“I do not want Fannie and Freddie to be just another bank… I do not want the same kind of focus on safety and soundness.”

-Barney Frank (September 25, 2003)


In his recently released “The End of Wall Street”, Roger Lowenstein kicks off a chapter titled, “To The Crossroads” with that quote from the House of American Perceived Wisdoms. As we try to figure out where the US stock market goes after a +76.9% rally, we should always remember that Congress helped create a massive hole in America’s balance sheet that the Chinese will never forget.


When President Obama asked China’s President Hu Jintao for a “more market oriented rate” yesterday in Washington, one has to wonder if that smile on Hu’s face was kindly asking the President of the United States ‘are you kidding me?’


In the face of the US Government marking the rate of return on Fed funds at ZERO percent, telling the Chinese to mark-to-market is the height of hypocrisy. Sure, the Chinese have their own accounting issues, but so do we, and it’s about time our President recognizes this as fact. This has nothing to do with China’s LGFV’s (Local Government Financing Vehicles). This has everything to do with America marking US government deficits and liabilities to model.


Now that Congress is back in session, if you want to see Barney Frank, Tim Geithner, and Ben Bernanke do the collective squirm, have your local Congressman ask any of them if GSE debt (Fannie and Freddie) is sovereign debt? Simple question; simple answer. Not unlike a low quality company that tries to keep their sordid secrets off-balance sheet, this is exactly what America has signed off on letting our politicians of the Bubble in American Politics do – it’s called marked-to-model.


GSE debt is backed by the US government and is, therefore, sovereign debt. You don’t have to take my word for it. Ask our largest creditor what they think. If it quacks and swims in a circle, it’s a one-legged duck.


Some “free marketers” of the Reagan revival will quickly come to the rescue of the US Treasury market and pronounce their proclamation of faith that Treasuries trade in a liquid market and are therefore trading marked-to-market. That’s all good, fine (and theoretical) and, to a degree I might actually agree with part of that argument if you push me out long enough on the curve. But reality is that the Fed Funds Rate is keeping the short end of the curve artificially depressed (or marked-to-model).


So my simpleton suggestion this morning is that we take a good hard long look in the mirror before we start trumpeting our once vaunted system of American Capitalism and see this for what it has become. Greece getting a short term bailout by European government officials who decided to mark Greek debt 200 basis points under the marked-to-market rate is simply a roadmap to our very own perdition.


Funding long term debt obligations by borrowing short on a conflicted and compromised government rate is the opposite of what we should have learned from the last 24 months of this mess. These American and Western European politicians aren’t doing anything different right now with sovereign debts than what Bernanke and Paulson attempted to have Wall Street bankers do in the early stages of 2008. It’s pathetic.


We can’t do this for much longer or the Chinese and Japanese are going to start doing exactly what we taught them to do, which is get out when something smells like it’s going down the path of a debt spiral. While hope is not an investment process, I can only pray that they don’t start doing this aggressively any time soon.


China has been a net seller of Treasuries for the past 3 months. This doesn’t include the March data, and in the month of March we saw a ton of Treasury selling on the short end of curve (2-year yields went from 0.8% at the beginning of March to 1.1% in a straight line = +37.5%). Can you imagine where interest rates would be if President Obama heeded his own advice and marked the Fed Funds rate at a “more market oriented rate”?


The Piggy Banker Spread is 10 basis points (0.10%) off its record wide levels in America. Again, the government’s choice has been to bailout financiers who need to borrow short to attempt to invest long, and that is what it is. Who underwrites this spread? You do. You don’t get the savings rates of return that Chinese, Australian and Brazilian citizens do because the ideology of the Greenspan and Bernanke Feds continues to be marking your savings rate to model, below the level of inflation.


Below the level of inflation? Yes. Expected inflation is one of the main drivers the long end of the Treasury curve in the last month. You see, the further you push out on the curve, the further away you get from the Fed’s marks. That’s why the yield spread (Piggy Banker Spread) between 10-year and 2-year rates is +282 basis points wide this morning.


Both the long end of the Treasury market and the US Dollar are marked-to-market more appropriately than the short end – Bernanke has politicized that just like Greenspan did. Meanwhile, both Mr. Currency and Mr. Bond Market see the inflation that will be reported here in the USA tomorrow, however compromised and conflicted that government calculation may be.


