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Ruby Tuesday is scheduled to report fiscal 2Q10 earnings after the close tomorrow and I am expecting EPS to come in a penny better than the street’s estimate of a loss of $0.02.  Fiscal 2Q10 marks RT’s last quarter of relatively easier comparisons from both a top-line and EBIT margin perspective.  I am expecting company-operated same-store sales growth to come in -2% relative to the street’s -2.7% estimate.  On a 2-year average basis, this assumes a 50 bp acceleration from the first quarter, a level that is even with that of the casual dining industry as measured by Malcolm Knapp.  As it relates to YOY comparisons for both RT and the industry as a whole, if RT’s trends improve by the same amount on a 2-year average basis as the industry in RT’s fiscal 2Q, the company’s gap to Knapp will narrow on a sequential basis to about 3% from 4% in 1Q10.   For reference RT’s performance has gotten better on a sequential basis relative to the industry for the last six reported quarters.


Even with the relatively easier EBIT margin comparison from 2Q09, I am expecting about 70 bps of contraction in 2Q10 (following a nearly 100 bp improvement in 1Q10).  In the back half of the year, however, margins will come under increased pressure as RT will be lapping two quarters of 200-plus bps of YOY improvements.  Making the second half more difficult is the fact that RT will be lapping lower SG&A spending as a result of the company’s increasing its span of control for both regional and area supervisors in the back half of last year and lower depreciation expense from the 3Q09 closures. 


Relative to RT’s full-year guidance, I am comfortable with the company’s ability to achieve EPS of $0.50-$0.60; though I think the lower end of the range is more likely.  Management gave same-store sales growth guidance of -1% to -3%.  Again, I think the lower end is more likely and could even be at risk as it assumes more than 300 bps of sequential improvement in 2-year average trends from 1Q10 to 4Q10.  For reference, same-store sales comparisons get relatively more difficult in the back half of the year so even if 2-year trends continue to improve, numbers will likely begin to come down on a 1-year basis in 3Q10.


This improvement in top-line trends will have a lot to do with how the overall industry fares going forward (we will have to see if the better November trends are sustainable), but RT is also lapping its significant promotional efforts from January 2009 in fiscal 3Q10.  In the last couple of quarters, RT’s top-line outperformance has been driven by traffic growth.  This growth has come at the expense of average check growth.  On RT’s 1Q10 earnings call, management stated it still has a goal to increase average check to the $12.50 to $14.50 range from the current mid-$11 range and that with customer traffic up, the company can now work on increasing average check.  It will be important to see if the company can continue to sustain traffic growth with average check growth and the true test will come in 3Q10. 


One area of management’s guidance that my numbers don’t currently match up with is the company’s outlook for restaurant level margins to decline 50 bps to 150 bps.   I am modeling closer to a 160 bp decline in margins for the full-year.  Obviously, where these numbers come in will be driven largely by how same-store sales trends play out for the balance of the year.  RT’s restaurant level margins have declined on a YOY basis for the last 11 quarters.  The YOY declines have continued despite the sequentially better same-store sales numbers because the company’s food costs as a percentage of sales have come under increased pressure from the company’s discounting and promotional efforts.  If the company is able to increase its average check and traffic in the back half of the year, then it will take some of the pressure off the food cost line and subsequently, restaurant level margins.


Fiscal 2010 should be another year of strong free cash flow for RT.  This free cash flow along with the $73 million in proceeds from the company’s equity offering in 1Q10 should allow the company to achieve its goal of paying down $165 million to $175 million of debt during the year.


RT has grossly outperformed its peers in the last year and that is with the group on average trading up 76%.  In the last six months, this outperformance has narrowed with RT up 10.7% versus its peers +9.6% move.  With RT’s top-line outperformance relative to Knapp Track likely to narrow from 1Q10 levels and margin comparisons getting more difficult in the back half of the year, I think it is unlikely that RT’s stock will have another year of outperformance.


RT - EARNINGS PREVIEW - RT stock price chart

Financials Breaking Out: Can They Hold?

