30 JULY 2009



It’s that time of year again where everyone boards that flight to Vegas to hear all the ‘powers that be’ in the footwear business pump their chests at the World Shoe Association (WSA) Show (which starts tonight). At trade shows and conferences earlier this year, it was as if every company read off the same script…”We’re keeping inventories tight, cutting SG&A, taking down growth capex, and managing for margin, blah blah blah…” I think we’re going to see a meaningful change this time around. There will be two main themes. 1) Distribution – especially given the recent AMZN/Zappos deal, and 2) Sourcing costs, and who keeps the savings. We’ve hit on the sourcing issue ad nauseum over the past six months. Unfortunately I still think that the industry at large still does not understand who will actually keep the sourcing savings. More on that later. For now let me touch on Distribution, as we’ve met with several management teams this week to discuss the issue.

1) First off, did anyone notice that on the same day as the Zappos deal, Charming Shoppes announced that it would be closing While Zappos is marginally profitable, public companies (i.e. BWS and CHRS) have had a difficult time making money with online shoe businesses largely due to the challenging variable cost structure – namely affiliate marketing and distribution costs (free shipping and returns).  This is best evidenced by Brown Shoe (BWS), which owns This should be the Mother Lode trademark for online footwear retailing. Unfortunately, the company has yet to print a red cent of profit in that division.  In what I’d consider a poor attempt to turn a frown upside down, BWS noted that a potential positive is if AMZN decides that it does not like Zappos’ strategy of paying for product returns, then it would be a massive donor of market share. The funny thing here is that if BWS picked up this share, it would be an incremental negative to cash flow given the margin structure of the division. 

2) Yesterday we visited Payless at the company’s HQ. Among many other topics, we discussed distribution. Matt Rubell was clearly more grounded in his view of this deal. Aside from commenting on the stratospheric nature of the $847mm price tag, Matt noted several important points. 1) PSS will likely need to make more custom product in its wholesale brands with Zappos as a larger customer. 2) This deal highlights the need for Payless to go more consumer-direct, which it had already planned to do this fall with 4x growth in direct marketing spend now that it has 4 years worth of data from which to harvest. This equates to a focus not only on getting more customers in the stores, but more importantly getting the right customers in the store. 3) The company has also invested in 1 platform and infrastructure system for it’s .com initiative. This is in its infancy, but it sounds to me like the ante just went up. 4) In its direct marketing effort, PSS will go out with an $8.99 entry level price point for back-to-school, which will be its lowest advertised price point ever. The shoes in question were reverse engineered to go out at the same margin (or higher) as a higher price point shoe.

3) New FL CEO Ken Hicks starts his job on Aug 17. Do you think that just MAYBE we should begin to discount the possibility of him making comments at WSA about his view on .com and on the strategic implications of Amazon/Zappos? Whether he’s right or wrong, the fact is that he is big.

4) It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Lastly, and most importantly, here are some thoughts from our Tech Sector Head, Rebecca Runkle, on Amazon.

1) Bullish on Internet, broadly speaking – think mobility is not yet understood both in breadth and depth of opportunity.

     a) Amazon’s mobile opportunity is massive… ubiquitous Internet is great for someone that owns online ecommerce.

     b) In other words, as the utility function of online retailing increases, brick and mortar retailing decreases…Amazon wins.

 2) Amazon has multiple ways to win – first party retail, third party retail and cloud computing are the three major legs.

     a) First Party Retail – as with the Zappos acquisition, Amazon will build out its direct-fulfillment infrastructure into new  categories and increasingly own major categories on the Web.  It will make/buy categories that it can leverage against its scale to drive value.

     b) Third Party Retail – Amazon will be a maker of Kings by enabling smaller parties with unique/differentiated merchandise to leverage the Amazon brand/platform.

     c) Back-end cloud compute ecosystem – Amazon web services.  This is the least understood and one of the most long-tail opportunities for the company.  They have a massive back end that they are proactively leveraging and in so doing enable entrepreneurs to create businesses at low cost.  This capability should continue to scale and grow and positions Amazon as a strategic service provider long term.



