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Natural Gas: Where Art Thou Reflation?

We’ve phrased the title for this note in olde English, much as our competitor Dennis Gartman might use.  No, don’t worry, we aren’t going to give Dennis a hard time today.  He’s already had a tough time lately (we hear down -2.2% in July in his retirement and personal accounts) and, to be honest, we find him a likeable sort, despite his dependency on one factor models such as the 200-day moving average.  For those that have missed the commodity reflation theme in the year-to-date, the question above remains an interesting one.  That is, is natural gas the next commodity to make a big move?

The pricing for natural gas is much more locally based then its global brethren, such as oil and copper.  Therefore, a weak US dollar and an increase in Chinese demand will not necessarily sway the price of natural gas in the United States.  These are the primary factors as to why natural gas has been a laggard in the year-to-date.  In fact, prices at the Henry Hub are down 40% year-to-date from $5.63 per MMBtu at the start of the year and 70% from the year-ago closing price from $11.15 per MMBtu.  The natural derivative of this decline in gas prices, is the decline in drilling.  According to Baker Hughes, gas rotary rig count is down 47% from the start of the year to 672 currently and at their lowest level since May 10th, 2002, which obviously should lead to supply declines in the future.

The major bearish factor continues to be supply.  Natural gas in storage is 25.6% above inventories of 2,297 BCF from one year ago, and 18.7% above inventories for the 5-year average.  In fact, according to the Energy Information Administration, “natural gas in storage is now at its highest level for any week in the month of July since collection of weekly storage began in 1994.”  This is obviously bearish, but is also a backward looking indicator.  As always, what will drive natural gas futures will be the next marginal change, even if only bullish on the margin.

The next marginal bullish shift will likely be a sustainable decline in the rate of the building of storage, which will be a function of weather being warmer than expected, which lead to demand for more cooling, or an eventual declining in production due to declining drilling rates.  While the rate of storage growth y-o-y has wavered from week-to-week, in aggregate we have seen a consistent build throughout the year.  Of course November 1st will be the key date to watch on storage levels, as it marks the end of the 7-month injection season.

According to Keith the quantitative set up is as follows (see chart):

“TAIL, broken = $5.45. TREND and TRADE = the same level, $3.82 (ie right where it closed on Friday. The setup is for a big move next (failure to breakout or a big time breakout)… if we see the breakdown, there is zero support until $3.11; breakout resistance is the TAIL line.”

On a percentage basis, this commodity has the potential for pin action and while the fundamentals favor an overly loose market at this point, a bullish shift in fundamentals could lead the potential for a test of the TAIL line at $5.45, which is 42% upside.

Daryl G. Jones

Managing Director

Natural Gas:  Where Art Thou Reflation? - gas


Slouching Towards Wall Street… Notes for the Week Ending Friday, July 17, 2009

ETF Update

The ETF marches on.  Traders Magazine Online (14 July) reports that the volume in ETFs is exploding.  According to the article, from last September through May, “ETF consolidated volume averaged almost 49 billion shares a month. That compared to almost 20.5 billion a month on average from the same period one year earlier.” 

This 150% jump follows a report where the NYSE found ETF consolidated volume on average doubled in comparable nine-month periods.

In other words, not only is ETF volume growing tremendously, it is growing at an accelerating pace.  We hold no degrees in rocket science – nor in any science – but we wrote earlier that the entry of such behemoths as PIMCO in to the ETF space all but guarantee that this market will soon top one trillion in assets.  Now, according to the Traders Magazine article, it appears that even the sky may not be the limit.

The article reports that Knight Capital has hired a team of fifteen ETF sales-traders to take advantage of “a tidal wave of volume and liquidity in the ETF space.”  In fact, Knight is going after a whole new customer base.

“We're seeing more traditional mutual fund managers converting more into ETF format for the lower cost structure and transparency that ETFs provide,” says a co-head of Knight’s ETF group.

Traditional asset managers have been steadily increasing their ETF exposure, using them for “core holdings, beta exposure, alpha generation, various hedging strategies. Whether you're bottom-up or top-down, they can be very useful.”

Something for everyone, it would seem.

Indeed, the article makes the following observation: “a traditional asset manager with money for a new account may want to be invested right away. Simultaneously, he also wants to wait two weeks to do some research on some stocks. While doing that research, he can invest the money in a value ETF and, at least, get the exposure until he has the individual stocks he wants to buy.”

This means that money managers who haven’t yet figured out what stocks to buy are sticking cash into an index, while figuring out what to do.  All right, we already admitted to not holding a degree in rocket science, but we wonder whether this lax approach to managing money is “demand-pull” or “supply-push”.  Did some smart money manager figure out that this is a good way to buy time while he does his homework, or are smart salesfolks hitting up money managers with hot new ideas?

In today’s interest rate environment, it makes little sense to park in cash while making an allocation decision.  Thus, an investor might assume that a money manager had ideas at the ready – the notion of being 100% invested, 100% of the time is a key selling point to private investors.  We will content ourselves here with smacking the same bell we have been ringing all year: the ETF trade risks becoming very crowded, very quickly.

ETFs and ETNs appear to trade based on two levels of price insensitivity.  First, the ETF sponsor does not care at what price the individual components are bought for the Fund or Note – their concern is having sufficient holdings in the underlying instrument to be able to issue their shares.  Secondly, the ETF buyer in the marketplace is looking, not at the price of the share, but at the action in the underlying index.  Thus, Best Execution appears to go out the window.