On our Macro Morning Call (available now, daily, by podcast – email ) last week, we talked about contrarian moves that might catch people off-side’s in the first few weeks of the new year. One was a final meltup in the SP500.  Another was a potential reversal (to the upside) in the US Financials.


Today we are seeing the Financials (XLF) play catch-up with the SP500. The XLF is up +0.75% in a flat tape, outperforming all of the sectors in our 9 sector SP500 Risk Management model.


Most importantly, the XLF is breaking out above our intermediate term TREND line. That line = $14.65/share. The question now is, can this mean reversion move in the XLF hold its gains? If it can, into and out of Friday’s employment report (ahead of JPM kicking off the sector’s earnings next week), this will get very interesting, very quickly.


Don’t forget that the XLF has underperformed the SP500 by 1100 basis points since it put in an intermediate term peak in mid-October. There are plenty of reasons to fear the financials, not the least of which are Macro Themes we’ve been beating on like Re-Regulation.  Today, consensus favorite, Meredith Whitney, is trying to add to well placed fears in the money centers and brokers by taking down her numbers again in Goldman Sachs.


Last month, we launched coverage of the Financials sector with a bearish immediate term view on the money center banks and a bullish view on Capital One (COF). In the long term however, Josh Steiner and I think that the financials should hold their long term TAIL of support (outlined in the chart below at $12.16).  


In between now and then, the best risk-managed approach to this sector will be to let real-time prices tell you where to bob and weave. Watch this $14.65 line in the XLF very closely.



Keith R. McCullough
Chief Executive Officer


Financials Breaking Out: Can They Hold? - XLF



Kraft Foods announced this morning that it has agreed to sell the assets of its North American pizza business to Nestle.  Among other brands, the sale includes the California Pizza Kitchen trademark license and is expected to close in 2010. CPKI stated in a press release that it is “excited about a new relationship with Nestle and look forward to working with them in further developing the brand in the grocery channel."  Although CPKI management went on to say that it expects a smooth transition to Nestle, I would expect some disruption around the company’s royalty business until the transition is complete.  And, longer term, the future of this part of CPKI’s business could be in question as we do not know if or how the trademark agreement will change with Nestle or how the brand will fit into Nestle’s portfolio.  With Nestle being a European company, albeit with a presence in the U.S., I am concerned that the CPK brand may not get the same focus as it did from Kraft, which could impact both the marketing and execution of the frozen pizza products.


Royalties from the Kraft licensing agreement only represented about 1% of total sales in 2008, but it is a fast growing, high margin business for CPKI.  In the most recent quarter, Kraft royalties grew 35.2% and this follows 40% growth in 2008 and 30% growth in 2007.  It was only two months ago on CPKI’s 3Q09 earnings call that CEO Rick Rosenfield said “Our Kraft business continues to perform well with its expanded product line of pizza and pizza-related items. And despite an influx of competition and escalating marketing initiatives, our Kraft royalties were up 35.2% in the period. We continue to be encouraged by our prospects in the grocery aisle and feel that we have a distinct advantage by having our frozen products identified with our successful restaurants.  Moreover, we have a great relationship with Kraft and expect them to spend a significant amount promoting the CPK brand this year. Larry and I are working cooperatively with them on several initiatives to increase brand awareness of both our frozen product line and full service restaurants themselves.” 


His point about Kraft spending a significant amount behind the CPK brand is an important one as Kraft was required to spend a percentage of net sales on advertising and promotion of California Pizza Kitchen’s licensed products. One of the key questions for CPKI is whether this part of the agreement remains intact under the new agreement with Nestle.

Early Look

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January 5, 2009


We’re on the cusp of getting the most important “rear-view” data point of the year for retailers and it’s likely to be pretty good. Positive earnings aside, now is the time to start thinking about the sustainability of both margin improvements resulting from inventory management and sales growth driven by consumer demand (or lack thereof).





