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The Compromised Conundrum

The most interesting thing I see in the FOMC decision is that their decision no longer has any proactive solution. By managing the Fed funds rate reactively, they have put themselves in a box.

"Downside risks to growth remain"... "we expect inflation to moderate"... and oh, by the way "strains in the financial market have increased significantly"... Gee, thanks for the update.

The only real update here is reality. Reality remains that the Fed can’t do a whole hell of a lot anymore. With slowing growth and sticky headline inflation, cutting rates further makes the USA look more and more like Japan. The US economy is experiencing stagflation, and the only way out of it is by eventually raising rates like the rest of the world has.

Bernanke blew all of his bullets way too early in this financial crisis. He did not have a process to proactively predict current market risks.

Now, he is in a politically compromised box, feeling shame.

Chart of the day: British CPI, Accelerating!

This chart amplifies the point I was making in this morning's Early Look with respect to the dynamics by which British inflation can accelerate as their currency gets pounded (pardon the pun). As the US Dollar wins, the British Pound loses.

The UK's CPI was reported at a new sequential high of +4.7% y/y and was the highest number I see in the data set, going back to 1997. The chart tells a thousand words, and it will pressure the BOE not to cut rates, yet.

That was the high in the CPI

This morning's US Consumer Price Inflation report came in line with my expectations, down -0.1% sequentially, but elevated on the year over year basis at +5.4%.

From a modeling perspective, the August comparison was really the last easy one left in the data set. In Q4 comparisons are higher, therefore the path of least resistance for reported US inflation will finally move to the downside.

On the margin, this is an important bullish macro market factor, as it will finally allow the objective (i.e. those who have seen the chart below for what it has been for the past 9 months for what it was, inflationary!) see a meaningful decline in headline inflation in their prospective outlook.

The politicians of course, will be stuck with the revisionist historians, telling you to react to this chart and all that we have already proactively prepared for. Inflation (in the US) is a trailing economic indicator.

Buying/Covering: All 8 On The Tape

Have a proactive plan. State the plan. Check the facts against that plan - then execute. That's what we do here at Research edge. I said I buy in the S&P 500 range of 1172-1196, and that's what I am doing again this morning.

I have 8 orders on the tape since 3:50PM yesterday afternoon - all covers and buys. The immediate "Trade" in this market is up from here. The intermediate "Trend" remains negative.

See the Hedgeye Portfolio for details, and let's keep winning here.

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,

Early Look

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