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12 AUGUST 2009




Lots going on from an earnings standpoint this morning, and most is net positive. The key call out here is LIZ. The print is in line with pre-announcement, and inventories improved on the margin for the first time in a year (see SIGMA below). SG&A deleverage is still killing the numbers, but with another $100mm in cost reductions announced, this is a pretty big development given that LIZ struggled to print $126mm in EBIT last year (and will be around ¼ of that this year). Bears will point to continued weak comps and a big sequential deceleration in margins at Direct Brands. I’m OK with that given 1) the sequential acceleration on a 2-year basis, and the fact that inventories are finally getting better on the margin. Also, look for the company to discuss its recent covert initiatives (i.e. key hires) to fix Mexx. We don’t give it a ton of focus in the US, but keep in mind that Mexx is roughly the same size as the Liz Claiborne brand, and is operating at a loss. Heck, if they unwound any and all investments in Mexx it would be accretive to every key line of the P&L and cash flow statement. The stock is off in early trading. Quite frankly, I don’t get it. This was one of the first times we did not see a meaningful guide-down in 2-years. I think prior guide-down will prove to have been the last. People will be calling me when this stock is mid-high single digits asking if it is time to start doing the work on it.  I still like this one.






Some Notable Call Outs


  • While still in the early stages of development, Fossil is rolling out a men’s and women’s footwear line to compliment the company’s leather accessory and non-watch business. The men’s line launched this Spring in a limited amount of doors and was essentially a learning experience for the company. Women’s launched a couple of weeks ago and is seeing a strong initial response. Based on a strong read from the footwear show, Spring 2010 is expected to show substantial door growth for the women’s line.


  • Warnaco’s management repeated several times over the course of its 2Q conference call that the timing of some wholesale shipments have been moved out of 2Q into 3Q. Customers are taking product closer to need or the time of retail sale. Given the relatively low level of visibility at retail, we expect this trend to continue over the next couple of quarters.


  • We’ve seen many examples of retailers and consumer brands using Twitter to get closer to their core customers, whether it be with a trend update or a promotion. In an interesting twist, New York discount/off-price retailer Daffy’s is using Twitter to alert customers where their delivery trucks are and when they are arriving on the loading dock. Clever? Yes. Useful? Probably not. The Tweets have no specifics on what merchandise is on the trucks are if the inventory will actually make it out on the floor in a timely manner. Nonetheless, an interesting use of real time media to connect the brand with customers (and generate buzz at the same time).




-The British Retail Consortium (BRC) has forecast that the return of VAT to 17.5% on January 1 will cost retailers £90m, as the Conservative party refused to rule out raising VAT further if they come to power - Retailers spent £90m altering their prices and systems when VAT was reduced to 15% in December, and the BRC said that it will cost a similar amount to reverse the change by January. Shadow chancellor George Osborne has also refused to rule out increasing VAT further than 17.5% to rebalance public finance. According to The Daily Telegraph senior Conservatives are looking at the possibility of increasing VAT to 20%. Separately, the Office for National Statistics (ONS) has found that a third of retailers did not pass on the price changes to consumers following the reduction in VAT in December. The ONS said that while 43% of shops applied the price change and 14% changed all prices marked on the shelves, 9% used a combination of the strategies. <drapersonline.com>


-Escada AG must file for bankruptcy after failing to achieve 80% acceptance of bonds - Having failed to reach the targeted 80% acceptance level for its bond exchange offer, Escada AG has reiterated plans to file for insolvency later this week. German law does not have the equivalent of Chapter 11, and planned insolvency is the closest procedure to bankruptcy. Late Tuesday night, the German fashion house said the bond exchange offer, which expired at 3 p.m. German time on Tuesday, achieved only a 46% acceptance rate. <wwd.com/business-news>


-CIT Group Inc. has two stress-inducing deadlines looming on the horizon - Friday, for a debt tender offer, and Oct. 1, for a restructuring plan. In a regulatory filing Tuesday with the Securities and Exchange Commission, CIT said the first steps of its restructuring plan are to complete a tender offer for its outstanding $1 billion in senior notes due Monday. It already reached an agreement with major bondholders for a $3 billion secured term loan facility, which has been drawn down. Presuming the tender offer is successful, neither CIT nor the steering committee of the bondholder lending group intends to file for Chapter 11 bankruptcy court protection. However, if the tender offer is not completed and the firm is unable to obtain alternative financing, the company said it would be in default under its credit facility and “could seek relief” under the auspices of the bankruptcy court. CIT previously said it had received enough offers, or 58% of the debt to be tendered, to complete the repurchase program. The tender offer expires Friday. <wwd.com/business-news>


