The Truth

"Whoever is careless with the truth in small matters cannot be trusted with the important matters."
~ Albert Einstein
At 4:15AM this morning, I was driving down Highway 95 listening to President Obama's address to Russian students. No matter what your politics, Americans should be proud of this man's oratory skills. On that score, he is truly gifted.
In the eyes of the Russians, I am sure the content of the speech is subject to debate. When it comes to the truth - there are always two sides to a story. Recent American economic history with the Russians remains scarred. Do the Russians actually trust us? Do we have any reason to trust them? President Obama is asking the Russians for a "fresh start", and it will be interesting to see if that incorporates America changing as we are asking for as much in return.
Relationships are built on trust. Being careless with the global financial truth is what America's currency currently has issues with. Surely, when it comes to US intelligence agencies like the FBI, CIA, etc, we are at least perceived to be on the cutting research edge of information transfer. That said, when it comes to our intelligence on global finance we are in the midst of a colossal Credibility Crisis. Being careless with the truth includes not understanding it.
My contention isn't a partisan one - it's a political one. Understanding global macro is a regimented daily exercise in objectivity, not a CYA job security show. From Bush to Obama, we have empowered an economic team of group-thinkers. We have reactive and politicized points of action. We don't have a proactive risk management process.
In 1913, the US Federal Reserve was created to protect the US currency and her country from crisis', not to perpetuate them. Fixing this will take time. The truth of the matter is that we have a team of lawyers, politicians, and professors who don't have a repeatable/practical investment process that they hang the country's balance sheet on every morning. Washington doesn't do global macro. Obama's team doesn't have the tools to show him the truth.
Understanding that Obama's intention of asking for a "fresh start" was more of a point on foreign policy - understand this: the Russians, like us and the Chinese, care about money. After Obama is done shaking hands with Medvedev (who can't seem to look people in the eye), the global macro debate will move on to Italy and the G-8 Summit. The only "fresh start" you're going to see there is a renewed squeezing of America's standing as the fiduciary of the global economic system.
No, the Chinese aren't selling their largest position (US Treasuries) "suddenly", but they are selling it down gradually. Yesterday's Treasury auction bids were MIA and, as a result, the yield on 10 year Treasuries made a 2-week high at 3.54% . The recent Treasury data shows China as a net seller of Treasuries. The Russians have already told us they are selling, quietly, the Japanese continue to do the same.
The truth is that China has political issues. The truth is that America does too. The New Reality is that all of this, from Madoff/Stanford to what you are seeing on the streets in Western China (Urumqi protests), is being You Tubed, to the world, real-time...
You Tube is a 21st century metaphor for Transparency. The truth is harder and harder to hide. While plenty a short seller of everything China states that China "makes up their numbers", what would the Russians call Dick Fuld's interpretation of "level 3 assets"? We're hosting our Q3 Investment Themes call this morning for our subscribers and Andrew Barber will walk through China's latest disclosure and transparency efforts. At least they are improving.
Chinese stocks finally had a down day last night, closing -1.1% at 3089, taking the Shanghai Stock Exchange to +69.7% YTD. The truth is that relative to the SP500 and Dow Jones indices being down YTD, that's pretty impressive. So is Chinese economic growth. The head of the Chinese central banking research bureau is out with comments this morning suggesting that Q2 GDP growth in China could come in close to +7.5% year-over-year. That would be a sequential (quarterly) acceleration - those are good.
Am I suggesting that you run out and buy China right here and now? Of course not. After a decade on the buy-side, I know better than to hold a conference call suggesting people buy things at immediate term tops. We have been "long of" China since December of last year, and we are going to walk through why you should not be short it!
Despite Japan trading down modestly overnight (-0.34%), The New Reality remains that those who are shaking hands with The Client (China) in Asia are seeing their business improve alongside the stability of relationships with their neighbor. Taiwanese exports for June improved again overnight, and the stock market there traded up another +1% as a result. Indonesian stocks put in a +2.4% session, and both South Korean and Indian equity markets recovered into positive territory as well.
The truth is that the world's economies are as interconnected as they have ever been. The truth is that China has financial credibility right now. The truth is that America needs to wake up and smell the robusto beans. "Fresh starts" may begin with speeches, but need to end with actions that trade partners can trust.
I continue to see the US stock market as range bound. I have intermediate term TREND support at 873, and long term TAIL resistance up at 954. Manage your risk around that range.
Best of luck out there today,


USO - Oil Fund-We bought USO on 7/6 on a pullback in oil over the last week. With the USD breaking down, oil should get a bid.  

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.  Energy flashed a major negative divergence last week.  TRADE and TREND are positive.

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

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.


