Chipotle is scheduled to report 4Q09 earnings after the close tomorrow, and based on the company’s recent track record (as shown in the chart below), it will likely beat street estimates.  I am modeling EPS of $0.84 versus the street at $0.81.  If my number is right, this outperformance would not come even close to the 26% earnings upside in 3Q09, but as the chart below also shows, this earnings beat was still not enough to get investors excited as the stock traded down 8% the following day.


CMG – WHERE TO FROM HERE? - CMG eps vs estimates


Investors have become accustomed to better-than-expected earnings, so what has mattered more is the trend in top-line numbers.  In 3Q09, the 150 bp sequential slowdown in 2-year average trends helps to explain why the stock performed so poorly.  To that end, we could see the stock trade higher on Friday as my estimates assume +2.3% same-store sales growth, better than the street’s +1.4% estimate.  Going forward, however, I would expect comparable store sales trends to get worse as we move through 2010, even if traffic trends on a 2-year average basis get less bad, which should influence CMG’s stock performance.


Throughout the third quarter, CMG’s EBIT margins have improved on a YOY basis in 2009, with the company operating at peak margins during 2Q09 and 3Q09 of 15.1% and 14.5%, respectively.  The company’s return on incremental invested capital has also moved higher in 2009.  These peak margins and returns are also reflected in CMG’s peak multiple.  The company is currently trading at nearly 11x on a NTM EV/EBITDA basis relative to the QSR average of 8x.


I have previously said that a restaurant company’s stock price performance is often highly correlated to the direction of returns and as the second chart below shows, this has been true for CMG.  The current direction of returns often impacts if a stock will move higher or lower and CMG’s trajectory of returns as of 3Q09 puts CMG in a seemingly favorable position.  So the most important question is whether the next leg is up or down and as I see it, CMG’s peak margins and returns are likely to roll over. 


CMG – WHERE TO FROM HERE? - CMG ebit margin 3Q09




In 4Q08, CMG rolled out a 6% incremental price increase, which helped to leverage the company’s P&L at a time when traffic was negative and deteriorating further on a 2-year average basis.  The 6% pricing impact from 3Q09 will come down in 4Q09 to +2.5% as we lap the 4Q08 price increase.  The company will have flat pricing as of January 1 and as of the last earnings call, did not expect to take any pricing in 2010 until management saw an uptick in consumer spending. 


My +2.3% same-store sales estimate for 4Q09 assumes some improvement in traffic trends on a 2-year basis (most likely the primary difference between my higher same-store sales estimate and that of the street’s) as we have seen sequentially better numbers in the fourth quarter from those restaurant concepts that attract higher income consumers.  Even so, EBIT margins should begin to roll over in 4Q09 from the peak levels earlier in the year.  I am expecting continued YOY margin growth but of a lesser magnitude than in the prior three quarters.  Some of this sequential decline in margins is explained by the fact that the fourth quarter typically results in lower margin and also the company is opening considerably more restaurants during the quarter, which implies higher preopening expenses and increased inefficiencies on the labor line.  The roll off in pricing also removes some of the leverage in the model and will have a bigger impact in 1Q10 when I would expect margins to begin to decline on a YOY basis.


Also impacting margins in 2010 is the fact that the company is forecasting low single digit food and labor cost inflation after getting significant leverage on both these expense lines in 2009.  In describing the gives and takes in its operating model, management stated on its last earnings call, “The way to think about it is in a perfect world if there was zero inflation and you had zero comps, our margins would hold up exactly as they are today. If you have a little bit of inflation - let's say it's 1% inflation across the board, across labor, across food, across everything - that would hit your margin for about 70 basis points; 2% inflation across everything would hit you for about 140 basis points.”  As I just said, management is not expecting zero inflation, but is expecting flat comps and the resulting impact on margins is obvious.  To be fair, management’s comp guidance assumes no improvement in consumer spending, so it might be somewhat conservative, and a lot will depend on whether management changes its stance on pricing in 2010. But, as I see it, operating margins are coming down in 2010.


