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R3: UA, NFL, Fila, JJB, and Bedbugs

R3: REQUIRED RETAIL READING

September 28, 2010

 

A fair amount of activity in the athletic space this morning, led by a strong initial day of trading by Fila.  Keep an eye on Fleet Feet Sports and the proliferation of the NFL into the women’s apparel market.

 

 

RESEARCH ANECDOTES

 

- Expect TLC’s bridal show spin-off, “Big Bliss” to be filled with advertising from retailers looking to capitalize on the plus size demographic.  The six episode spin-off of “Say Yes to the Dress” will chronicle plus-sized brides searching for the perfect gown at Kleinfeld’s in Manhattan.

 

- Topshop continues its expansion with the announcement of the company’s second stateside location, this time in Chicago.  The British retailer is also seeking locations in additional metro areas including Las Vegas, San Francisco, Miami, LA, and NYC.

 

- Back to school was a key driver of an acceleration in web traffic to retail-related websites.  Sites seeing major increases included: Target (+6.2%), Staples (+22.8%), JC Penney (+24.8%), Kohls (+23.8%), Macy’s (+13%), Zappos (+30.3%) and Gap (+19.6%). 

 

- Keep an eye on website Sourcemap.com.  The site aims to increase transparency in supply chains, allowing consumers to know where items come from and what exactly they are made of.  With genuine concern from shoppers regarding sustainability and social responsibility, transparency is becoming a much bigger factor in the consumer’s decision making and purchasing process. 

 

- In a sign that Tommy Hilfiger is accelerating its new ‘Tommy’ concept – a new line that will be a departure from preppy basics, its Bleeker Street location is under renovation and already sporting new signage. Certainly more aggressive than initial plans to soft launch the brand in Canada, the new concepts location should give Tommy and PVH a quick read on demand as it opens in time for the holiday season.

 

- In an attempt to kickoff its new Sport Performance collection in world record fashion, Jockey rallied more than 100 players for a game of dodgeball in Chicago wearing nothing but skivvies. We hope the line is more successful than the company’s guerilla marketing attempt since it fell far short of its goal of more than 1,200 participants.

 

- Macy’s Inc. is touting Elvis Christmas tree ornaments in Tennessee and Blackhawks decorations in Illinois ahead of the holidays, tailoring goods for local markets to squeeze more out of its biggest shopping season. The company is hoping its “My Macy’s” will add as much as 3% to the chain’s holiday sales at stores.

 

- The 65th session of the United Nation's General Assembly has plagued many retailers since its open last Tuesday, driving down traffic for most stores as local shoppers couldn't access the area due to street closures and chose to steer clear of the chaos.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Fleet Feet Sports to Acquire Phidippides Encino - Specialty Retail Development Company (SRDC), Inc., a multi-store Fleet Feet Sports franchise affiliated with Fleet Feet Sports Inc., announced the purchase of Phidippides Encino, a top running shop in Los Angeles. Change of possession will take place on Nov. 1. Phidippides Encino has served the Southern California running community for 30 years and is one of the pioneering, premier specialty stores in the United States.  <sportsonesource.com>

Hedgeye Retail’s Take: Without knowing the terms of the deal it’s difficult to speculate on its financial merits, but adding nearly 20 additional running specialty locations to its base of 90 makes Fleet Feet an increasingly more relevant player amongst athletic footwear retailers nationwide.

 

Fila Korea IPO Set for September 28th - Fila Korea Ltd., which in March 2007 purchased the Fila brand from Sports Brands International Ltd., will complete the initial public offering of its shares on the Korean Stock Exchange (KRX) on Tuesday, September 28th. Proceeds will be used to pay down debt. <sportsonesource.com>

Hedgeye Retail’s Take: After posting a 26% increase in sales in the 1H of 2010, shares doubled on its debut on the Kospi. With its re-entry into the basketball category back in April, the brand moves up in relevance on our radars in athletic footwear as it pursues further share gains.

