Nike Crushed It

Nike Crushed It


Consumer Discretionary is clinging on for dear life. But athletic apparel sales for last week turned up sequentially. Nike crushed it. UA put in a nice dent as well. No one else came close.


Key observations from sports apparel sales for the first full week of July:

  1. Noticeable uptick after 3 disappointing weeks. As always, we look at the 3-week trend, which accelerated by 200bp.
  2. All channels improved sequentially, which in itself is rare based on the year-to-date trends. There does not appear to be a calendar shift issue or any major weather anomalies. In fact, the Northeast heat wave could have easily stunted sales last week, but it did not.
  3. New England, South Atlantic, Pacific/Mountain regions all showed the biggest uplift. If this is a sign of broader shopping patterns, it’ll be interesting to see how this triangulates with retailers like Payless who called the South/West as negative contributors last quarter (we’re meeting w PSS tomorrow).
  4. Nike had a HUGE week. I mean HUGE. Sales +28% with market share +626bps? That’s tremendous for a company that has 30% of the market.
  5. The next best share leader is UA, with 46bp. Might not sound as impressive, but given such a smaller sales base, it still translates to 10% sell-through growth. The recent trend of sales growth 2-3x the industry is holding for UA.
  6. Every other brand was a yawn/sleeper from a market share perspective. Adidas was particularly notable with sales -5.3% given its World Cup exposure. I guess not many Spain and Germany jerseys flew off the shelves last week in the U.S. despite selling nearly one-million Spanish jerseys following World Cup victory   per our news run this morning.

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Currency’s Reflection: Bullish on the Pound

Position: Long the British Pound via the etf (FXB); Short US Dollar (UUP)


“Put your hand on a hot stove for a minute, and it seems like an hour. Sit with a pretty girl for an hour, and it seem like a minute. THAT’s relativity.”

-Albert Einstein


When discussing currencies it’s worth repeating that we’re betting on the “relative” strength of one currency versus another. Currently we are bullish on the British Pound (GBP) versus both the USD and EUR; we expressed this conviction by buying the etf FXB in our virtual portfolio on 7/12.


The Debt Road


Taking a step back, yesterday in the Early Look Keith wrote: “This morning’s run of global macro news reminds me of three things:


1.       Sovereign Debt issues are here to stay

2.       American Austerity is on the way

3.       Global growth is going to continue to slow”


In summary, these three points reflect much of what our macro team has focused on in our research over the last 6th months: unchecked government debt and deficit imbalances (globally) will come home to roost. Over the balance of this year the price action across global markets and multiple asset classes has swung considerably alongside fears of sovereign default in Europe, especially from those nations so affectionately named under the acronym “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) or “Club Med” states. We’ve track this fear in the form of bond yield spreads, CDS prices, currency moves, and equity market performance, and played Europe’s Sovereign Debt Dichotomy (our Q2 Theme) by shorting Spain (via the etf EWP) and being long Germany (EWG) in 1H10.


We now think that while Europe’s Sovereign debt issues are by no means rearview (Portugal’s debt was downgraded by Moody’s yesterday), the spotlight concerning the risk of a government piling debt up debt will move to the US, a position encapsulated by our Q3 macro theme of American Austerity.  (Note: this position is very quickly becoming consensus).


As it translates to our view of global currencies, we believe the USD is setting up to give back much of its gains YTD. Should this be the case, and in light of the continued sovereign debt fears in Europe, we could see the Pound as the relative beneficiary of this currency trade. 


Currency’s Reflection: Bullish on the Pound - DXY1


Our bullish positioning on the Pound follows two main threads:


1.)    The Austerity measures issued by the new UK government of PM Cameron and Chancellor of the Exchequer Osborne show their intention to rein in fiscal imbalances. We think fiscal austerity should boost investor sentiment and future growth in the UK despite meek growth prospects this year and next.

2.)    For the intermediate term TREND we see continued political and economic headwinds in the US and throughout certain Eurozone countries; we believe the Pound stands to benefit on a relative basis from the downward pressure on the USD and EUR.


