Research Edge Position: Short EWJ

The Aso administration's call for an election on August 30 is being reported in the media as the curtain being lowered on the LDP's domination of government in Japan for an entire generation.  With a moribund economy, a vicious demographic curve looming ever larger and a national debt that, at 200% of GDP, which is staggering, a defeat for the incumbent party is a foregone conclusion.

Today's consumer confidence data reading from the cabinet office showed a marginally positive reading for at least one aspect of the Aso' government's stimulus package. Despite worries about job security and future earnings, consumers seem primed to start buying durable goods to take advantage of the various government price rebate incentives and corporate discounting (with the Tokyo specific index showing more pronounced divergence than the national index).


Leadership with the Democratic Party -which is expected to have an easy victory in the upcoming polling, has zeroed in on dollar replacement rhetoric as a substitute for any proposal to encourage growth for the stagnant domestic economy.  Mashaharu Nakagawa's comments last week on a move to hold more Euro or IMF denominated debt.

Politicians aren't the only ones longing for a strong dollar, Japanese equity investors remained focused on currency valuation as the sole near term positive catalyst for Japanese export dependent industrials who are floundering in a strong yen environment. 


If you have been reading our work for a while, you are aware that we view the Japanese economy of something of a ponzi scheme, with massive debt held domestically by a rapidly ageing population who are receiving little or no yield for their trouble.  As more and more seniors starting drawing down their savings and receiving pensions, the pressure on policy makers intensifies to find new methods of stimulating growth -so far Aso's appliance coupons and reduced road tolls have failed to spur the internal demand growth.  It remains to be seen if the Democratic Party will assemble an economic platform that contains any original ideas -or simply more of the same short term incentives for consumer spending that the LDP has relied on.

We are currently short Japanese equities via EWJ with a long term negative bias.  We see no long term or intermediate duration factors which could conceivably drive Japan's economy to recover in advance of the US and European customer markets they depend on.

Andrew Barber


SBUX - Looking at the Durations

Over the long-term I'm bullish on Starbucks. Coupled with Keith's quant factors, we are also risk managers that will actively seek to trade in and out of a stock that has experienced an intense short term move in either direction with unchanged fundamentals. The process uses overlapping durations TRADE, TREND and TAIL, so we have the luxury of picking intermediate entry and exit points while remaining focused on the prize - making money.

From a quant standpoint, SBUX is one of the best looking stocks in consumer using 2/3 of the durations. I believe that fundamentals for Starbucks continue to improve, and there is a catalyst coming for Starbucks when the world realizes that McDonald's McCafe is not taking significant share from SBUX.

Here is the quant set up for SBUX right now:
TREND = 13.22
TAIL = 12.05
TRADE = 14.15 (Only line broken is the immediate term)

SBUX - Looking at the Durations - SBUX levels


Slouching Towards Wall Street… Notes for the Week Ending Friday, July 10, 2009


The Random Don't Walk Theory

In its ongoing quest to make capitalism safe for human consumption, the Obama Administration has resurrected  on the  an economic policy concept discredited under President Nixon, whose 90-day wage and price freeze of 1971 morphed into a series of government programs lasting into 1974.  Programs being put forward by Team Obama offer price controls in sheep's clothing.

Conservative Republicans - whose concept of Free Markets includes drafting legislation to crush free competition - may have met their match in a liberal Democrat, who appears to favor every aspect of the free market, as long as the market itself is kept under lock and key.  The operative factor underlying the recent White Paper's regulatory initiatives is the notion that Someone is doing Something they shouldn't, and it is the job of government to put a stop to it.  Having a traffic cop on duty reduces traffic accidents and pedestrian fatalities.  And, while the traffic cop who does not permit anyone to move at all will have the highest safety ranking, we demand that the traffic flow nonetheless, because the concept of acceptable risk is fundamental to notions of societal balance, progress, and human happiness. 

In the earlier stages of the financial meltdown pundits debated about whether "this" would spill over into "the real economy."  But it is devilishly difficult to separate "real" from "not real" in the marketplace, and the attempt to define one group of market participants out of existence - or to sequester their activities - is the cusp of an extremely slippery slope.  The policy and social implications of clamping down on broad areas of market activity are broad ranging, and frankly unpredictable.

Trying to define where the market ends, and the "real economy" begins is like trying to find the line separating the air from the sky.  Further, since everything meaningful - and market events that cause social shocks are certainly meaningful - occurs at the margins, the activity at the market / real economy interface is sufficient to drive political concerns on a global scale.

As reported in the NY Times (7 July, "US Considers Curbs on Speculative Trading of Oil"), CFTC Chairman Gary Gensler is gearing up for a showdown over speculative trading in natural resources.  This was highlighted recently by widely reported "speculative" swings in the price of oil - as exemplified by the story of the world's largest OTC oil broker, PVM Oil Associates, which disclosed unauthorized orders entered by a "rogue broker" that generated $10 million in losses for the firm, after causing an inexplicable run-up in the price of oil (Financial Times, 3 July, "Rogue Oil Broker Triggered Price Spike").

