Shorting The Market: SP500 Levels, Refreshed...

Some people say you can’t make market calls. I agree. Some people can’t.


There is actually a big difference between making a market call that’s based on math (probabilities, standard deviations, mean reversions, etc…), and combining that math with a repeatable global macro research process, versus licking one’s almighty finger to test the ferocity of a bull’s wind.


Ten years ago, I thought I was Captain Stock picker at a hedge fund that was changing its name from Dawson Samberg to Dawson Giammalva. The guys I worked with knew what they were doing. They still do.


Today, I realize that there is a huge difference between stock picking and managing global macro risk. That’s why I concentrate most of my incremental time to trying to evolve the risk management process that surrounds my investment team’s stock picking.


My macro model isn’t based on a 200-day moving average. Nor is it based on calling up Stan or Fibonacci for their reads. It’s my own. I build it; I break it; I call it names – but the one thing I love about it is that it’s flexible and able to change, dynamically, as market prices and the quantitative factors that drive them do.


One function of the model that I have recently learned a lot about is the high correlation between declining volatility and tightening ranges. What I mean by that is that the higher the SP500 (SPY) goes, and the lower Volatility (VIX) goes, the more proactively predictable the top ends of my immediate term TRADE ranges become. That’s why I am brave enough to put my daily range for the SP500 in my daily note.


The immediate term TRADE lines of support and resistance for the SP500 are now 1170 and 1180, respectively. The more significant lines of support below 1170 are outlined in the chart below. I shorted the SPY at $118.00 this morning. My position is on the board for everyone to see, and I am accountable to this view.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shorting The Market: SP500 Levels, Refreshed...  - S P


We have downgraded our estimate for March gaming revenues in Macau.  We now believe the number will be in the range from HK$13.5 billion (+46%) to HK$14 billion (+51%) down from our prior estimate of HK$14.0-14.5.  Analysts are all over the place so its difficult to gauge consensus.  The most recent estimate we saw put March revenues at MOP13.2bn.  Based on our sources that seems like a good estimate, but for TABLE revenues in HONG KONG dollars.  Earlier estimates had growth at 60-80%.


Here is the math:


We are pretty sure the first 28 days of March did HK$12BN in table revenue.  That means that the pace for the first 15 days was HK$467MM per day and the following 13 days were at HK$385MM.  The last 3 days were weekdays so if assuming a HK$325-350MM pace that mean tables should shake out around HK$13-13.1BN.  Slots should be in the HK$650MM to HK$700MM.


If the pace we saw in the latter half of March continues into April – that implies roughly HK$11.5BN or 41.5% y-o-y growth

R3 - FL: Confirming What We Know


April 1, 2010


TODAY’S CALL OUT: FL: Confirming What We Know


We spent some time at Foot Locker’s NY headquarters the other day with Ken Hicks, Bob McHugh, and Peter Brown.  Overall,  we walked away feeling confident with our positive stance surrounding the company’s near, intermediate, and longer term prospects.  Net, net we got confirmation of what we already knew, but with a little more detail surrounding what’s going on behind the scenes.  Importantly, we got a sense that there is finally “real” change underway within the organization- a topic Hick’s spoke about with passion and at times even compared to his experience with the transformation of JC Penney. 


With another upgrade this morning, buy ratings now constitute 60% of total FL ratings (a level not seen since April ’06).  Interestingly, the “buy side” sentiment (a.k.a short interest) still  remains elevated relative to historical levels, with 6% of the float currently short.  Looking back to the last time the sell-side was as decidedly positive we see that the short interest was under 2% of the float.  Importantly, we believe and confirmed that Foot Locker is very much in the early stages of its turnaround.  The overall environment is clearly providing a strong tailwind, but it’s important to note that many of the company’s merchandising initiatives have still not hit the stores.  We expect to see more meaningful changes as the year progresses, beginning with back to school.


Key takeaways from the Foot Locker meeting:


