Brinker’s 2Q10 earnings of $0.29 per share (includes about a $0.04 per share benefit) came in much better than the street’s and my $0.22 per share estimate.  Same-store sales growth also beat expectations with Chili’s -3.2% and blended comps -3.1% versus my estimate of -4% for both and the street’s expectations of -4.2% and -4.3%, respectively.  Based on the definite change in management’s tone on today’s earnings call relative to last quarter, results may have exceeded management’s expectations as well.


Last quarter, Brinker did not provide any updates to the guidance it provided in its 4Q09 earnings release.  Today, EAT’s press release stated, “Brinker provides annual guidance as it relates to comparable restaurant sales, earnings per diluted share, and other key line items in the income statement and will only provide updates if there is a material change versus the original guidance.”  So although management maintained the same official guidance policy this quarter, the company did make comments about the specific guidance ranges it had provided at the start of the full year whereas last quarter management seemed unwilling to even repeat the prior ranges.


Last quarter, there seemed to be a question about whether the company’s unwillingness to reiterate guidance was due to management’s not feeling comfortable with the prior guidance.  Although management said that it just did not want to get into the habit of providing quarterly guidance, it was a little unclear in its answers to investors because it seemed unwilling to repeat any prior ranges. 


From the fiscal 1Q10 earnings call:

So that means it is suspended or the $1.15 to $1.30 is still a good guidance number or we do not have any guidance except for the line by line information?


Chuck Sonsteby
I would say that the second piece would be accurate.


Today, management said it was comfortable with the higher end of guidance.  Management also said that comps during the quarter were -3%, “comfortably within the initial -2% to -4% range.”


Other management comments that signal a real shift in management tone:


“We are gaining share…we are excited about that.”


“Up is up.”


“We are seeing small bright lights in the economy.”


Echoing PFCB’s CEO Bert Vivian’s comments from last week, Brinker also stated that it is seeing improved business spending.  Specifically, management said that the banquet business at Maggiano’s was better in December, which it attributed to more expense account spending.


Although Chili’s traffic improved sequentially in the quarter and same-store sales came in 80 bps better on a 2-year average basis, it may be a little premature for the company to remove its 3 Courses for $20 promotion.  Management said that the promotion has gotten “a little stale,” but I think it could be increasingly difficult to drive traffic without it.  Management is aware that consumers are still looking for value so it will be important to watch whether the promotions currently being offered at lunch, along with the company’s upcoming value initiative, which is expected to highlight the company’s new and improved menu, will prove as successful as 3 for $20. 


The company has made a significant step in downsizing its menu (to 8 pages from 12), deemphasizing items less critical to guest loyalty.  This alone should lead to more efficient execution at Chili’s.  As I have said before, Chili’s needed to simplify its back of the house operations by reducing menu items to include only the core items that represent the bulk of the chain’s sales.  These menu changes will allow the company to increase the quality of the items left on the menu (75% of menu items now include a new recipe, new ingredient or have been replaced).  A menu that is simpler to execute will translate into better food delivered to the guest with fewer complaints, thereby allowing the concept to build increased customer loyalty.  Importantly, it will provide a better work environment for restaurant employees. 


Gaming stocks have performed well in 2010, potentially signaling escalating expectations for the Q4 earnings season.



The following chart shows year-to-date performance for the largest gaming stocks as a gauge for investor expectations as we head into the Q4CY2009 earnings season.




PNK is the only gaming stock down year-to-date and after seeing those Louisiana numbers yesterday, it’s not hard to know why.  Even so, the stock is only down 2% on the year.  The regionals as a whole have been the laggard, up only 3%, relative to the major market operators and slot companies which have appreciated 23% and 10%, respectively.


Leading the way are the three US based Macau operators, MGM, LVS and WYNN, up 34%, 25% and 22%, respectively.  As we’ve written about, both LVS and WYNN will likely beat current consensus projections pretty handily.  We’re more concerned with “whisper” expectations which seem to have gotten pretty high.  Analysts may be setting the stage for disappointment.  The appreciation in MGM, on the other hand, may be more due to the incredibly high short interest in the stock at the end of 2009 combined with a growing belief that the Q4 may have represented the trough in Las Vegas.  We covered the potential for this outcome in our 12/15/09 post, “MGM: THE CONSENSUS SHORT”.