These price swings, by the way, occurred almost exactly one year after the last "unreasonable" spike in the price of oil, likewise attributed to "speculative excess".  We recall discussions over the years with energy market participants, many of whom referred to some kind of pricing cycle that peaks in the summer, before prices retreat into the fall.  We would welcome a study on this - any one will do, it should not be difficult to determine price moves over time - but the conspiracy theorist in us salivates in Pavlovian glee at the suggestion that there might be a "cycle" that "everyone knows about" in a market that is prone to "speculative excess" and "manipulation."

Indeed, some folks we know have observed this pattern based on insights gained from Goldman Sachs, the firm where CFTC Chairman Gensler was once a partner.  This was before he served as deputy Treasury secretary under President Clinton - at whose behest he drafted the language used to defeat the urgent proposals from then CFTC Chair Brooksley Born who pushed, to no avail, for oversight of the derivatives markets.

Has this leopard changed its spots?  We are willing to believe that people can learn from their mistakes.  Chairman Gensler would no doubt say he was learning from other people's mistakes - specifically, from the mistake publicly admitted by Chairman Greenspan.  Whatever the cause, we wish Chairman Gensler well in his quest to force transparency in the derivatives markets.  This idea has tremendous merit - it's what market regulation is supposed to do. 

Perhaps dancing to the tune of his new political masters, Gensler is doing some muscle-flexing in other areas, and catching some flak for it.  We think contract limits for speculative traders is a relatively benign outcome for most participants, though perhaps not for the ETF / ETN business, of which we shall have more to say in our forthcoming screed.

On the other side is the argument that the job of regulation is to keep enough of the playing field open so that "legitimate" market participants can have reasonable access.  The issue is: who decides where the borders of legitimacy lie.  Many industrial companies have come out against Chairman Gensler's proposals to limit speculative trading.  Why, as these are the very markets on which they rely for the key inputs to their livelihood, would they not want speculation curbed?

We believe there are several forces at work.  One is simply that capitalists see government interference in markets as bad.  Governments are notoriously inept at helping markets to improve, and efforts to "fix" markets invariably end in what the Germans call Schlimmverbesserung - an improvement that makes things worse.  Call it what you will, the attempt to tamp down speculative trading through legislation is price fixing.

If you want proof of just how rotten an idea it is, you have but to look at the Op Ed piece in the Wall Street Journal (8 July, "Oil Prices Need Government Supervision") co-authored by Nicolas Sarkozy and Gordon Brown, and calling for a controlled pricing mechanism to keep the price of oil within a stable band.  Even as these champions of government control of industry mount their soapboxes, Europeans are playing the regulatory equivalent of Beggar Thy Neighbor by considering looser rules on derivatives than those proposed for the US (Financial Times, 12 July, "Geithner Warns of European Threat to Derivatives").

Industrial companies see both edges of the blade: today, the government will be setting the price at which producers can sell key inputs.  Tomorrow, the government will be dictating the prices at which manufacturers can sell output.  Along the way, the increased costs associated with implementing the new regulations will drive a number of smaller operators out of business.  This is regulatory Lysenkoism at its finest.

Secretary Geithner's testimony on Friday contained soothing words, assuring industrial companies that the legitimate use of futures for hedging purposes is not the target of these reforms.

But it seems no one is buying it.  The financial companies that take the other side of these bets are the target, and any restriction on their activities will dramatically increase the costs of doing business.  Which will be passed directly to You Know Who.  The majority of derivative contracts for the world's largest corporations are issued by two firms - JP Morgan Chase, and BofA/Merrill.  These are big-ticket operators, and the companies that rely on them for their hedge contracts must permit them to overcharge them for services.  In the case of Morgan, they are paying for one of the only really competent risk managements in the world.  In the case of BofA they are paying for the implicit ongoing government guarantee and the fact that the firm continues to wield incredible market clout.

This is all based on degrees of trust.  Trust in the soundness of the bank, in the judgment of the bankers, and in the soundness of the financial system and those who oversee its smooth functioning.

This reminds us of Paul, one of our favorite brokerage customers - a long-suffering gent with a seemingly endless ability to absorb market abuse.  Paul had the same plangent refrain every time a new stock idea was presented.  He would listen to the sales pitch, old his breath for a few silent seconds, then invest ten thousand dollars into the idea.  Each time, before hanging up the phone, he would sigh, "this better be good..."

But of course, it almost never was.



The Good, The Bad, And The Citi

You see in this world there's two kinds of people, my friend. Those with loaded guns, and those who dig. You dig.

- "The Good, the Bad, and the Ugly"

Some folks believe it should not be a fundamental requirement for financial survival that every private investor be an expert in forensic accounting.  Thus, it is with more than our usual dash of skepticism that we look at the number - $1,593 - representing Citigroup's net profit for the first quarter.  This comes on the back of a year where the company lost $27.6 billion.  One need not be the proverbial rocket scientist to know that this "earnings" number should have an asterisk.

Along with these earnings, Citi issued a press release, explaining that Citigroup has been stripped of its nonperforming and toxic assets, all of which have been bundled into an entity called Citi Holdings.  CEO Pandit explains, "The creation of Citicorp and Citi Holdings reflects our strategy to refocus the company on its greatest strength: our global institutional and consumer banking businesses, while exiting non-core businesses and reducing risk assets."

