Slouching Towards Wall Street…


Bernanke-Panky - Congress is Shocked At Politics in High Places


SEC / CFTC - The Regulatory Smackdown


And: ETFs - We Don't Want To Say We Told You So... Actually, We Do!




"Paulson - BofA is the turd in the punchbowl."


This quote - reported in Friday's Wall Street Journal as "Jan. 9 note by participant in call among Fed, Treasury, OCC, FDIC" - is being waved under Fed Chairman Bernanke's nose as evidence of skullduggery on the part of the Gang of Two - Paulson and Bernanke - in their alleged manhandling of BofA CEO Ken Lewis.  Lewis has stated under oath that he was "threatened" by Paulson and Bernanke.  One comment we have not seen in this Brouhaha in a Brown Betty is the fact that, an out-of-work Ken Lewis is not exactly to be pitied.

"Threatened"?  We recognize that, at over six feet, former football player Paulson is physically imposing.  But what was he going to do to Lewis - beat him up?

Reality check:  Wall Street Journal staff reporter Kate Kelley has come out with a book - Street Fighters - based upon the series of articles she wrote about Bear Stearns that ran in the WSJ last year.  The book is a quick and lively read.  It purports to chronicle the blow by blow of the last three days of Bear's independent existence and comes complete with personal portraits of key players.  For all the excitement that fills its pages, we found by far the most important passage is a brief paragraph on pages 164-165, describing Treasury Secretary Paulson's discussions with Deutsche Bank Chairman Josef Ackermann.

Ackermann, whom Paulson considered a possible buyer for Bear, responded to Paulson's query by saying that Deutsche would be making no such offer.  Further, Ackermann said "if those guys go down, we're not interested in doing business with any bank in the United States."

We thought that sentence worth the entire price of the book, and then some.  Whether we agree or disagree with the program Paulson and Bernanke pursued, they certainly saw with crystal clarity that the entire US financial system - and with it, the American way of life - was on the line.  Paulson may, in fact, have fully believed what he was saying when he told members of Congress, in his famous secret late-night call, that there would be rioting in the streets, nation-wide unrest, and martial law if the TARP were not passed and implemented.  In light of the projections made in the latest IMF report, we fear Secretary Paulson's predictions may yet prove true.

Fast forward to BofA CEO Ken Lewis whining to New York AG Cuomo that Paulson and Bernanke "threatened" him over the Merrill acquisition.  Then faster-forward to Thursday of this week, when Chairman Bernanke sat before a Congressional panel and took it on the neatly-whiskered chin.

Bernanke testified that the decisions at issue "were taken under highly unusual circumstances in the face of grave threats to our financial system and our economy" (WSJ, 26 June, "Bernanke Blasted In House").  Reality check, Part II: Lewis, Paulson, Bernanke - don't let the Ivy-League veneer fool you - these three guys are tough and smart, and they do not - repeat, Do Not - take "No" for an answer.  Lewis and Bernanke, both having been well coached by their counsel, are walking the finest of lines - they have to balance avoiding perjury, with avoiding screaming back at Congress and asking why they are going through this self-serving Inqusition, instead of supporting those who did the dirty work of keeping the markets afloat.

For this Deluge in the Royal Doulton is nothing more than a self-serving exercise for Congress to distract public attention from the fact that they caved in to the pressure from the Dynamic Duo, giving Paulson and Bernanke carte blanche over... uhmmm... a really large amount of money.

If one believes - as Congress clearly did at the time - that the rescue of the US financial system depended on extraordinary measures, one can not have it both ways and now go after those who forced the issue.

As the quote from Josef Ackermann makes clear, the credibility of the US markets was mighty tenuous.  The trillions thrown at the marketplace notwithstanding, the ice upon which we tread still seems perilously thin.  For all its economic clout, China is not as much creating global events, as taking advantage of them, and the current campaign to uproot the US dollar as the world's reference currency is a sign that the tide has turned definitively away from our markets as the sole beacon for the global economy.  The only questions now are, how much influence will the US lose, and how quickly will we lose it? 

The failure of a deal to rescue Merrill Lynch would have blown a hole right through the hull of the US market and our economic ship would have been sunk for good.

What next for these hearings?  Our nickel is on Mr. Bernanke for another term.  He will surely get Geithner's vote - and it is clear that President Obama is giving Secretary Geithner enough rope to either tie down the monster, or hang himself and the Ship of State and all who sail in her.  For all the screeching on the Hill, if Congress goes after Chairman Bernanke for his role in the BofA / Merrill deal, Congress itself will have to admit that they were reckless in approving the TARP and handing the money over to the Pair Extraordinaire.