There’s nothing like starting the New Year with a look back.  While most of us are still figuring out our resolutions and goals for 2010, retailers are about to report their most important sales data of the year.  The month likely ended positively, with a surge in mall traffic coming in the critical final weeks of the holiday.  Calendar favorability is also expected to contribute 1-1.5% to results, which will add to both profits and positive headlines.  After a sluggish start to the holiday season (weather related), clean inventories, planned but not excessive promotional activity, and status quo demand all lined up for a solid profit picture as we wrap up 4Q and look towards Spring. As we eagerly await same-store sales results to be reported on Thursday, the bigger picture is probably the better place to focus in on. 


The real question coming out of the holiday season is if there were any notable signs or changes in consumer behavior.  The answer is probably not, as consumer credit, employment, housing, and even prices at the pump have remained relatively stable over the past few months.  On the margin, some of these factors are improving (albeit with the help of good ‘ol “easy compares”), but not a rate needed to support continued earnings upside at the pace we saw in 2009.   


The real issue here, in the wake of expense and inventory cuts is now one of demand.  As we look ahead to January, we don’t believe this month will be a good barometer as inventories are currently depleted, post-holiday clearance activity is its lowest point in years, and the cold freeze is unlikely to spark early sales of Spring apparel.  This expected lull sets up some “breathing room” to really figure out if the consumer is about to step-up and make that extra visit to the mall.  From our vantage point, we maintain that this is going to be a stock picking year.  Demand is likely to remain lackluster and cost cutting has peaked.  We may have another month to piece together a better picture of the consumer, but at the same time it’s probably best to retire the thesis of “easy compares”.


Eric Levine






  • With CES taking place this week in Las Vegas, expect to hear lots of buzz surrounding the latest and greatest gadgets and technology breakthroughs. In the absence of any expected “breakthrough” technology, there is likely to be lots of chatter surrounding 3D TV (thank Avatar for the added focus here), e-readers, netbooks, mobility, and Apple’s imminent tablet launch. As always, retailers will be looking for any products that can help boost AUR’s and margins.
  • According to Forrester Research, retailers spent $4.67 billion in 2009 on interactive marketing. The figure is expected to grow to $8.6 billion by 2014, with mobile growing to almost $200 million from just $59 million this year. While the growth rates are impressive, the absolute dollars spent on interactive marketing are still small relative to traditional marketing spend. Wal-Mart and Target combined spend near $2 billion annually on marketing and advertising!
  • Over a week ago I pointed out that the UGG retail store in Soho consistently had a line out the door during the holiday season. Well, now it’s time for an update. Both the UGG store and a metro-area outlet store still have long lines of customers waiting to get in. To my knowledge, UGG is one of a very few retailers that employ a “bouncer” to control entry and exit into their stores.
  • “Green” and “sustainability” are buzzwords that are expected to continue to increase in importance to the U.S. consumer. The longevity of such trends is still questionable, but most signs suggest that retailers and brands will continue to push the environmentally friendly envelope. A 2009 survey found that 54% of consumers would purchase more sustainable, green products if pricing was at parity with non-green products. Additionally, consumers are very aware of lip-service vs. reality. Another survey suggests that 70% of consumers don’t believe companies when they tout their efforts to help the environment and sustainability. As such, 64% of consumers would like corporations to use third-party verification to ensure that intentions are honest and transparent.




Target Launches Warehouse Club Event - One of the first discounters to advocate design for the masses, Target is now dabbling in the no-frills warehouse club concept. The Great Save, a shopping event now through Feb. 21, features low prices on bulk-packaged items and designer brands in a warehouse-club-like setting, but without club membership fees or ID cards. The event is being held in the seasonal departments of all 1,740 Target stores. The strategy could be aimed at countering the consumer perception that Target is more expensive that its rival Wal-Mart, whose parent company operates its own warehouse club division, Sam’s Club. Wal-Mart Stores Inc. has consistently outperformed Target Corp. over the last year in comparable-store sales gains. A Target spokesman declined to speculate as to whether The Great Save is a harbinger of the retailer rolling out its own warehouse club format. <wwd.com>