-The NPD Group Tuesday added to the growing body of evidence that this year’s back-to-school season will be late and lean - NPD reported 44% of those surveyed said they would spend less this b-t-s season than they did a year ago, while 32% expect to spend the same and 23% foresee greater expenditures. Last year, 35% expected to spend less, 34% the same and 31% more. Although still the second-most critical category behind school supplies, apparel is a lower priority this year than last, with 52% of respondents expecting to purchase it versus 60% last year. Footwear was down to 39% from 48%, but held the number-three spot in order of priority. Apparel accessories fell to 16% from 20%, and beauty products declined to 13% from 17%. <wwd.com/business-news>


-After seeing heavy markdowns and few profits in recent years, the market now is about to lose one of its premier names and major anchors: Ellen Tracy - Under a new operating license with RVC Enterprises, Ellen Tracy plans to morph into a better sportswear player, taking its prices down considerably and competing with firms such as Michael Michael Kors, Lauren by Ralph Lauren, Jones New York, Calvin Klein white label, Liz Claiborne and AK Anne Klein. Sources indicated that Ellen Tracy is talking with several major retail groups, namely Macy’s, Dillard’s and Lord & Taylor, about an exclusive sportswear arrangement.  The company’s plan to exit the bridge floor has put major real estate in limbo at key accounts such as Bloomingdale’s, Saks Fifth Avenue, Neiman Marcus, Nordstrom, Dillard’s and Lord & Taylor — and is a further blow to a brand that was once the undisputed leader of the category, with sales of more than $170 million at wholesale at its peak.  <wwd.com/retail-news>


-AVP Pro Beach Volleyball and Crocs Inc. will part ways in 2010 after a longstanding partnership - Crocs has bought out the remainder of its contract with the domestic professional beach volleyball tour <sportsonesource.com>


-adidas America, Inc., announced a long-term extension of its relationship with Agron, Inc. - Argon is adi's exclusive licensee for headwear, bags, socks, underwear, and other accessory items. The extension through 2022 will expand the two companies’ successful partnership offering a strong portfolio of accessories. <sportsonesource.com>


-Macy’s has teamed up with Feeding America to launch a celebrity-studded fall campaign that links the eat-at-home trend with hunger relief - The campaign, called “Come Together,” asks consumers to host dinner parties and have guests make a donation to Feeding America instead of the usual host gift. Macy’s is matching all contributions until a total of 10 million meals is reached. The retailer has tapped celebrities like Jessica Simpson, Queen Latifah and Tommy Hilfiger to star in the campaign. One spot breaking in mid-September shows the A-listers seated for a meal—inside a Macy’s store—that’s “peppered with the usual and unexpected twists and turns that occur at all great gatherings,” per the company.  With the eat-at-home trend holding steady, however, Macy's saw an opportunity to link the trend with cause marketing. “Come Together was designed with two goals in mind: To create special moments in our customers’ own homes this fall by bringing friends and families together over a meal, and in turn, to raise meals for an incredible cause that is feeling the real side effects of today’s economy,” said Robin Reibel, Macy’s group vp of cause marketing and public relations.  <brandweek.com>


-An exclusive line of Marvel-inspired T-shirts and more for boys and toddlers have arrived at Old Navy stores in the U.S. and Canada - Just in time for the back-to-school season, the collection includes tees, hoodies and outerwear featuring Spider-Man, The Incredible Hulk, Iron Man and X-Men. Fans will also receive a limited-edition Amazing Fantasy No. 15 comic book with the purchase of a Marvel collectible T-shirt. "We are excited to continue our successful relationship with Old Navy and celebrate Marvel's 70th anniversary with a leading retail brand," says Paul Gitter, president of consumer products for Marvel Entertainment in North America. "This partnership reinforces our overall strategy to build exclusive relationships and merchandising programs that open up new channels of distribution for Marvel, enabling us to further maximize the exposure for our brands." <licensemag.com>


-A military footwear manufacturer will bring more than 100 jobs when it opens a new plant in the Morristown Airport Industrial District month after next - Wellco Enterprises, a manufacturer of footwear for military, tactical, industrial and outdoor applications will open its new plant in the former BOS Automotive Inc. building. Lee Ferguson, Chief Executive Officer of Wellco’s parent company, Tactical Holdings Operations Inc. announced the new manufacturing project which will realize a capital investment of $8 million in building and equipment. "We have had a very long, slow period in the economy, and too many people have lost jobs during this recession," said chamber chair Lynn Elkins. <timesnews.net>


