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As it relates to our stance on the US Dollar, we started out 2009 with the theme “BREAKING THE BUCK” and ended the year with the “BOMBED OUT BUCK”, which focused on the bottoming-out process for the Dollar.  For 1Q10, we are now BULLISH on the dollar; hence we’ve named one of our major themes for this quarter, “BUCK BREAKOUT.” 


In the last weeks Keith has made it abundantly clear that while the inverse correlation between the SP500 and the US Dollar that we pick up on in February of 2009 (see our note to President Obama from 2/24/09 titled, “Breaking The Buck) held for the balance of much of the year with a high R-squared, correlations are not perpetual, especially when they become consensus. 


On January 4, 2010 we bought the US Dollar via the etf UUP in our model portfolio, a position anchored on our belief that despite Federal Reserve Ben Bernanke’s current strangle hold on interest rates, even “He Who Sees No Bubbles” (Bernanke) will have to signal an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable: US inflation continues to break out (the latest CPI reading was 1.8% Y/Y) and we expect this number to climb when December CPI is released on Friday.


Our bet is that raising rates should translate into the citizenry earning a higher rate of return on their savings and a flight by investors to the US Dollar as a safe haven. From a macro perspective, we think this aligns well with recent economic and political developments shaking global markets. The debt leverage and balance sheet issues associated with countries like Greece and Dubai continue to make headlines. As such issues persist (for example we continue to see a negative correlation with ME markets and the price of oil), we see the USD as attractive on a relative basis.


To substantiate our conviction on the Greenback, we shorted the Euro versus the USD via the etf FXE on 1/11/10. Additionally, our call that Chinese growth will slow in 1H10 (for more see our post on 1/13, Chinese Ox in a Box), should be bullish for the USD on the margin.


On the intermediate term TREND (3 months or more) we are bullish on the USD.  The TREND line for the Dollar Index is 76.24, which we’re comfortably above, with TAIL resistance up at 80.29. Since the beginning of December, the US Dollar Index is up 2.8%.


Matthew Hedrick





A sustained recovery in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up.


Almost without exception, QSR companies presenting at the Cowen and Company conference outlined their strategies along the lines of “strengthening the brand, using product innovation to drive traffic, and increasing financial flexibility”.  While we anticipated that the timing of the conference would lead to more qualitative than quantitative commentary, there were some interesting discussions about the current macro backdrop, with regard to regional performance (Texas, in particular) and the impact of rising unemployment.


During the JACK presentation, Chairman and CEO Linda Lang stated that unemployment was the primary macroeconomic issue impacting their business.  She pointed out that Texas, California, and Nevada have seen adverse economic trends of late, with unemployment among the young (especially Hispanics and males) being a particularly acute problem.  While 16-19 year olds are a key customer base for all QSR concepts, Lang admitted that JACK’s customer base skews at least one-third more Hispanic than major competing QSR chains.  The chart below illustrates the unemployment picture for young Hispanics. 


QSR - DON'T MESS WITH MACRO - hispanics 16.19


This group is also a vital source of business for TAST; the company hinges much of its future growth strategy on its Hispanic brand restaurants, “Pollo Tropical” and “Taco Cabana”.  During the Carrols presentation at the Cowen and Company conference, Chairman of the Board and CEO Alan Vituli’s presentation discusses how the company is “well positioned to capitalize on growing Hispanic trends” such as Hispanic population growth and Hispanic disposable income being “projected to rise to $1.4 trillion by 2013 (+8% CAGR from 1990)”.  The source for the disposable income statistic is cited as “Article appearing in the third quarter 2008 edition of ‘Georgia Business and Economic Conditions’, a publication of the Terry College of Business, The University of Georgia.”  We are going to make a wild assumption that this study was put together before the third quarter, when the economic landscape of America changed drastically.  While Hispanic disposable income will undoubtedly grow over the long term, the unemployment picture among young Hispanics is far more relevant than the stale statistic cited by TAST’s presentation.


Some 27% of JACK’s system units, and 30% of company units, are in Texas.   Other QSR companies with significant exposure to Texas include TAST and SONC.  Consumer spending has fallen in step with unemployment rising and this is reflected in the second chart below showing sales tax data for the Dallas metropolitan area.  Trends in the Houston, San Antonio, and Austin metropolitan areas are almost identical.




