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CCL 2Q YOUTUBE

In preparation for Carnival's Q3 earnings release on September 21 , we’ve put together the pertinent forward looking commentary from CCL’s Q2 earnings release/call.

 

 

YOUTUBE

  

General Comments:

  • “We are maintaining earnings guidance of $2.25 to $2.35 a share.”
  •  “Looking at bookings over the last six weeks by major trades for North American brands, Caribbean itineraries, which are more than 50% of North American capacity over the next nine months, continue to be strong at higher prices. Bookings for Alaska cruises however, ran behind the last six-week period but at substantially higher prices. But fortunately, there is very little Alaskan inventory left to sell. Bookings for North American brand Europe programs were also lower, but there’s also not much inventory left to sell in Europe for the reminder of the year.”
  • “Despite the brief slowdown in these trades, we are still expecting significant year-over-year pricing improvement for Alaska and Europe for 2010.”
  • “There may be a slight increase in fuel consumption because we have to navigate around what may be the worst areas, but the ships are being inspected every time they return to the U.S. We haven’t had to clean a hull once yet. We’ve seen no slowdown in booking pattern.”
  • “As we get bigger and bigger and bigger in our European brands, you become more and more seasonal. And so our advance ticket deposits at the end of 2Q is always going to be significantly higher than at the end of the year. As we grow the European brands, you can expect lower earnings in the first quarter and more earnings in the third quarter.”
  • [Booking curve] “The curve is about at the same levels as last year.”
  • “But typically for the next quarter, which in this case would be the 3Q, we’re always 85 to 95% booked. Two quarters out, which is 4Q, our historical range is 55 to 75% booked. And for three quarters out, which would be 1Q, traditionally we are in the range of 30 to 50% booked, and we’re still in those historical ranges.”

3Q 2010:

  • “For the third quarter, fleet-wide capacity is 6.2% higher than last year, 3.7% in North America, 8% for Europe brands. At this point, with very little inventory left to sell in the quarter, fleet-wide capacity is slightly ahead -- fleet-wide occupancy, I should say, is slightly ahead YoY, with local currency pricing well ahead.”
  • “We are expecting that third quarter ticket pricing for North American brands to increase in the low double-digit levels by the time the third quarter closes.”
  • “By the time the quarter closes out, we are expecting European brand pricing to be flattish YoY, which is a very good result given the 8% increase in capacity. We are forecasting third quarter fleet-wide revenue yields will increase in the 5 to 6% range on a local currency basis, flat to up slightly on a current dollar basis.”

4Q 2010

  • “Now turning to the fourth quarter, wide capacity is up 6.1% in the quarter, 1.7% in North America and 10.6% in Europe. On an overall basis, fourth quarter occupancy is slightly lower, with local currency pricing running nicely higher. North American brands in the fourth quarter are 50% in the Caribbean, with all other itineraries individually below 10%.”
  • “At the present time, pricing is running nicely ahead year-over-year with lower occupancies. Overbooking volumes for the fourth quarter for North American brands continue to be strong.”
  • “European brands are 73% in Europe in the fourth quarter, with all other itineraries individually under 10%. Europe itinerary pricing on a local currency basis is nicely ahead of last year with slightly better occupancy. Bookings continue to be strong for the fourth quarter, and we are forecasting that by the time the fourth quarter closes Europe brand local currency pricing will be higher YoY, which is a very good result considering the 10% capacity increase that we have during the quarter.”
  • “On a fleet-wide basis, we expect fourth quarter revenue yields to be up approximately 3% on a local currency basis.”

1Q 2011

  • “Our fleet-wide capacity is going to be up 6.6%--3.8% for North American brands and 11.7% for European brands.”
  • “1Q pricing is running higher on a YoY basis with occupancy running slightly behind.”
  • “North American brands are 66% in the Caribbean, 11% in Mexican Riviera cruises and the balance in all other itineraries. Presently, Caribbean pricing is slightly higher on lower occupancies and Mexican Riviera pricing is higher on higher occupancies. Pricing on virtually all other itineraries, mostly longer premium-price cruises, is higher on lower occupancies.”
  • “European brands are 25% in European itineraries, 23% in the Caribbean and 18% in South America with the remaining in various other itineraries. Local currency pricing for Europe and South America cruises is running higher on lower occupancies and pricing for European brand Caribbean cruises is higher on higher occupancies. Overall, pricing in local currency for Europe brand cruises is nicely higher at this time with occupancies, when you combine it all, at the same level as the prior year.”

