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Shorting Oil

Earlier this morning, Keith shorted the XLE in our virtual portfolio.  We’ve outlined the chart of this etf below, but suffice it to say oil, the commodity, and oil producers, as represented in the XLE, are broken.  The key drivers behind this breakdown are the inverse correlations with the U.S. dollar, an ongoing slowdown in China, and burgeoning inventories globally.


Two days ago we wrote a note titled, “Oil is Broken”, and we noted:


“As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.”


As the Chinese proactively slow their economy in the first half of this year via lending restrictions and higher interest rates, it will continue to have a negative impact on the demand side of the equation for commodities and primarily oil and copper.  China is the world’s GDP market share taker and as its growth slows, even on the margin, it has an amplified impact on the demand for commodities, which is negative for price in the intermediate term.


On January 27th the DOE reported inventory numbers for oil and oil products.  While oil actually showed a draw of 3.9 million barrels, which is bullish on face value, this was quickly attributed to weather issues in the Gulf of Mexico.  Most disturbing for those bullish of oil were the build in inventories of both gasoline and distillates, which suggest a soft demand situation in the United States, the world’s largest user of petroleum.


The chart of the XLE and its key levels is outlined below.


Daryl G. Jones

Managing Director


Shorting Oil - xle29



Consumer confidence bottomed in early 2009.  In early 2010, divergences in consumer confidence among income groups will be worth watching for restaurant investors.


The chart below clearly shows a split in consumer confidence between those earning salaries of $35,000 and over and those earning $34,999 and below.  Since October 2009, the wealthier segment of the population has seen a significant boost in confidence, while lower income levels have seen stagnating, or even deteriorating, levels of consumer confidence.


CONSUMER CONFIDENCE & EATING OUT - consumer confidence


Looking at quarterly comparable-store sales metrics for restaurants by average check, it is clear that trends have been improving in restaurants with average check of $45+.  The third calendar quarter has seen a slight tick up in trends for the $5-10 average check group.  It is worth noting, however, that some of the 4Q comparable sales numbers that have been released by companies whose average checks fall within $5-10 have been negative.  Carl’s Jr. has released comparable-store sales for two of the three periods of the fourth calendar quarter.  Thus far for the quarter, comparable-store sales have been approximately -8%.  In addition, Sonic’s comparable-store sales for the quarter ended November 30th (not included in the chart below) declined -9.1%.  We anticipate declines in the trends for these companies going forward, assuming the divergence in consumer confidence between income levels remains.


Between restaurants with average check between $10-20 and $20-27.50, it seems that the $20-27.50 average check group saw more stability in the last quarter than those restaurants with average check between $10-20.   At this point, it is difficult to draw a firm conclusion from the data available, but we will be paying close attention to the consumer confidence trends, comparable-store sales at various average check levels, and the relationship between the two metrics.




Below is a table indicating the companies whose data was included in the chart above:



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Sovereign CDS Download - cds29

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Europeans Pointing Fingers

With the meeting of the World Economic Forum this week in Davos, we’re getting a host of interviews from the Who’s Who, including European policy makers that are asked to comment on Greece’s budget deficit issues. What’s clear from the interviews is that while by in large most of the European community has tried to calm fears of sovereign default in Greece’s debt—suggesting a close cooperation with Greek officials to cut spending and hone in on its budget deficit over the next three years - we’ve also seen officials (including those with important name tags on) put their foot in their mouth.  In particular, Monetary Affairs Commissioner Joaquin Almunia recently said” “Greece will not default. In the Euroarea, default doesn’t exist.”


As we’ve noted in our recent posts on Greece (see our portal), there’s plenty of evidence that sovereign default exists, and could be a reality for Greece. Further, we’d point you to “This Time is Different”, a book by Carmen Reinhard and Kenneth Rogoff that discusses sovereign default across nations over the last eight centuries. In short, Almunia’s statement seems fully absurd. 


