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Yes, In Q2 US Housing Bottomed...

According to data released by the U.S. Department of Housing and Urban Development, sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes.  Consensus had forecast seasonally adjusted sales of 352,000. 

While the rate of improvement is consistent with our 2Q09 housing bottom call, the rate of sales is still 21% below the year ago levels.  For reference, four years ago (during the height of the housing boom), the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month.

This report is impressive given what is going on with existing home sales and all of the foreclosure activity, which is sending home prices significantly lower.

I think most people would agree that Obama's $8,000 tax credit for first-time homebuyers is having a positive impact, but what will happen when it goes away in December?

Importantly, the June inventory of new homes dropped to 281,000, an 8.8 month supply at current rates of sale; in May, supply stood at 10.2 months.  Most of the excess inventories tend to be concentrated in just a few markets, such as California, southern Florida, Las Vegas and Arizona. 

As we look forward, "the construction-put-in-place” data next month will likely suggest that housing will be an additive to GDP versus being a drag as it has been more recently.

Howard Penney

Managing Director

Yes, In Q2 US Housing Bottomed...  - housingch

 


Slouching Towards Wall Street… Notes for the Week Ending Friday, July 24, 2009

Home Court Advantage

Who is the tall dark stranger there?

Maverick is the name.

Riding the trail to who knows where

Luck is his companionGamblin' is his game.           

- “Maverick” TV series, Theme Song

The SEC has seen a couple of high-profile cases go the wrong way.  One recently hit a brick wall (WSJ, 18 July, “Mark Cuban Scores In SEC Case”) when a federal judge in Dallas threw out the SEC’s insider-trading case against billionaire Mark Cuban.

At issue was Cuban’s alleged promise not to sell his 6% stake in the common stock of Mamma.com after a phone conversation in which the Mamma.com CEO told Mr. Cuban about a proposed PIPE (“Private Investment in Public Equity”) offering.

We are not attorneys, and we offer here only our own observations from a compliance professional’s perspective.  We caution that you should not rely on this for a legal interpretation.  Nor are we giving legal advice.  We are – like Jim Cramer – just providing entertainment.

That being said, it is clear that what Judge Sidney Fitzwater, of the US District Court in Dallas, has done is to define the concept of Duty in very specific terms.  In so doing, he has stuffed the SEC’s attempt pretty decisively.  As the Journal article points out, quoting a former SEC Enforcement attorney, the SEC “already put in all their best facts, and the court said those weren’t sufficient.”

What we like about this ruling is it says corporate executives can not use the law to bludgeon their shareholders.  It is clear to us that Mamma.com’s proposed capital raise was in violation of promises made to Mr. Cuban at the time he took his stake.  We can just imagine the conversation in the boardroom at Mamma.com’s offices.  No doubt, it boiled down to one conclusion: Mark Cuban’s gonna be pissed.

Based on this conclusion, the CEO seems to have hit on the brilliant strategy of calling this significant shareholder and, in the jargon of investment banking, “bringing him over the wall” by disclosing that the financing was going forward.  The CEO no doubt figured that, once Cuban knew of the proposed offering, he would be prevented from selling his shares – to do so, the CEO reasoned, would be a textbook case of insider trading.

Indeed, according to the SEC complaint, Mr. Cuban’s response was “Well, now I’m screwed.”

But the court thought not. 

This ruling leads to the conclusion that, while recipients of information may not disclose it, they may be permitted to trade on it.  We should point out that this is not the first time this concept has been applied to exonerate people accused of insider trading.  But coming from a federal district court, and in such a high-visibility case, this hits the SEC where they live.

The longstanding practice of the SEC Staff has been to prosecute persons or entities for trading in a security while in possession of MNPI regarding the issuer.  The Dallas ruling appears to hold the Commission to the strict letter of US insider trading law, which prohibits trading on the basis of MNPI.  According to the definition which the court appears to favor, mere possession of such information also does not create Duty – the other required element under US law.  Indeed, the court found that even being a major shareholder and having a conversation with the CEO does not in itself create a Duty.

We think this is a big ruling.  It puts executives of small companies on notice that they can not use securities laws to manipulate their shareholders.  It puts large shareholders on notice that they have rights and remedies, and that they must be properly guided as to how to proceed, in order to best protect those rights.  And it puts the SEC on notice that they can’t make up the law as they go along. You thought activist judges were a problem – how about Activist Regulators?