The drama unfolding alongside this financial restructuring is CEO Pandit's juggling of personnel in the inner circle.  Friday's release came a day after the public removal of Ned Kelly from the CFO position - a post he occupied for all of four months - to be replaced by Citi's long-serving chief accountant, John Gerspach, who was likely far more suitable for the job in the first instance.  The ongoing Night of the Long Knives at the Citi boardroom was "not something the FDIC ordered" (Financial Times, 10 July, "Citigroup Finance Chief In Reshuffle").  While there are clear political motives for this management restructuring, it certainly would appear Vikram Pandit is more concerned with his own agenda than with the best interests of Citi's shareholders.

In fairness to Pandit & Co., the pilot for this long-running series - The Great Global Financial Meltdown - included the first appearance of TARP, wherein then Treasury Chief Paulson floated a version of a good bank / bad bank model.  Using the TARP funds to remove toxic assets from the balance sheets of major US institutions would unclog the markets - so went the argument - and permit credit to flow once again.  Indeed, that was what got voted on and passed.

But good bank / bad bank did not materialize.  Instead, we got Uber-Bank / Lick Your Wounds Bank, as Goldman and JP Morgan pocketed tens of billions of dollars they did not need, and segments of the economy desperate for liquidity (in economic jargon they are called "small businesses" and "consumers") were instructed to pound salt.

Now Citi is bringing the good / bad model to the firm level.  The canonization of Too Big To Fail may be Obama's downfall.  It shows that he lacks the guts to wrestle the bad guy to the floor, disarm him, then stand over him brandishing his own weapon.  President Obama does not seem to understand that perpetuating Very Bad Ideas launched under the Bush Administration does not get him off the hook.  We fear that President Obama and Speaker Pelosi think they will get to point to their failures and say "don't blame us - look at the mess we inherited!"  As Petey, in the old neighborhood, used to say - someone should tell them what time it is.

Skeptics though we have been, we think institutions like Citi, which bear the formal government designation of 2B2F, may be the only place the good / bad model can be made to work.  In a perverse way, Citi's restructuring may be the bellwether of sound economic thinking.  It appears to have been structured for the benefit of the shareholders - that would be us, the American taxpayer.  (Indeed, the American Tax Avoider will benefit as well, which adds another layer of unfairness to the tax system.  But we digress... )

The fundamental problem underlying TARP and its countless begats is that governments can not repair markets.  When they seek to do so, it is always a disaster.  The only question is the extent of the damage, and the time and cost to recover.

As a side bet, it  seems Pandit and Geithner have mounted an effort to shove Sheila Bair out of bounds, just when she is about to run for daylight.  Bair has stated publicly that Pandit should not be CEO of a bank.  Her convoluted logic holds that people who are not bankers, and who do not understand either the business or the regulation of banking, should not be given free hand to own and operate banks.  This led her to clash with Mr. Geithner in the early stages of TARP, and it is setting her on a collision course with the major private equity firms as she insists they post credible protection for depositors and other assets in the banks they seek to acquire (using government money, mind you.) 

Ms. Bair has long worn the mantle of Digger In Of Heels In Chief.  As even regulatory agencies are suffering hiring freezes, it is interesting that the Fed has increased its bank examiner staff by ten percent, with more growth in the offing.  Amidst the proposals to make it the Systemic Risk Regulator, the Fed is arming itself to replace the FDIC. 

Similarly, Mr. Pandit's internal reshuffling is clearly designed to keep as many of his cronies as close as possible - Mr. Kelly, a longtime FOV ("Friend of Vikram") remains on in a strategic and dealmaking capacity - while giving up just enough to make colorable the argument that he should stay on as CEO, and have access to FDIC guarantees.  We anticipate that Secretary Geithner will beat Chairman Bair over the head with this before too long.  In this battle, as in so many others, we are rooting for Chairman Bair, if only as a needed corrective to pervasive Geithnerism.

The ultimate rescue of Citi will be a long and arduous process.  Back in the dot-com boom America enjoyed global handshake credibility.  This credibility allowed our banks to abuse the goodwill of all our trading partners.  When Chairman Greenspan admitted to the UK's central bankers that the losses in the swap contracts - very real ones, at that - had been borne by European insurance companies, he was disclosing a nasty truth: the US, which considered itself 2B2F, had maneuvered its financial trading partners into serving as a landfill for all our toxic paper.  This was far beyond Good bank / Bad Bank.  It was Good Country / Bad Continent.  With our handshake credibility gone, we must now use our own shovels to dig ourselves out.

Perhaps by bringing good bank / bad bank to the firm level, Citi is actually showing leadership.  It will take a long time to work out the toxic paper that has been rolled into Citi Holdings, but at least now we know where it is, and there is hope of transparency for both shareholders and the markets.  We hate to admit it, but CEO Pandit may have actually engineered Change We Can Believe In.



