Chart of The Week: Volatility Breakdown

One of the main lessons from what is becoming as forceful an up move as we had on the way down is that Wall Street continues manages risk on a revisionist basis. This is not a proactive investment process. It’s reactive, and you should capitalize on its outputs.


Prior to Q2 of 2008, for most 30-year old hedge fund managers a VIX above 30 was unheard of. Although I’m using that age to be cute, the reality is that there are very few institutional managers who managed their portfolios in a 30-80 VIX environment prior to 2008. Today, there are equally as many PM’s who are being told to manage their exposures towards a 30-80 environment AFTER the fact.


The probabilities of seeing a VIX over 30 anytime in the immediate term are very slim. That, of course, makes the 30-80 range a tail risk that we should perpetually consider. But it also means that you’ll get crushed on 97% of the days in this current trading environment by hedging towards that tail risk scenario. Tail risk is exactly that – not in the heart of the bell curve of daily price distributions.


Across all three of our key durations, the VIX remains broken. While it’s nowhere near as nasty as the US Dollar chart, this is one of the most bearish charts in all of global macro right now.


The long term TAIL line = $41.29 and the intermediate term TREND line = $30.57. Until you see these lines penetrated to the upside, you’ll be paid to buy low and sell high.


Trade the range confidently, rather than in fear. The days of calling for crashes and squeezes are behind us… for now…  simply because everyone continues to look for them.



Keith R. McCullough
Chief Executive Officer

Chart of The Week: Volatility Breakdown - kmchart1

Slouching Towards Wall Street… Notes for the Week Ending Friday, July 31, 2009

A Flash In The Pan


An appeaser is one who feeds a crocodile, hoping it will eat him last.

                             - Winston Churchill


Senator Chuck Schumer has warned the SEC that, if the Commission does not act to halt the new “flash orders”, he will introduce legislation to ban the practice.  The New York Times obligingly ran a front-page story (23 July, “Stock Traders Find Speed Pays, In Milliseconds”) and followed up with stories about Senator Schumer’s assault.


Flash trading takes to a new level the algorithm-driven model known as “High Frequency / Low Latency” trading.  Traders with the most powerful computers and the most sophisticated algorithms – “algos” in trader-ese – capture significant advantage by identifying patterns of buying and selling literally as they emerge, and in many cases before trades are even printed.


Free markets are predicated on the notion that those who are smarter, faster and more diligent than the rest also get to make more money, even at the expense of the rest.  No one compels us to trade stocks, and we do so with eyes open to the risks.  Including especially the risk of trading against someone smarter than ourselves.


But the flash order double-dips the advantage already enjoyed by the smart guys.  First, the market venue where you enter your trade attempts to fill your order by sweeping available inside bids or offers – preferencing its own members – then they flash the unfilled portion to their biggest customers.  Only then does it get routed out to the broad market.  We always knew that money talks.  Now we learn that it also front runs your order.


The Times reports that on July 15, trading in the shares of Broadcom surged.  The Times story indicates that buy orders in Broadcom were flashed to the Star Wars crowd for 30 milliseconds.  This 0.03 of a second was enough for the algos to determine out not only the direction of interest, but the upper and lower price limits, and to scale their orders accordingly.  The times reports “the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.”


A profit of $7,800 on transactions valued at $1.4 million may not seem like a lot of money, especially when factored over all the High Frequency / Low Latency guys in the flash realm.  It is a return of 0.0056, or a little over one-half of one percent of the total amount that changed hands.


Multiply that by the billions of shares that trade in the markets every day, factor in the news stories, rumors or just plain market momentum that drives trading swells, and you see this can add up.


As a random example, for trade date 30 June of this year, NYSE Group daily dollar volume was reported as $45.6 billion.  One-half of one percent of numbers of that magnitude – $228 million – adds up quickly.  How quickly?  The Times article cites a report indicating the high frequency traders as a group took in $21 billion in profits in 2008. 


At the time of this writing, the SEC is looking at flash orders and it looks like the kibosh will soon be applied.


Buried in the Times story, almost as a throwaway, is the following:


“High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.”


The exchanges, in an attempt to attract business, pay incentive fees to traders who execute on their facilities.  Everyone in the business acknowledges this practice. It even has crept into trader-ese, where they call it “incenting.”  For those of you who have forgotten, this practice – Payment For Order Flow – is how Bernie Madoff built his business.  It worked for him, and it has certainly worked for the exchanges.  NYSE average daily volume is up some 164% since 2005, even as other exchanges and trading venues have proliferated.  By some estimates the Star Wars guys account for over half of all trading volume on all exchanges.


This is touted as being good for everybody.  Markets need depth.  All other things being equal, the more volume on an exchange, the more robust that market should be.  But by paying for order flow the exchanges induce firms to place orders in trading venues, regardless of the quality of execution.  Exchanges are supposed to offer depth, liquidity, transparency, and protection of customer orders.  Firms should trade based on the robustness of that venue – not on the basis of who pays them for their business.  By “incenting”, exchanges create a false impression of market activity – the activity is real; what is false is the underlying reason for that activity.