We first went out on the limb with the MPEL call on 6/30 with our "MPEL: NOT QUITE THE CITY OF NIGHTMARES" and the stock is only up slightly.  Granted, the XLY is down 4% since the note and LVS and WYNN are down 15% and 12%, respectively.  Thursday's release of preliminary numbers should've been more of a catalyst but for a 2.5% decline in the S&P and a CS First Boston downgrade post release.  The downgrade carried a lot of weight initially, sending the stock down 12%, but MPEL ended the day only slightly down which is more than I can say for its competitors.  Investors finally realized that calling out City of Dreams (CoD) for lagging the revenues of a property twice its size and fully ramped (Venetian) is not relevant.  Nevertheless, I don't get paid for moral victories.

So why am I still positive on MPEL but not Macau, LVS, and WYNN?  We are very concerned about supply growth, particularly when Beijing is restricting demand.  Specifically, the supply growth is concentrated in the Mass Market and Beijing effectively controls Mass visitation.  Our belief that Beijing is targeting mid-to-high single digit MARKET growth means that same store revenue growth will be decidedly negative.  We want to own the provider of new supply (MPEL, SJM) and sell those properties most susceptible to Mass market share loss (Wynn Macau, Venetian, and Sands).

City of Dreams June numbers were better than the whisper number and our expectations.  Here are our takeaways from last week's release:

  • CoD Mass Market drop was spot in line with our $100MM estimate
  • CoD Rolling Chip volume of $1.94BN was much better than our $1.5BN estimate. It looks like some of this strength came at the expense of Altira's RC which came in at $2.76
  • RC at Altira was down 55% y-o-y in June vs. down 44% in the 2 prior months. However, June was also the toughest comp of the year
  • Slot volume of $81MM came in above our $51MM estimate

The incremental news on CoD is likely to be positive since expectations have been set so low.  Both segments are ramping.  Mass advertising in mainland China only began two weeks ago and the VIP business was effectively launched a few days later.  With CoD's ramp and Beijing controlling the visitation spigot, Mass numbers for the existing Mass properties will be under pressure.  Wynn Macau is at risk due to the Cotai undertow pulling visitors away from the Peninsula while Sands may get drowned by the coming tidal wave of Oceanus (See "OCEANUS TO SINK SANDS").  We don't want to fight those tides.

PNRA - Checking in on the Model

PNRA was one of the few restaurant stocks that saw its price increase in 2008 and it increased significantly, up 45% relative to the restaurant group's average 40% decline. And, the company's stock performance was warranted. Year-to-date, however, PNRA's stock performance has lagged the group, down 7% versus up 50%. Using our "Research Edge Restaurant Process" metrics (please refer to the post dated June 22, 2009), which look at how a company manages its cash and deploys new capital in the business, PNRA management made a lot of the right decisions and improved the company's sustainability trends in 2008. The company reduced its 2008 new unit development by 60% and cut its capital expenditures in half. As is typically the case when a restaurant company decides to slow new unit growth and focus on its core business, PNRA was able to grow operating margins in 2008 after four years of declines and reverse two years of declining returns on incremental investment.

Relative to PNRA's recent stock performance, these sustainable trends should continue throughout the balance of 2009 as the company has maintained its more prudent level of new unit growth and capital spending. We should see another year of margin improvement, but I would not be surprised to see somewhat of shortfall relative to management guidance and consensus in the second quarter as the benefits that stemmed from slowing growth really started to impact the P&L in 2Q08. In 2Q09, PNRA is facing its toughest same-store sales comparison of the year and a difficult operating margin comparison as 2Q08 marked the first time PNRA grew its operating margins on a YOY basis in over 10 quarters.

Management guided to a -1% to flat same-store sales number for the second quarter and said that it expects FY09 operating margins to come in at the high end of its targeted 75 to 125 bps of improvement. Given the tough 6.5% same-store sales comparison from 2Q08 and the fact that most restaurant commentary regarding May and June trends has been less than favorable, I think it could prove difficult for PNRA to post only a 1% comparable sales decline. For reference, even a 1.5% decline would still mark a sequential improvement in 2-year trends from Q1. This weaker than expected top-line number will put real pressure on margins despite the expected food cost favorability in the quarter (lower wheat costs are expected to benefit food costs by $5 million in the second quarter alone).

To help build top line momentum, PNRA has been testing media (radio/billboards) in roughly 50% of its markets for the better part of two years. In 2009, the plan is to increase the media impressions up to 70% of the store base beginning in 3Q09. In 2010, marketing will become a larger part of driving traffic growth; it will not be until the company executes a TV strategy (currently in test) that we will see incrementally better sales trends. In the short run, the results appear to be lumpy.

Even with same-store sales down in the quarter, I am still modeling margin expansion in the quarter, which points to the increased operating leverage in the business model post 2007, but I think earnings numbers could fall short of the street's EPS estimate of $0.64. Instead, the low end of management's guidance of $0.62 to $0.66 per share seems to make more sense.

PNRA - Checking in on the Model - PNRA 1Q09 SSS

PNRA - Checking in on the Model - PNRA 1Q09 EBIT


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Slouching Towards Wall Street… Notes for the Week Ending Friday, July 3, 2009


Bye-Bye, Bernie

It is the end that crown us, not the fight.