-Last week in Akron, when LeBron James unveiled the Air Zoom LeBron VII, he expressed his happiness with his decision to sign with Nike in May 2003 - “I looked at it like I was going to be in a position with a great company, where I can help hopefully business with them and they can help me," James said. And now, seven years later, it’s been everything I’ve expected.” The question is, as James' Nike contract comes to an end after this season, was it all that Nike expected when they signed him 2,273 days ago. The answer is no. When Nike signed James they agreed to guarantee him some $13 million a year, which would have only been worth it if he turned into the next Michael Jordan. But while James has somehow lived up to the hype on the court, he hasn’t really done so off the court.  Much of it is not his fault. It’s just that it’s LeBron himself who has proven that there is no next Michael Jordan. In LeBron, we finally had the perfect test case. The most glorified high school basketball player of all time who somehow lived up to all expectations. And yet, even he couldn’t sell gear or shoes like MJ did. So the question is how much does Nike pay LeBron for his next deal? Some might suggest James has some leverage in that he could sign his next deal with the Knicks, which would literally put him on Madison Avenue. But, trust me, location doesn't sell as much as championships do. <cnbc.com>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): PSS, PETM


08/11/2009 10:56 AM


Here's a name that McGough doesn't necessarily like for the quarter, but likes it for the intermediate term - and I like at this price. Buying red. KM


08/11/2009 10:03 AM


Buying the red associated with the JPM downgrade. McGough and Levine's read on this upcoming quarter is that margin expectations are too low. KM




RL: Roger Farah, President and COO, sold 99,458shs ($6.8mm) nearly 40% of common holdings.

JCG:  Mickey Drexler, sold 58,074shs ($1.7mm) less than 5% of total common holdings.


  • David Nichols, Executive VP, sold 100,000shs ($1.1mm) after exercising the right to buy 100,000shs roughly 30% of common holdings.
  • George Powlick, VP of Finance, CFO, sold 30,000shs ($323k) after exercising the right to buy 30,000shs roughly 20% of common holdings.

BGFV: Michael Brown, Director, sold 750shs (~$11k) nearly 12.5% of common holdings.








Ahead of BYI’s earnings tonight, BYI filed an interesting 8K. Historically, adding change of control provisions to management employment contracts has been a signal.



Bally filed an 8k last night involving an amendment to CEO Dick Haddrill’s employment contract.  Among other things, the amendment provides for a cash payment of $2.5 million to Mr. Haddrill upon the company meeting certain financial objectives OR upon a change of control. 


Michelle Leder of Footnoted, our SEC filings expert and partner, will be following up with some important detail and historical implications of these types of filings.  The main takeaway, however, is that adding change of control language to management employment contracts has been a somewhat reliable signal of a company being acquired.


Mr. Haddrill successfully sold another gaming equipment supplier, Powerhouse Technologies, among other companies, so he is no stranger to getting deals done at a premium.


BYI will report earnings tonight after the close.  As we wrote about in our preview note, we think earnings will be fine but we are not making a call on the quarter.  We do like the company and fundamentals long-term and obviously, realization of the company’s true value could be expedited with a sale.


Status quo from Beijing or Macau governments until 2010 at the earliest but visa and tax changes are looking likely in 2010. 



Our sources are telling us that Beijing wants to be perceived as impartial when it comes to Macau politics.  The visa situation is unlikely to change until well into 2010.  The new Macau government is also likely to remain idle but the good news is that they are becoming increasingly open to reducing the gaming tax rate to remain competitive with Singapore.  We are hearing that LVS will not open in Singapore until April and the Macau government would wait on the tax reduction until then.


We’ve got some pretty good color on government intentions:

  • Investors expecting an immediate visa relaxation by Beijing may be disappointed. We are hearing that the Chinese government wants to sit tight for 4 to 6 months after the new CE takes over later this year so not to show favoritism.  We remain convinced that Beijing wants to control growth in the 5% range and will only tweak the visas to reach that goal.
  • We are now more optimistic about the Macau government lowering the gaming tax rate.  Our government sources indicate that officials are very worried about the Singapore impact.  Macau wouldn’t move until the spring, just a bit ahead of the LVS opening in Singapore.  This would be good news, just maybe not as soon as some were hoping.
  • The new Macau government will be deliberate on implementing any changes.
  • The bad news on the status quo is that Macau hotel casinos are still being forced to reduce the number of foreign employees.  The entertainment divisions are taking the biggest hit which is affecting service issues and potentially could weigh on visitation.  We’ll be following this closely.

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Macau is hopping in August but it doesn’t seem to be visa related.