It is not lost on us that Mark Cuban (“Luck is his companion”) is the owner of the Dallas Mavericks, and that the court that threw out the SEC’s case was the US District Court in Dallas.  The SEC lawyers assigned to this case couldn’t even figure out how to forum shop for a better venue.  And from reading the complaint and what has appeared in the press, the SEC’s case hinged on whether or not Mr. Cuban had promised not to trade on the information allegedly conveyed in the phone call.  The complaint was drafted to rely solely on the alleged promise not to sell the shares.  The complaint further relies on one of the most difficult things of all to prove in a court of law – intent and mental state.  In legal terms it’s called “scienter”.  How the SEC’s attorneys figured they were going to prove scienter in this case is anybody’s guess.  We think it is not the hubris of hindsight to suggest that, with the entire case hanging on the intent embodied in a single telephone conversation between two men who are out to get one another – and with the single key sentence in that conversation under dispute – it would have been prudent to add some meat to the complaint beyond a single deniable utterance.

This looks like rather poor lawyering.  Clearly, the SEC attorneys who prepared this case will not be offered high paying jobs on Wall Street any time soon.  No, only the really smart lawyers get to leave government and go to work on Wall Street.  Those not competent enough to get an offer from Goldman Sachs stay on at the SEC.

 

Them As Can’t

Do or do not.  There is no “try”.

- Yoda

Speaking of those at the SEC who didn’t get an offer from Goldman – as of this writing, we still do not know where Lori Richards will go when she leaves the Commission on 7 August.

Richards has served as head of the Office of Compliance Inspections and Examinations (OCIE) since it was created in 1995 under Arthur Levitt.

“It was completely my decision to step down” she has told the press.  This was no doubt in response to the poor showing she made in her appearance before Congress in February, where she did not discuss how it could be possible that Bernard Madoff perpetrated a decades-long scam to the tune of tens of billions of dollars, yet her Office’s examinations consistently failed to turn up anything suspicious.

Or Ms. Richards may be responding to the widespread perception that Enforcement Chief Linda Chatman Thomsen had been bounced as Part One of a one-two combo, and that Ms. Richards would be heading for the exit in short order.  Thomsen’s departure was announced just after the disastrous February appearance before Congress where both ladies played leading roles.

Ms. Richards and Mary Schapiro are understood to have enjoyed a close professional relationship, one that should have been enhanced by Schapiro’s move to the Commission.  It is our understanding that, while Richards knew she would have to go, she prevailed upon Schapiro to give her time to find a colorable position in the private sector.  Her colleague Thomsen returned to her old haunts at the high-profile law firm of Davis Polk.  But Ms. Richards has so far come up with no offer.  And her time has run out.  In between all the quotes about it being “my decision” and her re-entering private life, we note there is no announcement of a next professional step.  We are hearing that no one wants to touch her professionally, and that the next head of OCIE will have a full plate just overcoming the sins of the past.

One might make a small allowance for Ms. Thomsen that is not available to Ms. Richards.  The Enforcement Division received tips about Madoff and failed to act on them.  That is bad enough.  Yet, whatever the failures of the Enforcement Division with respect to the Madoff case, it is generally up to OCIE to make an enforcement referral.  Enforcement typically goes after investigations based on what the examiners turn up, and since the allegations against Madoff did not come from his own family or firm insiders, they were likely automatically classed as rumors.

Or, there was a cover-up.

In 2001 John Mack, CEO of Credit Suisse First Boston, hired Gary G. Lynch, then a partner at Davis Polk & Wardwell, and a former SEC Enforcement Chief.  Lynch became CSFB’s General Counsel, reporting directly to the CEO.  In 2005, John Mack became Chairman and CEO of Morgan Stanley.  The next year, he hired Davis Polk partner Eric Grossman to become Morgan’s global head of litigation.  Davis Polk, where Ms. Thomsen is resuming her career in private practice, is also home to former SEC Commissioner Annette Nazareth, and former Acting Head of Market Regulation, Robert Colby.

We think it can nut be just bad luck that Ms. Richards is having such a tough time landing.  Now, it is clear that Ms. Richards’ time has just plain run out.  In the testimony of fired SEC Staffer Gary Aguirre, he refers to John Mack as being untouchable because he has “juice” – the ability to contact the Director of Enforcement directly.  Clearly, Lori Richards never came close enough to getting anyone really big in any serious trouble.   Can it be that, after being the only Director OCIE has ever known, no one in the private sector owes her any favors?

Can it be that OCIE’s bailiwick was so restricted, and Ms. Richards’ running of her Office so tame, that after fourteen years, she has not a drop of “juice”?

That looks stunningly incompetent – even by SEC standards.

 

Boxing Out

You watch some teams these days and you wonder if they just met on the playground and decided to choose up sides.

-Dennis Rodman    

The going has been rough for the SEC of late.  No sooner does a Dallas judge ring the curtain down on a high-profile insider trading case, than they go into a paroxysm of chest-thumping over a case they won on paper but that, like the Cuban case, appears to narrow the SEC’s powers.

The Commission issued a press release this week claiming victory in its case against Perry Corp, a $6.6 billion hedge fund.

What is odd is the language the SEC uses in characterizing this case.  Their press release (21 July, SEC 2009-165) is titled “SEC Charges Perry Corp With Disclosure Violations In Vote Buying Scheme”.  An intelligent person who did not read the article might believe Perry Corp had bribed corporate directors to vote on a corporate matter.

