Divergence of trends between QSR and Casual Dining and comments on sales trends in Texas!


Yesterday, SONC reported horrific fiscal first quarter 2010 same-store sales trends, with partner drive-in comparable sales coming in down 9.1% relative to the street’s -4.6% estimate and my -5.% estimate.  This 9.1% decline implies a 200 bp deceleration in 2-year average trends from the fourth quarter.  And, based on management’s comments on the earnings call, the freefall in top-line trends continued into 2Q10.  Specifically, management stated, “The environment continues to be a challenging one from the standpoint of the industry, so heavily focused on price and moving into the winter months that's traditionally when there is so much more sensitivity to cost anyway post holiday season, and you add to that the unpredictable weather mix that we've had December moving into January. And our perspective is that the same-store sales will continue to be a challenge moving into our second fiscal quarter, our fiscal quarter ending February.”


SONC is not the only company citing challenging weather in December.  This morning CKR reported period 12 comparable sales trends for the period ended December 28 and attributed the 6.5% decline in blended same-store sales to “ongoing weakness in the overall economy coupled with poor weather conditions negatively impacted both brands' sales results during period 12.” Same-store sales at Carl’s Jr. declined -8.9%, pointing to a nearly 130 bp decline in 2-year average trends from the prior period and marks the fifth consecutive month of sequentially worse trends.  Hardee’s -3.2% comparable sales decline came in sequentially worse on a 1-year basis but the concept’s 2-year average trends have remained relatively flat for the past 6 months.


So we have gotten two worse than expected data points on QSR trends in December while the only glimpse of December out of the casual dining operators (that I can recall) was the more favorable comment made by Darden.  On its last earnings call, the company said, “The sequential improvement in same-restaurant sales has continued so far in fiscal December for both the industry and for our brands after adjusting for the estimated impact of the Thanksgiving shift. However, we're still early in the month and weather can always be a factor in December.”  The casual dining operators are facing easier comparisons than the QSR industry, but both SONC’s and CKR’s recently reported numbers point to increasingly worse results on a 2-year average basis.


To that end, Darden did not clarify whether December trends were looking better on a 2-year average basis or whether the improvement is the result of the industry’s (as measured by Malcolm Knapp) easiest comparison from calendar 2008 when comparable sales declined 9.5%.  It is important to remember that casual dining trends in November improved on a 2-year basis.  We have yet to learn how December played out for the casual dining operators, but like Darden said, weather can always be a factor in December and if SONC and CKR are any indication, weather was a factor.


SONC also pointed to recent weakness in Texas to explain the company’s worse than expected trends.  Management stated that the “higher unemployment that we've been experiencing for a while in the more recent past more negatively impacting our brand because of the late impact of the recession on some of our core markets such as Texas and Oklahoma, and so with a more pronounced impact on those markets in the more recent past, their shift having a more pronounced effect on our brand and on our system than some of our competitors.”  In an attempt to provide some proof of the slowdown in Texas, management cited the fact that the sales tax collection statewide was -12% in October and -14% in November.  And, with SONC having about 45% of its partner drive-ins located in Texas this recent YOY slowdown disproportionately impacts its numbers.


If SONC management is correct in its assessment of the current situation and the macro environment in Texas is largely to blame for its fall off in trends, then that will have an obvious impact on players with high geographic exposure to Texas.  EAT, PFCB, TXRH, BJRI and JACK all come to mind.  Looking back at the regional trends provided by Malcolm Knapp, Texas was the best performing region of the country in late 2008/early 2009 so on a YOY basis, Texas is currently lapping more difficult comparisons than much of the country. 


Gas vs. Retail: History and Math Don’t Lie

Gas vs. Retail: History and Math Don’t Lie

Looking through the pages of history, we see that gas prices aren’t always quite as consistently relevant to retail sales as many might think.


Here’s a mixed bag to start the year off.  Retail gas prices at the pump are over 50% higher than they were last year. Aside from the obvious fact that starting in late January gas prices start to lap an increasingly favorable compare vs last year, we find it interesting to look through the pages of history and see that gas prices aren’t always quite as consistently relevant to retail sales as many might think. Huh??  