My immediate term support and resistance levels for the SP500 are now 1184 and 1201, respectively. If this note read as angry, it should have. Re-reading Lowenstein’s account of what caused this mess has reminded me of my greatest fear. With the stock market back up, we may have learned nothing.


Best of luck out there today,



Marked-To-Model - OBAMA



The Macau Metro Monitor, April 13th, 2010



According to a survey carried out by universities in the region, consumer confidence in mainland China, Hong Kong and Macau fell QoQ to 92.3, 88.1 and 82.8, respectively. Macau's decline of 4.7% was the most of the group. The index uses a scale of 0 (representing no confidence) to 200 (complete confidence) to represent ascending levels of consumer confidence. Scores below 100 suggest people are lacking adequate confidence while scores above 100 reflect good confidence. 


The drop in the overall consumer confidence in mainland China, Hong Kong and Macau was mainly due to the record low sentiment about prospects in the housing market. In this category, Macau recorded the steepest decline of 15.3%, to 37.6, while sentiment in Hong Kong and mainland China was down 12.4% (to 58.1) and 7.8% (to 62.9), respectively.





Macau focused real estate investment company, Speymill Macau Property, has reached sale agreements for almost all the 259 apartment units the company owns in The Riviera, a two tower residential development on the Inner Harbour area, formerly known as Lorcha. The company owns a total amount of 270,951 square feet in the development, of which 231,291 sq ft were under contract as of 4/12/2010, leaving a total of 39,660 sq ft remaining to be sold. The company owns 145 units of 296 units in Tower 1 and 114 units of 222 units in Tower 2 of Riviera. The average price of the units sold in Tower 1 was HK$3,568 per square foot.The average price of the units sold in Tower 2 was HK$3,581 per square foot. The estimated total net revenue from such sales will amount to approximately HK$796MM, according to Speymill.



The Labuan Chamber of Commerce (LCC) would like a casino to boost its tourism industry. LCC chairman Datuk Francis Tee Chee Hok told the Daily Express, "A casino could be the answer and it is also compatible with Labuan's status as a free port". Aware of the government's stand of not favoring the issuance of new casino permits, Tee said the proposed Labuan casino could be an extension of the Genting Highlands casino.He suggested that the casino could be in the form of a floating ship, departing from the island at 6pm and returning at 6am with strict checks to prevent the wrong people from patronizing it.


The S&P 500 finished slightly higher (+0.18%) in mixed trading on Monday - volume was anemic and the advance/decline number was down significantly.   The trend of waning upside momentum continues; the unknown is how long it will be before that matters.


On the MACRO front, the biggest tailwind for stocks comes from the EU finance minister’s details of a funding package for Greece, though ongoing concerns remain.  In addition, M&A activity and deal speculation are contributing to the froth, as Bloomberg reported that US companies have announced more than $272 billion in M&A activity, up from $213 billion last year.


Yesterday, CPKI confirmed that it is reviewing strategic alternatives, UAL Corp and US Air continued to move higher after the WSJ reported that talks between the two airlines have become "very serious", and shares of PALM surged on the back reports that the company has put itself up for sale. 


The best performing sector yesterday was the Financials (XLF).  The KBW Bank Index was up 4.7% over that last week, and extended its outperformance by 100bps yesterday.  Some of the regional names were notable gainers, while C was the standout among the money-center banks.  For the Financials, the Q1 earnings season is expected to have a positive tone to it. 


The Dollar Index was down 0.65% yesterday and 1.19% over the past two days.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.48) and sell TRADE (81.82).


Ahead of the AA earnings the Materials (XLB) was the worst performing sector on the day.  AA reported disappointing revenue numbers, showing that the end markets are not consistent with 5.6% real GDP.  Yesterday the RISK/RECOVERY trade also got a boost from the VIX being down 3.5%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (15.45) and sell TRADE (17.30).


In early trading, Oil is trading down for a fifth day in a row as we are looking at forecasts of an 11th consecutive weekly gain in U.S. crude inventories.  U.S. inventories of crude oil probably rose 1.15 million barrels as imports climbed, according to a Bloomberg News survey. It would be the longest stretch of increases in five years.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.84) and Sell TRADE (85.28). 


In early trading gold is trading lower, as the dollar is looking higher.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,136) and Sell TRADE (1,173).


