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The Angry Client

“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.”

-Friedrich Nietzsche


With every crisis, there comes both a cost and an opportunity. One of the most obvious costs coming out of the global financial crisis is trust. Whether it be between the American people and Washington or China and Washington, it’s all one and the same. No one trusts Washington.


When people lie to you, you get upset. When those same people start telling you what to believe, you get angry. This morning you are seeing headlines from China’s Premier Wen Jiabao who is going after Washington for “finger pointing.” The Client is angry.


As he wound down his parliamentary meetings last night, Wen said, “we oppose countries pointing fingers at each other and even forcing a country to appreciate its currency” and then he focused his finger on America in saying that it needs to “take concrete steps to reassure investors” that there is “safety” in dollar based assets. Translation: put a muzzle on Chuck Schumer, and focus on fixing your own balance sheet problems.


For the past 18 months we have affectionately labeled China, The Client. So who is The Angry Client? Is it the conservative American saver who gets zero percent returns on their hard earned savings accounts so that the Piggy Banker Spread can get Wall Street stocks and bonuses back on track? Or is it America’s Chinese creditor? It’s both.


Per its Premier’s comments last night, here’s a focus list of what angers The Chinese Client:

  1. US Dollar Policy
  2. US Fiscal Policy
  3. US Trade Protectionism
  4. US Foreign Policy on Weapons Sales to Taiwan
  5. US President Obama meeting with the Dalai Lama
  6. US Corporates attempting to set Foreign Policy (Google)

Per its citizens last week, here’s a focus list showing the anger of The American Client:

  1. AFTER the SP500 ramped +3.1% in the 1st week of March, the ABC/Washington Post Consumer Confidence reading remained at minus -49 (vs. -49 in the wk prior). Just awful.
  2. AFTER the SP500 has ripped those Selling Fear in February for a +8.7% move to the upside (Feb 8th to March 12th), Friday’s University of Michigan Consumer Confidence report put in a lower-high, decelerating to 72.5 in March versus 73.6 in February.
  3. AFTER putting the rest of America on hold for his final countdown healthcare tour, President Obama’s approval rating hit a new low last week (The Rasmussen Reports daily Presidential Tracking Poll for Wednesday showed that 22% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (43%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21. That matches the lowest Approval Index rating yet recorded for this President).

Yes, willfully blind ones of the Bubble in US Politics, you have a secular problem on your hands. It’s called trust, and it can’t be bought and paid for like your political careers. You can tell me I am lying, but the score doesn’t. Despite a 69.9% rally in the SP500 since March 9th of the 2009 said “great depression”, this is one of the most explosive global votes of no-confidence that we have ever seen. Ever, is a long time.


So where do we go from here? I’m not smart enough to solve for this, so I say every man for himself. We already have raised a 61% position in cash in our Asset Allocation Model. We have a 6% position in US Equities entirely allocated to Healthcare (XLV) because we don’t trust Nancy Pelosi will be successful scaring the horses with reform much longer. We are short the SP500 (SPY) after it made a lower-high on Friday, closing at 1149.


As opposed to the bullish conviction I started to build in the spring of last year, now I do not think that the answer on where global equity, currency, bond, and commodity markets go from here is as clear. In a new world order that doesn’t have trust, what else is there to move forward with?


Accepting that uncertainty drives a dynamic and interconnected global marketplace is a good place for us all to start. With that said, I can tell you with 100% certainty, that the US stock market is either going up or down from here and our collective distrust for those running this joint will remain.


My immediate term support and resistance lines for the SP500 are now 1135 and 1160, respectively.


Best of luck out there today,





CAF – Morgan Stanley A Share — Now that all of the inflation data we have been calling for is on the tape, China's stock market looks like it wants to tell us the news is now baked into the expectations cake. Buying China low.


XLV – SPDR Healthcare — Healthcare was down again on 3/9/10 in the face of “Obamacare” inspired fear. While we fear we may be early here, it’s better than fearing fear itself.