Throughout the 1990’s, total retail sales (ex energy) and prices paid at the pump had a 37% correlation. Then, in the first half of the 2000’s there was a 45% correlation. The correlation rose even higher to 74% in the back half of the decade, and was 89% over the last 2 years. Check out chart 3 below, which shows how the spread between retail sales and gas has been increasingly volatile in recent years while putting it higher highs and lower lows. We agree that each period needs to be taken in isolation and dissected to drill down factors that are specific to that time. But the lack of long-term support is tough to ignore.


The month of December will be a historical peak in the spread between total retail sales growth and year-over-year pump price growth, due to gasoline’s 53.7% increase y/y.  Not for a minute will we ever buy into an argument suggesting that higher gas prices is good for retail sales. But the ‘higher gas is the enemy’ argument just fell a notch  on our list of things to watch.


Gas vs. Retail: History and Math Don’t Lie  - 1


Gas vs. Retail: History and Math Don’t Lie  - 2


Gas vs. Retail: History and Math Don’t Lie  - 3



R3: ICR Pre-Announcement Season Roadmap


January 6, 2009


Here’s an overview of which companies have set a precedent in pre-announcing results in advance of the annual ICR conference, which takes place next week in So Cal. We’ll be out with a Black Book and conf call on Friday discussing key ‘Predictable Unpredictables’ for ’10, which should be good ammo for interviewing management’s at the event.





In light of the ICR Conference next week, we looked back over the last 4 years to see which companies have a history of pre-announcing either before or at the conference. Keep these companies on your radar as there will be a lot of action around the conference.  Below is a table with ICR participants that have a preannounced positively in green and negatively in red. Also it should be noted that WRC unofficially updated guidance during their presentation last year (see our post on 1/15/09 titled “WRC: Got Transparency?”).  Also look out for SKX which preannounced 2 of the last 4 Mondays before the conference. We’re digging into the next step of this, which clearly is to drill down who will be on this year’s list. We’ve got some initial thoughts. Let us know if you care to discuss.


R3: ICR Pre-Announcement Season Roadmap - 1 



We are hosting a conference call on Friday,  January 8th  at 11AM (EST) to discuss our Top 10 Retail Predictable Unpredictables in 2010.  Simply put, these are 10 ideas that we assess at better than 60% chance of happening, but today's Wizards of Wall Street either: A) do not acknowledge that such ideas exist, OR B) see them as so unlikely, they do not bake them into their investment process.  Please contact or reply to this email to request dial-in information.





  • Both Saks and Bergdorfs are advertising post holiday clearance sales at 60% off. However, upon shopping the actual stores there is some merchandise being sold at even greater discounts. Given the backlash last year from the designer community, we suspect the stealth clearance is an effort to appease the vendor community. Second markdowns are still expected to take place later this week or early next week.
  • Meteorologists are suggesting that the recent cold wave that has hovered across most of the country (and is likely to continue) is shaping up to be like the “great winters” of the 60’s and 70’s. After a cold spell early in the Fall and then a warm stretch that followed, the unseasonably cold and consistent cold/snow combination is likely to leave inventory of outerwear and boots in a barren state. Of course, sales of early Spring and transitional apparel may also be put on hold…
  • With CES about to begin, the hype surrounding 3D television is reaching new heights. While the TV technology is likely to be costly and slow to hit the market, the industry may benefit from a major network’s effort to embrace the technology. ESPN announced it is launching ESPN 3D. The network will broadcast 85 live sporting events in 3D in 2010, including the Mexico-South Africa World Cup match in June. An additional 3D network is also expected to be created in a collaboration between Sony, Imax, and Discovery.




Disney Ups Retail Ante - Disney is creating a coast-to-coast retail sequel stretching from Southern California to Times Square. The Burbank, Calif.-based company is taking an interactive theme park-style approach to revamping its retail profile, and this year will open 20 doors featuring a new store design. Although details are under wraps, the tech-heavy retail concept will have elements reminiscent of Disney’s original Anaheim, Calif., theme park, and is designed as an interactive experience to lure young fans. About 340 stores, a combination of existing locations and new leases, will be launched in the next five years. An undisclosed Southern California space will be the first to bow, and renovations will begin soon on an estimated 25,000-square-foot space at 1540 Broadway, between 45th and 46th Streets, in Times Square. Disney’s first Times Square store closed in 2000. The new concept will feature an assortment of Disney products; interactive displays for children using Disney characters and themes (a “magic mirror” is one such element); theme park-style attractions like a “princess castle” in the store, and a children’s theater with customized viewing material, such as movie clips from Disney’s recent releases.  <>