For the gaming equipment suppliers, calendar Q4 2009 looks like it may come in a little better than expected for the sector.  We’re not sure that will matter since Street estimates for the March and June quarters look a bit aggressive to us.  Likewise though, lower near term estimates may not matter much if the focus continues to be on new markets.  The long-term outlook for this group is very bright, mostly due to new markets.  It may take a slippage in the timing of new markets to drive the stocks in this sector down.  History suggests this is a real possibility.


Back to the regional operators.  We haven’t liked this group for a few months now due mainly to fundamentals.  Despite easy comps, revenue growth remains negative and could have been worse, if not for very low gas prices y-o-y.  The gas tailwind has now reversed, potentially squashing any hopes for positive growth in 1H2010.  As forecasted in the stocks, Q4 earnings and guidance are not likely to be catalysts for share appreciation.


Starbucks is scheduled to report fiscal 1Q10 after the close today and it should be another good quarter.  I think SBUX’s earnings could come in a penny better than the street’s $0.28 per share estimate.  Same-store sales trends and operating margins should continue to improve sequentially from the fourth quarter.  I am modeling +1.5% same-store sales growth in the U.S. (assumes a 20 bp improvement in 2-year average trends from 4Q09), which would mark the first quarter of positive growth since fiscal 4Q07.  My +3% comparable store sales estimate for the international segment implies flat 2-year average trends from the fourth quarter.  The company is facing its easiest same-store sales and margins comparisons in the first quarter.  From a cost savings standpoint, the company will get the biggest YOY benefit in the first quarter as it had only implemented $75 million of the total $580 million in FY09 cost during 1Q09. 


SBUX has worked and should continue to work as the company continues to grow margins throughout the year.  Same-store sales are likely to continue to get better as the economy improves and the company’s guidance of “modestly positive comparable store sales” growth is easily achievable, as is the company’s EPS guidance of +15%-20%.  This is already baked into expectations, however, as the street’s full-year 2010 EPS estimate of $1.02 implies nearly 28% growth.  Relative to expectations, there is a lot less upside potential for SBUX.  A little over six months ago when I published my SBUX Black Book, I called SBUX “underloved” by the sell-side community.  Since then the stock has moved nearly 60% higher, and analysts are now more bullish on the name (as shown below).


Back in June 2009, Keith McCullough also highlighted in the SBUX Black Book that from a sentiment perspective that SBUX was a buy.  Specifically, he said, “Short interest as a % of the float is lower than what it was but still relatively high for a stock with this kind of market cap (6% of the float). Insider activity has been benign for 2009 to date. However, share­holder concentration factors here are also scream­ing buy. Away from Fidelity, no institutional investor owns this stock for real. Capital Research is ap­proaching 4% of the shares out, but away from that position you easily make it into the top 10 holders of this stock with 2-2.5% of the shares outstanding.” 


Today, short interest has fallen to 2.6%.  Fidelity still holds the number one position with 11% ownership and you can still make into the top 10 holders with 2-2.5% of the shares outstanding.  The difference now is that Capital Research’s ownership is above 5%, T. Rowe is above 4% and two other holders are approaching 4% (Barclays and Vanguard).  So, more ownership is now required to make it into the top 5 positions.


Sentiment has turned for SBUX, and with expectations so high, it is getting increasingly harder to pound the table on this name.  Again, the first quarter will be strong, but with the stock now trading over 10x on a NTM EV/EBITDA basis, there is less to be excited about.  That being said, I am excited about the prospects of VIA and look forward to hearing how the product fared during the first quarter.  To recall, Starbucks put out a press release on October 12 stating that after only 2 weeks of national availability of Starbucks VIA, early indicators showed that the product was exceeding expectations.  Management did say that it intends to spend significantly higher marketing dollars than any typical quarter to support the launch in Q1 and that VIA should be profit neutral during fiscal 2010 so the level of spending behind the brand during the quarter and the year remains a big question.