 

 



APPAREL SIGMA: NUMBERS DON’T LIE

Unless we we’re completely off base with the analysis behind our bearish industry call, the number of companies in the quadrant of our SIGMA framework that is most linked to stock blowups will double over 2 quarters. Our updated book is available for your enjoyment. Please let us know if you'd like a copy.

 

Sales/inventory spread drifting lower, gross margin improvement eroding, sg&a and capex starting to build. It’s all plain as day in the attached apparel supply chain SIGMA chart, and we just inked the fourth quarter of easy compares.  Mind you, this is completely retrospective, and does not account for the rise in input costs we’ve seen in just 3-weeks.  All this, and the consensus still has margins reaching new highs in 2011, and the market is sporting a 15x p/e on 15% forward earnings growth consensus expectations.  

 

Out of the 107 companies we track in this framework, 75 were in the ‘sweet spot’ (positive sales/inv spread with improving margins) last quarter, and that has since fallen to 53.  Conversely, the number of companies in the quadrant of our chart that is most often linked to stock ‘blowups’ went from 7 stocks last quarter to 26 in 2Q. Unless we we’re completely off base in our bearish industry call, the number of companies in the SIGMA ‘sweet spot’ will be cut in half over 2 quarters.

 

APPAREL SIGMA: NUMBERS DON’T LIE - SIGMA Industry Positions Q2 10

 

APPAREL SIGMA: NUMBERS DON’T LIE - Industry SIGMA

 

ABOUT SIGMA

One of the cornerstones of our analytical process is our SIGMA (Sales Inventory Gross Margin Analysis). Once you take a minute to understand it, you see that this is not only a strong analytical tool, but also a way to monitor the behavioral changes of how a management team (or group of them) trades one line of the P&L or balance sheet against each other in the face of volatility in the Macro environment.

 

Here is a quick overview of how to read the chart:

 

  • The vertical axis illustrates the difference between sales growth and inventory growth, while the horizontal axis represents the year-to-year change in the operating margin.  We then plot the past 8 quarters of data to visualize the trend. The ultimate fundamental outcome for any company occurs when the data points line up in the upper right hand quadrant (sales outpace inventories and margins up).
  • The background of the SIGMA chart depicts the year-to-year changes in gross margin and SG&A margin, along with a line representing capex as a percent of sales on a trailing twelve month basis. This allows us to track margin and cash flow comparisons on a quarter-to-quarter basis.

 


R3: JCG, KCP, DBRN, APP, UA

R3: REQUIRED RETAIL READING

September 20, 2010

 

While talks of ICON acquiring KCP would keep the business essentially ‘all in the family,’ it’s clear that discussions haven’t been kept quite as close to the vest with shares of KCP up 35% last week. 

 

 

RESEARCH ANECDOTES

 

- Over the weekend, J Crew launched its online outlet.  The clearance site (which doesn’t look too different from the sale section of the normal site) offers a limited assortment of factory-only merchandise for a limited time.  The site is scheduled to open at 12AM on Fridays and closes at midnight on Sunday.

 

- Add Style Trek to the list of websites aiming to add a bit of democracy to the fashion process.  The site which is being hailed as “Facebook meets Net-A-Porter for emerging designers” features an offering from designers across the globe.  Style Trek aims to facilitate communication and feedback between designers themselves and consumers.  Underpinning the whole concept is the idea that designers can track demand in real time via the open feedback loop they create with their fashionable customers.

 

- Keep an eye on TwitterMoms, an effort aimed at becoming the modern day version of the “Good Housekeeping Seal of Approval”.  The network comprised of 30,000 mommy bloggers acts essentially like one giant, controlled product focus group.  Subsets of mom’s/bloggers will be testing CPG products at home and then will provide honest, practical feedback to both marketers and their consumer peers.  P&G is currently working on adding a QR code on their product packaging which in turn would allow instant electronic access to TwitterMom reviews right from the shelf.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

J-Crew Kickin' It - J.Crew is better known for knits, but could kicks be the next big thing? The prep-chic store’s exclusive New Balance 1400s are hitting shelves Nov. 1 and could give the retailer a serious injection of sneakerhead cred. The made-in-the-U.S. men’s styles, which Muytjens said were sleek, versatile and worked well with J.Crew’s classic apparel mix, come in bottle-green, deep-blue and black. They will retail at select J.Crew locations.  <wwd.com/footwear-news>

Hedgeye Retail’s Take: We don’t expect these exclusive footwear offerings to move the needle for J. Crew, but they could certainly help drive traffic in addition to keeping the brand highly relevant. If you recall, the company carried exclusive metallic Sperry Top-Siders last year that were almost instantaneously sold out. The regularity of this strategy appears to be paying dividends.

