Malcolm Knapp provides regional performance data on a monthly lag basis relative to the overall sales and traffic results.  This morning we got the July numbers for sales and traffic, which were just bad (-8.4% and -7.7% respectively).  On a regional basis, in June, Texas shifted into the group of regions that performed worse than the national average, which was -7.6%.  New England, on the other hand, performed better or equal to the national average.  I only point this out because Texas has performed better than the average while New England has underperformed for most of 2008 and year-to-date as tracked by Malcolm Knapp.  Both TAST and TXRH highlighted on their 2Q earnings calls this softening of trends in Texas in June.


Other regional shifts include both Florida and the South Atlantic which have been outperforming the national average in recent months after consistently underperforming in 2008 and early 2009.  Granted, all of the regions posted negative numbers and the spread between the best and worst performing regions of 4.7% has actually narrowed from 7.1% in May and 5.4% in April. 


The chart below shows casual dining restaurants’ exposure to the better and worse performing regions of the U.S. relative to the national average from a comparable sales growth perspective in June.  CHUX, RT and SNS have over 90% restaurant base exposure to the regions that performed better than or equal to the average in June.



Slouching Towards Wall Street… Notes for the Week Ending Friday, August 14, 2009

Here Come Da Judge


It’s the oldest-established, permanent floating crap game in New York.

                   - “Guys and Dolls”


In a giggle-inducing wire-crossing of intercultural word-play, December of last year saw a $300 million settlement between the federal government and the founder of on-line poker phenomenon PartyGaming.  The co-owner of what was by far the world’s largest poker room had not been charged with any crime.  Nonetheless, he agreed to plead guilty to one count of violating the Federal Wire Act, and to forfeit $300 million, on the basis that he “could be charged with a crime in the future.”  Unusual as the settlement may have been, it was clearly the unusual name of the protagonist – A. Dikshit – that excited press coverage, as much as the legal fine points of the case.  The judge in charge of the proceedings was Jed Rakoff – pronounced “RAKE-off”, we were told – which is exactly what gaming parlours the world over have been doing since time immemorial.


Now Judge Rakoff finds himself assigned to a case in which the stakes are orders of magnitude larger.  At the heart of this case is a man perhaps even lass fortunate than the Judge’s previous defendant.  The poker entrepreneur had the misfortune to be named Dikshit – with the understandable consequence that the media mentioned him almost as frequently as the Democrats referred to the fact that Dick Cheney’s daughter is a lesbian. 


Judge Rakoff is now faced with a man whose name is not at issue, but who has the still greater misfortune to actually be Ken Lewis, the CEO of Bank of America who has managed to add insult to injury by not only spending his shareholders’ money in the acquisition of a multi billion-dollar black hole called Merrill, but has now managed to agree to buy off the SEC with $33 million of shareholder hush money.


Judge Rakoff, to his credit, isn’t having any of it.  He has given the parties – the SEC and Bank of America – two weeks to come up with the goods.  And, as the ads for the National Enquirer used to say: I want to know.  Inquiring minds want to know who actually lied to shareholders; who made the decision not to reveal the additional Merrill losses, which were known about before the closing of the transaction; who within Bank of America made the determination that the additional few billion in losses were “not material”; how the SEC and Bank of America arrived at the number of $33 million, and who at the SEC was responsible.  In refusing to sign off on the settlement, the Judge made reference to the fact that, having cost the shareholders a bundle, some persons inside the bank were now getting the shareholders to cough up another bundle to make these sins go away.


The speed with which the SEC pushed this matter to a close is disconcerting.  There was no information produced – not to the public, anyway, and especially not to BofA’s shareholders – even by Wall Street standards, it is pretty startling to watch the SEC sweep this under the rug.


What political agenda can Chairman Schapiro be running on now?


We understand that pursuing this in a thoroughgoing investigation might end up implicating former Treasury Secretary Paulson, current Secretary Geithner, Fed Chairman Bernanke, not to mention making the members of Congress who pushed for approval of the funding to backstop the BofA / Merrill transaction look stupid.