In fact, what Perry Corp did was to buy shares of Mylan Labs, in order to vote in favor of a corporate transaction.  Perry had taken a large position designed to yield a profit when the pending merger between Mylan and King Pharmaceuticals closed.  Subsequently, a large activist investor entered the picture, this time with Hart-Scott-Rodino clearance to acquire Mylan shares.  This investor proceeded to buy the shares, file a 13D, and announced its intention to solicit proxies against the Mylan-King merger.

According to the SEC complaint Perry, to protect its own position, started buying up Mylan shares, planning to vote in favor of the merger.  In acquiring these shares, Perry took two steps, both of which feature prominently in the SEC’s complaint: their traders allegedly instructed their banks to buy the shares outside of normal market hours in such a way as the purchases would not be widely reported; and they reportedly entered into swap contracts to hedge out the risk of owning the additional shares.

In the complaint, and in press coverage surrounding the case, much is made of these swap contracts – indeed, they feature so prominently in what has been written that one might believe the case is about the swaps themselves.

We have seen an inverse type of transaction, where portfolio managers wanted to exercise control over shares, but without owning them.  This is done to avoid having to report under the provisions of Section 13, or of Hart-Scott-Rodino.  They enter into a long-side swap for the shares, in some cases instructing the bank how to vote the shares.  The portfolio manager owns the economic consequences of ownership of the stock, though not the stock itself.  There is a certain logic that the bank should vote the shares as the swap-buyer dictated.

In the Perry case, the SEC is not alleging that swaps were improperly used to cloak ownership of either shares or votes – just that swaps were put on the long position, thereby hedging out the economic risk of owning the additional Mylan shares.

What first caught our eye was the settlement.  Perry is paying $150,000 to settle this case – on a transaction where they acquired just under ten percent of Mylan’s shares.  The SEC case focuses on Perry’s purported obligation under Section 13 of the 1934 Act.  The amount in question – $150,000 – is a small settlement, given both the depth of Perry’s pockets, and the general seriousness of Section 13 violations.

As with the Mark Cuban litigation, the Perry case focuses on narrow matters of law and SEC Rules.  A key element of the case is the question of whether the 13D – the filing that Perry did not make – is specifically intended for takeovers.  The SEC argued that the 13D is a catch-all filing.  Perry Corp believed that its acquisition of the additional Mylan shares were “in the normal course of business” and exempt from filing.

Whatever merits underlie either side’s arguments, we were stumped by the noisy discussion of the swap contracts.  Clearly, this is an exercise in public consciousness raising – tinged with fear-mongering – on the part of the Commission.  For the purposes of generating public outrage it does not matter that the swaps were not what was wrong with the transactions.  Because swaps, like all derivative contracts, are poorly understood by the public and by legislators alike, the SEC has a free hand to do a little public pitchfork-waving at the expense of the truth.

As one industry participant observed, with all the uncertainty around regulatory reform, all these agencies are boxing one another out under the basket, each hoping to snag the rebound of increased regulatory turf.  The SEC apparently wants to regulate swaps, and will be expanding that to other derivatives as well.  They appear not to have thought through the implications of the Commission’s own lack of experience in those markets, nor of the budgetary constraints that should make this expansion impossible.

Industry observers have expressed admiration for Chairman Schapiro’s ability, in the aftermath of Madoff, to hold on to, and even expand the Commission’s turf.  The whole world of derivatives regulation is up in the air.  The SEC appears to be using every opportunity to increase its areas of oversight – but so are the CFTC, the FDIC, Treasury, and the Fed.

This jump ball begs the issue of how one can entrust increased regulation – and in areas in which its staff is not even trained – to a government agency that is not well enough capitalized, or well enough run, to oversee its own discreet marketplace.

Frighteningly, it looks like the answer may be: It’s not, but since we are politicians, that’s all right.

 

 

Is This The Person To Whom I Am Speaking?

I don’t need to talk to you, Jerky!

          - The Jerky Boys

Last on this week’s litany of SEC near-successes is the case of SEC vs. Eric Todd Seiden.

According to the SEC complaint, “Seiden has fraudulently induced at least fifteen broker-dealers to buy over $1.8 million of thinly-traded stocks.”  How did he manage that, you ask?

“On numerous occasions from at least October 24, 2008 to the present Seiden, a former securities professional, telephoned broker-dealers, falsely identified himself as a customer or customer representative, and place large orders to purchase a thinly-traded stock for the customer’s account.”

Seiden, a 38-year old resident of Boca Raton, worked as a registered representative from 1993 until October of 2008, which is the month in which his alleged fraud started.  Seiden knows lots of folks on Wall Street.  He has worked at a number of firms and knows lots of folks, both professionally and socially.  Using the names of individuals, and of customers that h has known off and on over the years, Seiden allegedly placed calls to at least 24 different firms to have them buy large blocks of penny stocks.  These trades would typically not be discovered as problems until at least T+1, when they would be rejected for delivery by the firm that allegedly placed the order.