Kohl's Enlarges N.Y. Design Office - Kohl’s Corp., intent on accelerating its private and exclusive brand strategy, is relocating and expanding its New York design office. The new location, at 1400 Broadway, is more than twice the size of Kohl’s existing design office at 1359 Broadway. The retailer plans to begin operating at 1400 Broadway in June. “We continue to differentiate Kohl’s through our exclusive partnerships and remain committed to bringing world-class brands to customers nationwide,” said Kevin Mansell, chairman, president and chief executive officer. “Having a New York presence has been instrumental in growing our exclusive and private brand strategy, which accounted for 45 percent of sales through the third quarter of this year, up over 2 percent compared with last year. The new location allows us to manage our existing brands and support anticipated growth as we continue to focus on growing market share.”  <>


Future Group: Value Retail Unit May Consider IPO - India's Future Group may look at options including an initial public offering if its discount store business needs to raise funds, the chief executive of its retail operations said Wednesday. "An IPO is a possibility," Rakesh Biyani told Dow Jones Newswires. "But there are no such plans now." Future Group operates Pantaloon Retail (India) Ltd., the country's largest listed retailer by market capitalization and ... <>


Report: Adidas' Reebok Turnaround on Track - Adidas AG may reach a "turnaround" for its Reebok brand as margins rise, Handelsblatt, the German business newspaper, reported, citing an interview with Reebok's head Uli Becker. New products such as its EasyTone toning collection are expected to improve profitability in the U.S. "Provided things continue like this we have reached the turnaround," Becker told the German newspaper in an interview. Becker didn't provide further details, according to Handelsblatt.   <>


Belk Bolsters E-Commerce Team - The Charlotte, N.C.-based department store chain said Tuesday that Jon Pollack, executive vice president of sales promotion and marketing, has been given additional responsibility for Belk’s e-commerce business. In another move, Ivy Chin, former vice president of strategic and multimedia operations for the home shopping network QVC Inc., has joined the company as senior vice president of e-commerce, reporting to Pollack. The promotion of Pollack also led to some changes within the merchandising area. David Neri, executive vice president and general merchandise manager of shoes and accessories, has added oversight for cosmetics, which reported to Pollack, and fine jewelry, which had been overseen by Kathy Bufano, president of merchandising and marketing. Pollack and Neri will continue to report to Bufano.  <>


M&S Sales Disappoint; Shares Drop Most Since October - Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, reported a gain in holiday sales that some analysts said missed estimates and predicted that business conditions will “remain challenging” over the coming year. Marks fell as much as 5.4 percent in London trading, the most since October, after saying revenue at stores open at least a year rose 0.8 percent in the fiscal third quarter. The sales missed estimates, according to Morgan Stanley and Credit Suisse analysts, although Finance Director Ian Dyson said growth would have been 1 percent higher had the figures included the first day of the post-holiday clearance, as they did last year.  <>


Saks Hit With Unfair Labor Charge - A department store union filed an unfair labor practice charge against Saks Inc., following a move by the upscale retailer to eliminate 115 jobs in the cosmetics department of its Fifth Avenue store in New York at the end of this month. <>


Ski Market Files for Bankruptcy Protection - Ski Market, a retailer of outdoor products and winter sports gear with headquarters in Wellesley, MA, filed for Chapter 11 bankruptcy protection. In court documents, Ski Market's president and chief executive, Andrew Ferguson, said the company had been operating at a loss for several years and the economic downturn and its "negative impact on consumer spending during 2008 and 2009 exacerbated Ski Market's financial problems." Ski Market employs 170 full- and part-time employees in seven retail stores. Its website lists 16 locations, most of which have been shut down. According to its website, only 7 stores remain in operation. <>


Crocs General Counsel Resigns  - Erik Rebich resigned as vice president, general counsel and secretary of Crocs, Inc., effective Dec. 31. Effective Jan. 1, Daniel P. Hart, the company’s current executive vice president, administration and corporate development was appointed as executive vice president, chief legal and administrative officer and secretary of the company. <>