Declining margins never bode well for returns and in my opinion, nor will the company’s new real estate strategy.  In 2010, CMG currently plans to open 120-130 new restaurants, even with the expected level of openings in 2009.  However, due to the “recent pressure on developers and the corresponding reduction in number of new developments currently available for [CMG] to buy or lease” (as cited by the company), CMG is now pursuing a new real estate strategy.  In the past, the company only opened restaurants in what it deemed “tier 1” trade areas.  Going forward, management plans to still open about two-thirds of its new units in these “tier 1” areas, but due to the limited number of opportunities, it will also pursue what it is calling “A model sites,” which it says are “tier two trade areas which still have attractive demographics typically characterized by lower occupancy costs and develop for a substantially lower investment cost.”


This new strategy will put pressure on new unit AUVs as the A model sites are expected to generate about $1.1 million in sales volumes, which is below the company’s average opening range of $1.350 million to $1.4 million.  In the past, CMG has built two-thirds of its new sites in proven markets, which yields opening volumes above its average new unit volumes and one-third in new and developing markets, which come in below average at $1.1M.


For 2010, CMG is planning to build 25% of its new openings as A model locations.  Initially, CMG said it will build these A models in proven markets, which means these relatively lower AUV new builds will take away from the higher volumes typically generated in proven markets.


Tier 2 sites are still expected to achieve cash on cash returns in the mid 30% range because the lower development, occupancy and operating costs will offset the lower expected sales volumes.  These new “A model sites” will not pose a problem should they generate the expected returns, but it always concerns me when a restaurant operator appears to be compromising its real estate decisions in order to maintain growth.  The fact that the company said it will pursue as many tier 1 locations as it can implies that they are still the preferred sites.  To that end, the tier 2 locations signal less discipline on the part of the company for the sake of maintaining growth.  These types of compromised real estate decisions often lead to declining returns.  And, increasing penetration of proven markets could put the company at risk of cannibalizing sales going forward.  That would not be a new story for a restaurant company.


Howard Penney

Managing Director

JNY: ‘They’re Baaaaack!’

JNY:  ‘They’re Baaaaack!’


JNY is morphing back to its old value destroying self again – both financially and behaviorally. JNY may have one quarter left of salvation, but then it’s gonna get ugly. The market is blissfully unaware of what lies ahead.



In case you weren’t counting, three of the seven analysts on the JNY call congratulated JNY on ‘a quarter well done.’  Am I the only one that hates when I hear someone being congratulated for doing their job – and a mediocre one at that? How’s that for a company that preannounced negatively a week ago, and put up a loss of $125mm thanks to yet another write down of its marginal assets.


I increasingly do not like this name. I’ve avoided being on the short side for the past three quarters as management simply had too many easy levers to pull to maintain momentum -- regardless of whether these levers should be pulled at all. Now we’re at a point where the incremental upside will be tougher to come by.  


Let’s consider the facts…


1. Wholesale Better Apparel (29% of Revenue and 55% of cash flow): Just printed an 11.2% margin – up 128bps from a year-ago. This margin absolutely HAS TO hold, which is a stretch. With so-called ‘bad business’ already having been pruned (i.e. lost), the natural mix shift to a better book is not going to recur. JNY will get about a 3% top line boost due to its Rodriguez acquisition and from jump ball business created by LIZ hopping in the sack with JCP. But on the same token, with LIZ no longer at Macy’s whim, JNY will see added pressure for markdown dollars at quarters’ end by the 900lb gorilla – even if it is not JNY product that is not selling through. This also holds true for Jeanswear and Footwear.


2. Wholesale Jeanswear (24% of revenue and 35% of cash flow): Let’s face an ugly reality. This business just printed a +3.5% top line, but a 385bp improvement in segment margins, and it just highlighted a major roll over this quarter in top line due to anniversarying a big push last year with l.e.i., and increased competitive pressure. This was also the source of JNY’s asset write down. Margins in ’10 are not looking good here.


3. Wholesale Footwear (26% of Revenue and 30% of cash flow): This business is the poster child for a wholesale business that benefitted from the boot cycle. Could it last another quarter? Maybe. Another year (of sequential improvement in trajectory of boot sales)? Not likely – by a long shot. The company is guiding for 4-9% top line growth for ’10. This looks like a stretch without meaningful margin erosion.