We understand that all of this would create turmoil in the Washington/Wall Street nexus and might even call into question, in highly public fashion, President Obama’s blithely fostering continuity of the Goldman Sachs dynasty in government, and the way in which he throws himself swooning at the bankers, all the while doing his pitchfork dance over things like “disgusting” bonuses.  It might make people question why, before the government had actually acquired its stake in GM, he felt ballsy enough to fire that company’s CEO, but didn’t even give UAW head Gettlefinger a public dressing-down.  It might even cause some folk to ask why President Obama has so far raised nary an eyebrow about Treasury Secretary Paulson inviting Goldman CEO Blankfein to participate in planning the euthanasia of Lehman.


Judge Rakoff will need to take his publicity where he can get it, and being mentioned in the same breath as some of those who have appeared before him is decidedly not a publicist’s dream.  The Judge’s actions in the present case indicate he is more interested in the law of the land, than in the SEC’s political aspirations.


Stay in there, Yer Honor!  We’re rootin’ fer ya.




Classical Gas


In the spirit of shameless self-promotion we wish to point out that the featured story in Friday’s Wall Street Journal (14 August, “ETF Looks To Escape US Reach”) was one we not only could have written – we essentially did write it.  Some months ago.


The Journal reports “US Natural Gas Fund, the giant exchange-traded fund, is exploring ways to avoid regulators’ cracking down on speculation.”  It has been clear that this showdown was coming. 


With the CFTC moving aggressively to curb speculation – and as we have previously reported, ETFs are by definition speculators – it was a no-brainer that natural resources ETFs would soon be under the gun.  Add to that the tightening in the natural gas market, as reported in the press – and as commented upon in these scrivenings – it should surprise no one that “the fund is considering moving to offshore energy exchanges or further into unpoliced over-the-counter swaps markets to avoid Commodity Futures Trading Commission rules that would limit the size of natural gas positions.”


The FT article quotes UNG Chief Investment Officer John Hyland as stating the ETF’s probable next step will be to increase its use of over-the-counter products.  “The fund already has about 5% of its assets in swaps,” and may diversify by buying crude oil, heating oil, or gasoline.


This points to two problem scenarios for ETFs in general.  We would call it the unintended consequences of government meddling – except that even we can not believe the government is so stupid they couldn’t have seen this coming.  This would make it, then, the intended consequence of government meddling.  What interest does the US government have in forcing ETFs to seek far and wide for hospitable trading venues?


To the extent natural resources ETF managers want to remain in their air-conditioned offices, they will need to find replacement trades.  We can envision a scenario where a successful ETF doesn’t want to just shut down and hand back investor cash – they don’t get paid for the money they return.  If the CFTC gets its way, it will clamp down on trading both of underlying physical commodities, and of certain futures contracts.  Shutting the door on near-month contracts, for example, will cause what the old Playtex Living Girdle ads used to call “an unsightly bulge” in far-month contracts, as the ETF managers synthesize new positions to replace the contracts they can no longer trade.  Trading in UNG has already breached the stability barrier touted as the benchmark of an ETF – demand for the shares themselves has outstripped the manager’s ability to do new creation trades, and the price of the shares has fluctuated based on actual demand for the shares, rather than benignly reflecting price movement in the underlying commodity.  We predicted this phenomenon some time ago, and we believe the UNG example should call into question the whole notion underlying ETFs, that ETF creation and liquidation trades somehow do not affect their underlying components.  As to the present political tug-of-war – do we think that forcing ETF managers to seek out new twists, different markets and queer synthetics to replace these instruments will disrupt pricing in the world’s energy markets?  It takes two to contango.


Next case: as more and more energy ETFs look for more and more places to do swaps, more and more firms will want to be on the other side of those contracts.  Somewhere along the line – trust us on this one – there will be some substantial ETF that will have some substantial position in some swap whose counterparty does not have the capital to unwind the transaction, and is betting on things to be the same tomorrow as they were today.  There will be some major disruption which, though brief, will cause enough displacement in the markets that the ETFs will have major liquidation-creation cycles.  Needing to husband the physical resources, the first place the ETFs will look for liquidity will be their swap contracts, and there will come a moment when one or more counterparties are unable to unwind.


The ETFs will try to keep their positions in the underlying and do all their liquidity maneuvering in the future and swaps markets, for fear that, once they let actual oil out of their grasp (or gas, or gold, or silver, or pork, or… ) they will be prevented by regulatory restrictions from ever getting their hands on it again.


This business will predictably be great for financial firms that can do the swaps – did we mention that CFTC Chairman Gensler is a former Goldman partner? – and will be deadly for firms that jump in without proper capital, and for the ETFs that, desperate to continue to grow their asset base, trade with them. 