 

NFL Launches Women-Specific Campaign - The National Football League is launching a $10 million TV campaign on Monday aimed at reaching women football fans. The effort also includes the launch of the new www.nfl.com/women microsite and is being done in concert with existing partners such J.C. Penney, Kohl's and Dick's Sporting Goods as well as new ones such as Victoria's Secret and Destination Maternity. <sportsonesource.com>

Hedgeye Retail’s Take: According to Scarborough research data on NFL demographics, only 37% of women are considered loyal fans and only 31% avid fans compared to 63% and 69% of men respectively. While a fraction of male audience, the increased spend makes sense given that women’s apparel represents the league’s fastest growing business.

 

Under Armour Signs Ravens' Anquan Boldin - Under Armour signed Baltimore Ravens wide receiver Anquan Boldin to an endorsement deal. The eight-year veteran is a three-time Pro Bowler and was the 2003 NFL Offensive Rookie of the Year.  <sportsonesource.com>

Hedgeye Retail’s Take: Just a week after signing Dallas receiver Austin Miles, Boldin is cut from the same cloth – known by fans as a physical receiver. The company is clearly becoming more visible with endorsements of professional athletes in addition to its historical stance of supporting collegiate teams – a trend that’s more costly on the margin.

 

Hundreds Queue as Bangkok Mall Opens Four Months After Deadly Riots, Fire - Hundreds of shoppers lined up to count down the reopening of Thailand’s Central World shopping mall today, more than four months after anti-government protesters torched it during deadly riots in Bangkok.  <bloomberg.com>

Hedgeye Retail’s Take:  Nothing like a shopping mall to symbolize some level of a return to normalcy in Bangkok.

 

UK Sporting Goods Retailer JJB Sports Increases Promotions to Drive Sales - JJB Sports Plc , the U.K.’s third- largest sporting goods retailer, fell the most in more than 14 months in London trading after the company added promotions following “more volatile” sales since August.  <bloomberg.com>

Hedgeye Retail’s Take:  This trend, while consistent with some back to school activity here in the U.S., runs counter to the full priced selling we are seeing across the athletic space.  Recall that JJB has been struggling for years, as has the entire UK sporting goods sector.

 

Sales and Site Traffic Jump For E-retailers - Revenue for online merchants has increased 23% so far this year, with web site traffic up 46%, according to a survey of 70 retailers. The findings could foreshadow a successful holiday shopping season. MarketLive Inc. ran a survey of its 70 retail clients finding consumers created 55.9% more shopping carts, and the number of orders grew 32.4%. Conversion rate dropped three-tenths of one percent. Company officials attribute the drop in conversion rate to the nearly 45% increase in traffic to the e-commerce sites.  <internetretailer.com>

Hedgeye Retail’s Take:  Nothing new here except the consumer continues to show interest in convenience and sharp pricing via the web.  Investments in .com infrastructure from traditional retailers have also enhanced the user experience, which in turn is helping to drive growth. 

 

Obama On Trade - The Obama administration is walking a fine line as it looks to strengthen its trade credentials. The administration is balancing a goal of doubling exports in five years to $3.14 trillion and moving forward with free trade initiatives against stepped-up enforcement of existing trade agreements. It is also reviewing the U.S. relationship with trade partners. It’s been 20 months since President Obama took office, following a long campaign leaning toward protectionism, and his trade agenda has evolved into a bifurcated strategy — emphasizing enforcement by bringing cases against illegal trade practices to the World Trade Organization, and moving slowly on free trade agreements negotiated by the Bush administration that it felt were not strong enough in areas such as labor rights on the one hand, and opening markets for U.S. exports on the other. The centerpiece of the President’s trade agenda so far has been the National Export Initiative, which aims to double exports in five years. <wwd.com/business-news>

Hedgeye Retail’s Take:  While this focus on exports will certainly be a help to the economy, we don’t expect to see any apparel or footwear production moving back onshore. 