 

ICON Talking Acquisition With KCP - Designer Kenneth Cole is in talks to sell the shoe and clothing company he founded to Iconix Brand Group Inc., the licensing company run by his brother Neil Cole, according to two people with knowledge of the matter. The timing for a takeover of Kenneth Cole Productions Inc. isn’t clear, and the companies may not reach an agreement. <bloomberg.com>

Hedgeye Retail’s Take: With an apparel-heavy portfolio, the addition of KCP’s concentrated footwear weighted stable makes sense in more ways than one given that it’s essentially all in the family. With the stock up 35% last week and trading 8x daily volume Friday this is does not exactly fall into the shocking category.

 

Niketown Attacked by Bedbugs in NYC - Niketown is the latest New York retail institution to be bitten by bedbugs. The 57th Street superstore shuttered its doors on Saturday after bedbugs were discovered, and it remained closed through Sunday. The store’s street level windows were covered with brown paper, and a sign was posted on the glass stating that it was temporarily closed. At press time, it remained unclear when the Portland, Ore.-based company was planning to reopen the 95,000-square-foot store, which has been a major Manhattan tourist destination since it first opened its doors in 1996. Nike could not be reached for comment on Sunday. In early July, an infestation of bedbugs forced Abercrombie & Fitch’s Hollister flagship at 600 Broadway in SoHo to shut down for a few days. <wwd.com/retail-news>

Hedgeye Retail’s Take: One of the more memorable story-lines of the summer of 2010 for retailers, Nike certainly isn’t the first to be plagued unfortunate event. At this point it’s almost status quo as doors close for only a few days and then it’s back to business as usual – we don’t expect this to be any different.

 

DBRN Launches Its First E-Commerce Site - Dressbarn, a women’s apparel retail chain with 830 stores, this week launched its first e-commerce site, dressbarn.com. The launch comes in a busy period for parent company Dressbarn Inc., which in the past year has launched an e-commerce site for its Maurice women’s apparel brand and also acquired retail chain Justice.  Dressbarn.com has a relatively clean and simple design, reflecting the tastes of the retailer’s customers. <internetretailer.com>

Hedgeye Retail’s Take: More important than the design is simply the fact that Dress Barn in now in the e-commerce game. With this channel typically an outperformer for most retailers, we only see upside to the launch.

 

American Apparel Gets New Deadline - American Apparel Inc. said Friday it had been given an extension until Nov. 15 by NYSE Amex LLC to file its official financial results for the second quarter ended June 30 and avoid being delisted by the exchange. The embattled Los Angeles-based retailer and wholesaler of trendy basics said it received a letter from NYSE Amex on Sept. 13 that its plan to regain compliance with listing criteria had been reviewed by the exchange and the extension granted. <wwd.com/business-news>

Hedgeye Retail’s Take: Time is critical in these situations and APP was just granted healthy dose of it. You’d probably be pressed to find another retailer that’s pulling harder for a strong holiday season.

 

Miles Austin Becomes Under Armour Endorser - Under Armour announced a multi-year partnership with NFL Pro Bowl wide receiver Miles Austin. Other Under Armour NFL players include Baltimore Ravens linebacker Ray Lewis, New York Giants running back Brandon Jacobs, Cincinnati Bengals linebacker Rey Maualuga and San Francisco 49ers tight end Vernon Davis. <sportsonesource.com>

Hedgeye Retail’s Take: A great fit for the brand. After a breakout season last year, Austin has been often lauded for his freakishly strong lower half for a receiver and is changing the perception of the position in the process.

 

The North Face Signs Action Sports Athletes - The North Face announced skiers Tom Wallisch, Nick Martini and Mike Riddle, and snowboarder Kaitlyn Farrington have joined its athlete sponsors team. The North Face has a team of more than 60 professional global athletes which includes snowboarders, skiers, rock climbers, mountaineers and ultrarunners. <sportsonesource.com>

Hedgeye Retail’s Take: Keeping with the integrity of its highly authentic brand, most have never heard of these athletes outside of these niche sports, but this is squarely centered with the company’s marketing/positioning strategy.