One point that stands out in the SEC’s complaint is that the traders and brokers at these firms all know Seiden.  Trading desk tapes were played back for some of them, and they immediately recognized his voice.

Another point that emerges – in the Prayer For Relief at the end of the Compliant – is the SEC has not yet determined the purpose of this behavior.  One would naturally assume that Seiden first established positions in these illiquid stocks, then, by placing fraudulent orders, created the liquidity to make his own positions profitable.  But the SEC has not yet determined whether such trades were ever done, so they only ask for disgorgement of any illegal profits Seiden may have received from this activity.  We find it curious that the SEC has not tracked down Seiden’s motive.  This looks like the SEC moving swiftly to put a stop to fraudulent behavior.  It may take more time to track down Seiden’s own financial interest in this matter.

But the big kicker on all this – compliance officers take note – is that these trades are not being reversed.  In each case, the name of the broker or trader who allegedly gave the order was known to the executing firm.  That is why Seiden gained access at all.  But it was Seiden himself, and not the person whose name he used, who placed the orders. 

Once this scam came to light, compliance officers and lawyers from the brokerage firms were on the phone immediately to the firms on the other sides of these trades, insisting that the trades be broken. 

But trades are not being broken, and after a certain amount of huffing and puffing, the calls are being abandoned and the trades allowed to stand.

As with every scam – Madoff comes to mind – there were those who did not take the bait.  There were firms that were approached with orders from Seiden, and that declined to do the trades.

As to those firms that went through with it and made the purchases, trades are being left to stand.  They are being told they did not know their customer.

‘Nuff sed.

 

 

Out F Depths I Call 2 U OMG Hr My Voice

As any religious person will tell you, God is everywhere.  Those who have searched in vain for the presence of the Almighty on LinkedIn, Facebook and MySpace can now take comfort: the Lord has achieved a virtual presence.                                                                   

For nearly two millennia, Jews from around the world have made their way to the Western Wall in Jerusalem – known in Hebrew simply as the Kotel, the Wall.  They have scribbled their hearts’ deepest longings and sorrows and fears on scraps of paper and, with trembling fingers, inserted them in the crevices of this ancient wall, the only part of the Temple still standing.

Now “TheKotel” on Twitter will take your Tweeted prayer, print it on a suitably small piece of paper, and insert it in the crevices of the Wall.  There is no charge for this service – those who carry out the task in the Holy City do so for the reward they will reap in the World to Come.

We wonder whether President Obama will take advantage of this service.  As Candidate Obama, he was mobbed when he visited the Wall, and his prayer note was stolen, allegedly by an enterprising yeshiva student – though to our knowledge it has not surfaced on eBay.  Now, with the anonymity of electronic communication, he can pray from the safety of the Oval Office, and his fervent words can be hand-delivered to the Almighty.

In the past, Israeli soldiers were often permitted unrestricted use of cellphones.  This has led to terrifying, yet at a distance comical moments of young men calling friends and family from the battlefield.  Now these youths will be able to Tweet their prayers from the heat of battle, then call their mothers while the bullets whiz by.

Yea verily – having formally entered the 21st Century, now the Lord is truly everywhere.  Watch for LinkedIn invites from Jehovah.

Moshe Silver

Chief Compliance Officer


Chart of The Week: Chinese Rising

After closing at another new YTD high last night, the chart below only continues to amplify. Whether you agree with us that the 21st century is as much China’s opportunity as it was America’s in the 20th or not, both the math and economic balance of power continue to shift China’s way. President Obama finally gave overdue respects to this New Reality in Washington this morning.

At 3,435, the Shanghai Stock Exchange is now up an astounding +88.7%. Yes, I know that the myopia of the moment has folks like Mr Bernanke still searching for the almighty “economic indicator”, but sometimes … some things… like say, the sun rising in the east, are very obvious.

China’s economic growth is now running +8%. Chinese money supply growth is running +28%. And, yes, China’s stock market is a leading indicator.

If you’d like Andrew Barber’s in depth “China Black Book”, please email us at .

Be long what China needs (copper, gold, stocks, etc…), and be short what American politicians want China to need (US Treasuries, US Dollars, etc…).

Keith R. McCullough
Chief Executive Officer

Chart of The Week: Chinese Rising - chartchina


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THE MACAU METRO MONITOR

FAMILY CONNECTIONS ARE A MIXED BLESSING FOR FERNANDO CHUI scmp.com

The new Macau chief executive seems to be an ideal executive from Beijing’s perspective.  While Beijing is pleased, the Macau public doubts his impartiality.  Dr. Chui is from on of Macau’s few ruling clans in a region where rule of law can often be trumped by power and connections. 