As just one example of how this might have turned out differently, ranking Republican Darrell Issa went hellbent-for-leather after Chairman Bernanke for Bernanke's failure to report Merrill's undisclosed losses to the SEC.  Lawyers can debate whether the Chairman should have done so, or at what point.  But as a practical matter, we can think of no worse lapse of judgment than bringing Chris Cox into the mix as the deal teetered on the brink.

Ken Lewis is no pansy.  He may have not known the full extent of Merrill's financial pain, but - not to be facetious - there isn't a hell of a lot of difference between $9 billion in undisclosed losses, and $12 billion in undisclosed losses.  And when he went to Paulson and Bernanke, no doubt trembling with rage, we envision Paulson - football player, high-powered investment banker, all-around tough guy - telling him, "shut yer trap and quit yer whining, and don't expect us to bail you out if you go shooting off your mouth now in the middle of the deal."  Paulson was right: BofA was the turd in that punchbowl.  Where else were they to put it now?

Yes, under proper corporate governance standards, Lewis should probably have evoked the Material Adverse Condition clause.  Yes, under proper regulatory and oversight standards, the public sector should not encourage the private sector to pursue highly irresponsible expenditures of shareholder capital.  Yes, under the standards of free market capitalism, federal monies should not be offered to support these highly irresponsible transactions.  And yes, under proper legislative procedures, Congress should not allocate a single dollar - much less nearly a trillion of them - without having heard full testimony and performing a thorough review of the uses to which the monies would be put, the persons and mechanisms in place to ensure proper management of the programs to be financed, and what measurements would be applied to determine success of the programs in question.

If Congress does not re-affirm Chairman Bernanke when President Obama nominates him for another term, who will answer for all of this?

Do you get it now?


Artificial Turf

The reigning market regulators - the SEC and the CFTC - are engaged in a careful minuet.  Even as they embrace, it is not clear whether they are dancing with one another - and impossible to tell who is leading.

As SEC Chair Schapiro arms her minions, CFTC Chair Gary Gensler appears to be making a quieter bid for dramatically increased power - one he may well win with no fanfare.

Gensler's proposal makes sense, and may be the only practical way of achieving the public policy objective of market transparency and stability.  The CFTC has a much lower public profile than the SEC.  Their brief is to promote market efficiency and transparency - as distinct from the SEC, which is designated an investor protection agency.  To most professional observers, the CFTC does its job fairly well - the SEC, in the past decade or so, not at all.

Gensler tells the Wall Street Journal (26 June, "CFTC Targets Derivatives Dealers") "The lack of regulation of dealers is 'one of the great lessons' of the financial crisis."  Alternatives, such as Senator Harkin's proposed legislation requiring OTC derivatives to be cleared through regulated exchanges, may gum up the works because they fail to take into account the mechanics of the marketplace they seek to regulate. 

The credit derivatives business is, by definition, a vast market of individual contracts.  These contracts are not standard, and will thus not be amenable to exchange trading.  As portfolio holdings, they are impossible to price in a mark-to-market environment, and traditional clearers will be hard pressed to take them into their systems, as there is nothing to hold.  As Gertrude Stein said, "there's no there there."  (She was speaking about the city of Burbank, CA.  The way things are going, this comment may take on renewed meaning.)  This makes exchange clearing more complicated than it needs to be - and still does not address the instruments at their heart, which is the issuers.  Could it be that Senator Harkin is putting out a red herring, making himself look tough, while keeping hands off the investment banks that are sources of campaign contributions?

Chairman Gensler's proposal, to regulate the issuers, looks to go straight to the heart of the matter.  Which is why it may face stiff opposition. 

SEC Chair Schapiro, meanwhile, is gaining praise (Financial Times, 26 June, "Schapiro Gets Troops Ready For Regulatory Turf War"; Floyd Norris, 22 June, "Good News At The SEC") for her recent appointment of University of Texas law professor Henry Hu to "a senior risk position."  Professor Hu has done recent work on the "empty creditor" problem - the phenomenon of investors who buy credit default protection, then force companies to credit events.  The investors lose out on their equity or corporate debt holdings, but they make a multiple of those losses on cashing in their credit default swaps.

Critics are saying Professor Hu's work might be deemed more important if he had published at the start of this decade, on the heels of the Marconi restructuring.  In the Marconi transaction, UBS insisted that the restructuring be packaged in such a way as to create an ISDA-defined "credit event", so it could collect on its default protection contracts.  After considerable haggling, this finally transpired in 2002.  Professor Hu published his first paper on the "empty creditor" problem in 2007.  Still, this was as an academic, and not a market participant.  We are willing to give Chairman Schapiro the benefit of this particular doubt and see how Professor Hu operates with his finger on a live pulse.

A loyal reader of this Screed has written: "Hey!  I just want to know how many of those 'seasoned, Wall Street vets' Mary Shapiro has hired so far.   THAT will tell you how much CHANGE we are going to have."

Point taken, my friend.