Copper fell for a second day in London on concern that prices at the highest level in more than 20 months maybe too high too fast.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.46) and Sell TRADE (3.63).


In early trading, equity futures are trading below fair value after Alcoa's revenues missed consensus.  As we look at today’s set up the range for the S&P 500 is 17 points or 1.0% (1,184) downside and 0.4% (1,201) upside. 


On the MACRO calendar today:

  • March NFIB Small Business Optimism Index
  • February Trade Balance
  • March Import Prices
  • APR IBD/TIPP Economic Optimism Index
  • ABC Consumer Confidence


Howard Penney

Managing Director













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Approval Down, Market Up

A few months ago, we wrote that we expected a bounce in President Obama’s approval rating.  While his approval ratings have fluctuated based on the Rasmussen Daily Tracking poll – a is poll that we have consistently focused on due to Rasmussen’s recent accuracy in calling Presidential elections – the more widely accepted Gallup Poll tells a more sobering tale. In that poll, President Obama’s approval rating has been in a directly downwards trajectory.


Since January of this year, President Obama’s approval rating on the Gallup presidential job approval rating has fluctuated between 47 – 51%.  On a shorter term basis, President Obama’s approval rating is at 45% and his disapproval rating is at 48% on a three day average basis.  Both of these are the worst approval ratings of his Presidency.


Below we have charted the stock market versus President Obama’s approval rating on a year to date basis.  While there is not a clear correlation, it is clear that President Obama’s declining approval rating has not had an adverse impact on the stock market, which has powered higher despite a continued lower shift in Obama’s approval.


We have written on this in the past, but, interestingly, negative Presidential approval is actually more positive for stock market returns.  In fact, according to a study by Ned Davis Research, which was summarized in Slate magazine, from 1960 through 2006:


“Stocks did better when presidents were doing poorly, and they did worse when presidents were more popular. In the weeks when the presidential approval rating was below 50 percent, stocks rose at an annualized rate of 9.2 percent. In weeks when the approval rating was between 50 and 65 percent, the Dow rose at an annualized rate of 5.4 percent. And in those periods when approval ratings were above 65 percent (about one-fifth of the time), the Dow rose at a 2.6 percent annual rate.”


The interesting caveat is that when Presidential Approval gets really bad, the stock market underperforms.  According to the same report:


“When presidential approval ratings sink below 38 percent, which they have only 7.2 percent of the time since 1959 (Bush stands at 37 percent in the current Gallup Poll). During such periods of "extreme low ratings, the Dow falls at a 2 percent annual rate.”


While President Obama’s approval is but one factor when thinking about stock market performance, it is not necessarily a negative one.


Daryl G. Jones

Managing Director


Approval Down, Market Up - Obama S P 500

Pain Trade Continues: SP500 Levels, Refreshed...

What I should have done was cover my SPY short position on Thursday’s market open down at 1176. Should have, a bag of pretzels, and something cold will render me just about useful enough for the world horse-shoe throwing championships down at Pass Lake.


Now the math is new and so are my updated immediate term TRADE ranges for the SP500. We’ll be immediate term overbought again at higher prices than those who are still in this Pain Trade may be able to bear. There is no resistance until 1202, which is obviously 2 points above a big round number that the monkeys are staring at.


Monkey-see, monkey-do, and we know that plenty a monkey can make money on the long-side of a market. So don’t be the horse-shoe that these monkeys are flinging or you’ll end up looking silly like I do right now being short. Wait for your spot.


Once this low volume Pain Trade rids itself of all its passengers, the move lower will be sharp and swift. Volatility (VIX) hasn’t been this low since May of 2008 and that’s an ominous sign in and of itself, particularly if you consider Greece the Bear Stearns of this market with the real show being a Spanish Lehman over the intermediate term.


Key support lines under 1184 is the intermediate term TREND line down at 1128 (-6.1% lower from 1202 if that’s where you get your next SP500 short off). Don’t disrespect the similarities that this current 2-month rally has to the one that ended, abruptly, on January 19th.  Just when you can’t take it anymore, the music stops.



Keith R. McCullough
Chief Executive Officer


Pain Trade Continues: SP500 Levels, Refreshed...  - S P

R3: Does Traffic Breed Traffic?


