Slum Dog Short Seller

“Courage is being scared to death, but saddling up anyway”
-John Wayne
Short sellers can be scary, particularly if they are the kind with real capital that don’t know what they are doing. Some short sellers know exactly what they are doing – trying to scare people to death with their narrative fallacies. Don’t be scared of them – they are Slum Dogs, and you can make a career for yourself in this business picking them off.
As sad as this is to say, making stuff up is actually an investment process that some market participants use, daily. If you have no moral compass, and the SEC isn’t going to regulate your slumming tactics of fear mongering, heck … why not keep doing it? Well, as one of our clients said to me on Friday, “these raccoons all have a plan, until someone punches them in the face.”
I am a proactive risk manager and short seller, and I have had to endure these Slum Dog Short Sellers for the better part of my career. The difference between my last 10 years in this business and now, is that now I have a platform by which I can shine a flashlight on them, publicly, when they are slumming in the garbage cans of information transfer. As I wrote in Friday’s missive, “it’s time to drop the gloves.” I’m saddling up for this fight, and while I am scared of socialization, I am not scared of raccoons.
On Friday I dropped the mitts with the Slum Dogs at 1:21PM EST, and posted a real time note to our clients to “Buy SPY, with the SP500 at the 754 line.” Now call me a knucklehead hockey player or call me right – that turned out to be both the low of the day and of the year to-date. I sincerely hope that those Slum Dogs who were floating their shameless rumors and pressing their shorts in Citigroup on that line doubted the power of The New Reality.
This market needs leadership. This market needs a voice. That voice can be Chinese, Arab, or American – global markets are as interconnected as they have ever been, and collaboration amongst the uncompromised is going to get this done right.
Despite the Slum Dogs shopping their short thesis’ into the US market close, Asian markets charged higher last night, reminding us that there are new Chinese leaders in town. China was up another +2%, taking the Shanghai Stock Exchange to +26.6% for 2009 to-date. How is that short China “because they lie and make up the numbers” thesis treating you this year Mr. Slummer? Isn’t it annoying when someone who is lying like you are is crushing the short side of your P&L? Or are they lying? Inquiring and accountable minds want to know…
Asian governments also took slum lord matters into their own hands over the weekend and, with China’s leadership, established a massive $120 billion dollar Asian Currency Pool. After seeing Asian currencies hit 3-month lows last week, this proactive risk management move makes sense. Remember, China owns both her own cash and liquidity at this stage of the game of global economic power re-balancing. China is doing what she needs to do, when she needs to do it – she is controlling her own destiny, and with our being long China via the CAF closed end fund, I support her message.
In the Middle East, they rang the short squeeze sirens in the United Arab Emirates last night, taking the Slum Dog Short Sellers for a little visit up on top of one of their monstrous buildings, giving the perpetrators of storytelling a peek over the ledge. Like the Chinese, the UAE decided to take matters into their own hands and lend Dubai a cool $10 billion at a 4% rate – I bet the Pandit Bandit wouldn’t mind some of them petrodollars – no regulation strings attached! The UAE’s stock market is trading up +7.9% so far this morning – leadership matters…
Saudi Arabia’s stock market is also trading higher in the face of what looks like a bottoming process in the price of those petrodollars. I had been buying oil for the last few weeks and stating my case against the Slum Dogs that buying oil under $38/barrel gets we un-compromised American capitalists paid. Despite all of the manic media’s noise about gold last week, oil actually outperformed gold on a week over week basis. Gold was +5.6% for the week, while oil was +6.7%. This has not happened for a long time. This doesn’t fit the narrative fallacy of the Slum Dog momentum trader either – oh what is a raccoon to do when that light is shining in his face?
For the immediate term “Trade”, I am long oil and short gold. On an intermediate term basis, gold is bullish and oil is bearish – so why trade? Trading is the only means of survival in this market, and it’s also the best way to pick off the Slum lords and Slum Dogs of the land without moral compass. Is it a battle in these trading trenches? You bet your Madoff it is  - and I am signed up for it. Gold is trading down -1.5% so far this morning, and oil is up again, testing $41/barrel – game on!
My downside target for the SP500 remains a higher low versus the November 20th low of 752. I have put my money where my mouth is and taken my cash position down to 58% versus the 64% position I was carrying into Friday’s open. I have a 21% position in US Equities, and I am Long America, for a Trade. I am short gold and short the Slum Dog Short Sellers, at a price.
Best of luck out there today,