 

Mexico's Upscale Department Store El Palacio de Hierro Plans to Expand - El Palacio de Hierro, Mexico’s upscale department store chain, plans to open 10 stores by 2015 as it continues to expand in the country’s growing luxury fashion market. “We want to expand in Mexico and will open one store per year in the next five years,” marketing director Carlos Salcido told WWD. Fashion and luxury account for 50 percent and 15 percent, respectively, of the chain’s apparel sales. Palacio is striving to persuade high-end global brands to debut in its stores — and the effort has so far proved fruitful. Italy’s Bottega Veneta is set to open two corners, in Palacio’s Santa Fe and Perisur outlets, while Hermès has agreed to open a corner in Guadalajara, a spokeswoman said. Givenchy Leathergoods, See by Chloé and Emporio Armani bags are also arriving in the coming weeks, Lavertu Stevens added. In the high-end shoe department, Jimmy Choo and Marc Jacobs are expected to reach Palacio in the second half. <wwd.com/retail-news>

Hedgeye Retail’s Take: A market at its infancy outside of key tourist destinations, the brands on board are some of the world’s most elite suggesting demand and now opportunity exists for retailers south of the border.

 

FN Fashion Brands With the Most Twitter Fans - The tweets were flying last week, during the bi-annual New York collections. From celebrity mentions and party pics to product hits and giveaways, designers were relying on social media more than ever to get their brands — and their merchandise — in front of consumers. Footwear News checked out the Twitter pages of all the designers showing around the city to see what news was rocking the Net. Here are some of the top fashion names, ranked by the size of their following: Lacoste 201,640; Christian Siriano 183,568; DKNY 175,906; Victoria Beckham 150,829; Diane Von Furstenberg 105,345. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Not to be overlooked, the current television spot featuring the red ‘lego-styled’ handbag and its ascension to popularity is closer to reality than not – these early trend reads are valuable.

 

Top Buyers Weigh in on the Spring Footwear Trends in New York - Strongest Trends: Height such as platforms, wedges, espadrilles and stacked heels; Ankle interests; Nude colors such as ivory, sand, tan, cognac, vacchetta and blush tones; Natural materials, including wood-bottomed wedges, rafia platforms, canvas uppers and macramé woven details. Must-Carry” Styles from New York: Height in every which way; Neutrals; Natural materials. Directional Styles: nudes, natural materials, height and ankle interest. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Lagging the trend towards neutrals that we’ve seen in furniture over the last year, when has height not been in favor?

 

Ankle Boots Are In - Ankle boots continued to gain momentum on the catwalks, with printed ponyhair, corset lacing and mixed material styles taking center stage. Alexander Wang’s utility laceups with cut-out heels ensured he will stay on top, while Rebecca Minkoff’s dalmatian booties from her footwear launch also promised to be must-haves. Suede uppers and stacked heels were key, while corset lacing added serious sex appeal to covered-up spring boots.  <wwd.com/footwear-news>

Hedgeye Retail’s Take: If you didn’t know, now you know…

 

Cambodia: Four-Day Massive Strike Ended - A massive strike of garment workers in Cambodia ended last Thursday following government intervention and promises to arrange talks with the garment manufacturers. <fashionnetasia.com>

Hedgeye Retail’s Take: The successful resolution of one of the industries strikes/disputes is inherently positive for other negations.

 

Vietnam: Shoe makers eye on domestic market - Vietnamese shoe manufacturers have plan ambitiously to increase its current 30% of the domestic market share to 50% by the end of the year. According to the Leather and Shoes Research Institute, Vietnamese consumers purchase 130 million pairs of shoes per annum, or 1.5 pairs per person per annum. Currently, 70% of products to meet the demand are being fed by imports. <fashionnetasia.com>

Hedgeye Retail’s Take: Aggressive domestic growth coupled with the country’s growing export business will require among other things, substantial capacity growth - a  positive for domestic infrastructure plays.