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).

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.



FXE – Currencyshares EuroWe've been saying the shorts would get squeezed to the top end of our immediate term TRADE range for the Euro at $1.37. And they have. Timing is always critical. We took our shot on 3/12/10. 


SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE again on 3/5 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


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


The S&P 500 was little changed on Friday after trading in a relatively narrow range, while volume improved 7% day over day.  On the MACRO front, last week ended with mixed signals from the February retail sales (slightly better) and the March University of Michigan Confidence data (disappointing).


On Friday, February Retail Sales were +0.3% vs. consensus (0.2%); ex-autos +0.8% vs. consensus +0.1%.   Rising gas and food prices, accounted for nearly 60% of the monthly gain in February sales and over 100% of the revised January sales data.  We continue to believe that inflation issues that the consumer faces are real and are supportative of our belief that the FED is behind the curve on its interest rate policy.


The inflation the consumer feels in his wallet is being played out in the lack of confidence.  The March preliminary University of Michigan Confidence came in at 72.5 below consensus of 74.0 and a final February reading of 73.6.  Despite a 70% move in the S&P 500 since the lows last March, Americans don’t trust the rally. 


Despite the stalled confidence figures, Consumer Discretionary (XLY) continues to be the “pain trade.”  The XLY was the third best performing on Friday, last week and year-to-date.  The better than expected February retail sales helped retail overcome an unexpected drop in confidence and a downward revision in January Retail Sales.


The Dollar index traded down for three straight days last week, declining 0.6% on Friday.  The Hedgeye Risk Management models have levels for the volatility Index (DXY) at:  buy Trade (79.79) and sell Trade (80.82).  Dollar weakness provided a tailwind for Materials (XLB) and parts of the REFLATION trade.   


Volatility lost 2.7% on Friday, but gained 0.9% for the week.  The VIX continues to be broken on TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.10) and sell Trade (19.22). 


As we wake up today, equity futures are trading below fair value ahead of a week which includes a number of key MACRO data points on inflation, housing, and industrial production reports and a FED policy meeting.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.3% (1,135) downside and 0.8% (1,160) upside.


Today's MACRO highlight will be:

  • Empire Manufacturing
  • TIC Flows
  • US Industrial Production for February
  • US Capacity Utilization for February
  • NAHB Housing Market Index for March

In early trading, copper is trading lower, extending the decline from last week’s loss on concerns that China will continue to slow growth after inflation rose to a 16-month high.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.23) and Sell Trade (3.39).


Gold is trading higher in early trading higher after hitting a two-week low last week.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,122).


Crude oil is trading lower for a second day ahead this week’s OPEC meeting in Vienna.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.57) and Sell Trade (83.10).


Howard Penney

Managing Director














Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Week Ahead

The Economic Data calendar for the week of the 15th of March through the 19th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Who Do Americans Trust?

We held a very interesting in-house conference yesterday in New Haven. Our goal was to take half a day, away from our screens, to think.


One of our latest hires, Diego Scataglini, talked about trust and how American society is losing theirs. Interestingly, almost 4x the amount of people in America believe in ghosts than they currently trust in the US government.


This isn’t a political point. This is a point about politics. AFTER the US stock market has tacked on a +70% rally to the upside, and AFTER the entire global economy has recovered from the said “great depression” of some who missed an annual bonus, this is what you get – the score:


1. AFTER the SP500 ramped +3.1% last week, the ABC/Washington Post Consumer Confidence reading remaining at minus -49 (vs. -49 in the wk prior).


2. AFTER the SP500 has ripped those Selling Fear in February for a +8.8% move to the upside (Feb 8th to March 12th), this morning’s University of Michigan Consumer Confidence report put in a lower-high, decelerating to 72.5 in March versus 73.6 in February (see chart below).


3. AFTER his final countdown healthcare tour, President Obama’s approval rating hit a new low this week (The Rasmussen Reports daily Presidential Tracking Poll for Wednesday showed that 22% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (43%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21. That matches the lowest Approval Index rating yet recorded for this President).


