Fast Monkeys

“Never hold discussions with the monkey when the organ grinder is in the room.”

-Winston Churchill


If the early part of the 20th century had their organ grinders performing on the streets, the 21st century has CNBC. Given the repetitious nature of their consensus music, we must be very thankful. I don’t know what I would do without them.


Squeezing the monkeys has to be one of the funniest things to watch in modern day markets. After not focusing on sovereign debt when they should have, the manic media quickly becomes a perceived expert on everything Greek - right at the bottom of both European currency and stock market moves.


What does squeezing the monkeys mean? Well, in a short seller’s market, a monkey is the contra-indicator. He is the last primate to jump out of his tree and try to short something that’s already been in free fall for all other monkeys to see. Monkey see, monkey do.


Typically, the monkey lives in the Zoo of Consensus. So, you can really think about Greece like a banana – after the stock market has collapsed for a -35% down move, enter CNBC’s Fast Money monkeys to clamor for the last feeding.


The actual squeezing of the Fast Monkeys is plainly obvious to anyone watching from outside the Cage of Consensus. This morning, for example, one of the top headlines on Bloomberg is, “Stocks Rise, Greek Bonds Soar on Speculation of German Bailout.” That’s called the monkeys getting squeezed.


Having covered most of my commodity and international equity market shorts at the lows, I can call these monkeys out for who they are. If you don’t know what they look like, tune into the ex-football player with the braided ponytail and Joey, who pronounces Asia’s largest country “China-rrr”, at 5PM on CNBC. The only thing funnier than watching monkeys at the zoo, is watching these ones stare seriously into the camera.


So what to do from here? I think this is pretty straightforward actually. Let the monkeys chase one another all the way back up into their trees. Once they get really quiet again, feeling shame, it will be safe to start selling again.


So far, Greece’s Athex Index is squeezing the monkeys for a +3.9% move in early morning trading. This is after seeing the Greek stock market jam them for a +5% up-move yesterday. At the same time, Greek bonds have dropped 55 basis points overnight  (the biggest one-day move for that local bond market since 1998) and credit default swaps (CDS) in Greece have dropped -17% in a straight line.


Even though Greek CDS has dropped from +428 basis points at the peak of the monkeys yelping (February 4, 2010), credit default swaps are still 357 basis points wide this morning. To put that in context, THE magic risk management line for CDS at both Lehman and Bear Stearns was 300 basis points. So the monkeys are rightly worried about having no more Bailout Bananas, but they forgot the most critical part of this risk management game – timing.


I wrote about this 3 months ago, because I saw no irony in both the Greek and Middle Eastern stock markets locking in their recent cycle-highs on exactly the same day. On October 14th, both Greece’s Athex and the United Arab Emirates DFM Indices locked in their highs. Since, both markets have lost over one-third of that peak-to-trough value, and it’s critical to observe their collective behavior.


As all of the monkeys are clanging for the Germans to bailout the Greeks this morning, stocks in the United Arab Emirates are trading down almost -1.5%. I don’t see any media outlet talking about it yet, nor do I hear any of the monkeys.


For 2010 to-date the Greek and UAE stock markets (inclusive of this morning’s moves), are down -10.3% and -9.1%, respectively. Since October 14th, now they are both down the exact same percentage, -32%. Irony or simplicity? Chaos or complexity? Or is there no or in Bailout Banana?


The most recent Piling of Debt Upon Debt data points this morning are as follows:


1.       Romania wants to sell another 1 Billion Euros in Euro denominated debt

2.       Dubai World (UAE) is asking for a “freeze” on their $22 Billion Dollars in debt

3.       Yale University edges out Harvard in issuing a massive muni-bond deal ($530M of 2025 notes)


Tying all of these things together can be frustrating, particularly if you don’t have a repeatable risk management process. You need to have your feet on the floor before the entire zoo wakes up. You need to do it every day, including snow days.


There is no glory. There are no lights. But at least no one can call you a Fast Monkey.


My immediate term support and resistance levels for the SP500 are now 1048 and 1078, respectively.


Best of luck out there today,





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).


EWG - iShares Germany — We added to our position in Germany on 2/4/10 on 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.  

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.


RSX – Market Vectors Russia We shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.


XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


EWW – iShares Mexico Mexico short is a solid compliment to our concerns about sovereign debt risks and our bearish intermediate term view on oil.


EWJ – iShares Japan We re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 


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.


The Macau Metro Monitor.  February 10th, 2010.



The number of visitors to Singapore declined 4.3% to 9.7MM, but still exceeded forecasts of between 9 - 9.5MM visitors. Tourism receipts between January and December were S$12.4BN, similar to 2006 levels. Singapore Tourism Board said the business travel sector is picking up for 2010.


Jornal Tribuna de Macau reported that Macau Asia Express, JV between Air Macau (51%), China National Aviation Company and Shun Tak, is preparing for dissolution. Macau Asia Express lost its sub-concession with Air Macau because it failed to start operating before an August 21, 2009 deadline, due to its inability to find new investors.