When this type of activity occurs in individual securities, it is called Painting the Tape.  Traders buy and sell the same securities repeatedly, artificially pumping the trading volume in order to create public interest in a security.  When individuals do it, it is a criminal activity.  When an exchange does it, it is called promoting liquidity and market depth.  Now, even incentive fees are not enough to hold onto the Star Wars traders, but they need an early peek into the order book to top it off.  The bigger they are, the more clout they have, and the more the exchanges have to offer them to stay.  Some traders even have algos that calculate maximum loss scenarios, then enter losing orders as long as the incentive fee will be more than the loss on the trades themselves.


In a reversal that should take no one by surprise, the NASDAQ Stock market, which introduced Flash Orders on 3 June, now characterizes these types of orders as “order types that do not support price formation” (Reuters, 28 July, “Nasdaq Backs Ban On “Flash” Trading: Schumer”).  For the lay person: we tried to give an excess unfair advantage to our biggest players, because try as we might, we couldn’t incent them enough, but too many people figured it out too quickly.


So it looks as though the flash order will end up as a flash in the pan.  This looks like the regulators once again giving away the store, then making a big fuss about taking back a little, while still leaving the big boys free rein to dominate the marketplace. 


The Star Wars world of high frequency trading is here to stay.  Anyone doubting this need only look at the Wall Street Journal report (WSJ, 31 July, “”NYSE’s Fast-Trade Hub Rises Up In New Jersey”).  The NYSE is creating a 400,000 square foot mega trading starship at a secret (we’re not making this up) location in Mahwah, NJ, to house Star Wars traders.  The physical proximity to the NYSE trading floor, we are told, will make a difference in time of order transmissions, as traders are now executing not in milliseconds – thousandths of a second – but in microseconds – millionths of a second.


Winston Churchill once observed that no government in history has ever gone to the vast logistical trouble and financial expense of a broad military mobilization without subsequently going to war.  Once the armies are massed on the border, too much money has been spent – and too much political capital – to ask that they stand down.


The NYSE is betting on the future of Star Wars, and it looks a safe bet – though whether the NYSE’s Starship Frequency will be the fleet’s flagship is anybody’s guess.  The article says the NYSE hopes to attract certain established players in the high frequency world.  “Worries about high-frequency trading aren’t focused on” Goldman or hedge fund Citadel.  No surprise there.  Indeed, the only thing the NYSE is worried about is whether Goldman and citadel will actually book aboard their starship, or if they will be off on someone else’s DeathStar.  Count on the NYSE to offer free rent – otherwise known as “soft dollars” – as another way to “incent” the big boys, at the risk of undermining the integrity of the marketplace.


As Senator Schumer leads the charge, the flash order may look like a dead issue.  But have no fear: the Empire will strike back.




Got Them By The Shorts


If you’re gonna set somebody up, it’s gotta be a surprise, you got that?

-         Chili Palmer, “Get Shorty”


What a surprise!


It isn’t every day we get to praise securities regulators, so let us not let pass this opportunity to congratulate SEC Chair Mary Schapiro on the announcement of new initiatives on short selling.  The high points of SEC Release 2009-172 (27 July, “SEC Takes Steps To Curtail Abusive Short Sales And Increase Market Transparency”) are: a requirement to deliver stock, and enhanced transparency by making short interest data more widely available. 


In addition, there are significant political offerings.  These include “a public roundtable… to discuss securities lending, pre-borrowing, and possible additional short sale disclosures…”, and assurance that the Commission is “continuing to actively consider proposals on short sale price test and circuit breaker restrictions.”


The SEC’s brief is market integrity, and investor protection.  Anyone who ever earned their living selling anything to anybody will tell you that the incidence of truly informed consumers is statistically insignificant.  Therefore, the best any market regulator can possibly do is require maximum market transparency.  Added to that, it would be helpful if every brokerage account statement came with a warning similar to those displayed on Canadian cigarette packages, which feature large full-color photographs of gangrenous limbs and active cancer tumors.


Chairman Schapiro has not always contented herself with hoping for the best.  She has acted affirmatively in the public interest before.  While at the NASD she oversaw the creation of the Investor Education program – you may remember the silly photos from the NASD website, like the pudgy gent wearing a tiny hat under the caption “Small Cap”.  The pictures were goofy but memorable, and they were right there on the NASD’s home page under a header that shouted INVESTOR EDUCATION.  If you got as far as typing in NASDR.COM you couldn’t miss it.


Of course, even Mary Schapiro could not force you to read the material – but until she came along, no one else had even bothered to publicize it.


