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US STRATEGY – Popping Bubbles

US equities finished lower in their final day of trading for 2009 with the Dow declining (0.87%), the S&P down (1.01%), the NASDAQ (0.72%) and the Russell (1.37%).  Last Thursday, the Industrials (XLI) and Consumer Staples (XLP) joined the Financials (XLF) and are now broken on TREND.   

 

In the last week of trading for the year the S&P 500 declined 1.0%.  On the MACRO calendar the week's economic data points included: the October S&P Case-Shiller 20-city home price index, December consumer confidence, December Chicago PMI and weekly initial claims; all came in better than expectations.  There was nothing in the MACRO data points to account for a shift in sentiment surrounding the momentum behind the RECOVERY theme.

 

Corporate news flow was again on the light side last Thursday, with the Jobless claims data the only release of interest on the economic calendar. Initial claims fell 22,000 to 432,000 in the week-ended December 26th; the lowest level since July of 2008 and below the 460,000 consensus. The four-week moving average fell to 460,000 from 466,000 the week before. 

 

The MACRO data points out of China continue to be a net positive; we believe that things will slow as we move thru the first quarter.  In China, the official purchasing managers index improved to 56.6 last month up from 55.2 in the previous month.  China's manufacturing sector is now expanding at the fastest pace since the financial crisis in late 2008.  The index’s low was at 38.8 in November 2008.  Domestically, we are looking for additional data points on the RECOVERY theme with the release of December ISM manufacturing. 

 

The Utilities (XLU) and the Materials (XLB) sectors were the two worst performers last Thursday, with the Road (R) and Air Freight (FDX) names performing the worst.  Financials (XLF) and Energy (XLE) were the best relative performers, with the larger-cap banks (WFC) and brokers (GS) among the standouts.  Every sector declined last Thursday. 

 

Last Thursday, the VIX closed at 21.68, up 8.6% day-over-day; last year the VIX declined 44.7%.  The Dollar Index traded in a tight range last week, and was down 4.2% for all of 2009. 

 

Today, the range for the S&P 500 is 22 points or 2.0% upside and 1.0% downside.  At the time of writing the major market futures are trading higher.    

 

Copper is trading higher for a sixth day in London to a 16-month high as a strike began at the world’s second-biggest mine and manufacturing in China expanded by the most in five years. 

 

In early trading today GOLD is trading in a narrow range around $1,095/OZ an ounce on Monday in a cautious start to the year after ending 2009 with their biggest absolute annual gain in three decades. 

 

Crude oil rose for an eighth day, trading above $80 a barrel for the first time in seven weeks, as freezing weather and improving economic prospects around the world helped the outlook for demand. 

 

Howard Penney

Managing Director

 

US STRATEGY – Popping Bubbles - hp1

 


How Fitting

“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)
 
I’ve decided to preface my first note of 2010 with a quote from the author of the Da Vinci Code. Dan Brown’s latest thriller, The Lost Symbol, is set in Washington, D.C. How fitting…
 
That’s exactly where He Who Sees No Bubbles (Ben Bernanke) has staged his storytelling since he joined the US Federal Reserve as a governor in 2002. Ever since, the man, the myth, the legend - of everything Great Depressionista - has been politicizing monetary policy with a mandate to keep the real rate of return on American savings accounts at zero.
 
Clearly, Harvard University symbologist, Robert Langdon, wasn’t invited (it was more of a Groupthink Inc. event), but there were plenty of revisionist historians who assembled at the American Economic Association’s conference in Atlanta yesterday. The Bloomberg headline coming out of the meeting was, “Bernanke Says Low Rates Didn’t Cause House Bubble; Regulation Best Answer.” How fitting …
 
Heck, maybe that’s the best call we can make on 2010. Those with Perceived Wisdom of how the US Financial System works are just going to keep making stuff up! Greenspan and Bernanke cutting rates to zero, twice, didn’t create any debt levered priced bubbles. Take their word for it!
 
We shouldn’t just pick on He Who Sees No Bubbles in 2010. That would be mean. My new year’s resolution is to spread the love. There were multiple members of Groupthink Inc. at the storytelling event in Atlanta yesterday, and here are two of the most representative conclusions that this consistently inaccurate group of wise men came up with:
 
1.      “It is not likely that we have robust growth anytime soon” –Joseph Stiglitz

2.      “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual.” – Donald Kohn

 
Donald Kohn is a much more accomplished storyteller for the Fed than Bernanke. He has been an economist supporting cut-to-zero bailout policies, well, since they were invented. Having seen none of this coming, he is now the Fed’s Vice Chairman. He apparently sees no reason to agree with me (or 99% of Americans who earn fixed incomes from their savings accounts) that consumer spending is being constrained by the Fed giving us ZERO return on our money.
 