Brokerage firms have written best execution procedures for ETF trading, but the ones we have seen are just retreads of their procedures for best execution of stock trades.  This begs a big question: if the floor traders are scooping up stocks, indexes, oil, gas, and gold based purely on size and timing – with no consideration for price – and if the customer is buying the ETF based on the price of the underlying instruments, on what basis would anyone ever request price improvement?

While this looks like a facetious question, we call your attention to the CFTC’s new initiative to impose speculative position limits on all commodities “of finite supply.”  This means all natural resources, and much hoopla erupted in the last two weeks about shares of the ETF UNG – the natural gas contract – which literally ran out of supply when the SEC did not authorize new notes to be issued.

This has created a situation where the ETF becomes sensitive to actual market demand on the offer side – more buyers of the now-finite ETF will actually drive up the price beyond its intended relationship to the underlying contract.  The bid side of the market might hypothetically remain tied to the underlying natural gas contract; the problem here is maintaining a fair and orderly market.  If a buying panic develops – not impossible in a world where Russia needs to spike the price of oil and gas just to keep making bread and vodka – the market makers may find themselves forced to chase the offer, raising the bid beyond its relationship to the contract.

But it gets better – because if the market regulators see the natural resource ETFs and ETNs spiraling out of control, they will beat their chests and say how very right they were.  The introduction of position limits in the actual corn, gas, soybean and pork markets should be something most professional traders can get used to.  What the locals will miss, once the shackles are on, is the free money they were scooping up filling price-insensitive orders for the ETF managers.

After that, we think SEC Chairman Schapiro starts applying the same logic to the stock market and the indexes – perhaps not the broad ones, but the narrow-based sector tracking indexes, most probably.

Earlier this year, there was a great outcry by the senior executives of REITs who complained that their shares were being whipsawed in the marketplace by ETF creation and liquidation trades.

Public companies have fixed numbers of shares outstanding, and even under a shelf registration, new shares are not issued intraday.  We think CFTC Chairman Gensler’s proposed position limits are a done deal.  The Next Big Thing, though, may be similar restrictions in the equities markets.  In short: the ETF marketplace is big and growing – for the time being, though, it is decidedly messy.

We keep coming back to our old conclusion: Goldman bowed out of the bidding for iShares.  Could Goldman have won, if they really wanted to?  We think so.

Is it safe to assume Goldman knows something we don’t?

Count on it.


Cuban Embargo – Lifted!

My old pals from the 1980’s wouldn’t recognize me now.

- Ross Mandell

In the same week the judge dismissed insider trading charges against Mark Cuban, the SEC has issued insider trading rules for agency staffers.

The rules require pre-clearance of all trades by agency employees, prohibit the trading of securities of corporations under investigation, and require SEC employees to certify that they don't have non-public information about the companies whose securities they are trading in.

In a related matter, the House Financial Services Subcommittee is taking up an SEC report examining “alleged inappropriate trading” by government officials, and legislation has been introduced in the House to prohibit insider trading by members of Congress or their staff. The bill is known as the Stop Trading on Congressional Knowledge, or STOCK Act.

Compliance officers in the audience will recognize that introducing these rules is only ten percent of the task – the SEC staff are held to no more rigorous standard than employees of banking and brokerage firms.  The whole exercise smells too much of government, and not enough of ethics and common sense.  This is another case of a political institution taking a political step to fix a political image problem.

The entire industry remains on the honor system.  Will this enhance public protection?  Will this enhance the transparency and proper functioning of our markets?

Only time – one resource we have in pitifully short supply – will tell.


Nails In The Coffin

How are the mighty fall’n!

- 2 Samuel, 1:19                                                       

Just like in the Bible, there are no coincidences in real life.  The past weeks saw the Icarus-like plummeting of two high-flying financial Daedaluses.  Far apart as their stories may seem, we find far more similarities than differences in these twin cautionary tales.

News media can be misleading.  Thus, one might be forgiven if, upon reading the Financial Times headline (10 July) – “The Storms That Swept Away Meriwether’s Flagship Fund” – one formed the impression that John Meriwether was the victim of an irrational market. 

We ask that you refrain from pointing out the unerring acuity of hindsight.  Hindsight was staring us in the face in the avatar of Long Term Capital Management.

Among our favorite financial media moments is the excellent segment of Public TV’s “Nova”, dedicated to the rise and demise of LCTM (PBS airdate: February 8, 2000).  LCTM, staffed by the rocketingest of rocket scientists, and supported not by one, but two Nobel prizewinning economists – Robert C. Merton and Myron  Scholes – managed to create one of the greatest pools of risk in the history of finance.  We keep being reminded of the fundamental truths we learned from the successful old-time stockbrokers.  Those who strive belly-to-belly in the trench warfare of money are most sensitive to the true driver of economic forces: emotion.

Andrew Racz, he of the Eraserhead hairdo and staccato Hungarian accent, told us years ago, “Smart people never buy.  They only sell.”  Meriwether & Co sold risk.  The banks, the brokers, the investors – even the regulators all bought it.

The denouement of the Nova segment includes clips of a Who’s Who of the “Models Model” of market economics – Paul Samuelson, Myron Scholes, Alan Greenspan and others – musing on the humbling of the “model” model of market economics.

Here is Merton Miller: “Models that they were using, not just Black-Scholes models, but other kinds of models, were based on normal behavior in the markets and when the behavior got wild, no models were able to put up with it.”