We now get to watch Chairman Schapiro as she joins the cast of Get Shorty, where people who are harder working, more focused, and better informed than average investors get punished for being… well… harder working, more focused, and better informed.  This has been true of hedge funds, and its latest targets are the High Frequency / Low Latency traders.  But there has always been a special place in the hearts of the American public – and legislators – for the Shorts.


Chairman Schapiro, herself no stranger to the Politics of Politics – to coin a phrase – has neatly thrown the short sellers into the briar patch by calling for a roundtable and promising “ongoing” and “active” consideration of other proposals.  With any luck, the political process – the septic interface where Hill and Street meet – will slow this debate down to a 16 RPM screaming match that will drag on until nature takes its course: either speculative frenzy will overtake the markets and no one will care about silly things like short sellers and hedge funds, or we will forget about short sales as we queue up to swap our dollars for Yuan, meanwhile hoarding water, bread and bullets.


It would be nonsensical to make a type of transaction illegal.  Cocaine is illegal and is distributed through a sales network.  Would it be a stretch to think the way to halt the widespread use of cocaine was to introduce legislation making it a crime to buy something?  (We may regret suggesting that – please don’t forward this to anyone in Washington!)


No politician will defend short selling against all the nonsense coming down the pike – that would make them look like they were in the pocket of the hedge funds.  But we note the issues Chairman Schapiro chooses to avoid. 


It is well and good to make delivery mandatory.  We expect there to be a few high-visibility and hard-hitting cases brought in short order, where firms will be punished for not making timely delivery.  Thus will the SEC show the press it Means Business.


Our market, large and complex as it is, runs on certain presuppositions.  At any given time, there is not enough stock available for borrowing in the marketplace to support all the short sales that are done on any given day.  Active traders in a volatile market may recycle a short multiple times in one day, shorting, covering and re-shorting stock against the same locate.  Would a “hard borrow” require them to make multiple deliveries, even if their position is flat at the close of business?  (Don’t send that to Washington either…)


We all know that the Easy To Borrow lists make unrealistic quantities of stock available for shorting, and that at any given moment there are phantom shares in the marketplace as a result of aggregate short sales that exceed prime broker Easy To Borrow lists.  But the probability is that not all these shares will be required for delivery at the same time.  To introduce a hard locate, or pre-borrow and deliver requirement would be to clamp down on volume and liquidity in the market so drastically, the US would no longer be the marketplace of choice for equity traders.  Talk about reneging on your handshake.


This aspect of the market appears to be here to stay.  If you had any doubts, footnote 29 of the Release quotes several Exchange Act Releases regarding issuers’ attempts to protect their shares from naked shorting.  Issuers have tried issuing shares that are only available in physical certificate and can not be “held” electronically, or simply withdrawing from the industry-wide DTC clearinghouse, making their securities no longer available for book-entry transfer.  “Withdrawing securities from DTC or requiring custody-only transfers would undermine the goal of a national clearance and settlement system designed to reduce the physical movement of certificates in the trading markets.”  Translation: self-help is not available to issuers.  Liquidity of the markets is more important than the woes of individual issuers; short selling is here to stay.


Even the absolute delivery requirement, which reads great in the press, is not absolutely absolute.  We note that the expression “ex clearing” does not appear in the SEC document.  What does appear is an immediate close-out and deliver position “if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency…”


Outside of the registered clearinghouses, there appears to be no record of how many trades remain uncompared at any given time.  Thus, there seems to be no clear way to challenge those corporate executives who rant in public about collusion between firms to run up and maintain invisible short positions in their stock.  If the SEC were serious about rooting out naked shorting and other abuses, they would require firms to record ex clearing contracts, to mark them to market, and charge them against regulatory capital. 


Thus, the new short selling release accomplishes a measurable increase in transparency – a good thing.  Outside of that, it makes permanent a prohibition against naked short selling – no one will argue there.  For the rest, as one market participant said, this monumental exercise appears to be “a fix in search of a problem.”


Or, to put it another way: this is the way the markets work.  You got a problem with that?




The Congressional Meddle Of Honor


Politics are very much like war.  We may even need to use poison gas at times.

- Winston Churchill


He’s Baaaaack!  Barney Frank, who once said it was worth taking on unknown risks in order to spur growth in the housing market, has now said it is advisable “to err on the side of caution” in imposing regulation and restrictions on the commodities, futures and derivatives markets.


The ban on naked trading of Credit Default Swaps (CDS) now under consideration may have the incidental effect of dramatically increasing the costs of borrowing.  To the extent the overblown CS markets represent an aberration – and even dramatically increased costs going forward would therefore be merely reversion to the mean – this is almost a a non-event.  For those who earn their living pushing these things around, though, it is big, big news.


As frightened as we are of as yet undiscovered abuses in the markets, we are far more scared of Washington.