The cynic in us says that Chairman Gensler, with an imminently sensible proposal, will encounter tremendous resistance.  Chairman Schapiro, by contrast, will find herself praised for her new appointment.  After all, she is bringing in, not the UBS bankers who figured out how to force Marconi into bankruptcy, but the law school professor who wrote about it five years after the fact.


ETFs - Again?!!!


None of them along the line knows what any of it is worth.

                             - Bob Dylan, "All Along the Watchtower"


We have spent a fair amount of virtual ink, going back to the start of January, addressing what we see as critical issues in the ETF / ETN space.  These issues focus around disconnects between the way the ETFs are advertised to work, and the way they actually do - or threaten to - act in the marketplace where, despite all representations to the contrary, they create additional volatility in the underlying securities, commodities and contracts on which they are based. 

We have also been particularly vocal about the way ETFs have been marketed to retail investors, and the lack of apparent training - and especially the lack of regulatory oversight - in this end of the market.

Now that the biggest players in the world are getting into this business, with PIMCO issuing ETFs, and with BlackRock buying Barclay's iShares business, we believe the risks have gone to warp.

Now the regulators have finally gotten antsy about these instruments.  This week saw an alert issued by FINRA about the marketing of these instruments to private investors.  The Wall Street Journal (23 June, "Finra Urges Caution On Leveraged Funds") reports that FINRA "has reminded brokers and registered investment advisers about their fiduciary duties when selling ETFs that offer leverage, are designed to perform inversely to the index or benchmark they track, or both."  Specifically, the article reports, FINRA "reminded the brokers and advisers that these instruments are complex and typically unsuitable for retail investors who plan to hold them longer than one trading session."

Looking into FINRA Release 09-31, we learn that, between December 1, 2008, and April 30, 2009:

           "The Dow Jones US Oil & Gas Index gained 2 percent, while an ETF seeking to deliver twice the index's daily return fell 6 percent and the related ETF seeking to deliver twice the inverse of the index's daily return fell 26 percent.

          An ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index fell 53 percent while the index actually gained around 8 percent.  The related ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period."

We find it noteworthy that FINRA itself makes no mention of any analysis a prospective investor should perform - such as reading the prospectus, or even asking one's stockbroker (Oops!  Sorry, Guys.  One's "Financial Adviser") to explain how these things work.  Seemingly, FINRA itself also has not performed this analysis.  If it had, we are confident it would have found - not two things, but one thing.

The one thing it would have found is that the typical ETF structure is about as complex as any OTC derivative contract, and beyond the patience, if not the ken, of the average investor.

There would be a second item to notice, which is that these ETFs reset daily, and that it is likely a bad plan to hold them for long terms.  We do not believe FINRA would have arrived at that conclusion, which would require analysis of the ETF, because they are no smarter than any of us.  To put it as gently as possible.

Heads up to you folks who are putting these instruments into your customers' accounts: the Notice refers to NASD Rule 2310, relating to Suitability.  It starts by observing that, prior to soliciting the purchase of ETFs, a firm must first make a determination as to whether such an instrument is a suitable investment for any customer.  Once it has passed this hurdle, the firm may then proceed to determine suitability investor by investor.

In other words, they are leaving it up to the firms that are marketing these things - and to investment advisors who are putting them into managed accounts - to determine whether they should even be touched with the proverbial ten-foot pole.

One of our contacts, who has served in senior compliance roles at the Exchanges, and at major trading desks, told us that his experience reading ETF prospectuses was every bit as confusing as reading the contracts that went along with complex OTC swaps, and in much the same way.

This immediately does not sound like a product that is suitable for any retail investor.

A friend out in the financial ether has recommended that brokers treat ETFs like options.  We think this is a brilliant idea, for brokerages that want to continue to do this business.

ETFs and ETNs are new instruments, and they entail unique risks.  Risks that have not been widely available in the marketplace heretofore.  Just as with options, we recommend creating a separate Risk Disclosure Document, together with a separate suitability approval process for investors who wish to trade these instruments.  They could be held in a separate account type, so they would be readily visible to branch managers and compliance officers charged with trade and suitability reviews.

The one concrete bit of guidance that FINRA hands out is that "While the customer-specific suitability analysis depends on the investor's particular circumstances, inverse and leveraged ETFs typically are not suitable for investors who plan to hold them for more than one trading session, particularly in volatile markets."

FINRA goes on to invoke IM-2310-2(e) (Fair Dealing With Customers with Regard To Derivative Products Or New Financial Products), and then to make specific mention of Communications With The Public, Supervision, and finally, Training of sales personnel.

If you are in the business of trading ETFs for your customers - or in your managed portfolios - you must read this Regulatory Notice in full and take it to heart.  As we saw with earlier NASD / FINRA initiatives (you may remember the issues around the marketing of hedge funds prior to the SEC's requiring registration) the regulators are using the Sales end as the very large tail to wag a much larger dog.