Some Notable Call Outs

- Carter’s solid 2Q results stand out as one of the few companies truly exceeding expectations for the right reasons. Interestingly, the strength in sales and margins is allowing management to take a slightly longer-term view of the business in an effort to sustain profitable growth. On the company’s conference call, management stated that it will strategically invest the upside from its strong 1H performance in key areas including: improving the product offering, enhancing in-store brand presentation, and marketing. The company also announced it is taking its capex budget up slightly for the year. We know that companies can still make EPS by cutting to the bone, but there are limited examples of companies like CRI that are actually setting up for sustained profit growth in 2010.

- Hidden amongst the disappointing results for TBL, was a some positive commentary on the brand’s licensing partnership with PVH. While the environment for men’s apparel is tough in general, PVH/Timberland is expanding its door count for the fall with its key distribution partner, Macy’s. CEO Swartz also went on to explain that being in a partnership with PVH is producing a product and business far better than TBL could have achieved on its own.

- In another sign that the environment still has low visibility, Hanes Brands highlighted that its retail partners are waiting to see how back to school sales progress before committing to promotional programs for the holiday season. Historically, those programs would be locked up by now and commitments would be firmly in place. We continue to see the “wait and see” approach as well as compressed lead times permeate both the footwear and apparel sectors.

- JNY is seeing very favorable results from its massive store closing efforts. As a result the company increased the number of stores it expects to close by the end of 2010 from 225 to 240. Additionally, the savings related to these efforts are coming in slightly ahead of expectations. With the bulk of the closures coming in the mall, the resulting store portfolio will be about 70% outlet locations when the process Is complete.

- Twitter is becoming a household name in the media and certainly in the tech world. However, it is now making its way into quarterly conference call recaps. JNY’s CEO mentioned that Twitter, Facebook, and other social media sites will be used to promote the company’s launch of Rachel Roy for Macy’s. Expect to hear more of this type of effort from other brands aiming to target a youthful demographic in more cost effective and direct ways. The interesting byproduct of this type of marketing lies in the real-time feedback a company or brand receives when they reach out and “talk” to their consumers directly on their Facebook pages or via their Twitter accounts.



- Beige Book indicates slight improvement but incredibly price conscious consumers - Retailers continued to adapt to a “price conscious” consumer across the country, as sales moderated slightly in June and early July, according to the Federal Reserve Board’s Beige Book released Wednesday.  Anecdotal accounts in the report, which provides a snapshot of economic activity in 12 regions in the U.S., seemed to indicate some stabilization in the overall economy. Retailers in the Boston, Kansas City and San Francisco districts reported modest sales increases, while merchants in Philadelphia, Atlanta, St. Louis, New York and Dallas had flat or mixed sales results. Sales continued to decline in Cleveland, Richmond and Minneapolis. “Consumers focused on purchasing less-expensive necessities, while sales of big ticket items languished,” the Fed reported. Despite some positive sales results, retailers in most regions were preparing for a poor back-to-school season and planned to trim back inventory levels. Merchants in New York, which had been lagging behind the rest of the region in retail sales, reported an overall uptick in sales in the period, although levels were 8 to 10 percent below the comparable period last year. One major retail chain in New York said moderate-priced lines were selling better than premium or lower-priced ones. <>

- Adidas toughens leather sourcing rules - Sportswear giant Adidas has followed its rival Nike to toughen its leather sourcing rules in response to Greenpeace's claims. The German company said it had asked its Brazilian suppliers to put in place a system to prove that all leather is sourced from cattle outside the Amazon Biome by July 1 2010. Suppliers will also be asked only to source cattle from legal farms in the area; only to source hides from cattle raised outside the Amazon Biome; and not to source hides from cattle farmed on land disputed by indigenous groups. The company said it also expected suppliers to source cattle from farms signed up to Brazil's National Pact on the Eradication of Slave Labour, supported by the International Labour Organisation. Any suppliers listed by Brazil's Ministry of Labour and Employment as being involved with employing slave labour on farms would be suspended immediately. The company will work with the Leather Working Group to develop a traceability protocol to implement these objectives. <>