 

iTwist Footwear - iTwist Footwear, the original interactive and changeable footwear brand, celebrates color, fun and individuality. Patented swivel tech allows wearers to flip over the tops of their flip-flops and reverse the tongue on their shoes to reveal different colors and graphics. Giving wearers complete control over their style with cool colors, graphics and textures, iTwist footwear features self-contained functionality, no parts to lose and no extra inventory for retailers. With a proven track record for selling their licensed technologies on product from major brands including K Swiss Tongue Twister™, Stripe Shifter™ and Band Em™, U Turn Sports kicks off the launch of iTwist Footwear with their product line of reversible sandals, flip-flops and slides for Spring 2011, with shoes to soon follow. <news4us.com>

Hedgeye Retail’s Take: The innovation here (if want to call it that) is not in the function of the shoe, but rather the design whereby wearers can change the color pattern of their flops by flipping the thongs over to the alternate side. Perhaps it will be marketed as a value proposition – essentially a 2-for-1 – but in all likelihood this will be the first and last time you hear of this one.

 

R3: JCG, KCP, DBRN, APP, UA  - 1

 


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MGM MACAU PRE-IPO AGGRESSION

Feed the junkets is the plan and we think it will work – at least for market share gains. 

 

 

We’ve written a few posts on MGM’s strategy to boost its Macau market share ahead of the planned IPO.  It’s been our belief that if management can elevate market share and revenues, even at the expense of margins, they MAY be able to sell a future EBITDA level based on a higher revenue run rate.  Of course, while it’s easy to “buy” revenues, you can’t “buy” profits.  We’ll see if investors “buy” the future EBITDA story.

 

MGM Macau recently hired Mr. Kwong away from Altira to run the VIP operation as part of this strategy.  Mr. Kwong is known to be very aggressive in compensating the junkets to focus on the top line rather than the bottom.  The property recently brought the junket operator David Star to operate a VIP room.  David Star maintains a sizable operation at Wynn.

 

So how aggressive are they?  We are hearing that David Star is getting in excess of 55% revenue share, but they are also responsible for the costs of the room, including staff and property expenses.  This deal would be similar to the Golden Group room in Grand Lisboa which is based on the deals at the SJM 3rd party casinos.  We estimate this structure provides a margin of roughly 5% for the casino versus a mid-teens margin for the property’s standard VIP arrangements.  

 

MGM Macau is also being aggressive with regards to the advanced front money, essentially credit, with a number of HK$500m being mentioned around town, although it’s unclear if this is just for David Star or spread around the other rooms as well.  Many of the casinos will offer up to 50% of the expected revenue share/commission based on historical performance and we are hearing that MGM is pushing between 75% and 100%--so considerably more.  This should not be considered a long term strategy and we doubt MGM is planning to be this generous for more than necessary to boost their numbers ahead of the IPO.

 

So how is it working so far?  In terms of volume share, we think the September numbers will show gains.  Hold percentage has been subpar so far in September so revenue share may not have kept up.  However, look for a big jump in Q4.

 

While management seems set on a Q4 deal, we still think the most prudent strategy for MGM would be to wait until they have a few months of market share gains under their belt before they price the IPO.  That would be put the timing in Q1 of 2011.


WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE

Last week, 4 of the 8 risk measures registered positive readings on a week-over-week basis, with one negative and three netural/mixed.  A summary table is provided below.

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies)

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - summary

 

1. Financials CDS Monitor – Swaps were mixed last week.  Swaps tightened for 19 of the 29 reference entities and widened for 10.    Conclusion: Mixed.

 

Tightened the most vs last week: SLM, MBI, AIG

Widened the most vs last week: LNC, MET, HIG

Tightened the most vs last month: JPM, UNM, XL

Widened the most vs last month: WFC, AGO, MMC

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - us cds

 

2. European CDS Monitor – In Europe, CDS was mostly positive.  Swaps tightened for 36 of the 39 reference entities tightened and widened for only 3.   Conclusion: Positive.

 

Widened the most/tightened the least vs last week:  Bank of Ireland, Banco Santander, Banco Pastor

Tightened the most vs last week: Soc. Gen., Commerzbank, National Bank of Greece

Widened the most vs last month: Bank of Ireland, Assicurazioni, DnB NOR

Tightened the most vs last month: Deutsche Bank, Alpha Bank, HSBC

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - euro cds

 

3. High Yield (YTM) Monitor  High Yield rates fell 4 bps last week, ending at 8.46 on Wednesday, the lastest day for which pricing was available. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - high yield

 

4. Leveraged Loan Index Monitor – The leveraged loan index rose 6 points last week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - lev loan

 

5. TED Spread Monitor – Last week the TED spread fell slightly, coming down by two basis points. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - ted spread

 

6. Journal of Commerce Commodity Price Index – Last week, the index fell just under 1 point, closing at 13.07 on Wednesday, the latest day for which pricing was available. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - joc

 

7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 17 bps, ending the week at 1156 bps versus 1173 bps the prior week.  Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - greek bond

 

8. Markit MCDX Index Monitor – Spreads were up slightly last week, closing at 227 versus 218 the prior week. The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - MORE POSITIVE THAN NEGATIVE - markit

 

Joshua Steiner, CFA

 

Allison Kaptur


Trojan Protection

“The best lightning rod for your protection is your own spine.”