ETFs originated as institutional contracts and were frequently issued for high-frequency traders to arbitrage against.  It was, of course, inevitable that they should become a retail product.  It is now inevitable that those who market them shall be smacked first. 
We will have to see who will be first to flinch.  We believe it will not be PIMCO or BlackRock - their money management arms are big enough to be major purchasers of their own ETF product - but suddenly Goldman and those other guys who dropped out of the bidding for iShares are looking just a bit smarter.

So, for brokers and bankers who want to find the next unregulated item to pump and dump, where will they turn?  We have an abiding faith in the creativity of Wall Street.  There will be diligent professionals who will create viable ETF strategies for their customers.

And there will be crooks who even now are working to bring you the Next Big Thing.

Last note: with the SEC proposing that a fiduciary standard be applied to brokers, this looks ready to become a hot button.


Restaurants - Chart of the Week

In a normal environment the Restaurant industry is a zero sum game.  We are now wittnessing a big battle between casual dining and QSR for market share, as extreme discounting is the rage.

With trends like this, no one is immune.   

Restaurants - Chart of the Week - The American Consumer


Retail First Look: 6/29/09


  1. The first is that the infamous 'Nike making a run at Under Armour' rumor reared its ugly head again on Friday. UA traded +4% in a down tape. To reiterate what I said on Friday, ...this is beyond ridiculous. Aside from the fact that the 'would be' buyer and seller simply do not like one another, the biggest reason such a deal will not happen is that Nike thinks that it can beat Under Armour organically. Whether it can or not is absolutely, completely, 100% irrelevant. They won't buy another brand  to touch a consumer they think that they can win over with their own. Case in point... remember Callaway golf? Think back to around 2003. The Street was bugging Nike to buy ELY - then worth about $1.5bn. "After all, Nike, you have Tiger Woods...Imagine what you could do with Callaway?"  Nike's thought back then, as well as today sounds something like this... "Why do such a deal today for $1.5bn, when we can invest $200mm in our own brand, beat them organically, and have no integration risk?"  Guess what? It worked. Nike's share is ahead of ELY in most categories.  Importantly, Nike does not think that it needs UA to win. If such a deal happened, it would make me seriously question this change in Nike's strategy.  I'm not going to have to answer that question. As I noted on Friday - I'd place better odds of Abercrombie making a run at P&G.
  2. Now that June books are nearly closed, the apparel/footwear retail industry is calling it official. Weather was a disaster in June. I don't think anyone doubts that one bit. In fact, the last time I recall the weather card being this strong and as widely accepted even by people (like me) who hate when a management team uses the 'W' word was 3-years ago during the snow-less winter. That's when people granted Quiksilver (75% of Rosignol's biz in Europe, here 70% of ski runs did not even open for the year) , Amer Sports, and Columbia free passes (or, at least, heavily discounted passes) for lost sales. One thing that makes me antsy now, however,is that the MVR is up 2.7% month-to-date vs. a flat performance for the S&P. Translation = either a) the market is absolutely looking through weather, or b) it is stupid and does not realize the risk to sales numbers next week. Take your pick. Either way, the bottom line is that this synchs with our view that we need high quality earnings beats to take components of this group higher.



Some Notable Call Outs

  • Despite a challenging economy and weak mall traffic, Finish Line's best selling item in the entire store is the Nike Air Max 2009, which retails for $160. While not enough to move the needle on tough compares, this is a reminder that unique product will continue to sell well despite the overall economic backdrop.
  • Finish Line was able to reduce overall occupancy costs by 5% in its recent quarter, reflecting the willingness of landlords to negotiate rather than lose tenants altogether. This is yet another example of retailers regaining the upper hand in negotiations as rent and lease terms remain the lynchpin for future profitability coming off of a 3 year period of unprecedented rent escalations.
  • In a sign that the Buckle anticipates substantial future growth, it signed a deal late Friday to build a new 240k/sq foot distribution center in its home state of Nebraska. The company's strong and stand out sale performance is clearly helping management's decision in laying out future growth plans.
  • A quick visit to the American Apparel sample sale on Orchard St. in Manhattan over the weekend suggested two things. First, consumers remain crazy about deals and are willing to wait in long, annoying lines for the opportunity to seek out values not otherwise found in "traditional" retail establishments. Secondly, companies with high inventory levels and creative merchandising will continue to seek out alternative forms of distribution, as evidenced by American Apparel's short-term lease of an empty store front. The challenging economic environment continues to afford those with creativity a unique opportunity to secure real estate at low prices in an effort to clear goods.



Zach's overview of items you're unlikely to find in the general press.