- Pakistan's hosiery exports hit by domestic issues - Pakistan's once booming hosiery exports have been slowed down by local issues of the electric power shortage and unrest social situation. Industry experts pointed out that it was these local problems that led to untimely delivery of orders rather than the global financial crisis. Overseas buying houses of the major hosiery markets were only willing to place orders provided that goods could be dispatched on time, which could not be guaranteed under the current circumstances. In this light, hosiery manufacturers in Pakistan have now been trying to divert products to neighbouring countries such as India, Bangladesh and China. <>

- Recap of the Denim Industry and its major players - The $13 billion denim industry — a life preserver for the sinking apparel industry the past year — may be fraying at the high end of its product line. While old standbys including Levi's, Lee and Wrangler are still seeing sales increases that likely will continue in the coming year, sales increases for pricey premium jeans will likely occur only in the under-$200 category, according to market research firm NPD Group. But really pricey denim pants may be falling out of fashion. The superpremium jean business has dropped off tremendously because the inspirational shoppers aren't going up that high, and luxury customers aren't buying two or three pairs anymore." Gap plans to take advantage of the downscaling of denim next month when it introduces a $60 line of what it says are great-fitting jeans designed in part by hires from premium jean companies. Gap, which says denim is its "birthright," is celebrating its 40th anniversary by launching a collection that builds on its expertise, as well as that of designers it has hired away from companies including Joe's and Earl. "Our goal is to build jeans every bit as good as any premium player," says Gap spokeswoman Louise Callagy. Gap, which lost many middle-age female customers when its pants went too low-cut several years ago, will offer seven different "fits" for men and seven for women. True Religion says it isn't going to shift its strategy. Lucky, which sells jeans from $99 to $139, is well-positioned for the downturn, says Bill McComb, CEO of Liz Claiborne, which owns Lucky, because it isn't selling at the upper reaches of denim. The company also got a jump-start on competitors by opening specialty shops, where it can control its promotions and displays. But, as with 7 for All Mankind and True Religion's stand-alone stores, Lucky often finds it has to compete with department stores, which are discounting their jeans faster than they'd like. Privately held premium-denim company Citizens of Humanity doesn't release sales numbers but, "Our business is not what it was last year," says Chief Operating Officer Gary Freedman. Still, he says, it's better than expected, and the company hopes to steal more sales with its recent introduction of "super stretch denim." Like its competitors, Citizens is expanding beyond denim. It will offer knit tops for the holiday season, allowing "our customer base to buy Citizens of Humanity products at a lower price." Levi Strauss and VF's Lee and Wrangler brands, while affected by the economy, are weathering it better than some at the highest ends. <>

- PLCE Ex-CEO drops proxy fight - The former chief executive of Children's Place Retail Stores Inc. abandoned his proxy fight two days before a stockholder vote, agreeing to sell half of his stake to the company. Ezra Dabah ended a fight to place three dissident directors on the board of the children's apparel and accessories retailer. The company agreed to buy 2.45 million shares of his shares for $70.8 million. Mr. Dabah said he would resign from the board upon the sale of the shares. Stanley Silverstein, Mr. Dabah's father-in-law and the company's second-largest individual shareholder after Mr. Dabah, also agreed to resign from the board. A spokesman for Mr. Dabah declined to comment. Four proxy advisory firms had issued recommendations siding with the Secaucus, N.J., company in the proxy battle. RiskMetrics Group said shareholders had benefited from current management. Mr. Dabah left his post as chief executive of Children's Place in September 2007 at the request of the board. He tried to buy the company in 2008 and launched his proxy fight after financing for a deal fell through. Those three board seats, in addition to his own seat and that of his father-in-law, would have given Mr. Dabah control over the company. <>