June 8, 2009:







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R3: COH: An Inflection in the New Reality


January 20, 2009


The “good ol' days” of multiple handbag purchases and annual price increases are long behind us.  The new reality is that COH is now managing its margin structure to more realistic levels, while operating margins are still amongst the highest in all of apparel, retail, and luxury.  The real challenge here is one of expectations, which just don’t yet seem to be aligned with the new reality.





There is no question that COH’s limited US growth prospects, large US outlet business, and strategy to emphasize growth in lower-priced categories are all concerns.  But the reality is, the “good ol' days” of multiple handbag purchases and annual price increases are long behind us.  The new reality is that COH is now managing its margin structure to more realistic levels, while operating margins are still amongst the highest in all of apparel, retail, and luxury.  The real challenge here is one of expectations, which just don’t yet seem to be aligned with the new reality.


This morning Coach reported 3Q EPS of $0.75, exceeding Street estimates by $0.03.   Embedded in the results was the company’s first positive increase in gross margins in three years! (+30bps).  Offsetting the gross margin gain was a lack of SG&A leverage to the tune of 80bps, as the company lapped some major cost savings last year.  While there is plenty to be positive about given what appears to be a bottoming in gross margins, the bears are likely to chew on the modest miss to domestic same store sales expectations.  With North American comps of +3.2% marking a return to positive sales for the first time in 4 quarters, expectations were calling for a 5% increase.


3Q results will be scrutinized given only modest upside (on a relative basis, COH is not yet showing substantial earnings leverage off of last year’s easy compares), but the net result here is that the top and bottom lines continue to improve.  Inventories ended the quarter in great shape, down 30% y/y against a total sales increase of 11%.  We actually wonder if inventory is too lean at this point.   The reductions are in part due to the mix shift towards lower price points, but still impressive and likely to set up well for future gross margin improvement (against easing compares).    Understanding where same-store sales can actually go in the absence of pricing power is the biggest challenge and one where expectations still seem a bit too high.


R3: COH: An Inflection in the New Reality - 1




  • Burberry management indicated strong sales of outerwear and non-apparel were key product categories helping to drive the company’s better than expected top and bottom line results. Interestingly, management also attributed the strength in part to the recent launch of the company’s social media effort dubbed The Art of the Trench. The online effort is considered one of the more creative interactive marketing efforts by a fashion brand in 2009.
  • After a multi-year run, fashion bloggers are calling for the bubble to burst on the Americana trend. American heritage brands such as Red Wing, L.L Bean, and Filson, which have seen a resurgence in popularity, may be poised for a relative slowdown now that year three of the trend is upon us. With the fashion trend potentially slowing, we wouldn’t be surprised to see the log cabin/apothecary themed store designs fade away as well.
  • In effort to generate buzz ahead of its Florence museum opening, Gucci is launching a collaboration with Christies. The luxury brand and auction house will be offering an online appraisal and authentication service for collectors of vintage Gucci wares. The sight will also allow Gucci archivists to prospect for potential acquisitions of historical importance ahead of the 2011 museum opening.




Liz Sells Claiborne Outlets in Canada - In a move to limit its exposure north of the U.S. border, Liz Claiborne Inc. has sold its 38 Liz Claiborne outlet stores in Canada to Laura Canada, a privately held specialty retailer based in Montreal. Terms weren’t disclosed, but Claiborne said financial details and closing information would be made available in subsequent filings with the Securities and Exchange Commission. The remaining six Liz Claiborne outlets in Canada are expected to be closed, either prior to or at the expiration of their leases, or converted into other formats. The company emphasized that the move will have no impact on its Canadian wholesale business, which it expects to expand, or its U.S. Liz Claiborne outlets. The 99 Mexx stores and 12 Lucky stores Liz operates in Canada aren’t affected by the transaction either. “The Liz Claiborne Canada retail division has struggled over the last two years and, after reviewing our options, we concluded that the assignment of the Liz Claiborne Canada retail leases was the best decision for the future of the brand in that country,” said Andrew Warren, executive vice president and chief financial officer of Liz Claiborne.  <>