Peter Fisher, Executive VP at the New York Fed during the LTCM crisis, says “I don’t yet know the balance between whether this was a random event or whether this was negligence on theirs and their creditors’ parts. If a random bolt of lightning hits you when you're standing in the middle of the field, that feels like a random event. But if your business is to stand in random fields during lightning storms, then you should anticipate, perhaps a little more robustly, the risks you're taking on.”

Fade to the past couple of weeks, where another icon was toppled as unceremoniously as the statue of Saddam Hussein.  Former baseball star Len Dykstra – whom Jim Cramer described in glowing terms as a stock picking Wunderkind – filed for bankruptcy, leaving in his wake a Hall Of Fame list of lawsuits.

In rebutting allegations that Dykstra was a beard for a scrum of no-name stockpickers who used Dykstra’s name recognition for marketing purposes, Wall Street pro Richard Suttmeier wrote (quoted in Silicon Alley Insider, 16 June 2008, “Lenny Dykstra makes His Own Stock Picks, Says Pro Who Helps Him”) “Lenny makes his own picks after reading tons of research notes from the most respected independent minds. He has become one of the best stock pickers after doing several years of homework. I can’t even explain how he uses his deep in the money call strategies.”

We especially like that last sentence.  Suttmeier devotes half his piece to bristling at being characterized as “a little-known strategist”, detailing his own professional resume, and his many television appearances.  He finishes with a flourish: “It was after one of these CNN ‘Talking Stock’ shows when Lenny Dykstra called me and said, ‘Hey Dude, can you teach me how to read a stock chart?’”

As our CEO, Keith McCullough, points out, running a P&L is not the same as running a business.  And – in his former capacity as Captain of the Yale hockey team – we are sure he would agree that even a .310 season batting average does not qualify one to handle investments.  Not one’s own, and not someone else’s.

The fault, to paraphrase Shakespeare, lies not in our markets, but in ourselves.  Markets, like computers, give us back what we provide: Garbage In, Garbage Out.

The traditional Wall Street management model consistently promotes excess over good sense.  In many firms the most successful salesmen are routinely turned into managers.  The apotheosis of this process is perhaps the elevation of Jimmy Cayne to head of Bear Stearns – accounts of the demise of that once-great firm - but it has deep and untouchable roots.  The finance business is, after all, about getting other people’s money – not about making money for other people. 

Superstar traders like Meriwether are able to generate outlandish profits for their firms for a number of reasons.  Not the least among those reasons, to be sure, is their own unique market acumen.  But running a profitable trading desk uses one skill set, while running a successful financial company uses a different one.

Meriwether was an all-star at Salomon Brothers, where he was Head of Fixed Income Arbitrage.   Traders who worked under him there credited Meriwether with applying a “yield-to-worst” analysis to their positions, trying to gauge the effect on their positions of, as one trader put, “the world going down.”

Here’s the rub: this is the right process for a trading desk manager to apply to protect his P&L.  In the meantime, he needs pay no attention to the cost of his office rent, light fixtures, telephone lines, or the expensive lunches he caters to feed the traders on his desk.  One would think that a well-run firm would charge these items back to the profit center.  But on Wall Street, the profit centers, to paraphrase the old management saw, walk out the door at the close of business every day.  Come year end, the same conversation takes place in every boardroom, when the heads of the profitable desks sit down with senior management.  We can just see Meriwether sitting across from Gutfreund.  Gutfreund is holding a gigantic cigar and gazing with his impassive basilisk stare as Meriwether, red pencil in hand, cuts expense items from his desk’s P&L.

In good times, firms end up eating the lion’s share of the expenses of their profitable departments.  The most profitable department – and Meriwether was a super-duper-star – gets first crack at ramming expenses back down the throat of the shareholders.  By the time this exercise is done and bonuses paid, the company ends up with a winnowed-down profit number, and the traders get new Porsches.

Who shoulders the burden of business decision-making at these hedge funds?  Managers who run world-class desks at major financial institutions find themselves paralyzed by having to face personnel decisions, by having to make decisions on compliance procedures, by having to negotiate with portfolio managers who insist on hiring staff.  Never mind the year-end bonus discussions.  High-profile traders at major firms are insulated from serious business decisions, and frequently falter when they must take them on in running their own firms.

Just like Lenny Dykstra.  “One of the great ones in this business,” according to Jim Cramer.  Dykstra’s options newsletter on TheStreet.com reportedly netted him $1 million a year until being discontinued earlier this year.  In a sad denouement reminiscent of “Requiem For A Heavyweight”, the public is ghoulishly watching as Dykstra’s former sports glory, his second career, his personal life, and the respect he once enjoyed from colleagues, friends and teammates all go down in flames.  Clearly, Dykstra was “one of the great ones”… until he wasn’t.

Both Meriwether and Dykstra represent what’s wrong with this system.  Both men were outstanding at their chosen vocations – and both appeared untouchable in their first careers.  In their second careers, they have fallen victim to the ultimate Wall Street sin: they believed their own hype.

Worse yet, the rest of the world believed it too.


Split Personality

I seem to be what I’m not, you see…

- “The Great Pretender”

GM shares shot up 35% in value on the news that the company is emerging from bankruptcy. Last Friday, when the announcement hit, the stock traded as high as $1.15.  Oh, by the way… that was not General Motors stock.  Not really.