Tesco Clubcard company Dunnhumby buys KSS Retail - Dunnhumby, the market research company that is majority-owned by Tesco, the UK supermarket, has bought KSS Retail, a US price-modelling company, for an undisclosed sum. KSS Retail analyses and predicts shoppers' behaviour by tracking the effects of price changes on shop shelves and on online stores. It then generates pricing "models" for the retailers to implement based on consumer demand. Its technology and services are used by retailers such as Kroger, Portugal's Sonae, and Associated Food Stores.  Dunnhumby, which runs Tesco's hugely successful Clubcard loyalty scheme and analyses shopper activity in over 200m households worldwide, said that the acquisition will enable it to combine its know-how and expertise with that of KSS Retail. <telegraph.co.uk>


Asda steps up UK grocery battle with price cuts - Asda, Britain's No. 2 grocer, is cutting prices on 3,600 products by an average of 13 percent, intensifying the battle between the big supermarket groups at a time when lower food price inflation is hitting sales growth. Asda, owned by the world's biggest retailer, U.S. group Wal-Mart Stores Inc (WMT.N), said on Tuesday the cuts covered one in five products in its stores, including potatoes, carrots, bananas, milk, nappies, rice, bread and cheese, and represented its biggest and broadest reductions in over a decade. The cuts would more than offset an increase in VAT sales tax applicable to some non-food products on Jan. 1 and the vast majority would last for a minimum of six to 12 weeks, it said. The move appears to ratchet up a price war between supermarket groups, although it is reminiscent of similar campaigns in previous years which have been funded mainly by cost cutting and have not undermined industry profit margins. <reuters.com>


PacSun Names Cameron New Marketing Chief - In a move designed to help the company recapture its roots, Pacific Sunwear of California Inc. will today name former Levi Strauss & Co. executive Robert Cameron senior vice president of marketing. At PacSun, Cameron, formerly vice president of Levi’s Brand Marketing, will be responsible for creating a differentiated experience at the company’s 897 stores around the U.S. as well as on its Web site. He will also work with the company’s major brands to re-create the California lifestyle at its stores. This is a new position. “Robert has a tremendous track record of building brands and creating world-class customer experiences, particularly in the youth segment,” said PacSun president and chief executive officer Gary Schoenfeld. “We’ll leverage his background to reclaim our position as the favorite place for 15- to 24-year-olds to shop.”  <wwd.com>


Military Retail Giant Seeks Growth - A $10 billion retail giant that operates in 49 states and more than 30 countries is on the prowl for market share. The Army and Air Force Exchange Service, which sells 877,000 items from socks to electronics to 11.6 million active and retired military personnel, plus their spouses and dependents, is stepping up fashion, modernizing systems and investing to improve service. It’s also building malls and lifestyle centers at major bases in the U.S. and abroad. The exchange service sees the potential to grow despite the impact of the recession. “It’s the largest $10 billion business that nobody knows about,” said Maj. Gen. Keith Thurgood, commanding general and chief executive officer. “I was asked how gloomy 2009 would be, and I said one word — ‘opportunity.’ This is the time for us to invest in technology, spend money and focus on the customer in terms of pricing and promotion. If we get our strategy right, we can put ourselves on a glide path to grow in ’10, ’12 and the future.”  <wwd.com>


Next Sees Momentum Slowing After Holiday Sales Gain - Next Plc, the U.K.’s second-largest clothing retailer, said a recovery in consumer spending may not be sustainable after a rebound in holiday sales caused the company to raise its annual profit target. Chief Executive Officer Simon Wolfson expects a “similar” level of profit in the coming year as shoppers feel the effects of tax increases or job cuts, the company said today. Next is buying inventory at the “lower end” of its sales budget. Next fell as much as 3.5 percent in London trading as the company’s comments on the outlook offset the increased earnings forecast and higher holiday sales. The retailer today raised its pretax profit goal for fiscal 2010 for a fifth time to as much as 500 million pounds ($807 million) after Britons bought more of its women’s fashion ranges in the build-up to Christmas.  <bloomberg.com>