Designer License Holding Files for Bankruptcy - Designer License Holding Co. LLC, the Bill Blass licensee partially owned by apparel entrepreneur Arnold Simon, has filed for Chapter 11 bankruptcy court protection. The voluntary filing was on Dec. 31 in a Manhattan bankruptcy court. The petition listed total assets of $18.7 million and total liabilities of $15.5 million. The petition listed Israel Discount Bank as a secured lender holding a $6.7 million claim. Among its 20 largest unsecured creditors, Sterling Factor Corp., New York, is listed as holding a claim for $534,580. Equity holders of Designer License include: Jubilee Limited Partnership, holding a 27.8 percent stake; Simon, 24.5 percent; Timothy Fullum, 24.5 percent; The Leiber Group Inc., 16.6 percent, and Daniel Gladstone, 6.6 percent. <>


Duffy to Head Performance Footwear for Timberland - The Timberland Co. appointed Gregg Duffy as senior director of performance footwear. In this role, Duffy is responsible for the overall management of Timberland’s global performance footwear portfolio, including multi-sport, hiking and seasonal offerings.  He reports to Brian Moore, Global Vice President of Men’s Footwear and Outdoor Performance for Timberland.  Duffy has more than 17 years experience in the performance footwear industry, having held senior positions in product design and management for such brands as Puma, Saucony, Burton-Gravis and most recently, Merrell. <>


Prada Confirms Hiring of Kress - François Kress has joined New York-based Prada USA as chief executive officer, a Prada spokesman said. This confirms a report on No further details were available, and the company has no plans to formally announce his hire. Kress was previously managing director of Bulgari’s jewelry, watch and accessories division. At Prada, he succeeds Graziano de Boni, who left the Italian brand in late October to head up the Reed Krakoff division at Coach Inc. <>


Cabela’s Names Head Merchant; Sets of String of Executive Promotions - Cabela’s Inc. announced that Brian J. Linneman would become its executive vice president and chief merchandising officer. Previously, Linneman was senior vice president of global supply chain and operations, Linneman will be responsible for merchandising, planning, inventory, visual merchandising and strategic planning/process improvement. Linneman's transition was included among a number of other senior level promotions: The other promoted executives now hold these titles and responsibilities: Patrick A. Snyder, Executive Vice President and Chief Marketing Officer. Snyder previously served as Senior Vice President of Merchandising and Marketing. Under Snyder’s leadership, the Company is consolidating responsibility for its e-commerce and catalog businesses. Snyder will continue his current responsibilities for market research/analysis, retail advertising, brand management and media relations. Ralph W. Castner, Executive Vice President and Chief Financial Officer of Cabela’s and Chairman of the Board of World’s Foremost Bank. Previously Vice President and Chief Financial Officer, and Chairman of the Board of World’s Foremost Bank, the Company’s wholly-owned bank subsidiary, Castner will continue his current responsibilities for finance, accounting, investor relations, tax, internal audit, legal, and risk management. Castner will also take on responsibilities for real estate, construction and facilities. Joseph M. Friebe, Executive Vice President of Cabela’s and President and Chief Executive Officer of World’s Foremost Bank. Previously Vice President, and President and Chief Executive Officer of World’s Foremost Bank, Mr. Friebe will continue to lead World’s Foremost Bank. Charles Baldwin, Executive Vice President and Chief Administrative Officer. Previously Vice President and Chief Human Resources Officer, Baldwin will continue his current responsibilities for human resources and take on responsibilities for information systems, call centers and the Company’s Outdoor Adventures division. Michael Copeland, Executive Vice President and Chief Operations Officer. Previously Vice President of Retail Operations, Copeland will continue his responsibilities for retail operations in the United States, as well as asset protection, and will take on responsibilities for operations in Canada. <>