The interviews have also demonstrated that European countries are quick to dismiss their own problems in favor of calling out their neighbors. The chart of Spanish unemployment is just one of the charts referenced to deflect attention. Today, Spain released its 4Q09 unemployment at 18.8% from 17.9% in the previous quarter, well above the Eurozone’s most recent reading of 10%.


Matthew Hedrick



Europeans Pointing Fingers - SP1


Risk Management Time: SP500 Levels, Refreshed...

I shorted the SP500 (SPY) on this morning’s GDP report strength simply because this officially puts He Who Sees No Data (Bernanke) in a political box.


No matter what you think about the sustainability of a +5.7% GDP number, the immediate term reality is that it is unreasonable and unsustainable to maintain an “exceptional and extended emergency” Fed funds rate of ZERO percent. Particularly with year-over-year inflation now running up +3-4%.


The doves will say I am off base because “unemployment is at 10%”… I get it. That’s been the case the ‘zero is a perpetual investment return’ crowd has been making for months. Unfortunately (for them) both the currency and bond markets are telling the doves they are wrong.


I continue to think that bond yields continue to make a series of higher-lows (Rate Run-up) and that the Buck Breakout will continue as a leading indicator of the same.


This sea change in consensus expectations (Goldman’s Research Department says the Fed is on hold until they get their 2012 bonuses), is being reflected in a weak gold price (we are short GLD) and, finally, a TRADE and TREND breakdown in US Equities.


Below I have outlined TRADE and TREND lines for the SP500. The most important line is the thick red line of resistance at 1098. I might cover my SPY position on the way down to 1065. I might not. Unlike our politicized Fed Chairman, as the math changes, I will.



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed...  - km3


R3: The Pause and Wait


January 29, 2009

January 2010 for most retailers is likely to be one of the least meaningful months in a while. With lean inventories going into and coming out of the holiday, a substantial year over year reduction in clearance activity (down 30-40% for most), and what appears to be a swift clean transition to Spring, there is little to glean from the biggest transition month of the year. Furthermore, many companies have updated earnings outlooks with the reporting of December sales.





January 2010 for most retailers is likely to be one of the least meaningful months in a while. With lean inventories going into and coming out of the holiday, a substantial year over year reduction in clearance activity (down 30-40% for most), and what appears to be a swift clean transition to Spring, there is little to glean from the biggest transition month of the year. Furthermore, many companies have updated earnings outlooks with the reporting of December sales.


Important or not, the trends over the past few weeks are still worth monitoring. Athletic apparel remains a relative outperformer, while it appears that athletic footwear may have slowed a bit. As highlighted last week, we expect pressure to continue near-term in footwear with the most challenging comps versus last over the next few weeks. Department stores are holding up slightly better post Christmas, most likely as a result of more clearance activity than we’ve seen vs. other channels. Overall, January likely represents a deceleration from December. There is not much to worry about given this slowdown however, except that it represents a pause in the positive trajectory that has been built since the Summer (see the ICSC chart below). We’re moving on, searching for early reads on Spring and marginal improvements in customer traffic. Inventories will still be managed tightly over the next few months, but whether the consumer shops more frequently is still unknown. Unfortunately, January is not likely to hold the answers…


R3: The Pause and Wait - 1


R3: The Pause and Wait - 2





  • Despite an image that is largely based on the original compression product, Under Armour’s CEO noted that the company now sells more “loose” product than anything else. The company continues to believe there are opportunities to expand across a wide range of fits-compression, fitted, semi-fitted, and loose.
  • American Apparel continues to push the envelope with its provocative marketing. The company is conducting an open casting call for the new “face” of the company’s expanding intimates and briefs lines. However, the term “face” must be examined closely. The search is actually looking for the “Best Bottom in the World”! Anyone interested is invited to submit their photos in online…
  • Stay tuned for the Fall launch of Columbia Sportswear’s latest technological innovation, Omni-Heat. The “warmth” technology will span over 100 products ranging from footwear to outerwear. The technology aims to “reflect” body heat, while eliminating the bulk of more traditional insulation. Management believes the technology may be a “game changer” and likened the launch to the time when Nike first introduced visible “air”. If true, this could be the beginning of a major turnaround…