Consider: our colleague, Andrew Barber, points out that, unlike securities regulations, “once you allow the camel’s nose into the tent on commodities, it gets international and global real fast.”  It is bad enough watching as Washington sinks its meathooks into the securities markets.  As anecdotal evidence that those charged with making our markets function properly do not understand those markets, we offer the latest news reports of Fed Chairman Bernanke’s net worth, which has fallen to perhaps under a million, from a reported range up to $2.5 million in 2007.  This is along the lines of our CEO Keith McCullough’s observation this morning (3 August) highlighting Nouriel Roubini now going bullish on commodities – copper is up over 90% year to date.


If Ben Bernanke can not parlay his market smarts into a substantial seven-figure portfolio – or if he can not parlay his banking and Wall Street connections into eight, or even nine figures – then why are we entrusting the world’s money supply to him and contemplating handing him an unprecedented level of control over the nation’s financial system?  Hank Paulson, now there was a guy who understood how money and markets function.  Why should a tyro be entrusted with the keys to the vault?


Following up on Andrew’s “nose of the camel” metaphor, it is now zero hour – midnight at the oasis.  We may want to instruct Sheikh Barney to send his camel to bed before it’s too late.


We watched Venezuela nationalize oil.  Will Chairman Frank give Chavez the opportunity to nationalize oil futures as well?  One thing we are comfortable predicting: once the Capitol Hill Pitchfork Brigade forces standardization and exchange trading of derivatives contracts, these contracts will become the next big product.  Watch for billions of dollars of issuance of derivative contracts aimed at the retail investor.  You were uncomfortable with Grandma buying oil and gas ETFs?  Wait until her broker puts her into CDS based on commercial mortgages. 


FINRA finally came forward with a timidly worded warning that certain ETFs are fiendishly complicated and possibly not appropriate for private investors.  They better start sharpening their pencils against the day when Series 7 registered stockbrokers start pitching CDS.  Many an average customer does not understand how a margin account works – alas, many an average broker either never bothered to explain, or can not explain to their customers.  Hands up, how many of you want these guys pitching derivatives to the public?






For the record, since January we have been raising questions about ETFs.  In addition, our conspiracy theorist paranoia has led us into speculation tying these sometimes complex critters to the political tension – between, say, the US and Switzerland, which was not playing ball.  We don’t mean that Switzerland was not playing ball about tax cheats – that’s old news, and we wonder whether some lawmakers have had to scramble to shift their accounts to Liechtenstein or Vanuatu in advance of the assault on bank secrecy.


If you recall, our theory was that the US was leaning on Switzerland because they were dramatically under-invested in US Treasurys, at a time when our debt needed all the bolstering it could get.  Once launched, we speculate the tax inquiry took on a life of its own.  The announcement this week that UBS reached a settlement with the IRS came on the heels of the announcement that UBS was discontinuing the marketing of leveraged and inverse ETFs.


Not a moment too soon, as Massachusetts state regulators have started issuing subpoenas requesting (Wall Street Journal, 1-2  August, “Subpoenas Put Pressure On ETFs With A Twist”) “requesting information on sales of products, the revenues generated from those sales, and broker training and marketing materials.”  Followers of this Screed will recall, this is exactly what we have been warning about.


Tough break, UBS.  If only we could convince Barney Frank that these things are a good idea…


Moshe Silver

Chief Compliance Officer




03 AUGUST 2009



We’ve seen forward earnings growth expectations go from 6-11% over the past month.  Yes the group has run meaningfully. But 11 to 20% over 3 months is not out of the question. Do you want to be short into that? Be my guest.


For those of you that have never seen the parody about the 1970s fictional metal band, go to YouTube and search for ‘these go to 11.’  It kind of speaks for itself.  Unlike Nigel Tufnel, I am not focused right now on modified Marshall amps, but on consensus earnings growth expectations for the next 12-months.


Why? Well, because it matters more than ever with a 15% run in the MVR vs. a 10% run in the market over the last month. Is the outperformance justified? My opinion is that it definitely is. Math does not lie. We’re seeing the rate of earnings growth accelerate into the back half. We can all say ‘yeah the market already knows this, and the group is trading at a 15x p/e.’  But the reality is that we’ve seen forward earnings growth expectations go from 6% to 11% over the past month.  Yes, the market knows this, but here’s a novel thought… With excess SG&A cuts, ridiculously easy comps, and fall/holiday ordering plans down in the double digit range (setting up for firm inventory position and higher GM%), can forward growth expectations pierce 20% within 3 months?  The answer is Yes.


These go to 20? 


That, my friends, is not yet in the stocks today. Do not get me wrong. McGough is not a blind bull oblivious to the factors impacting consumer spending (and retrenchment) over the next 2-3 years. But we’ve got more good news to come from the EPS picture before any big downside calls on the group make sense to me.

RETAIL FIRST LOOK: "THESE GO TO 11" - Conensus EPS NTM chart short term

RETAIL FIRST LOOK: "THESE GO TO 11" - 90 Day stock revisions long term



Some Notable Call Outs

- In a move sure to challenge Wal-Mart’s low-price leadership, Kmart is selling a 24-count box of Crayola Crayons for $0.20 this back to school season. Kmart’s price is 20% below Wal-Mart’s price of $0.25! If you’re not into the buying the iconic yellow and green box, then head to Office Max for a box of Schoolio von Hulio crayons for $0.01 (yes, a penny). This certainly seems like the making of “crayon wars” to me.