This is where the Fed’s unscientific narrative is dead wrong:
 
1.      That we need more debt and credit to fix our debtor nation problem.

2.      That we silly people who save wouldn’t know what to do with a risk free rate of return if we ever see it again.

3.      That main street inflation with $81/barrel oil and $3.34/lbs copper is nowhere to be seen.

 
In September of 2007, the Fed Funds Rate was 5.25%. We need to get at least half way back to that rate, over time, unless we want to become Japan. Savings build investment dollars. More investment dollars put into the hands of hard working American entrepreneurs is what builds the next Google or Nike. The Big Government Decade we just experienced failed. “Wide acceptance of an idea” that we need to fear rates hikes “is not proof of its validity.”
 
Two of our three Macro Investment Themes for 2010 are Buck Breakout and Rate Run-up. Both of these themes are correlated. Both of these themes stand on the other side of the two aforementioned quotes coming out of Groupthink Inc.

Sorry Mr. Stiglitz, reported growth is going to be robust for at least the next 6 months (Q4 and Q1 GDP). At the same time, reported inflation is going to continue to rise, as will asset prices. The US Dollar is breaking out to the upside as a leading indicator that the Fed Heads are staring in the rear-view mirror again.
 
At the same time, yields across the US Treasury curve are also breaking out across all three of my key investment durations (TRADE, TREND and TAIL). The long term TAIL breakout levels for 2-year and 10-year Treasury yields are 0.96% and 3.29%, respectively.
 
My intermediate term TREND lines (3 months or more) of support for the US Dollar and the SP500 are $76.31 and 1081, respectively. Provided that those two lines hold and the aforementioned move in the bond market continues to confirm higher-highs in the prices of copper and oil this morning, the Fed will remain behind the curve.
 
In 2009, they called for emergency levels of zero percent rates because we were in a “Depression.” The Fed has it wrong again already in 2010. How fitting…
 
Best of luck out there today,
KM

 

 

LONG ETFS


XLV – SPDR Healthcare
Buying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

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

EWG - iShares Germany
Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

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 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.

 
SHORT ETFS

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.

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 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.


The Week Ahead

The Economic Data calendar for the week of the 4th of January through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - sv41

The Week Ahead - sv42

The Week Ahead - sv43


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ROLLING CLAIMS KEEP HEADING LOWER

Joshua Steiner, our new Financials sector head, takes a look at today's release of US Jobless Claims:

 

The 432k print this morning marks a further step in the right direction from the slightly revised 454k print last week (up from 452k).

 

The rolling average claims improved this week to 460k from 466k last week - an improvement of 6k, slightly better than the slope of 5.2k/week since March (9 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders. It’s worth mentioning that claims do experience some seasonality, as people are, on the margin, less likely to file around the holidays, so it is normal to see rolling improvement through mid-January followed by an upswing thereafter. If claims fail to rise post the normal seasonal January improvement this will be a particularly strong sign that the jobless environment is continuing to improve.

 

For those wondering how to interpret a possible inflection in rolling claims in coming weeks, should there be one, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 485-490k as a near-term rolling upper limit based on the downward channel that's been in place since March.

 

ROLLING CLAIMS KEEP HEADING LOWER - ijc


ROLLING CLAIMS KEEP HEADING LOWER

The 432k print this morning marks a further step in the right direction from the slightly revised 454k print last week (up from 452k).

 

The rolling average claims improved this week to 460k from 466k last week - an improvement of 6k, slightly better than the slope of 5.2k/week since March (9 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders. It’s worth mentioning that claims do experience some seasonality, as people are, on the margin, less likely to file around the holidays, so it is normal to see rolling improvement through mid-January followed by an upswing thereafter. If claims fail to rise post the normal seasonal January improvement this will be a particularly strong sign that the jobless environment is continuing to improve.

 

ROLLING CLAIMS KEEP HEADING LOWER - 1

 

For those wondering how to interpret a possible inflection in rolling claims in coming weeks, should there be one, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 485-490k as a near-term rolling upper limit based on the downward channel that's been in place since March.


R3: THINK GLOBAL... FAST

R3: REQUIRED RETAIL READING

December 31, 2009

 

This might be the last day of the year, but that doesn’t give a hall pass to any self-respecting risk manager to ignore the mother of all calendar set-ups in global retail trade. Check this out…

 

 

TODAY’S CALL OUT

 

The biggest call-out this morning is a personal one. After the most hated rally in history, there’s a whole lot of people out there who are happy to be looking 2010 square in the eye in hope of another chance at alpha-generating salvation. I am simply grateful for having what I think is the greatest job on the planet, and have never in my 15 years on Wall Street been more excited about what is to come in 2010. My team has doubled and our Firm has tripled in size over the past year. As Keith pointed out in his Early Look this morning, this was not funded by TARP money. It is because of your support. We will never forget that. A sincere ‘Thank You’ from the Retail Team as well as my other colleagues here at Research Edge.