- Boscov’s Inc. appeared to clear the final hurdle in its battle to emerge from Chapter 11 - Boscov's may be in family hands after freeholders in Atlantic County, N.J., voted 7 to 2 in favor of guaranteeing $1 million under the federal government’s Section 108 loan program. Boscov’s needed Atlantic County to cap the $300 million package of government loans and private equity required to seal emergence from Chapter 11 bankruptcy. That was backed since December by a combined $200 million credit line from Bank of America, Wells Fargo, GE Finance and CIT. It also includes $53 million from the Boscov and Lakin families and $35 million from the state of Pennsylvania, where Boscov employs 5,000 out of a total of about 9,000. <>

- Apparel vendors felt the sting of a slower economy very directly in 2008 — Lower profits dragged down the compensation of top industry executives by a total of 25.6% last year, and a few even elected to forgo some bonus money as they made tough decisions that often translated into smaller head counts. The double-digit percentage decline was greater than the 9.4% decline in the top 10 retail paychecks. It was the largest decrease in the past five years as the recession extracted a toll on stock and option awards. Here are the top 10:  1) Ralph Lauren Chairman and CEO of RL $20.3, 2) Roger N. Farah President and COO of RL $14.1, 3) Richard A. Noll Chairman and CEO of Hanesbrands $9.28, 4) Neil Cole Chairman, President and CEO of Iconix $9, 5) Jeffrey Lubell CEO True Religion $7.7, 6) Mark G. Parker President and CEO of Nike $7.3, 7) Joseph R. Gromek President and CEO of Warnaco $6.4, 8) Eric C. Wiseman CEO VFC $6.2, 9) Charles Denson President of Nike Brand $6.9, 10) William McComb CEO LIZ $5.5. <>

- LIZ's Mexx Worldwide hired three new top executives - In an effort to build its Mexx Worldwide business, Liz Claiborne Inc. has hired three top executives, all starting on Nov. 1. Two of the executives come from Esprit, where Mexx’s incoming chief executive officer, Thomas Grote, was most recently president of the Esprit brand and a 15-year veteran of the firm. Volker Schmidt will join as global head of wholesale development and vice president of region 2. Schmidt will be responsible for the Amsterdam-based company’s global wholesale business development in Germany, Austria, Switzerland and the Nordic countries. Schmidt most recently was senior vice president and head of partnership sales at Esprit. Prior to joining Esprit 16 years ago, Schmidt held a variety of sales positions at firms such as In-Wear and Mustang Jeans Group. Jim Nowak will join Mexx as global head of product overseeing all Mexx product divisions including accountability for the line’s pricing structure, assortment planning and product design. Most recently, Nowak was senior vice president, head of Esprit Casual, where he set global strategy for all of the brand’s casual lines. A 20-year veteran of the apparel industry, he spent the last nine years working with product in various divisions within Esprit, including EDC, women’s and men’s casual and kids. Knut Burgdorf will join Mexx as vice president of marketing. He will be responsible for all brand marketing activity, from creative to production. Previously, Burgdorf worked with TBWA, a marketing and advertising firm with such clients as Apple, McDonald’s and Adidas. <>

- Wicked Fashions launches skate clothes line at JCP - Wicked Fashions is launching its first celebrity clothing line at JCPenney this Friday, in partnership with teenage pro-skateboarder and reality TV star Ryan Sheckler. The new line, RS by Sheckler, will include t-shirts, jeans, hooded sweatshirts and other apparel for boys and young men ages 12-24. It will also be available at other retail stores nationwide. The campaign, which was developed by Wicked Fashions’ marketing department and Sheckler’s management team, targets mostly young people “who want to be like Ryan,” said Janice Welles, director of marketing and advertising for Wicked Fashions.  <>

- The Home Depot targets cost-conscious consumers with a savings center - The down economy is leading more homeowners to do more do-it-yourself home upgrades. Since launching a savings center in March, The Home Depot says discounts and low prices have led to nearly $410 million in savings for shoppers so far.  <>