And Now For Something Completely Different

"Banks Reinvent Securitisation To Cut Capital Costs" reads the Financial Times headline (6 July).  The story describes efforts at "smart securitization" by Goldman and Barclay's to package billions of dollars' worth of customer assets in vehicles that can be rated by credit rating agencies, then sell them on to third parties.  This brilliant new strategy will enable the originating banks to reduce their capital requirements, by taking the assets off their books, and replacing them with cash.

Call us cynical, but we suspect they will be fast-tracked to the market with their products before second and third-round me-too-ers find the door has been slammed shut.

On the face of it, Barclay's is offering a clearing system for banks to factor productive assets, swapping balance sheet liability for cash today, thereby freeing up regulatory capital.

Observers of the current crisis generally agree that bank capital needs to be increased to prevent repeats of the current dismal scenario, and that the quality of that capital should be more robust.  This means holding larger reserves - which means lower returns.  It also means retaining more of a bank's liabilities on its own books, not shunting them off to third parties.  This means less liquidity.

What we find impressive is the acceleration of the pace of innovation in the capitalist model.  No sooner has the world gotten comfortable with the "R" word - "Recession" - than serious market pundits are talking about a new bull market, and governments and global economic organizations are talking about "already being in a recovery."  Global powerhouse banking firms (Merrill, Morgan, Goldman...) are putting out bullish reports urging folks to Buy China (up some 70-80% since January) - if the recovery is to gain steam, the banks will have to sell their inventory to someone...

And now, the ink not yet dry on President Obama's white paper, the bankers are getting back into the securitization business.  Factoring assets is a simple business.  Factoring assets, as presented by Barclay's, is sure to become complex.  Even a small wrinkle - one single swap in lieu of actual cash - will create an opening for follow-on participants to wreak havoc.  We wonder when that first loophole will be probed.  We wonder whether any regulators are actually watching.

We are staying tuned.




California Dreamin'

stopped into a church I passed along the waywell, I got down on my knees and I pretend to pray

The downside of posting this column weekly is that we get no credit for being right when things move fast.

On Monday (Financial Times, 6 July, "Opportunistic Wall Street Gears Up To Trade In California IOUs") we jotted Note To Self predicting that the SEC would deem the State of California scrip to be securities.  By the end of the week, that had come to pass.

Next, we believe, will be an SEC action against Craigslist.  Like the cop on the beat who assiduously writes out parking tickets, turning his back on the armed drug dealers at the other end of the block, various courts and government agencies have tried to enjoin, censure, fine, or just plain close down Craigslist over criminal activity - real or alleged - connected to postings on this service.

The ink on the first California IOUs was not yet dry when postings appeared on Craigslist offering to buy and sell them.  Collectors were bidding as much as twice face value, in hopes of getting a piece of history, and speculators got into the game, offering instant cash for the IOUs at a discount.  The State promises to pay them off at face value when they mature, in October, plus an interest rate of 3.75%.  At the right price, there are those who deem that acceptable risk/reward.

Rather than going after Craigslist, we urge Chairman Schapiro to explore ways to bring social networking venues into the mainstream of the markets.  Deals are already being done away from the eyes of the regulators - deals that the SEC would probably deem securities transactions.  The combined resources of FINRA and the SEC could not catch Bernie Madoff - even when he was delivered on the proverbial silver platter by highly qualified professionals who provided extensive analysis.  We do not hold out much hope of them catching someone trading limited partnership interests via Twitter.  

If the Commission goes after Craigslist, they will be launching a frontal attack on market transparency - the one thing market regulators should seek to ensure.  On the other hand, regulators might learn something from watching the way a marketplace evolves.

This model of a self-regulating marketplace, where buyers must beware by definition, and where information is freely shared across all segments, should be explored by Schapiro & Co as a paradigm for rethinking the regulatory framework.  In a world where Facebook effectively faced down the FARC in Colombia, and Twitter combines with iPhone to tweak the Ayatollahs, we suggest the US regulators would be ill advised to go head to head with the social networking phenomenon - itself the most dynamic emerging global marketplace.  We don't give this much of a chance - but we can dream.

Moshe Silver

Chief Compliance Officer

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.

Chart Of The Week: The Dow's Departed

There is a lot of pin action this morning in and around the Dow's intermediate term TREND line (8,235).

In the chart below, we have outlined the two lines that we think matter - the longer term TAIL (3 years or less) and the TREND (3 months or more).

From a long term TAIL perspective, fully loaded with the Dow's Departed (AIG, GM, and C), the Dow Jones Industrial average remains broken. That TAIL line is at 8,890, and unless I see a sustainable close above that line, I am being reminded by Mr. Market that the REFLATION trade is a trade, and we better keep it one.

The Dow is a narrow index of companies that auger to US financial leverage. Since 1971, when Nixon abandoned the gold standard and we established a global capital market system of limitless credit creation, we have taught American and International investors that levered returns are what gets you paid. That's not a perpetual entitlement, and neither is the currency that backs 54% of the world's debt. The world is changing, and so is the attractiveness of the Dow as the beacon of American style capitalism.

We remain short financial leverage via the Dow (DIA) and long liquidity via the Nasdaq (QQQQ).


Keith R. McCullough
Chief Executive Officer

Chart Of The Week: The Dow's Departed - aigch


Retail First Look: Growers vs. Filers


13 JULY 2009


How can I not comment on the Sterne Agee UA downgrade this morning...