Gregory Scott Said Offered New York & Co. Post - Gregory Scott, who resigned as Bebe Stores Inc’s chief executive officer in January 2009 after a stormy five-year tenure, could be next in line to run New York & Company Inc. Sources said Scott is being offered a top post at New York & Co., which would establish him as the lead candidate to succeed Richard Crystal, the 64-year-old chairman, president and ceo. Crystal’s employment contract was extended last year to February 2011. Sources also said Scott, considered a strong merchant more so than an operations executive, has been actively seeking a job and has been talking to companies in New York. Crystal declined comment. He is recognized as building New York & Co. into a national specialty retail force, and earlier in his career was a high-level Macy’s merchant. Scott could not be reached Tuesday.  <>


Retailers spent 17% more on search marketing in Q4, report finds - Search engine marketing firm Efficient Frontier says its retailer clients spent 17% more on search engine marketing in the fourth quarter than they did in same period in 2008, and 46% more than in the third quarter. SearchIgnite, also a search marketing firm, says its clients spent 12% more in the fourth quarter on paid search ads than they did a year ago. Efficient Frontier also reported a 90% increase in retail-related search queries. But that didn’t necessarily increase sales. Click-through rates declined 40%, orders per impression fell 30% and conversions per click were flat. Cost per click was 9% lower for the quarter than the same time last year.  <>


Retail's Technological Revolution Takes Off - Major initiatives are under way in cloud computing, social media and mobile that have the power to upend the business. Here is the vision: Retailers — and, not incidentally, apparel makers and consumers — will get any kind of computing power they need from the “cloud” — which provides an application or service available to anyone at any time as long as they have an Internet connection. Everything will be knitted together by social media and accessible from any mobile device anywhere. Call it the third-wave Web. The result could be new competitors, and a blurring of the distinctions between customers, designers and retailers. Examples include user-designed clothing and inexpensive, easy-to-use point of sale systems that small retailers can log onto online — or from their iPhones. Five-year-long implementations of business software will be history, as will the need to maintain a data center. Startup and operating costs will fall dramatically, and small companies and individuals will have access to previously unaffordable resources such as enterprise-level security. Take Still in beta test mode, this cloud POS for small retailers is cheap and easy to use, yet it has the security of a big company because it is hosted by (on its own cloud offering, Amazon EC2). Two other behind-the-scenes partners provide secure credit-card processing and full PCI compliance.  <>


Obama Pressing for Protections Against Lenders - President Obama on Tuesday stepped into the middle of a fierce lobbying battle by reinforcing his support for an independent agency to protect consumers against lending abuses that contributed to the financial crisis. The president’s move also signaled a tougher line and a more direct role as Congress weighs an overhaul of banking regulation.The financial industry and Congressional Republicans have singled out the administration’s proposed consumer agency in particular, hoping to greatly weaken if not kill it. With liberal Democrats and Web commentators fighting just as hard for a strong independent office, the issue is becoming the central flashpoint in the debate over regulation. Mr. Obama personally weighed in on Tuesday in a one-on-one meeting at the White House with Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee. Reports last week suggested that Mr. Dodd might drop the consumer agency from the emerging Senate bill in order to attract support from Republicans and some centrist Democrats on his committee, but Democratic aides disputed that. <>


The major indexes – the Dow, S&P, NASDAQ and Russell - all closed at new highs for the year. The big winner on the day was the continued outperformance of the Healthcare (XLV) as it outperformed the S&P 500 by 120bps on expectations of a Republican victory in the Massachusetts. 


The Hedgeye sector models are back to having all nine sectors positive on TRADE and TREND.


Also on the positive side were increased M&A activity and some better-than-expected earnings/guidance from Parker Hannifin.  Yesterday the market seemed to ignore another tightening move out of China and the Greek budget deficit crisis.  Other MACRO data points should have presented some additional headwinds. The National Association of Home Builders index of builder confidence decreased to 15 from 16 the prior month to the lowest level since June 2009.  After the close the ABC consumer confidence declined for the second week in a row. 


As we look at today’s set up the range for the S&P 500 narrowed from 20 points on Friday to 10 points or 0.60% (1,143) downside and 0.3% (1,153) upside.  At the time of writing the major market futures are trading down on the day.  


Yesterday, Technology (XLK) was the second best performing sector.  Within the XLK the communications equipment group provided upside leadership and AAPL +4.4% was the highlight in the hardware space after the company confirmed it will be holding a 27-Jan event to launch its “latest creation”.   Semis rebounded from a 6% selloff last week with the SOX +1.8%.