- Apparel merchants led in response time in June - For the second consecutive month, apparel and accessories merchants delivered the best response time to shoppers with a high broadband connection, says Gomez Inc. Shoppers with a high broadband connection in June could visit an apparel retail web site in an average time of 6.02 seconds, Gomez says, compared with mass merchants (6.73), computers and electronics retailers (6.74 seconds), and specialty merchants (8.02). When a site is accessed by a low broadband connection, mass merchants provided the fastest average access at 22.03 seconds, Gomez says. The next fastest web retailing category for low broadband response time was apparel and accessories merchants at 22.47 seconds, followed by computers and electronics retailers at 23.18 seconds. <>

- Twenty Sears stores are expected to open in-store toy shops next month - According to published reports, the toy shop locations include six in Los Angeles, four in San Francisco, three in the New York metropolitan area and seven in the Chicago area. Sears is not a rookie to the toy market, having published the iconic Christmas Wish Book and, in 2001, launched a holiday store-within-a-store concept with KB Toys. <>


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

07/29/2009 03:32 PM


Runkle has had me waiting in the weeds to buy AMZN. Its down again today and this is a solid level to get involved. No, her thesis isn't based on the Fast Money Kindle! KM




  • Steven Schneider, President & COO, sold 12,500shs ($109k) after exercising 12,500 options less than 10% of common holdings.
  • Glenn Lyon, CEO, sold 40,000shs ($436k) after exercising 40,000 options less than 30% of common holdings.

VFC: Candace Cummings, VP Admin & General Counsel, sold 20,000shs ($1.3mm) after exercising the right to buy 20,000shs approximately 50% of total common holdings.

NKE: Eric Sprunk, Vice President, sold 4,058shs ($221k) roughly 10% of common holdings pursuant to 10b5-1 plan.







The Galaxy call was fairly optimistic (when is it not?). Most of the issues we see are on the Mass Market side – supply growth and discounting – which shouldn’t affect the VIP centric Starworld much.


Galaxy 2Q09 Earnings call:

  • Improving but more competitive Macau market
  • Continuing with the development of Galaxy Cotai but at a slower pace
  • Added 16 VIP tables in June and 6 more in July at Starworld
  • 50% of their Mass table area was closed during the quarter due to renovations
  • Cotai shell is due to completed end of 2009 and will align the opening with a recovery in the market
  • Maintained 12% market share in Q2 in the face of supply growth
  • Annualized ROI of 26%
  • Net cash positive at end of June, retired $250MM of debt at .50 on the dollar
  • Confident that they can deliver the $200MM of operational efficiencies that they have already announced