 

More Bedbug Problems For NYC Retailers, Macy's Herald Square Flagship is this Week's Victim - New York’s bedbug problem is spreading to more retailers. Macy’s Inc. is the latest to encounter the parasites. Both Macy’s Herald Square flagship and Bloomingdale’s 59th Street flagship have reported bedbug sightings. Bloomingdale’s last week cited bedbugs but never closed and said it quickly took care of the problem. On Friday, the store distributed a memo to employees as they entered the 59th Street flagship. Other retailers recently citing bedbugs were Niketown on 57th Street, Abercrombie & Fitch in the South Street Seaport, Hollister on Houston Street and Broadway and Victoria’s Secret on Lexington Avenue and 58th Street. They were all temporarily closed and reopened after debugging. <wwd.com/retail-news>

Hedgeye Retail’s Take:  With bedbugs now discovered almost everywhere, the epidemic now shifts to retailers that actually sell solutions.  BBBY, TGT, and WMT all appear to be positioned with sprays and other extermination products.  With that said, we’re not expecting any same stores sales boost as a result of the miniscule pests. 

  


The St. Petersburg Paradox

“The mathematical expectation of the speculator is zero.”

-Louis Bachelier

 

Louis Bachelier was a French mathematician who was, well after the fact, credited with founding the Efficient Market Thesis.  In 1900 Bachelier published his Ph.D thesis titled “The Theory of Speculation.”  In his paper, Bachelier discussed the use of Brownian motion to evaluate stock prices.  Unfortunately, his thesis was “not appropriately received”, which resulted in academic black-balling and the concept being buried for more than sixty years.

 

Almost sixty-five years later Professor Eugene Fama from the University of Chicago was officially credited with developing the Efficient Market Thesis after publishing his Ph.D thesis.  His paper was titled “The Behavior of Stock Market Prices.”  The core tenet of his paper and the Efficient Market Thesis is that an investor “cannot consistently achieve returns in excess of average of market returns on a risk-adjusted basis, given the information that is publicly available at the time the investment is made.”

 

Is it not somewhat ironic that the determination of who founded the Efficient Market Thesis was not efficient?

 

Despite not having a Ph.D on staff at Hedgeye Risk Management, we have been performing our own experiment to test the Efficient Market Thesis over the past two years.  We call this experiment the Hedgeye Virtual Portfolio, and it is a culmination of our stock picks since inception.

 

In that time, we have closed 510 long positions and closed 490 short positions. 85.9% of the closed long positions have been winners and 83.5% of the closed short positions have been winners.  Obviously, these results are far from a “random walk”.  So, either we are good at our jobs, or the market is not quite as efficient as Efficient Market Theorists believe.  I would submit that it is a combination of both.   

 

Clearly, though, many stock market participants work hard, have processes, and are intelligent.  So, why do many stock market operators underperform even the basic broad market returns? Simply put, because of this little critter called Behavioral Economics that leads many market participants to act against their best interests. 

 

By way of example, let’s consider the St. Petersburg Paradox, which is as follows:

 

“Consider the following game of chance: you pay a fixed fee to enter and then a fair coin is tossed repeatedly until a tail appears, ending the game. The pot starts at 1 dollar and is doubled every time a head appears. You win whatever is in the pot after the game ends. Thus you win 1 dollar if a tail appears on the first toss, 2 dollars if a head appears on the first toss and a tail on the second, 4 dollars if a head appears on the first two tosses and a tail on the third, 8 dollars if a head appears on the first three tosses and a tail on the fourth, etc. In short, you win 2^k−1 dollars if the coin is tossed k times until the first tail appears.”

 

So, what would be a fair price to pay for entering the game?

 

I posed this question to our Research Team at Hedgeye yesterday and they came back with myriad of answers, which ranged from $1 to infinity.  This simple mathematical answer is that you should be willing to pay infinity (or your entire net worth) to play this game as your expected value is infinity.