- Robert Herrick

Bernie Madoff must be upset.  Here he went to the trouble to make sure everyone knows he perpetrated the greatest financial fraud in history, and he doesn't even come close to the all-time record sentence.

As reported in the Wall Street Journal (29 June, "Madoff's 150-Year Sentence: Long, But Not Longest") "Sholam Weiss received an 845 year sentence for a fraud scheme that took $450 million from an insurance company... In 2008, Norman Schmidt was sentenced to serve 330 years in federal prison for his role in a fraudulent 'high yield investment scheme.'"

Weiss' 845 years, amortized over $450 million, works out to over half a million dollars per year - more than $530,000.  At that rate, Madoff's declared $65 billion fraud should have brought him over 130,000 years in the slammer.  Now that's what we call something To Write Home About!

Compared to Schmidt and Weiss, Madoff hardly even qualifies for the Hall of Fame.  Why did he do it?

What really sparks our interest is: why, when he saw it all crashing around his ears, did Madoff not throw a few hundred million dollars into a duffel bag and travel to some part of the world where they would neither find, nor extradite him?

He is not protecting his family - at least not from legal action.  His guilty plea means he will not have to testify, but there will be intense scrutiny on every aspect of his business - and every person involved - as the civil suits start to unfold over what promise to be a chock-full several years.

So we repeat: why did Bernie cop a plea?

One tale making the rounds is that Bernie lost a few hundred million dollars belonging to some high-profile Russian mobsters.  We find this believable for several reasons.  One is that we have worked on Wall Street long enough to know that there is no type of nasty person who does not have a finger or two in a pie.  Typically, the nastier the pie, the nastier the fingers.  It is crystal clear that everyone who understands the markets even a little recognized that Bernie was violating the rules - if not breaking the law.  There was no other way he could have delivered steady returns year in, year out.  And bad guys like dealing with bad guys - their secrets are safer with someone who has significant secrets of his own to protect.

Another reason - circumstantial, to be sure - is Harry Markopolous' statement, buried in his now-famous correspondence with the SEC, that he feared for his safety and the safety of his family if his work on Madoff's dealings became widely known.  Another is that we have heard this story from people who invested with Madoff.  And don't forget, the unspoken reason the judge permitted Madoff to show up in court in a suit, instead of his prison jumpsuit, is he was wearing a bulletproof vest and could keepit out of sight under his coat.

Judge Chin's sentence of 150 years guarantees that Bernie Madoff will die in prison.  Now it looks to us like the only question is: how soon?



Fighting the Good Fight

Will no one rid me of this meddlesome priest?

Pity poor Sheila Bair.  She is getting kudos from the public - including a smart piece praising her in the current New Yorker magazine (28 June, "The Contrarian: Sheila Bair and the White House Financial Debate").  Bair was just honored with the Profile in Courage Award from Boston's Kennedy Library Foundation - awarded annually to public officials that the Foundation deems to have "exhibited political bravery."  Bair, the article reports, "was recognized for her early, though ultimately futile, attempt to get the Bush Administration to address the subprime-mortgage crisis before it became a threat to the entire economy." 

Bair is on the move.  She has started laying down the law to newcomers, letting them know in no uncertain terms whose territory they are now on (WSJ, 3-5 July, "FDIC Proposes New Bank Rules").  Bair is proposing new standards for firms that want to buy into the banking business, including greatly increased capital reserve requirements, and what many are calling an unreasonable proposal that buyers from outside the banking industry not be given a green light to buy banks merely to flip them.

Bair is struggling to maintain her balance atop a stack of shifting tectonic plates.  As private equity discovers banking, Chairman Bair is trying to create rules that will protect the remnants of the banking system from the worst of the private equity abuses.  Who would have thought that a US regulator would attempt to inject a note of caution into the business of banking?

As the New Yorker article points out, Bair is hardly your typical Washington Insider, and is that much more of an outsider in the current administration.  The political process that continues to unfold is highlighted by recent stories about the promotion of William Dudley to the position of president of the New York Fed, the post vacated by Timothy Geithner when he became Secretary of the Treasury.

As reported in the Wall Street Journal (2 July, "Fissures Appear At The New York Fed"), a number of New York Fed directors were not pleased with Geithner's obvious efforts to push Mr. Dudley into the role.  Dudley, it should be noted, is a former Goldman Sachs economist.  He stepped into his new role shortly before the eruption of publicity surrounding New York Fed board chairman Stephen Friedman, who had not disclosed his trading in the stock of his former employer - Goldman Sachs - despite requirements that he do so.  "Some are calling for more oversight of both the reserve banks and the central bank," reports the WSJ article.  We wonder who shall do this overseeing.