April 12, 2010


‘Traffic’ has referred largely to consumers walking into stores. But now the bigger ‘traffic’ metric to watch is the container traffic coming into the US. We just saw the biggest sequential uptick in 15+ years.





After last month’s sales report, it’s going to be tough to find any retailer say ‘we’re planning conservatively for summer/fall.’  In fact well before the sales numbers were known, we started to see a sequential uptick in container traffic into Long Beach, the best proxy for retail goods coming in from Asia. This past month, however, we saw TEUs (twenty-foot-equivalent units) grow at a yy rate not seen since early 2005, with a sequential 3-month acceleration the strongest in over 15-years. The point here is that the goods are coming…the consumer needs to be there waiting.


R3: Does Traffic Breed Traffic? - traffic chart shipping





  • Score one for fast fashion retailer, Forever 21. With value and price consciousness still very much on the mind of teen consumers, the company is promoting its “prom collection”. The dress offering includes 44 styles ranging from $13.50 to $42.80. Given that a prom dress is likely to be worn only once, we suspect these price points will make prom 2010 a “throwaway” for those a dress at Forever 21.


  • After hinting that the company was exploring the opening of bridal boutique, it has been confirmed that J Crew will open its first freestanding store focused on the bride this summer. The new store is slated to open on 66th St and Madison Avenue in New York in late May or early June. Interestingly, the store will be set amongst some pricey competition. Donna Karan, Oscar de la Renta, and Vera Wang are all located within 10 blocks of the new store.


  • Add Mintbox to the growing list of online “flash sale” operators. However, the latest entry into limited time, discounted fashion sales is aiming to bridge the gap between the on and offline worlds. Shoppers will receive loyalty rewards for their purchases, which in turn can be used towards gaining access to in-store VIP events, fashion shows, and exclusive preview sales. The site aims to build better relationships between retailers, designers, and consumers beyond simply selling goods off-price.





R3: Does Traffic Breed Traffic? - Calendar 





Health Care Reform & Retail - Health care reform is translating to more spending for companies of all sizes. How much more won’t be clear for some time and this kind of general muddiness should continue as officials decide how to apply the new laws, reforms phase in and insurance providers and individuals choose their paths. The plan will dramatically boost benefits for some and costs for others. But the net effect of the sweeping changes is the province of future historians — despite the highly politicized debate in Washington. Most companies would have to start to provide health insurance for employees’ dependants up to the age of 26 and for dependants who are under 19 and have preexisting medical conditions. By 2014 all legal U.S. residents will be required to have health insurance or pay a tax penalty. Under the employer mandate, retailers with more than 50 full-time employees who don’t offer insurance to their full-time workers will face a $2,000 penalty per full-time employee after the first 30 such workers. <>


Indian garment exports from India to the US, Europe and Japan are likely to pick up in the coming months ahead due to the gradual recovery of their retail markets, according to the Confederation of Indian Textile Industries. "Indian and Bangladeshi garment exporters have started getting better prices now in the US. There are signs of improvement even in the retail market of the EU, all of which indicates that garment exports are slated to improve in the coming months," said Confederation of Indian Textile Industries General Secretary D K Nair.

The Apparel Export Promotion Council also expects the April export figures to show improvement, even though the industry went through a rough time with outbound shipments dropping 10.16% to $7.92 billion in April-January period of fiscal 2009-10 over the last one. However, the strength of the Indian currency is a cause of concern for exporters.  <>


 R3: Does Traffic Breed Traffic? - Apparel Imports Table


Hong Kong's Luxury Markets Boom as Rich Mainlanders Snap Up Watches, Flats - Ju Wei, the owner of an advertising company in China’s north-western Gansu province, makes an 1,800 kilometer (1,100 miles) trek to Hong Kong at least six times a year to go shopping. <>


Home Retail Advances to Four-Month High on Report Wal-Mart's Asda May Bid - Home Retail Group Plc rose to a four-month high in London trading after the Mail on Sunday reported that Wal-Mart Stores Inc.’s Asda may be interested in making an offer for the U.K. company. <>


MasterCard Is Set to Launch an Online Shopping Mall - MasterCard plans to launch Monday the MasterCard MarketPlace, an online mall with more than 28,000 merchants. The payment card network is collaborating on the project with Next Jump, an Internet company that specializes in personalized shopping. <>