 

All of that said, what we don’t do here at Research Edge is take days off. So let’s look at the hand we’re dealt today. In the world of retail, the consensus view of the easiest things to look at probably point to the extra shopping day, post Christmas inventory, and impact of both weather and dot.com on this year’s holiday sales (turn on CNBC and that’s what you’ll get).  I think the most notable factors today are happening within the next 12-hours in Asia and Europe…

 

  • Europe: Many people forget that at the stroke of midnight, the VAT (Value Added Tax) goes up tonight in the UK to 17.5%, after a full year of a meaningful push by the government to stimulate the economy.  The debate amongst retailers is how long they can hold off in implementing price increases as to not confuse the consumer (and hurt margins) while holiday product is returned. Others, like Marks and Spencer, are more aggressively pushing prices through immediately. That’s a big gamble that the consumer will be waiting and willing to eat higher prices to protect retailer margins. Let’s be mindful of the ensuing fireworks in the coming months.

 

  •  Asian Free Trade Zone:  Reminder #2… China and Southeast Asia are creating a free-trade zone spanning more than 1.9 billion people on January 1, as China, and 10 South-East Asian countries join together to scrap tariffs. Duties will be dropped on everything from steel to rubber and shoes to electronics. China hopes that the zone will quickly rival the European Economic Area and the North American Free Trade Area and provide new outlets for its goods in the face of Western protectionism. Duties will be scrapped on 90% of goods traded across China, Indonesia, Malaysia, Singapore, Thailand, Brunei and the Philippines. Over the next five years, tariffs will also be removed on trade in Cambodia, Laos, Vietnam and Burma. Ok…so let me get this straight…90%+ of goods sold at retail are made in Asia, and we’re seeing Asian nations (some of which historically hate each other) band together to stimulate local consumption and trade to lessen reliance on the West AT THE SAME TIME the US Dollar ceases to be the world’s reserve currency. Does anyone else out there think that this is one of the scariest things going??? No one’s focused on this, but they should be.   

 

MORNING NEWS 

 

In an e-retail online shopping satisfaction survey by ForeSee Results, larger retailers fared better than their smaller counterparts in 2009. Based on a 100-point scale where scores above 80 are considered excellent, 5 of the 8 companies surpassing the threshold in ’09 were apparel retailers or mass merchants: Amazon, QVC, JCP, LLBean, and Victoria Secret. With e-commerce proving to be a real avenue of growth for retailers, expect this number to grow next year as the many retailers that launched sites over the LTM focus efforts towards getting it right.  <dallasnews.com>

 

Safilo Sells Some Retail Operations -  Safilo Group SpA said Wednesday that it had sold a portion of its retail units to Hal Holding NV for 13.7 million euros, or $19.7 million. Hal Holding acquired the Loop Vision chain in Spain, the Just Spectacles chain in Australia and all of Safilo’s retail units in China. The Italian eyewear group holds on to the remaining three chains — Solstice in the U.S. and both Sunglass Island and Island Optical in Mexico, which account for 215 of the company’s 300-plus retail units. Safilo outlined this sale in a plan released on Oct. 19. In that plan, the eyewear firm said it would sell the Mexican chains as well, for a total of 20 euros, or $28.80 at current exchange. However, the company said Wednesday it is retaining the Mexican chains “for now.” There are no plans to sell the Solstice chain. The sale was part of a recapitalization deal struck with Hal Holding in mid-December, expanding its investment in Safilo from 2 percent to a controlling share that will eventually be from 37.23 to 49.99 percent. Without a successful offer, Safilo faced bankruptcy, with debts that amounted to about 590 million euros, or $848.9 million.  <wwd.com>

 

Sockwell Retires from Claiborne Board - Oliver Sockwell has resigned as a director of Liz Claiborne Inc. after seven years on the board. Sockwell, 65 when the firm issued its 2008 definitive proxy in March, is the co-founder and retired president and chief executive officer of Construction Loan Insurance Corp. When first elected, he succeeded Jim Gordon, an original investor in the firm. With Sockwell’s departure, the board has nine members, seven of them independent. Doreen Toben, who retired as chief financial officer of Verizon earlier this year, was added to the board in October.  <wwd.com>

 

