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Eye On Free Markets: Ayn Rand Institute...

In the Op-ed section of the ‘Ayn Rand Center for Individual Rights’ this week, there was a solid article written by Amit Ghate titled "In defense of Speculators and Short Sellers" (http://www.aynrand.org/site/News2 JServSessionIdr001=2nqb69i7v1.app14b&page=NewsArticle&id=21553&news_iv_ctrl=1021).

You don't have to be a stock market guru to understand the simplicity of the US Government's compromised position here. Banning short selling is simply un-American. This reality is finally finding its way into a much broader forum of public discussion. This is a very good thing for what we need to get back – free market capitalism.

Having not understood what he was doing when he was talked into doing it by the self interested powers that be of ‘Investment Banking Inc’, there is no way that Chris Cox at the SEC is proactively prepared for the tsunami of rational thought and pushback that he is about to endure. It will hopefully cost him his job.

In order to save you some time, here are the 3 most impactful excerpts from Ghate’s discussion:
KM
  • “let’s ask what the critics consider a “correct” price? Clearly it’s not the price which obtains when all market participants are free to engage in trade based on their best judgment, because this is precisely the free-market price--a price which they so vociferously condemn. But if “too low” and “too high” aren’t judged relative to the free market, what is the standard? Stripped of euphemism: their wishes.”
  • “attempting to set prices by wishing doesn’t--and can’t--work, not for Lenin, Stalin or Brezhnev; or for Paulson, Bernanke and Bush. If prices are to reflect reality, they must be the result of an objective process of discovery and judgment performed by interested actors.”
  • “Speculators and short-sellers don’t create facts, they seek to identify and respond to them; and in the process they help adjust prices to economic conditions and establish smooth and liquid markets. As a result--instead of being scapegoated and banished--they should be respected and welcomed for the productive role they play in our markets.”

CAKE – POTENTIALLY EASING SOME OF THE PAIN!

Over the past 12-months CAKE has taken significant steps to reshape the company and focus on utilizing capital more efficiently for shareholders. Unfortunately, due to commodity pressures and the fact that CAKE is a California-centric company, the macro issues are overwhelming any initiatives the company is taking to improve its business.

While, milk and dairy products represent only 5% of CAKE’s COGS, the trend toward easing commodity costs will help market psychology. Over the past month, milk has been headed south and the latest numbers from the government suggest that further declines are likely. While this will not provide any solace to CAKE shareholders this quarter (CAKE has contracted a majority of its cream cheese costs for the balance of 2008), the commentary coming out of the quarter will be more positive than negative for this key commodity.

BEGGING FOR RELIEF

With the market’s tepid response to the bailout bill passed this afternoon in Congress, we’ve had our “Eyes” on the 30 Day Fed Fund Futures. We have no doubt that the government will continue to use whatever measures necessary to create liquidity and, by default, attempt to support the stock market. The next tool of intervention is likely to be another cut in rates. Since the passage of the bailout bill, the October Fed Fund Futures contract is trading 98.44. The market is thus pricing in a 100% likelihood that the Fed will cut by 50 bps on Oct.29th and a 24% change of a 75 bps cut.

Daryl Jones
Managing Director
30 Day Fed Funds Futures

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YUM – Lower 2H08 Expectations, Less than 10% EPS growth

YUM is scheduled to report 3Q earnings on Tuesday after the close. Although the company raised its full-year 2008 EPS growth guidance to up 12% following its 2Q results, this reflects a significant slowdown in YOY growth in the back half of the year as 1Q and 2Q EPS grew 18% and 16%, respectively, excluding one-time items. It is important to remember that YUM’s FY08 EPS growth is being helped by the company’s expected share buy backs, which will reduce shares outstanding by 8% (down 8.5% in 1Q and down 9% in 2Q). As I have said before, YUM management’s compensation is tied to EPS growth so I do not doubt management will find a way to achieve its long-term full-year EPS target of at least 10%.
  • This slower 2H08 earnings growth can be partly attributed to tougher revenue and operating profit comparisons, particularly in 3Q, on top of an already tough operating environment (increasing commodity costs in each of YUM geographic segments). On a consolidated basis, YUM is facing its toughest top-line comparison in 3Q (3Q07 revenues grew 12.6%). YRI and China both had strong quarters from a revenue standpoint in 3Q07 while the U.S. experienced a 5.8% revenue decline. Unfortunately, easy comparisons no longer provide much cushion for YUM’s U.S. segment as 1Q07 and 2Q07 YOY declines were worse than 3Q07 and results continued to be soft in 1H08. These recent declines stem primarily from declining trends at KFC, which the company does not expect to see any material improvement from until 2009 (also partly attributable to company refranchising).
  • Increasing commodity costs will continue to hurt profits in all three of YUM’s divisions with management guiding to a one point contraction in restaurant margins for FY08 in China, YRI and the U.S. I would not be surprised to see U.S. restaurant margins decline slightly more than the one point the company is guiding. Management stated that operating profit comparisons get more difficult for YRI and China in 3Q, saying, “In the third quarter, we expect YRI will be below our first half profit growth rate as they lap strong year-ago performance.” Regarding China, management stated, “We cannot expect mid-teens same-store sales growth and 30% to 40% profit growth to continue.”

