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Goldman (GS): Staying Short

To me, this has been, and continues to be, the most straightforward secular short thesis in the Hedgeye Portfolio. Wall Street’s operating structure is in the process of changing, and those captive to its current structure will have perpetual headaches to deal with, including competing with Research Edge.

There was nothing that Goldman's CFO, David Viniar, said on the GS conference call today that convinces me that they are not operating under the same compromised, constrained, and conflicted structure that the industry is struggling with. Conversely, Viniar reminded us all that they are very much hostage to the investment banking cycle, and as captive as they have ever been to the volatility implied in their Principal and Prop P&L's. It would have been interesting to get one of their prop traders on the conference call – but these guys aren’t into the transparency thing.

Goldman Sachs is a compensation structure that is proving to make a lot of money in bull markets, and losing an undeterminable amount in down markets. They have not been public across cycles of economic crisis, so the jury is still out on how much money they can lose peak to trough. Today, they printed a down -40% number in their investment banking division and a nasty -67% one in their Trading & Principal division. While Viniar admitted on the call that they may take down risk in a "tactical" way, he refused to imply that they will change their strategies. They don’t consider risk in the same way that I proactively manage it, so this is confusing to me altogether.

There are levered long bull market strategies, and then there are those that can protect and preserve capital in times like this. Great investors evolve. Goldman's prop businesses sound like they don't think they need to. That's plain scary, and I am excited to wakeup competing them every day. They have nothing but market share to give us.

The stock has rallied from $118/share on the open. You should sell it here. On Sunday, my downside target was $147.43. As the facts change, I do, and after listening to their conference call today, I'm going to move that immediate target price to $117.72.


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.

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