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Draghi Leaves Door Open For Rate Cut and Liquidity Injection

Mario Draghi and the ECB’s governing council voted today to keep rates unchanged, although a cut was suggested by some members.


Last month’s dramatic pivot to a dovish monetary tone that interest rates should remain “at present OR lower levels for an extended period of time” was reiterated again today in remarks that monetary policy will remain accommodative for “as long as is necessary”.  Draghi described an economy that is “weak, fragile, and uneven” and left the prospect of issuing another LTRO on the table. We expect that given the continued clog in the credit channel, a liquidity package could be released into year-end (see chart below).


Interestingly, and despite the dovish commentary, the EUR/USD rose following the announcement, which we think is reflective of the impact of Bernanke talking down U.S. growth prospects (and the USD), as well as the Eurozone economy showing improvement on the margin.  


As central bankers struggle to guide expectations (hint Fed’s no-taper decision and the ECB’s and BOE’s forward guidance) we wouldn’t be surprised to see Draghi keep his cards tight on when he may issue liquidity measures or cut rates, and continue to drag his feet on any policy action until more data confirms his team’s outlook.


As it relates to the Eurozone, our call remains that we expect Europe’s economy to gradually improve off low levels (we’re UK and German equity bulls) and bullish on the EUR/USD, which is in a bullish breakout above its TRADE, TREND, and TAIL levels (see chart below).


Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. loans


Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. eur usd


Draghi highlights from the Press Conference:

  • Somewhat weaker growth in the beginning of Q3, but still expects a gradual recovery
  • The recovery is “weak, fragile, and uneven” and starting from very low levels
  • Unemployment, especially youth, needs to be reduced from very high levels
  • Credit dynamics remain subdued with flows “still weak, very weak” 
  • On broader developments of liquidity: ECB is ready to use all available instruments, including LTRO
  • Inflation continues to be firmly anchored, on the very low side of the 2% target (at 1.1%), but the baseline scenario has been underpinned
  • Progress is being made on political reforms:  greatest pressure should come from the inside; don’t need to be pressed by markets
  • On political instability (Italy and the rise of anti-Euro parties in Germany and Austria): while instability hampers hopes for a recovery, it doesn’t hurt the foundations of the Eurozone as it used to do a few years ago -- that suggests that the Eurozone and Euro is more stable


Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. interest rates



Matthew Hedrick

Senior Analyst

Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on our radar screen.

Tom Tobin – Healthcare

Web traffic, glitches slow Obamacare exchanges launch (via Reuters)


Morning Reads on Our Radar Screen - huff78


Keith McCullough – CEO

Japan Auto Sales Climb Most in 14 Months (Bloomberg)

Letta Wins Confidence Vote After Berlusconi Support (via WSJ)

Israel PM calls Iran leader 'wolf in sheep's clothing' (via BBC)

Pirates' First postseason Win Since 1992 (via ESPN)


Jonathan Casteleyn – Financials

Gundlach’s Fund Had Its Biggest Redemptions in September (via Bloomberg)

Fed Said to Review Commodities at Goldman, Morgan Stanley (Bloomberg)


Howard Penney – Restaurants

McDonald’s Stores Trying Loyalty Program to Attract Millenials (via Bloomberg)


Brian McGough – Retail

Lululemon’s sheer yoga pants lawsuit gets lead plaintiff (via NY Post)

NBA Standout Stephen Curry Joins Under Armour Basketball Roster (via Sports One Source)

Jacobs Exits Vuitton To Focus On IPO (via WWD)


Kevin Kaiser - Energy

Kinder Morgan Detailed Analysis (via Scribd)

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Some are excited about a return to growth in August.  Time for a look under the hood.


  • US gaming revenues (from reporting jurisdictions) increased 5% YoY in August.  Even same-store revenues were positive, up 3%.
  • However, August received a 2% boost from a very high hold % in Strip Baccarat.  Subtracting out Strip revenues (to look at regional type markets), same-store revenue was actually flat in August.
  • Moreover, August contained one extra Saturday which likely contributed 2-3% to YoY growth
  • The takeaway is that August was actually another weak month overall in US gaming


What’s New Today in Retail (10/2)

Takeaway: Footwear data weakish -- but in a seasonally unimportant period. Interesting color from RH mgmt. UA, LULU, LVMH, SPLS, ICON, Uniglo, JCP...