Bullish on the UK


We’re bullish of PM Cameron’s conservative government that took office in early May. The new tide of “austerity” that his government has issued, with initial measures proposed in an Emergency Budget released on June 22nd by the Chancellor of the Exchequer, George Osborne, spell significant spending cuts and incremental consumption tax hikes to trim fat and boost revenue in Britain. With a budget deficit (as a % of GDP) of some 11% in 2010, Britain is proverbially biting the bullet (now) to shore up its fiscal house, a move we believe will better position itself for future growth and appreciate the value of the Pound.


The UK’s main austerity measures include:

  • A 25% cut in the budgets of government departments starting April 2011 through 2015 (a spending review is expected for released in October)
  • Tax on banks with liabilities greater than £20 Billion (the tax is expected to generate approx. £2 Billion annually)
  • Increase to the Value Added Tax (VAT) from 17.5% to 20% starting January 2011
  • Increase in capital gains tax for higher tax bracket earners, to 28%. No change (18%) for low to middle income earners
  • A 2 year wage freeze for all but the lowest paid among Britain’s 6 million public servants and a 3 year freeze on benefits paid to parents for rearing children
  • Cuts to the housing benefit and disability allowance
  • Decrease in corporate taxes, staggered over 4 years from 28% to 24%

We are by no means bullish on the UK economy across the board (it’s one of the main reasons we haven’t bought UK equities). The housing market is one particular area of concern. To the joy of many home sellers (and real estate agents), Cameron’s government did away with Home Information Packs (HIPs) in late May, documents required of homeowners to sell their properties that many complained simply increased the “cost and hassle of selling a home”. However, scrapping HIPs has increased the supply of homes on the market over the last months, and consequently dampened prices.  Recent surveys from Hometrack and Nationwide corroborate the recent turn in prices (see chart below). Should the housing market take a second dip, we’d expect to see significant downward pressure on the consumer.


Currency’s Reflection: Bullish on the Pound - home2


Secondly, the government’s go-forward relationship to the country’s all-important banking sector is still unclear. Cameron’s policy will need to find the appropriate balance between levying a bank tax (which the UK has spearheaded ahead of global backing) and guarding against excessive risk taking by banks while not running banks (and financial professionals) to tax friendly havens, like Switzerland. Decreasing corporate taxes is a start.



Bottom Line


Growth: we don’t expect to see significant growth in the UK in the next year. GDP is projected at 1.2% in 2010 and 2.0% in 2011 by Bloomberg consensus, and we think that consenus is reasonable.


Unemployment: the UK’s nominal unemployment rate has shown improvement over the last two months, dropping 10bps to 7.8% in the latest reading.


Inflation: inflation pressures appear to be waning—CPI readings have come in over the last months, registering 3.2% in June Y/Y.


Currency: we’re bullish on the Pound outright because we think that capital and currency markets will favorably price the austerity measures Britain is taking to shave down the government’s budget deficit.  We think the Pound-USD can continue to trend higher from its near-term bottom of $1.43 on 5/20 (see chart below).


Our TRADE line of support for the Pound-USD is $1.48 with TRADE resistance at $1.53.


Matthew Hedrick



Currency’s Reflection: Bullish on the Pound - p3

R3: Gulf Impact Still Early


 July14, 2010


We’ve received increased interest in names over-indexed to the gulf states of late – here are a few to keep an eye on.





As we near day 100 of the BP Deepwater Horizon oil spill saga and the economic impact on the region shifts from near-to-intermediate term in nature, we’ve received increased interest in names over-indexed to the region. While outsized risk of underperformance in gulf state markets (i.e. TX, LA, MS, AL, & FL) is expected to soon take hold, confirmation of this reality at retail is currently mixed at best.


Case in point are the regional trends from our weekly Sportscan apparel data (see chart). Over the last 4-months, the South Atlantic region (including FL & AL) has reported the strongest results while South Central (including TX, LA, & MS) has held in surprisingly well on a relative basis.  It’s important to keep in mind, however, this is simply one of many sources reflecting regional performance.  Recall that the Midwest was highlighted as a pocket of strength in June by many retailers yet this region is a clear laggard in sporting apparel.