Wave of Store Closings Seen as Firms Reshape - As Macy’s Inc. on Tuesday revealed it’s shutting down five units over the next two months, there’s been growing speculation other chains will soon chime in with their own announcements of closures after digesting 2009 results and determining which units performed and which didn’t. The first quarter is usually when retailers streamline their fleets. However, the recession has underscored the nation’s overstored and overinventoried state. It’s testing retailers’ management skills, pushing them to rethink the future, strive for greater productivity and to make painful cuts across the board. Aside from closing stores, retailers have intensified negotiations with landlords over rent concessions, mitigating some downsizing. Last year, there were sharp reductions in head counts and merchandise orders, but not the tsunami of store closings that was expected.  <>


Consumer bankruptcies jump 32 percent in 2009 - Consumer bankruptcies in the United States soared 32 percent in 2009 from the year before, the American Bankruptcy Institute said Tuesday. The total filings -- 1.4 million -- is the highest since 2005, the same year that Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. "A combination of economic stress, including high debt loads, rising unemployment and unsustainable mortgage burdens, left many consumers with little choice but to seek the financial relief of bankruptcy, ABI Executive Director Samuel J. Gerdano said in a statement. "As these strains continue for U.S. households, we expect that consumer filings will rise higher in 2010." Indeed, in December consumer bankruptcy filings rose 33 percent to 113,274 from 84,926 during the same month in 2008. <>


Asian Consumers Most Upbeat, American Sentiment Dips - Consumer confidence is strongest in emerging Asia, Brazil and Australia, but weakened slightly in the United States in the fourth quarter as Americans worried about job security, a survey showed on Wednesday. Consumer sentiment was highest in Indonesia, followed by India and Brazil, and was weakest in Japan and South Korea, according to the survey conducted by the New York-based Nielsen Company a month ago. Globally, the Nielsen Global Consumer Confidence Index averaged a reading of 87 points in the fourth quarter, little changed from the third quarter but 5 points higher than the second quarter. The U.S. reading dipped to 82 in the fourth quarter from 84 three months earlier, reflecting concern about rising unemployment and ranking U.S. confidence at 18th among the 29 markets surveyed worldwide. <>


China To End Subsidies On 'Famous Brands' Manufacturing - China has agreed to eliminate dozens of subsidies supporting the export of so-called "famous brands" in a move that U.S. Trade Representative (USTR) Ron Kirk says will  "level the playing field" for U.S. manufacturers of a wide range of products. The subsidies were the subject of a World Trade Organization (WTO) dispute initiated by the U.S. government in the face of what it believed were illegal subsidies under WTO rules. Kirk said the agreement is designed to resolve U.S. concerns raised in a WTO case the United States initiated in December 2008. He said the United States had challenged a Chinese industrial policy that generated a "vast number" of central, provisional and local government subsidies promoting increased worldwide recognition  and sales of famous brands for merchandise. <>


Paid search clicks and costs go up, search marketing firm says - Online shoppers clicked more often on paid search ads during the holiday season than a year earlier, and retailers paid more for those clicks, says search marketing firm NetElixir, based on a study of 32 retailer clients. Total clicks were up 11.0% from Nov. 1-Dec. 26 versus a year earlier, and cost per click increased 4.58%, says NetElixir. The study also found there were 10-12% more advertisers per keyword this year. The click-through rate also increased, to 9.8%, but consumers clicked more often before making a purchase, 6-8% more often on average, the search marketing firm says. The increase in total clicks was the big surprise, as NetElixir had projected only a 3-4% year-over-year increase in clicks for the holiday season, following a slow first half of 2009. “The jump in clicks bodes well for our industry,” says NetElixir CEO Udayan Bose.  <>


Shop price inflation rises in December - Shop inflation rose sharply in December to 2.2%, from 0.2% in November, according to the BRC Nielsen Shop Price Index. The passing of the first anniversary of the 15% VAT rate, effectively cutting its downward effect on inflation, was blamed for much of the rise. Non-food inflation rose to 1.4% from -1.2% in November, making the month the first for non-food inflation since December 2008. BRC director general Stephen Robertson said:  “With December being the first and only month where the 15% VAT rate was the same as a year earlier, a shop price inflation rise was inevitable.” The BRC said the return to a 17.5% VAT rate on January 1 would mean further upward pressure on inflation as comparisons are made against the lower rate of the corresponding period in 2009. <>