 

 As one of our astute Analysts responded to me yesterday:

 

“Well, the series doesn’t converge …EV = (1/2)*($1) + (1/4)*($2) + (1/8)*($4) + …EV = ½ + ½ + ½ + …… the sum of which is infinite.  So, is the fair entering price infinite? Strictly speaking, I think the answer is yes – but no one on earth would take that deal (even if we cap the number of rounds such that EV = all your money, since no one has infinite money).”

 

Therein is another paradox, the paradox of the Efficient Market Thesis.  Specifically, most market operators do not make rational decision based on math.  They make emotional decisions based on arbitrary evaluations of risk. This, of course, leaves opportunities for the sneaky mathematicians to make profit.

 

So then, how do we account for valuation when considering an investment?  Surely, valuation is rational?

 

In my view, valuation is an indicator of sentiment around a security.  For instance, when a stock trades with a single digit P/E, its business is either declining, or the collection of market operators believe it is.  There are many studies that support the idea that value based strategies (i.e. buying cheap stocks) outperform over time, but I would submit that this is not because of the valuation, but rather because of the behavioral finance indicator embedded therein.

 

As we consider the stock market today, the first question many strategists try to answer is whether the stock market is “cheap”.  The simple way to make this determination is to pull up a long term price / earnings chart and look at it going back fifty years.  Today, at 15x current earnings and 13.7x forward earnings, the SP500 looks cheap versus history. 

 

The more important task though is determining what expectations are embedded in that valuation.  What is the correct earnings multiple for an economy that has crossed the Rubicon of Debt at 90% debt / GDP and has budget deficits projected for the next thirty plus years (I would say infinity, but that’s probably not fair)? Additionally, if growth rates are mired in the 1 - 2% range as a result of this fiscal situation, is the stock market “cheap”?

 

In the shorter term, setting those sneaky valuation metrics to the side for a second, what do you think is priced into the S&P500 up 8.8% in September?  Given the cover of Barron’s this weekend and the rapid rise in the S&P in the last few weeks, the catalyst of the Republicans winning more seats than expected in the midterms is likely priced in. (We called this out on our conference call with Karl Rove in early September - Could the Midterm Election Be A Major Stock Market Catalyst?)  So, what is priced in now?

 

Well, perhaps our friend George Soros said it best:

 

“The financial markets generally are unpredictable. So that one has to have different scenarios. The idea that you can actually predict what's going to happen contradicts my way of looking at the market.”

 

Or as we say at Hedgeye, the plan is that the plan will change.

 

Yours in risk management,

 

Daryl G. Jones

Managing Director

 

The St. Petersburg Paradox - PE


THE M3: S'PORE VISITOR GROWTH SLOWS; 57% MODEL; MGM PROPOSED IPO

The Macau Metro Monitor, September 28th 2010

 

VISITOR ARRIVALS TO SINGAPORE GROW 18% IN AUGUST STB, Channel News Asia

Visitor arrivals to Singapore registered 18% growth in August to 996,000.  It is also the ninth consecutive month of record visitor arrivals.  STB stated that the two IRs, Youth Olympic Games, and the strength of the Asian economy attributed to the growth.  The top markets--Indonesia, China, Malaysia, Australia and India-- gained 25%, 51%, 22%, 2%, and 4%, respectively.

 

STB also said average occupancy rate in August rose to 85%, a gain of 7.6% points YoY. ADR increased 24.7% YoY to S$218.

 

THE M3:  S'PORE VISITOR GROWTH SLOWS; 57% MODEL; MGM PROPOSED IPO - spore1


NEW VIP COMPETITION WAR IN MACAU? Asian Gaming Intelligence

According to AGI, one Macau operator is now offering a 57% share of the VIP profit to junkets, keeping only 3% for itself.  This would be 15% more than Wynn Macau has reportedly being offering junkets under its profit share set up.  AGI believes the 40:57:3 model could bring about a price war as aggressive as those seen in late 2007 and the autumn of 2009.  The 40:57:3 model probably only makes economic sense for the operator if the operator no longer has to staff and directly manage the VIP rooms involved and passes that responsibility instead to the junkets.