While the economic impact from event-driven catalysts such as the BP oil spill can take time to materialize and in some cases can be short-lived, we have run an analysis flushing out retailers with over-exposure to Gulf states. Including some names from our Restaurant sector head, Howard Penney, the retail/restaurant names with high exposure to the region include: DDS (42%), CTRN (41%), SMRT (39%), HIBB (31%), SKS (28%), SCVL (26%) as well as EAT, PFCB, and SONC.  If you are interested in further detail on the broader list of names let us know.


R3: Gulf Impact Still Early - Sports Apparel Geographies





- Add maternity to the list of growing merchandise categories and demographics that privately held fast-fashion retailer, Forever 21, is targeting. The latest line called love21mternity is available online and at stores in five states. Bloggers are quick to point out that three of the five states have amongst the highest teen pregnancy rates in the country, but that’s a tough demographic positioning to prove.


- According to American Express, 61% of Americans report that customer service is more important to them in today’s economic environment and will spend 9% more when they believe a company provides excellent customer service. However, only 37% of Americans believe companies have increased their focus on providing quality service, while 27% believe there has been no change, and 28% say they believe less attention is being paid to good service.


- Burberry noted that in light of more recent global macro jitters, it has yet to see any pick up in order cancellations or changes in whole account buying behavior. Additionally, U.S department store distribution was highlighted as an area in which they are expecting to gain penetration for the Spring ’11 season.


- Retail real estate continues to struggle, despite the appearance that the health of retailers remains OK. In the second quarter, vacancy rates for shopping centers hit their highest point since 1991, while regional malls hit levels not seen since 1999. Shopping center vacancies are tracking at 10.9% while mall vacancies are at 9%.





Avon Acquires Jewelry Company Silpada Designs - The direct seller stepped up its acquisition spree by purchasing jewelry company Silpada Designs Inc., a direct seller with operations in the U.S., Canada and the U.K., for $650 mm. The purchase is Avon’s third this year — after a 13-year hiatus from acquisitions. It follows two smaller-sized buys, the premium natural skin care range Liz Earle and the trademark of baby care line Tiny Tillia. The all-cash transaction is expected to close in the third quarter. The jewlery category offers an opportunity to polish the company’s image and style authority. <>

Hedgeye Retail’s Take:  The largest of the transactions announced over the past couple of days, but just one of many.


Asics Buys Swedish Outdoor Products Company  Haglöfs - Asics Corp. said Monday that it has agreed to purchase 100% of Swedish outdoor products company Haglöfs for 1 bn Swedish krona, or $133.4 mm at current exchange, from private equity company Ratos AB. Asics said it is looking to expand its apparel business by rolling out high-quality and functional products, as well as grow its core business of running gear. Haglöfs posted a net profit of 48 mm krona, or $6.4 mm, on sales of 590 mm krona, or $78.7 mm , for the fiscal year ended Dec. 12.  <>

Hedgeye Retail’s Take:  Hitting the iron while its hot, Asics looking outside the company to build and boost its apparel business.  We continue to believe more capital and competition put into the space is a win for retailers and the consumer.


Billabong Acquires RVCA - Billabong International Ltd. reached a conditional agreement to acquire California apparel brand RVCA. Terms of the deal were not disclosed. Billabong expects RVCA to contribute 2% to Billabong group revenues in the 2010/2011 fiscal year and be neutral to earnings. <>

Hedgeye Retail’s Take:  Nothing wrong here with an effort to bring some grassroots creativity into the corporate mix.  Smaller brands continue to be the lifeblood of the “alternative” sports and lifestyle sectors.


Concept One Accessories Acquires Blue Marlin - Concept One Accessories has acquired the trademarks and Web site of Blue Marlin, the men’s sportswear and headwear brand, from New Blue Holdings. Blue Marlin, known for its vintage track jackets and caps featuring the insignia of historic Negro League and international baseball teams, went bankrupt in 2008 after reaching a sales peak of $25 mm in 2006. Its assets were subsequently bought by New Blue Holdings, an investment group. Concept One Accessories owns the Block Headwear brand and also holds more than 65 licenses. <>

Hedgeye Retail’s Take:  One of the originators of vintage athletic appears to be on the cusp of a comeback.  Expect to see Blue Marlin leverage the license portfolio of its parent.