The rationale? "Current Macro Trends and Retail Inventory Levels Are of Concern."  Ok... thanks for that insight.


Are these trends concerning? You bet. That's why it's never been easier to craft a short case. Core apparel sales are flattish, footwear is performing 'fine' (i.e. not stellar), management has been selling stock, key internal positions have turned over, prior guidance is vague, 2Q just closed after it rained for 80% of the most important month of the quarter, and at 26x earnings it is one of the most expensive stocks in retail.  The stock is resting right on top of $21 TREND support.  I can't say that I blame the bears...


But whenever it is so easy to craft a short case, one needs to ask what the long case is. NO ONE who owns UA does so because they think that the company will smoke the upcoming quarter or year. They largely own it because they think that this company can, and will double in size over 3 years. 


Bulls are unlikely to throw in the towel unless the company does. UA will definitely not back off its growth strategy, and in fact is likely to highlight organizational changes to take the footwear organization to the next level.


Also, what about the call option of better footwear pricing out of Asia in the coming 12 months (which I think is underappreciated)? How about ANY success in moving the needle with women's biz? How about the new CEO at Foot Locker that wants nothing more than smaller brands to succeed as he looks to make something out of the disaster that is Foot Locker?


Are the 'challenging environment' trends new to the 29% of the float that is short the stock already? Probably not.


With only 2 out of 21 analysts on UA still bullish, we can't see a slew of additional downgrades around the event.


I'm still in the camp that a nugget of positive news will have a disproportionate impact on the stock than negative news. Check out our 7/8 note - UA: The Duration Bifurcation). 



Some Notable Call Outs

  • Over the weekend it was reported that Ecko is putting its headquarters in Manhattan on the market. The space commands $9 million/year in rent. This move is just one of many the company has undertaken recently to pay off debts in an attempt to avoid further steps towards bankruptcy. While apparel in general remains under pressure, the urbanwear market is suffering a severe downturn as its core customer base has shown it is not wedded to one particular style or brand. The entire market has been in decline even before the economy took a turn.


  • Lost in the news shuffle over the past week was a story in the Silicon Alley Insider indicating private-sale ecommerce operator Gilt Groupe was raising another $40 million. The capital raise values the business at $400 million. I've mentioned this business before and I'm sure many people are already familiar with the concept. However, the growth here is truly impressive. In just two short years, the closeout retailer of luxury goods is expected to do $150 million in revenue. According to other articles, management expects that figure to grow to $500 million next year. The company is expanding into new geographies as well as product categories. This is one to watch as we'll likely be seeing an IPO at some point. Before we get an S-1 however, I suspect competition will grow rapidly alongside an eventual improvement in the economy. The dislocation in the luxury apparel market over the time frame in which Gilt has blossomed is likely to be unsustainable, which will make it tougher for the online retailer to obtain such high-end product at steep discounts. A designer I spoke with recently explained to me that Gilt generally pays ten to twenty cents on the wholesale dollar when procuring goods.


  • A lesson in 'false bottom' avoidance. Kellwood is the latest potential casualty as it works through 11th hour discussions to avoid Chapter 11. The company, which private equity firm Sun Capital Partners Inc. bought for $762 million in February 2008, has been in talks with its bondholders for two months concerning $140 million in notes that mature at midnight on Wednesday. As is usual in the final days before a maturity of this nature, there's the usual posturing by all parties involved in the press. The irony here is that Kellwood is a perennial underperformer that was bought by Sun Capital about six months after the market for such assets cratered. Sun in itself has had 12 portfolio companies file for bankruptcy protection since the start of 2008, including the high-profile Mervyn's LLC filing. Other Chapter 11 filings include auto-parts supplier Mark IV Industries, pharmacy chain Drug Fair Group Inc. and clothing stores Anchor Blue Retail Group Inc. Tempting to act on KWD the time, I'm sure, to the extent that we were not heading into a prolonged period of consumer spending winding down and cost of capital going up. Now we're sitting here 17 months later with a $2bn revs company with 6% margins. Not horrible, perhaps, but tack on 100% debt to equity and it's less rosy. In the end, content usually wins. And the content here is bottom of the barrel.




Apparel Import Trends, Vietnam and Bangladesh Only Countries in Top 10 with Increase in May - Apparel imports from China, Vietnam and India increased in May despite the continuing overall decline of combined textile and apparel shipments to the U.S. The Commerce Department's Office of Textiles & Apparel said Friday that shipments of apparel from China increased 8.9 percent to 592 million square meter equivalents in May compared with a year earlier. Shipments from Vietnam rose 2 percent to 120 million SME, and imports from India spiked 17.1 percent to 83 million SME. Combined shipments of textiles and apparel to the U.S. from all trading partners declined 11.5 percent to 3.8 billion SME in 12-month comparisons. Apparel imports fell 9.2 percent to 1.6 billion SME in May, and textile shipments decreased 13.1 percent to 2.2 billion SME. Apparel and textile imports have been dropping in year-over-year comparisons for 13 consecutive months, the Commerce Department office said. Year-to-date apparel and textile shipments dropped 11.1 percent to 17.9 billion SME, the lowest level for the five-month period since 2005. China's overall shipments of textiles and apparel in May declined 5.3 percent to 1.7 billion SME, dragged down by a double-digit drop in textile imports. Vietnam continued to show overall growth. Imports of textiles and apparel grew 27.2 percent to 176 million SME for the month. Bangladesh increased shipments 2.5 percent to 145 million SME. Vietnam and Bangladesh were the only countries in the top 10 to show higher import levels. "Those are still the go-to countries," said Julia Hughes, senior vice president of international trade for the U.S. Association of Importers of Textiles and Apparel. "If you're talking about where apparel executives are sourcing from, if they are going to expand, you're looking at what we should call the big three: China, Vietnam and Bangladesh."  <Women's Wear Daily>