The Wall Street Journal (16 July, Marketbeat, “Stock Split: New GM vs. Old GM”) scratches its journalistic head over aggressive trading in the shares of General Motors, particularly the 35% surge in the price of the shares in the wake of the announcement that the company is emerging from bankruptcy.

What’s odd about this market action is, the trading is in ticker symbol GMGMQ – the designation for the old GM shares that still trade in the Pink Sheets, the home of delisted public companies.  These shares – as the Journal correctly points out – “represent ownership stakes in the GM assets that remain in bankruptcy court, a company named Motors Liquidation Co., assets that the new GM didn’t want.”

This is the industrial version of the Good Bank / Bad Bank model.  It has been around for a long time, as it is a standard part of the bankruptcy process.  In the public markets, there is invariably a rush of buying in the delisted company around the times of filing for, and emergence from bankruptcy. 

Over the years, retail investors have erroneously believed that they were buying the “new” company for pennies on the dollar, when what they were actually buying was the abandoned assets.  Now – lo and behold – FINRA actually has exercised its Investor Protection responsibility.  Last Friday it acted to halt trading in GMGMQ.  FINRA issued a public statement saying there may be “potentially misleading” information in the marketplace, and that investors should not assume that the mere fact of a security trading in the market should not be interpreted “as indicating that the shares have any value.”

With so many companies in danger of filing bankruptcy, why haven’t the SEC and FINRA – both in their primary capacity, which is investor protection – issued statements advising investors that the common stock of companies in bankruptcy is not the same as the common stock of companies emerging from bankruptcy?

We have not forgotten that last year FINRA – with Mary Schapiro still in the saddle – suspended delistings on the basis of price.  Their logic was that there were many companies whose stock price was unrealistically depressed due to market conditions, and it would cause unreasonable pressure in the markets if they were to delist every company whose price collapsed.  The NYSE followed suit some time thereafter. 

In the midst of all this incompetence – and just in time for the potential bankruptcy of CIT Group – FINRA has suddenly discovered its investor protection roots.

Hear the applause?  It is the sound of one hand clapping,


A Final Reflection

Esse Quam Videre (“To Be, Rather Than To Seem”)

- North Carolina State Motto

To much front-page fanfare, Bernard Madoff has driven the last five hundred miles (Wall Street Journal, 16 July, “Sins And Admissions: Getting Into The Top Prisons”).  Against the recommendation of defence attorney Ira Sorkin, Madoff is now an inmate at Butner Federal Correction Center, a medium-security facility in North Carolina.  The WSJ article mentions that the Rigas boys – pere and fils – are doing their time at Butner for their fraud convictions relating to their tenure at Adelphia Communications.

But of all the places Madoff could have been sent, it is a twisted irony that he is now housed at the same facility as Jonathan Pollard, serving a life sentence for passing US Naval Intelligence information to the Israelis.  Pollard, who violated the laws of the United States, believing his actions would save the Jewish people, is paying the price for what he believed was right.  Madoff, who ruthlessly exploited his close ties to the Jewish community, breaking the laws of the United States to satisfy his own irrational greed, will now pay a price of his own.

Welcome to North Carolina, Bernie.  “First In Flight” – but not for you.

Bernie Madoff, today is the first day of the rest of your life.


Moshe Silver

Chief Compliance Officer


Chart Of The Week: The Free Money Chart

This is the chart that the so called “free market” economists like Larry Kudlow hold so dear to their hearts. The only part of this that’s “free” is the politicization of American capital. There is nothing “free market” about screaming bloody red murder for “shock and awe” government sponsored rate cutting every time your banking friends and network producers aren’t getting paid.

Andrew Barber and I have put together 2 charts and 1 picture to amplify this point:

  1. Top Chart (2008-2009) - the widest that the US Treasury yield curve has EVER been was in June of 2009.
  2. Bottom Chart (1) – shows you the Greenspan (1993, 2003) and Bernanke (2009) inspired love bubbles.

EVER, of course, is a long time by any economic measure. Into Friday’s US market close, the US Dollar was getting tagged and the yield curve (10’s to 2’s) had expanded to +265 basis points wide, challenging it’s all time high in terms of its spread (+271bps).

For the immediate term REFLATION trade, it’s all good and fine to trumpet this as a positive for both credit and equity markets. It is positive and, in the moment, pigging out at the trough of a fat yield curve provides a bounty for the bankers belly.

The longer term question remains however – how will this all end?

My answer: higher long term cost of capital with tighter/re-regulated access to it. Reflation will morph into reported inflation in Q4, and Bernanke will be left chasing his own tail alongside the long end of the yield curve (which isn’t as politicized as the short end and has already left the barn).

Beware of modern economic theory’s groupthink.


Keith R. McCullough
Chief Executive Officer

Chart Of The Week: The Free Money Chart - km12

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India Changes The Question!

Indian inflation data has been providing unwelcome answers, the government is changing the question…

The Statistics Ministry of India announced the unveiling of a new CPI measure to be introduced in 2010 as a replacement for the current system, a monthly series of four price basket indices specific to urban or rural workers in different industries calculated by the Ministry of Labour.

The readings provided through the ML calculations has been significantly divergent from the Ministry of Commerce Wholesale Price Inflation index, a weekly data point which is the more commonly quoted measure as well as the one used by government planners to track price sensitivity in policy making.