  • Did have 50% of the Mass gaming floor out of operations for at least 50% of the quarter
  • Very diligently managing their costs
  • Are they able to take on additional debt under their current credit agreements?
    • At the corporate level there are no restrictions think they need to get lender approval
    • Doesn’t sound like they have an issue here
  • Seeing positive trends in Cotai with the opening of City of Dreams – gaining critical mass needed to succeed
  • Commission Caps?
    • “Momentous occasion” the commission cap has been on the table for over a year.  They are cautiously optimistic that there will be a cap implemented by year end
    • Don’t think it will have a large impact on VIP volumes
    • We remain skeptical that the y will be enforced and are concerned with the number of loop holes – more on that later
  • How do they feel about 2010?
    • Fairly positive
  • Any other trends they can highlight?
    • VIP volumes were up around 10% in the 2Q
    • July was pretty solid as well
    • Added 6 new tables in July and relaunched the Mass gaming area this past Sunday
  • Cotai Project – remaining capex?
    • Spent HK$4BN already, have another HK$1-1.5BN left for 2009 and then another HK$4BN
    • Leverage post project will be 35-40%, and should decline once the property gets up and running
  • Mass Market strategy
    • Cash rebate programs are very competitive with the market – we are concerned with the potential for shrinking Mass Market margins
    • Volumes in July are pretty healthy
    • June was the best month for VIP volume
  • Starworld ROI – 26%, hope high teens ROI at the Cotai project and eventually break 20%
  • Tax gain was from the bond buyback – HK$800MM ($100MM US)
  • Areas for operational improvement, future for the company/ strategic direction
    • Pleased with the new marketing programs
    • Working on efficiencies
    • Focused on opening an “Asian Centric” Cotai resort
  • Will be prudent and opportunistic with debt buyback now that the paper is trading in the 90s
  • May & June visitation numbers have been very weak, despite decent revenues
    • Hasn’t affected them as much because they are VIP focused
    • Once they  re-opened, the majority of the Mass space their visitation has improved
  • Bank debt: only a few hundred million HK
  • Restatement of Mass and VIP revenues in their reporting
    • Reporting is consistent with the way they pay their commission and the DICJ practice
  • Where is the cash coming from on their balance sheet?
    • Working capital –have had inflows/deposits from new VIP room junkets
  • How will the HK$5.4BN of cash on hand be spent?
    • Mostly on Cotai – another HK$5-5.5BN to spend
    • Construction materials / city clubs/ Starworld cash flow will help fund that
    • Not unreasonable to think that they will do a new debt offering in the future given the recent repurchases - Will be opportunistic – but have no plans for a buyback right now
  • VIP/ Mass split with the capacity additions:
    • VIP – 140
    • Mass- 100
  • Cotai – spend about HK$300-400MM in 1Q09 and a few hundred MM in 2Q09
  • City Club- Declining EBITDA contribution – reorganized the business – they switched from a profit share to a top line agreement – they actually lost money in the 2H08. Think they will contribute around HK$100MM per year
  • Lots of questions on where all the cash balances came from – VIP promoter deposits and R/C draw as well…  Cash balances will obviously decrease going forward as they develop Cotai
  • Bank debt – was HK$200-300MM … now they repaid it.  I don’t understand why they just don’t disclose their debt balances – ie net cash
  • Seeing HK$50MM per quarter of savings
    • Starworld focused on managing labor and marketing.
    • Reducing work week from 48 to 40 hours. 
    • Directing investment of marketing more productively
  •  The commission cap will definitely benefit their margins, commission caps are north of 1.25% now
  • VIP volumes aren’t growing so why is everyone so upbeat?
    • Added 16 tables in June and another 6 in July
    • Over time- visa restrictions, swine flu, economy… just feels better

Bernanke's Bananas

"There is nothing more deceptive than an obvious fact."
-Sherlock Holmes
The global macro fact of the matter remains - when the US Dollar goes up, everything priced in those dollars goes down. That's what happened yesterday. Let's eliminate that from our minds and focus on today.
Today, the US Dollar is trading down again. And guess what? Oh yes dear leading indicator investors, those US Futures like that don't they! The fact of the matter remains - when the US Dollar goes down, everything priced in those dollars goes up.
At one point yesterday, the inverse correlation was a perfect 1:1. The US Dollar Index was up +1% and the SP500 was down -1%. Perfect is as perfect does, so in Forrest Gump fashion I simply re-shorted the US Dollar (UUP) and started getting "long of" things that would augur well to a reversal in that one-day move (US Technology ETF and the Australian Equity ETF). While one day performance always matters, it does not a TREND make.
Never mind intermediate term TREND, across all durations in my macro model, the Buck is Broken. We have 3 Macro Themes that we issue at the beginning of every quarter here at Research Edge, and one of them has been "Burning The Buck". Cramer, please stay in your cage. This banana is mine.
I have beaten this theme to a dead pulp in 2009, and I will continue to until the facts change. The fact of the matter remains - we are witnessing the most politicized directive that US monetary policy has ever seen. Don't fight it folks. Capitalize on it. There are no incremental buyers of significance for the American compromise anymore. The US Dollar will not find a sustainable bid until Ben Bernanke raises rates.
Since the professor of Great Depression storytelling outlined his economic outlook at his Humphrey Hawkins testimony last week, the short end of the US Treasury yield curve has gone straight up. Straight up? Yes, straight up into the right hand corner of the chart - get one of the 50-day Moving Monkeys to give you their read on it. Throw them a banana and they'll say "bullish." Since July 22, the yield on 2-year treasuries have gone from 0.93% to 1.18%. By my math, that's a +27% move in just over a week.
The Economist had a great one-liner in their Future of Economic Theory feature a few weeks back: "real scientists don't leaf through Newton's Principia Mathematica to solve problems!" Mr. Bernanke's rear-view considerations of what he learned in the library stacks about 1929 aren't going to help you risk manage your finances either. Let's seriously get with the program here Mr. Chairman. Mr. Market is embarrassing you.
Real-time markets are leading indicators. GDP, unemployment, and the history of Goldman blowing up levered long Investment Trusts in 1930 are lagging ones. For those who continue to manage other people's moneys using Bernanke's economic outlook as their leading indicator, all I can say is Godspeed.
Back to that Buck that Bernanke is Burning... here are the price levels and durations I am considering when I say that its broken:
1.      TRADE (3 weeks or less) resistance = $79.74