Genting Singapore might open its Universal Studios theme park at RWS on Feb 11 and the casino on Feb 12. ECM Libra Research stated “With MBS slated to open between April and June, RWS will take the lion’s share of the Singaporean gaming market which we value at S$4bil. With two to four months lead time, avid Singaporean gamblers will opt to pay the annual levy of S$2,000 rather than pay S$100 per 24 hour visit and commit themselves to gambling at RWS.”


The Ministry of Public Security stated that Beijing will commence a crack down on online gaming and underground casinos, including illegal banks, financial institutions and websites that support illegal operations that will last through August 2010. The campaign will concentrate on investigating major and important cases of online gambling, shut down domestic and foreign groups that organize online gambling, and severely punish the criminal participants .


I never had a policy; I have just tried to do my very best each and every day. 

~Abraham Lincoln


Some might say that the positive bias in the S&P 500 on Tuesday was driven by the dampened RISK AVERSION trade following some positive news regarding the European sovereign credit contagion.  Yesterday was really all about the FEEL GOOD trade.  With the Dollar index and the VIX comfortable above the TREND and TRADE and not doing much of anything yesterday, the 1.3% rise in the S&P 500 is all about the New Orleans Saints winning the super bowl (it just took a day to sink in.) 


Seeing Bourbon Street come alive last night was amazing to watch.  I have never watched a super bowl parade until yesterday.  Four years after being ravished from hurricane Katrina, New Orleans is back and is a small metaphor for the USA.  It makes you FEEL GOOD knowing that someday the US recovery story will be well grounded under the right leadership!  Unfortunately, it still feels like the USA is in training camp. 


Sovereign credit contagion concerns have been among the strongest macro headwinds facing the global markets over the last few weeks, and while there no explicit EU backstop for Greece, the market had a more positive tone on the belief that there will be.  To use the line that Jerry Maguire made famous and Drew Brees is thinking - “show me the money.”


Yesterday’s performance made you FEEL GOOD about the global RECOVERY trade.  While some of the more defensive leaning sectors such as Healthcare (XLV) and Utilities (XLU) lagged the market, the two best performing sectors are leveraged to a global recovery - The Materials (XLB) and Energy (XLE).  A sell-side upgrade of the Industrials (XLI), rounded out the three top performing sectors. 


The Materials (XLB) sector was the best performing sector yesterday, on the back of dollar weakness.  The Dollar index has now declined for the past two days, declining 0.55% yesterday.  The Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64).  Within the XLB the Steel and Ag chemicals names were some of the strongest performers. 


Yesterday, the Consumer Discretionary (XLY) was the second sector to turn positive on TREND.  Helping the XLY was the above-consensus January global comps from MCD and some fairly upbeat commentary on the retail space.  A headwind for the XLY yesterday was the Homebuilders.  The strength is the housing recovery story is government sponsored and that sponsorship will start to disappear in 2Q10.  We remain very cautious on the housing recovery story!


The two notable underperformers yesterday were Technology (XLK) and Financials (XLF).  The banking group was a slight laggard, with both money-center and regional’s underperforming.  Yesterday we shorted CIT.  Josh Steiner wrote a great research note on CIT Monday after the media got too excited about John Thain entering the building.  In short, the cost of capital is a major issue that will not go away anytime soon.


As we look at today’s set up the range for the S&P 500 is 36 points or 2.0% (1,048) downside and 0.74% (1,078) upside.  Equity futures are currently trading above fair value, rallying on news Germany said to consider Greek aid beyond loan guarantees.  News about Europe (or Germany) offering Greece some life support continues to be a significant driver of the RISK AVERSION trade.  I still FEEL GOOD that the party in New Orleans will continue into Mardi gras next week.   The Hedgeye Risk Management models have the following levels for VIX – buy Trade (24.30) and Sell Trade (28.12). 


Copper is trading higher for a third day as January imports by China rebounded from last year.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.14).


The correlation for gold continues - gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,047) and Sell Trade (1,111).


The American Petroleum Institute reported that crude inventories rose to the highest since October last year and gasoline supplies reached the highest since March 1999.  Currently Oil is trading up slightly on the day!  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.02) and Sell Trade (77.27).


Howard Penney

Managing Director














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VFC: Right for the Wrong Reasons

VFC likely has enough gas in the tank to make numbers on Thursday, but we think that the consensus is right for the wrong reasons. We are in line with the street at $1.46 for Q4, and would not be surprised to see a beat (in typical VFC style). Next year they HAVE TO do a deal in order to hit estimates, which they are likely to do. Both forward trends and yy compares look decent for 2 quarters until then. These guys are wizards at financially engineering their way out of a negative growth scenario, and managing expectations accordingly. I don’t have any ammo to suggest that this will break fundamentally.