  1. Robust near-term momentum is largely the result of 1) success with higher price point, technical product (running, hoops), 2) clean inventories across the channel (limiting need for promotion), and 3) growth in toning (Reebok is the brand of choice for FL) which is really more than just selling the shoes, but rather an opportunity to sell the woman apparel as well.   Management is very focused on maximizing the opportunities resulting from the toning-driven traffic increases that are bringing female shoppers into their stores. 
  2. The organization behind the scenes has been realigned and is better suited to 1) apparel growth (Hicks brought in two apparel heads rather than using “shoe people” as in the past), and 2) buyers/planners/merchants now responsible for their own banner, not the entire chain or multiple banners.  Also, Hicks has abandoned the old top-down management style to foster more risk taking and creativity within the organization.  The old mentality was one of more order taking than anything else.
  3. The “buy” mentality days are over.  The company used to place a substantial amount of orders in advance in order to receive bigger volume discounts (think futures).  When product didn’t sell it backed up, became aged, and ultimately hurt margins.  The new approach allows for more open to buy and more product being held centrally to facilitate better flow by SKU, by store.  Expect to see less BOGO’s and mare targeted promotions. 
  4. From a systems perspective, expect to see greater and seamless integration between the .com platform and the physical stores.  While there is some integration currently, management’s goal is to have all shopping permutations available to its customers.  In other words, buy at home, return in the store or buy online in the store, deliver to the home.  We were told the pieces are in place and they must now be connected to allow for a seamless consumer experience.  Conversion rates should improve as a result of this effort.  Additionally, the company expects to install new labor management software which will take the current and antiquated system off of the POS and put it on a central server.  This will allow for central planning of labor, by store, as well as free up capacity on the POS to allow for faster transaction times.  Training modules will also be served centrally, freeing up costs and streamlining the current process.




  • Dollar General noted that it continues to add national brands to its mix, especially as suppliers look for growth opportunities at retail. Notably, DG will launch L’Oreal cosmetics. The line will add four feet of shelf space to the category. Additionally, DG is adding Rexall products to its health and beauty area. Recall that these new branded initiatives follow a recent announcement which brings Hanes to DG as well.


  • Rite Aid management noted that the company’s loyalty program/card, Wellness Plus, has been well received by customers. In the company’s four test markets (launched in October), over 50% of front-end and 40% of pharmacy sales were transacted with the card. The program is now expected to rollout chainwide this year, backed by the largest marketing spend the company has seen in several years.


  • A meeting with Foot Locker management revealed that sales of Reebok’s Easy Tones remain robust. The product is still in short supply and Foot Locker expects to be in “chase mode” for several weeks longer before adequate supply arrives. Importantly, Foot Locker is excited about a possible resurgence for Reebok which could lead other associated benefits. Most notably, the ability to attract the woman consumer into their stores allows for apparel conversion opportunities- something that has proven to be a difficult sale in the past.




R3 - FL: Confirming What We Know - Calendar





China's Textile Exports to US Increased 25.6% yy in February - China's textile exports to the US reached US$2.825 bn in February 2010, according to US Customs data, an increase of 25.6% compared with February 2009. From the structure of China’s export products to the US, in February 2010, US imports of yarn and fiber from China accounted for 12% all products, chemical fiber textile formed 53% and cotton textiles accounted for 33%. Growth of US imports of yarns and fibers reached 65.27%, indicating that the US textile industry has been recovering and is moving towards a rebalancing process between real economy and virtual economy.  <>


LeBron Signs New Deal with Nike - Cleveland Cavaliers star LeBron James has signed a new shoe and apparel deal with Nike, the company acknowledged on Wednesday. The deal is longer than the 7 year $93 mm contract signed in May 2003. <>


Richemont Bids for Net-a-Porter - Compagnie Financiere Richemont SA made an offer to buy in a deal valuing the online retailer at $532 mm. Richemont currently owns 33% of Net-a-Porter, and will purchase the remaining stake. Net-a-Porter’s business has grown steadily since Massenet founded the retailer in 2000, and sales were approximately $182 million in the year ending January 31, 2010. <>


Talbots Deal Extension - TLB extended exchange offer for BPW Acquisition Corp (BPW) to 18:00ET on 1-Apr from 29-Mar. As of 18:00 on 31-Mar, approximately 87.9% of BPW warrants issued in initial public offering had been tendered. <>


Australia: Garment and shoe sales drag retail performance in February - Australia retail sales dipped in February due to weak performance of department stores particularly in terms of clothing and footwear sales, according to the Bureau of Statistics. <>


Korea: New Certification Impact on Local Textile Commodities - Korea's Ministry of Knowledge Economy has implemented a new national unified mark, called KC Mark (stands for “Korea Certification”), a legally compulsory certification appears on products as specified in related laws and ordinances including textile commodities. <>


Levi Strauss Files Suit Against Evisu - Levi Strauss & Co. has cried foul over Japanese brand Evisu’s plans to replicate some of Levi's most famous pairs of jeans. The action came a little more than two weeks after Evisu revealed details of the upcoming “Private Stock” line on March 11. Levi’s alleges the Evisu line will lead to customer confusion, cause a false association between the two companies and cause it to lose sales. It's not the first legal match between the two firms. <>