Dr. Chui has yet to convince the public that he can avoid conflicts of interest arising from his business and family background.  The Chui family has widespread business interests in Macau, covering properties, construction, tourism and commodities.  Chui has tried to assure the public that his family background will not affect his impartiality. 

For more detail on the Chui family’s business influences, read this article published late last week in the South China Morning Post.

MACAU’S NEW LEADER RAISES PROSPECT OF CASINO REVIVAL bloomberg.com

Macau’s new leader says that “the Motherland” will provide powerful backing to the gaming hub of Macau.  There are expectations that the new chief executive will bring about a smoother relationship with the central government.  In light of the visitation numbers revealing an 11% year on year decline in visitation, many in Macau will be hoping for a loosening of visa restrictions under the new chief.

WYNN –LVS IPO “RACE” IS ON destination-macau.com

Destination Macau lays out the race to file IPOs between perpetual rivals Steve Wynn and Sheldon Adelson.  DM believes that a Wynn listing is a high probability in the fourth quarter of this year and would be well received by the market. They question why Sheldon leaked his intention to file the IPO application "early next month" just hours before getting on his plane to Beijing, where he has spent the past week. The article speculates that Sheldon went to China to look at his "other options" for the financial rescue of his debt-laden, cashflow-rich, Macau casinos, such as a direct purchase of equity in Venetian Macau Limited that negates the need for an IPO. 

Amongst Adelson’s appeal to Beijing is a long list which includes a very influential partner in Lot 3, David Chu of the Far Eastern Group, who has an interest in seeing the Cotai Strip become a reality. The Macau and Chinese governments would also like to see construction on Lot 5 & 6 resumed and the tens of thousands of jobs created as a result. Finally, having a Chinese equity partner would make Adelson's ambitions both more manageable and more realistic in Macau.  More news on the topic is sure to be discussed on LVS’s earnings call next Thursday.  The article also speculates that results will be “strong.”

LADY LUCK FAVORS HO SIBLINGS destination-macau.com

Apparently City of Dreams has had a reversal of luck in the first 22 days of July.  The hold rate is speculated to be close to 5% on rolling-chip turnover, mass volumes are said to be up about 25 per cent, as well. The better performance at CoD is not seemingly at the expense of Altira, which is said to be doing better in July.  If the streak continues, Melco is on track to take an 18.4% share, putting them in third place, behind SJM (23%) and LVS (19.6%), and well ahead of Wynn (13.4%).

The most astonishing result from the preliminary numbers, however, comes not from the Lawrence’s results but from his sister, the Pansy Ho. This source claims that MGM Grand, has made more money than Wynn so far and taken a 14.8% market share as a result of the power of direct high-rollers.

Apparently the news is not so bright for Galaxy.  Despite having a record month for turnover, the group's win-hold percentage was a negative 2%. So some very happy people have gone home this month with lots of the Lui family's money in their pockets, leaving Galaxy with just 10.8% of market share in revenues.

AIRPORT DOWN, VIVA UP destination-macau.com

As was previously published, the Macau International Airport saw throughput of passengers (down 24%) and cargo (down 64%) plunge in the first half of this year, hit by the double whammy of the global economy and the initiation of direct flights between Taiwan and the mainland.

In addition, Viva Macau, the city's second carrier, has expanded its Ho Chi Minh City service to daily, which should bring a little more volume through Macau’s airport.  The airline is growing in capacity, too. It will soon take delivery of a Boeing 767-300ER, which will allow Viva to increase capacity and frequency on its existing routes to Tokyo, Ho Chi Minh City, Jakarta and Sydney. It would also allow the airline to reach new destinations should they be opened such as Moscow or Bombay...

PHENGU THINKS BIG destination-macau.com

Officials in Penghu say they are confident of getting a referendum passed among all 90,000 of their residents to allow a casino to be built there.


According to Reuters, the Penghu County government has proposed its casino resort on 130 coastal hectares with hotels, duty-free shops, a convention centre and a golf course, costing a total of around $1BN.

TAIWAN EASES CURBS ON TOURISM BY INDIVIDUALS scmp.com

Taiwan will allow persons who have worked in Hong Kong or Macau for a year or more to visit the island, it has been revealed. The measure is aimed at boosting the island’s tourism industry and is expected to generate an extra HK$2.7 billion in tourism revenue. Under existing regulations, mainlanders who had worked in Hong Kong or Macau for four years could apply to visit Taiwan as individual tourists.

STAKE SALE CASTS NEW LIGHT ON MACAU INC scmp.com

This article details the small and politically influential group of business families that have loomed large over most aspects of Macau’s domestic economy for decades.  Included in the article is detail on Macau Chief Executive Edmund Ho Hau-wah, and how his family has played a prominent role in business in Macau, owning country clubs, hotels, and stakes in airlines, amongst other ventures.  The line between business and politics in Macau is often blurred.  Read the article here.