For QSR in general, however, unemployment is a national issue and it is adversely affecting traffic in all areas of the country.  A sustained recover in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up.  As we wrote about in “I’LL HAVE ONE JOB, HOLD THE BURGER”, on 01/08/10, the 16-19 year old demographic is extremely important for QSR chains.  The chart below shows the high rate at which this age group is losing jobs. 


QSR - DON'T MESS WITH MACRO - 16.19 total



We also noted that several of the management teams that presented at the conference are projecting flat operating margins going forward despite their expectations for continued softness in top-line trends, which led me to consider another important employment-related issue for restaurant operators.   In the event of the Employee Free Choice Act passing this year, labor costs would increase materially.  We did not hear any QSR management teams discuss this topic during presentations this week.  Unions are disappointed over the public option and with politicians needing campaign help, we could hear more about unionization in the coming months ahead of 2010 mid-terms. 


Hedgeye Risk Management’s Macro and Healthcare sectors have been monitoring the theme of unionization closely.  This is a highly relevant topic for QSR companies.  For instance, McDonalds employs more than 600,000 U.S. restaurant workers, many earning less than $10 per hour.  This makes the chain an attractive target for union organizers, a point McDonald’s recently elected President and COO Don Thompson was apparently aware of when he urged 2,400 franchisees to write to their US senators and representatives to oppose the Employee Free Choice Act, which would effectively end secret ballots and lead to binding arbitration for labor contracts.   Rick Berman, a lobbyist for the food industry in Washington, D.C., says that the bill is “a huge threat to fast food and … the long-term health of the industry”. 

R3: Observations from ICR (literally)


January 14, 2009


With day 1 complete, there are a handful of observations and highlights worthy of passing along from the 12th annual ICR Exchange.





With day 1 complete from the annual ICR Exchange, the following is a handful of first-hand observations:


  • Take it as a sign that the market is back, people are just plain sick of the cold weather, or the interest in retail, apparel, and restaurants is at peak levels. The conference is PACKED! There are likely several hundred attendees including investment bankers, sell-side analysts, investors, company managements, and institutional salesmen.
  • “Banker Bonanza” observed first hand. The conference literature includes 12 profiles of investment banks, each touting their expertise in consumer-sector transactions. Word has it there has been a full schedule of “one-on-ones” between the banking teams and company managements. Attendance at the “private day” on Tuesday was also sizable.
  • Standing room only at “breakout” tables for: JCG, CROX, AEO, DECK, RUE, GES, PLCE, and LULU
  • Empty “breakout” table of the day award: GOLF
  • Most talked about presentation: Rue 21. Management’s opening comments about Rue’s post-IPO stock performance and market-cap growth takes self-promotion to a new level. There is likely still near-term upside given the hyper square footage growth and related comp benefits coming from a young store base. However, there is a high degree of skepticism surrounding the company’s 1500 store goal and sustainability of same store sales if the economy actually improves.
  • Quote highlights:
    • “We’re in the pop culture business” –Mickey Drexler, J Crew
    • “When I was asked if we were ready to go public, I said, why not?” – Bob Fisch, Rue 21
    • “We’re working to become a shoe company that retailers can deal with in a normal way” –John Duerden, Crocs
    • “Aerie inventory is a little rich” –Joan Hilson, American Eagle Outfitters
    • “You gotta throw last year away” -Jim O'Donnell, American Eagle Outfitters
    • “We can play in any mall in the country.”  -Aeropostale
  • Mark your calendars for a March update on the fate of AEO’s Martin & Osa concept. Based on management comments, it now seems likely that the company will put an end to developing the 28 store, money-losing concept. Management was up front that the progress here is just not where it needs to be and a decision will now be made as to whether or not the company will continue to run the division.
  • Deckers updated its longer-term sales goals, raising the forecast for UGG’s to $900 million in 2012 from $750 million. 30% of sales will be international, which still seems low given the limited penetration in key markets such as Japan and Germany.
  • While the mood is decidedly more upbeat across the board (vs. last year), there is still a consistent undertone of caution from most management teams. Even with better 4Q results, extrapolation into 1Q is absent. Tight inventory management remains a key focus for 2010 and barely any presentation suggested inventory growth was a key factor in driving sales. Macro has been notably absent from most discussions, with management’s refraining from assessing the state (or fate) of the consumer.