Herrera Greets 2010 With New Game Plan - While many companies are hunkering down given the sputtering global economy, Carolina Herrera is forging ahead with new stores, sharper pricing and an aggressive rollout of CH Carolina Herrera. “Fashion is about movement. It is a dream you can make a reality when people wear your clothes,” the designer said during a Monday morning interview with Marc Puig, chairman and chief executive officer of the Puig Beauty & Fashion Group, which owns the Herrera fashion house. While some might argue last year was one bad dream given the recession, the duo is determined not to get mired down by the malaise that seems to have engulfed many shoppers around the globe. <wwd.com>


END Footwear Co-Founder Launches LUME - Andrew Estey, former END Footwear co-founder and award-winning footwear designer, announced the launch of LUME, a premier active-lifestyle brand focused in the fusion of health and wellness. Influenced by the active baby boomer and grounded in a design philosophy of “inside out,” LUME’s main focus is to drive innovation through fit with a focus on how the foot connects to its environment. As footwear will be the catalyst, LUME’s plan is to move quickly over the next few seasons to complete a unique wellness system comprised of Footwear, Inserts and Socks, all designed to benefit and enhance the foot's comfort. With its core group in place, the brand is moving full steam ahead with a planned launch into footwear as their first introduction in FA’10.  <sportsonesource.com>


Lanvin Investor Revealed -  Lanvin’s parent Arpège SAS, which last November sold a 12.5 percent stake, realized a capital increase totaling 27.5 million euros, or about $39.3 million at current exchange rates. The amount is disclosed in documents filed with the commercial court here and obtained by WWD. They describe a two-prong capital increase, with 10 million euros, or about $14.3 million, representing a debt-to-equity conversion, and 17.5 million euros, or $25 million, deposited at the private bank Neuflize OBC. It is understood the minority investment was made through a family trust associated with the Bartel family. The documents name Ralph Bartel, born in Germany and resident of Switzerland, as a new director of Jeanne Lanvin SA.  <wwd.com>


Congress Inaction Puts Tariffs on Textile Imports - U.S. apparel, textiles and footwear manufacturers could be hit with tens of millions of dollars in duties on imported components after Congress failed to pass legislation extending hundreds of expiring duty breaks before adjourning for the year. The so-called temporary duty suspensions, which must be renewed periodically by Congress, are intended to help domestic manufacturers compete by giving them tariff breaks on components such as certain yarns, fibers and footwear parts that are no longer made in the U.S. and must be imported. Lawmakers granted three-year duty suspensions on an estimated 500 imported categories in 2006, but those breaks expired on Dec. 31, leaving U.S. companies to pay for the duties on the imports that enter the country, beginning Jan. 1. The tariff suspensions are contained in legislation dubbed the “Miscellaneous Tariff Bill” that has a strict set of criteria, including stipulations that each import category receiving the breaks is “noncontroversial,” which means the items are no longer made in the U.S., and cannot cost more than $500,000 in lost revenue per category annually to the U.S. Treasury. <wwd.com>


E-commerce stocks roar into 2010 up 91% from January 2009 - Despite an off week as the year came to a close, 2009 represented a big rebound for e-commerce stocks. The Internet Retailer Online Retail Index of 25 e-commerce stocks advanced 91.44% over the course of 2009, easily exceeding the gains in the broader stock market. By comparison, the Dow Jones Industrial Average gained 18.82% and the Standard & Poor’s 500 Index was up 23.45% for 2009. The e-commerce index’s gains were more in line with that of the NASDAQ exchange, which includes many high-tech companies, and which advanced 43.89% in the past 12 months. E-commerce and other tech companies were bouncing back from a miserable 2008. While Internet Retailer only began tracking its Online Retail Index in February 2009, those 25 stocks collectively were down 39% in 2008. The NASDAQ fared even worse in 2008, sinking 41%, while the Dow was off 34% and the S&P 500 37%.  <internetretailer.com>