 

MGM MACAU GETS CLOSER TO HONG KONG IPO MGM, macaubusiness.com

MGM China Holdings Limited, yesterday filed a proposed listing application with the HKSE.  According to MGM Resorts International, “there have not been any decisions made regarding the timing or terms of any such listing or whether MGM China Holdings Limited will ultimately proceed with such a transaction or whether the proposed transaction will ultimately be approved by the Hong Kong Exchange.”  According to previous media reports, to goal of the IPO is to raise US$500 million (MOP4 billion).


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MACAU COMMISSION ADVANCES

Higher commission rates are only part of the more competitive VIP environment.

 

 

We are pleased investors are finally focused on the increasing competition for Macau junkets.  Wynn’s market share was ripe for the taking as Four Seasons recently figured out.  MGM’s strategy has been clear for months and MPEL has been very aggressive on the VIP side for a few months.  Higher commissions are only part of the story.

 

With a huge book of junket business, the lowest junket commissions in Macau, and a conservative credit issuance policy, Wynn’s VIP business remains vulnerable.  We’ve been making that call for months.  The other call we’ve been making is MPEL and MGM gaining share.  With these guys, it’s not just about aggressive commissions.

 

Both MGM and MPEL may be advancing commissions to junkets for up to 3-4 months versus the former standard 15-30 days.  Wynn advances commissions to junkets in the beginning of each month for roughly 30 days. We're hearing that even Venetian has moved up to 2 months recently.  Market share data for September will again show strong market shares from MGM (despite low hold) and MPEL and weak share for Wynn (partly due to low hold); so clearly junket credit matters.  It may start to matter enough for Wynn.  We believe Wynn may be considering a more aggressive junket strategy for the first time to offset the competitive onslaught.

 

The sell side has finally figured out that the environment has gotten more competitive.  They’ve focused only on higher commission rates.  That may certainly impact margins so the explosive VIP growth is not all good news.  We are starting to worry a bit that a credit bubble could be forming.  Current volumes may be unsustainable.  How long can the operators continue to provide this duration of liquidity?  What happens when a junket can’t pay?  We’re not sure this level of credit is sustainable.

 

Over the near term, the credit bubble is still building.  Volumes will remain strong as long as liquidity remains.  Even though MPEL has been an aggressor, the stock remains the one with the most near term upside, in our opinion.  The good news for near-term investors in MPEL is that it appears to be driving VIP through commission advancement rather than further hikes in commission rates.  Near term margins will look better under this scenario and the company should finally be able to put up estimate beating quarters until the credit dries up.


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 28, 2010

As we look at today’s set up for the S&P 500, the range is 17 points or -0.71% downside to 1134 and 0.77% upside to 1151. Equity futures have turned higher following comments by Fitch that Ireland may avoid further downgrades if it comes out with a credible cost plan for Anglo Irish Bank.  Earlier today, Ireland reiterated it would not default on ANGL senior debt.

  • American Capital Agency (AGNC) plans to sell 10m shares in secondary offering
  • Cognex (CGNX) raises 3Q rev. forecast to $74m-$76m vs estimate $66.7m
  • Entropic Communications (ENTR) plans to offer 10m shares
  • LaSalle Hotel Properties (LHO) said CFO Hans S. Weger will leave the company by February 28
  • Pfizer (PFE) discontinued phase 3 trial evaluating Sutent drug with prednisone for castration- resistant prostate cancer
  • Viacom (VIA/B US) CEO Philippe Dauman, told CNBC that ad market is “strong,” sees “sequential growth” over next two quarters 

