Japan's Bottom Is Not In...

See the chart below. While it is not new news that a country that gives its people zero interest rates on their life savings ends up wallowing in their own economic misery, it was apparently new to the media this morning that Japan could drive itself into another recession...

Do not mistake the 2008 Japanese recession for the one we witnessed in 1998 (where the Nikkei looked past the news and ripped higher ahead of accelerating economic growth). This Japanese bailout policy is going result in protracted economic stagnation.

We remain short Japan via the EWJ etf. This is a position we have held since opening the firm in May.

UA: Eye On Insider Buying

Amidst all the market noise, most people probably missed the insider buying at UnderArmour last week. Was it massive in size? Nah… But notable in that it was only the second insider buy all year. Harvey Sanders, member of the Board since 2004 and Chair of the Compensation Committee, boosted his stake in UA by 19% at $21.68 (i.e. where it is now). Equally as important is that Mr. Sanders has been a reasonably astute buyer and seller over time. – having lost money on 1 out of his 5 trades. In addition, his largest trade to date was 1,900 shares. This transaction was for 10,000.

Charting EU Credit Divergences, By Country...

Sometimes simple charts like this can reveal critical truths. While the EU has created a common currency, not all credit quality in the European bond market is considered equal. This is one more reason to like German Equities. We are remain long Germany, via the EWG etf.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

China: Best Looking Country Chart In The League

The fundamental picture in China continues to improve (growth expectations have been reigned in, and inflation continues to abate). In the face of a $586B stimulus spending plan and the cutting of taxes on exports, this is not a macro train many can afford to miss.

China's SSEC closed up another +2.2% overnight at 2030. The Composite Index has had a better than +15% move in the last week of trading. The chart below shows the impact of breaking out through our "shark line", which rests comfortably underwater now at 1866.

We remain long China via the FXI exchange traded fund. We were the bears for the better part of the last year, so we are well aware of their pitching our stale thesis.

Eye On The New Reality: American Cost Of Capital...

Below are two of the most important macro charts in my notebook – cost of long term capital on both a 30 and 1 year basis. Why are these “most important”? Because what occurs next on the margin here will have a meaningful impact across asset classes, how they trade, and how they are valued.

The 30 year chart puts a lot of what has occurred in the cheap money leverage cycle in context. The numbers don’t lie here, people do. This long term chart made geniuses of many in America. As cost of capital declined, some levered up on it and spent their brains out – some even called it a repeatable investment process. Pardon?

THE QUESTION from here is what do you do if the Queen Mary turns up into the right on 10 year yields?

You know that access to capital is never going to be what it was. You know that anyone in need of long term capital (MGM Mirage, Barclays, etc…) is paying double digit rates. You know that the US Federal Reserve eventually has to raise rates (they can’t cut from zero).

Do you know what this means for your portfolio? This is going to be “The New Reality”…

I have the critical breakout/breakdown line (or “shark” line) for US 10 Year Treasury Yields at 3.83% (see chart).

Manage risk at the tail. Jimmy Carter’s economic legacy remembers cost of capital well…

Keith R. McCullough
Chief Investment officer
Research Edge LLC

LIZ: The Question for Bill and His Board

So Bill, the question I pose to you is quite simple. Do you want equity value or not? The path you are on will erase your remaining $3 stock price faster than you can say “fashionista.” Will your options struck at $40 ever be worth anything? I doubt it. But the fact remains that you’ve got a couple of major call options that will, if exercised, 1) triple your stock price, 2) mitigate the need for a dividend cut, 3) fund your Oct ’09 debt payment, and 4) make you some friends with your company’s long-term shareholders.

It’s a simple question, no? It’s one that I thought that the Board would be asking a few hundred percent higher. I outlined two key modeling scenarios in my 11/11 note (LIZ: Dismantling An Empire) – one where management remains in denial and lets its business and balance sheet erode, and the other where it takes the bull by the horns strategically and makes the current equity valuation (or lack thereof) appear to be a gift. Here’s some added color as to why I get to LIZ being a 3-bagger if this team actually decides to embrace a proactive strategy to create value.

Assumptions in my sum-of-parts analysis.

1. Shrink. Get rid of Mexx. Aside from being an earnings drag, it is a massive working capital drain. $1bn in revenue with 75% in Europe – and the brand has not been able to make money in a weak dollar environment? Sell the leases (which you can do in most parts of Europe). See if you can get a couple of bucks for it. If not, eat crow and give it away. In the US, your leases are in good shape. Take advantage of them. Milk them. Stop trying to grow.

2. Unwind the parts of the core Liz Claiborne brand that should never have existed in the first place. This was once a $1.4bn brand. By last year it was $1bn. Take it below $700mm to a core level where it stands a chance to actually be relevant to its core customer. The asset valuation below shows that at this level, I assume margins of only 6%, and give it a 2x EBITDA multiple. Yes, I am valuing the venerable ‘Liz Claiborne’ trademark at only $125mm (or less than 0.2x sales for a non-seasonal, non-capital-intensive asset).

3. Get by on 2% of sales in corporate expenses. VFC does it. Why can’t you?

4. Juicy Coture, Lucky Brand, and Kate Spade keep mid/high-teens segment margins, and are valued at 4x EBITDA.

5. LIZ frees up $150mm in working capital from Mexx divestiture, and gets another $150mm for all asset sales remaining (including Mexx).

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