Costco vs. Omega, Big Implications for Industry - The Supreme Court is expected to meet on Friday to decide whether to hear a case brought by Costco Wholesale Corp. against Omega SA challenging whether Omega can use copyright law to control the distribution and resale of watches made lawfully abroad and imported into the U.S. The case has significant implications for off-price retailers and discounters that often purchase imported goods from middlemen and distributors at cheaper prices, rather than purchasing directly from a manufacturer or its authorized U.S. distributor, and then sell them in the U.S. below the brand’s official price. Online auction sites such as eBay also could be impacted by the case. <>


Wisco Badgers Drop Nike - The University of Wisconsin-Madison said today it has ended its licensing agreement with Nike Inc. as a result of issues the school has with how the shoe company handled problems with contract factories in Honduras. The school alleged that Nike has failed to adequately address problems resulting from the closure of two Honduran factories in January 2009. The licensing relationship between the school and Nike generated $49,000 in royalties last year. The university has a code of conduct that governs the activities of companies under contract. <>


Gossip, Glitz, P&G, and Progressive - Procter & Gamble’s Gain detergent and Progressive Insurance have signed on for Starlicious, an online game show that plays on America’s fascination with celebrities. The show, now running on the News Corp.-owned celebrity gossip site,, tests contestants’ knowledge of celebrity trivia with two press-the-button, answer-it-first rounds, followed by a 30-second “speed round” before advancing to the final prize. Those who are not content with merely watching Starlicious—which enters episode five of its first season this week—can also compete with other online viewers for a chance to appear on the show. (The criteria involves notching the top score in its “Celebrity Trivia Challenge.”) <>


A Look at Rock & Tone and Truebalance by New Balance - New Balance Athletic Shoe Inc. last week launched its first toning collection, Rock & Tone, and in July, the company will bow another toning franchise called Truebalance. Wendy Yang, GM of wellness at New Balance, said the firm’s background in walking and comfort will be an advantage as it enters the category. “Comfort is in everything we do. It’s that first feel. You want your foot to feel as good at the end of the day as it does at the beginning,” she said. <>


R3: Does Traffic Breed Traffic? - new balance image 


K-Swiss California Music Month - Move to the music with California Music Month, presented by K-Swiss Inc. The Westlake Village, Calif.-based company is honoring its home state with a series of online programs and a five-part video series, out this month. The brand explores some of the area’s best music, including classics from the 1960s to present day hits, featuring artists such as The Beach Boys, Guns N’ Roses, The Red Hot Chili Peppers and Green Day. The release comes simultaneously with the launch of the Vintage California sneaker. To access the tunes, visit or, where the site will host an Album of the Week interactive feature. <


R3: Does Traffic Breed Traffic? - K Swiss Image


Card Activation Technologies Sues Apparel Retailers - Card Activation Technologies Inc., which holds a patent on debit card-related technology and has a reputation for litigiousness, again has filed an infringement lawsuit against several apparel retailers. Macy’s Inc., J.C. Penney Co. Inc., Nordstrom Inc., Guess Inc. and the Fashion Bug and Lane Bryant divisions of Charming Shoppes Inc. were among 10 defendants the company accused of violating its patent in a suit filed in U.S. District Court in Kansas City, Mo., in February. Card Activation Technologies alleged the retailers have processed debit and gift cards in ways that infringe on a patent it received in 2000. <>


Christine Su and Elizabeth Yoon  met while working at the Adidas USA headquarters in Portland, Ore. Their new line, Su-Yoon, has a little extra style: “What we are ultimately trying to do is create a holistic collection where fashion fuses and submerges with sportswear athleticism, and where clean and classic styles are refined with slightly provocative athletic details,” Yoon said. Launching for fall ’10, the line of pumps, wedge booties and flat over-the-knee boots takes an athletic look at women’s shoes. The $250-to-$600 styles are made on custom-built lasts (Su’s family owns factories in China, which gave the self-financed startup a head start in product creation) and incorporate flex-built midsoles, EVA heel inserts and cupsole constructions to offer sneaker comfort. <


Puma to Sponsor Top Sailing Event Again - Puma Ocean Racing, which finished second overall in the 2008-09 Volvo Ocean Race, has confirmed its entry for the next edition of the event. Puma will also be the official supplier of footwear, clothing, and accessories to the Volvo Ocean Race <>


R3: Does Traffic Breed Traffic? - PUMA image

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