(discussion continued after charts)

India Changes The Question! - India34

Over the course of the first half of 2009  the divergence between the 2 index series has become pronounced, with the May CPI for rural workers showing a growth rate of 10.6% versus the prices paid by the poor farmers that comprise half the sub continents population last year while the most recent weekly Wholesale figure showed a decline of 1.21%. The Statistics Ministry hopes that a newly calibrated basket of goods and services, measured through a more frequent survey and aggregated for consumers of all classes, will correct this “disconnect” between the current data series and aid policy makers.

Although the Indian collection methodology is antiquated, and price subsidies can complicate the calculation process, the change will not be without controversy. Leftist parties that have been marginalized by the sweeping Congress Party victory may well latch on to the data recalibration as a political football –the current CPI system, though flawed, does reflect the cost of living for the poorest and most vulnerable members of society (which in India means 25-40% of the total population depending on whose figures you choose to trust).

Any change which is perceived to provide the Singh Administrations’ with policy flexibility at the expense of vulnerable demographic groups will be a source of controversy as the Central Bank and Ministry of Finance continue to chart a course of lowered rates and privatization of state owned enterprise.

India Changes The Question! - india45

Andrew Barber





20 JULY 2009


What are the stocks discounting from earnings season?  Interestingly enough, they appear to be discounting that current earnings expectations are correct. It’s odd that we approach an earnings season and the earnings revision factor and stock performance are so closely in synch. That begs the question as to whether we will be sitting here in another month saying “gee, this earnings season was exactly in line with where every Tom, Dick and Harry thought it would be.”  Something tells me that the answer here is an overwhelming ‘No.’ We’re officially entering the period where there will be meaningful bifurcations by company, and this will accelerate throughout the remainder of the year. It’s a stock-pickers game again, folks. This is where you get paid to know your companies, be meaningfully different than consensus (when appropriate), and most importantly, be right. We’ll be out with written comments on many of these in advance of earnings. Premium subscribers…you know where to reach me to discuss live.




Some Notable Call Outs

- It looks like VF Corp will not announce that it won Eddie Bauer assets with its earnings release tonight. Golden Gate capital has emerged the winner at $286mm. Ironically, this is the same exact size bid it made 2-years ago, but was rejected by a judge. It looks like the economy has changed the rules of engagement. Yes, that seems low on a base of $1bn in revenue. But this is about 7x EBITDA on a grossly mismanaged asset whose relevance is in question. Should the brand exist? Probably. With more than $500mm in revs? Not so sure…

-CIT is getting all the press, but Steve Madden (SHOO) has dumped GMAC as its factor. That’s a shocker to me. Looks like SHOO is shifting away from factoring en masse and more towards utilizing its stellar balance sheet to sidestep and perceived ‘factor’ risk. You’ll see more of this from many mid-size companies that can afford to do so.

- In an unusual move within the Nike, Inc portfolio, Dwyane Wade switched from Converse to Brand Jordan. The move did not surprise me as much as the accompanying statement… "I didn't want to be in the Converse brand anymore because it seemed like they didn't know what to do with me." Could this be a sign of Converse reallocating capital from the performance business over to the classic segment in which it dominates? As evidenced by the deal with Target for expansion of One Star, I’m inclined to say yes. Don’t get me wrong, it’s tough to fault Converse for almost anything. People thought that Nike was foolish for buying the company 2 years after it otherwise could have scooped it up out of bankruptcy at half the price. But Nike is not good at fixing things. They’d rather pay more and not have to fix anything. The result? A near triple-digit return on its original investment.  Nonetheless, let’s keep an eye on clearer definition between Converse and other Nike, Inc brands.

- As retailers and brands work to find the best use of social media, we are seeing companies actually reach out to their customers in new ways. It was reported on Friday, that privately held fast fashion retailer, Forever 21, asked its Twitter followers if they would be interested in a Forever 21 magazine. The questions even dug deeper asking what features and content these loyal customers would like to see in the “hypothetical” publication. Expect to see much more of this outreach as it presents a larger, cheaper, and potentially more targeted way for companies to reach their core constituents.

- Late last week the legal battle between Ebay and Tiffany re-emerged. In an effort to appeal a ruling from last year that favored Ebay, Tiffany presented its arguments claiming that Ebay should enforce more vigorous counterfeit controls. The judge ruled last year that Tiffany should be responsible for protecting its own trademarks. The appeals case was presented before a packed court house and is being watched closely. If the original ruling were to be overturned, it would be viewed as a monumental change in the balance of responsibility for fighting counterfeiting and huge victory for the trademark holders which historically have spent all of their own capital on countering the sale of fake products. 



- The controlling shareholders of Hong Kong-based sourcing giant Li & Fung are branching off into India's modern retail market - Fung Capital, controlled by Li & Fung’s controlling shareholders Victor and William Fung, said it would invest $30 million in Future Logistic Solutions Limited, which specializes in supplying fashion and other products to 1,100 retail doors. In a statement, they described the move as “unrelated to any of the Li & Fung Group companies.”Future Logistics, part of Future Group, operates 30 supply chains in fashion, food, home products and general merchandise. It also has joint-venture partnerships with stationery retailer Staples and French fashion chain Celio. Future Group is best known for Pantaloon Retail, one of India’s largest operators. India’s logistics market is valued at about $100 billion. <wwd.com/business-news>

