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The European Credit Markets Smell PIIGS

Position: Short the Euro via FXE


As we noted in our post “Politics vs. Pragmatism” last week, despite the decision by the EU and IMF on 3/25 to “safeguard financial stability” in Greece, sovereign debt imbalances (especially among the PIIGS) remain at large and continue to heighten investors’ fears.  Regarding Greece, most recently credit markets are clearly indicating heightened risk via rising bond yields.


In the first chart (below) we highlight that since 3/25 the yield on the 10YR Greek Bond has jumped a hefty 25bps. And while 10YR yields for the other PIIGS have held pretty steady over the last weeks (chart 2), we’d expect to see them to push up in the coming weeks as Greece shares more of the “sovereign debt” spotlight. Note that Portugal’s credit rating was recently cut to AA- by Fitch Ratings; we’d expect to see a downgrade of Spain in the coming weeks. For reference on the total debt and budget deficit constraints afflicting the PIIGS, see chart 3.


Where else is this fear showing up?

  • The equity markets of Spain, Greece, and Portugal are among the worst global performers YTD, down -7.3%, -4.6%, and -3.6% respectively.
  • Moody’s downgraded five of the nine Greek banks it tracks yesterday, saying the “country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity.” (a lagging indicator, but representative of consensus).

As we’ve said before, the lack of policy from the European Community to address the sovereign debt issues of its member states will continue to shake markets. We’re currently short the Euro versus the US dollar via FXE in our model portfolio, trading a range of:  buy/cover at $1.32 and sell/short at $1.36.


Matthew Hedrick



The European Credit Markets Smell PIIGS - e1


The European Credit Markets Smell PIIGS - e2


The European Credit Markets Smell PIIGS - e3



The data is hawkish and bonds are getting smoked for a reason!


Since the beginning of the year we have been very constant with our criticism of the man we refer to as “He Who Sees No Bubbles”  - Ben Bernanke. Not only is it his mandate to control “inflation”, he is also responsible for controlling “growth” too.  Today’s ISM data shows he is failing on both counts. But then again, has the Fed ever been accurate with their forecasts for inflation? They’ve only changed the CPI calculation nine times since 1996 – but who’s counting?


We are. 


Below, we have attached the latest readings on from the ISM: the Manufacturing Index and Prices Paid.

  • ISM Manufacturing for March just made another higher-high at 59.6 (versus 56.5 in February).
  • Prices Paid continue to ramp, coming in at 75.0 in March (versus 67 in February).



On the ISM Manufacturing reading - manufacturing expanded in March at the fastest pace since July 2004.


The Prices Paid survey is still below the 2008 highs, but those readings also carried $152/barrel oil prices!


Yields across the Treasury curve continue to breakout to the upside, as we are short High Yield and Municipal bonds.  The US Dollar has been lower for the past two days but is still in a bullish formation and we believe it will continue to make higher-highs throughout the intermediate term. As usual, the equity market gets the memo last and will be the last to see an impending rate hike priced in. As such, we’ve just shorted the S&P via the SPY this morning and will continue to manage risk around the position.


Howard Penney

Managing Director


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

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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.  <fashionnetasia.com>


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. <cnbc.com>


Richemont Bids for Net-a-Porter - Compagnie Financiere Richemont SA made an offer to buy Net-a-Porter.com 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. <wwd.com/business-news>


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. <streetaccount.com>


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. <fashionnetasia.com>


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. <fashionnetasia.com>


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. <wwd.com/business-news>


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. <drapersonline.com>


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. <wwd.com/retail-news>


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. <wwd.com/footwear-news>


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. <sportsonesource.com>


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.  <bloomberg.com/news>


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. <drapersonline.com>


Nike.com Runs Away with Fastest ResponseTime - In February, Nike.com 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. <internetretailer.com>


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.  <internetretailer.com>

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