You Are My Hero

"Show me a hero and I will write you a tragedy."
-F. Scott Fitzgerald
 
If you spend enough time in the group-think tanks of Washington economics, you start to believe in your own storytelling. On Jim Lehrer's PBS town hall with Ben Bernanke this weekend, the Federal Reserve Chairman stated plainly that he was "not going to be the Federal Reserve chairman who presided over the second Great Depression."
 
Ben Bernanke, thank you so much for saving me. You are my hero.
 
This is the very same man who is allegedly an academic messiah of Depression histories. This is the very same man that no less than 3 months ago was signing off on a compromised and conflicted fear-mongering campaign that bailing out Wall Street had to be done or the end of the earth cometh. This is the very same man who is using his history books and lagging economic indicators to prognosticate the future of America's economy. This is a tragedy.
 
Obviously, if Bernanke was the hero of this story the US currency wouldn't have traded down for the 3rd consecutive week last week. Alongside Goldman printing $5/share in earnings and Citigroup paying a trader $100M (yes, that's million), 99% of Americans who are allowed to, get the joke. The joke is that Bernanke doesn't get that he is the lemming that's getting the Debtors, Bankers, and Politicians paid.
 
Lemming? That's harsh Keith. Yes, folks, and so will our commoner lives be if I am right and we see what I have been calling for in the 4th quarter - reflation morphing back into inflation. While the high side of my Range Rover macro theme for Q3 was off the mark, my other 2 macro themes (Burning The Buck and Reflation Rotation) continue to play out in lock step.
 
This morning you are seeing the US Dollar Index trade down again to $78.56. This is only the 4th time in almost 40 years that the $78 level has been tested. That matters.
 
Since March, the world's reserve currency has basically crashed. I know, I know - Barron's is calling for "Hello 9,000: The Dow's Run Is Far From Over", but there is a loser in the game of everything priced in US dollars reflating - the Dollar! The US currency has lost -12% of her credibility in less than 4 months. That's a crash.
 
Rather than appearing on 60 Minutes, PBS, and writing Wall Street Journal Editorials, I suggest Mr. Bernanke starts spending some time looking at real-time, marked-to-market, leading economic indicators. Since it's clear that he hasn't done the math, here are some things to look at:
 
After keeping a completely politicized "emergency" level of a Fed Funds rate at ZERO, look at what these prices have done in the last 2 weeks:
 
1.      The CRB Commodities Index +7.5%

2.      Oil +15%

3.      Copper +14%

4.      Gold +5%

5.      SP500 +11%

6.      10-year US Treasury yields 3.71%

 
As Bernanke hinged his cart to the conflicted, saying that he'll change his monetary policy "when the economic outlook requires us to do so", the world simply sold more US Dollars, and continued to buy everything else. If America is willing to let her currency burn, why hold any more of it?
 
Have no fear, our super heroes Hillary Clinton and Timmy Geithner are here. This week, China is sending their B-team to Washington to meet with our equivalents of Dora The World Peace Explorer and her buddy Go Go Goldman Diego to talk about China's largest invested position. How do you think these meetings are going to go? Go Go doesn't do global macro...
 
Again, maybe... just maybe, Main Street isn't as stupid as Washington makes them out to be. Maybe they see the Reflation Rotation coming for Christmas 2009. Maybe that's why President Obama's approval rating just hit a new low.
 
Maybe people get that the "Great Depression" narrative fallacy was a purely political one. Maybe China gets that this situation is going to end wherever they decide it will. Maybe today's CNBC heroes are writing the history of the American currency tragedy right before our very eyes.
 
Keep those eyes wide open. The level of group-think we are seeing in the US market is generational in scope. My refreshed levels for the immediate term TRADE in the SP500 are 948 support and 990 resistance. If the Buck continues to Burn, we'll get our 990, and the said Great Depressionista bankers will get their raise.
 
Best of luck out there today,
KM
 

LONG ETFS

QQQQ - PowerShares NASDAQ 100
-With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don't need as much financial leverage.

EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.

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.

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.


SHORT ETFS
 
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
- As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

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.


UA: I’m issuing a challenge….

UA: I'M ISSUING A CHALLENGE...

27 JULY 2009

 

TODAY’S CALL OUT

If I hear one more person tell me that Under Armour is too expensive, I’m going to scream. I’m not even going to rehash the consensus short case headed into the quarter as well as my rebuttal (see the half dozen notes I’ve written on this over the past few weeks), but would encourage those ‘valuation shorts’ to drill down what the really appropriate metric is for UA.  29x earnings and 11x EBITDA. Yes, scary at face value. But who are you going to compare this to? Abercrombie??? Coach???? Dick’s???  I’ll take that comparison, as well as just about any other in the entire Consumer space. But we need to consider the total addressable market size.  These are companies that are so much further down the market share penetration curve than UA that it’s almost ridiculous to make the comparison.  We’ve got to factor growth into the equation here.  We sliced and diced the addressable market for 18 different consumer names, and no one comes close to how cheap UA is on an Enterprise Value to Total Addressable Market ratio.  In fact, with UA at 1.4% we’re looking at a median closer to 5% for the names people traditionally view as peers.