Online Private Shopping Club Beyond the Rack Received Equity Investment - Online private shopping club Beyond the Rack said Monday it has received a $12 million equity investment from Highland Capital Partners LLC and BDC Venture Capital Inc. The proceeds will be used to finance accelerated growth and expansion of operations of the Montreal-based firm, which, until this point, had been funded exclusively by angel investors. The percentage of equity to be held by the new investors wasn’t disclosed.  Highland, whose previous investments have included Lululemon Athletica Inc., MapQuest Inc. and Lycos Inc., will have a favorable impact on its business both logistically and financially. <>

Hedgeye Retail’s Take:  Is the bubble nearing for “private sale” ecommerce?  It now appears that private equity is going well beyond the name brand sites in an effort to get in on a piece of the latest retail trend.  Certainly the RueLaLa and Vente-Privee valuations are enough to keep investors interested.


Rock Creek Athletics Acquires DeLong Brand - Rock Creek Athletics, based in Grinnell, Iowa, has acquired the varsity award jacket business assets from Daden Group, also based in Grinnell, Iowa, including the DeLong brand. <>

Hedgeye Retail’s Take: Gotta love M&A, but do kids still wear wool and leather-armed varsity jackets? 


UK Retail Sales Rise in June Against Tough Comps, Helped by Sun and Clearance - UK retail sales values rose 1.2% on a like-for-like basis from June 2009's 1.4% increase, helped by the heatwave in the second half of the month. This June was slightly less hot, but sunny for most of the month. On a total basis, sales were up 3.4% against a 3.2% increase in June 2009. Clothing and footwear sales growth slowed, as many people had already bought in May's sun. TVs benefited from the football and outdoor DIY and leisure improved in the sun, but at the expense of indoor homewares. Overall shop price inflation slowed to 1.5% in June from 1.8% in May. Food inflation slowed to 1.7% in June from 2.2% in May. Non-food inflation slowed to 1.4% in June from 1.6% in May. Non-food items, including electricals and clothing, continue to be cheaper than they were this time last year. In the face of weak demand, retailers will continue to use widespread discounts and promotions. But, given their thin margins, there will be little scope to absorb next year's VAT increase. This will put significant pressure on inflation from January onwards.  <>

Hedgeye Retail’s Take:  Outlook not looking good for the UK consumer, although this market has never been a hotbed of successful and profitable retailing. 


China's Textile Manufacturers Fear Yuan Appreciation Will Lead to Bankruptcies - China National Textile & Apparel Council vice president Gao Yong told the China Daily that a 5% currency appreciation could cause half of the country’s textile companies to go bankrupt. He said the bankruptcies would be spurred by the industry’s thin profit margins of around 3 to 5 percent. The textile industry output in 2009 accounted for just more than 11% of China’s gross domestic product, a Ministry of Commerce report said. The Chinese government conducted a yuan stress test in March that indicated textile manufacturers’ profit margins would decline 1% if the currency appreciates by 1%. Textile industry profit margins already have been affected by rising raw material and labor costs, together with an appreciating yuan, which rose 21% against the dollar from 2005 to 2008. Textile products have become more expensive, resulting in diminishing price advantages compared with Vietnam, Indonesia and other Southeast Asian countries. China’s textile manufacturers could further be squeezed by rising labor costs. <>

Hedgeye Retail’s Take:  Interesting politicking here by the Ministry of Commerce, which surely must have known that this was coming.  Seems suspect that the policies put in place would hurt such an important component of China’s GDP, without some sort of offset.  As such, perhaps additional VAT rebates are on the horizon.


Chinese Footwear Exports Saw Significant Growth in the First Five Months of 2010 - China’s footwear exports recorded an increase of 45% in volume and 32% in value in May compared to the same period a year ago, according to the China Leather Industry Association. <>

Hedgeye Retail’s Take:  Easy comps coupled with one of the hottest sectors in retail is sure to lead to a substantial pick up in demand.  Interestingly, China has lost some share on the margin to Vietnam and Indonesia, making these numbers appear to be even stronger.