  • California Senator Dianne Feinstein (Democrat) introduced legislation on 21 May that would provide duty-free treatment through 31 December 2019 to apparel imports from least-developed countries that do not receive benefits under other U.S. preferential duty programmes, namely Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Laos, Maldives, Nepal, Samoa, Solomon Islands, Timor-Leste, Tuvalu, Vanuatu and Yemen. Sri Lanka would also be eligible to receive duty-free treatment under this legislation even though that country is not an LDC. To qualify for duty-free treatment, apparel would have to comply with certain requirements that are similar, and in some aspects identical, to those set forth under the African Growth and Opportunity Act, which is a programme that provides duty-free access to apparel from sub-Saharan African countries. In practical terms, the single most important benefit provided under this legislation is clearly the extension of duty-free treatment to imports of apparel wholly assembled in Bangladesh, Cambodia or Sri Lanka from foreign fabrics made from foreign yarns. This could present both an opportunity and a challenge to Hong Kong and mainland Chinese exporters. On the one hand, the enactment of this legislation would most likely stimulate demand in beneficiary countries for mainland Chinese textile inputs for apparel production, particularly fabrics. At the same time, these three countries, especially Bangladesh and Cambodia, would probably increase their apparel exports to the United States to the detriment of Hong Kong and mainland Chinese suppliers.  <>
  • China is Russia's biggest trade partner. China's consumer goods such as textile and garments, with their cheep prices, are sustaining the daily needs of Russian people, who are less than prosperous. The announcement by Russia on June 18th of destroying imported Chinese goods on its 22 counters has put the long-standing problem of "gray custom clearance" on the table, again. "Gray custom clearance" refers to the practice by some government-connected "clearance" companies in Russia pushing imported goods into the Russian market at a tax rate far lower than the official level. These companies often undertake the whole process of the freight after they depart from Chinese ports, and deal with all procedures within the Russian territory. Last October, nearly $1 billion worth of goods were banned due to "gray custom clearance," and up to 400 Chinese enterprises were afflicted. This time, after the confiscation of goods in these 22 counters, another 7000 or so counters are also challenged, where $5 billion worth of Chinese commodities are facing the danger of being destroyed. <,+10:00+AM>
  • Japan's retail sales dropped for a ninth month in May as a worsening job market forced households to cut back. Sales slid 2.8% which was worse than the -2.6% consensus estimate. Falling wages and an unemployment rate at a five-year high are forcing households in the world's second-largest economy to reduce spending. The jobless rate rose to 5% in April, the highest since 2003, and about two work seekers are competing for a single spot, the most severe job shortage on record. Wages have slid for 11 months, the worst losing streak in six years. <>
  • Angela Merkel, the German chancellor, has categorically ruled out an increase in value added tax in spite of rocketing public deficits, should she return to power for a second term after this year's general election. Speaking ahead of a conference of her Christian Democratic Union in Berlin on Monday that will endorse the party's manifesto, Ms Merkel sought to silence political allies and economists who last week called for tax increases to plug the hole blown in the public coffers by the economic crisis. "Every discussion about VAT damages economic activity," she told the mass-market weekly Bild am Sonntag. "With me, there will be no increase in value added tax under the next government." <>
  • Canada signed a free trade agreement Sunday with Jordan, its first with an Arab nation. The deal gives Jordan preferential trade conditions, including full exemption from customs duties for Jordanian goods. In return, the Mideast country will lower customs duties on Canadian products over a four-year transitional period. Agriculture, forestry, manufacturing and agri-food are expected to be the beneficiaries from immediate duty free access. The agreement is expected to be ratified by both parliaments later this year. Bilateral trade was estimated to be about $80 million in 2008, according to the Canadian Embassy in Amman, Jordan. <>
  • David Webb Inc. has filed for Chapter 11 bankruptcy court protection in Manhattan, the second New York-based jeweler to do so in the same week. In business since 1948, the family-owned Webb operates a jewelry store at 789 Madison Avenue in Manhattan and has more than 30 employees. Webb listed assets of between $10 million and $50 million and liabilities of between $1 million and $10 million. Webb said in court papers filed last Tuesday that it has inventory valued at $7 million and accounts receivable of $165,000, among other assets. It owes FCC, which does business as First Capital, a secured creditor, $2.9 million. It is also a party to a lawsuit involving its landlord, Lawrence and Melvin Friedland, bankruptcy documents said. The company Web site lists Nina Silberstein as chairman, Stan Silberstein as president and Sharon Silberstein as vice president and creative director. <>