IRCE 2010 announces largest e-retailing conference agenda ever - The Internet Retailer Conference and Exhibition 2010 today announced the largest e-retailing conference agenda in the history of online selling. 91 conference sessions over four days—June 8 to 11 at Chicago’s McCormick Place West—will address topics of crucial interest as Internet retailing becomes more important than ever in the economic recovery. IRCE’s 175 speakers will address every major e-retailing strategy and practice and will weave their presentations into the theme of this year's agenda: "Time to Reboot: Recharging Your E-Commerce Business." Registration information for the conference is available at IRCE 2010 is also pleased to announce that the 2010 Keynote Speaker will be Imran Jooma, senior vice president and general manager of e-commerce, Sears Holdings Corp., the No. 2 online mass merchant and No. 7 online merchant overall.  <>

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.70%


Even the players face disclosure requirements.



While not unexpected, Singapore’s newly released gaming regulations included fairly high hurdles for prospective junket operators.  What may be a surprise is that high rollers will also face disclosure requirements. 


We’ve long maintained that that the Singapore ramp may be slower than anticipated.  Junket operations already have a clientele.  The casinos themselves need to time to build a database.  From our conversations with junket operators over the last year it was pretty clear that given the likely regulations in Singapore, they wouldn’t even apply for licenses. 


Now, even the prospective high rollers will have to provide personal disclosures.  This is likely to negatively impact the VIP business as well.  Are the new regulations enough to kill the long-term viability of the market?  Probably not.  Over time, the operators will establish a strong high end business and benefit from an extremely low relative tax rate.  Moreover, if the regulations prove too onerous, the Singapore Government could make changes.  We believe the government desperately wants the projects to succeed.  After all, legalizing gaming in this conservative country was controversial from the start.  Success is now imperative.


However, our concern remains the speed of the ramp relative to expectations.  Indeed, we are projecting only $650 million in EBITDAR at LVS’s Marina Bay Sands in the first year of operations, below Street expectations and certainly company “guidance”.

World Championships

“You're looking for players whose name on the front of the sweater is more important than the one on the back”
-Herb Brooks
The Americans scored in overtime last night to beat Canada 6-5 at the World Junior Hockey Championship in Saskatchewan. This ends Canada’s gold medal streak at 5, and reminds young American hockey players that miracles still happen on ice. The USA name on the front of those jerseys last night were powered by pride. Great job boys – congratulations.
Unfortunately, off the ice, American politicians and bankers alike, continue to focus on the names on their backs. I do commend Senator Chris Dodd for exiting the building this morning. He was willfully blind to the leverage-fest he signed off on in Connecticut, and now its time for him to retire his jersey to the state and feel shame. Game over.
Meanwhile, He Who Sees No Inflation (Bernanke) has a few weeks left of focusing on the name on the back of his jersey. This week he has taken the zero accountability model straight to the job retention bank as he looks for the Senate to re-confirm him as Maestro-man of the year, part deux.
Off the ice, we live in a Debtor Nation that continues to be fueled by a severe level of group-think that only credit upon credit, and debt upon debt, can solve our losing problems. This morning, the Bernanke/Greenspan debt doctrines have gone municipal as the New York Metropolitan Transportation Authority will be first in line to sell 2010 issued “Build America Bonds.”
Timmy Geithner has signed off on a 35% Treasury rebate, so this has his banker boys watering at the mouth. It’s a new season for banker bonuses folks, and what better way to get this debt party started than by plugging municipalities and states with some Big Debtor Government sponsored liabilities.
In the first eight months of the “Build America’s” debt pile legislation, muni-bond sales have already totaled almost $70B. I know, I know – a billion dollars ain’t what it used to be to these politicians so, in 2010, they are going to likely double state and local bond sales just so that we can get a sip of that trillion dollar cup.
There is no World Championship cup for becoming the leader of the Debtor Nations. Ask 1920’s Germany or 1990’s Japan about that. Nevertheless, this morning’s global macro news run is definitely seeing other countries compete with team USA for a shot at the debtor title:
1.      Greece: The Finance Minister told Bloomberg worry no more. They have plenty of private buyers of debt willing to underwrite a reduction of their national deficit (currently running at 12.7% of GDP), in exchange for imposed stagflation on the Greek citizenry.

2.      Philippines: The Government is looking to sell $1.5 billion in US Dollar Denominated bonds in order to plug their deficit.