A new technology that enables selling on Facebook is Off The Wall - Online marketing firm Resource Interactive has unveiled technology, dubbed Off The Wall, that lets retailers create a small but complete e-commerce experience on Facebook users’ “walls,” part of the pages on the social network. “The vast majority of activity on Facebook happens on users’ walls; they want to stay in the stream of things,” says Dan Shust, director of emerging media at Resource Interactive, which also builds Facebook pages for retailers. “If you have hot information, the best way to communicate on the social network is through the wall.” The firm tested the product in the days before Christmas with multichannel retailer The Limited. The merchant posted a scarf on its Facebook page, which has more than 20,000 fans, and offered 30% off and free shipping. Fans saw the promotion pop up in their news stream and could share it with their Facebook friends. The scarf sold out in a matter of days, the firm reports. Retailers can use the software to post a single product on Facebook fans’ walls. A Facebook user clicks on the image, which expands within the wall. Then the image displays information similar to that found on an e-commerce product page, such as product description and price, and offers options for selecting size and color. The user makes his selections, then clicks on a button to enter his shipping and payment information. He then clicks on a Buy button to complete the transaction.  <internetretailer.com>


Lauder, P&G to Flex Marketing Muscle - Leading firms the Estée Lauder Cos. Inc. and Procter & Gamble Co. told analysts Thursday they will accelerate advertising spending in the second half of the year. Both companies were emboldened by stronger-than-expected second-quarter earnings. Lauder’s profit for the quarter ended Dec. 31 surged 62.2 percent to $256.2 million, or $1.28 a diluted share, from $158 million, or 80 cents, a year ago, beating analysts’ revised earnings expectations of $1.21 a share. Sales gained 10.8 percent to $2.26 billion from $2.04 billion, or 6 percent in local currency, beating Wall Street’s $2.24 billion consensus. P&G’s profits for the quarter ended Dec. 31 fell 6.9 percent to $4.66 billion, or $1.49 a diluted share, from $5 billion, or $1.58, a year ago, while sales rose 6.4 percent to $21.03 billion from $19.76 billion. Profits came in better than the $1.43 Wall Street expected, though sales were somewhat below the $21.07 billion anticipated. Lauder will spend $150 million to $175 million more than in the same year-ago period on marketing expenses, which include advertising, in-store merchandising and product sampling, said president and chief executive officer Fabrizio Freda.  <wwd.com>


Versace Restructuring Plan Approved - Gian Giacomo Ferraris, chief executive officer of Gianni Versace SPA, said Thursday his extensive restructuring plan has been unanimously approved by the family, the shareholders, the banks and the unions. Ferraris also unveiled the launch of a new women’s diffusion line called Versace Collection for fall, which is forecast to achieve sales of more than 8 million euros, or $11 million, in the first season. The reorganization charted by Ferraris in October is aimed at returning the company to profitability in 2011 and includes cutting 350 jobs, or 25 percent of Versace’s worldwide workforce. The layoffs, which are primarily supported by government funds, begin in March and will be staggered through June. “The plan is based on a 360-degree reorganization and drastic internal measures but it guarantees Versace’s future and independence,” Ferraris contended during an interview at the company’s Via Gesù headquarters. The executive reiterated his priority to reverse last year’s operating loss of 30 million euros, or $41.8 million. He also confirmed 2010 sales will mirror last year’s revenues of 273 million euros, or $381 million.  <wwd.com>


SKECHERS Donates $100,000 and Product to Haiti Earthquake Relief Efforts - SKECHERS USA, Inc., a global leader in the lifestyle footwear industry, today announced that the Company is donating $100,000 to Haiti earthquake relief efforts as well as 5,000 pairs of shoes to the people of Haiti. SKECHERS employees also are raising funds for various charities operating on relief efforts for victims of the tragic earthquake in Haiti. Specifically, SKECHERS donated $50,000 each to Doctors without Borders and Save the Children -- two charities deeply involved in delivering aid to the devastated nation. And the Company has also delivered 5,000 pairs of shoes to Soles 4 Souls, a charity that distributes new and lightly worn footwear to those who need it most.  <tradingmarkets.com>