A&F Going Big With 40,000 sq. ft. Hollister SoHo Store - Despite a dramatic slump in sales, Abercrombie & Fitch Co. is thinking big and not letting up on its strategy or image-building.The sexual overtones, aspirational product and defiant nonpromotional stance go on vivid display Wednesday with the opening of Manhattan's first Hollister store in SoHo, the initial flagship for A&F's mall-based teen chain and a linchpin to the brand's goal of global growth. It's the mother ship - four levels and 40,000 square feet - being aggressively marketed as "The Epic Hollister Store." "Considering the scale of the store, epic seemed appropriate," said Michael Jeffries, chairman and chief executive officer of Abercrombie & Fitch Co., the parent of the Hollister, Abercrombie & Fitch, abercrombie, Gilly Hicks and soon-to-be-shuttered Ruehl brands. "Those that share the experience with us will understand." With same-store sales dropping more than any competitors - 32 percent companywide in June and 28 percent in May - A&F is under enormous pressure.The outlook from both inside and outside the company is for some closings next year. Certain analysts expect a significant number of them, along with a few openings and relocations. The company has started scrutinizing locations in malls across the country, with 70 leases across all brands coming up for renewal at the end of this year, and another 210 leases expiring between 2010 and 2011. Rents and other terms will be negotiated with landlords, as well as closings. <Women's Wear Daily>


JCG Lunches Skinnier Skinny Jean - Millard "Mickey" Drexler is bullish on denim. And with the launch today of the Madewell '37s jeans collection, Drexler, chairman and chief executive officer of Madewell parent J. Crew Group Inc., is out to prove it. The line is launching with a single "skinny skinny" ultralean, detail-free silhouette priced at $59.50, well below Madewell's opening jeans price point of $78. The jeans are available in five washes: black, plume, avalanche (modified acid-wash), dark ash and chimney (a bleached-out black-on-gray). The '37s launch is an important one, considering denim is a core component of Madewell, representing 20 percent of the three-year-old brand's volume, according to market sources. Boots, T-shirts and scarves are also big. "Instead of having an assortment [of jeans], we said, 'Let's go with the skinny skinny,'" Drexler said. "That's our best shot. Most girls and women are wearing skinny jeans these days. <Women's Wear Daily>


Vietnam Footwear Exports Down ~9% in 1H - Vietnam's footwear exports totalled US$2 billion in the first half of 2009, representing a year-on-year decline of 8.8%, largely due to the global financial crisis. The Vietnam Leather and Shoe Association (Lefaso) reported that the exporting activities saw recovery in the second quarter after deep decline in the first quarter. Footwear exports to the US during the interim period saw growth of 9% as compared to the same period last year.<FashionNetAsia>


Indian Cotton Exports Down - Indian cotton exports have slumped because of higher state support prices and lower international demand. Domestic cotton prices are higher than international ones, while major importers are also buying less of the fibre, said Junior textile minister Panabaaka Lakshmi. The Cotton Advisory Board has previously said that exports are likely to by 5 million bales in 2008/09, well down on the 8.5 million bales exported in the previous year. Industry officials expect exports to be 40% below the government estimate, with weak Chinese demand, lower production and higher state purchase prices all to blame. <FashionNetAsia>


Gearing up for BTS - Retailers aren't likely to get high marks this back-to-school season. With early reads less than reassuring, most storeowners are prepared for flat comparisons or slight declines during the critical selling period. "The reality is that the average price point could be less than last year," said Scott Collins, GMM of DTLR. "When you couple that with people buying fewer pairs of shoes, it's a recipe for disaster."  Still, most believe that footwear will be a relative bright spot during the upcoming season, outpacing sales of other b-t-s items, such as apparel and electronics."Footwear is going to be a stride ahead of many other industries during back-to-school," said Marshal Cohen, chief industry analyst at the NPD Group. "People either look at shoes as a necessity, or a passion that they're not willing to give up. But people are going to be buying two pairs instead of four, and they're going to be buying closer to need."  <Women's Wear Daily>