It is clear that Tim Geithner has been given the go-ahead to create a new financial system.  Nor do we perceive the influence of Goldman on the wane in the Business As Usual initiatives of the current administration.  (Business As "Use You All"?).

In short, FDIC Chairman Bair is facing extremely long odds.  She is being set up by the Old Boys' Network.  The Journal article quotes billionaire investor Wilbur Ross as saying Bair's proposed new requirements are "harsh and discretionary."  Ross, part of the consortium that acquired Florida's failed BankUnited, now says "I think it could guarantee that there will be no more private equity coming into banks."

First, given the current model and primary players in the private equity business, we fail to see that as an unmitigated disaster.  Add to that the reality that the government is handing out incentives to buyers who neither come from, nor care to understand the banking business, merely to get someone to take the liability off their hands.  Finally, the incentives come with a powerful precedent and an implicit guarantee that, if the bank fails again, there will be a bailout.

Which lands these future disasters right in the lap of the FDIC.  We note that the Journal article is flanked by a column headed "Tally Hits 52 As Regulators Close 7 Banks."

In the world of things that ain't over till they're over, this ain't anywhere near over.  Chairman Bair is collecting bids to acquire failed banks, and she has already seen a few that didn't pass the smell test.  We are rooting for her to stick to her guns - we just wish the President would give her a much bigger arsenal.  We fear Chairman Bair will be beaten from all sides by the fairy tale that she is single-handedly impeding the recovery.  That, if not for This Meddlesome Regulator, the billions sitting idle in private equity coffers would come charging in off the sidelines and win the day.

The fact is that private equity is not the gem of the investment world it once was.  There is idle cash lying around because deals are going too cheaply, or because investors are clamoring for the managers to stop screwing up with their money - all while demanding greatly reduced fees.  Is it any wonder the private equity guys are looking for new fields to furrow?

The final paragraph of the Journal story tells us "Ms. Bair said she remained open to make changes on most parts of the proposal."  We would hate to think that, now that the crush is coming, Sheila Bair is preparing to bend in the political wind.



The Long And The Short Of It

The New York Times (3 July, "SEC May Reinstate Rules For Short-Selling Stocks") reports that the Commission looks set to bring back the Uptick Rule, abolished by the Commission under Chairman Cox in 2007. 

The Rule, voted out based on studies that seemed to show it had no effect on market stability, is on the political agenda.  According to the Times, House Financial Services Committee Chair Barney Frank is pushing SEC Chair Schapiro on the issue, as is Delaware Senator Edward Kaufman, who has introduced a bill to reinstate the Rule.

It appears that reinstating the Uptick Rule will end, at least temporarily, the long-winded discussion over short selling circuit breakers.  This is presumably good news on many fronts - not least for the politicians themselves.  It will enable Frank, Kaufman and others to show instant action on a subject that they have made sure is uppermost in the minds of their constituents - even those who do not know what short selling is. 

Underlying the battle over short selling is the fairy tale about unfettered growth.  "Think and grow rich," wrote Napoleon Hill.  The mantra of both Wall Street and Washington is, "Let us do the thinking - and you'll grow rich."

Under the mysterious machinations of the Maestro - Alan Greenspan - the nation was lulled into a sense of entitlement.  All we had to do was buy stuff, then sit back and wait for it to go up in price.  Then we bought more stuff.  Then we used that as collateral and leveraged it to buy still more.  Irrational exuberance - shamelessly promoted by the most irrational of them all - led us to where we are today.

Short sellers have long been seen as un-American.  As a balance, we offer a piece from this weekend's Wall Street Journal (3-5 July, "New Evidence On The Foreclosure Crisis"), in which Stan Liebowitz, of the University of Texas, Dallas, argues that the greatest single contributing factor to the foreclosure crisis was not subprime loans, but zero money-down mortgages.  The incidence of defaults among zero money-down mortgages far outweighs those among subprime, NINJA ("No Income, No Job or Assets"), or "liar" loans.  The Mortgage Bankers Association's own statistics show "that 51% of all foreclosed homes had prime loans. Not subprime, and that the foreclosure rate for prime loans grew by 488%, compared to a growth rate of 200% for subprime foreclosures."  What, then, is determinative?  In the figures quoted by Professor Liebowitz, the twelve percent of homes having negative equity accounted for 47% of all foreclosures. No skin in the game.

This is the new American Dream: working for what you want, and keeping what you build, has been replaced by Something for Nothing.

Something for Nothing became the driving force behind Wall Street.  In the 1980's and 90's, tens of thousands of young men flocked to Wall Street where the business was fueled by OPM - Other People's Money.  No one has had skin in the game for a generation.  No one except the customer.  And now - as a result - the taxpayer. 

Regulators and brokerage managements insisted that financial salespeople not invest in the same instruments they pitched to their customers.  Under the guise of Conflicts of Interest, the purveyors of investments were insulated from the negative effects of owning them.  Investment banks, meanwhile, created product - in the form of deals and public offerings - promoted them through their own in-house advertising agencies - research departments - and pumped them through their own distribution pipeline - the brokers.