PERFORMANCE

  • One day performance: Dow (0.44%), S&P (0.57%), Nasdaq (0.48%), Russell (0.41%)
  • Month-to-date: Dow +7.96%, S&P +8.85%, Nasdaq +12.1%, Russell +11%
  • Quarter-to-date: Dow +10.62%, S&P +10.81%, Nasdaq +12.35%, Russell +9.65%
  • Year-to-date: Dow +3.68%, S&P +2.43%, Nasdaq +4.43%, Russell +6.86%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -485 (-2465)
  • VOLUME: NYSE: 920.44 (-14.04%)  
  • SECTOR PERFORMANCE: Other than continued M&A there was not much news flow yesterday; neither major economic data points nor big corporate releases. European bank/credit concerns pressured the financial sector, which was the worst performing sector. Technology and utilities were positive and Financials was the worst performing sector.  
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Southwest Air 8.71%, Juniper +4.20% and Pulte +3.56%/M&T Bank -7.04%, Intuitive -5.01% and Monsanto -4.17%
  • VIX: 22.54 +3.82% - YTD PERFORMANCE +3.97%
  • SPX PUT/CALL RATIO: 1.73 from 1.57 +9.93%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.84 -1.116 (-6.997%)
  • 3-MONTH T-BILL YIELD: 0.16% +0.1%
  • YIELD CURVE: 2.10 from 2.17

COMMODITY/GROWTH EXPECTATION:

  • CRB: 284.14 +0.18% - up 4 days in a row.
  • Oil: 76.52 +0.04%
  • COPPER: 359.70 -0.58%
  • GOLD: 1,297.02 +0.08%

CURRENCIES:

  • EURO: 1.3479 -0.10%
  • DOLLAR: 79.338 -0.07%

OVERSEAS MARKETS:

Europe

  • FTSE 100: (0.40%); DAX (0.16%); CAC 40 (0.19%)
  • Equities are trading lower as concerns over the economies resurface following negative news flow concerning Spain, Greece and Ireland.
  • Automobiles, Construction & Materials and Banks are among the worst performing sectors.
  • UK Q2 Final GDP +1.2% q/q vs consensus +1.2%
  • UK Q2 Final GDP +1.7% y/y vs consensus +1.7%
  • France August Consumer Spending (1.6%) m/m vs consensus +0.2%
  • France July Consumer Spending +2.7% m/m vs consensus +0.6% and prior revised (1.5%) from (1.4%)
  • Germany Oct GfK Consumer Sentiment Indicator +4.9 vs consensus +4.2 and prior revised +4.3  

Asia

  • Asian Markets: Nikkei (1.12%); Shanghai Composite (0.63%)
  • Most Asian markets followed Wall Street down today.
  • Australia was also flat.
  • South Korea slipped as carmakers and tech stocks gave up recent gains.
  • China declined when weakness in financials and profit-taking in airlines outweighed strong performances by agricultural stocks.
  • The combination of a weak performance by Wall Street and a strong yen sent Japan lower, though expectations for further monetary easing by the Bank of Japan provided some support.
  • The yen is trading at 84.20 to the US dollar. 

Howard Penney

Managing Director 

 

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER

 


EARLY LOOK: Macro Forces

 

"The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

-David Einhorn

 

 

 

There was an article in the Wall Street Journal on Friday that was forwarded to me hundreds of times over. The article was titled “Macro Forces In Market Confound Stock Pickers.” There was nothing particularly new in the article. Everyone who has protected their client’s hard earned capital in the last 3 years gets that macro matters. But what about those who don’t get it? What’s their answer to David Einhorn’s mental flexibility? Do their answers matter?

 

Macro Forces certainly matter. As Risk Managers, it’s our job to both identify their market impact and proactively prepare for their most “improbable” outcomes. I have a great deal of respect for someone like Einhorn because he can skate circles around Captain Stock Picker out there but, at the same time, acknowledge that he needs to continually evolve his investment process to incorporate the macro frontier.