What gives?


Americans don’t trust the rally, and Americans don’t trust the government. Now that the immediate term (TRADE) bubble in gold has popped, and the intermediate term (TREND) bubble in US Treasuries keeps popping, I guess the only bubble we have left to make a call on is the one that we have held out on our longest duration (the TAIL) – the Bubble In US Politics.


Its sad, but these numbers don’t lie; politicians do.



Keith R. McCullough
Chief Executive Officer


Who Do Americans Trust? - um


R3: Three for Friday


March 12, 2010


This morning we highlight three earnings reports from three totally different businesses that reported over the past 24 hours. Yes they were all positive relative to expectations, but underlying the results are some interesting callouts.





This morning we highlight three earnings reports from three totally different businesses that reported over the past 24 hours. Yes they were all positive relative to expectations, but underlying the results are some interesting callouts.


ZQK- Clearly on track here toward a recovery in margins, driven primarily by very tight inventory management. Inventories ended the quarter down 21%, with about two-thirds of the decline coming from the company’s domestic segment. This is a dramatic decline in light of what was only a 2% decline in revenues. Additionally, management now expects to see about $75 million in free cash flow this year vs. prior expectations for $50 million. While it is clear that the risk profile of ZQK has been substantially improved over the past year, the key question here will be if the reduction in inventory may now actually inhibit sales recovery in the near term.


R3: Three for Friday - ZQK SIGMA


ARO- Another slight beat for Aeropostale after earnings moved higher throughout the quarter. No surprise here. What is more interesting is the company’s focus on driving AUR’s higher over the course of 2010. This is clearly a key focus because it will be absolutely necessary if the company is going to drive same store sales higher on top of very difficult comparisons throughout much of this year. Management believes it can drive AUR’s higher in two ways- adding more fashion product to the mix at higher price points and through more effective use of technology which will reduce markdown exposure. Both strategies appear to be slightly more risky than the traffic driven gains that have been a dominant factor in the company’s outsized growth over the past year.


R3: Three for Friday - ARO SIGMA


HIBB- This morning’s strong 4Q results from HIBB are not exactly a surprise given recent positive sales read-throughs out of both FL and DKS, as well as the anticipated boost from a couple of one-time benefits (i.e. Alabama and New Orleans football championships). That said, there are some notable callouts. Comps up 9.6% reflects a massive acceleration on both a 1Yr and 2Yr basis – a statement that holds true even when considering core comps were roughly +6% (ex the 1x events). Inventories continue to improve as evidenced by the first positive sales/inventory spread in the last four quarters. Despite some speculation about whether or not the company was going to give guidance, an initial fiscal 2011 outlook of $1.12-$1.30 was provided (Street at $1.18). Similar to Foot Locker, with a portfolio over indexed towards NKE product (50%+), we believe the company is well-positioned to benefit from the impending improvement in the product cycle which will be beginning over the next 3 to 6 months.


R3: Three for Friday - HIBB S 3 10




  • Quicksilver noted that its strongest performing region was the West Coast in its company owned retail stores. However, unlike most retailers, its business in Florida has not shown a sustained pick-up yet. 
  • PacSun management noted that efforts to re-enter the footwear business during the holiday were limited by small assortments available only in select stores. By March, the company expects to have a broader assortment available in 200 doors, with a ramp in product depth and store penetration building into back-to-school. 
  • Williams Sonoma remains focused on increasing the productivity of its ecommerce business and believes there is still a great opportunity to increase conversion on its sites. A 30 bps improvement in conversion would yield an additional $100 million in revenues. The company is currently testing technology to serve personalized or tailored content to its customers in an effort to boost purchase behavior. 
  • After a brief test phase, Google rolled out a new search feature which allows consumers searching for a specific product to see if the item may be in stock at a local retailer. The initial launch includes local in-store inventory information for retailers including Best Buy, Sears, Williams-Sonoma, Pottery Barn, and West Elm. While this technology has existed for individual retailers on their respective sites, this is one of the first efforts to aggregate local inventory data on a real time basis. 