Ultimately, that model caused a global crash - because not everyone can get out the exit at the same time.  Short sellers, dubbed unpatriotic because they take up permanent residence outside the exit, are our society's Mark of Cain.  In a culture that has confused Owning with Creating, it is virtuous to possess.  It hardly matters what - just go out and obtain something.  If you can not afford it, we will arrange for you to borrow the money.  Or you can buy it with OPM.  Or, as Professor Liebowitz' research indicates, if you can not afford it, we will give it to you anyway.

In a seemingly unrelated story, the Wall Street Journal had a front-page item (1 July, "Finance Lobby Cut Spending As Feds Targeted Wall Street") saying political contributions from Wall Street to Washington are down a whopping 65% in 2009, as compared to 2007.  Also, there has been an upward trend in giving to Democrats over Republicans - which only makes sense when you consider a random list of Dems in a position to exert influence on Wall Street: Barney Frank, Chuck Schumer, Chris Dodd, Henry Waxman and Barak Obama come to mind, just to name a few.  By making the fuss about short selling go away, Frank and his cronies hope to emerge as the good guys in this debate.

Clearly, the outcome most devoutly wished by all is a return to Business As Usual - investment bankers will return to doing deals, private equity will gobble up banks, brokers will go back to cramming deals in their customers' accounts, and the money will flow back from Wall Street to Washington. 

Folks, short sellers are not the heart of the problems facing the world's economies today.  The real question is, who will rein in the Long Buyers?



Coded Messages

Just walk 'round like you own the place.  Always works for me.

- Dr. Who, "The Shakespeare Code"

First, do no harm.  Then, when they're not looking - f*** 'em where they breathe!

This was the text first considered for the new Code of Ethics for new MBA graduates.  After due consideration, it was shelved in favor of a somewhat more flowery text that includes such notions as protecting the interests of shareholders, managing one's enterprise in good faith, and taking responsibility for one's own actions.  We especially like the undertaking to "understand and uphold, both in letter an in spirit, the laws and contracts governing my own conduct and that of my enterprise."  Considering how many folks get to squirm out of a tight spot by pointing to inconsistencies in the black letters of law or contract, it would be a welcome breath of fresh air to have managers one could actually rely on to interpret such documents for the benefit of the enterprise.

Now (WSJ, 2 July, "Adviser Adopts Cuomo's 'Code Of Conduct'") Pacific Corporate Group Holdings LLC has voluntarily signed on to NY Attorney General Cuomo's new document, the Code of Conduct.  In so doing, PCG "also will return $2 million in fees it received from the New York State Common Retirement Fund."  As has been earlier reported, both the Carlyle Group and Riverstone Holdings have signed this documents and made payments to the State of New York.

The Code of Ethics is now a requirement for investment advisory firms, and brokers and hedge funds have long wrestled with the compliance manual, endlessly supplemented by memoranda and addenda.  This cumbersome document is almost never read by any person to whom it pertains, but read in meticulous detail by examiners who pick apart every sentence and now actually quiz employees on its content, and on how the prescribed procedures are implemented.

The Code of Ethics is a sort of pre-consent decree.  Regulators often have a hard time proving a case, but at a certain point it becomes compelling for both sides to seek a settlement. So the firm, or individual, pays a fine and enters into an agreement "without confirming or denying" the charges.  They then promise that, even though they do not admit that they violated a rule or broke a law, they will not violate that rule or break that law in the future.

This has now led to the Code of Ethics, where firms and employees sign a document in advance of engaging in any business, affirming that they will not break the law.

This process of regulatory creep goes on constantly.  In an ideal world, it would be a positive.  Regulators who were well versed in the industry would fine tune their approach as the industry evolved.  Over time, regulators in the field would report a consensus that the industry had changed, and the commissioners and senior staff would review rules and procedures accordingly.  From this process would evolve Best Practices.  New rules would be drafted, and old ones scrapped or modified to keep pace with reality.  This would keep the rule books lean, and the rules and practices current.  It would achieve buy-in and self policing from the industry and would benefit all.

Until the SEC and FINRA drop the pretense of knowing what they are doing and actually hire large numbers of people with real industry experience, regulatory creep will ensure that old rules stay in place - and stay old - while new rules will continue to display a tin ear with respect to the marketplace.  In the current political environment, the regulators are too busy appeasing special interests. Ditto the White House and Capital Hill. 

Check out this howler from the Wall Street Journal (2 July, "SEC Plan Aims To Better Foretell Risks") in a description of new rules proposed to regulate executive pay.  "The proposed compensation rules would require public companies to disclose information about how compensation policies can lead to increased risk-taking and explain how those risks are managed.  Companies would only need to provide this information, however, if the risks could have a material effect on the business."