Slum Dog Short Seller - etfs022309

LIZ: Tremendous Call Option

Only 3 weeks after an 8% workforce cut, LIZ is selling a cost center for cash. I’m also gaining confidence that the debt covenants will not be breached, and top line pressure (though not integral to the story here) is easing on the margin. By late 2009, I think that investors will be eyeing EPS closer to $0.75. I maintain my view that this company will remain solvent, and that the stock under $3 is a tremendous call option.

1. LIZ announced this morning that it is selling its sourcing operations to Li&Fung for up to $83mm in cash. This makes perfect sense to me, as LIZ has invested way too much capital in its internal sourcing arm over the past 10 years with negative cumulative return. Not only will this take a cost center off of LIZ’s P&L, but they’ll get paid cash for it. Will LIZ see higher FOB costs on its apparel? Yes. They’ll need to pay Li&Fung for execution on orders. But I’ll take that any day for LIZ. With the transaction, net debt comes down by 8%, and EBITDA goes up by 10% using even the most conservative estimates.

2. Watch the top line. LIZ is not a top line growth story. I repeat…It is not a top line story. But with sales of its Partner brands (40% of total) falling by over 30% over the past 3 quarters, let’s keep an eye on changes on the margin. Specifically, Kohl’s recently launched Dana Buchman as an exclusive from LIZ, and the company finally launched the long-awaited Mizrahi redesigned Liz Claiborne line. My digging suggests that this is actually performing well relative to expectations. I still think that LIZ should take the Claiborne brand and sell/license the whole thing to Wal*Mart while it monetizes its other brands like Juicy, Lucky and Kate Spade. That’s probably not in the cards soon – but it does not need to for a $2.33 stock to work.

3. Debt covenants look good. Even before this morning’s announced sale to Li&Fung we’d been getting warmer on LIZ’s ability to hold the line on its debt covenants. The bottom line is that we need to justify that margins are down 450bp in ’09 in order to breach. I find it tough to logically, or mathematically, get there. A few considerations on the EBITDA coverage calculations that give a bit more cushion that I think many are currently looking for…

a. There is $150mm of cash restructuring added back in ’08 and up to $60mm in ’09 in the numerator.
b. The lenders are not counting ~$100mm in CapEx in F08 that was spent on store growth, which is being deducted out of the numerator.
c. In the Interest calculation, cash taxes and dividends are added as well so with the dividend suspended and no cash taxes paid, there is no impact from these lines.

Little Light at End of European Tunnel

Here’s an overview of Eastern Europe exposure by apparel/footwear brand. Adi and Nike are most exposed. Not good that the athletic retail base in Western Europe is weakening on the margin.

More than a few people have asked me to rank exposure to Eastern Europe for apparel and footwear companies given the turmoil in its financial markets over the past week. The good news is that most US companies have no more than about 5% exposure in revenue and profits. The bad news is that this is not about direct exposure, but rather indirect exposure throughout the rest of Europe and the World if the situation there worsens.

As it relates to direct exposure, the two top companies on the list are Adidas and Nike at 9% and 6%, respectively. Also worth noting that the two key Western European sporting goods retailers are on the skids – with JJB Sports (22% of the UK market) on the verge of going away. Sports Direct (37% share) has been doing better, and is likely to benefit from JJB’s problems. That’s a challenge in itself given the often irrational pricing behavior of Sports Direct’s management team. This is not good…

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Quote Of The Week: Tiger Woods

Tiger is making his comeback. On Friday, he was asked about expectations. Effectively, the media wants to know what he expects of himself in his first tour event post his rehab.

Question: Can you just talk about what your expectations are for the week, whether it's results oriented or play oriented?

Tiger Woods: Well, nothing changes from every time I enter, it's to win. So that's my intent, to go in there and win, and nothing has ever changed.

At the highest levels of competition, from sports to business, we’re looking for new leadership in this country. We want leaders who are transparent, accountable, and trustworthy. We want leaders whose handshake means more than the money they have made. We want winners who can win without using performance enhancing drugs or excessive leverage.

