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The Marty Parrot Takes A Dive

Another Steve and Barry-esque Chapter 11. Signing long term rents at the top of a margin cycle is a bad idea.

Here’s a good early morning call out from FirstRain… Marty Shoes, Inc, filed for Bankruptcy late yesterday. Yet another sign indication of the number of marginally profitable retailers out there who have locked in properties in high-rent districts (NYC, in this case) at the top of the margin cycle who will feel the pain as sales roll, supply chain margin opportunity goes away, and cannot flex property terms to prevent negative leverage in their respective operating models.

This one is a close comp to Steve and Barry’s, as athletic footwear is a large part of its mix. Marty’s operates 47 stores in the Northeast.

Not a shocker…but one of the top 10 creditors is Skechers, in yet another sign of how the brand is increasingly showing up in marginal channels. The $172,934 in exposure accounts for about 20bps in margin to SKX. New Balance and Asics also have meaningful exposure. Nike and Adidas have marginal exposure.

Some will argue that this is good for DSW given overlap. I don’t buy it. Aside from not enough overlap, there will be stepped up clearance activity. Also, this highlights the challenges to this model – which DSW shares.

Goodbye Gekko

“An invasion of armies can be resisted, but not an idea whose time has come.”
-Victor Hugo

I spent the entire day on the phones and travelling to meetings in New York and New Haven yesterday. Suffice to say, there are a lot of honest and hard working people in this business who have been devastated. They have families. They have commitments. For the first night in a long time I couldn’t sleep. This upsets me to the core.

Who knows whether Merrill Lynch’s fire sale “Executives”, John Thain and Tom Montag, get paid their total compensation of an estimated $45-50 million to walk away after selling out down here to Bank of America. Who knows who throws who under the bus at these firms next. Who knows who admits to having absolutely no accountability in their definition of business principles. The point is that we all know that the said leadership in this business is making us sick to our stomachs.

I for one have a great deal of respect for the sweat equity that the Wall Street commoner has put into the fortifications of the walls that uphold the American capitalist system. I am also ready to raise my hand and execute on an idea whose time has come. The current Wall Street structure of gluing together the 3 proverbial Berlin Walls of Investment Banking, Asset Management, and Sales/Trading/Brokerage is conflicted, compromised, and constrained. It stifles any legitimate form of leadership. It fosters groupthink, and it amplifies risk. The almighty “greed is good” cultures of cycles past has returned and impaired the ability for those working within the rank and file to raise their hands, and say “hey, there is risk here”.

So, let’s start this morning by getting things right. If your boss or bank has zero credibility – leave. Go somewhere where you can rebuild the wealth that they took from you. Take control of your own destiny. Otherwise, the principles of transparency, accountability, and trust are nothing but words we are giving lip service to. Lip service is not going to change the fact that this is a globally interconnected market of risk factors. It certainly is not going to change the fact that your boss or bank wasn’t ready for this tsunami. If you work for someone who doesn’t get it – leave. Being “unaware” in this market environment is a lame excuse for those who don’t proactively prepare. Upward and onward – the time for this idea has come.

Enough with my diatribe, let’s get in the game here. Not surprisingly, Asian equities got tagged overnight, but the immediate “Trade” there looks oversold to me. I will be covering my short position in the Japan ETF today. The Japanese stock market closed down another -5% at 11,609, while Hong Kong and China lost another -5.4% and -4.5%, respectively. Taiwan was -4.9%, Korea -6.1%, and the Philippines -4.5%. This is not new. Asian growth has been slowing for 6 months and the “it’s global this time” China story has lost -67.4% of its value since October 16, 2007. If you proactively identified and managed toward this global risk factor, you probably made money yesterday, like I did. If you didn’t, don’t get lost in Wall Street’s reactive back pedaling shuffle this morning and freak out. Stop doing what they do, and start anew.

In Europe, markets are flashing pseudo constructive to me this morning. The Brits printed a nasty consumer price inflation number of +4.7% year over year for the month of August. That’s the highest inflation rate they have reported since they started issuing the data in 1997, and this is largely driven by what we have been talking about which is that a stronger US Dollar = weaker Euro = higher imported European inflation. Again, this is not new, so don’t freak out. Illiquid European stocks in Ireland and Portugal are very weak this morning, but the more liquid equities in the UK, France, and Germany are selling off in what I would characterize as an orderly fashion. Get long liquidity.

I have cash to invest here, so that’s what I am going to do between the lines of S&P and 1196. As for all of those hedge fund, private equity, and investment banking “leaders” who levered themselves up like Gordon Gekko, only to see their “wealth” compromised… take solace in the fact that their emotional sales will breed deflation across asset classes. This is what I want - fresh new opportunities for those of you out there “whose time has come”. Buy Low, Sell high.

If you need our help and/or would like to join our team here at Research Edge, our feet are on the floor early, the coffee is on, and we’re looking forward to re-building the business on the principles that Wall Street’s said leaders lost.

Good luck out there today,

ROE – ROC Spreads Looking Peaky

Spreads between ROE and ROC in the apparel and footwear industries are widening. Not a complete shocker given the slowdown in business trends and the fact that the industry is always at least 3-4 quarters behind a change in the cycle in altering its capital investment plans. So ROC is coming down, but ROE is hanging in there as debt levels build. Spreads in the 6% range are not sustainable, as evidenced by the ’01 bottom. When ROE reverts toward the rate of ROC – it does so fast.

This analysis is for 42 core US apparel and footwear companies. But when we go global, and screen all 440 companies that we screen through regularly, things are looking to be well above anything we have seen historically.

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 80.51%
  • SHORT SIGNALS 78.32%

August – A Repeat of July

Sanderson Farms’ comments from late August regarding weakened restaurant demand appear to have been spot on. The company had said that August was shaping up like July, and today we learned that casual dining guest traffic was down 6% in August, similar to July’s 6.2% decline. August was actually the strongest month in 2007 from a traffic standpoint, but was still down 1.5% so on a 2-year average basis, traffic trends improved 70 bps from July to down 3.8% (still toxic, in my view). This continued softness heightens our concerns around casual dining operators that seemed to think the worse was behind them in 2Q08 (please refer to my August 30 post titled “Casual Dining Top-Line Risk” for more details). Casual dining same-store sales were down 1.1% in 2Q with traffic down 3.9% while 3Q-to-date (July and August) comparable sales are down 3.8% and traffic has fallen 6.1%.

Falling BRIC: Selloff in Brazil

The Bovespa slid over 5% this morning.

The fear of the turmoil spreading from US financial institutions would have been enough to spark selling in Brazil today, but with an economy so heavily tied to oil, gas and biofuels the post-Ike sell-off in crude only adds insult to injury.

Central Bankers raised the benchmark SELIC rate by 75 basis points last Wednesday in an attempt to control inflation –the 4th time the rate has been raised since April. That intervention may not be enough to help this BRIC find a soft landing.

Andrew Barber

Liquidity Watch: LIBOR Still Won’t Budge

Revisiting TED spread again. Despite the Fed’s attempts to increase liquidity in the system, LIBOR still has not budged.

The TED spread has obviously widened dramatically since we last discussed it. As you can see the short term cost of liquidity is trading at a big premium. As of this morning, the spread was at the highest levels it has touched since the Bear Stearns collapse back in March.

At that time calm was restored rapidly as JP Morgan emerged as a white knight. With no one there to catch Lehman as it fell and the Jury still out on AIG’s condition, we could well see spreads widen further before they come back down.

Andrew Barber

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