  • Now that a Chicago bankruptcy court has signed a final order approving the sale of the assets of bankrupt Hartmarx Corp. to London-based Emerisque Brands and its investment partner SKNL North America, the question among retailers, bankers and even politicians - including its best-known customer, President Obama - remains whether the new owners can make Hartmarx and its brands viable in the long term and fulfill their promise to maintain jobs in the U.S. A. <>
  • Sport Chalet, Inc. reported fourth quarter sales declined 12.7% as same-store sales tumbled 17.7% and the net loss in the period of $11.1 million, or 79 cents a share, compared to a loss of $2.8 million, or 20 cents, a year ago. Results came in just ahead of a forecast given in early May.  The Los Angeles-based sporting goods chain noted that same store sales were hurt by macro economic conditions and a warm January in the company's markets as compared to January of the prior fiscal year, which impacted the demand for winter related merchandise. <>
  • Escada said its 200 million euro, or $280 million, bond exchange program would begin today, and that almost all the preconditions for the realization of its financial restructuring plan have been met. The struggling German fashion house is offering bond holders a cash incentive if they accept the offer during the early-bird period, which ends July 14. The overall exchange period runs through Wednesday. The bond restructuring is a central pillar of Escada's rescue plan, which also calls for a capital increase of at least 29 million euros, or about $40.7 million at current exchange. <>
  • Foot Locker Inc. is looking to pick up market share in the $8.4 billion skate market with the debut of CCS-branded brick-and-mortar stores. The company bowed CCS's first retail shop on the Third Street Promenade in Santa Monica, Calif., on April 30, and the second opened at the Garden State Plaza mall here on June 10. Foot Locker acquired CCS, an online skate retailer, for $102 million from Delia's Inc. last September. The CCS shops, which mimic the Website, feature skate shoes, apparel, accessories and hardgoods for the 12-to-18 year-old customer. CCS devotes plenty of shelf space to apparel, with labels such as Volcom, Fallen, Element and its own CCS brand. Although Foot Locker has experimented with skate-oriented displays in its Champs locations and about 600 Foot Locker stores, CCS marks the company's first push into full-line dedicated skate stores. But Foot Locker is hardly entering into unfamiliar territory: The company has retained all 32 of CCS' original merchants since its acquisition, including its managing director, Susan Van Arsdale. <>
  • Insider caught up with the "Gossip Girl" star and face of K-Swiss' "Classic Remastered" ad campaign at the after-party celebrating the shoe launch at New York's Bloomingdale's. Is there a place for K-Swiss in the wardrobe of Chuck Bass, his ultra-dandified "Gossip Girl" alter ego? "Absolutely," he said, without hesitating. "I see him wearing them on the basketball court." Nearby, DJ Josh Madden (who also runs DCMA Collective with his brothers Joel and Benji of Good Charlotte) gave Insider some advice for keeping a party moving. "If you want to be a good DJ, all you have to do is worry about making the ladies dance," he said. Also feeling the beat was David Nichols, EVP of K-Swiss, who hinted that news would be forthcoming about the new California Youth action-sports label, which is a major facet of the Westlake, Calif.-based company's turnaround plan. <>
  • Juicy Couture launched an intimate apparel store Friday in Las Vegas' Forum Shops at Caesars Palace, the first of what is expected to be a handful of single-category concepts for the Liz Claiborne Inc.-owned brand. The 2,200-square-foot boutique, called Love G&P, is on the former site of Juicy Couture's multicategory location that bowed in 2004. "Intimates is a natural extension to the brand and showcasing it in a close but separate environment felt like a strategic next step," said Beth Cohn, vice president of retail for Juicy Couture. "This will be the true destination for this category." The chain introduced intimate apparel a year ago with nighties, robes, pajama bottoms, sleep tops and underwear ranging from about $15 to $150, with graphics and prints that speak to the brand. Outside of Juicy Couture's stores, the line is carried in 200 specialty and department store doors, including Bloomingdale's, Nordstrom, Saks Fifth Avenue and Lord & Taylor. Bestsellers include a $60 stripe nightie called Crochet & Charms, Beach and Dog Boxers for $42, a long brushed jersey pant for $65, and a Love, Peace & Juicy pointelle nightie for $58. <>