Finally – or perhaps first, as the Journal article points out – as the CFTC tightens its grip on natural resources trading, more and more natural resources ETFs will look for less encumbered jurisdictions.  They are not likely to find succor in the EU – witness the rumblings from the French and the Brits about controlling the price of oil.  This means they will have to seek out more hospitable places to trade.


Where will a growing natural resources ETF go to trade its underlying commodity when the US and Europe no longer will permit it?


One obvious place to look is parts of the globe that are eager for business, and that have a vested interest in seeing the commodity in question trade actively.  We would hardly be shocked to see ETF managers heading off on global jaunts.  Did we mention that Russia is home to the world’s largest proven gas reserves?  Or that Kazakhstan, number eleven on the list, is kindly disposed to talking to the West?


Or that the country with the world’s second largest proven natural gas reserves is Iran?




Hedge Fund Of Last Resort


If the size of your bundle you want to increase,

He’ll arrange that you go broke in quiet and peace…

-         “Guys and Dolls”


The Financial Times ran a piece (10 August, “New York Fed In Hiring Spree”) describing the New York Federal Reserve Bank’s new expansion program.  The FT reports that the Bank “ is aggressively hiring traders as it seeks to manage its burgeoning securities holdings, making the central bank one of Wall Street’s most active recruiters of financial talent.”  Indeed, the plan is to add 400 new hires to its markets group by year end.


This is significant, as it is the markets arm of the New York Fed that actually implements monetary policy.  When Chairman Bernanke says “add liquidity to the system”, it is traders at the New York Fed who rush out and purchase Treasurys – or who sell gobs of them when the Chairman orders a tightening.


New York City officials estimate that the financial sector will end up shedding as many as 140,000 jobs, which makes the pickings particularly ripe for those looking to scoop up traders.


The article quotes a Fed official as saying they have implemented programs that are “clearly outside the traditional credit-easing tools” that have been the Fed’s normal course of operation.  In recognition of the Brave New World in which they find themselves, the determination was made that new people – and new skill sets – need to be brought in to better manage credit risk.  This is also in recognition of the sheer quantity of securities the Fed has purchased recently – the FT states their assets have more than doubled in the past year and now exceed two trillion dollars.


Who is going to ride herd on that bundle?


But there is another question – and the answer might be more disturbing even than you think.


New programs already implemented at the New York Fed range from “first-ever purchases of mortgage-backed securities to lending money to hedge funds to buy securities backed by loans.”


The entity that, if the Obamam / Geithner plan is approved, will become the Systemic Risk Supervisor is in danger of, itself, becoming one of the greatest sources of systemic risk.


How will the Fed manage its plethora of new programs?  The Fed looks like it will be funding just about everything.  And it will provide the liquidity to support a two-sided market in what it buys and sells.  From where we sit, it looks like the Fed will be trading against itself.


Perhaps Chairman Bernanke doesn’t really get that, because he reads lots of books about what happened under FDR.  And guess what?  The traders being hired now won’t tell anyone – because they will expect their compensation to be tied to how their desk does, and not to the overall robustness of the markets, which is actually the Fed’s job.


Oh, and one other thing.  The articles we have read about this hiring spree say nothing of oversight and surveillance.  The Fed is hiring people whose job will be to provide liquidity to hedge funds, so that the hedge funds can buy garbage.  They are hiring people to trade existing mortgage-backed securities, and to take the plunge in commercial mortgage debt.  For what our two cents may be worth, we think a lot of the price risk may be out of many of the instruments they are gearing up to buy, and there are decided advantages to being on both sides of the market.


At the same time, we have heard it reported anecdotally that good quality surveillance and compliance people are in short supply.  The professionals who recruit in the sector say the very best have kept their jobs, or were snapped up in short order as firms vanished out from under them.  As to the rest – yes, there are compliance professionals out of work in their hundreds, just as there are bankers, traders, brokers and research analysts contemplating forced career changes.  But it is not the very best ones. 


The SEC has created an internal compliance function – though it remains to be seen how seriously this will be taken.  No less important will be the in-house surveillance team charged with making sure the New York Fed’s new trading machine runs clean.  In the absence of ill will, there will be plenty to do just to make sure the transactional and record-keeping part of the business remain free of conflict. 