4. Retail: (21% of revenue and -20% hit to cash flow): Here’s where I’m most concerned. JNY is in store closing mode, and 1Q alone should see a double digit revenue hit due to 50 fewer stores, and that should accelerate to 165 stores by end the of the year (it closed 96 in 2009). Also, retail has been a beneficiary of the boot cycle – something that’s not likely to recur in 2010. Management is on record as saying that it will break-even at retail this year. That might seem impressive in looking at the $41mm loss JNY just printed at retail. But read the fine print – that is ‘before corporate allocation.’  We estimate about $40mm in corporate expenses, or about $12mm at retail. So ‘breaking even’ actually equates to losing a double-digit number in what is reported to the Street. You can’t cut a business to profitability long-term. Ultimately you need to sell stuff that the consumer wants.


5. Balance Sheet: Lastly, let’s consider this thing called the balance sheet. On the plus side, JNY printed a commendable 18 point spread between sales growth and inventory growth. But how much longer is that sustainable for? Working capital should be helped by store closures, but keep in mind that in 2009 working capital was accretive to cash flow from operations to the tune of 29%. That’s the SAME year when capex as a percent of sales came down to 0.9%. Yes, boys and girls, that’s 0.9%. Can someone find me any company that touches this industry that can sustain a capex rate below 1%. Thanks in advance. In fact, JNY already guided that capex is going up to 1.5%, or about 55-60%.


6. Buy, Buy Buy. Another note on cash. JNY did not buy back stock this quarter, and in fact it issued a small amount. The company said flat-out that it is in full-on deal mode. No stock repo, no debt paydown. They’re gonna buy something. Let’s look back at JNY’s track record of acquisitions. Actually, let’s not. It’s too depressing. Just take a quick glimpse at long-term return on capital.


The bottom line here is that JNY is easing back into the ‘old Jones’ mindset. Cut when you should invest, and acquire when you can, not when you should.  Let’s not forget that this is a company that historically traded as low as 3-4x EBITDA and 9-10x EPS, and had up to 35% short interest. Today it is at 6x EBITDA, 14.5x earnings, and has a paltry 6% short interest. Some might argue that 6x EBITDA is not expensive. And overall, it’s probably not – IF they believe in the stability of cash flow. I’ll go to the mat with them on that one!


-Brian McGough


JNY:  ‘They’re Baaaaack!’ - jny


JNY:  ‘They’re Baaaaack!’ - jny2



Risk Management Time: SP500 Levels, Refreshed...

This tape definitely has the continued potential to frustrate people. I think we are going to continue to trade in a range with a bearish bias.


Chasing the snap-back intraday rallies is going to be a monkey’s game. Shorting/Selling the high end of the range and Buying/Covering the low end should really drive some alpha. I outline this range (1044-1076) in the chart below. Unless we can clear and close above the 1076 line (dotted red), I think we’re going to keep grinding between 1044 and 1076.


Because plenty of the monkeys have been distracted with European sovereign debt news doesn’t mean the rest of global macro ceases to exist. There are 2 big game changers out there that are mutually exclusive to where Greek CDS trades on a tick:


1.       The US Dollar

2.       China


On the US Dollar front, the Buck Breakout looks poised to continue, making a series of intermediate term higher-highs and higher-lows. Staying ahead of Bernanke’s changing rate rhetoric should lead you to water on your US Dollar positioning. What is good for the dollar is bad for reflation trades, commodities, etc.


On the Chinese front, tonight we are going to get another inflationary CPI report. While the precedent for one of those inflation scares is backward looking (last month), it really started China’s recent -10% correction. It deserves your risk management respect.


China was up +1.1% last night and could easily get rocked tonight. If that happens, I’d consider an SP500 test of 1044 probable in the next 3 trading days.



Keith R. McCullough
Chief Executive Officer


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



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He Who Sees The Light?

If you didn’t know why everything “reflation” has been getting crushed for the last 3 weeks, now you know…


In a refreshingly objective prepared statement today, Ben Bernanke said the Federal Reserve will raise the discount rate “before long”…


Make no mistake folks – this is an explicit change in the Fed’s language. I have been saying for some time now that the current language of “exceptional and extended” was both unsustainable and unreasonable. Apparently the Greenspan Group-thinkers are starting to see the light.


