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. <>


    McCarran Airport showed a scant gain in traffic in November. It doesn't mean revenues will be up but baby steps...



    Last week, McCarran Aiport released monthly data showing the number of enplaned/deplaned passengers actually increased 0.1% in November.  This is the first uptick since February of 2008.  Yes the comparison was easy - down 14.8% last year - but the trend is moving in the right direction.  See the chart below.


    STABLE NOV AIRPORT TRAFFIC - mccarran nov chart


    Before we get too excited, realize that gaming revenues likely still fell, assuming a normal hold percentage, and gaming volumes almost certainly declined.  Based on our proprietary model, we project a mid-single digit decline in gaming revenues as shown in the table below.  The comparison of down 16% was easy, although moderate on a relative basis to the recent monthly comps.  Hold percentage last year was normal for both slots and tables last year.  We expect a slight uptick in slot hold for November 2009 due to the timing of the 10/31/09 count.  When the count falls on a weekend, slot revenues tend to be understated in that month (October) and overstated in the following month (November).


    STABLE NOV AIRPORT TRAFFIC - nov est strip metrics


    Of course, November is not the most critical month of any year, and particularly not this year since CityCenter opened in December and added quite a bit of supply to the market.  Moreover, the air capacity into McCarran is on the decline which will not be helpful as supply increases.  More on that later.

    Frightening Faith

    “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”

    -Amos Tversky


    The world lost a wonderful mathematical mind in June of this year. Amos Tversky was a pioneer in many of the not yet accepted halls of cognitive science and  behavioral economics. Not yet accepted by the Perceived Wizards of Wall Street Oz that is…


    Whether it was my having to endure Larry Kudlow’s market call last night on CNBC, or scanning this Bloomberg article on my desk about Legg Mason’s Bill Miller making a “comeback” this morning, it’s all one and the same. These guys apparently don’t have mirrors or a YouTube. They both missed calling the crash. They are both perpetually bullish. They, sadly, are both part of the incompetent old boy club that aids and abets an American culture of recklessly buying high.


    I could not make this up if I tried, but this is a direct quote from Bill Miller after the SP500 closed at a year-to-date high of 1127 last night: “There is a lot of upside left.” After the most expedited 9 month rally in modern stock market history (+66.7% from the March 9th lows), that’s what you get. That advice, and Kudlow calling for a “mini-boom” last night are classic contrarian indicators.


    Legg Mason’s marketing machine will be the last to remind you, so I’ll be the first this morning. Miller lost -55% of his clients’ money in 2008, and has been beat by 99% of his peers on a 5 year basis. To his defense, he also remarked that “we positioned the fund for a recovery.” Thank God for that proactive plan, Bill.


    Whether it’s Kudlow, or Miller, or Larry Summers (whose interest rate swap positions that he signed off on in 2006 almost blew up the Harvard Endowment), it’s all one and the same folks. As your favorite market savants roll out their “2010 predictions”, here’s mine: these guys will miss calling out most of the 2010 risk, and swing with the monkeys from the market highs. They do not have a repeatable risk management process to do otherwise. They never have.


    Back to being your risk manager…


    Higher-highs in the SP500 and the Nasdaq were bullish confirmations of a bullish intermediate term TREND in US equities yesterday. However (and yes old boys, there is always a however), these higher-highs were not confirmed by small caps or the financials.


    The Russell 2000 (IWM) closed down small on the day, and the Financials Sector ETF (XLF) closed down another -0.34% at $14.48. The XLF remains the worst sector out of the 9 we assign risk factors to in our SP500 Sector model. The Financials are broken from both an immediate term TRADE and an intermediate term TREND perspective. There is a long term TAIL line of support for the XLF down at $12.05/share. That’s -16.8% lower than last night’s close.


    When Josh Steiner, our new Sector Head of Financials Research, launched last month, he came out bearish on the money center banks. We took a lot of heat from a certain corridor of the hedge fund community with that call, so we knew the Street was long some of the brokers and government sponsored banks (BAC, C, GS, etc…). After a +128% rally from her early 2009 lows, seeing bulls chase price was no surprise whatsoever.


    Since October 14th, the financials (XLF) are down -8.3% and the SP500 is +3.2%. If you aren’t living in the land of perpetual bullishness, for the financials that’s what we call a nasty negative divergence. If you have been short the financials and long the market, that’s called alpha.


    Now, from a global risk management perspective, what else is interesting about October 14th?


    1.       The stock market in the United Arab Emirates peaked, and has since lost 24.6% of its value

    2.       The stock market in Greece peaked, and has since lost 24.3% of its value

    3.       The stock market in Vietnam peaked, and has since lost -22.4% of its value


    Yes. If you have your calculator out doing your own work Larry, you’ll realize that I purposefully just made an inaccurate statement. Vietnam peaked on October 22nd. I just wanted to make sure you are reading my work extra closely this morning. These cross market macro correlations are not ironic. They are leading indicators that not all is going “mini boom” in global macro – or wait, maybe some things are…


    I’m all for a country that’s everything that we want it to be. But when it comes to your financial freedoms and safeties, I think you need to start with either your own investment process or augmenting it with people who do their own work and are accountable to it. That’s it. It’s that simple.


    To ignore risk for the sake of sounding positive may not deserve the capital punishment that the Chinese gave that British drug lord last night, but it certainly deserves your losing the ability to manage other people’s capital or to broadcast your views to a national audience of impressionable young Americans.


    From the US financial stocks falling, to the price of oil hitting a 5-week high post plenty of geopolitical risk being reflected via oil price premium, this game is all about risk. Real-time prices are always telling us where to look for those risks. Its hard work. The days of looking to the likes of Kudlow, Miller, and some Robert Rubin disciple are thankfully ending. For far too long this country upheld some Frightening Faith in their hope based bullishness.


    Remember, hope is not an investment process. God bless Amos Tversky.


    My immediate term TRADE lines of support and resistance for the SP500 are now 1113 and 1133, 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 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 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.

    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 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.

    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.


    US STRATEGY - MACRO pre-open levels

    The range for the S&P 500 is 20 points or 0.5% upside and 1.0% downside.  At the time of writing the major market futures are slightly higher. Below you'll find our Macro pre-open TRADE levels for the S&P 500, US Dollar Index, VIX, Oil, Gold, and Copper.


    Howard Penney

    Managing Director


    US STRATEGY -  MACRO pre-open levels  - sp1


    US STRATEGY -  MACRO pre-open levels  - usd2


    US STRATEGY -  MACRO pre-open levels  - vix3


    US STRATEGY -  MACRO pre-open levels  - oil4


    US STRATEGY -  MACRO pre-open levels  - gold5


    US STRATEGY -  MACRO pre-open levels  - copper6


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