When is disclosure not disclosure?  When it's not material.  Who gets to decide when an item is material?  Well, since the company itself will not have to make a disclosure unless it is material, logic dictates that the company itself makes the determination as to materiality.  After all, no one but the company itself will ever have access to this information.  Why did we just bother using taxpayer resources to discuss and propose a rule designed to enshrine in statute a company's prerogative to scam its shareholders?

MBA students are lining up to swear an oath of morality, integrity, and good business practices.  Why aren't their professors telling them that it puts them at an immediate disadvantage in the careers they are preparing for?


Moshe Silver

Chief Compliance Officer


Charts Of The Week: Unemployment's Double Top

When we called this out as a major go forward positive in March (post the February employment report), not many people agreed... and after the stock market's response to the better than expected unemployment rate on Friday, I have no reason to believe that consensus will agree with me right here and now.

The crowd likes holding hands. In the moment of redness, post a +40% trough-to-peak rip from the March 9th low, I understand how it may be hard to see that the US stock market may have already discounted some of this better than expected economic news. This is what it is. Markets look forward.

The June unemployment rate came in at 9.5%. That was both better than expectations of 9.6% and only a 10 basis point sequential increase versus that last nosebleed charge (+50bps sequentially) that we saw in May versus April. This, on the margin, is bullish for the US Dollar and bullish for long term interest rates. We aren't going to have the next Great Depression. Sorry storytellers.

Plenty of people still mistake  good news for the US currency as good news for stocks. After markets recover from their freak-out lows, that doesn't make sense in the early part of a recessionary recovery. What's good for the economy, is bullish for interest rates and the Dollar. What's bullish for those two factors is nasty for what's been working for the last 3 months - the REFLATION trade. 

In the charts below, Andrew Barber provides important historical context. My view is that in the next 6-9 months, you're going to see this chart of US unemployment rollover. No, I'm not saying it's a new bull market in employment. I am simply saying that the rate of change will rollover to down sequential monthly reports.

Keith R. McCullough
Chief Executive Officer

Charts Of The Week: Unemployment's Double Top - ab34

Charts Of The Week: Unemployment's Double Top - ab45

Retail First Look: 7/6/09


Ok, it's been raining... I get it.

Either the market does too, or it simply doesn't care.  It doesn't take an intuitive genius to figure out that nearly every retailer will mention weather as a culprit this Thursday when sales are released. Even those that put up decent numbers will mention it, simply because the market is allowing them to do so. I won't argue that Retail stocks are cheap here - because they're not. But combine the 'Mother Nature Free Pass' with what we think is more important - the topping process of unemployment (a lagging economic indicator) in the rear view and it's tough to be short US Consumer stocks right now.   Check out Keith's comments on that front in his Research Edge Early Look this morning. I'll point you toward an interesting call out on the earnings front.

Check out the earnings revision charts below (earnings revisions vs stock performance); one on a shorter-term basis, and the other back to 2001. I'm often asked why I look at chart #1 given the seemingly low correlation.  My answer lies in chart #2. Over time, revisions synch lock-step with the stocks. I know, not exactly a revolutionary thought there, either. But the interpretation is probably what matters most. Right now we're sitting at flattish 90-day stock performance, and revisions that are still positive. Have they stalled? Yes. Could they ease on the margin as weather is baked in to numbers? Yes. But we've got a mid-teens pe on a group where the consensus thinks it will grow only 8% over the next 12 months. That will be a tough number for many starting in holiday. But that's a long ways off for a short who is just starting to enjoy summer.

Retail First Look: 7/6/09 - 90 day revision

Retail First Look: 7/6/09 - 90 day historical chart

Retail First Look: 7/6/09 - NTM PE

Retail First Look: 7/6/09 - sector view


- More issues in Honduras - More global sanctions have been called to be imposed on Honduras unless democracy is restored following the military coup which has ousted Honduran President Manuel Zelaya reported in the international press. The global union for workers in the textile, garment and footwear industries has added to condemnation of the coup, and is calling for an urgent review of trade with the country. "It is particularly regrettable that some elements of the Honduran business community, including the export sector, appear to support the overthrow of democracy," said Neil Kearney, general secretary of the International Textile, Garment and Leather Workers' Federation. <>

- Russian fashion and footwear - Despite clothing sales slump due to the economic downturn, Russia's fashion and footwear market has created opportunities to allow retailers to further expand and diversify their portfolios. Melon Fashion Group has acquired the Taxi clothing retail chain consisting of 14 stores and launched a new retail project under the Love Republic banner. Earlier this year, Sun Investment Partners bought a 33% stake in the CentrObuv footwear retail chain, and maternity wear specialist Budu Mamoi said it expects to double its store count this year. Foreign clothing and footwear retailers tend to continue their expansion and increase the level of market penetration. For instance, H&M entered the country in March 2009 with two stores in Moscow and plans to open its stores beyond the capital city. The Japan-basedUniqlo and the US firm GAP are also said to be considering expansion into the Russian. <>

