During the month of September, we are going to be adding a special section to this site.

The TDI Managed Growth Strategy provides a private “client-only” blog where we discuss the day and our general outlook. Areas that we cover range from current holdings analysis, economic reports, political commentary and more.

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2011-09-02

Aside from China’s slowing economic condition, trade data from others areas were also rather disconcerting. Both India and South Korea underperformed expectations, adding to a string of let-downs that provide a clearer picture of the coordinated global economic slowdown.

There was some news out of Europe Tuesday that provided for a drag on markets. The Euro was under pressure as it hit some technical levels that were breached. Both the 20- and 50-Day moving average were taken out which caused a quick sell call by traders. There is resistance now at the 1.4285 level which is where the currency consolidated after the breakdown and the 50-Day moving average at 1.432.

Briefing.com was on the scene to provide some clarity:

In Europe, the region saw selling pressure early as already weak readings on PMI were revised lower. Germany was particularly concerning coming in at 50.9 against expectations of 52.0. There was no revision to the German GDP number which remained at +0.1%.

The news did not get any better when a disappointing Spanish auction crossed the wires. This followed a weak Italian auction on Tuesday. The bigger problem was that the Spanish auction involved the ECB so the weakness was even more glaring. The country sold ‚¬3.6 bln of 5-year notes. In the middle of the ‚¬3-4 bln projected. Bid/cover was 1.76x and the yield was 4.489%. The region will be a big focus in the next few weeks as traders return to their desk.

Note, in the U.S. the week leading up to Labor Day sees a slowdown as people go on vacation for the last weekend of the summer. Europe basically does the same but takes the entire month of August for the most part. So the market moves next week and through September should provide us a little more insight into the psyche of the region.

We took a close look at the retail sales comps and found the Vehicle Sales in Asia to be interesting. Of course, there was a substantial amount of problems created by the March earthquake/tsunami in Japan that may be to blame, but we cannot ignore the fact that there is also a slowdown occurring that is helping to keep sales down. Overnight in Asia, the auto manufacturers and parts companies were sold vigorously.

The chart shows the trend better than any discussion could.

Retail Sales were surprisingly good, considering the downtrodden consumer that report their sentiment is the lowest it has been in years.

A selection of retail reports from Briefing.com:

Some companies that exceeded August Same-Store Sales estimates include (listed according to the magnitude of the beat):

• BJ’s Wholesale (BJ) reported Aug comps 11.5% vs. 6.7% consensus, stock is near the unchanged mark (being acquired). Co said that Hurricane Irene had a positive impact on merchandise comparable club sales of ~2.5-3.0%.
• The Buckle (BKE) reported Aug comps 8.3% vs. 4.6% consensus
• Limited (LTD) reported Aug comps 11% vs. 8% consensus
• Nordstrom (JWN) reported Aug comps 6.7% vs. 5% consensus

Some companies that missed August Same-Store Sales estimates include (listed according to the magnitude of the miss):

• Kohl’s (KSS) reported Aug comps -1.9% vs. 1.7% consensus
• Bon-Ton Stores (BONT) reported Aug comps -4.7% vs. -1.3% consensus
• JC Penney (JCP) reported Aug comps -1.9% vs. 1.3% consensus
• Stein Mart (SMRT) reported Aug comps -7.5% vs. -4.3% consensus

The short hedges we added into the close on Wednesday worked out well on the day, although it was questionable at 10am. Once again there was a knee-jerk reaction to buy the news after the the manufacturing number was released better than expectations.

One of the factors that may also be attributed to the selling pressure was the Productivity release. Notice that there is a rise in the unit labor cost with the 4 week moving average also resuming its climb. Combine that with a slide in productivity will result in a significant burden to corporate profit. Putting into plain English: Companies are paying more and getting less out of their employees.

On CNBC today, resident Economist Steve Leisman was doing all he could to show that this particular series may bode well for future hiring. He tried to make the ridiculous case that companies need to add to their workforce as productivity is down. Unfortunately, that could not be further from reality. Once again, the academics have too much information that they have no idea how to correctly interpret. Perhaps if a prerequisite to becoming an economist (or politician for that matter) was that they would have to spend some time working/managing a company, they would have a better understanding of how the economy actually works.

Initial claims dropped from last week, just under the 4-week average. But, the total is still over the key 400,000 level.

Soon after the ISM Manufacturing report, the realization hit that while expectations were exceeded, manufacturing hit its slowest pace in over two years. That caused the buyers to back off and markets slid the remainder of the day. Very near the low point of the day, when the Russell 2000 index started to consolidate and base, we sold the position in Proshares 3X inverse R2000 for a 7% gain. With that we increased the position on the Proshares Ultra Short Emerging Markets (EEV).

That particular index held up well on Thursday. The reason was that Brazil, a big part of the emerging market index, was higher by almost 3% after a surprise rate cut overnight. That helped to prevent the EM Index from a major decline. That appears to be a great setup as there may be a follow through effect from the U.S. market’s drop for Asia and other Emerging Markets overnight if the belief that tomorrow’s job numbers will disappoint.

Latest holdings of the MSCI Emerging Markets Index ETF (EEM):

Sector/Geographic Allocation

Top Sectors

Banks 15.56
Oil&Gas 13.10
Telecommunications 8.04
Mining 6.56
Semiconductors 4.99
Diversified Fin Services 3.68

Top Countries

South Korea 15.09
Brazil 14.85
China 12.83
Taiwan 10.95
South Africa 7.43

One TDIMG holding in particular did very well today, bucking the trend and spiking higher by over 8% on double the average volume. Spreadtrum Communications (SPRD) has been climbing nicely over the past few weeks and staged a breakout today. The company is benefiting from the massive growth of the Smartphone market in Asia.

There will be a great deal of activity on Friday as the NFP payroll number is released. Volume on exchanges should dry up into the afternoon as traders take an early leave for the extended Labor Day holiday. Equity markets in the U.S. will be closed on Monday and there is a high probability that there will be little interest in laying out new long positions into the weekend. If selling starts to build during the day, buyers may not be there to prevent a fall for the S&P 500 below 1,200 on a disappointing report.

Note: This week’s guest on the TDI Podcast is Frank Curzio. We are looking forward to checking in with him on his view of small caps and global market

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