- While many bankruptcy cases in the retail sector have resulted in liquidation, there are a few exceptions. On Friday, after just four months of Chapter 11 protection, Sportsman’s Warehouse announced the court approved the company’s reorganization plan. The outdoor retailer’s emergence from bankruptcy is a result of a capital infusion from private equity firm, Seidler Equity Partners. Interestingly, Cabela’s mentioned last week that it was gaining market share from a competitor operating under Chapter 11.


- Over the past few weeks, I’ve highlighted several companies that are experimenting and using social media sites/Twitter to promote brands and to connect directly with target consumers. However, the power of the Internet and “crowdsourcing” is now being used in a new way. Let me draw your attention to Groupon, a marketing company uses the power of the masses on the Internet. Groupon sends out daily e-mails with a deal that offers a product or service at a discounted price. The business relies on the collective purchasing power of a group of interested consumers, hence the name Groupon. Participating merchants pay a commission, which makes the service a viable business at a time when so many online ideas are interesting but not profitable. For the deal of the day to work, a minimum number of people have to buy it. That “crowdsourcing” encourages subscribers to tell their friends, family and co-workers. As word spreads, the selected business gains exposure. While the service currently operates in about 14 cities, expect the “buzz” on this one to grow quickly. After all, the viral nature of the Internet and the consumers’ appetite for a deal could not intersect at a better time than now.



- Vendors can perhaps breathe a little easier over CIT - The group’s profitable factoring business, Trade Finance, on Friday got a boost when $1 billion was earmarked to fund the operation, a move aimed at proving to vendors that CIT has the money to fund clients’ needs.  In a letter to clients, John Daly, president of Trade Finance, wrote that “CIT Trade Finance is one of the nation’s oldest providers of factoring and financing services. The companies that have placed their confidence in us — our clients — range from family-owned and -operated manufacturers to global publicly traded corporations. We believe we have sufficient liquidity to meet our obligations and our clients’ needs while our parent company implements its restructuring plan.” CIT Trade Finance “remains open for business. We are actively reaching out to and working with our clients to ensure they continue to access our services needed to run their business. Credit is being checked, invoices are being collected and funds are being remitted,” Daly emphasized. <>

- Vietnam apparel industry to improve working conditions - Better Work Vietnam has begun offering new services to apparel enterprises in Vietnam’s southern provinces, helping them improve working conditions for more than 700,000 workers and boost the competitiveness. Tara Rangarajan, Program Manager of Better Work Vietnam, said: "Better Work Vietnam looks forward to working as partners with Vietnamese apparel enterprises, workers, and the Government of Vietnam to make sustainable improvements in labor conditions. The goal of our work is to find practical solutions that will decrease costs for project participants, enhance factory competitiveness in international markets, and reduce poverty among Vietnamese apparel workers, their families, and communities". Initially targeting apparel factories with more than 200 workers located in Ho Chi Minh City and neighboring provinces," said Nguyen Van Tien, chief labor inspectorate of MoLISA and chair of Better Work Vietnam’s Project Advisory Committee. <>

- British retail organization giants combine - The British Fashion Council (BFC) is the latest organization to become a member of the trade association UK Fashion and Textile Association(UKFT). "UKFT’s aim is to be the ‘single voice’ of the fashion and textile industry, representing businesses of all sizes – whether they be a small design-led company or a multi-million pound organization. Having the BFC on board adds further depth on the design side and enables us to work more closely on initiatives that will help designers be better placed to develop sales both in the UK and overseas and receive first-hand guidance on national and international issues that will affect them," said Peter Lucas, chairman, UKFT. Harold Tillman, chairman, BFC, added: "The BFC promotes leading British fashion designers in a global market, supports emerging talent to showcase and develop their businesses and organizes events, including London Fashion Week and the British Fashion Awards, to support these goals and strengthen the UK’s reputation for developing design excellence. <>

- Annual report of sport participation - The annual report is out from the Sporting Goods Manufacturers Association. The report details participation trends in sports and provides insight into what sports are growing and what sports are hurting. Here are some interesting figures: (1)  The biggest increase in participation in team sports in 2008 was ultimate Frisbee, up 20.8%. (2) Hunting and target shooting with a handgun was up 10.7% and 13.9%, respectively, this year. (3)  There were 17 million people playing table tennis last year, a 15.5% increase from 2007. (4)  The worst decline in participation in team sports in 2008 was roller hockey, down 15.4%. (5)  Last year, 15% of cheerleaders and 29% of gymnasts were male. (6)  Last year, 6% of tackle football players and 18% of paintball players were female. (7)  Archery participation was up 7.7 percent. (8)  Skateboarding participation was down 7.4% in 2008 and is now down 20.8% since 2000. (9) Interest in the UFC might be skyrocketing, but mixed martial arts participation actually went don 1.4% last year. That has nothing on boxing, which is down 42.3% as compared to participation in the sport eight years ago. (10) Lacrosse has long been called the fastest growing sport in America, as it has grown 117% since 2000. Still, only 1.9 million people played lacrosse in 2008 compared to something like slow pitch softball, which had 9.8 million participants. <>