Abercrombie Will Keep Discounting - Abercrombie & Fitch Co. said Wednesday that it will continue its uncharacteristically high levels of discounting through the spring in order to boost store sales. Jonathan Ramsden, chief financial officer of the New Albany, Ohio, teen clothing retailer, said it is willing to sacrifice margins if necessary to improve sales. Average unit prices, which were down 14% in February on higher discounting, will continue to be "down quite significantly" for the first half of the year, Mr. Ramsden said. The company accept some "gross margin erosion for the season" so long as it is "effective in increasing productivity," Mr. Ramsden said at a Bank of America investors' conference. Abercrombie, which also operates the Hollister and Gilly Hicks brands, reported sales at stores open at least a year declined dramatically in 2009. After a string of double-digit monthly decreases, the company is focused on posting sales increases this year. Mr. Ramsden said it hopes to report same-store sales increases for the entire year, as well as on a monthly basis, but warned the road to recovery could be choppy. The company is also in the process of examining its real estate portfolio and has identified more than 200 underperforming stores. About half of those are locations with leases that come due in the next three years, Mr. Ramsden said, at which point the company will vacate the space. The bulk of the store closures will be in its namesake brand. The company hopes cutting back their ubiquity will help restore Abercrombie & Fitch's reputation as a premium brand. <wsj.com>


H&M Plans 240 New Stores This Year - Karl-Johan Persson, H&M's chief executive officer, has said the company plans to open 240 new stores this year and that the economy will be "a little better" than in 2009. Persson was in Tel Aviv, where H&M's first store is just opening. Another seven are planned for Israel. He added that H&M doesn't plan to exit any markets and that it is pushing ahead with investment plans in Spain, Portugal, Italy and Greece. The Swedish retailer (Europe's second-largest clothing retailer) reported sales in January rose 11 percent, while sales at shops open at least a year increased 1 percent. <licensemag.com>


Warehouse Plans NZ$100 Million, Five-Year Expansion - Warehouse Group Ltd. plans to spend as much as NZ$100 million ($70 million) the next five years opening new stores and expanding its product range to grab a bigger share of New Zealand’s retail market. The company, 10 percent-owned by Australia’s Woolworths Ltd., will build as many as eight general merchandise stores to add new locations and increase floor space as much as 5 percent, Warehouse said in a presentation today. It will build as many as 10 stationery outlets to increase sales, improve national coverage and almost double the division’s margins by 2014. Warehouse, the nation’s largest discount retailer, is expanding after quitting its unprofitable Australian unit in 2005 and last year halting a shift into groceries and liquor that failed to meet targets. New stores, of the most-profitable size, will help the company lift earnings and recover market share lost to new clothing and hardware stores, Chief Executive Officer Ian Morricesaid today. <bloomberg.com>


Della Valle Adds to Holdings in Saks - Having more than doubled his money on his earlier investments in Saks Inc., Diego Della Valle has boosted his bet on the recovery of the luxury retailer. Through his personal investment vehicle, Diego Della Valle & C. S.A.P.A., the chairman and chief executive officer of Italy’s Tod’s SpA this week spent $22.3 million for an additional 2.9 million shares of the luxe retailer, according to a filing with the Securities and Exchange Commission. The investment comes on top of the 8.48 million shares of Saks that Della Valle acquired last year for $30.3 million. He now controls 11.38 million shares of Saks’ common stock, or 7.1 percent of those outstanding. Among noninstitutional investors, only Mexican telecommunications billionaire and the world’s richest man Carlos Slim Helú has more, with 25.62 million shares of the firm, or 16.1 percent of those outstanding. Saks has proven to be a very good investment for Della Valle. He bought 8.48 million shares of the firm between Feb. 20 and May 7 last year for $30.3 million, an average price of $3.57 a share. As of Thursday’s closing price, that portion of his holdings was worth $67.7 million, making for a $37.4 million gain. <wwd.com>