37% of smartphone owners purchased merchandise via their phones in 2009 - Mobile commerce is poised to explode this year, says online marketing and research firm Compete, which has found in new research that 37% of smartphone owners purchased merchandise via their phones in 2009. However, smartphone owners are not all alike, the firm says. “We’re seeing notable behavior differences across devices. So, for example, users of the Android operating system share different characteristics than Blackberry and iPhone enthusiasts,” says Danielle Nohe, director of consumer technologies at Compete. “As marketers better understand how each group actually uses their devices, there’s a huge potential in 2010 for mobile commerce to explode.”  <internetretailer.com>


Supreme Court to Consider NFL's Exclusive Licensing Deal Case - The National Football League next week will ask the U.S. Supreme Court for a broader shield from antitrust lawsuits, one that would let teams act as a group in marketing their logos and trademarks. The court will hear arguments over the league’s exclusive agreement with Adidas’s Reebok subsidiary to sell hats, jerseys and all clothing with team logos. The Supreme Court will decide whether the National Football League should be considered as a single entity or as separate businesses when defending against antitrust claims, according to the Los Angeles Times. Lawyers for pro football owners will ask the justices to rule that the NFL should be shielded from antitrust laws because its teams, while competitive on the field, function in business as one entity. If exempted from the antitrust laws, sports leagues could be insulated from antitrust claims over video-game licenses, television rights, franchise relocation and even player salaries, Bloomberg News reported. Only Major League Baseball is exempt from antitrust laws now. <sportsonesource.com>


Vietnamese Footwear exports fall sharply - Vietnam’s earnings from footwear export in 2009 dropped by 15.8 percent to US$4 billion despite the sector’s efforts to weather the global economic crisis. According to the General Statistics Office, the country’s footwear exports to all its main markets fell sharply. This was attributed to Vietnam’s shrinking export markets. Following the EU’s decision to continue imposing anti-dumping taxes on Vietnamese leather-capped shoes, many footwear companies, including foreign-invested companies in the country had to cut down production levels by between 10-30 percent in comparison with 2008.  <vovnews.vn>

Going After Gold

“You wanna settle old scores, you're on the wrong team. We move forward starting right now.”
-Herb Brooks (Miracle)
Tonight, in Saskatoon, Saskatchewan, Canada will face-off against a young American team in the gold medal game of the World Junior Hockey Championship. The Canadians will have the edge with the home crowd behind them, but we men and women of the ice never, ever, underestimate the US National Team’s potential for a Miracle On Ice.
For Americans and Canadians investors alike, going for gold in 2010 is as consensus as consensus gets. Thankfully, I have been a gold bull since 2003. That score means nothing to me this morning. It’s a new season, with a new score. On this research bench, if “you want to settle old scores, you are on the wrong team.”
Today, we move forward. We have moved to a zero percent position in our Asset Allocation Model in Gold. Are we early? Maybe. I have immediate term TRADE resistance for the price of gold at $1137 – but I sold into the biggest up day gold has had since November 3rd (+2.3%), and I like being early.
I wrote an intraday note to our Macro Subscribers on December 2nd titled “Bubbly Gold: Selling Some, Again!” – that wasn’t early. That was, as they say on the ponds of Thunder Bay, “ticklin’ the twine”…
The top right corner of the twine, net, or chart, is the same thing. For the foreseeable future, you cannot get the puck, or the gold price, stuffed any higher than that. A decade high for the price of gold was established on December 2nd of 2009. Mark that date down. You might not see a higher-high for gold until the Fed stops raising interest rates.
Raising rates? Huh? Knuckle head hockey boy – Goldman says the Fed is on hold until their 2012 banker bonus season. We’re long of gold and levering up returns for some free moneys, eh.
That, hockey fans, would be the consensus view for 2010. Actually, throw “Long China” onto that bucket of consensus ice too (after an +80% run in 2009, Goldman is also saying buy China right here this morning as well). Sorry to keep score guys – but there’s a new chirper in this league. Game on.
My research team remains outside of consensus on all 3 of our core Macro Themes for Q1 of 2010. As a refresher, here they are:
1.      Buck Breakout