  • The legal headaches continue to pile up for Forever 21, with a new copyright and trade dress infringement suit filed against it by Express last week. In a complaint filed in U.S. District Court for the Central District of California, Express claims Forever 21 copied four of its copyrighted plaid patterns for men's shorts that were introduced in its stores in December 2007. Additionally, Express is claiming trade dress infringement for a zippered jacket the specialty retailer introduced last December. Forever 21 has been sued over 50 times in the past seven years for alleged intellectual property violations by competing retailers and designer labels. It has settled almost all of those cases out of court, but last month a case brought against it by California-based Trovata went to jury trial, ending in a hung jury. <>
  • Children's Place Retail Stores Inc. has agreed to pay $12 million to settle a class action lawsuit that alleged its officers misrepresented facts about operations that caused the company's stock to artificially increase. The company said that it denied all the suit's allegations and decided to eliminate further litigation and related expenses. Children's Place said the settlement's cost would be covered by insurance. <>
  • Amazon Cuts Ties With North Carolina Affiliates Over State Sales-Tax Plan Inc., the largest Internet retailer, cut ties with business affiliates in North Carolina after the state drafted legislation that would force the company to collect sales tax. <>
  • Urban Outfitters last week joined a very small club: Retailers who sell via smartphone, such as the iPhone. Urban's new site,, is designed to be easy to use on a mobile device. Now Urban customers can shop, see their wish lists, read the blog, check order status, find a store and sign up for text alerts from their mobile phones. The mobile store also links to Urban Outfitter's pages on Facebook, MySpace, Twitter, YouTube and Flickr. While any cell phone with Internet access can visit any Web store, unless the site has been optimized for the small screen, the experience is cumbersome and typically the checkout process doesn't work. As BlackBerrys, iPhones and Palms become ubiquitous, it makes sense to create stores for them, said retailers, to capture business from potential customers who are surfing the Web while waiting for appointments, commuting, on a lunch break or any place without full computer access. When Yoox quietly put up a test site in April, it received 710 orders in one month. Polo Ralph Lauren, Sears, SVC and Amazon also offer mobile shopping. <>
  • steps up its traffic -eBay, however, isn't so lucky - Consumers love their stilettos and sneakers, at least if recent traffic data from Nielsen Online is any indication. Shoe e-retailer posted a whopping 43% rise in traffic in May compared to a year earlier. <>
  • Amid the flailing economy, footwear brands are finding opportunity in the bridal category. Several women's brands, from Payless ShoeSource to Mary Norton, have launched new bridal collections this year and are looking to make wedding shoes permanent additions to their lines. While Payless has long included dyeable dress shoes in its business, the retailer is now pushing bridal more heavily with Unforgettable Moments by Lela Rose, a capsule collection of kitten, slingback and T-strap heels priced between $25 and $45. It debuted in February at 2,600 Payless stores. Payless debuted an Unforgettable Moments Website in April to build the line independent from the other Payless collections. Cole Haan, meanwhile, launched a bridal collection this spring, following the debut of its DressAir line, which uses Nike Air technology to create comfortable dress shoes. <>
  • Retailers across the country said that unusual weather patterns during June made a tough month even tougher. According to information from the weather-tracking firm Planalytics, the Northeast has had one of the wettest, coolest Junes in history, while areas of the South have experienced extreme heat. The Midwest has seen rain and flash flooding in some areas. Laura Bryan, who owns Wish, a women's high-end shoe store in St. Louis, said alternating bouts of rain and extreme heat have kept shoppers out of stores. But, some say indoor shopping malls may benefit from the weather. "People tend to want to get away from the rain and the heat, and they can't go to the beach if it's rainy, so they hang out in the mall," Garcia said. <>
  • The mood at this week's Bread & Butter show is dark - at least as far as sneakers are concerned. Athletic companies showing at the event in Berlin put black front and center for both men and women, playing with texture, embellishment and colorful accents for contrast. <>
  • With retailers working harder than ever to excite the customer, many are seeking new brands to create a point of difference. But where can they go to find fresh resources? In this economy, footwear retailers everywhere are scrambling to gain an edge on the competition. Many are turning to new designers and brands to bring excitement to their shelves. But it isn't always easy to find them. To track down new talent, store owners say they are looking beyond the trade show circuit and getting creative. Bloomingdale's began holding designer open calls in February. Some of these will be among the 17 new shoe brands the department store is adding to its roster for fall '09. The Internet also has become an increasingly important tool for hunting for up-and-coming designers and brands.  <>