- Footwear companies saw shares plummet in 2008, so for many in 2009, there’s been nowhere to go but up - But even as shares grew in percentage, few firms saw their stock prices return to the levels seen at the beginning of last year. Here’s how the retailers tracked by Footwear News stacked up in the first half of 2009, ranked by percentage of change: Dillards 133%, Sears Holdings Corp. 72%, TJX Cos. 54%, Nordstrom Inc. 49%, JC Penny 45%, Bakers Footwear Group 39%, Foot Locker 39%, Collective Brands 24%, Shoe Carnival 23%, Dick's Sporting Goods 22%. <>

- German Retail Sales Unexpectedly Slump for Second Month on Unemployment  - Retail sales in Germany, Europe’s largest economy, unexpectedly dropped for a second month in June as rising unemployment prompted consumers to trim spending. <>

 - A Gap and Levi Strauss jean factory in Africa is illegally dumping chemicals - A factory that makes jeans for Gap and Levi Strauss is illegally dumping chemical waste in a river and two unsecured tips where it poses a hazard to children. The scandal was uncovered by a Sunday Times investigation into pollution caused by a plant in Lesotho, southern Africa, which supplies denim to the two companies. Dark blue effluent from the factory of Nien Hsing, a Taiwanese firm, was pouring into a river from which people draw water for cooking and bathing. The firm was also dumping needles, razors and harmful chemicals such as caustic soda at municipal dumps that have attracted child rag-pickers as young as five in search of cloth fragments to sell for fuel. Many of the children, who work for up to 10 hours a day, complain of breathing difficulties, weeping eyes and rashes. <>

- Van Heusen looks to expand retail presence in India - Apparel brand Van Heusen from the Madura Garments group is looking to implement an extensive retail expansion plan by opening 25 exclusive stores this year and 65 more stores by the end of financial year 2012. The brand wants to have a pan-India presence and reach 50 tier-I and tier-II cities. The average size of the stores will be 200 square feet and the flagship stores will cover 7,000 square feet. The company is planning most of its stores on high street locations because it does not want to be dependent on malls. The company will have stores in four different formats – men, women, V Dot for youngsters and a combination of all of these.  <>

- Private label beauty manufacturer purchases large stake in Lucy B Cosmetics - Absolute Amenities Inc., a Riverside, Calif.-based private-label beauty manufacturer headed by Jackie Applebaum, has purchased a stake in Lucy B Cosmetics for an undisclosed sum. Baldock and Sacchi are remaining with the brand and are creative directors as well as president and vice president, respectively. “The creative person really has to be free to be creative, and then there is the other side of how do you make the business run,” said Applebaum. “You can’t build a house unless you have a strong foundation. That is my job to build the foundation. It’s Lucy’s job to build the beautiful house.” Applebaum said she could provide Lucy B Cosmetics with the back end and financing needed to grow the brand beyond its current distribution of roughly 270 U.S. doors, including Anthropologie and QVC. She added the brand’s focus on specialty stores wouldn’t change and estimated it would generate $3 million in retail sales in the first year of her involvement. The Lucy B Cosmetics assortment contains 22 stockkeeping units that use ingredients from Australian flowers and colorful graphics evocative of the Australian landscape. <>

- Sport Supply Group, Inc. said it has acquired certain team sports assets from Har-Bell Athletic Goods of Springfield, MO - Bryan Tucker, Owner of Har-Bell, will be employed by SSG as will his existing sales force in Missouri. Sport Supply did not assume any liabilities in the transaction. Terms were not disclosed. <>

- Highline United making progress in footwear - Executives at Highline United may have stepped into the footwear arena quietly with soft launches in 2008, but they are now gearing up to draw major attention to their portfolio of brands. The New York-based firm, whose brand roster includes United Nude, Ash and Luxury Rebel, along with licensing agreements with Miss Sixty and Tracy Reese, formally debuted in June with a launch party at its 7,600-sq.-ft. Chelsea showroom and is making a concentrated push to attract department stores and better independents with its mix of bridge women’s footwear.“June was our coming out party,” said Highline United President Matt Joyce, who has held top sales and merchandising roles at Nordstrom, Via Spiga, Kenneth Cole, Nine West and Steve Madden. “We wanted to make sure we brought in the product correctly, are taking care of our customers and have [footwear] that is viable for the future.”The company, named after New York’s newest city park, an elevated and out-of-service railway called the High Line, began showing capsule collections at last summer’s FFANY and WSA shows and has spent the last year building a mix of brands targeted at retailers looking for bridge-priced footwear that has been designed and sourced globally.“We have people in Italy, France, China, the U.K. and Russia,” Joyce said. “It’s a global mentality [and] it gives us the opportunity to get a broader view rather than just see what’s happening in [one place].” Early goals for the company, said VP of sales Scott Kaminsky, include building each of the brands and positioning the firm to become a long-term and dominant player in the industry. <>