Global Yarn and Fabric Output Suddenly Dropped in Q1 - Global yarn and fabric output dropped significantly in the first quarter, largely because of double-digit declines in production in China, an industry survey said. The biggest factor pushing down the numbers was the decline in apparel consumption, but conceded factors such as stock draw downs and scarcity of cotton supplies may have played a role. <>

Hedgeye Retail’s Take:  Sounds like another reason for inflation to pick up.


 Adidas Sells Almost One Million Jerseys of Spanish Soccer Team - Adidas AG indicated it sold almost one million replica jerseys of the Spanish national team, which won the World Cup on Sunday. <>

Hedgeye Retail’s Take:  Clear example of how one of the most challenged economies in the Western world can still find a reason to spend.  At almost $100 for an official replica, plenty of unemployed Spaniards found a few extra dollars to focus on a positive.


Giorgio Armani SpA 2009 Earnings Drop - With the recession affecting its core business and licensed products, Giorgio Armani struggled in 2009.  Total sales fell 6% but jumped 32% in China. The company closed 2009 with a cash pile of 447 mm euros. <>

Hedgeye Retail’s Take:  Interesting proxy as Prada readies its IPO.  Expect to get sick of hearing about the Chinese luxury consumer at any point now.


Amazon Offers College Students Exclusive Perks - Inc. moved today to grab a bigger piece of the online textbook business by offering college students special deals. The world’s largest online retailer today launched Amazon Student, a free membership program that offers college students at least one year of free two-day shipping via free membership in Amazon Prime, which usually costs $79, as well as other benefits such as exclusive discounts and promotions. In doing so Amazon enables students who buy new textbooks through the site to have those books guaranteed to arrive in two days—or they can pay $3.99 for next-day delivery. The Amazon Student page, located at, also features a variety of other merchandise likely to appeal to college students, such as laptops, bedding and microwavable foods like Kraft Easy Mac. <>

Hedgeye Retail’s Take: And now we wait to see what Barnes & Noble does in response now that they own one of the largest college bookstore operations in the U.S.


Retailers Seek an Edge with New Formats - The retail landscape is being remodeled as economic volatility compels stores to alter traditional formats. Large chains are breaking out the most profitable or promising segments of their businesses, such as accessories, sportswear and denim, into smaller stand-alone footprints. Other retailers are trying to appeal to a younger demographic with new labels and edgier store concepts. BCBG launched BCBGeneration to target a younger crowd and A|X Armani Exchange opened a new concept store in Los Angeles that doubles as an event space and features an art gallery. Guess is revamping its accessories-only concept, and plans to open more than 40 of those doors globally over the next year. The company’s Guess denim stores also have a new look and are branded separately from other company lines, such as G by Guess. <>

Hedgeye Retail’s Take:  Creativity is the most overlooked factor in a retailers ability to drive sales.  Those that are not investing and experimenting will ultimately lose, or be relegated to a simple one factor model, which is price.


Prada Receives 360 mm Euro Loan - Prada SpA has negotiated a three-year loan agreement of 360 mm euros to refinance a long-standing debt and to propel the company’s retail growth, its top priority. Prada is eyeing an initial public offering for the fourth time, possibly as soon as the first quarter of 2012. The timing coincides with the expiration of a 450 million euro, or $568.5 million, debt, which will partly be written off by this fresh loan, secured at lower interest rates. <>

Hedgeye Retail’s Take:  The pre-IPO cleansing process is now in full force.


Golfsmith Secures $90M Loan; Opening 14 Stores - Golfsmith completed an amendment and extension of its revolving credit facility with GE Antares Capital.  <>

Hedgeye Retail’s Take:  With the golf space in a malaise (was it ever really that great?), it’s unfortunate to see companies still growing for the sake of growth. 


GIL Shuttering Fort Payne Hoisery Plant, Shifts to Honduras - Gildan-Prewitt company officials announced plans to relocate 30% of its knitting equipment and all its remaining wet processing operations in Fort Payne, AL to Honduras. About 130 of Fort Payne's remaining hosiery workers will lose their jobs by the end of the year. <>

Hedgeye Retail’s Take:  Hard to believe there were still socks being manufactured stateside.  On the other hand this is a natural off-shoring margin boost strategy that is long overdue.