3.      Iceland: After being run-over by Fitch last night, seeing their foreign currency issuer default rating downgraded, it’s time to jack up inflation and consumer borrowing costs again. Debt levered dog sledding time boys – gotta keep whipping the citizenry. Make’m yelp!

I know, I know. Who on the Big Government Debt team has any care about the name on the front of their country’s jersey? Piling debt upon debt is for their teammates kids to have to deal with some day. This self centeredness and short-termism that Bernanke and the boys on Team USA perpetuate globally is plain sad.
All the while, the Chinese seem to be marching down a different path at their own, well deserved, pace. Since President Hu’s year end remarks that China will be focused on “quality” growth going forward (as opposed to speculative loan growth), Chinese officials continue to focus on the name on the front of their jerseys. Yes, to some extent, that’s the mandate of state capitalism and I get that. But, to me at least, China’s cash reserve position seems to be powered by pride.
China is this decade’s Creditor Nation. America is the Debtor Nation. China’s central bank chief, Zhou, stated plainly yesterday that speculative investments “pose a risk to the quality of bank loans.” America’s central bank chief, Bernanke, stated that he sees nothing other than a regulatory problem that drives this country’s asset price bubbles.
Hmmm… It seems to me that China is ending America’s gold medal streak at the World Championships of Financial Leadership and Credibility.
The SP500 closed one point above my immediate term TRADE target yesterday, making a higher-high at 1136. My refreshed, immediate term, levels of support and resistance are now 1125 and 1138, 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 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 Volatility For 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.


After a melt-up day on Monday the S&P 500 finished up 0.31% in fairly light trading on Tuesday.  There was no dominating theme running thru the market yesterday.  From a MACRO view the market has seemed to discount the heightened global economic recovery theme that fueled Monday’s rally. 


Tuesday’s MACRO data points were not as convincing as Monday’s and in some cases were downright bearish.   After rising for 10 consecutive months, pending home sales declined 16% month-to-month in November vs. expectations for a 2% decline.  While the number was explained away as an anomaly as the early November extension of the first-time homebuyer tax credit was not in place to provide any meaningful support. 


Also on the MACRO calendar, factory orders rose 1.1% in November, above consensus estimates for a 0.5% increase. While durable orders were unrevised at up 0.2%, core capital goods orders were revised up to 3.6% from 2.9% in the advance report. In addition, core capital goods shipments were revised up to 1.1% from 0.8%; orders for non-durable goods rose 1.8% in November, the fourth consecutive increase.  Inventories rose 0.2% in November following a 0.6% gain in October. 


After the close the ABC consumer confidence reading came in at -41 versus last week’s reading of -44.  The index has not seen a reading of better that -41 in nearly two years.


While the MACRO calendar was mixed, the sectors levered to the RECOVERY trade were the outperformers.  Defensive sectors were among the worst performers, with the Utilities being the worst performing sector for the second day in a row.  The underperformance of the Utilities is consistent with our “Rate Run-up” theme for 1Q10.


Yesterday, the Financials was the best performing sector on the day.  Life insurers and Bank stocks were another bright spot with the BKX +2.24% and now up 4.51% over the past two days.  Within the XLF, COF was up +3.9% (A Research Edge top pick) and C +3.8%, BAC +3.3% and WFC +2.8% also outperformed.  MS is now up 8.09% in the first two trading day of the year. 


After underperforming on Monday, Consumer Discretionary was the third best performing sector yesterday.  Consensus is building that December same-store sales are going to be stronger than expected and some key sell-side upgrades helped the retailers outperform. 


The range for the S&P 500 is 12 points or 0.25% upside to 1,385 and 1.0% downside to 1,125.  At the time of writing the major market futures are trading lower on the day.    


Copper rose O.22% yesterday and is trading up 1.77% in early trading today.  Copper is trading higher for the fifth straight day on speculation that demand will improve as the U.S. economy continues to show strength.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.31) and Sell Trade (3.47).


GOLD trade up yesterday by 0.33%, but the dip mentality prevails.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,084) and Sell Trade (1,137).


Crude oil traded up 0.32% yesterday to 81.77 - a 14-month high – as cold weather in the U.S. and signs of economic recovery are helping demand.  The Research Edge Quant models have the following levels for OIL – buy Trade (78.74) and Sell Trade (83.04).


Howard Penney

Managing Director














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