- India has no intention of allowing foreign direct investment in retail - India has no plans to allow foreign direct investment in multi-brand retail trade, the country's junior commerce and industry minister said Monday. Under current policy, foreign direct investment is not permitted in retail trade except in single-brand product retailing where foreign investment up to 51% is allowed. "Government fully recognizes the need to ensure that small retailers are not adversely affected by the growing organized retail and that there is no adverse effect on employment," Mr. Scindia said. <online.wsj.com>

- Retailers report increased sales, conversions and return on ad spend - Online marketing company Channel Intelligence says its jewelry, apparel and sporting goods retail clients increased their return on ad spend in Q2 compared to Q1. <internetretailer.com>

- RVS buys Ellen Tracy brand from Brand Matter LLC - Brand Matter LLC has sold the operational part of the Ellen Tracy business to RVC Enterprises and licensed RVC for use of the brand for women’s sportswear in both the better and bridge categories. Mark Mendelson, president and chief executive officer of Ellen Tracy, will become president of the Ellen Tracy division of RVC. The operations will remain in Manhattan, where RVC is located. Market sources said there have been discussions for an Ellen Tracy line in the better category at Macy’s. But Brand Matter president Rick Platt said Ellen Tracy’s management has had conversations with a variety of retailers. <wwd.com/business-news>

- Geox North America plans - Six months after taking the helm at Geox North America, Gary Champion is working to invigorate the brand with fresh styling, new marketing and an aggressive retail push. The former Clarks executive, who joined the Italy-based label in February, told Footwear News he aims to “introduce the U.S. customer to the Geox brand.” The market has been a challenge for the company since its debut here five years ago — of Geox’s $1.2 billion in annual sales, North America accounts for less than 5%. The COO’s first move has been to strengthen the product. For spring ’10, the brand initiated its first collection made specifically for North America. It also moved away from traditional Euro-comfort styling to infuse more fashion into the line. “We did three different heights of wedge heels, with three to four patterns on each  height,” Champion said. Price points will remain unchanged, in the $120-to-150 range, and Champion said he sees Tory Burch, Cole Haan and Sofft as the brand’s main competitors. To support the product overhaul, the North American team is strengthening product merchandising, starting in its own stores. (It has 30 to 35 in the U.S., with two dozen more slated to open in North America this year.) Champion said Geox will adjust the way product is displayed, in addition to implementing lifestyle messaging.  <wwd.com/footwear-news>

- U.S. retailers may see spending drop in the back-to-school shopping season - 32% of U.S. consumers said they are saving more, up 10% from a year earlier, according to a survey being released today by Deloitte LLP. 64% said they would spend less on back-to-school items, compared with 71% last year. 22%  said they would spend less because of a job loss in the household, Deloitte said in an e-mailed statement. Deloitte counts the back-to-school shopping period as running from the July 4 weekend to Labor Day in September. 65% said they will only buy what the family needs, according to the survey. That means spending less on clothes and shoes. Another 74% said that they will buy more of their items on sale.  Consumers plan to seek out stores offering value. 90% of those surveyed said they will shop at discount department stores and 40% at dollar stores. Retailers need to be creative in promoting loyalty programs and offering coupons, Janiak said. More than three-quarters of shoppers will do the bulk of their shopping in August, she said. “Although retailers may not see as many wallets snapping shut as they did in late 2008, consumers still plan to stretch their dollars, telling us that their shopping remains constrained,” Janiak said in the statement. “Retailers should focus on delivering the best incentives and in-store experiences to get the most out of the back-to-school season.” <bloomberg.com>

- Philippines' Richest Man Henry Sy Plans to Expand Retail Empire in China - Billionaire Henry Sy, whose retail empire has made him the richest man in the Philippines, may build as many as three malls a year in China to expand in the first major economy to rebound from the global recession. <bloomberg.com>

- Urban Outfitters Would Consider Lending to Its Vendors if CIT Collapses - Urban Outfitters Inc., the clothing and housewares retailer, may consider providing short-term financing to some of its vendors should CIT Group Inc. collapse. <bloomberg.com/news>

- As consumer confidence  continues to hit all-time lows, more marketers are getting into the insurance business - Last week, for instance, Hewlett-Packard began offering a “printing payback guarantee” which promises consumers a check if its printing solutions don’t deliver the recommended cost savings in a year. Earlier this month, Sears launched its “Buyer Protection Program,” which lets buyers keep an appliance purchased for more than $399 with a Sears card if the consumer loses his or her job. “Get a new appliance. Get peace of mind,” the program’s landing page proclaims, adding, “The Sears Blue Appliance Crew has got your back.” Kevin Brown, CMO for Sears’ home appliances division, said the incentive was necessary to get consumers to buy. “It really came from listening to our customers who have been telling us that…they’re worrying about their jobs and the economy,” Brown said, noting that consumers are “deferring much needed appliances and bigger ticket purchases.” Sears and HP aren’t the first to try to address consumers’ sagging confidence. Brands ranging from Virgin Mobile to men’s clothing retailer Jos. A. Bank have been running similar offers in recent months. The catalyst appears to be Hyundai, which trumpeted the idea the loudest with its Super Bowl “Assurance” spot, which outlined a program in which the automaker offered to buy back consumers’ cars should they lose their jobs within a year. Addressing consumers’ concerns about their jobs is an unusual marketing tack. Jack Trout, president of Trout & Partners, said he has never seen anyone making such offers before in previous recessions. “It just shows you how tough it is out there,” he said. “It shows you how people’s minds have changed.” Yet programs essentially telling consumers, “We’ve got your back,” have emerged in large numbers. <brandweek.com>

