7ET; December Chicago PMI is estimated to be 55.1 versus the last reading of 56.1 and the DOE crude oil inventories are to be released at 10:30.


The Asian markets are trading mixed, with China up on a report that new loans in Dec will increase month-to-month.  The European markets are trading lower on the day on very light volume


Crude oil is trading higher for a sixth day on the belief that U.S. stockpiles are shrinking, while unrest in Iran sows concerns of a supply disruption.  According to analysts, U.S. crude inventories are expected to decline by 1.85 million barrels last week, according to a Bloomberg survey.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.37) and Sell Trade (79.91).


Gold fell to a one-week low in London on speculation U.S. economic growth will curb demand.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,071) and Sell Trade ($1,147). 


Copper rose for a fourth day in London to the highest price in almost 16 months.  Today, Copper is trading higher on speculation that supplies from Chile, the world’s largest producer, may be disrupted by a mine strike.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.21) and Sell Trade (3.36).


Howard Penney

Managing Director


US STRATEGY – Running in Place - sp1


US STRATEGY – Running in Place - usd2


US STRATEGY – Running in Place - vix3


US STRATEGY – Running in Place - oil4


US STRATEGY – Running in Place - gold5


US STRATEGY – Running in Place - copper6


Energy Costs Stoke Mild Inflation

A preliminary inflation reading from five German states suggests that energy costs are leading consumer prices higher. According to the statistical office in Munich, the states of Bavaria, North Rhine-Westphalia, Hesse, Brandenburg, and Saxony  saw inflation rise to the range of +0.7% – 1.0% in December Y/Y from +0.2% – 0.4% in November versus the year earlier.


Petroleum and fuel recorded low double digit gains on an annual basis across most states and heating oil inflated just shy of +10%, while food inflation fell ~3%.


As a gauge for Eurozone inflation (at +0.5% in November Y/Y), German CPI does not appear an intermediate term threat in 2010, despite the pressures that rising energy prices will put on consumers and producers. However, unemployment fears in Germany, despite holding at the 8.2% level over the last months, remain a particular concern, which has been confirmed by surveys showing deterioration in consumer and business confidence and a slowing in the services and manufacturing PMI.


Interestingly, the DAX is performing in line with the S&P 500 in year-to-date performance, up 24%. The DAX overcame the 6000 line on Monday, not achieved since September 2008. We’re currently not invested in Europe in our model portfolio and very mindful of fundamental and structural issues facing Europe’s weaker and leveraged economies.


Matthew Hedrick



Energy Costs Stoke Mild Inflation - gecpi



December 29, 2009





We quantified yesterday why the ‘group call’ will matter in 2010 far less than it did in 2009. In that vein, as the year draws to a close, let’s keep a keen eye on incremental changes in sentiment on specific names in retail. The chart below triangulates sentiment on the sell side (ratings), buy side (short interest), and inside (management buy/sell activity).  Here are some notable callouts…


  1. SHLD: No major changes, but how can I not mention 32% of the float short with not a single sell-sider on the Buy bandwagon. I’m firmly in the ‘why does this business need to exist?’ camp, but let’s not ignore these factors.
  2. BKS is a close second with 30% of the short float, a 6% increase from a month ago.
  3. UA sentiment is still overwhelmingly negative, but its 5 buy ratings is markedly higher than the lone Buy rating we had earlier this year. It’s still hated with 19 other ratings that are NOT Buy, but the short interest failed to move meaningfully higher over the past month, which is also notable. All-in, this is worth calling out, and it tells me that the direction on the top line is gaining in importance here.
  4. TRLG: Sell side loves it, Buy side hates it. Fundamentally this margin structure is almost as sustainable as Timmy Geithner as our Treasury Secretary.
  5. There’s no shortage of big, liquid names with low short interest that are universally loved by the sell side: M, KSS, JCP, TJX, ROST, COH, MWT, TGT, VFC   


    R3: GETTING SENTIMENTAL - R3 12 29 09 Sentiment Chart




    • With the holiday shopping season now behind us, retailers are now in clearance mode as reflected in ‘Final Sales’ on popular on-line luxury discount sites Ruelala and Gilt.  While discounts over 50% are more rule than exception this season, of particular interest is how retailers with e-commerce site are balancing clearance activity. Some popular retailers like J. Crew are actually discounting more significantly in-store compared to on-line perhaps as a tactic to drive traffic. There are a few notable exceptions, however, such as Patagonia where I did not see one single sale tag.
    • In an aggressive move to turn inventory, private furniture retailer Raymour & Flanigan is now offering a deal for no money down and no interest until 2014! While an alternative to further discounting, the likelihood for rates to move higher over the next 4 years may result in retailers wishing they had taken the pain upfront in hindsight.