Also, unlike many of these other companies – UA actually has a plan on how to tap this market.

Yes, this will spur plenty of hate mail from people that don’t like the story here (and there are plenty of them), but my challenge is this… Find me a real company in the Consumer space that is cheaper than UA relative to the addressable market that the company is proactively planning to capture.

UA: I’m issuing a challenge…. - table for post

 

LEVINE’S LOW DOWN

Some Notable Call Outs

  • Beginning on Friday and lasting through Sunday, off-pricer Ruelala.com hosted its first Lululemon sale. While on the surface it may seem alarming that LULU is clearing goods through an online retailer other than its own site, it is important to keep this in perspective. The limited time event offered a total of 61 items, ranging from gym bags to pants. The items were mostly priced at 50% off original retail prices and it appeared that at least half of the items were sold out within an hour of the beginning of the sale. Given the growing list of prominent and premium brands taking advantage of this new channel for disposition of goods, we wouldn’t be surprised to see more events in the future. Furthermore, the ability to have a direct relationship with the customer via ecommerce offers great insight not previously available in a physical outlet or warehouse sale setting.
  • Back to school season is just beginning and the marketplace for computers already appears extremely competitive. Over the weekend on its blog, Wal-Mart advertised the first sub $300 laptop for the key back to school season. The model made by Compaq is full-sized (not a netbook) with a 160GB hard drive and 3GB of RAM. A quick check on Sunday night indicated the item is already sold out online after just one day. With the season still early and less competition in the electronics space, we’ll watch pricing very carefully for signs of what may also be a very promotional holiday season. With netbooks offering less features but at a more compelling price, we wonder if this is the first sign of price compression in the traditional notebook category beyond normalized deflation.

 

MORNING NEWS 

- Report on global high-end luxury market - The worst has become to an end in the global high-end luxury market, according to the Italian luxury association Altagamma.  "There're signs, in June and July, that show a significant improvement," said Santo Versace, president of Altagamma. Greater China, the Middle East and Latin America are showing signs of slight growth while the US were still seen a downward trend in July, Versace said.  Altagamma also expects the world's $249 billion fashion industry's earnings before interest, taxes, depreciation and amortisation to drop by 21% in 2009. <fashionnetasia.com>

- US clothing retailers are hoping to raise their bottom line by expanding their offering of accessories - Gap Inc launched the first accessories-only Edition under Banana Republic in May while Henri Bendel is expanding its offerings this summer with six new 2,000 sq ft accessories stores. Casualwear retailer J.Crew opened its first accessories boutique in New York last month and will release its third accessories catalogue. Accessories accounted for around $165 million last year, or 12% of its sales, almost double the amount in 2004. Jewellery and bags can yield as much as double the 40% profit margins of apparel, according to the international press, because they take up less space and have more of a timeless appeal. Women's accessories sales by unit for the three months ended April 30 were up 2% from a year earlier, according to market research company NPD Group. <fashionnetasia.com>

- US ban on imports from Burma has been renewed for three years - The American Apparel & Footwear Association (AAFA) has urged both chambers of the US Congress to promptly renew the Burmese Freedom and Democracy Act of 2003. The US ban on imports from Burma has been renewed for three years last week and the legislation is awaiting the White House's signature. "The US apparel and footwear industry strongly stands behind the commitment the US made in support of human rights," said AAFA president and CEO Kevin Burke. "These sanctions are justified by the countless atrocities committed against the Burmese people everyday." He continued: "Eliminating oppression from the world market must be a multilateral effort... The global community must join together and implement global sanctions to demonstrate that oppression will not be tolerated in the global marketplace."  <fashionnetasia.com>

- The Great Retail Rationalization of the Great Recession - And even though the economy already has forced retailers to take a scalpel — or a meat cleaver — to their store portfolios, there’s still plenty of excess to cut. There is currently 46.6 square feet of retail space for every man, woman and child in the country, an increase of 14.2% since 1990, according to CoStar Group. A few retailers are continuing to grow. Buckle Inc. plans to open 21 stores this year and Kohl’s Corp. is cutting the ribbon on 56 new outposts this fall. But that expansion largely comes at the expense of fallen nameplates or with the help of landlords who want to keep their malls filled. The days of unfettered expansion are over. Per capita retail space is down slightly from a year ago, the first decline since 2000. And the pullback is expected to continue. As of April, retailers were on track to close 4,600 doors this year, according to a report from the International Council of Shopping Centers. That’s on top of 6,913 closures last year.  <wwd.com/business-news>