Ullman, Penney's Break Away From NRF - Myron E. “Mike” Ullman 3rd, chairman and chief executive officer of J.C. Penney Co. Inc., has resigned his seat on the board of the National Retail Federation and will not renew the company’s membership with the trade and lobbying group. Ullman, a recent chairman of NRF, sent a letter Wednesday to current chairman Terry J. Lundgren, who is also president and ceo of Macy’s Inc., to tell him of the decision, according to Tracy Mullin, president and ceo of NRF. Penney’s membership with NRF expires on April 1. A Penney’s spokesman said nine of 10 of the largest retailers, inluding Penney’s, are represented on the board of the Retail Industry Leaders Association and “given the gravity of all of the issues facing large employers, specifically in the retail industry, we made the decision to focus all of our industry advocacy through RILA.” RILA and the NRF called off a merger last June after announcing they were combining their groups in April, but declined to provide details. Ullman also sits on the RILA board. “It appears that he [Ullman] is really more interested in working with big box companies,” said Mullin, referring to RILA, the other key retail trade and lobbying group in Washington. “Clearly he feels a greater affinity there than here. That is the conclusion I draw from this.”  <wwd.com>


Apax, Private-Equity Firms Say Retail LBOs Return With Recovery - Private-equity firms looking to buy retail and consumer companies said they’re now able to finance deals and pay reasonable prices after the credit crisis and global recession triggered a buyout slump. “It feels like it’s a little bit of Goldilocks now,” Alex Pellegrini, a New York-based partner with Apax Partners LLP, said yesterday. “It feels just right.” Buyout managers are getting back to business after the global credit crisis that began in 2007 froze them out of buying companies or selling what they owned. About $12.9 billion worth of private-equity deals have been announced in the past three months, compared with $2.5 billion in the same period a year earlier, according to data compiled by Bloomberg. “The last couple months would suggest that people are getting active again,” said John Howard, chief executive officer of New York-based Irving Place Capital Management LP, noting his firm hasn’t made a retail investment in four years. “We’re seeing more real opportunities.” Financing from Wall Street banks is returning for some deals after financial institutions suffered losses of $1.7 trillion since the onset of the credit crisis. Howard said deals require investors to contribute more of their own cash and less borrowed money, which means he and other managers are most interested in targets they think will boost sales and profits. U.S. comparable-stores sales climbed 4.1 percent in February, topping the 3 percent growth estimate by researcher Retail Metrics. It was the sixth-straight monthly gain and the biggest in more than two years. <bloomberg.com>


Obama Outlines Export Growth Push - President Obama provided a blueprint Thursday for the administration’s strategy to grow U.S. exports to help drive job creation and economic recovery. The initiatives were outlined on the same day a Commerce Department report showed U.S. imports of textiles and apparel rose in January. The export push will include greater access to trade financing — including another $2 billion annually to help small and medium-size businesses — and a new Export Promotion Cabinet to coordinate the government’s efforts. “We’re going to increase financing, advocacy and assistance for American businesses to locate, set up shop and win new markets,” Obama said in a speech to the Export-Import Bank’s annual conference. As part of the plan, more than 40 trade missions intended to promote U.S.-made products have been scheduled for this year — the first went to India this week. There will be more money for promoting exports and Obama said federal agencies would establish public-private partnerships with companies to tap into their expertise about overseas markets and aid firms looking to expand. Obama said the administration also will focus on enforcement of existing trade agreements to give companies a level playing field, and will seek to open more markets through new and pending trade pacts. The President reiterated his call for China to move to a market-oriented exchange rate to help correct global trading imbalances. The National Export Initiative, announced in the State of the Union address, will “substantially increase” companies’ access to trade financing through the Export-Import Bank, Obama said.  <wwd.com

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