2.      Rate Run-up

3.      Chinese Ox In A Box

We authored the “Breaking” and “Burning” The Buck thesis early last year, so we think we have some credibility in calling the turn on our own bearish US Dollar thesis. We aren’t making this call for the sake of being contrarian. We are making it because we think we have an increasing probability of being right.
We put our bucks where our mouths were yesterday and bought the UUP (Dollar ETF) in our Virtual Portfolio. We also sold our position in Gold (GLD). Both of these moves are born out of the same investment thesis. He Who Sees No Bubbles (Bernanke) is way behind the yield curve. Consensus that he will remain asleep at the switch for another full year of Obama getting blamed for funding banker bonuses is politically reckless, at best.
Politically reckless? Pardon? What do intermediate term breakouts in both US Dollars and Treasury yields have to do with politics? Answer: Everything.
As Herb Brooks would say, “Again!” … “Again!”. Forget the new normal folks, we came up with The New Reality before that low growth, low rates, thesis started getting parroted by the CNBC plebes. “Again!”, The New Reality is that US monetary policy is as politicized as it has ever been. Ever, by our math, is a very long time.
Last week, saw the Piggy Banker Spread (yield spread between 10 and 2-year interest rates) hit its widest margin EVER. At the same time, you saw the US stock market hitting its highest of highs for the year. And, at the same time, you saw President Obama’s approval ratings hit some of the lowest levels ever in an environment of expeditiously rising stock prices.
You don’t need a puck to the melon to wake-up to the political conclusion that the President of the United States needs a big political win here in 2010. It’s not coming from Healthcare or Afghanistan either. Ask Hillary and Bill about that. The turn-coats are moving in on the Obama Hammer. This top political draft pick of 2009 needs to put one in the back of the net, and soon.
We think that political win comes against the bankers. We think the best way to ensure that populist win is to raise the rates of return on American savings accounts.
Forget “extended and exceptional.” ZERO rate of return being issued to the US citizenry is unreasonable and unsustainable. As soon as Ben Bernanke gets re-confirmed as Fed Head by the Senate, look for Obama to be having a little fire-side chat with He Who Has Great Depression about the same.
Our job is to wake-up every morning and manage risk, not to make friends. Sell your gold. Buy some dollars. “We move forward starting right now.”
My immediate term support and resistance levels for the SP500 are now 1123 and 1135, respectively.
Best of luck out there today,


UUP – PowerShares US Dollar Index Fund
We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

XLV – SPDR HealthcareBuying 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 12/14/09.

EWG - iShares GermanyBuying 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 12/8/09 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.

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 12/18/09 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.

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30/09 and 12/2/09.

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.


A vote on gaming legislation in Brazil probably won't occur until the spring, at the earliest.



As we wrote about in our 12/18/09 post, "SIZING UP THE BRAZIL OPPORTUNITY", the Brazilian federal government is considering gaming legislation.  The proposed legislation, Bill No. 270/03, would legalize licensed bingo and electronic gaming machines and allow for gaming parlors with 20-40 devices in some of Brazil's larger cities and a maximum number of 75 devices per location in Sao Paulo.  We believe the market could be at least 40,000 machines


In mid-September 2009, a draft version of Bill 270/03 passed in the Chamber of Deputies by a 40-to-7 vote.  The Bill is now awaiting debate and vote in the lower house of the Brazilian Congress.  While the Bill was given the green light to go to floor a few weeks ago, it appears that the debate has been delayed because of a provision dealing with the retirement age of public servants that was tacked onto Bill 270/03.  There may be other issues since we are now hearing no vote until the spring, at the earliest.


The October presidential election is the key time frame.  Our sources indicate the likelihood of a successful vote diminishes post election.

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