JCP: Morgan Stanley upgrades to Overweight from Equal-weight, price target is $35.



Retail First Look: 6/29/09 - sector view

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.

Ambition's Ladder

"Tis a common proof... That lowliness is young ambitions ladder."
-William Shakespeare
Don't worry - I didn't spend the last week reading Shakespeare. I did, however, brush up on my late 19th century global central banking history, and that's actually where I came across that quote. The quote was in reference to an unproven country that decided to take their economic destiny into their own hands - the United States of America.
While many a British short seller of America's 20th century has rendered himself a secure job as a Scottish golf caddy, I left Edinburgh yesterday wondering what an American short seller of China's 21st century might end up doing... super size them fries for me there laddy!
On this continent, US investors should continue to open their minds to The New Reality of global macro winds that continue to blow onto her shores. They're real, and oh' are they a changin'.
While the easiest thing for an American investor to do is assume that he is smarter than everyone else and that the Chinese are making up their numbers, it's also proving to be the dumbest thing to do.
Whether you're having a pint in the highlands of the United Kingdom or sippin' on some Sapporo in Japan, if you have a television today you're going to see Madoff as frequently as you see Michael. They are both performers. They are both American. If your investment thesis is that the rest of the world lies, please take a look at the man in the mirror and re-adjust that set.
This morning I am waking up to a Chinese stock market that is hitting another fresh year-to-date high. In addition to effectively signaling that Q2 GDP will be reported at a higher growth rate than the +6.1% that was reported in Q1, Chinese central bank chief, Zhou, said China's reserve policy is aimed at "liquidity, safety and returns." I like that.
All the while, the American manic media is anchoring on Zhou's comment that China will not make any "sudden" changes to their currency policy. This has investors who completely missed the mother of all REFLATION trades perplexed. Hate to break it to you CNBC, Zhou's comments aren't perplexing - buying REFLATION stocks high at the lows of a Broken Buck in mid-June is!
When it comes to managing his largest position, no rational risk manager would ever signal to the world that he is going to start behaving like a crackberry addict. Do US centric investors think we are going to get a memo one day from the Chinese that 'today is the day we are blowing out of Treasuries'? C'mon. Let's be serious here.
Inclusive of locking in another higher-high last night, the Shanghai Stock Exchange is seriously in the green for 2009. At a closing price of 2,975 I'll proactively predict that you're going to see a cover story on Barron's sometime soon about a "China bubble". Right now, most people who missed the crash are bubble pros don't forget. That's what the "I'm smarter than you" does.
What is it that you do? I think that's the question that people managing countries, currencies, and companies will have to answer in the 21st century. As the Chinese sign a hugely relevant deal with Hong Kong this morning to settle international trade in Chinese Yuan, I think they are telling us what it is that they do. They are taking their destiny  into their own hands.
China is The Client. China wants "liquidity, safety, and returns." China wants the world to buy into one of the 33 IPO's they have on tap ($10B in issuance).
China doesn't want Bernie Madoff. China doesn't want Alan Stanford. China doesn't want any more US Treasuries (April Treasury data shows that the Chinese actually had a net outflow of US Treasuries to the tune of $4.4B. Outflows mean they are a net seller).
I know, I know... a billion dollars isn't what it used to be in this country. But then again, the Dollar isn't going to be the world's dollar like it used to be either. As we think about this "150 years" that will grip post weekend at Bernie's headlines this morning. I think we need to keep thinking about what them British caddies are still whining about missing 100 years back. The lowliness in which some currently regard this young Chinese economic power is their ambition's ladder.
I continue to think that the bubble and crash callers will be frustrated by a US market that, while still trading -61.8% lower than the Chinese stock market YTD, will continue to trade in a proactively predictable range. This morning I have downside support for the SP500 at 910, and upside resistance at 930.
Best of luck out there this week,


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.
EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.


Food costs continue to be extremely favorable for restaurant companies with only chicken prices currently up on a YOY basis.

Sales trends continue to be weak but the 20%-plus YOY declines in most restaurant commodity prices should continue to soften the impact on margins in Q2. Chicken prices are only up about 2% YOY and year-to-date so the only negative standout is the increasing gas prices, which though still extremely favorable on a YOY basis, are now up nearly 70% year-to-date. Gas prices tend to increase the most in the summer driving months so we will have to watch how these increasing prices impact consumers' discretionary spending and eating out habits in the coming months. Current prices at the pump still look good, however, relative to the $4-plus per gallon we experienced last June and July.

Lower dairy prices will continue to help restaurant margins in the near-term with milk and cheese prices down 51% and 42%, respectively. That being said, these favorable prices may reverse rather significantly in 2010 because according to a Bloomberg article, milk prices could rise by at least 25% by the second half of 2010. Dairy farmer profits are currently under pressure because it now costs $17 to produce $10 of milk. In an effort to improve profitability, the article states that the National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in the coming months. "The cuts will lead to the first two-year drop in output in four decades and higher prices in 2010 for butter, cheese, milk and the non-fat dry powder that's a benchmark for global exports, according to U.S. Department of Agriculture forecasts....U.S. dairies are trimming the herd. The kill in the week ended June 6 rose to 60,800 head, 35 percent higher than a year earlier, according to USDA data. This year's cull is up 13 percent from 2008."






Macau was granted authorization to rent a plot of land on Hengqin island for the development of the new University of Macau campus.  The bill proposing the arrangement was passed by the eleventh National People's Congress (NPC) Standing Committee of China.  Presently under the jurisdiction of Zhuhai, the land will be rented to Macau until 2049. 

The central government has approved a pilot joint development project to make Hengqin Island "a new platform to promote industry upgrade in the west bank of the Pearl River under the 'one country, two systems' policy."


The second locally infected H1 N1 case with an unknown source of infection was reported yesterday.  The Influenza Emergency Coordination Center also announced one additional imported case of Influenza A (H1 N1), bringing the total number of local and imported H1N1 cases to 18 in Macau as of yesterday.

Health Bureau director Lei Chin lon said that tourists from different countries coming in and Macau were contributing to the problem.  "Macau is at risk of a H1 N1 influenza outbreak", he said.