    Stay Union-Free’ Pushed by Target, Michaels as Obama Law Looms  - Target Corp. retooled a training video to warn workers against a bill that would make union organizing easier. Michaels Stores Inc. told investors “our businesses could be impacted” by the measure. Enrollment in Jackson Lewis LLP’s “How to Stay Union-Free” seminars tripled. Companies are rallying to fend off a so-called card-check law sought by labor leaders and backed by President Barack Obama. While the bill stalled in Congress this year as health- care legislation dominated debate, anti-union groups say they expect the president and Democrats to deliver next year on a compromise version of the legislation. “As we approach the 2010 elections, the unions are really going to want their pound of flesh,” said Randy Johnson, who handles labor issues for the U.S. Chamber of Commerce, the nation’s largest business lobbying group. “Even if we defeat the card-check bill, it’s entirely possible that other changes to the National Labor Relations Act will come up, and some of those will likely make it easier to organize the workplace.”  <>


    Electronic books outsell paper volumes at Amazon for the first time - Many consumers who found new Kindle e-book readers under the tree Christmas Day rushed to fill up those devices with e-books the same day. The result: for the first time ever, Inc. says it sold more e-books for the Kindle on Christmas than paper books. Amazon, which has featured the Kindle prominently on its home page since introducing the device in November 2007, says more shoppers bought the Kindle as a gift this holiday season than any other item on Amazon. "We are grateful to our customers for making Kindle the most gifted item ever in our history," says Jeff Bezos, founder and CEO of "On behalf of employees around the world, we wish everyone happy holidays and happy reading!" <>


    Claire's to go for European expansion drive in 2010 - Accessories retailer Claire’s intends to open significantly more stores during 2010 than this year. Keny Wilson, the US-based retailer’s European president unveiled plans to maximise the label’s European presence by concentrating on stores openings in Spain and Germany, which he believes are well-placed for expansion. Noting that Claire’s opened 25 stores in Europe during the last year, Wilson said: “We’re going to open significantly more in the next year.” In order to expedite this, Wilson also plans to beef up the company’s executive base and will be looking for management with “pan-European expertise.” Currently, Europe, has 953 Claire’s stores, the bulk of which are in the UK and France, against over 2,000 in the US. The European business accounts for close to a third of the retailer’s annual sales. It is owned by private equity firm Apollo Management, which acquired it for $3.1bn in 2007.  <>


    JD takes over Australian and New Zealand Canterbury distributors - The sports retail group has acquired stakes in the Australian and New Zealand distribution companies for rugby brand Canterbury. The move is a futher step by JD to increase its stake in the rugby clothing brand as well as to consolidate control of its global distribution. The retailer has taken 100% of the issued share capital of Canterbury International Australia and 51% of Canterbury New Zealand. Both companies were previously subsidiaries of New Zealand-based company Herald Island. Ross Munro, who has control of Herald Island will hold the remaining 49% stake in the New Zealand organisation, along with CCC Nominees, and has agreed to become the CEO of CNZ. In a statement to the London Stock Exchange, JD said that it did not expect the acquisitions to be “materially earnings enhancing in the short terrm”, but that they would add to the group’s control of the Canterbury brand and its global marketing properties. <>