Never mind what will transpire when someone decides to do something improper.  The Fed’s brief will be to keep the wheels turning – that is, provide liquidity.  In order to do this, it clearly resides on both sides of the market.  Desks will throw positions over the transom as fast as they can.  In this environment, is there an opportunity for fraud?  Would you like a better price on that trade?  Is there something in it for me?


The Fed needs to take this new hiring spree rather carefully.  Many of the very best traders are, well, still trading.  Many of those who were good in the bull market will be found wanting if their job is to actually trade the current markets.  If their job is merely to shuffle around pieces of paper and electronic bits and bytes, then we need computer programmers, not traders.  We wonder what profile the Fed is actually looking at as their ideal trader.  We understand Jerome Kerviel is available.




Cutting The Herd


Thy thunder, conscious of the new command,
  Rumbles reluctant o'er our fallen house.
      -John Keats, “Hyperion”


“Bank of America’s Merrill Lynch unit is offering signing packages greater than those handed out in the bull market of 2006 and 2007” reports the Financial Times (14 August, “Merrill In Aggressive Hiring Push”).  Merrill’s sales force has dropped from 18,000, before the BofA acquisition, to 15,000 as of the end of June – to say nothing of the top executives who took the money and ran before Ken Lewis had even had his first public bout of petulance over those sneaky extra few billion in losses.


Merrill wants to reverse this trend by signing up to 450 new top producing brokers.  They have already brought in Sallie Krawcheck, who quickly showed her confidence in her new employer by laying out a million bucks to buy BofA stock.  Of course, if she leaves BofA in a snit, they will likely have to buy her out as part of her severance.  Indeed, given the deal-making acumen of Ken Lewis and his board, we would not be surprised to learn they had fronted Krawcheck the money, then guaranteed her against losses on the position… but we digress


New superstar stockbrokers are being wooed to Merrill with offers of signing bonuses of 140% of their trailing twelve months’ production, plus an additional 200% over five years.  The FT article quotes a recruiter as saying this is more than Merrill has ever offered new recruits.


And just who are they recruiting with these lavish payouts?


Says an anonymous Merrill veteran, “They’re bringing someone in from a firm most of us would never consider going to.  It’s not the Merrill Lynch it was and never will be.”


The herd has stampeded, leaving the stragglers behind.  Now, desperate to sell something – anything – to redeem what might still be salvageable of this transaction, BofA management has decided to go for aggressive salesmen with high production numbers.  This is a change from the Merrill we knew, that was paying people premiums for their money lines.  In today’s world, assets under management are of less value than the immediate generating of commission dollars.


As we say, the art of managing money is the art of having money to manage.  And that comes down to marketing.  Merrill used to be in the business of having money to manage.  Now it appears they are in the business of generating gross.  Trust us, these interests conflict.


“To those of us that lived it,” says the anonymous Merrill broker quoted by the FT, “it was Camelot.  It’s not any more.”


This push to hire aggressive producers is not limited to Merrill.  The FT article reports that Morgan Stanley has similarly raised the bounty – while apparently lowering the bar on bringing in new salesmen with proven track records.  This was a predictable outcome of the government backstopping gargantuan acquisitions of a failed business model. 


Speaking of “Camelot” – for brokerage customers, the days of receiving prudent investment advice from seasoned professionals may soon resemble another famous Broadway musical – “Brigadoon”, the tale of a magical place that appears for only one day every hundred years.


It used to be Buyer Beware.  Now it’s Buyer, be afraid.  Be very afraid.



Moshe Silver

Chief Compliance Officer



Stanley Ho is recovering, according to a report citing his third wife published in the Chinese-language newspaper, Apple Daily.  Ho’s wife, Chan Un Chan, visited the hospital yesterday and responded with “yes” when asked if his condition was better. 

Ho’s spokesman also labeled any speculation that the casino mogul had suffered a stroke and was immobile as being “unfounded”.



Thirty-seven more cases of A (H1N1) flue were announced on Sunday by the Health Bureau, bringing the total number of cases to 394.   The spread of the virus is still considered moderate and there have been no fatal cases.



More than ten senior police officers have been detained on suspicion of being connected with crime gangs in Chongqing.  Many of these crime gangs have set up loan-sharking operations in Macau, preying on Chongqing businessmen going to Macau for vacations.  Police have said Chongqing loansharks held 30 billion yuan (HK$34 billion) in extortionist loans.  The Chairman of Chongqing Municipal Private Business Association, Huang Wei, remarked that, “At least half of these loans” were made in Macau.