  • An additional headwind for YUM stems from the currency benefit the company has been booking at both its China and YRI segments since early 2005. I think it is worth noting that the currency benefit has grown over time for both China and YRI and helped by 12% and 9%, respectively, in 2Q08. Investors have become accustomed to high, double-digit reported operating profit growth results and this favorable currency impact may not be around forever.

Autumn Chill

Here is something interesting to consider: Since President Eisenhower left office, the only periods that US unemployment has held above 6% for more than 3 consecutive quarters began in October 1974, October 1979 and November 1990 respectively. The start of each of these periods of sustained higher levels of unemployment was also accompanied by initial claims spikes which exceeded the typical seasonal inflections.

The bailout bill has passed, but the liquidity that it will inject into credit markets won’t come soon enough for many small business and service industry employers across the country who face an ugly cycle of cutbacks at year end.

Andrew Barber
Director

Trend Nuggets: ANF, JWN, GPS, LTD, GES, RL, URBN

I never make fashion calls – ever. Not my place, nor my skill set. But I can’t turn a blind eye on what’s selling. That’s why I hired an expert whose opinion I trust implicitly. Here’s some scoop...

His view from the field…
HOLLISTER:
The stores are stocked with all the Hollister basics: the usual surf influence, short sleeve polos, cargo pants, plaid woven shirts, and witty text print shirts. It works, but I think it might be time for a change of pace…store traffic was almost non-existent. B-

ABERCROMBIE KIDS:
Abercrombie never disappoints with their colors. I think the wall of buttery yellows and creamy whites next to shelves of soft pinks looks extra appetizing. Abercrombie also has new fixtures and visuals that enhanced their basics. Abercrombie is increasingly shifting to a trend of season-less merchandising…they offer tanks, short sleeve knits, shorts, and denim minis all year round on the selling floor until late fall. It’s a bit too much of the “same old, same old.” B

ABERCROMBIE & FITCH:
When you enter the store, you are greeted by new display fixtures showcasing tank tops in 25 different colors. It takes the “same old, same old” and gives it a boost and shows off what A&F excels at – color. There are not enough prints; bordering on nonexistent. A rare mistake.

Classic navy blue is the most important color in the store (all mannequins are dressed head-to-toe in layers of navy. Abercrombie’s assortment includes all the classics, such as ribbed sweaters, knits for layering, plaid woven shirts, and polos. The most beautiful pieces are done in sophisticated neutral colors like stone gray and oatmeal…it keeps the merchandise modern and salable. I also see a return to destroyed denim; many jeans have rips, holes, and fading treatments…all well done. I’m impressed by the uniqueness of the distressed denim, but the denim division has the same disease that all the other divisions have…they look good, but nothing new. B-

RUEHL:
Ruehl is still more sophisticated than Abercrombie & Fitch with better fabrics and more upscale details, but yes, key best sellers from other divisions are also used in Ruehl with a bit of tweaking. Ruehl’s color story consists of deep colors (though not enough black) in vintage washes, perfect for fall. To become a major player Ruehl needs to have a bigger differentiation from the other divisions. B-

NORDSTROM MEN:
Rock & roll continues to be a major trend for fall; even making an appearance at the high-end men’s departments at Nordstrom. There are plenty of cool graphic T-shirts, skinny dark denim, and rugged leather jackets; near the cash register is a table of colorful sunglasses. At $10 a piece, the sunglasses are the perfect impulse buy to complete any rock & roll outfit. Beyond rock & roll, newness is hard to find at Nordstrom in both the men’s and women’s area. C+