Desigual Set to Expand in 2010 - Despite the global downturn, the Spanish fashion brand Desigual remains on a rapid expansion course, including the opening of its first German — and largest European — store here. Now available in 70 countries, the vertical Barcelona-based company has pinpointed Germany and France as its most important growth markets in the year to come. At the official Berlin opening, chief executive officer Manel Adell said, “We should see some 10 stores in each of these markets soon.” Known for its lively novelty patchwork looks for men, women and children of all ages, Desigual has increased its revenues 20 times over the last seven years. Sales last year reached 162 million euros, or $238.4 million at average exchange, versus 8 million euros, or $7.6 million, in 2002, and while the company wouldn’t forecast 2009 sales, it expects to sell 10 million garments this year, up from 6 million in 2008.  <wwd.com>

 

Assouline Steps Up Retailing and Custom Services - Assouline, the fashion crowd’s favorite book publisher, has turned its eye toward retail expansion and luxury services. The New York-based company, founded 15 years ago in France by Prosper and Martine Assouline, has established itself as a tastemaker in the fashion world, which is a frequent subject of Assouline’s glossy picture books. An official partnership with the Council of Fashion Designers of America generates numerous books about American designers and the New York fashion scene. In addition to fashion, subjects encompass art, design, lifestyles, travel and culinary arts. The books are always rich in history, but historical significance alone doesn’t merit an Assouline project, according to Martine. It also must have some contemporary relevance. Recent and upcoming releases include books on polo, architect Oscar Niemeyer, India, Pierre Cardin, American men’s wear, the Esquire covers of George Lois and the Deyrolle fire. Subjects needn’t be serious, though, as there are also Assouline books about bikinis, Barbie and dog fashion. <wwd.com>

 

Hugo Boss to Close Ohio Factory, Cut 300 Jobs, Union Says - Hugo Boss plans to close an Ohio factory, affecting 300 jobs, according to labor union Workers United. <bloomberg.com>

 

Danner Sues Rag & Bone Over Boot - Rag & Bone has a history of looking to classic work and military wear for reference points, but a recent lawsuit brought by boot maker Danner Inc. accuses the label of being a bit too inspired in one of its recent designs. The Portland, Ore.-based shoemaker filed its complaint in U.S. District Court in its hometown on Dec. 18. The suit accuses Rag & Bone of trademark infringement for selling a boot design named the Danner Combat Boot through Barneys New York and Saks Fifth Avenue. Danner listed both retailers as co-defendants. Representatives for Rag & Bone did not return calls seeking comment Monday. Barneys said it does not comment on litigation and Saks said it had no comment. Danner registered trademarks for its scripted logo in 1974 in the men’s and women’s footwear class, and its name in 2007. The company has sold boots under the Danner brand since 1933.  <wwd.com>

 

Suit Against Retailer Chick Downtown - Online boutique Chick Downtown has defaulted on a $950,000 line of credit from Enterprise Bank, according to a lawsuit brought earlier this month by the lender. The suit, filed Dec. 15 in the Court of Common Pleas of Allegheny County, Pa., seeks $972,830.46 from the Pittsburgh-based e-commerce operator for the remainder of its principal and interest and attorneys’ fees. The bank’s complaint is the latest in a string of recent lawsuits filed against the online merchant. Several creditors, including Mint Collection Inc. and Molli Enterprise, have filed lawsuits accusing the company of failing to pay debts. A number listed for the company was disconnected when reached Tuesday. The retailer closed its brick-and-mortar location in Pittsburgh earlier this year. <wwd.com>

 

Storm Boosts Holiday Spending Online - ComScore Inc. reported Wednesday that, during the stormy weekend of Dec. 19 and 20, online sales increased 13.3 percent, to $767 million from $677 million during the comparable weekend in 2008. The challenging weather conditions in the Northeast and Middle Atlantic during the final weekend before Christmas kept many U.S. shoppers indoors and online, helping to boost e-commerce sales for the period between Nov. 1 and Dec. 24 to $27.12 billion, 4.9 percent higher than the $25.85 billion spent online during the 2008 holiday season. Adjusting for an extra shopping day this year, comScore put the year-on-year increase at a more modest 3.5 percent, but that’s still more than a 6 point swing from the 3 percent decline registered for holiday 2008 versus the 2007 season.  <wwd.com>

 

Denim's New Direction: Brands, Retailers Feel Pressure on Price - Denim proved to be a winning category for retailers throughout the recession and its momentum carried through the holiday season — but the warning lights are flashing. While the better-than-expected sales have been welcome news for brands and retailers alike, December’s results offered a clear picture of consumers’ pricing limitations as the new year approaches. “The reset button has been pressed,” said Andreas Kurz, former head of Diesel USA and Seven For All Mankind and now president and owner of fashion consultancy Akari Enterprises LLC. “We are back at the level where we were two years ago, and we have to start over again and with different rules.” Lawrence Scott, owner of Pittsburgh Jeans Co., has seen the change in his customers. They’ve continued to buy, but their tolerance levels on pricing have become pronounced and aren’t likely to change soon. <wwd.com>


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