China Stresses Domestic Consumption at Davos - DAVOS, Switzerland — China will focus on boosting domestic demand to drive economic growth, Li Keqiang, vice premier of the powerful state council, said Thursday. “China’s domestic market has huge potential,” Li told business and political leaders at the annual World Economic Forum here. “We will strive to expand domestic demand, especially consumer demand.” Growing domestic demand has played “a critical role” in the quick economic rebound of the world’s biggest and most dynamic emerging market, he said. Total sales of consumer goods rose 15.5 percent last year, Li said, noting domestic demand helped make up for fewer exports and helped the economy to grow 8.7 percent. The International Monetary Fund this week estimated China’s economy would expand 10 percent this year. Turning to trade, the vice premier said imports totaled $1 trillion last year, making China the world’s second largest importer after the U.S. <wwd.com>


British Retailers Complain Of Poor January Sales Due To Winter, Higher VAT - London, England, United Kingdom (AHN) - High-street retailers in the United Kingdom have complained of weak sales for the first month of 2010. They attributed the poor January sales to the winter and higher value added tax. The CBI's latest Distributive Trades Survey showed that 36 percent of retailers reported lower sales, while 28 percent logged bigger volume of sales for January 2010. The negative 8 percent balance between higher and lower sales volume was higher that the CBI's forecast in December that the balance would only be minus 2 percent. CBI is U.K's top business lobbying group. UK's harsh weather prevented consumers from going out and doing some shopping at a time when stores are offering hefty New Year discounts. For those who braved the cold climate, the bigger deterrent was the larger VAT, which went up to 17.5 percent beginning Jan. 1. Affected by the higher VAT were stores that carry big-ticket items like furniture and electronic goods. According to CBI Chairman Andy Clarke, the least affected by these two factors are groceries and shoe stores, but as a whole the retail was negatively affected. <allheadlinenews.com>


Haitian Industry Coming Back Slowly - Apparel manufacturers in Haiti are rushing to get operating again in the face of significant challenges for workers and supply chains. The apparel industry in Haiti was a mainstay of the country’s economy, accounting for two-thirds of exports and nearly 10 percent of gross domestic product. As the country struggles to recover from the devastating Jan. 12 earthquake, the garment sector will be an important tool in helping it get back on its feet. Most factories operating in and around Port-au-Prince escaped the earthquake and its aftershocks with little damage, said Georges Sassine, president of the Association of Industries of Haiti, which represents the country’s manufacturers. He predicts apparel production will be fully back online by the end of February. However, the industry faces some daunting hurdles, including getting safety certifications for all factory buildings, even those without visible damage, so production can begin in earnest. Starting Thursday, engineers from the U.S. and France began visiting factories with Haiti’s Minister of Public Works to start the certification process, Sassine said. Prior to the quake, 28 apparel and textile companies operated in Haiti. They employed 28,000 workers at last count, Sassine said. In one of the largest tragedies caused by the earthquake, the Palm Apparel factory, which manufactured T-shirts for companies such as Gildan Activewear Inc., collapsed, killing an estimated 500 workers.  <wwd.com>


Americans Agree: Quality Jobs Remain Hard to Find - As the Obama administration and Congress shift their focus to the economy and jobs after the State of the Union, Gallup polling suggests they need to consider quality as well as quantity. One in 10 Americans (9%) believe now is a "good time" to find a "quality job" -- a situation that has persisted over the past year, and a huge deterioration in job-market conditions from January 2007, when nearly half of Americans (48%) expressed optimism about finding a quality job.

R3: The Pause and Wait - G2

While Americans disagree about many things -- and rarely reflect an overwhelming consensus about anything concerning the economy -- their views about the lack of quality jobs are a clear exception; the total lack of optimism about the prospects of finding a quality job in January 2010 is consistent across ages, incomes, genders, and regions of the country.

R3: The Pause and Wait - G1


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