Wrangler to Open Shop-in-Shops in UK - Denim brand Wrangler has announced the expansion of its shop-in shop programme which will see it offer the concept to independents and department stores across the UK. <>


Men's Businesses Taping Sports - Men’s wear companies are playing a new game as they increasingly look to complex sports partnerships to drive sales and build brands. In the past six months, major nonathletic apparel brands have unveiled far-reaching, and at times surprising, deals with professional sports teams and their players. Izod doubled down on its extensive integrated partnership with Indy Car racing; JA Apparel Corp. and its Joseph Abboud brand inked a deal with the New York Giants, and both Canali and Emporio Armani tapped major sports stars as the faces of their respective spring campaigns.Sports is a more effective, credible and even more cost effective way to reach male consumers than traditional fashion marketing — even if your brand has nothing to do with athletics. Apparel brands are using sports to tap into a deeper level of passion within the male consumer. <>


New Balance Signs Red Sox Player Dustin Pedroia - New Balance announced Wednesday a multi-year endorsement contract with for the Boston Red Sox second baseman Dustin Pedroia.  Under the terms of the deal, the Boston-based athletic company will be Pedroia’s official footwear and off-field apparel provider. The former league MVP will be outfitted in the New Balance 1101 baseball spike and will have a special make-up in his signature camouflage colors. <>


Fila Returns to Basketball - Fila plans to return to the basketball footwear category. The company is partnering with agency Michael T. White, Inc. (MTW) to launch the new DLS Slam performance shoe by Fila along wiht a grassroots initiative targeted to high school, club and collegiate players. A take-down version of the shoe will be available at Foot Locker in mid-July. <>


Yue Yuen Declines in Hong Kong on $707 Million Bank Loan, Share-Sale Plan - Yue Yuen Industrial (Holdings) Ltd. fell the most in two months in Hong Kong on resumption of trading after it entered into agreements for as much as $707 million in funding to repay debt, boost working capital and cut financing costs.  <>


UK Retailers Plan to Reverse National Insurance Rise - Retail chiefs including Marks & Spencer executive chairman Sir Stuart Rose, Next chief executive Simon Wolfson and Harvey Nichols chief executive Joseph Wan have backed the Conservative party’s plans to reverse part of Labour’s National Insurance rise. <> Runs Away with Fastest ResponseTime - In February, generated an average high broadband Internet backbone response time of 0.59 seconds to lead a list of 50 top e-retailers, according to measurements from Gomez, the web performance division of Compuware. <>


Web Sales at Foot Locker Grew for the Year, but Fell Flat in Q4 - E-commerce revenue for Foot Locker increased 6.8% in 2009, despite growing only 1.0% in the fourth quarter.  <>

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Further progress on the jobs front this morning continues to augur well for lenders. Claims dropped 6k week over week to 439k from 445k (last week was revised up 3k), while the 4-week rolling average declined by 6.5k to 447k from 454k. This week's data came in 4k below consensus. The following chart shows the rolling average trend line. Below that we show the raw data.




It's worth mentioning that we're now within 6k of the lows set at the beginning of January on both a rolling and printed basis. We think breaking to new lows will be a positive development. With respect to where claims are tracking relative to our three standard deviation channel, they are back to knocking on the door of the high side of the channel. We continue to expect claims to move lower in coming months as we see the tailwind associated with Census hiring. This will create a positive environment for secured and unsecured lenders alike. We continue to favor credit card names heading into this environment.




The following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this Spring.




Joshua Steiner, CFA

Greenspan's Top Tick

“It is absolutely conceivable that the Euro will replace the dollar as the reserve currency, or will be traded as an equally important reserve currency.”

-Alan Greenspan, Late 2007


As tremors of sovereign default concerns continue in Europe, it is worthwhile looking at the history of the Euro and the Eurozone to put this current crisis in context.  For starters, the Euro and Eurozone are far from established and historic institutions. 


The origin of the Euro can be traced back to the 1992 Maastricht Treaty, which obliged most European Union member states to adopt the Euro upon meeting specific budget and monetary requirements.  These requirements included: budget deficits of less than 3% of GDP, debt to GDP ratios of less than 60%, low inflation, and interest rates close to the EU average.


Technically, the Euro was introduced in non-physical form on January 1st, 1999, just over eleven years ago, and began to be used as legal tender on January 1, 2002.  Currently, roughly 330 million Europeans use the currency on a daily basis and almost 175 million people globally (primarily in Africa) use currencies that are pegged to the Euro.  The Euro is the sole currency of 16 EU Member States: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Irelenad, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.