    Fast-Fashion Retailers Eye New Concepts - Despite surviving the economic downturn better than luxury brands, fast-fashion retailers aren’t resting on their laurels. As customers’ spending patterns become unpredictable despite the receding recession, fast-fashion giants are turning to concepts that until now had been untapped or were considered marginal to their main businesses. Despite the recession, Inditex SA, H&M and Japan’s Fast Retailing Co. Ltd. managed to grow total sales in 2009, helped by new store openings, particularly in emerging markets in Asia. But the rise of competition, especially from low-cost and online retailers, combined with fickle consumer confidence, has persuaded fast-fashion retailers to sharpen their product offerings.  Fast Retailing’s flagship chain Uniqlo — with the stated goal of becoming the world’s largest fashion retailer by 2020 — is both shifting upscale with its premium Jil Sander-designed collection, +J, and expanding into thrifty apparel retailing with the low-cost g.u. chain in Japan. H&M has expanded its successful one-off designer collaborations beyond apparel, with a footwear collection by red-carpet shoemaker Jimmy Choo and a lingerie collaboration with Parisian designer Sonia Rykiel. And Inditex is finally catching up with competitors by bringing its main label, Zara, online for the first time.  <>


    Dept. Store Sites Score Big Increases - While broadline retailers struggled to top their November 2008 sales figures last month in their brick-and-mortar stores, many of their e-commerce sites enjoyed tidings of comfort and joy as the holiday season began in earnest. Department store e-commerce sites scored the fifth largest increase in unique visitors in November compared with October, rising 29.9 percent to 80.9 million from 62.2 million the prior month, according to a report released Monday by comScore Inc., which specializes in the measurement of digital traffic and purchasing. Overall in e-commerce, there was a 1.5 percent increase in “uniques” to 201.14 billion from 198.22 billion in October. E-commerce sites offering jewelry, accessories and luxury goods had the ninth largest increase, up 15.2 percent to 17.7 million visitors. <>


    Online retail was the holiday season’s big winner, MasterCard says - Online retailers were the big winners this holiday season, as their sales grew significantly faster than those at stores, according to the MasterCard Advisors SpendingPulse report released today. E-commerce sales were up 15.5% over last year for the period Nov. 1-Dec. 24, and 18% since the Friday after Thanksgiving, says the report from MasterCard Advisors, the consulting arm of MasterCard Inc. Overall, retail sales increased 3.6% during the period, a substantial improvement from a 2.3% drop-off during the 2008 holiday season, MasterCard says. The e-retail segment registered double-digit growth in all but one week during this holiday season, MasterCard says. Several major winter storms that kept shoppers from bricks-and-mortar stores seem to have boosted online sales, says Michael McNamara, vice president of research and analysis for SpendingPulse. <>


    Retailers Shoot for Top-line Growth in 2010 - It hasn’t been a cakewalk, yet after the final big shopping weekend of the year and the onset of steeper markdowns, retailers are easing out of holiday selling into clearance mode feeling OK about business and ready to bring on spring. The verdict is a preliminary one, of course, with December sales not being reported until Jan. 7, and about five weeks remaining in the fourth quarter that ends Jan. 31. Not to mention double-digit unemployment and difficulties for consumers getting credit. However, there’s been a discernible shift in the tone among retail executives in the last few weeks. Many predict improved margins and profits for the fourth quarter even with flattish sales, a consequence of lower inventories and demand. Beyond that, some suggest real and long-awaited top-line growth occurring in 2010, most likely in the second half. <>


    Online Vintage Stores Bucking the Economy - Britain’s high street clothing stores might be struggling, but Internet business is brisk for a new clutch of vintage stores. The Web sites are proving popular among those who love the idea of wearing important pieces of 20th-century fashion, but who don’t have the time or energy to trawl through shops or markets. The sites are also doubling as vintage clothing libraries, offering video clips, editorial comments and research on the pieces they carry. Many are creating a real world presence by staging exhibitions and salon events, as well as permanent and pop-up stores.  <>


    Study: Women to Spend Less on Cosmetics in '10 - American consumers will maintain and even intensify their focus on thrift in 2010, and their frugality is expected to reduce cosmetics purchases by women by nearly 9 percent. According to a survey of 600 Americans, age 25 and up, by AlixPartners’ consumer products group, women are expected to reduce spending on cosmetics by 8.7 percent next year, greater than the 7.5 percent decline expected for prepared food and prepackaged meals or the 3.4 percent drop foreseen for health and personal care items among all respondents. Seventy-five percent of those surveyed said they expected to be more frugal when shopping for food in 2010 and 55 percent said they would reduce their spending on household-care products. <>

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