No excuses. No pretense. Tiger is a winner, and that’s what he wakes up expecting to do, every day of his life.

To all of those in positions of leadership in this country, from the US government to corporate America – this is the kind of leadership we can believe in.

Keith R. McCullough
CEO / Chief Investment Officer

Converse: Multi-Generational Relevance

You gotta take notice when facebook has more registered fans for Converse than it does for Starbucks, The Yankees, Disney, and God – combined! Brand relevancy remains big here.

There’s a story in today’s NY Post that highlights how Converse is leveraging its heritage to sell co-branded product with rock bands like The Who and Pink Floyd. Makes sense to me, as part of the aging hipster crowd, but let’s look at a much bigger snapshot of the Brand’s relevance to today’s core consumer. What better place to start than Facebook? Consider that on FB’s ‘favorite products’ board, Converse represents 4 of the top 40 groups, representing over 5 million members. Even if I assume that half these are dupes (consumers belonging to more than one group) it would rank Converse above the following brands and personalities…

1) Facebook and YouTube (2.2mm and 2.1mm fans, respectively)
2) Adidas and Nike (1.2mm fans each)
3) Twilight (1.9mm)
4) McDonald’s (1.3mm)
5) Starbucks (1.1mm)
6) Stewie Griffin (1.8mm)
7) Dr. House (2.5mm)
8) Christiano Ronaldo (2.4mm)
9) The NY Yankees (only 200k, and the 12th most popular sports team – but #1 in the US).
10) Rihanna (1.9mm – the most popular musician)
11) Disney (540k)
12) The Planet Earth (220k)
13) God (2.5k)

The only other Consumer brand to rank above Converse is Coke – which has just shy of 3mm registered fans.

Almost makes you wish that Converse was more than its current (estimated) 7-8% of Nike, Inc revenue. Current Brand strength at Converse can't offset the rollover in profit growth in the global core near-term. Nonetheless, it shows how Nike has done an exceptional job in keeping the Brand relevant under its ownership, and why it's likely to emerge from this environment a net share gainer across most businesses.

Chart of the Week: Safety Trade Peaking?

The global macro facts in the rear view mirror are what they are at this point – crystal clear. We are thankful to have carried both a long position in gold (up until recently - we shorted gold this week), and a 46-86% position in US Dollars over the course of the year in our Asset Allocation Model. As prices and expectations change, we do – and we think this Safety Trade is finally peaking.

For 2009 YTD, gold is up over +13% and the SP500 is down -14.8%. Alongside US centric equity portfolio deflation we have a continuation of the nasty year over year deflation in both US real estate prices and the overall Commodities Index (CRB Index is down -12% for the YTD). In the face of pervasively bearish deflation and US Financial media sentiment, the US Dollar has “re-flated” +7% for the YTD.

Calling the next big asset class move from here is going to be a critical differentiator for this year’s performance. The world is now being soaked with government issued liquidity and, as a result, we are finally starting to see risk spreads narrow and premiums on corporate bond yields dampen. Looking at this chart below, you can see that there has been a 150 basis point drop in those freak-out bond yields you saw during the October/November. Despite this, gold is raging to higher highs?

Either gold is signaling that bond yields and risk spreads are going to blow out to those October/November highs, or the whole wide world of underperforming wealth managers who are now fire engine chasing this relative performance trade in cash/gold are teeing themselves up to get tagged.

We have seen this movie before – remember that black stuff called oil that kept chugging higher despite the fundamentals of oil supplies rising in the face of slowing demand? The only demand that remained (at the top) was that of the incremental asset allocator getting sucked into the vortex of the “its different this time” peak…

There has always been a baseline of demand for gold – we know this. We have been bullish on gold since 2005, and we still can be if we see a lower price. However, right here and now is where we get paid to manage risk - with the TED Spread trading 96 basis points wide (vs. Oct/Nov 400-500 bps), and both corporate bond yields and spreads narrowing sequentially vs. Q4 of 2008, the question is – is the speculation of the momentum trading community signaling a peak in the Safety Trade?

Everything has a time and a price. We think that the answer to that question, for the immediate term “Trade”, is yes.

Keith R. McCullough
CEO / Chief Investment Officer

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