-Ralph Waldo Emerson

 

On Friday President Obama introduced Elizabeth Warren as the new head of the US Consumer Protection Agency. Sounds serious. We hope that she’ll be working vigilantly to protect us from more policy making ideas coming out of Larry Summers and Timmy Geithner.

 

Hope, of course, is not an investment process. So the best we can do for your protection this morning is recommend you take your financial security into your own hands – in the face of government sponsored volatility, sell high - buy low.

 

If you thought last week was a big week for Government (Congress was back in session), this week is going to be a barn burner:

  1. Monday - kicks things off with an “exclusive CNBC” town-hall meeting with none other than the President of the United States as 12PM EST today (I couldn’t make that up if I tried).
  2. Tuesday - Heli-Ben is going to save us all from the road that is US monetary policy perdition at the FOMC meeting that will be brought to you by Trojan’s NEW “Fire & Ice Quantitative Easing”, twice the turn on!
  3. Wednesday – both the Senate Banking Committee and weekend at Barney’s House Financial Service committee will be back in action.

Some people take the alleged Trojan horse protection Ben Bernanke provides us very seriously – if you think about it in terms of the world’s poor who are watching food prices rip higher again this morning, it’s very serious indeed.

 

Bernanke’s “Warped Twenty Ten Tour” (Trojan) has been a battle. He started the year talking about US GDP growth accelerating into the back half of the year on the order of 3.5-4%. Now that US GDP growth is barely 2%, you can fully expect him to downgrade his growth estimates tomorrow. In modern day risk management speak, we call this chasing your own tail.

 

Protecting their own tail is what people in Washington do. This isn’t new, and you don’t need CNBC to provide the sponsor’s messaging to understand this either. Today is just another day in the Fiat Republic. Prices are a lot higher than where they were only a month ago, so now is not the time to be buying those inflated prices.

 

On a sequential basis versus August, inflation in September has re-reared its ugly head. Expect Ben Bernanke to mention none of this tomorrow. If he didn’t see inflation in 2008, he’s certainly not going to see it now. These things are very hard to see from a helicopter.

 

Interestingly, but not ironically, Bernanke’s counterpart at the Reserve Bank of Australia, Glenn Stevens, pre-empted Heli-Ben’s political pandering by saying the following in Victoria this morning: “If downside possibilities do not materialize, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy.”

 

Now if you are part of the perma-Deflationista camp, you probably don’t like these trivial things like prices going up being mentioned as inflation. Heck, how should we expect one of the next alleged great leaders of the Fiat Republic like Republican Senate candidate, Christine O’Donnell, ever see anything but deflation in US home prices since she stopped paying her mortgage in 2007?

 

Never mind 15 year highs in cotton prices this morning or all-time highs in the nominal price of gold – the deflation story-telling is entrenched – and Elizabeth Warren is going to protect all consumers from those evil-doer gold commercials anyway.

 

Last week saw further deflation in the US Dollar Index’s price. The US Dollar continued to look like the credibility of the government that backs it, losing another -1.6% of its debauched value week-over-week and closing down for the 13th week out of the last sixteen.

 

In response to the Dollar DOWN trade that Ben Bernanke has been hired to perpetuate, most asset prices inflated week-over-week, including short-term US Treasury bonds. As we look at 2-year yields dropping to generational lows this morning of 0.47%, Americans with hard earned savings accounts in this country must be wondering whether Elizabeth is going to protect us from Japanese style fixed income rates too…

 

As Emerson dares me to have the spine to sell my 6% asset allocation to Gold (GLD) this morning, I think I might just do it. That’s right - I have my own protection strategy against Government.

 

My immediate term support and resistance levels for the SP500 are now 1113 and 1137, respectively. On Friday, I sold 3% of our 15% position in the Chinese Yuan (CYB), taking our asset allocation to Cash up from 46% to 49%. Unlike prior bear market rallies, we have plenty more to sell into this one.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Trojan Protection - TROJAN


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