- London retail sales boosted by good weather- Clothing and footwear sales also benefited from discounting and Sales, according to BRC/KPMG’s London Retail Sales Monitor. The sales increase bucked the overall trend in the UK which saw an increase of 1.4% in June. The figures also showed that footfall in central London in June was up on last year. The BRC added that the sterling’s weakness against the euro had continued to attract international visitors to the capital, especially from Western Europe. However, it added that tourists were more cautious with their spending. BRC director general Stephen Robertson said: “Sunshine and sales helped boost London retail sales. Footfall in the capital was well up on a year ago, as shoppers sought out summer clothes, sandals and other goods.” “The pound’s weakness against the euro continued to attract shoppers from western Europe. And sales in the capital were also helped by Middle Eastern visitors. Although individual tourists have become more cautious, there are more of them which produced sales gains.” For the three months from April to June, like-for-like retail sales in London rose 3.9%. <drapersonline.com>

- The European managing director of Crocs has spoken out against negative reports - US newspaper The Washington Post wrote an article last week suggesting that the brightly coloured footwear phenomena may have reached its maturity in the market place and could be on its last legs. Other newspapers suggested that the iconic footwear brand, which launched just seven years ago, was close to bankruptcy, claiming that because the shoes hardly ever wore out there was no need for repeat purchases by customers. In response to the article, managing director of Crocs Europe, Robin Akeroyd issued a statement which said he was “extremely confident” in the future of the company. He added: “Crocs is here to stay and has continually invested in product development which has generated constant demand. <drapersonline.com>

- One Star, a new fall apparel collection by Converse, will be available exclusively at Target stores this September - The all-American sportswear line will include men's and women's apparel and accessories, including denim, graphic tees, plaid tops, zip-ups, dresses, outerwear, fringed scarves and hobo bags. Footwear also will roll out for men, women and children. Converse's One Star for Target debuted in February 2008. <licensemag.com>

- Retail stocks see new calculus on investors' hopes - Frugal shoppers are still fixated on discounters, not their upscale fashion and home furnishings competitors. Investors, however, are no longer so certain. Mall-based purveyors like J.C. Penney and Macy's Inc. are now back on the hot list of investors, who have pushed prices up in recent months as they turn to the beaten-down shares in the belief they don't have much farther to fall and could be big winners in a rebound. Still, shares of many of these mall-based merchants are still far below the levels they traded at since the recession started in late 2007. And analysts say their honeymoon may soon be over as investors grow impatient with the persistent sales slump and profit declines. "Retailers have to show investors the money," said Ken Perkins, president of retail consulting firm Retail Metrics LLC. "At some point, they have to show (profit) growth." Perkins estimated that the retail industry is expected to record an earnings decline of 11.6 percent for the second quarter compared with a year ago, marking the ninth consecutive quarter of earnings declines. Excluding Wal-Mart Stores Inc., that decrease would be almost 18 percent. While the earnings declines have moderated in recent quarters, investors are concerned about the financial health of retailers and are hoping for some signs of a turnaround this back-to-school season. <boston.com/business/articles>

- Footwear brands expanding scope into accessories - Having options is a mantra that footwear brands, from Steve Madden to Salvatore Ferragamo, are embracing as they branch further into categories that don’t have anything to do with feet. Even as an unstable economy rocked the retail market this past year, Steve Madden developed a line of bedding targeted to college-age girls, and Ferragamo expanded its fragrance collection to include home offerings such as candles and room spray. For spring ’10, Shane and Shawn Ward are tackling timepieces, while Tory Burch continues to build her lifestyle empire, with eyewear for fall. And designers Elizabeth Brady and Matt Bernson have spun out into handbags and jewelry, respectively. “Brands are trying to find an opportunity to sustain their volume and keep the cachet of their brand alive,” said Marshal Cohen, chief industry analyst at The NPD Group. “But stretching out into other categories doesn’t always mean a home run.” While the risks include diluting the brand message and tainting relationships with retailers that expect a focused story, Cohen said, product expansion could boost sales, particularly among consumers already buying into the brand. “That’s where most of the growth will come from,” he said. “You’ve already convinced them you are the brand for them.” <wwd.com/footwear-news>

- Outdoor companies focusing a bit more on the female consumer style - Whitney Conner said she first knew something needed to change during a visit to the Patagonia campus. Conner, the brand manager for Patagonia footwear, noticed that none of the female staffers at Patagonia’s Ventura, Calif., headquarters were wearing the brand’s more outdoorsy casual footwear. To get them and other women excited about its shoe collection, the brand this season will debut its new Elegance casual line, featuring more dressed-up, fashion-conscious silhouettes. And Patagonia isn’t the only one. Many leading outdoor firms are taking another look at their women’s casuals, aligning them more with current trends and giving the traditionally rugged styles a more feminine, polished look. Brand executives said the new direction better suits their female consumers’ need for style and functionality — and updated styles and colors give them a reason to buy. Portland, Ore.-based Keen’s ongoing push toenhance its feminine styling has ramped up this season. For Patagonia, the wakeup call led to a new direction: making the footwear collection better sync up with the dresses being shown in the apparel line. “When we looked at trending things, it became clear it was time to step away from the Outdoor Group and get into a more feminine, sophisticated look that matched the Patagonia dress line,” Conner said. <wwd.com/footwear-news>

- Outdoor Trend: Bright Colored Shoes - Runners taking to the trails for spring will be doing everything but blending into the scenery. Bright citrus shades of lemon-yellow and lime-green are juicing up performance trail runners.