2.      TREND (3 months or more) resistance = $81.68

3.      TAIL (3 years or less) resistance = $82.77

I get to my numbers using these little mathematical monsters we fact oriented sleuths in math call fractals. I know, I know - these aren't the kinds of things like a 200-day moving average that my 2-year old can plug into Yahoo Finance and belt over the box at Merrill. My levels are born out of a global macro multi-factor investment process. A mathematician would call it complexity or chaos theory.
I know, I know - that sounds like being a quant. So what? It's better than sounding like a monkey. But if you throw my quant boys a banana over here, they'll eat them too ... and then they'll smile, reminding you that complexity theory may be the most relevant scientific discovery since relativity. It matters.
The global market place is an interconnected and complex system with dynamically changing inputs/outputs. When "smart" people told me that spending so much time on macro was "style drift" 3 years ago, I actually had to grind my teeth and listen. Today, some of those people have closed their almighty funds.
Today is one more day where we have an opportunity to recognize that we have a wonderful opportunity in modern day finance. We have the opportunity to evolve.
We have an opportunity to quantify our decision making processes rather than qualify them. After all, this is a tidy way of auditing all of Washington and Wall Street's storytelling. While fiction is entertaining, don't forget that the stories theoretically make sense because they are made up.
Today is the first day this week where the immediate term reward in the SP500 outruns the risk. I have immediate term resistance/support at 995 and 965, respectively. If Bernanke's free money bananas are on the table again today, eat'em.
Best of luck out there today,


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.

EWG - iShares Germany - We bought Germany on 7/28 on a pullback in the etf. Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany's powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last three months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe's largest economy.

XLK - SPDR Technology - Tech got smushed for the 2nd day in a row on 7/27. Buying red.

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.

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.

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.


UUP - U.S. Dollar Index - With a +1% move in the USD on 7/29 we shorted the greenback. This is how you earn a return on the socialization of the US Financial system's risk. We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

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.

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Last night’s 5% pullback in the Shanghai Composite was a jolt to the system of bubble watchers like myself who have been following the trajectory of a market that appears to have come too far too fast in recent weeks -driven by a cocktail of optimistic first-time investors, easy credit and raw momentum.  5% does not a correction make however, so the price action in the next two sessions will provide us with a critical signal.

Currently, the quantitative model that Keith uses as part of our portfolio process has identified a SSEC index TRADE resistance level at 3,488 and a TRADE support level at 3,123. On a longer duration, 2776 is setting up as a TREND support line.

BUZZKILL - abchina1

In the here and now, Chinese equities are not being driven by fundamentals and only two forces are poised to force a reckoning:

  1. The IPO Calendar: In the wake  of the 12 billion share State Construction initial offering there are a slew of additional companies lined up to begin trading now that the 9 month new issue moratorium  has ended. Presumably, even with the billions of dollars that Chinese households have in savings accounts, the impact of increased supply will be felt eventually.
  2. Credit: Last night saw a 57 basis point spike in 1 month repo rates to 2.23% on speculation of tightening by the central bank. The trend in short term rates in recent weeks has been pronounced as more stock and commodity speculators enter the short term money markets (see chart below).