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Camp Roubini

“Charlie and I believe that when you find information that contradicts your existing beliefs, you’ve got a special obligation to look at it – and quickly”
-Warren Buffett
Other than consensus starting to finally become bullish enough, I really don’t see anything in global macro this morning that should stop the upward momentum of anything priced in US Dollars.  We have new highs, a new month, and a New Reality.
After trading down for the 4th consecutive week, the US Dollar is down again this morning, hitting new YTD lows. As we roll out the backward-looking barrels of Alan Greenspan and Larry Summers economic forecasts, the manic media will finally come to realize that they perpetuated one of the most ridiculous narrative fallacies since “Chindia” – the Greatest Depression. The only depression I saw was that of Wall Streeters who missed one year’s bonus.
As Barclays and HSBC print big league profit growth results this morning, you can bet your Madoff that the bankers are going to get paid. The New Reality of Burning the Buck remains: as the US government devalues her credibility, her currency will continue to crater. As the Buck Burns, three core constituencies get paid: Debtors, Bankers, and Politicians. If you’re a Chinese holder of anything US Dollar denominated or an American commoner who saved, shame on you.
With the SP500 lassoing all short sellers of Camp Roubini/Rosenberg, we’re at least seeing one of these one-way economic prognosticators throw in his towel this morning. Nouriel Roubini is long term bullish on world travel. He loves helicopters and flying the friendly CNBC skies of fictional storytelling. Overnight he has made a mea culpa of sorts while speaking in Australia – he is now bullish of commodities!
AFTER the price of copper has moved to +92% higher for the year-to-date (trading at new YTD highs alongside the Chinese stock market this morning), and both oil and gold prices are busting another move to the upside, Doctor Doom is taking a ride on the bullish side! Stick to your new day job of selling market crash books my man – there is this thing called timing that we global market operators care about – professors shouldn’t manage the public’s daily marked-to-market risk.
As the US Dollar hits new YTD lows at $78.14 this morning, the US stock market futures are setting up to register another YTD high. This pre-open setup makes perfect sense to me. After seeing the SP500 close +7.4% for the month of July, Rosenberg bears are finding information on the Q2 earnings season that contradicts their existing beliefs.
Don’t underestimate how many people are out there who were not allowed to be bullish into these earnings numbers. Now that all of those short sellers have been put out to pasture, all they can do is whine about “valuation.” Being short “valuation” in a market that’s building price momentum alongside sequentially accelerating volume and expanding positive breadth, is something we can leave up to the brave. Yes, Mr. Abelson – that’s you again.
Abelson hasn’t mentioned his China bearish thesis in quite some time. However, this weekend he did highlight David Rosenberg’s thoughts on valuation mind you… and at the end of the day, without these guys ignoring their special obligation to look at the facts, this latest rally in everything priced in Dollars wouldn’t have this lasting kick.
Here are 3 global economic facts to add to your existing beliefs this morning:
1.      China’s manufacturing report (PMI) made another new high for July at 53

2.      German Retail Sales improved again in June to -1.6% versus -2.9% last month

3.      UK manufacturing PMI (July) moved into the economic expansion zone with a reading of 51 versus 47 reported in June

I know, I know… some of these numbers incorporate that silly stuff we math guys call derivatives. When rates of change improve, we do recognize them for what it they are – positive relative to expectations. At the end of the day, this investment process is agnostic. If the facts, on the margin, change to the negative… we’ll “have a special obligation to look at it – and quickly.”
My immediate term TRADE upside target for the SP500 is 998 and I have downside support at 975.
Best of luck out there this week,


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

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.

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 IndustrialsWe don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian 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 DiscretionaryAs 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.



Las Vegas Sands Corp has paid US$42.5 million to settle a dispute with three Macau and US businessmen, Jose Cheong Vai-chi, Clive Jones, and Darryl Turok, who had claimed credit for helping the casino operator gain its Macau license in 2002.  The figure was revealed yesterday as part of the company’s US$178.26 million second-quarter loss.  The settlement was reached in June, just before a Nevada jury was to initiate a public hearing on the lawsuit.

The payment, along with a US$151.18 million write-down on the aborted sale of a shopping center in Las Vegas, contributed to Las Vegas Sands’ sixth consecutive quarterly loss. 