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Malcolm Knapp reported that July casual dining same-store sales declined 8.4% with traffic -7.7%.  For the third consecutive month, comparable guest count results were better than sales, which points to the significant discounting in the industry. 


Sales trends have worsened on a sequential basis throughout the year.  After somewhat of a rebound in sales following the difficult 4Q08, sales have now fallen to a level that is not much better than December.  On a two-year basis, July comparable sales are down 6.2%, only 60 bps better than December and traffic is down 7.0%, improving 90 bps from December.


It is going to be increasingly more difficult for restaurant operators to maintain margins in this sales environment as they can’t maintain their current pace of cost cutting and will soon be lapping the initial implementation of these cost saving initiatives.


Please call or email me for more details.




17 AUGUST 2009




  • ANF is looking to invest in growth almost exclusively outside of the US while likely downsizing the domestic store base in a meaningful way.  On its 2Q conference call, management made it clear that the domestic market is now mature (Author’s note: thanks for that insight, ANF).  In the near term, they are trimming capex to $185m from $200m.  270 of 987 total stores have leases coming due between now and 2010, which will give the company a chance to downsize and cut losses on unprofitable locations.  This puts ANF in the “cutting to buy time” camp.


  • For the first time in a while, we heard there may be some signs that pent-up demand is creeping into shopping patterns.  On JCP’s 2Q conference call, management expressed there are some signs that the consumer is entering a replenishment cycle after cutting back apparel purchases over the past year.  The comments also included some early color on back to school, which suggested the season is off to a decent start.  Management also cautioned that it is only 10 days into the back to school period and too early to be overly optimistic.


  • Sitting with $1bln in buying power, Asian sourcing powerhouse, Li & Fung, is looking to make acquisitions.  The company is focused on targets in the U.S. and Europe and has its eye on the HBA sector.  The company also expects that “big” acquisitions will come at the end of this year or beginning of next year.  That synchs with our view that a short-term cash flow pop will delay major M&A activity in this space for another 4-6 months (i.e. that’s when more companies will HAVE TO sell).


  • URBN’s management team made it clear the company has not sacrificed any investment in the company’s growth initiatives over the past year. After pointing out there have been no layoffs at the company despite the challenging environment, the CEO highlighted ongoing investments which include: a joint venture with an Asian buying agent, enhanced functionality of the ecommerce platform, a new mobile site, investments in social media marketing, a 50% capacity increase in the East Coast distribution center, and development of European infrastructure to support aggressive growth in the near future. The company announced that it expects there could 100+ stores in Europe between the two main brands.  This is the most defined and aggressive view we have heard on non-US growth from URBN.


  • On the surface it appears that KSS’ store growth of 20-25 stores for next year seems very conservative given the company’s aggressive push to open 59 stores this year, including the strategic acquisition of former Mervyn’s location in CA and the Southwest. However, when pressed on the topic management explained that it sees many opportunities materializing over the next 12-18 months and the company will be aggressive in using its balance sheet to pursue market share opportunities through displaced real estate.


  • Opposite KSS, is JC Penney’s view that the real estate market is stressed and it’s better to remain conservative at this time.  The company plans to open 5 stores next year and plans to continue investing primarily in remodels.  Capex will decline again next year, going to $400m from $600m.  The company does not appear to be adopting an opportunistic real estate strategy despite expressing confidence in its off-mall stores.


  • Nordstrom is opportunistically taking advantage of the real estate environment and value conscious consumer with a slightly more aggressive store growth plan for its Rack concept. There are now plans to open 13 stores this year vs. a prior plan for 10. There is also a plan for 12 units in 2010, with a few additional locations to be added soon. Management noted that closures from Linens N’ Things and Circuit City have provided opportunities for new Rack locations.


  • After taking a more bearish view on the 2Q in mid-June when the company announced its convertible offering, LIZ announced an additional $100mm in cost reductions this week based on their 2H outlook. While several mid-tier retailers have suggested that promotional discounting will be no worse than last year based on significantly improved inventory levels, CEO McComb continues to believe that markdowns will be a major issue again this holiday season as the means by which department stores will drive traffic. That said, we met with him several weeks ago, and believe that the direction of LIZ’ financials are inflecting.