ROST: Gary Cribb, Executive VP & COO, sold 90,057shs ($4.1mm) after exercising the right to buy 90,057shs less than 20% of common holdings.

ROST: Lisa Panattoni, Executive VP of Merchandising, sold 40,000shs ($1.7mm) after exercising the right to buy 40,000shs less than 20% of common holdings.

ROST: Barbara Rentler, Executive VP of Merchandising, sold 58,557shs ($2.5mm) after exercising the right to buy 58,557shs less than 20% of common holdings.

RBI: Williams Lockhart, Director, purchased 2,304shs ($20k) increasing common holdings by ~100%.

TJK: Ernie Herrman, SEVP & Group President, sold 20,000shs ($68k) after exercising the right to buy 20,000shs representing less than 20% of common holdings.






Missing The Cut

"I just made mistakes... And obviously you can't make mistakes and expect to not only make the cut but also try and win a championship."
-Tiger Woods

After shooting a second 2nd 74 and Tiger missing the cut at this weekend's British Open, one of the more prescient thinkers in our subscriber base pointed out that quote to me. His point was that this is how the leaders of the US Financial system should behave. Holding themselves accountable. Looking in the mirror, calling it like it is.

Instead, what you're going to see this morning is more of the same. Woods will be back at the practice range, and Wall Street's finest group-thinkers will be out in full force talking about the economic "recovery" that they completely missed. Sadly, unlike Tiger - they'll behave as if they missed nothing at all.

Who missed this REFLATION trade? YouTube them and you tell me. Rewind the tape to 5 months ago and show me which one of these economic savants weren't scaring the hell out of the American public ranting about Great Depressions. AFTER seeing the SP500 rip higher for another +7% weekly move, are they bullish? You bet your Madoff they are - AFTER the fact. Washington and Wall Street job security depends on revisionist history.

Asia continues to teach America a lesson in high octane, unlevered, growth. Last night, Japan was closed but the rest of Asia roared higher for another big up day. The world's new economic leader, China, closed up yet another +2.4%, taking her 2009 score to +79.5% - that's another new YTD high. On the heels of Chinese strength, stocks on the Hang Seng tacked on another +3.7% move. Hong Kong equities are up +12.5% in the last 5 trading days and have now piled on a +35.6% YTD gain!

The New Reality remains: China's 21st century domestic consumption growth is reminiscent of that little train that could in the early part of the 20th century, the United States of America. China is now The Client. It's time for America's institutional investors to be "long of" what China needs versus what the US government wants them to need. Copper and oil prices were up +10% and 8%, respectively, last week - outperforming US Bonds, big time.

China doesn't need any more US Treasuries. Get your 200-day Moving Monkey to pull up a chart of the yield on 10-year US Treasury yields. Yes, at 3.7% this morning it is breaking out across all 3 of my durations (TAIL, TREND, and TRADE). Yes, Ben Bernanke is going to be chasing the long end of the marked-to-market curve. Yes, that change in US Federal Reserve policy rhetoric is as imminent as a monkey making money on the long side of the REFLATION trade right now.
Imminent returns? Oh yes, fellow commoners - if we Burn our Buck like this, everything priced in those bucks will continue to REFLATE. Never mind these silly details like Bankers, Debtors, and Politicians getting paid. You American commoners didn't make the Wall Street Club's cut! After missing the cut, the US government will be issuing you a zero rate of return on your savings account, and some Q4 inflation just in time for Christmas.

This morning the Buck is Burning, again, trading down another -0.56% at $78.87 on the US Dollar Index. After last week's -1.1% dollar decline, the negative price momentum associated with a completely politicized monetary policy in America continues. Going back to when Nixon abandoned the gold standard (1971), the US Dollar has only sustainably violated the $80 level twice. No, don't remind those Washington professors of economics when the last time was - that too, would be professionally embarrassing.

There is no embarrassment in admitting when you are wrong. Every mistake I make is up with a real-time quote on the Research Edge portal. Not learning from your mistakes is what is embarrassing - and unfortunately, Greenspan's ghost still remains in this country's leadership closet.

Tomorrow, Ben Bernanke will have one more opportunity to establish some credibility in America's currency. I am fairly certain however that his Humphrey Hawkins testimony will not be focused on how alarmist the US government's rhetoric had to be in order to get interest rates to an "emergency level" of ZERO.

The global macro market of countries, currencies, and commodities are currently betting that Bernanke maintains that the US outlook didn't miss the cut. Marked-to-market odds currently have the politicization of the short end of the US yield curve remaining intact. That's why the US yield curve is very close to being as steep as it has EVER been.

My intermediate term TREND support for the SP500 remains 871. My long term TAIL of resistance remains 954. The best thing I can tell you right here and now is stay with our proactive plan in managing risk around that range.

What you are hearing from Wall Street's consensus forecasters will continue to be completely backward looking. After a +40% move in the SP500, the House of almighty Goldman is raising their SP500 target this morning. Thanks for the Early Look guys - what would this country do without your stewardship.

Best of luck out there this week,


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.

CYB - WisdomTree Dreyfus Chinese Yuan - The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

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.

XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

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

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

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.  

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

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.