GAP
There are some obvious tries to grab a trendy customer, like with Gap’s ruffle-front blouse for women, but bad color, poor fit, and outdated proportions crush those attempts. And again in Gap, I ask myself “where are all the cool things and slim fits we see in Gap Japan?”…Huge disconnect between Gap Japan and Gap America. In America, Gap pushes the same old pant fits: the low rise straight (their “new favorite”), the relaxed fit, and the straight. Does Gap know that the cool guys that are spending money on clothes in a tough economy are buying their pants slim and skinny and slim like in Tokyo? Putting some skinny jeans with all those sloppy tops would make a more interesting pairing than sloppy tops with sloppy bottoms. In men’s there are sloppy hoodies with a waffle knit lining for $79.50 Do we want to look like college students that can’t do any better? Not at all. In kids (another example of a literal gap) some of the items are actually cute! And they have nice clean colors for fall like navy blue, red, and platinum gray. Gap kids also hits the mark with clean wearable plaids and basic salable stripes…perfect for little Mr. and Mrs. Average, but it’s a check year. Where are all the checks? C-

BANANA REPUBLIC:
Everything at Banana Republic looks okay…and just okay; nothing spectacular. Do I want to buy anything? Nope. Maybe next time… C-

VICTORIA’S SECRET:
Victoria’s Secret Pink looks great with fresh ideas (like the Collegiate Collection), graphics, details, and colors. The current color story makes everything looks extra enticing with soft heather fabrics (from heather gray to heather pink and heather green) and a shocking touch of neon. We give them an A. Victoria’s Secret lingerie is more of the same…we have seen it all before. C-

EXPRESS:
The stores are very inconsistent. There are some good things and there is the same amount of bad things. All of it has an edge of sleaze. Boring denim and loads of markdowns bring the store down. C-

GUESS:
The Guess people are smart people. The store is full of good ideas. I love: the lightweight sexy fabrics, the interesting placed prints, the touches of shine, and the excellent denim finishes. The bling-bling people do it again. B+

URBAN OUTFITTERS:
I can understand why Urban Outfitters is the favorite store of people that are hip and cool. The store is ready for fall with right colors, silhouettes, prints, and patterns. Key pieces for both men and women include: the plaid shirt, the long cardigan, and skinny jeans. Adding to the Urban Outfitters success are the mini boutiques of capsule collections. Designers like Steve Alan, Charlotte Ronson, and Geren Ford create lines exclusively for Urban Outfitters. These capsule collections make contemporary designs, usually sold at retailers like Barneys and Saks, affordable for the average college student. Urban Outfitters is an A+ store.

FREE PEOPLE:
It’s a treasure chest of quirky details, delicate fabrics, and eccentric designs. Free People is one of my favorite companies right now. The designers are very clever with mixing prints and fabrics; always two steps ahead in offering the customer something new and different. Though the overall aesthetic may seem a bit overwhelming, Free People anchors itself with a wonderful color story of earth tones and neutrals. Items such as lace dresses, distressed denim, and cowl-neck sweaters are very right for the season. A

ANTHROPOLOGIE:
With their one of a kind visuals plus unique assortments of merchandise, Anthropologie continues to prosper. A true lifestyle store, offering everything from shower curtains to “boyfriend” cardigans, Anthropologie is one of the few retailers to excite their customers. Fashion forward trends like menswear pants and bowtie blouses, as well as current trends like ruffle blouses, painterly prints, and pencil skirts can be found in the store. Anthropologie has also launched a new line – Liefsdottir (think: a grown up Free People for wear-to-work) sold at Anthropologie stores as well as Nordstrom, Bloomingdale’s and Bergdorf Goodman. A-

CLUB MONACO:
The winning streak continues! The visuals are outstanding, the overwhelmingly gray color palette is absolutely right, the shots of color are exciting, and the prints and garment details are on target! Very solid. A+

WHITE HOUSE/BLACK MARKET:
I think these stores are looking a bit old-lady, but hey, there is a population of old ladies with money to spend. White House/Black Market does a great job of borrowing ideas from high-end designers (Oscar de la Renta and Chanel) and contemporary designer such as Alice & Olivia. Sophisticated yet wearable silhouettes and details are available to customers attempting to be a little bit more fashion forward. I think they have great black & white prints; in patterns from animal to floral and abstract…it all looks very sharp and classic….but no, I did not like all of it. B-

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