Double-Digit Growth Again for Online Ad Spend - The economy suffered around the world in 2009, but the online advertising market showed its resistance to the recession. While total media spending dropped, online ad spending increased by 2% to $55.2 bn. eMarketer forecasts that 2010 will bring a return to double-digit online ad growth, with global spending set to reach $61.8 bn. Growth will continue at rates of over 10% each year through 2014. North America and Western Europe accounted for nearly three-quarters of the world’s online ad spending in 2009, but those mature online ad markets will post slower growth rates than developing areas in Asia-Pacific, Eastern Europe and Latin America. The internet’s share of total ad spending worldwide will jump from 11.9% in 2009 to 17.2% in 2014. Continued high growth in the online space coupled with a 2009 spending decrease of 10.5% for total media, followed by a slower recovery, will help online get an ever-larger slice of the ad spending pie. <>

Hedgeye Retail’s Take:  Nothing surprising here, given the relatively small share online advertising currently has in the grand scheme of things.  Furthermore, the with higher ROI’s and almost infinite ways to get closer to specific target audiences online ads just make a heck of a lot of sense.


R3: Gulf Impact Still Early - 2 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%


Seems like old times - “dollar down, stocks up...”  With the buck burning again, the Reflation Trade is in play.


Yesterday, US equities rallied hard, with the Dow, S&P and NASDAQ all finishing higher for a sixth straight session.  Over the past month the dollar is down 4.4% and the S&P 500 is up 6.5% as of last night close.  Reflation is back, but this time China is not leading the way and neither is copper.  Last night China was only up 0.8% (down 24.6% YTD) and copper managed to squeak out a 0.3% gain (down 9.8% YTD).  China is due to report its GDP number tomorrow, with likely commentary about any changes to their policies measures.  Will they save the planet a second time? 


Yesterday, the S&P 500 benefitted by the largely favorable takeaways from the early commentary from the June quarter earnings season.  Despite the signs of slowing global growth, early company commentary is helping to dampen the MACRO headwinds from past two weeks.  Even Moody's downgrade of Portugal had little or no impact on sentiment.  Accelerating M&A trends and the likelihood of a resolution for financial reform was also a net positive.


Yesterday, treasuries were weaker with the rally stocks and a disappointing 10-year note auction.  The increased appetite for risk was not confirmed in the yesterday’s performance in the VIX; the VIX rose 0.5% yesterday, but is down 14.7% over the past month.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.69) and Sell Trade (28.97).


The dollar index continues to get smoked, trading down 0.7% yesterday and is trading lower again today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.64) and Sell Trade (84.04).


Apparently the "euro parity" call is being trumped by the US Dollar being debauched again; the EURO closed up 0.9% yesterday, closing at 1.27.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.28).


The three best performing sectors yesterday were Materials (XLB), Consumer Discretionary (XLY), and Financials (XLF).  The Materials (XLB) benefited from its leverage to the RISK/RECOVERY trade; AA helped underpin sentiment following its 2Q10 earnings release.  The company also raised its 2010 global aluminum demand forecast.  Steel and Paper and forest products names also rallied sharply yesterday.


Consumer Discretionary (XLY) outperformed Consumer Staples (XLP) by 1.4%.  Housing-leveraged stocks were among the standouts with the XHB up 3.9%.  A notable stand out was USG, up 10% on the day.  Upscale retailers outperformed the dollar stores and discounters. 


Financials (XLF) put in a strong performance yesterday, ahead of JPM earnings due out on Thursday.  The issues surrounding regulatory overhang was the biggest positive for the sector in the wake of confirmation that the Democrats have the necessary votes to pass reform legislation later this week. The regional names were the best performers in the BKX, but the money-center banks also outperformed the overall market. 

Copper gained for the sixth time in seven days yesterday.  The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (2.87) and Sell Trade (3.20).


Yesterday, gold rose the most in three weeks.  Gold is currently trading at $1,213 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,186) and Sell Trade (1,217). 


In a sign that global growth might not be slowing, crude oil rose to the highest level in more than two weeks.  Ironically, the IEA reported today that is forecasts for world oil demand to slow in 2011.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.21) and Sell Trade (78.54).  