 

If you are a bloodhound who trades merger arbitrage or your job is to be long of the next stock to hit this market’s broadening “rumor mill” of takeout targets, that’s fine. Maybe you don’t do macro until, as Mike Tyson would say, it “punches you in the face.” For the rest of us, “it isn’t reasonable to be agnostic” about global macro market risk anymore. October 1987 mattered.

 

Being Duration Agnostic is also something we evangelize a lot here in New Haven. My sense is that the Buy-And-Hope model of yesteryear isn’t going to be emailed to me 100 times over via a WSJ article anytime soon. Legacy print media has a funny way of being a lagging indicator. All that said, we need to focus intensely on compartmentalizing calendar catalysts that are macro in nature. It’s unreasonable to actively manage risk otherwise.

 

During Friday’s US stock market short squeeze I was also getting a lot of emails asking me when I was going to short the SP500 (SPY). After 3 consecutive down days (Tuesday, Wednesday, and Thursday), the illiquidity rally was broad based and I think the questions were well timed.

 

Unfortunately, I’m not enough of a cowboy anymore to stand on the other side of this market’s intermediate term TREND line and call it anything other than what it became on Friday – what was 1144 resistance in the SP500 is now support.

 

It’s not my job to be bearish or bullish. It’s really not my job to be anything other than a student of whatever it is that Mr. Macro Market throws at me each and every day. There certainly were more bearish than bullish fundamental research data points in my notebook last week but at the end of the week they were all trumped by Mr. Macro’s market price. The US Dollar has been demolished (down 14 of the last 17 weeks) and the reflation trade is back on.

 

To be crystal clear, there are no rules in this game suggesting that the 1144 line cannot become resistance again. The Macro calendar of catalysts for the early part of this week that could easily be construed as bearish are:

  1. Monday: A breakdown close through 1144 on the SP500 combined with a failure of the VIX to breakdown through its critical 20.77 line of support.
  2. Tuesday: A reminder that Housing Headwinds remain in the US economy with the Case Shiller report for July.
  3. Wednesday: An acknowledgement by both Japan (Tankan Survey) and the US (Obama speaks on joblessness) that Fiat Republics are not stable.

Then, of course, you have month and quarter-end on Thursday for the hedge fund business on top of a Chinese PMI report for September that could go either way. No one said that doing macro is easy. The way we all get paid in this business, it shouldn’t be…

 

The Macro Forces that are bullish out there are fairly straight forward at this point:

  1. Prices: The SP500 is up +9.43% for September-to-date!
  2. M&A: Unilever buys Alberto Culver this morning for $3.7B making at least 1 of the 67 rumors of takeouts we are tracking true…
  3. Mid Terms: If you didn’t know the Republicans are going to take the House, now you know.

“Republican House” being on the cover of Barron’s this weekend certainly doesn’t make this a new Macro Force to consider. That’s why we did our risk management call with Karl Rove last month to get ahead of this. As always, the better questions in our risk management lives surround what people aren’t talking about. These factors, too, need to be considered on a Duration Agnostic basis.

 

Whether or not the intermediate term TREND line in the SP500 of 1144 holds or not definitely matters to me in the immediate term. At the same time, out on the long term TAIL, the biggest question is why won’t the US stock market continue to make a series of lower-long-term-highs like the Nikkei in Japan has?

 

 

EARLY LOOK: Macro Forces - nikkei

 

 

There are only 7 countries in the world who have underperformed Japanese equities for the YTD at this point (in order of worst to Japan: Greece, China, Slovakia, Italy, Portugal, Spain, and Ireland). Sadly, in response to another lower-long-term-high in the Nikkei, this morning the Japanese have introduced another 4.6 TRILLION Yen in stimulus. Shame on those who don’t learn history’s lessons. They deserve to lose.

 

My immediate term support and resistance lines for the SP500 are now 1131 and 1150, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

 

This note was originally published at 8am this morning, September 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


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