My immediate term downside target in the SP500 is now 1044. I am not in the camp that a Fed hike (or implied hike due to the change in the language) is going to crush stocks to smithereens. I simply think they are going lower, for now.


Goldman Sachs has set unreasonable expectation that the Fed is going to maintain a zero percent rate policy in perpetuity (until 2012).


As Shakespeare said, “expectations are the root of all heartache.”



Keith R. McCullough
Chief Executive Officer


He Who Sees The Light? - bernspan


R3: SNAP Participation Growth Slowing


February 10, 2010


We’ve been tracking food stamp usage as a proxy for the low income consumer and the trends have been quite alarming for just over two years.  However, the recent monthly data (through Nov ’09) suggests a slight change on the margin in the year over year growth trajectory of SNAP participation.  





So you may be scratching your head with the title. What the heck is SNAP? SNAP is the Supplemental Nutritional Assistance Program, formerly known as the Federal Food Stamp program. We’ve been tracking food stamp usage as a proxy for the low income consumer and the trends have been quite alarming for just over two years. However, the recent monthly data (through Nov ’09) suggests a slight change on the margin in the year over year growth trajectory of SNAP participation. Slowing growth in the number of Americans receiving benefits is flat out positive for our country. The flip side here is that this may be yet another factor in a slowing trend for those retailers (DG, FDO) that cater to consumers relying on SNAP. This is definitely something to watch. Take a look at the shorter and longer term trends below-


R3: SNAP Participation Growth Slowing - SNAP and FDO and DG


R3: SNAP Participation Growth Slowing - Food Stamps Historical




  • In an effort to source some creativity from new places, Bloomingdales flagship 59th location has conducted open casting calls for designers. However, the designers are not being sourced for apparel but rather to decorate the store’s prime window displaces. So far the company has recruited two different design bloggers to create window displays. The current Helmut Lang windows were designed by a DIY blogger who authors a site called P.S –I Made This.
  • Despite the push by marketers to tap into the “real” opinions and views of consumers via social media, a recent study by the Edelman Group may suggest this “authenticity” isn’t as pervasive as it seems. According to the Edelman Trust Barometer, the number of people who view their friends or peers as credible sources of information about companies dropped from 45% to 25% since 2008. Other information sources such as TV, radio, and newspapers showed substantial declines in their “trust” levels as well. The key conclusion from the study goes on to suggest that that American consumer is “scarred” from the last 18 months and is now much less willing to trust a single source of information when making a purchase decision.
  • After we highlighted Wal-Mart’s efforts to consolidate its vendor base and narrow its SKU count in the CPG aisles, Gildan confirmed that the same approach it being taken in apparel. In the case of GIL, they are one of the key beneficiaries of these strategic moves with their underwear program presented under the Starter brand name.




Target enables customers to redeem gift cards through their mobile phones - To redeem a gift card, one must remember to bring it to a store. Not anymore at Target Corp., where consumers at any of its 1,740 stores need only remember to bring their mobile phones. Target shoppers can save gift card information to their accounts, either through or the mass merchant’s mobile site When at a register, a customer with an Internet-enabled phone can access her card information, which pulls up a 2-D bar code. A clerk scans the bar code on the phone’s screen and the amount is taken off at the register. “The addition of Mobile GiftCards to our suite of mobile shopping solutions further simplifies the Target experience for our guests,” says Steve Eastman, president of Target is among the first American retailers to deploy the necessary scanning hardware to scan two-dimensional bar codes, which are popular in Japan. Larger retailers like Target using 2-D bar codes could create a trend in the U.S., some experts say.  <>


Walt Disney Japan Buys Retail Networks - All shares of Retail Networks Co., operator of Disney Stores in Japan, were recently acquired by The Walt Disney Company, Japan. RNC was a wholly owned Oriental Land subsidiary. In the recent acquisition, RNC will continue to run Japan's Disney Stores, but now as a wholly owned Disney subsidiary, beginning on April 1. Financial details were not disclosed.