Firms Like Gildan Activewear Inc.Take Stock After Haiti Earthquake - Apparel companies assessed the situation on the ground in Haiti on Wednesday after the devastating earthquake on Tuesday that killed thousands of people and crippled the Caribbean nation. The American Apparel & Footwear Association and the U.S. Association of Importers of Textiles & Apparel said they had reached out to members doing business in Haiti and would continue to do so as the situation evolved. The AAFA Apparel Foundation, the group’s charitable arm, began coordinating with disaster relief organizations on Wednesday to offer assistance. Allan Ellinger chairman of the Fashion Delivers Foundation, has put out a call for donated women’s and men’s clothing, as well as sheets, throws and blankets. Gildan Activewear Inc. said it would move some of its manufacturing operations to Central America after the earthquake in Haiti damaged one of its subcontractor’s factories. The Montreal-based company, which manufactures T-shirts, socks and underwear, said one of three factories that sews fabric for Gildan suffered substantial damage during Tuesday’s quake. Gildan said it would shift production of the shirts destined for the U.S. screen-print market to the Dominican Republic, Honduras and Nicaragua. The company said its U.S. retail customers will not be affected.  <wwd.com>


L Capital Takes Stake in Italian Brand Dondup - L Capital, the private equity arm of LVMH Moët Hennessy Louis Vuitton, said Wednesday it has taken a 40 percent stake in Italian apparel and denim brand Dondup for 30 million euros, or $43.3 million at current exchange. This confirms a WWD report in September. The brand’s founders, husband-and-wife team Massimo Berloni and designer Manuela Mariotti, hold the remaining shares, with four minor partners. Through the agreement with L Capital, Dondup chief executive officer Berloni said he planned to expand the brand’s business internationally. Dondup reported sales of about 60 million euros, or $83.4 million at average exchange, last year and Italy accounted for 80 percent of the business. Berloni said he was “less attracted by emerging markets that show a more immediate boost and more by those that may be tougher, but will allow a more solid growth and a serious presence in Europe,” citing Germany, France and the U.K. as examples.  <wwd.com>


Kaberuka Sees Production Opportunities in Africa - Africa may be an alternative for textiles and apparel manufacturers that are paying higher labor costs in China and other newly industrialized nations, a top African banker said. Donald Kaberuka, president of the 53-nation African Development Bank, which seeks to promote economic and social development on the continent, said at the bank’s Eminent Speakers Program here that the higher wages have already caused some Chinese industries to relocate to Southeast Asian nations such as Cambodia and Laos. Speaking with a group of visiting foreign reporters, Kaberuka said he expects some relocations for textiles and apparel industries “could be on the African continent.” He plans to visit Beijing next month in an effort to ensure “that some of this manufacturing capacity comes to Africa.” However, Kaberuka, a former minister of finance in Rwanda, said big outlays would be needed to improve core infrastructure such as roads, ports and public utilities.  <wwd.com>


Wet Seal expands its mobile channel with an m-commerce site - When your demographic is 15- to 25-year-old females, the kind of consumer who is connected to her mobile phone 24/7, mobile commerce is a good bet, many experts say. That’s what The Wet Seal has concluded, and it’s expanding its mobile offerings as a result. The multichannel retailer has launched a mobile-optimized version of its e-commerce site; consumers enter the e-commerce URL on their mobile phones and are automatically redirected to the m-commerce site. The site joins a mobile app and text messaging program.  <internetretailer.com>


Coach Opening Shanghai Flagship - Coach Inc. is affirming its presence in China and growing aggressively throughout the Far East. The $3.2 billion American accessories giant will open a 7,000-square-foot flagship in Shanghai in April. The New York-based firm, which has 343 full-price boutiques and 118 factory outlet stores in North America, and about 160 locations in Japan, has accelerated its original plan for China and is opening 15 locations this year. By June 30, the end of the firm’s fiscal year, there will be 43 units throughout Mainland China and its special administrative districts of Hong Kong and Macau. <wwd.com>


ID Wholesaler.com conjures up a newly designed web store - A new redesign and e-commerce platform helped online photo identification products retailer ID Wholesaler grow annual web sales by about 7.3% to $17.5 million in 2009 from $16.3 million in 2008. In August, ID Wholesaler worked with web site design firm Fuze LLC to update its e-commerce site with cleaner pages, guided navigation and bigger images. The new design also features a navigation bar on the top of the home page and other pages that highlights the site’s core product categories such as printers, photo identification systems and related supplies.  <internetretailer.com>


