"Evil Doers", Continued...

In what looks to be the most ridiculous comment of the day by the US Financial system's said leadership, New York's Attorney General, Andrew Cuomo, is asking the SEC to "freeze short selling" in the US Financials!

Are you kidding me Andrew? Do you have any idea what this kind of reckless political rhetoric can do to the market? If you think Long Term Capital Management blowing up was a problem, go right ahead and test your politically convenient theory here and see what happens if the entire hedge fund community has to pull their hedges.

Worse yet, consider the implications to the few money managers and individuals out there who have proactively hedged their portfolios for what has turned out to be an unmitigated disaster in risk management by the executives of our publicly held investment banks.

We cannot continue to manage this Financial Crisis reactively. Now that John McCain has thrown his thought partner, George Bush, under the bus today, I have no idea who is going to provide some sensible, calming, proactive leadership – but, boy, do we need it, fast!


"They" are going to get them Evil Doers!

Allegedly, per our friends at Street Account, "CalPERS no longer lending out shares of Goldman Sachs and Morgan Stanley"...

At one point, MS was down -40% today. Morgan Stanley has already traded 225 million shares, multiply that number by $20 or $25/share, and that's one heck of a lot of evil doers shorting their stock!

Maybe someone who is long is selling it... Shhh - don't tell anyone... that doesn’t fit the Wall Street excuse making narrative.


The following comments are from a well respected MCD observer:

The original (internal) objective was to have enough stores on specialty coffee to go on National television in April of 2009. The national fund (OPNAD) had it on the 2009 calendar until recently. Problem is that no one thinks it would be smart to launch in the summer, especially since they had reasonable success this summer with a national iced coffee program so they'll want to do a repeat next summer and launch McCafe in the Fall/Winter of 2009/2010.

Reasons for the delay are many:

* franchisee foot dragging

* Unrealistic construction schedules

* Instead of using proven local contractors experienced in remodeling MCD stores MCD Corp. hired Bovis Lend Lease to coordinate the remodeling of all USA stores from Australia.

The real issue here is that the products have not proven themselves and many are still in the development stage yet a huge chuck of MCD advertising will eventually be diverted to McCafe. And if it
doesn't work well management will insist on diverting even more advertising $$$$$ to the program.

The MCD franchisees are concerned about the impact on overall sales, development and the introduction of other new products.

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VIX 42: Now We Have Ourselves A Game!

Attached is a chart of the VIX from 1. No, I doubt some of the vaunted hedge fund PM's out there who are running levered long businesses were around way back then (I wasn’t!). Most recently however, 1998 and 2002 saw the 4 handle on the VIX. So, depending on what kind of experience you have at the wheel here with your money, there's a chance your guy/gal has seen this movie before.
  • A. Barber has charted out the spread between the high and low levels for each period below the actual VIX to give a sense of intra-period change in volatility.

NKE: I’m Surprised It’s Grinding Higher

Nike is taking off today in a weak tape on heavy volume. What gives? I think the quarter next week will come in just fine. In fact, my model is nearly 10% ahead of consensus for the quarter. But I’m not so sure that will matter this time. Think of the following…
1) This is a global growth story in a slowing global and increasingly stagflationary economy.

2) With 50% of sales outside of the US, the dollar has been a meaningful driver to sales and gross profit. Nike is one of the few companies that has actually taken excess FX-related cash and reinvested back into the model instead of printing as higher EBIT margins. This allows NKE to sustain growth due to better infrastructure, and leaves it cost levers to pull in case things slow down. Good stuff. In addition, it is one of the few names anywhere near this space that has been through several FX cycles. Its hedging strategy is all about profit preservation. But what does all this mean? In ’09 the company’s P&L is going to shift from a rapid-top-line/improving gross margin story, to being a slower growth SG&A leverage story with FX offset shifted to gains in ‘other income.’ Quality of earnings probably won’t improve for FY09.

3) Costs are not getting better in Asia. 97% of the industry’s footwear is made in China (bad). Nike is less exposed at about a third, but it also is far overexposed to Vietnam (also a third of its footwear production). Two weeks ago, Hanoi announced 28% inflation – its highest rate in 16 years. In Vietnam and Thailand we’ve seen factory workers strike because mid-teens wage increases are not enough to keep pace with inflation. Ultimate, this has to impact Nike. They’re big and smart enough to pass it through to the rest of the global supply chain, but that process is lumpy.

4) Did you see Belle International? Belle is the largest shoe retailer in China. It has the exclusive distribution rights to many brands, and is also a major partner for Nike and Adidas. The stock went from 8 to 6 in a week. Margins compressed just as the Olympics peaked and all partner brands filled potential capacity as much as possible to build awareness in advance of the Olympics. Now we see China’s retail sales at a whopping 23%, but with the growth incrementally coming from Beijing, and with the Real rate ex-inflation slowing. The China growth opportunity remains HUGE. But it should take a breather for a few quarters.

5) We’re still only 3.5 months into Nike’s fiscal year – this is a time when the company is NEVER upbeat with guidance – even when not faced with these macro challenges. Guidance won’t be good. They’ll try to buy themselves breathing room.

6) ROE/ROIC has started to decouple. Cash is building faster than the company can invest it at prevailing rates of return. Not a bad problem at all in this environment. In fact, that may one of the primary reason why this name is viewed as safe by many PMs. Yes we’ll see stock repo. Yes we’ll see dividends – but both growing at a steady measured pace. Don’t expect any sudden capital returning events. Acquisitions are likely – especially with Umbro now tucked in. Timberland makes sense. I could even justify a retailer.

To those that know me, you know that I fundamentally believe in Nike’s strategy – which is why in a former life my family and I packed our bags, gave up Wall Street, and moved out to Oregon so I could work there. But based on what I see happening on the global stage, I’m surprised to see the stock continuing to grind higher.

Underneath this Financial Crisis Is An Economic Cycle

This morning's weekly US jobless claims report reminds us that the unemployment cycle in this country will continue to worsen. This week's jobless claims came in higher than expected at 455,000 vs. 445,000 last week.

The "Trend" here is up into the right. The 4 week moving average of claims bumps higher yet again to 445,000, and everyone should recall that last month's unemployment reading finally broke out through the 6% line.

While some pundits suggest this number was high last week by virtue of hurricanes Gustav and Ike, you should consider the impact of the real time structural hurricane in the US Financial industry, this week.


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