- Indian retail industry may see benefits in the nation's budget - The Indian retail industry is all geared to look at what the Finance Minister has to offer to the different industry segments in this year's budget. Organized retail accounts for approximately 5% of the total retail business in India, Chadha reminds. "Thus, there is a tremendous scope for the retail sector to contribute to the Government in terms of taxes and serving the economy by generating employment opportunities, improving supply chain management, reducing wastage, and offering goods to consumers at discounted prices." <>

- DHL to serve more Indian locations in India - Logistic firm DHL is planning to have around 1,000 outlets in the country in next two years time, as part of its retail expansion move.  "We are planning to have around 1,000 outlets in the next two years as there is a need to be present in lot new locations in the country," DHL Express head of marketing - South Asia, Chandrashekhar Pitre said.  After the DHL-Blue Dart mega co-branding spree, there are 350 retail outlets and we plan to take the number to 1,000 through various formats such as tie ups, alliances and partnerships, he said. Pitre further said: "At present our retail segment contributes 8-10 per cent of our total business and in next 3-5 years we expect out retail segment to contribute as much as 20 per cent".  <>

- Sourcing at risk in Bangladesh - After four days of angry protests over pay and conditions during which several factories were forced to close, the Bangladesh government had reached an agreement with unions over increased pay and better working conditions as Drapers went to press. However, supply chain and sourcing experts said further riots in the area were inevitable as demand for garment manufacturing in Dhaka rises. Dhaka is one of the cheapest sourcing bases for high street retailers, partly because of low wage costs. However, if riots gain momentum, manufacturing could be threatened and the supply chain of UK retailers disrupted. Chains such as Primark and New Look source out of Bangladesh. <>

- Violence in Chinese factory - Violence broke out Sunday in the capital of China's mainly Muslim northwest region of Xinjiang where an unknown number of people attacked passers-by and torched vehicles, state media reported. Thousands of protesters from the Turkish ethnic group Uighur clashed with police and two people died. At least 300 people had been arrested. He said the confrontation involved about 3,000 Uighur and 1,000 police who used electric cattle prods and fired gunshots into the air to try to disband the demonstration. He said it was sparked by a recent dispute at a toy factory between Chinese and Uighurs over a rumour that Uighurs had abused a Chinese woman. <>

- Vogue dips into the discount realm - When a magazine features items like a $40 Gap hat, a $50 pair of J. Crew shorts and a $48 Tommy Hilfiger scarf, one might assume that the magazine is Cosmopolitan or Lucky, proudly midrange publications. But in fact, the magazine is the high-fashion bible Vogue, which has gone budget-conscious in its July issue, promising a "Steal of the Month," and a section with all items under $500. Vogue included a gift guide in December in which all the products were under $500, a 100-under-$100 article in March, and a "Steal of the Month" in June as well as July. Part of the shift was because of the economy, Ms. Singer said, and part of it was that popular designers like Phillip Lim and Alexander Wang were selling clothes at reasonable prices. Chain stores, as well, have stocked increasingly sophisticated designs, she said. Despite the proliferation of Gap and Nine West items in its pages, Ms. Singer said she was not worried that Vogue would be confused with its price-conscious sisters. <>

- California and Hawaii think better of imposing sales taxes on e-retailers - Threats by retailers to end affiliate marketing relationships in states trying to tax sales generated by affiliates have had an effect. The governors of California and Hawaii have vetoed legislation that would have imposed such taxes in those states. <>

- Tough Times in California - The California economy keeps sinking and retailers and manufacturers are bracing for the worst. The state, which has the world's eighth largest economy, can't pay its bills because lawmakers have been unable meet a deadline to close a budget deficit that has swelled to more than $26 billion. The sales tax increase to 9.75% in Los Angeles County last week and unemployment at a 30 year high at 11.5% are bad indicators. Merchants said the state's decision to begin issuing IOUs on Thursday will undermine already weakened consumer confidence and spending. <>

- Prada plans to expand retail space - After opening 34 stores in 2008 and with plans to continue at a similar pace over the next three years, a Prada spokeswoman confirmed Thursday the Italian luxury firm was set to unveil at least two boutiques this month - in Paris and Prague - and remodel and expand others. Prada aims to generate more than 70% of consolidated turnover from directly operated stores by 2011, from around 53% currently, a company spokesman said last month. At the close of 2008, Prada's directly operated store network totaled 238 boutiques worldwide. <>

- British retailer and brand realigning business - Joseph, the fashion retailer that's been selling designer labels to Londoners since 1972, is getting a long-awaited facelift, and building its wholesale and retail businesses under new chief executive officer Sara Ferrero. Ferrero, formerly ceo at Furla, who joined the company last year, has begun revamping stores, introducing edgy new designers and giving the Joseph private label collection --which counts Selfridges, Harvey Nichols and Le Bon Marché among its stockists - a new lease on life. Alain Snege, a former buyer at Colette, has also joined as artistic director and head of buying, with the job of giving a new direction to the company's 28 freestanding stores worldwide. Ferrero said the brand's wholesale line's prices are designed to be about 30% to 40% less expensive than the designer brands the Joseph stores carry. Management is working on building the label in the U.S. <>