Despite virtually no MACRO data points, parts of the RECOVERY trade outperformed.  The Materials (XLB) sector has been down 4 of the last 5 days, but was the third best performing sector yesterday.  Steel stocks were among the best performers in the group with the S&P Steel Index +2.9%. 


The Financials (XLF) rebounded from a 2% decline on Friday, though the banking sector was a slight laggard.  Citigroup outperformed the large-cap group after reporting Q4 results.  The regional banks outperformed with ZION and PNC among the notable gainers.


In early trading Copper is trading down on China tightening concerns.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.28) and Sell Trade (3.49).


In early trading Gold is trading down about 0.8% to 1,130. The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,119) and Sell Trade (1,150).


Yesterday crude traded up by 1.3%, but is giving back all the gains in early trading today.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (77.51) and Sell Trade (81.10).


Howard Penney

Managing Director















"The Constitution does not just protect those whose views we share; it also protects those with whose views we disagree."
-Edward Kennedy
Good or bad, everything happens for a reason.  Like the late Ted Kennedy once said, the constitution is working to protect those with differing views, especially those with views of the current administration in Washington.    
It’s fitting that “this change of guard” is happening in Massachusetts, a state that has played a big role in American history:
(1)   Plymouth was the second permanent English settlement in North America.

(2)   During the eighteenth century, Boston became known as the "Cradle of Liberty" for the agitation there that led to the American Revolution and the independence of the United States from Great Britain.

(3)   It was also a center of the temperance movement  and abolitionist activity before the American Civil War.

(4)   In 2004, Massachusetts became the first U.S. state to legally recognize same-sex marriage.

(5)   In 2010, Massachusetts has become Obama’s nightmare.

The S&P 500 has rallied 69.9% since March 9, 2009 and the average American is fed up!  In light of where we may have been heading a year ago and where we are today, this does not make sense.  Or does it?  After the close, the weekly ABC consumer confidence reading came in at -49 versus -47 last week and -50 a year ago.  Consumer sentiment is virtually unchanged from a year ago as most consumers are concerned about their personal finances because Washington is not.  
The nasty consumer confidence reading, combined with Scott Brown winning a U.S. Senate seat in Massachusetts, helps put things into perspective - Americans are fed up with the “Piggy Banker Spread” and the fact that Obama does not represent “change” in Washington.
The S&P 500 is up 3.2% so far in 2010 with the leadership coming from Healthcare, up 6.2% and the Financials, up 5.1%; both sectors are the target of the Obama administration and the re-regulation short sellers.   
Looking forward to today’s trading, here are some risk management items to consider:
(1)   Big intraday reversal to the upside in C got the Financials up again yesterday– XLF looks bullish (big driver of this recent breakout)

(2)   Yesterday was the 9th day out of 11 trading days this year that the S&P 500 has been up - short sellers of year-end feeling shame; pain trade is still up.

(3)   The closing price of the S&P 500 at 1,150 and the NASDAQ at 2,320 are higher highs – this is bullish.  

(4)   A loss for the Democrats in Massachusetts puts all of the re-regulation short sellers in the penalty box – XLV outperformed the S&P 500 yesterday by 120 bps.

Our 1Q 2010 MACRO themes continue to play out as planned.  
“CHINESE OX IN A BOX” - In China, it’s the “end of an emergency” as the cost of borrowing money is on the rise.  According to the China Securities Journal (citing unidentified people in Beijing and Shanghai), some of the nation’s banks have been told to “limit lending.”  The Shanghai index was down 2.9% last night and is now down 3.9% year-to-date.
Also, the “BUCK BREAKOUT” theme got a lift from the events in the Commonwealth, as the Dollar is once again looking more like a safe haven, trading at levels not seen since September 2009.  Yesterday, the Dollar index rallied 0.6% and is up 0.6% in early trading again today.  
Change is good!
Howard Penney
Managing Director

EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
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).

VXX - iPath S&P500 Volatility — The 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 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 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.

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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