What’s New Today in Retail (10/2)




MFB – Extraordinary Shareholder Meeting: Thursday 10/3




Weekly Footwear Data

Another weak showing for athletic footwear sales, with trends remaining flattish for the year. Units are weak, while they're offset by a 4% increase in ASP. The saving grace is that this week is traditionally one of the weakest from a seasonal perspective. We'd be a lot more concerned to be looking at these trends a month from now.  


What’s New Today in Retail (10/2) - chart1 10 2

What’s New Today in Retail (10/2) - chart2 10 2

What’s New Today in Retail (10/2) - chart3 10 2

What’s New Today in Retail (10/2) - chart6 10 2

What’s New Today in Retail (10/2) - chart5 10 2




RH - Interesting Discussion In Conference Webcast 


CEO Gary Freidman explains the companies sourcing advantages:


"Here you can see an example that we've used, where these are the exact same chairs. They're colored slightly differently, just so they don't look exactly the same. But this chair was being sold at $500 to $600 in the independent boutiques. We're able to bring this chair to market at $199: exact same wood, exact same fabrication. You go, how do we do that? Well, what we've done is we've eliminated the middleman."

"So, you've had a market that's controlled at the high end that has worked through domestic importers, okay. Somebody buying the chair, for example for $125 in Asia, importing that chair at 20 to maybe 200 chairs at a time, marking that chair up to $250, selling it to a local retailer, who is marketing it up to $500 to $600, and you say, what have we done? Well, one, we went to that supplier and didn't buy the chair for $125; we're buying the chair for significantly less, one because of our volume. Two, because we've got the opportunity to enable that vendor to source raw materials better, whether it's sourcing the wood or in this case this chair is covered with Belgian linen. We happen to be the biggest importers of Belgian linen in the world. Okay. So instead of that vendor buying Belgian linen at his price, he is now buying it at our price. Instead of $15 a yard, it might be $9 a yard. So we got multiple opportunities to kind of create a value that's unseen before in this marketplace and this is a real example. In this case, both these retailers have recently discontinued selling this chair. But that chair was probably carried in hundreds of small retailers."


"Yeah, I mean when you say you can't get it here, almost all of our assortments in the high 90s is kind of proprietary goods. But you will have people that might have something similar. In that case, that chair, we came into the market after that chair was in the market. And then we bought that chair that was in the market. We completely disrupted the market. Now it's hard to find anybody that has that chair. One of our competitors Williams-Sonoma Home just introduced that chair at I think $420, I don't why, but we believe our compelling value will keep people out of the market as far as trying to knock us off at least at that quality level. But today, the vast majority of our products in the 90s isn't available anywhere else."


Trivia Question of the Day


“What’s the significance of today’s data (10/2) in the world of retail?”

Answer: It marks the day in 1996 that Lance Armstrong learned that he had cancer. Upon his recovery and subsequent Tour de France victories, Nike commercialized it into a product line of mostly black and yellow product called 10/2. It grew up into a several hundred million dollar business.

Trivia question number 2. “How big is the line today?” Zero


UA - NBA Standout Stephen Curry Joins Under Armour Basketball Roster 



"Under Armour announced the addition of NBA point guard Stephen Curry to their roster of world-class athletes. As part of the multi-year partnership, Curry will be wearing the new UA Micro G Anatomix Spawn basketball shoes and featured in upcoming marketing campaigns via digital, social, print, in-store and out-of-home."

"Curry joins an Under Armour athlete roster that includes Michael Phelps, Tom Brady, Cam Newton, Bryce Harper, Jordan Spieth, Lindsey Vonn and NBA players Brandon Jennings, Raymond Felton, Greivis Vasquez and Kemba Walker."


Takeaway: With basketball players, the first question to ask is ‘why did Nike pass on him’. That said, this synch with UA’s strategy to secure ‘B’ players that wear UA shoes while competing against Nike players.


LULU - Lululemon’s sheer yoga pants lawsuit gets lead plaintiff



"A Louisiana pension fund will lead U.S. litigation accusing Lululemon Athletica Inc. of fraudulently hiding defects that caused yoga pants to become nearly sheer, and concealing talks that led to the surprise departure of its chief executive."

"U.S. District Judge Katherine Forrest in Manhattan on Tuesday said the Louisiana Sheriffs’ Pension & Relief Fund, which owned about $1.3 million of Lululemon stock, will handle the litigation on behalf of shareholders."