- Several designer jewelry firms win lawsuit - Several designer jewelry firms won an apology and “substantial” cash settlement last week from an online jeweler who used the phrase “inspired by” alongside the jewelry brands’ names in its marketing. Under the terms of an agreement revealed July 24, Overstockjeweler.com and its president, Elena Castaneda, promised not to use the trademarked designs of David Yurman, Cartier, Van Cleef & Arpels, Bulgari and Gucci in the future and apologized for the harm its unauthorized wares had already caused the companies. The plaintiffs said the settlement also included a “substantial cash component,” which wasn’t disclosed. The U.S. District Court in Manhattan issued a permanent consent injunction against Overstockjeweler.com on July 9, barring the Web site from further infringements. The jewelers filed two separate lawsuits against the Web site in 2007, which the court eventually consolidated into one case. They accused the site of copying various trademarked designs and selling them as “inspired by” or “replicas of,” among other allegations. On Friday, the site’s homepage included jewelry identified as “Tiffany inspired.”  <wwd.com/business-news>

- Insight into the sneaker retail business - For owner Farshad Arshid, opening his Standard sneakerhead boutique in Atlanta was a return to retail. Today, the stores stock footwear, apparel and accessories, with 40 percent to 45 percent of the business done in shoes. This time, being back in retail is a labor of love, Arshid said. “We’re fans of this stuff. We wear it ourselves.” THE RIGHT MIX: Standard stocks sneaker favorites such as Nike, Vans, Puma, Alife and DC. PROMOTIONAL STRATEGIES: The store’s Website gets 2,000 to 3,000 unique hits a day, and both the store and its staff are on Twitter — Arshid also likes to reach out the old-fashioned way. There are 3,000 clients on Standard’s direct-mail list, and cross-promotions with other local stores draw new ones. In addition, Arshid leverages his connections in music to bring new artists and DJs into the stores. And even in price-conscious times, Arshid said he is trying to limit how often he goes on sale. FACING CHALLENGES:  If sales are down in the 10-to-15 percent range, he said, they will count themselves lucky. Their dollars-per-ticket has dropped tremendously. They work twice as hard to make the same sale. <wwd.com/footwear-news>

- Prints by artist Alexander Girard will hit retail for the first time - The artwork moves from museum walls to a home collection this month at Urban Outfitters, in partnership with máXimo: art & research. Alexander Girard for Urban Outfitters, manufactured by The Millwork Group, features printed bed linens, pillows, drapery, shower curtains and wall art. The line includes prints from original Girard works such as Alphabet, Multiform, Eden, Loveheart and Moon with Flag. máXimo: art & research is the agent to the Estate of Alexander Girard. Besides Girard, the Los Angeles-based Millwork Group's other licenses include Robert Crowder Collection and Christopher Bettig/The Mountain Label. The home textile company also plans to announce a new license with a world-renowned pop artist. <licensemag.com>

- A pop-up art gallery featuring the fall's Gap Red Artist Edition T-shirt Collection - The exclusive T-shirt designs for men and women are produced by various established and up-and-coming artists, including James Jean, Deanne Cheuk, Stine Persson and others. The exclusive designs are available for $28 at the gallery, as well as at Gap stores nationwide, gap.com and the Whitney Museum of American Art in New York City. The line is in partnership with Red, where 50 percent of profits sold go toward the Global Fund to help eliminate AIDS in Africa. The pop-up art gallery, which will close on Aug. 30, will also feature original works of art from featured T-shirt artists, including paintings, sculptures and sketches. <licensemag.com>

- It took a harsh economic downturn to teach apparel exporter R. Sivaram what works and what doesn’t in Indian retail - When his Royal Classic Mills Pvt. Ltd, a company based in the Tamil Nadu textile town of Tirupur, rolled out its first store in 2005, the domestic retail sector was growing and many exporters were eyeing a share of the market. Four years later he is rethinking its domestic business model. In June 2008, Royal Classic shut its flagship store on Brigade Road, a Bangalore high street, where it was paying a monthly rental of Rs1 lakh. Since then, Royal Classic has shut nearly 10 stores in other cities, relocating from shopping malls and premium locations to cheaper areas. Exporters who have already got into retail don’t have a choice, but no one would get into the business now. <livemint.com>

 

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): UA

07/24/2009 09:47 AM

SELLING UA $23.96

After an awful downgrade by Sterne Agee, the stock is up +17% in less than 2-weeks. I'll sell here and buy it back on a down move. McGough continues to be the bull. KM

 

INSIDER TRADING ACTIVITY:

WEYS: John Florsheim, President & COO, sold 24,054shs ($577k) after exercising the right to buy 24,054shs less than 10% of common holdings.

 

MACRO SECTOR VIEW AND TRADING CALL OUTS:

UA: I’m issuing a challenge…. - SV 7 27 09

 

 


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