Escada at Risk of Insolvency - Saelzer reportedly told German newspaper Welt Am Sonntag that talks had already taken place with insolvency experts. He said he hoped it would not come to that, but that the group was in a difficult situation. He said it had enough liquidity to last until August but not beyond. Escada has put a debt restructuring plan to its creditors which must be approved by 80% of them by July 31. If that fails, Saelzer said it would be "inevitable" that Escada would cease trading because "98 out of the 99 possible measures" to save the company had already been taken. In the UK, Escada has a standalone store in London's Sloane Street, concessions in Harrods in London and Gleneagles Hotel in Scotland, and a store at Heathrow Terminal 4.  The Escada mainline collection has 27 wholesale accounts in the UK and the Escada Sport range has 43 UK doors. Escada sold its mid-market subsidiary Primera, which included brands Laurèl, Cavita and Apriori in May. <Draper's Online>


New Female Face for Adidas Tennis - Adidas has a new face for the fall-winter 2009 Adidas by Stella McCartney tennis line - Danish star Caroline Wozniacki. The 19-year-old up-and-comer, ranked ninth on the World Tennis Association tour, will kick off her new role at the U.S. Open in Flushing Meadow, N.Y., which starts Aug. 31. Wozniacki will play tournaments in Adidas by Stella McCartney apparel and footwear and will be featured in promotional and retail materials. Terms of the long-term deal weren't disclosed.  The Adidas by Stella McCartney tennis collection will arrive next month in stores such as Lane Bryant, Isetan, Harrods, Holt Renfrew and Nordstrom, as well as and sports retailers worldwide. Prices include $175 for the Skynde shoe; $130 for the performance dress and $175 for the tennis image jacket. The tennis collection includes colorful Eighties-inspired skirts combined with feminine ruching and gathering, as well as tops with draped sleeves. Launched in 2005, the Adidas by Stella McCartney collaboration consists of apparel, footwear and accessories for golf, running, gym dance, gym yoga, gym studio, tennis, swim and winter sports. <Women's Wear Daily>


Empty Woolworth Stores Suggest Retail Prices Still Inflated - According to The Times the figures highlight the troubled state of the retail property market and will heighten fears about the decline of the high street as discount stores replace mainstream retailers. A survey for the newspaper by the Local Data Company showed that retailers including Iceland, Bargain Madness, 99p Stores and Poundland, among other businesses, have taken some of the former units of Woolworths, which had around 800 shops. While more than half the Woolworths stores in Greater London have been let, 80% of sites in Scotland, and 90% of those in the North East are still empty. Landlords have been forced to offer reduced rents and incentive packages to let the shops, causing a drop in high street rents across the board. Rob Alston, retail partner at property firm Cushman & Wakefield, told the newspaper: "The fact that only about 20% of the Woolworths stores have been sold by the administrators says a lot about the current retail demand, and while a substantial number of other units have either been let or are currently under offer via the landlords, there is still a huge hole in many towns in the UK." <Draper's Online>


NY City Sales Tax Increased, Clothing Exemption Remains - After a five-week standstill in legislation because of political infighting, members of the New York State Senate worked until 2 a.m. Friday passing more than 100 bills including a sales tax increase for New York City. After much debate, senators agreed to raise the sales tax by one-half of a percentage point to 8.875 percent, making it one of the highest rates in the country. It was passed by a measure of 43 to 19. However, the exemption on clothing purchases for $110 or less remains. That may come as a relief to critics of the sales tax increase who worried it would deter today's already cash-strapped shoppers from spending. <Women's Wear Daily>


Desperate Need for Children's Shoes in NYC? - The York footwear indie, which sells men's and women's brands including Paco Gil, Beatrix Ong and Jeffery-West, has doubled the size of its Gillygate shop. Exclusive Footwear director Frances Chalmers took over the building next door to the original shop and knocked the wall through to create an open plan 700sq ft space, half of which is dedicated to kids' footwear. She said: "I believe that adding kids' footwear will more than double our business this year." Exclusive Footwear, which does 85% of its business through its website, has also added kids' footwear to its online offer. Chalmers is searching for a second Exclusive Footwear site in an undisclosed northern city, which she said would focus on kids' footwear with a smattering of women's styles and specialist footwear by the likes of MBT. She added: "Customers were always asking if I'd add children's shoes. It wasn't until my own children got a bit older that I realized there was a desperate need in York." Exclusive Footwear saw like-for-like sales increase 47% in May. <Draper's Online>


New Lingerie Brands in '09 - The recession isn't stopping a crop of new lingerie designers and iconic brands and licensees from filling the marketplace. Fresh resources said despite the harsh economy and retail climate, there is still a demand for creative, innovative merchandise, especially at a time when inventories are practically bare and selling floors are ready for innovative product, ideas and concepts. Although intimates have been regarded as a recession-proof category, sales the first half of the year were down 10 to 12 percent, industry executives said. Three major players are headlining the entry in the lingerie category: Jessica Simpson Intimates, a full range of lingerie, undies, shapewear and sleepwear produced under license by Vandale Industries Inc.; XoXo, a licensed line of bras, panties, daywear and bustiers at Dreamwear Inc., and the licensed Lucky brand that will feature contemporary fare at the D2 Brands division of Delta Galil Industries Ltd.  <Women's Wear Daily>