Oriental Land is the operator of Disneyland Tokyo. <>


Marc Jacobs Sues Ed Hardy - Marc Jacobs has filed an infringe‑ment lawsuit against Ed Hardy parent company Nervous Tattoo Inc. over a handbag design. The complaint, filed by Jacobs’ Marc Jacobs International, centers on an Ed Hardy handbag the Jacobs firm claims infringes on its pending Scrambled trademark and the trade dress associated with its Pretty Nylon tote. According to court exhibits, the Ed Hardy bag at issue is a quilted tote with the brand’s name in stitched block print, features shared by the Jacobs Pretty Nylon bag. The Jacobs bag has been available since early 2007, according to the complaint. Attorneys for Jacobs wrote that the tattoo-based brand’s bag makes use of a trade dress that is “confusingly similar” to their client’s and that any infringement “has been intentional and willful, calculated specifically to trade off the goodwill that plaintiffs have developed in their successful Marc Jacobs Pretty Nylon tote bags.”  <>


Bergdorf's Opens Children's Department - When it comes to children’s wear, Bergdorf Goodman isn’t kidding around. A 1,200-square-foot shop on the seventh floor for infants to size 6, with a floor-to-ceiling tree house, opened Tuesday. It’s called Little BG and displays a mix of traditional and contemporary styles and designer brands, which suggest you’re never too young to be chic. For a relatively small department, there’s a wide range, from suitings to casual sportswear, as well as Steiff mohair stuffed animals, sterling silver gifts from Monica Rich Kosann, rattles, rocking horses and keepsake boxes. The department is particularly comprehensive in layette, with a collection of hand-embroidered footies and playsuits made from soft Pima cotton, Italian-made cashmere booties, onesies and receiving blankets, and Moses baskets and gift sets.  <>


25% of the top 100 retailers have no formal Facebook presence, says study - 

A quarter of the top 100 retailers in the Internet Retailer Top 500 Guide have no formal Facebook presence and another quarter have fewer than 10,000 fans, according to a new study from customer satisfaction measurement firm ForeSee Results Inc. That means that those retailers are missing opportunities to engage consumers, says the report, since of the 69% of online shoppers who say they use social media sites 56% follow at least one retailer on at least one social network. Shoppers who interact with a company on a social media site report being more satisfied, more committed to the brand and more likely to make future purchases from that company. The study found that 49% of respondents who become a fan of, or follow, a retailer do so to learn about special deals and options, 45% to learn about products, and 5% for customer support. That’s exactly what marketers want to hear from consumers, says Ertell. <>


E-retail spending finished flat for 2009, comScore says - A strong holiday season kept online retail from finishing 2009 in negative territory, and offers hope for a better year for e-retailers in 2010, web measurement firm comScore Inc. said in a report released today. E-retail sales trailed the prior year for most of 2009, but year-over-year gains of a few percentage points in November and December allowed e-retail to finish the year at $129.8 billion in sales, essentially unchanged from $130.1 billion in 2008. The holiday season comeback “does suggest that the tides of consumer sentiment are beginning to turn and that 2010 may be a healthier year for retail e-commerce,” noted comScore’s report, “The 2009 U.S. Digital Year in Review.” Despite the fall-off from growth rates that were consistently in double digits before slipping to 6% in 2008, the web remains a relative bright spot for retailers, comScore says. “New buyers continue to enter the channel, and as average spending per buyer rebounds off its 2009 lows, the e-commerce channel should return to healthy growth rates,” the report says.  <>


Sales at Wholesalers Climb, Stockpiles Decrease -  Sales at U.S. wholesalers climbed in December for a ninth consecutive month, leading to an unexpected drop in stockpiles that may keep spurring orders. Purchases increased 0.8 percent after a 3.6 percent gain in November, the Commerce Department reported today in Washington. Inventories fell 0.8 percent following a revised 1.6 percent increase that was the largest in more than five years. A record inventory drawdown last year has opened the door for factories to pick up production, leading a recovery from the worst recession since the 1930s. Another report showed job openings climbed in December for the first time in three months, signaling employers are gaining confidence the expansion will be sustained in coming months.  <>