ShoeMall.com adds products and tweaks its site to drive a sales turnaround - After a rocky beginning to the year, Shoemall.com ended 2009 with record-breaking online sales during the holiday shopping season. Shoemall.com recorded a 148% boost in online sales on the Friday after Thanksgiving from the same Friday the year before, its highest sales on that Friday. In December, online sales increased 30% from December 2008. The company ended the year with $90 million in online sales, a 3% decline from $92.9 million in 2008. Bresina credits the addition of two new product lines on its site—children’s footwear and accessories such as handbags, scarves and hats—with improving sales during the course of the year. <internetretailer.com>


Intermix Changes With the Times - The 23-unit national specialty store retailer — known best for its extensive mix of both established and emerging designer brands including Stella McCartney, Elizabeth and James, Balmain, J Brand, ALC by Andrea Lieberman, Chloé, Rag & Bone and Proenza Schouler — has entered 2010 with a new buying and merchandising strategy and several other developments. These moves — including everything from shutting several under-performing units (Charlotte, N.C., closed this week and Orlando, Fla., shuttered a few months ago) to launching a redesigned, more sophisticated logo and new store environment — come after a rough few years in the retail arena. With that said, Khajak Keledjian, chief executive officer and co-founder of Intermix, said he has seen single-digit comp-store sales increases year after year, even during the recession. He claims this is because of Intermix’s unusual “mom-and-pop feeling” in each of the stores, where customers feel as though they are shopping in an environment which is unique to their specific neighborhood, allowing them to purchase special, not mass-produced, items.  <wwd.com>


On top of credit score, retail credit lines now ask for income, asset data - Consumers will have to divulge more personal information to apply for store credit cards -- possibly putting the brakes on so-called instant credit -- under sweeping industry reforms finalized by the Federal Reserve on Tuesday. The measure, which takes effect on Feb. 22, requires all credit card issuers to consider shoppers' income and ability to pay before granting approval for a card. The rule aims to tighten the lax lending standards that helped fuel the financial crisis. Retailers say the new measure could disrupt popular promotions that incentivize shoppers, such as discounts for opening a credit card. Typically, retailers quickly approve new accounts based on customers' credit scores. The new regulations require that they also consider shoppers' income and assets.  <washingtonpost.com>


Supreme Court Hears NFL Licensing Case - Exclusive licensing agreements between apparel makers and professional sports leagues were put to the test on Wednesday as the Supreme Court considered arguments in an antitrust case that could have significant ramifications for the industry. The crux of the case before the high court is whether the National Football League acts as a single entity that can collectively enter into exclusive licensing deals for apparel products and is immune from antitrust laws or whether it is a collection of independently owned businesses and therefore subject to antitrust laws that prohibit price fixing and monopolies. The case involves American Needle Inc., a manufacturer based in Buffalo Grove, Ill., which sued the NFL, National Football League Properties, 30 of its 32 teams and Reebok International in 2004 alleging a violation of antitrust laws when the NFL entered into an exclusive, 10-year licensing deal with the activewear firm to produce headwear with NFL team logos in 2001.  <wwd.com>


House Committee Passes Bill on Pricing Agreements - The House Judiciary Committee approved a bill Wednesday that would overturn a Supreme Court decision giving apparel brands the ability to set minimum prices. In a landmark case in 2007, the Supreme Court struck down a 96-year-old legislative ban on minimum pricing agreements, giving apparel brands the potential to enforce the lowest price at which their products could be sold.  In effect, the ruling allowed manufacturers to potentially restrict how much a retailer can discount a product, creating challenges for off-pricers, Internet retailers and other discounters. The decision gave lower courts the flexibility to determine, on a case-by-case basis, whether minimum pricing agreements are anticompetitive based on several factors. Previously, such agreements were illegal on their face.  Watched closely by the fashion industry, the Supreme Court case pitted Leegin Creative Leather Products against PSKS Inc., which operated the Kay’s Kloset boutique in a Dallas suburb. The court sided with Leegin.  <wwd.com>


E-retailers sold more items at full price, boosting December profits - Web sales grew 18% in December compared with December 2008 and profits increased by 20% as e-retailers sold more products at full price after a year of luring consumers with heavy discounts, according to a monthly study of 150 e-retailer clients of MyBuys Inc. that the personalization technology firm provides exclusively to Internet Retailer. Total revenue from items sold at list price increased nearly 30% in December, MyBuys says. Meanwhile, revenue generated by sales of discounted items increased by 19%, down substantially from the 100%-200% increases in sales of discounted items earlier in the year, the study shows. While revenue growth from discounting was substantially smaller than prior months, the average discount offered increased by 5%, growing from 25.3% in December 2008 to 26.6% in December 2009.  <internetretailer.com>

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The Macau Metro Monitor.  January 14th, 2009.