Seven For All Mankind has signed leases for five new stores. The premium denim label plans to open shops in San Diego and Newport Beach, Calif., Scottsdale, Ariz., Honolulu, and Houston between August and October. Designs for the stores will continue to push the label's modern contemporary aesthetic with the use of Zebrano wood, stone floors and polished marble. The label has 18 boutiques in the States and 15 international locations. Its first store opened in Los Angeles in November 2007. <Women's Wear Daily>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):

07/10/2009 10:06 AM


We're short Consumer Discretionary, and this position is making less and less sense. Stopping ourselves out and taking our loss before it expands. KM



Retail First Look: Growers vs. Filers - SV 7 13 09

Geithner Puts

"Victory is reserved for those who are willing to pay its price."
- Sun Tzu
This morning we are waking up to Timmy Geithner headlines. He said "it's going to be awhile before we're confident we're going to have a strong sustainable recovery in place" and that "enormous challenges" remain for the US economy. I don't disagree with any of that.
Take the man's word for it - he'd know. Geithner is not the person to be leading America into the next stage of this global economic battle. Neither are the boys in London that he'll be meeting with today. At -7%, respectively, the UK's FTSE and the US's Dow are in a dead heat for the worst performing country indices in the world this year for a reason. Neither country has paid the price of change.
Paying the US Bankers, Politicians, and Debtors is not a long term fix. It's a REFLATION trade, and my best strategy advice is to keep it one. In the long term, you cannot burn the US Currency, her Creditors (China, Japan, etc...) and US Consumers (via zero rates on their savings).
Overnight, Japanese equities got rocked because they finally started hinting at paying that price. The old boy network of a conflicted past has finally called an election. After the LDP's government rule dating back to 1955 (for all but 10 months), there looks to be a very high probability that the DPJ (Democratic Party of Japan) will find a victory in the fall. Old habits die hard, and so will the idea of holding a monster position in US Treasuries.
The shadow finance minister for the DPJ made explicit comments that the new Japan will need to focus on economic gravity. That includes diversifying away from the USD Dollar and US denominated bonds. Since Japan holds $685B worth (2nd most to China), now we know the rest of the story - China, Japan, and Russia are not only net sellers of US Treasuries, they are willing to pay the price.
For Japan, paying the price of repatriating their debt equals a 5% reflation of their currency already for the month of July. It also equates to a smack down of their stock market. This is an island economy that needs to export in cheap Yen, don't forget. Strong currency = bad for the price of exported goods to China. Samurai bonds anyone?
We are short Japan in the virtual portfolio (see not because we saw this morning's political news coming, rather because Japan is a levered long disaster in the making. No matter what price this country is willing to pay in the short term, they remain "long of" A) negative population growth, B) government debt/GDP ratio of almost 190%, and C) negative quantitative price momentum developing in the Nikkei.
Japan's Nikkei was down every day last week, and closed down another -2.6% last night. This takes the average of the Japanese stock market below the intermediate term TREND line for the first time since March. This is new.
Admitting that you need to pay the price to change doesn't mean that everything starts to go well for you thereafter. In order to realize long term economic victory, this is just the way that it has to go. After almost 55 years of one party rule, you can bet your Madoff that political change in Japan will be met with concern. In markets, concern breeds contempt.
Across the board, this is the primary reason why Asia got rocked overnight. Chinese equities were down the least, losing -1.1%, taking their YTD gain down to +69% (the peak was established last week at +71.5%). Meanwhile, Hong Kong lost -2.6% and Korea and Taiwan got tagged for -3.5% down moves, respectively. It's been a while since I have logged almost all red in my notebook for a morning in Asia. Everything that matters in my macro model occurs on the margin.
The only country that closed up meaningfully in Asia overnight was Pakistan. Assuming most of you aren't "long of" the tribal traunch, that probably doesn't help you much either. Pakistan closed +2.3% overnight, and it matters.
Why does it matter? Well, the price of oil always implies some level of geopolitical risk. The stock market in Karachi stabilizing in the last few weeks means that tensions in the Swat Valley have at hit their crescendo, for now. From Iran to North Korea, I am comfortable saying that, for now, the rear view of 3 weeks ago looks to have been what it was, a 2009 peak for the price of oil.
Oil prices have corrected -17% in 3 weeks. That's a lot. As the Japanese Yen and US Dollar stop going down, the price of everything you buy in these currencies stops going up. There is a price for currency stability. And, sorry levered long guys, that's not one that the debtors of dollars and yen are going to like.
I don't want to be long financial leverage. I want to be long liquidity and the economic leverage associated with unlevered demand. That's why I am short the Dow Jones Industrial Index right now (DIA). That's also why I am long the Nasdaq (QQQQ). This is a very straightforward way to hedge my macro views.
Intermediate term TREND line resistance for the Dow is 8224. Intermediate term TREND line support for the Nasdaq is 1707. I have no position in the SP500, yet. I am short Japan (EWJ), long China (CAF), and if you can find me some puts on Timmy Geithner's global macro investment process, I'll pay a premium price for those.
Best of luck out there this week,


USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. 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 and added to the position on 7/7 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 resourcerich British Columbia should provide a positive catalyst for investors to get long the country.   

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.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations. We are long the NASDAQ via Qs, which is long liquidity and economic leverage.  
EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands. 

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

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. 
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.


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