While it has a short history, the Euro has established scale.  In fact, there are currently $790 billion Euros in circulation.  According to estimates, the Euro has become the second largest reserve currency in the world.  Currently its share of total global reserve currency is 27% versus 64% for the U.S. dollar and 3% for the Yen. 


Not surprisingly, the Former Fed Chairman basically top ticked (Greenspan’s Top Tick) the Euro with his aforementioned statement in 2007. Since then, the Euro’s share of global reserves has flat lined and it’s price has declined.  We’ve highlighted this in terms of the price of the Euro in the chart below.


After serving the United States as Chairman of the Federal Reserve for nineteen years, Chairman Greenspan admitted in a congressional hearing in 2008 that he had “a flaw” in the model with which he analyzes markets.  Thus, we are pretty comfortable taking the other side of his market calls.


We have one of the top young European Strategists in the business in Matt Hedrick and he has written widely about the issues facing the Eurozone.  On March 26th , he wrote a note titled Politics versus Pragmatism, which highlighted the following:


“To return to Barroso’s quote above, Eurozone skeptics exists. And one could argue that the decision by Eurozone leaders to support Greece in a coordinated fashion—rather than a unilateral IMF-led loan—is born out of the desire of the European community to further substantiate the existence of the Eurozone as an entity. While Barroso as President of the European Commission will put his best foot forward in confirming that the Eurozone has a sound governing body, the fact remains that the Eurozone is young, only 10-years old, and still working through honing policy to benefit the whole.


Clearly, finding consensus on policy from country members with vast histories, and divergent economies and cultures, will remain a challenge. Countries will differ on stance; having a unified currency will put additional challenges (handcuffs) on exercising monetary and fiscal policy measures with such issues like debt restructuring and default.


Equally, imbalances in terms of economic weight and political influence will continue to weigh on decision making. These points were put on center stage with German Chancellor Angela Merkel’s full support of a unilateral IMF-led bailout for Greece. The fiscally conservative Chancellor wasn’t questioning the validity of the Eurozone, but suggesting that Greece continue to work to clean up its own “house” (budget deficit) before monies were placed on the table so as to not reducing Greece’s incentive to issue austerity measures to shave its imbalances.”


Herein is the dilemma with a regional currency such as the Euro.  In times of crises, will nations choose to support weaker member nations with fiscal issues? In a world of realism, this support will occur to a point.  The reality is, Germany on some levels would be much stronger without its weaker Eurozone counterparts.  And, in fact, has been reluctant to dedicate its or the European Union’s resources to support Greece.


Moreover, on a longer term basis, is it at all sustainable to have the same currency for rich and technology-driven nations like Germany and more agrarian nations like Portugal and Spain.  The very nature of these economies is inherently at conflict.  Poor and agrarian nations need weak currencies because price is their competitive advantage.  Conversely, nations like Germany would prefer higher interest rates and strong currencies to attract investment.


We would be naïve to believe that any nation state, whether a member of the Eurozone or not, will not ultimately act in its own self interest.  As Sun Tzu famously wrote in the Art of War:


“The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.”


As we enter into the second quarter of 2010, it is clear that winners and losers will emerge out of the current crisis in Europe.  Those countries and companies that are positioned “beyond defeat” will ultimately prevail.  And, in contrast to the fine Chairman Greenspan’s quote, the ultimately loser could be the Euro itself.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Greenspan's Top Tick - Greenspans Top Tick



The Macau Metro Monitor, April 1rst, 2010



Several US gaming regulators are analyzing Macau casinos and possible links to organized criminals, Reuters reports.

Nevada’s Gaming Control Board is looking at LVS operations, following the report on triad member, Cheung Chi-tai. In addition,  a spokesman for the Pennsylvania Gaming Control Board told Reuters that ''the review of suitability by the Bureau of Investigations and Enforcement is ongoing for all license holders, and it will not confirm or deny whether this is a matter in which it is actively investigating.''


MGM Mirage will be investigated by the Illinois Gaming Board, after the state of New Jersey found that the company's Macau partner, Pansy Ho, allegedly has links to organized crime. The Michigan Gaming Control Board said it was also reviewing MGM, which owns a share in MGM Grand Detroit casino, after the New Jersey findings.  The Mississippi Gaming Commission said it was reviewing the New Jersey report on MGM Mirage, according to the commission's deputy director, Allen Godfrey. In Nevada, where MGM operates 14 casinos, regulators have no plans to reopen the MGM case.

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