"The Baton Rouge-based fund plans to seek class-action status for shareholders between March 21, when full-year results were announced, and June 10. It said it lost $116,000 on transactions in that period. The fund’s law firm is Bernstein Litowitz Berger & Grossmann, a shareholder class-action specialist."


Takeaway: Proving a moronic business blunder is one thing. Proving malice and/or violation of Securities law is another.


LVMH - WWD NEWS ALERT: Jacobs Exits Vuitton To Focus On IPO



  • "Marc Jacobs is leaving Louis Vuitton as plans take shape for an eventual public offering for the Marc Jacobs brand."
  • "LVMH chairman and ceo Bernard Arnault, together with Jacobs and his long-time business partner Robert Duffy, confirmed the developments to WWD…"
  • "The offering should occur within the next three years."


Takeaway: Stating the obvious here, but not good for LVMH. Jacobs is looking at KORS, Kate Spade, the likely IPO of Tory Burch, and the success of Ralph Lauren – and with some likely coaching from his bankers – it makes perfect sense that he’s focused on better monetizing his name.


FL, LVHM, BONT, HMB, GPS - LVMH, Richemont Among World's Best E-tailers



  • "The scores for the table were created by Web site management company Sitemorse using automated software that read and reviewed the first 125 pages of each retailer’s site, placing them in a ranked table based on user experience (UX), governance, risk and compliance (GRC), and search capability (SEO)."
  • "C&A Europe was the highest-ranking fashion company, in second position. Swedish food retailer ICA was the top performer. The German Tengelmann Group, which owns fashion retailer KiK, in 9th place; Nordstrom was 11th, followed by Associated British Foods, which owns Primark, at 13th place; Foot Locker and the Bon-Ton stores also appeared in the top 20 retailers’ Web sites."
  • "Further down the list, at number 38, was Richemont, Marks & Spencer at 54th position, Inditex was 63rd, [LVMH] was 67th, [H&M] was 121st, The Gap was 157th, Arcadia — owner of Topshop— was 173rd, while Macy’s was 191st."

Takeaway: We’re not verifying this study, bc it seems so ‘off’ logically. LVMH makes sense. HMB – perhaps. But BONT? FL? GPS? We don’t see it.


ICON - Macklemore & Ryan Lewis Taking Buffalo Brand Viral



  • "Iconix Brand Group Inc., which sought to give Buffalo David Bitton an international boost when it acquired a 51 percent stake in the company eight months ago, is now looking to give the brand a viral lift."
  • "Iconix has engaged hip-hop duo Macklemore & Ryan Lewis as the first of its participants in its 'Blank Check Series,' which will endow artists in various media to produce media content on behalf of the brand."

Takeaway: Not sure if these guys have staying power --- but their status in the hip-hop realm today is untouchable.


9983 - Uniqlo Expands Footprint in U.S.


  • "Uniqlo is multiplying in the San Francisco Bay Area.After opening a flagship on Powell Street in San Francisco a year ago, the Japanese retailer is adding four stores in the region by November. The new Northern California stores are in Hillsdale Shopping Center in San Mateo, Stonestown Galleria Mall in San Francisco, Westfield Valley Fair Mall in Santa Clara and the mixed-use development Bay Street Emeryville in Emeryville."
  • "The San Francisco and New York areas are hubs of retail activity for Uniqlo in the U.S., where it will end up with a total of 17 stores this fall."
  • "Next year, Meyer [COO of Uniqlo US] has forecast that Uniqlo will add 20 or more stores in the U.S."
  • "In the U.S., Uniqlo is just getting off the ground and has registered operating losses."

Takeaway: Watch out for these guys. The parent is comfortable growing while losing money, and the product is inexpensive relative to the quality and fashion quotient. Also, its cost of capital is close to zero.


BURL - Burlington Prices IPO Shares



  • "Burlington Stores has priced its shares at $17 each as it prepares to go public on Wednesday."
  • "So far 13.3 million shares are set to begin trading Wednesday morning on the New York Stock Exchange under the symbol 'BURL.'"


SPLS - Staples Acquires Runa to Transform Shopping Experience Through Personalization



  • "[SPLS]...announced today it has completed the acquisition of Runa, a software company based in San Mateo, Calif. that helps online retailers increase sales by personalizing the shopping experience. Terms and conditions of the acquisition were not disclosed."


Takeaway: Makes sense. Anyone in this space needs to differentiate as much as possible to gain share.