Sands China announced today that its Cotai Strip CotaiJet ferry operation has been issues a license to operate between Macau and Hong Kong for another ten years.  The license also increases the number of routes the CotaiJet service can use, including the addition of several daily roundtrip sailings between the Hong Kong International Airport and the Taipa Ferry Terminal – which is located minutes from the company’s properties on the Cotai Strip.


It is expected by LVS executives that the new routes and increase in capacity from Hong Kong to Macau will facilitate growth of the meetings, incentive, convention, and exhibition business.  Steve Jacobs, CEO of Sands China LTD., said that the company would work as fast as possible to have the new routes up and running.




Casino operator Galaxy Entertainment Group LTD. will finalize a plan to complete the financing for its HK$14.1 billion flagship resort in Macau within 30 days, according to CFO Robert Drake.  The funding plan will cover the remainder of Galaxy’ financing needs for the Cotai project.  Details of the funding are yet to emerge.  Drake said that the company is on track to open the resort in the first quarter of next year. 



The 2010 Macau-Zhejiang Week began on Wednesday with an aim of deepening the economic ties between China’s Zhejian province and Macau.  During the event, a series of economic and trade cooperation agreements will be signed.  With its experience and infrastructure, Macau will be an important platform through which Zhejiang products can enter the world market, said Gong Zheng, vice governor of Zhejiang province.


Statistics from the Zhejiang provincial government showed that the trade volume between Macau and Zhejiang reached 11.18 million U.S. dollars during the first eight months of last year, down by 49% year-over-year, with Zhejiang’s export to Macau standing at 136,400 dollars.


In physics, defining a "downward" direction, buoyancy is the upward force, caused by fluid pressure which keeps things afloat; this force enables the object to float or at least seem lighter.  While the S&P 500 is not floating on liquid it’s floating on the free money policy of the Federal Reserve. 


One day after all the major indexes all posted their biggest one-day losses for 2010, the market came back strong with every sector in positive territory yesterday.  It should be noted that the quality of the rally yesterday was low as the volume on the NYSE declined 11.6% sequentially. 


From a MACRO standpoint there did not seem to be any specific catalyst behind yesterday’s move, though one of positive dynamics was acceleration in mortgage applications which increased 14.3% from 0.5% last week.  


The best performing sector yesterday was Healthcare (XLV), rising 1.3%.  The pharma group was one of the bright spots with the positive tone set by upgrades at Credit Suisse.  The facilities and Biotech names also outperformed; the Amex Biotech index has only declined twice so far in 2010. 


After turning in the worst sector performance on Tuesday, the Financials (XLF) outperformed the S&P 500 by 30bps on Wednesday.  On the back of acceleration in mortgage applications, the mortgage insurance group outperformed the overall index.  Within the banking group, the regional’s put in the best performance.  


In a surprising move the Technology (XLK) sector outperformed the S&P 500 by 20bps.  A bulk of the outperformance came from a rebound the semi names, as the SOX increased 1.6% after falling the previous two days.  Also bucking the downward trend were Software stocks with the S&P Software Index up 1.1%.


The worst performing sector yesterday was Energy (XLE).  The XLE underperformed as crude oil declined for the fifth straight day.  Oil stockpiles rose by 3.7M barrels last week vs. expectations for a 1.5M barrel build.  In addition, distillate inventories increased 1.35M barrels vs. expectations for a 1.3M barrel draw. 


Slowing growth in China is also a concern for the RECOVERY trade, although the Materials (XLB) was the second best performing sector yesterday. 


The range for the S&P 500 is 18 points or 0.8% (1,155) upside and 0.7% (1,137) downside.  At the time of writing the major market futures are trading flat on the day.    


Yesterday the CRB finished higher by 0.28% on the back of the Industrials and Precious metals. Once again the soft commodities and Grains were the worst performing.   


In early trading today Copper is trading higher, after increasing 1.5% yesterday.  The Hedgeye Quant models have the following levels for COPPER – buy Trade (3.32) and Sell Trade (3.49).