- K-Swiss taps pro skater  to represent new skate line - K-Swiss signed pro skater Greg Lutzka as creative director of the line, part of its recently created California Sports division. Lutzka, 24, will be charged with building a skate team with both professional and amateur riders. He also will serve as the face of the brand and offer input on new product. Lutzka, who was previously part of El Segundo, Calif.-based Globe International's skate team, is a seven-year pro and an X-Games medalist who swept the 2009 Tampa Pro. Nichols characterized Lutzka's commitment to K-Swiss as "multiyear" and said the skater will have offices at K-Swiss' headquarters. The brand said it would announce a skate brand manager and dedicated skate team shortly. Skate is a new category for the athletic firm, part of a broader brand revamp that focuses on its California roots. The company will debut a small series of men's-only lifestyle looks and performance skate shoes (including a Lutzka signature shoe) priced from $70 to $90 for spring '10. <>

- Former Crocs CEO Leaves Board - Crocs Inc.'s former CEO has resigned from the company's board of directors, according to a filing with the Securities & Exchange Commission. Snyder left the board for personal reasons and not because of any disagreement with the company. Snyder announced his retirement in February, effective March 16, from his role as president and CEO. He remained on the board to offer any help to his replacement, John Duerden. Snyder had served as Crocs' CEO from January 2005. <>

- VF Imagewear officially introduced the VF Licensed Sports Group - VF Licensed Sports Group is a division focused on the development of both on-field and licensed sports apparel. Previously known as VF Activewear, the VF Licensed Sports Group's growth accelerated with the 2007 addition of Majestic Athletic and this year's opening of a new manufacturing and distribution facility in Easton, PA. The new location enables faster speed to market by aggregating eight smaller facilities. "This is much more than a division name change, but really a statement about who we are and where we are going. Our mission is to take the strategic goals of leagues and retailers and create winning licensed apparel programs," said Jim Pisani, President, VF Licensed Sports Group. <>

- Drop in Ralph Lauren's Compensation - Ralph Lauren's official compensation as chairman and chief executive officer of Polo Ralph Lauren Corp. dropped more than 40 percent during the 2009 fiscal year, despite a 25 percent raise in his base pay. <>

- Safilo Group SpA postpones loan payment - Safilo Group SpA said Thursday its lending banks had agreed to postpone to the end of the year a loan payment due June 30 and waiver the respective debt covenants, while sale talks continue with potential suitors. The Italian eyewear firm's majority shareholder, Only 3T SpA, is in talks with at least two private equity funds about selling a stake to ease Safilo's debts amid declining demand. <>

- Nine West Flashes Back - The 1980s (similar to the 2000s) was a decade of high gas prices, recessionary times and larger-than-life fashion and entertainment...  And Nine West is betting that consumers see the similarities, too. For its fall advertising campaign, the New York-based accessories brand is harking back to the Reagan Era, with glossy images inspired by the '80s. The campaign sets the brand's high-glamour products against the bare landscape of Joshua Tree National Park in California to play up the dramatic details. The campaign will hit in select September fashion magazines, as well as in stores and on the Nine West Website. <>

- JJB Sports looks for more cash - JJB Sports, the U.K. sports retailer, is considering selling new shares as one of "a range of possible options" to provide more cash for the group. The company confirmed "it is reviewing a range of possible options to provide additional capital for the group. <>

- Bebe signs new chief merchandiser officer - Kathy Lee, most recently senior vice president of merchandising at Forever 21 Inc., has rejoined Bebe Stores Inc. as chief merchandising officer of the Bebe retail division. <>

- Former Adidas CEO passes away - Robert Louis-Dreyfus, the former adidas-Salomon AG chairman & CEO and current owner of the Le Coq Sportif brand and the Marseilles, France soccer club, lost his battle with leukemia on Saturday. He was 63 years old. Dreyfus assumed the chairmanship of adidas AG in 1996. He served in the leadership role until 2001. <>



BBBY: Arthur Stark, President & CMO, sold 60,000shs ($1.8mm) nearly 30% of common holdings.

CHRS: Jeannine Strandjord, Director, purchased 5,000shs ($19k) on a base of roughly 95,000 shares.


  • Michael Devine, SVP, CFO, sold 2,865shs ($77k) after converting 7,642shs of restricted stock units to common shares.
  • Michael Tucci, President, NA Retail, sold 5,509shs (~$150k) after converting 14,696shs of restricted stock units to common shares.

CROX: Thomas Smach, Director, sold 28,000shs ($96k) roughly 50% of common holdings pursuant to 10b5-1 plan.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%