As we look at today’s set up for the S&P 500, the range is 32 points or 1.9% (1,074) downside and 1.0% (1,106) upside.   Equity futures are trading above fair value, supported by Intel’s results last night.  On the MACRO calendar today:

  • MBA Mortgage Applications
  • US Import Prices (June) - Consensus (0.3%)
  • US Export Prices (June) - Consensus 0.1%
  • US Retail Sales (June) - Consensus (0.2%); ex-autos (0.1%)
  • US Business Inventories (May) - Consensus 0.3%
  • DOE Crude Oil Inventories released
  • Treasury Auctions in 30-yr bonds

Howard Penney













No Excuses

“He that is good for making excuses is seldom good for anything else.”

-Benjamin Franklin


I’m in the midst of finishing one of the more calming books that I’ve read in a while – “Benjamin Franklin: An American Life.” That’s a good thing, because there has been nothing calm about being short the SP500 for the last few days. Franklin’s wisdom is giving me some much needed balance.


In a prior life, if I was short an equity market that was going straight up I’d have compounded my mistakes by making up stories that fit my positioning.  Clearly, I didn’t know what I was doing. Note to self: if you want to find data in this business that supports your positioning, you will.


Franklin endowed this world with many practical lessons. Learning by doing and not making excuses while you are making mistakes are two of the critical ones. I’ve been bearish on US Equities and I recently re-shorted the SP500 on Friday July 9 at $107.47. As of last night’s close, the position is -2.04% against me. That makes me wrong right now. The score doesn’t lie; excuse makers do.


In terms of moving to a zero percent asset allocation to US Equities last week, 3 major mistakes I have made this week have been revealed:

  1. Not thinking that Alcoa (AA) barely beating estimates (that had been coming down) would be seen positively by the market.
  2. Not knowing Intel (INTC) would crush the quarter on one of the best earning’s releases I have seen relative to expectations in a while.
  3. Not agreeing that Earnings Season was going to be the bullish catalyst that the bulls have been talking about for months.

Now, to be fair, these are all US stock market mistakes. In terms of currencies and fixed income I’ve been short the US Dollar (UUP) and short term US Treasuries (SHY) this week and those have been wins.


Not thinking; not knowing; and not agreeing – whether I like it or not, these are mistakes that can add up to cumulative losses. A lot of excuse makers will point fingers at their analysts and blame their teammates for “not knowing” – but that speaks to the sad state of how leadership and accountability are currently defined in this modern day CYA culture. If you are wearing the ‘C’ on your jersey, act like a Captain.


As always, after making mistakes, my risk management process has evolved to a point where I take a step back before I take the next step forward. Most of you who have been following my performance for the last 3 years probably recognize this as me slowing down my decision making. All of my risk management moves are time stamped, so I don’t need to give lip service to what I am doing versus what I say I think you should be doing.


From a top down level, our risk management process is designed so that I can always take a step back and review the 3 highest conviction Macro Themes that I’d like to express with every asset allocation and long/short security position.


To review, our current Q3 Macro Themes are as follows:

  1. American Austerity (short the US Dollar and intermediate term bearish on US Equities)
  2. Housing Headwinds (short single stocks like BKD, TOL, and HCBK that are levered to housing’s double dip)
  3. Bear Market Macro (slide 25 of our 35 slide presentation outlines all of the intermediate term TREND lines that we see as bearish)

Zeroing in on the American Austerity theme is where I think we make or break ourselves this quarter. A solid argument can be made that yesterday’s appointment of Jack Lew to replace Peter Orszag as the new OMB budget director was a positive. 


Lew is actually an experienced hand in the budget area and has spent seven years in the OMB. He was lastly OMB director under President Clinton until 2001, and produced a budget SURPLUS. Since I think that the broken intermediate term TREND in both the SP500 and the US Dollar are reminiscent of what we saw emerging in Europe 3-6 months ago, this is progress. It’s Spending, Stupid.


Back to the bearish side of American Austerity, yesterday’s budget deficit for June was reported intraday and a quantified argument can be made that nothing has changed the intermediate term TREND of lower tax receipts and higher spending.