In LVS’ quest for cash, the company is marketing the sale of convertible bonds in attempt to raise US$400 million in short-term funding to withstand a cash shortfall and also to potentially restart construction of its stalled resort in Macau.  The package consists of three sets of bonds: A 3-year bond paying 10% annually, a 5-year bond paying 13% annually, and a 10-year bond paying 16% annually.

The bond sale will be linked to the plan to raise US$2.5 billion in a Hong Kong IPO of its Macau operations early in 2010.  Holders of the convertible bonds would have the option to swap the loans for shares in the newly listed company.  The risk of lending to LVS is underlined by the considerable debt the company has already taken on and the impending tightening of debt covenants – the debt to earnings ceiling is lowering to 3.5x.



The total number of H1N1 cases reported in Macau exceeded 200 yesterday.  Ten newly confirmed cases from Saturday to Sunday afternoon took the number to 204. 


THE WEEK AHEAD: August 3-9

We have a full plate of critical economic data on deck for the week of August 3rd. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.   


  • US: ISM manufacturing and Manufacturing Price index data for July will arrive on Monday, as will July BAE Domestic Auto sales and June Construction Spending.

  • EURPOPE: German Retail sales are scheduled for release early Monday morning, as are July Manufacturing PMI data for Switzerland, Italy, France, Germany, UK and the Eurozone in aggregate.  

  • ASIA: On Sunday evening South Korean July Trade data will be released and, after the strong rebound in June industrial production released on Friday, we will be watching for more confirmation of recovering strength there (CPI and FX reserve data are scheduled for Monday).  China July CLSA PMI will be released on Tuesday evening. We initiated a new long CAF position in our portfolio on Friday and, with anecdotal reports of some marginal declines in demand for commodity imports, we will be intensely focused on this data point as a signal.  India trade data for June will be released on Monday; we remain bearish on long term prospects there but are anxious to see if imports are showing signs of stimulus driven demand for raw materials. Singapore July PMI is slated for released on Monday Morning.  

 TUESDAY August 4

  • US: BEA June Personal Income/PCE data will be released on Tuesday morning as will weekly ICSC and Redbook figures. Weekly ABC Consumer Comfort index levels are scheduled for 5PM.  

  • EUROPE:  Eurozone PPI data for June will be released on Tuesday morning.

  • ASIA: The RBA board will meet on Tuesday morning; ABS Balance on Goods and Services data for June will be released in the evening. Although we closed our long position in Australian equities last week it’s no secret that we are big fans of Glen Stevens and expect that he will act proactively despite any political pressure to keep rates low.


  • US: Census Bureau June Factory Orders and Factory Inventory data will be released on Wednesday morning as will the ISM Non-Manufacturing Index for July. Weekly MBA mortgage application and EIA Fuel Stock releases are also on the schedule for the day.

  • EUROPE: Eurozone June Retail Sales data released on Wednesday morning.  July Services PMI for Italy, France, Germany and the Eurozone in aggregate are also slated for released that morning along with the final Eurozone PMI Composite.  The UK has a slew of economic data releases scheduled, including NIESR GDP Estimates, Manufacturing and Industrial Production data for June and HBOS housing data. We still regard the UK as one of the weak hands at the table in Europe and will be watching closely for any marginal changes.

  • ASIA: Taiwan CPI for July will be released on Wednesday morning, as will FX reserves.  Australian Employment data for July will be released in the evening.  


  • US: As we said in last Thursday’s note “When Bad Is Good!” any increase in Initial Claims will add more pressure to the US Dollar and support stock and commodity prices (at time of writing, we are short the dollar via UUP and long gold in our portfolio). Consensus estimated for this week’s reading is a 10K decline from last week’s 584K new claims –we’ll see.

  • EUROPE:  German BBK Factory Orders for June and Italian June Industrial Production will be released on Thursday morning. We are long German equities and short Italian equities in our portfolio and expect German orders to show signs of recovery as Chinese led global industrial demand improvement starts to be felt in Europe’s strongest economy. The ECB has a rate announcement scheduled for 7:45 AM.

  • ASIA: On Thursday evening, the RBA will release a monetary statement as a follow up to Monday’s board meeting. Indian Weekly Wholesale Inflation data is released on Thursdays. With some core component prices rising in recent weeks, we will be watching for any marginal increase from last week’s -1.54% WPI reading.

FRIDAY August 7

  • US: July Payroll data and Unemployment Rate will be released at 8:30AM. The Federal Reserve Consumer credit measure for June will be released at 3PM.

  • EUROPE: Friday’s schedule will continue to test our long Germany/short Italy portfolio thesis with German June Trade and Production data and preliminary Italian Q2 GDP due out on Friday morning.  UK PPI and French Trade data are also on deck.

  • ASIA: We will be pouring through Taiwanese July Export data on Friday morning looking for more signals of increasing demand for consumer electronics and from China. On Sunday, Japanese June Machinery Orders, July M2 and Bank Loan data will be released. Chinese CPI and PPI readings for July are also scheduled for Sunday evening.