U.K. January retail worst in fifteen years - Despite the Christmas sales which boosted the UK's fashion retailers, January saw the lowest sales growth in fifteen years. UK retail sales values fell 0.7 per cent on a like-for-like basis from January 2009, when sales had risen 1.1 per cent. On a total basis, sales rose 1.2 per cent against a 3.2 per cent increase in January 2009. The snow and terrible weather hit the retail sector, especially discretionary items. Over the month, clothing and footwear showed gains on a year ago, but other sectors, like homewares and furniture showed declines.  <>


European Outdoor Group Restructures Board - Members of the European Outdoor Group (EOG) elected Monday a new president and agreed to restructure their board. “As the industry itself changes, the European Outdoor Group has felt it necessary to restructure to ensure the appropriate flexibility to accommodate the requirements and demands of its growing membership and the industry itself,” said Mark Held, secretary general, of the EOG. From the existing EOG Board, Albrecht von Dewitz of Vaude, announced his decision to step down from the Board. Rolf Schmid of the Mammut Sports Group, has stepped down as president and Claes Broqvist of Odlo, has stepped down as vice president. Both Schmid and Broqvist will remain on the board as ordinary members and this will aid continuity and ensure the EOG retains experience. Bernd Kullmann of Deuter has been elected as vice president and Jean-Marc Pambet of Salomon and Eddy Codega of C.A.M.P. have formally joined the board.  <>


Education costs top consumer price increases since 1990 - Prices paid by urban consumers in 2009 for a sampling of goods and services increased the most since 1990, especially for items heavily influenced by government policies. The cost of education increased by more than 200 percent during the 20-year period, followed closely by the cost hikes in health care and fuel, according to data gathered by the Bureau of Labor Statistics for the Consumer Price Index. The index, which will be released for January next week, measures buying habits of urban wage earners and clerical workers. The index is used as an economic indicator -- to measure inflation, for example, and as a means of adjusting the value of a dollar. On the other side, the cost of personal computers declined by nearly 90 percent, leading the list of price drops on items tracked by the Bureau of Labor's CPI index. Other large drops were seen in the costs of TV sets, audio equipment, toys and photographic equipment. The cost of all items in the index increased by more than 71 percent from 1990 to 2009, the American Institute for Economic Research analysis of CPI data shows. <>


Gallup Economic Weekly: No Super Bowl Boost - No change in economic confidence, job creation, or consumer spending last week. Falling stocks, a lower unemployment rate, winter storms, and even the approach of the Super Bowl and the parties that surround it seem to have had little impact on American consumers last week, as Gallup's Economic Confidence Index was unchanged at -29 -- virtually the same reading as those of the prior three weeks. Job market conditions also remained essentially the same, as Gallup's Job Creation Index was at 0 -- compared to -1 the prior week and 0 for the week ending Jan. 24. Even with parties to hold and paychecks in hand, self-reported consumer spending remained unchanged at an average of $60 per day last week.

R3: SNAP Participation Growth Slowing - G1

What Happened (Week Ending Feb. 7)

  • Economic Confidence was unchanged once again last week, as Gallup's Economic Confidence Index stood at -29. Forty-eight percent of Americans rated the economy "poor" and 11% rated it "excellent" or "good." Thirty-seven percent said the economy is "getting better" while 57% said it is "getting worse." Consumers' mood seems largely unaffected by weekly events these days, as economic confidence remains flat. Not only did the Super Bowl seemingly make no impact, but neither did the plunge in the stock market nor the global credit market concerns that spawned the plunge.
  • Job Creation inched back to 0 last week from -1 the prior week -- matching conditions of two weeks ago. Twenty-four percent of employees reported that their companies are hiring and 24% said their employers are letting people go. Both hiring and firing activities have shown virtually no variation so far in 2010 -- a situation that might not be so bad if overall job market conditions weren't so bleak.
  • Consumer Spending continues to disappoint. Last week's Super Bowl preparations -- particularly because it was a paycheck week -- might have encouraged consumers to increase their spending, at least on the margins. Instead, self-reported daily spending in stores, restaurants, gas stations, and online was flat, averaging $60 per day -- the same as the prior week and identical to spending during the same week a year ago. Evidence continues to mount that what turned out to be a "new normal" for spending during most of last year may also characterize consumer spending during the first part of 2010 -- if not longer.

R3: SNAP Participation Growth Slowing - G2


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.

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