BUZZKILL - abchina2

On this second point, Ken Fisher was quoted today saying that Chinese regulators have “zero incentive” to curb lending since the nation’s economy is “going gangbusters compared to the rest of the world, so why would they try to kick that”. Now I know that Ken has been doing this for longer than I have, but to my mind the decision by the central bank to keep the loosening policy in play doesn’t necessarily mean that they won’t try to curb speculative excess.  Beijing doesn’t want to have volatile stock market fluctuations create discord among the new retail investors flocking to the markets so, I think that it is entirely possible that they could take steps to reign in margin lending and proprietary speculation by banks ( a growing factor in the equity markets there –see chart below) without impacting the access to credit for consumer spending on durable goods and industrial expansion.

BUZZKILL - abchina3

Andrew Barber

Apparel: Small, but improving trend for the week

Despite total sports apparel sales being down again, sporting goods and family retailers had positive weeks. Total sports apparel was strong on the West Coast in all channels, but considerably weaker in the Mid-Atlantic region, especially for family retailers.  New England was soft with negative mid to high single digit declines across all channels with the exception of family retailers which increased 1.5% for the.  Columbia and The North Face were the outliers on the upside, with 43% growth in the outdoor apparel category for the week.  Hanes Brands had another slow week.  Under Armour’s decline for the week was driven primarily by weakness in compression, which recorded a  9% decline for the entire category.  Market share gainers on the week were Nike, Adidas, Columbia, and The North Face while Hanes, Russell Athletic, and Under Armour lost share.

Apparel: Small, but improving trend for the week - Sports Apparel Table

Apparel: Small, but improving trend for the week - SPorts apparel dollar chart

Apparel: Small, but improving trend for the week - Sports Apparel ASP chart


PNRA - Standing Apart

Going into Q2, I was having difficulty seeing how PNRA would achieve the high end of its $0.62-$0.64 EPS guidance range.  Well today, PNRA reported $0.69 per share excluding $0.04 of one-time charges.  On the high quality side, PNRA’s company same-store sales came in at -0.7%, which was better than my expectations, particularly considering the 6.5% comparison from 2Q08.  PNRA’s same-store sales improved rather significantly throughout the quarter, posting -1.9% in April, -1.6% in May and +1.6% in June.  The favorable June sales trends continued into July and even improved, running up 2.8% for the first 27 days of Q3.

On the low quality side, however, G&A expenses declined nearly 15% YOY, marking the first time this expense has decreased on a YOY basis in at least 5 years, never mind the magnitude of the decline!  This significant cut to G&A costs accounted for $0.04 per share relative to what I was modeling.  Management stated that it is not cutting G&A, but rather the quarterly decline can be attributed to the general lumpiness of projecting G&A costs as a result of timing differences for overhead expenses.   Specifically, management said that bonus accruals were lower in 2Q because relative to certain performance metrics, the company had underperformed relative to Q1.   Given that restaurant margins declined 110 bps YOY in the quarter (before the one-time charge related to the roll out of new china), the timing of such a significant reduction to G&A expense does not seem coincidental.  Instead, it seems that management needed to cut G&A to save operating margins. 

Even with PNRA maintaining such impressive top-line numbers, it is going to become increasingly more difficult for the company to maintain margins.  Unlike most restaurant companies, PNRA is still growing.  I am forecasting 4% company unit growth in 2009, which means that PNRA is still incurring growth related costs.    And, these costs are only heading higher next year because management stated today that it expects to increase its company-owned unit growth by 50% in 2010.  PNRA is only expecting modest cost inflation in 2010 as higher labor and occupancy costs are expected to be largely offset by lower food costs, but increased development costs will creep into the P&L as the company aggressively ratchets up its unit growth targets.

PNRA - Standing Apart  - PNRA Restaurant level margin 2Q09

PNRA - Standing Apart  - PNRA G A 2Q09

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