JCP - Former J.C. Penney Outlet Stores to Close; 1,400 Jobs Lost



  • "The new owner of J.C. Penney's former outlet store business said Tuesday that it will close all 15 locations amid a steep drop in sales."
  • "The outlet stores, which are in 14 states, were purchased in October 2011 by SB Acquisitions from J.C. Penney and rebranded JC's 5 Star Outlet."
  • "Before the acquisition by SB Acquisitions, Penney had designated them for closure."


KER - Saint Laurent Severs Ties With Colette



  • "According to sources, Yves Saint Laurent is taking legal action against several makers of T-shirts bearing the 'Ain’t Laurent Without Yves' slogan."
  • "The French fashion house also has severed a 15-year business relationship with Paris retailer Colette for having carried them."
  • "Sarah Andelman, Colette’s creative director...said Slimane and YSL have retaliated by canceling her spring and resort orders totaling 101,191 euros at wholesale, or $136,690 at current exchange."
  • "The 'Ain’t Laurent' T-shirt, retailing for about 42 euros, or $56.75, winks to Slimane’s decision last year to change the name of YSL collections and stores to Saint Laurent."


What’s New Today in Retail (10/2) - chart4 10 2


JOEZ - Joe's Hudson Jeans Buy Said Completed



  • "Joe’s Jeans Inc.’s acquisition of fellow premium denim brand Hudson Jeans for $97.6 million has been consummated."
  • "Joe’s acquired all the assets of Hudson Clothing Holdings Inc. for a combination of cash and $24.1 million in convertible notes from Peter Kim and Fireman Capital Partners. Kim will continue with Hudson as its chief executive officer and join the board of Joe’s."




Bangladesh apparel makers count the cost of unrest



  • "The fallout from last week's violent protests in Bangladesh's key apparel industrial belts could lead to financial losses of around BDT6.0bn (US$77m) for apparel makers…"
  • "Garment exporters say the losses were incurred as a result of production disruption and vandalism during the six days of unrest, which began on 21 September."
  • "An official from the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) told just-style that nearly 3,000 ready-made garment (RMG) units were caught up in the clashes - with 65 factories damaged and arson attacks launched on 25."
  • "'the overall cost of production in the apparel sector has increased by 12-13% due to the recent trouble, general strikes and political uncertainty over the upcoming general election,' Atiqul Islam, president of the BGMEA, told just-style yesterday…"


India’s apparel exports to touch US$ 17bn in FY’14: AEPC



  • "The garment industry of India is expected to achieve the target of US$ 17 billion in exports for the current fiscal year as the outbound shipments of apparel have already touched US$ 5 billion during the first four months of 2013-14, according to the Apparel Export Promotion Council (AEPC)."
  • "Mr. Sakthivel [President of the AEPC] said that the growth in apparel exports is attributed to the recovery of the US economy, which is the country’s second largest export destination, in addition to the increasing demands from emerging markets such as Latin America and Africa, he added."
  • "During April to July 2013-14, apparel exports have increased by 13 percent year-on-year to US$ 5 billion, he added."

Managing Global Risk

Client Talking Points


After posting the best Japanese auto sales number in 14 months, the Yen continued its latest run and is finally signaling immediate-term TRADE overbought vs US Dollar. No, the Nikkei definitely does not like #StrongYen. It closed down -2.1%, leading the losers in Asia overnight. Japanese stocks are oversold right now. Yes - it's a good spot to buy. 


The critical confidence vote appears to be going the right way for Italy's Prime Minister Enrico Letta (not so good for Berlusconi). Italian stocks are up +0.9% in response to that development. Italy is diverging big time versus the rest of European Equities (Swiss -1.1%, France -0.9%, Russia -0.9%).


After a nice run-up on yesterday’s 56.2 ISM manufacturing print for September, the 10-year yield has pulled back to 2.62% this morning. US Equity futures? They do not like Down Dollar, Down Rates. Politicians (and bond fund managers) do. It's #OctTaper vs Bernanke now. More to be revealed.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


TREASURIES: 10yr and Yield Spread backing off again this morning - US stock futures dont like that @KeithMcCullough


It's not that I am smart, it's just that I stay with problems longer

-Albert Einstein


According to MarketWatch, it was virtually impossible to sign up for Obamacare on it opening day yesterday. They went went 0-for-51 in trying to apply online for Obamacare in all 50 states and the District of Columbia. (MarketWatch)