Per my defense partner Daryl Jones’ math in a note he sent to our macro clients last night titled “The Deficit Still Looks Ugly, Normalize For Tarp And It Looks Uglier”, the June headline improvement in deficit can be attributed primarily to timing of revenues.  Due to the Memorial Day shift, a large amount of tax revenue was pushed into June. 


In aggregate for the year-to-date, overall revenues are only up 0.5%, with corporate income tax contributing all of this increase growing 33% year-over-year.  Personal income tax, on the other hand, is down -4.4% in the year-to-date.  So despite the “economic recovery”, tax receipts from individuals are still lagging on a year-over-year basis (jobless recovery sound familiar?).


Additionally, while reported outlays were $73 billion, or -3%, lower for the first three quarters of the fiscal year, this decline included a reduction in nearly $350 billion from a combination of TARP, Treasury payments to Fannie Mae and Freddie Mac, and net outlays for FDIC insurance.  If normalized for TARP, so removing the $350 billion from last year’s numbers, then spending ex-Tarp is up 10.6% on a year-over-year basis!  Not good.


All the while, I was tweeted last night by the President of the United states with the following storytelling:


“Wall St. reform helps families, businesses, and the entire economy. I urge the Senate to act quickly, so I can sign it into law next week.”


And then, this morning, in a Bloomberg National Poll, “More than 7 out of 10 Americans say the economy is mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit.”


So the people get it, but Washington doesn’t. And, unfortunately, the next leg down in both the US Dollar and US Equities will be a direct function of a Duration Mismatch between political change in this country and the gravity associated with debts and deficits as a percentage of US GDP not changing.


My immediate term support and resistance lines for the SP500 are now 1074 and 1106, respectively. The Bear Market Macro TREND line of resistance for the SP500 remains 1144.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Excuses - Frank


The Macau Metro Monitor, July 14th, 2010



GDP rose 19.3% YoY in 2Q, accelerating from 1Q's 16.9%.  On an annualized and seasonally adjusted basis, GDP grew 26% in 2Q, higher than the 17.4% forecast in a Dow Jones Newswires survey.  Strong manufactured exports and positive trade data boosted GDP.  The bullish data sent the US$/Singapore exchange rate up to 1.3741.  The Monetary Authority of Singapore won't stand in the way of the local dollar's subsequent rise, a person familiar with the central bank's thinking told Dow Jones Newswires.


But Singapore's Ministry of Trade and Industry is more cautious about growth going forward, stating "The sluggish final demand in the US and EU has moderated industrial activities and lowered expectations for manufacturing output in the Asian economies. The momentum of the global economic recovery has thus moderated, although a double-dip recession remains unlikely at this juncture."  Nevertheless, the government raised its full-year growth forecast for nominal GDP to 13%-15% from its May estimate of 7%-9%.


Meanwhile, Prime Minister Lee Hsien Loong said the government will be mindful of the economy overheating with the strong growth - which will also mean having more foreign workers.  Mr Lee said: "I believe this year foreign worker numbers will go up in Singapore. It cannot be helped because with the market so tight, if we don't allow the foreign workers in you are going to have overheating."



Marina Bay Sands has filed a second lawsuit against lawyers' group Inter Pacific Bar Association (IPBA) for not paying for their May conference.  This comes despite Adelson recently saying he wants to "make love, not war at MBS".  In this second suit filed on June 28th, MBS is asking for full outstanding amount $641,245.57 owed, or $341,245.57 if it managed to claim the $300,000 it had sued for earlier on May 14.



Adelson recently said, “I will go visit Vietnam, maybe at the end of July. I have met Vietnamese officials many times in Singapore.  We want to build the same thing as Marina Bay Sands in Vietnam, in the south and in an urban area.... I can only do it on the condition that Vietnamese people are allowed to come in. The problem is that Vietnam does not allow its citizens to get access to the casino. We want to invest in Saigon, but we cannot do that if the government does not allow people to gamble."


Vietnam currently has one casino in Hai Phong City--for foreign tourists only.



According to the Consumer Council’s monthly “Supermarket Price Survey Report”, 44% of 200 supermarket goods were cheaper in July, relative to June.