Revenue: Should print a flat to slightly down top line vs. a -2.2% last year. Then they go up against a -6.5% and -11.4% in 1Q and 2Q, respectively. This happens at the same time a 3-5% FX drag turns into a 2-3% tailwind.  Also, VFC has accelerated store growth and added almost 90 retail stores over the past 4 quarters, which naturally boosts sales as mix shifts to fully captured-retail sales instead of shared wholesale. Putting it into numbers, VFC grosses about 1.5mm annually per store, with about $400k in the fourth quarter. All said, we’re looking at a 1.5%-2% boost in revenue simply from the addition of VFC retail. So we’re looking at a boost from retail and FX and even a point in growth from acquisitions – which is in consensus numbers.  I’m not sure that the consensus knows why it’s right. But that might not matter.


Margins: Gross Margin compares are easy in 4Q and ridiculously easy in 1Q. And yes, both retail and FX will start to help. The consensus numbers only have a 1pt GM rebound in 1Q – even though they face a -3pt compare vs. last yr. Considering how FX was blamed for a good portion of 1H 08’s declines, it alone should get them a point in recovery. As guided, nothing major on SG&A, though higher retail costs will pinch a bit. I actually like how they’ve been investing in SG&A despite downturn over past 6 quarters. This makes them either careless, or good, proactive managers. They’re the latter.


Balance Sheet/Cash Flow: Inventories have been tight in 2009 and should continue in Q4 and 2010. Capex coming down this year to 1.5% of sales. Good near term. But can’t go any lower. It will need t go up next year, which will pinch cash flow later in the year. For now it’s a wash.


VFC: Right for the Wrong Reasons - 1


VFC: Right for the Wrong Reasons - 2


VFC: Right for the Wrong Reasons - 4

Good Old Germany

Position: Long Germany via the etf EWG


We got a bullish report on German imports and exports today for the month of December, with exports up 3% and imports +4.5% versus the previous month. Importantly for the export-heavy economy (exports account for ~ 40% of GDP), December’s reading could suggest an improving trend in 2010. With 5% contraction in German GDP last year and a 18.4% downturn in exports and 17.4% contraction in imports, compares will be easier in 2010.


While we still expect mild growth this year for Germany (and much of the Eurozone), the recent heightened market volatility in Europe over the PIGS affirms our view in owning a lower beta play and countries with “sound” balance sheets.  Although Germany, with a budget deficit that may swell to 5.5% of GDP, exceeds the Eurozone’s 3% limit, it’s a far cry from the 10-13% levels of the PIGS and double that of the USA.


Additionally, we’ve had our Hedgeyes on German inflation and employment, both of which have remained resilient over the last months since Germany returned to growth quarter-over-quarter in Q2 ’09.  CPI was up 0.8% in January Y/Y, in line with the Eurozone average of 0.9%. And while we haven’t ruled out a gain in unemployment over the intermediate term, which currently stands at 8.2%, we’d expect the government extension of subsidized short-time employment to mute significant gains. Stay tuned.


Matthew Hedrick


Good Old Germany - tradege



The Federal Reserve Senior Loan Officer Survey came out on Feb 1. There was no material change in trend from the last few surveys. That said, this survey did mark an inflection point of sorts in that the net percentage of banks tightening vs. last period was actually zero (for C&I loans). In other words, on average, banks have finally stopped tightening their lending standards on C&I. The following chart demonstrates. For reference, the chart shows a blend of the large, medium and small bank survey data.




The below chart looks back to 1992 and 2003 as the prior two instances when the banks stopped net tightening. Financials traded higher over the two-year periods following the point at which banks stopped tightening. However, we should point out that in both 1992 and 2003 Financials were relatively range-bound for the first 4-5 months thereafter, for the most part staying within a +/- 5% band. We use an equal-weighted basket of 20 mid-cap and large-cap banks that traded back to 1990 for our benchmark.




Banks are still tightening in some asset classes, however, such as CRE loans. The following chart shows that 30% of banks put the brakes even harder this quarter on the CRE front. That said, the trend clearly shows we're closer to the bottom than the top on CRE - an important read through to credit quality for the regional banks.




At the consumer level, banks continue to tighten on residential real estate loans.




Meanwhile, consumer demand for mortgage loans fell materially in the fourth quarter. The increase in prime residential mortgage loan demand dropped from +28% to -8% linked quarter, while the change in demand for nontraditional mortgages fell from -4% to -35%. Subprime data hasn't been recorded for 4 quarters now.




What we find really interesting is the fact that banks are now finally more willing to lend, but consumers are pulling back at a growing rate, even as unemployment is leveling off and starting to decline.




Conclusion. We think the conclusions are four-fold. First, Financials have historically risen in the wake of banks reaching the zero-line with respect to net tightening on C&I loans. The caveat is that they haven't done much for the first 4-5 months of that two-year period, which would correspond to Feb 2010 - June 2010. Second, commercial real estate tightening, while still underway, has fallen from 87% to 27% in the last 5 quarters in, more or less, a straight line. We think this bodes positively for regional banks with CRE exposure. Third, residential mortgage loan demand dropped in both the prime and nontraditional categories. We think this bodes poorly for future home price trends. Fourth, demand for non-mortgage consumer loans continues to drop at an increasing rate in spite of banks actually now easing their standards for such loans. This tells us that the consumer's demand for incremental credit continues to abate - a near-term negative for lenders, but probably a long-term positive for the country.


Joshua Steiner, CFA


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