Gold is trading in a narrow range.  It traded up modestly yesterday and is down in early trading today at $1,134.  The Hedgeye Quant models have the following levels for GOLD – buy Trade (1,120) and Sell Trade (1,158).


Yesterday, crude oil traded down for the third day in a row and is trading flat in early trading.   As we mentioned, the supply picture is putting pressure on the commodity.  The Hedgeye Quant models have the following levels for OIL – buy Trade (79.22) and Sell Trade (84.11).


Howard Penney

Managing Director














Wealth And Power

“A true friendship develops on the basis of genuine human affection, not money or power. Of course, due to your power or wealth, more people may approach you with big smiles or gifts. But deep down these are not real friends of yours; these are friends of your wealth or power.”
- Dalai Lama
The Summit meeting between Obama and the Dalai Lama is all about WEALTH and POWER.  Taiwan needs weapons that will give them more POWER.  Will the Obama swagger with the Dalai Lama give us more POWER over the Chinese or just some needed income?  At best, the administration can hope that the damage will be limited.  
The Chinese already don’t like us and that was made clear at the climate talks in Copenhagen.  There is nothing simple about the US - China relationship, but it appears that we are headed for a rough patch.  The Chinese have made a series of moves to slow its market-oriented, economic reforms over the last year (CHINESE OX IN A BOX), which should raise some concerns for many businesses in the West and increases our conviction that the Chinese market will underperform in 1Q10.  

It now becomes a delicate balance on the part of the Obama administration to play hardball with the Chinese so the US is not perceived to be POWERLESS, while not making them angrier.   Obama needs to demonstrate that he is not “in a box” but instead, has WEALTH and POWER to navigate the issues with the Chinese.      
While hope is not an investment process, let’s hope that the administration does not make some irrational decisions in dealing with the Chinese given that Obama is losing POWER at home.         
Yesterday’s ABC consumer confidence number confirms what the polling numbers are saying about the Obama administration.  Poll after poll suggests that President Obama’s efforts to reassure Americans about the economy haven’t paid off.  According to the latest American Pulse™ Survey of over 5,400 people, 64.2% say the economy will worsen or stay the same in 2010 (29.7% think it will improve) and 43.7% plan to spend less this year than last.
Americans also remain uneasy about terrorism - 92.8% believe the U.S. is still fighting the war on terror, 40.8% feel less safe since President Obama took office (47.3% feel the same, 11.9% feel safer) and 68.9% are somewhat/very concerned that terrorists may infiltrate high-level elected positions or the military.
Overnight, Asian stocks rallied after Australian employment increased three times more than consensus expectations.  Even after the central bank in Australia raised interest rates in the middle of 2009, the December employment figure was up 35,200 vs. the consensus at 10,000.  The Central Bank in Australia has the POWER to make decisions that are right for the country.     
Ben Bernanke has the WEALTH (albeit leveraged) but appears to be “in a box” and can’t demonstrate that he has the POWER to lead.  At the time Bernanke last printed his “extended and exceptional” view of monetary policy the U.S. economy improved in 10 of the Federal Reserve’s 12 districts.  
Despite unemployment staying at 10%, the economic conditions in the USA continue to improve, putting our “RATE RUN UP” theme into play.  The evidence continues to mount that the FED will need to change its policy statement at the next meeting.  
Here is a thought that most people don’t believe could happen.  The Federal Reserve hints at a rate increase, maybe even raises rates slightly and the employment picture begins to improve in the US. Higher interest rates in the USA will instill confidence that the Administration and the Federal Reserve have the POWER to do what is right for the country, while helping put WEALTH back into the pockets of the average consumer.  At this point corporate America just might believe we have turned the corner and start hiring again.   
What does all this mean?  That’s right, the “BUCK BREAKS OUT.” America has vast amounts of WEALTH; we just need leadership that has the POWER to make the difficult decisions.     
Hedgeye Risk Management will be hosting its Q1 2010 quarterly themes strategy conference call this Friday January 15th at 11 AM EST.  Contact to request access to the conference call.
Function in disaster; finish in style.
Howard Penney
Managing Director
XLK – SPDR Technology
Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.

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 VolatilityThe VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.

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 BrazilAs 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 TIPSThe iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


IEF – iShares 7-10 Year Treasury One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

FXE – CurrencyShares EuroWe shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

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 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.

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.

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