Our guys on the ground are telling us that it’s pretty difficult to get a cab these days in Macau.  The Mass floors are packed.  “It’s like the old Macau again”, we’ve been told.  By “old” Macau, they are referring to last year.  We’re pretty sure there hasn’t been any visa tweaking by Beijing.  Rather, the drivers are:

  • Venetian arena – The Venetian is holding more events at the arena including concerts and other shows.  Some of the acts have been big draws.
  • “Holiday Season” – July tends to be a month where many kids are in summer school.  Families visit in August.
  • Stock market/economy – The Hong Kong stock market has bounced back and the economy has stabilized.  The Chinese stock market is booming. 
  • City of Dreams growing the Mass market


Even though we are only half way through the month the August number are looking pretty good.  Anecdotally, the Wynn Macau floor has been particularly busy.

Game Time

"In life, as in a football game, the principle is to hit the line hard.”
-Theodore Roosevelt
If you want to make it in this business, have your own process and patiently prepare. When you see a high probability opportunity to win - hit the line hard. Otherwise, just buy an index fund and/or ask you friends for their “best ideas.”
If you want to approach this game hitting the line hard on every market move (trust me, in the last decade of my making mistakes trading markets with live ammo I’ve tried it), you’re going to have a short shelf life. The investment season is long and hard. Pick your spots. Timing and sizing is everything when it comes to winning.
With the SP500 trading lower in 4 out of the last 5 sessions, and the media carting out everyone from David Tice (on Bloomberg), Nouriel Roubini (on CNBC), to some head and shoulders double top technician, I see a big opportunity.
Two days ago I posted an intraday note titled “Buying Red”, and yesterday I posted another one titled “Game Time.” When your investment process leads you to high probabilities of economic reward, it’s not time to take a show of hands – it’s time to do up your chinstrap and make the call.
My call is this – take advantage of the generational level of groupthink that you are seeing out there and buy low. Until the US market’s intermediate term TREND of Dollar down = everything priced in Dollars up breaks down, don’t fight it – capitalize on it.
A lot of levered long investors called themselves “event driven” funds at the manic highs of 2007. In many cases, unlike tangible merger arb events, these “events” were soft catalyst in nature (like say buying shares of something wild Bill Ackman was about to file an Ackmanist position in). That greater lemming strategy obviously doesn’t work when the market is going down. But what about macro “events” that you can have Research Edge on in a market that’s going up?
You see, the problem a lot of these levered long super duper stock picking dudes have with macro is that a company’s CFO can’t get them comfortable with macro catalysts. There is no super special “one on one” that a portfolio manager can sign up for to get that Global Macro memo. Macro matters, and so do the macro events.
My global macro “event” is Ben Bernanke’s FOMC statement.
Game Time: today - 2:15PM EST.
If Bernanke panders to the political pressures of maintaining this ridiculous rhetoric of “Depressions” and “emergency level” interest rates, the US Dollar will put in another lower-high, and start to retrace it’s year-to-date lows. If he doesn’t pander, he still might confuse the currency market and I win that way too. I think he panders.
On our 1PM EST Macro Monthly Strategy call today, I’ll go over one of my Q3 Macro Themes, “Burning The Buck”. Since March, if you’ve only bought stocks/commodities/currencies, etc. on US Dollar up moves, you have been absolutely crushing it in your 2009 season.
Again, the US stock market has been down 4 out of the last 5 trading days. Over that time period, the US Dollar has rallied +2.5%. The US Dollar remains broken across all 3 of my key investment durations (TRADE, TREND, and TAIL). Stocks, commodities, and currencies remain bullish across all 3 durations.
That’s why I am choosing to hit this line hard. In the Virtual Portfolio, I have 28 longs and 6 shorts. In the Asset Allocation Model, I have taken my position in US Cash down to 32%. Until I don’t see these buying opportunities for what they are, I will keep taking these shots.
That’s all I have for you this morning. It’s Game Time.
Best of luck to you out there on the field today,


XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10. With Bernanke as the catalyst for the USD breaking down we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

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

EWG – iShares Germany 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 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.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

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

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

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 IndexShorting the USD on a strong 3-day rally to another lower high. Your catalyst is Bernanke pandering to political consensus on Wednesday. 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.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

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.

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.

Chart of The Day: Game Time

Bernanke’s Bucks are on the line. We are t-minus 6 trading hours here until game time. To pander, or not to pander, remains the question…


I made the call on The Maintenance Man (Bernanke) in my Early Look today… and to be clear, I want to make it again:


  1. I am short the US Dollar into/out of the next 3-6 trading days of this FOMC statement
  2. I am long most things that anchor on the price of the US Dollar declining
  3. I am expecting group-thinkers to short low and cover high all the while


The US Dollar remains broken across all 3 of our key investment durations (TRADE, TREND, and TAIL). See the chart below for our resistance levels. This is one of my key macro roadmaps:


  1. 1.       TRADE = $79.96
  2. 2.       TREND = $81.03
  3. 3.       TAIL     =  $82.82


Buying red,



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Game Time - km811



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