  • Capex at WMT is beginning to show signs of picking up from the bottom. Almost all the growth is coming outside of the US which is the only place left to expand. Also some step up in a worldwide systems initiative to create common platforms. With fairly stable US results and inventory productivity still improving, it appears that cash flow is getting a slightly higher allocation towards non-US growth. 


  • Warnaco opened 43 new retail locations in the 2Q, significantly more than expected. With International sales +8% in the 2Q helping to offset domestic weakness and a long runway for international retail growth north of 20% over the next 3yrs, we wouldn’t be surprised if the company accelerates its growth plans further before year end.  


  • Macy’s indicated it is seeing benefits from cost savings and consolidation efforts materialize faster than originally excepted.  They are also shifting marketing dollars out of 2Q/3Q and into 4Q.  All of these moves amount to defense in an effort to make/exceed expectations.  Capex is still muted here at $400m vs. a normalized run rate of $800m. 




-Shoemaker Skins Footwear Inc (SKNN.OB) filed for Chapter 7 bankruptcy - Skins cited assets of less than $50,000 and liabilities of between $10 million and $50 million, according to court documents filed on Friday in federal bankruptcy court in Delaware. The New Jersey-based company makes shoes with a two-part structure consisting of an outer collapsible, interchangeable shell called its "skin," and an inner orthopedic support section called the "bone."  <>


-Four Asian manufacturers filed an involuntary Chapter 7 petition against Ellen Tracy seeking to liquidate the company - The filing was made on Friday in Manhattan bankruptcy court. The four petitioners are: Shanghai K&J Apparel Co. Ltd., Shanghai, which owed $1.5 million; Chinamine Trading, Kowloon, Hong Kong, $676,000; Excellent Jade Ltd., Kwai Chung, New Territories, Hong Kong, $1.2 million, and Shanghai Mandarin Fashion Ltd., Shanghai, $432,000. Kenneth Rosen of Lowenstein Sandler in Rosalind, N.J., who represents the petitioners, said Ellen Tracy has 20 days to respond to the filing. He said the filing was necessary and called it an “alternative of last resort” because the debts were “substantially” overdue. Rosen also said he is seeking to have a bankruptcy trustee “investigate what happened to the Ellen Tracy license,” referring to the one in existence before RVC came into the picture. Fashionology Group, which is winding down its manufacturing business, last month sold the operational division of Ellen Tracy to RVC Enterprises. RVC was given the license for use of the Ellen Tracy brand for women’s sportswear in both the better and bridge categories. RVC is said to be in talks with several chains, including Macy’s, Dillard’s and Lord & Taylor. <>


-Kmart is launching a new apparel brand, Thre3 by the U.S. Polo Assoc., in time for the back-to-school selling season - The collection for women, men, girls and boys consists of jeans, sweaters, rugby shirts, polo shirts, woven shirts, fleece, zip pocket hoodies, French terry blazers and twill trousers. Prices range from $9.99 for children’s graphic T-shirts and women’s tops to $24.99 for women’s signature boot-cut jeans. Jordache Ltd. is responsible for designing, manufacturing and other creative aspects of Thre3. The U.S. Polo Assoc. is a division of Jordache. Four deliveries a year are planned. Thre3 apparel is preppy, designed with the elite sport’s classic iconography in mind. Thre3 seems to be taking a page from American Living, the collection sold at J.C. Penney designed by the Global Brand Concepts unit of Polo Ralph Lauren Inc., and Lauren’s Chaps, which is exclusive to Kohl’s. The Thre3 opening page on the Kmart Web site shows two neatly scrubbed men wearing khakis and jeans with polo shirts and two All-American women in twill pants with a polo and a woven blouse with ruffles. The Thre3 logo features an American flag and says, “Confident, iconic American style brought to you by the U.S. Polo Assoc.” <>


-UK Clothing and footwear sales in London fell back during July as the wet weather during the month drove sales of indoor items such as homewares and furniture - Total retail sales in London during the month grew 2.2% on a like-for-like basis, according to the British Retail Consortium (BRC)-KPMG London Retail Sales Monitor. The figure compares with a 5.8% like-for-like increase in sales during the same month a year ago. Footfall in July dropped below its year earlier level, hit by the wettest July on record and the end of Sale periods. In July, the capital benefitted from overseas visitors cashing in on the weakness of the pound against the euro. London outperformed the rest of the UK, which notched up a 1.8% increase in like-for-like sales during July, by the narrowest margin for nine months. <>


-Japan has officially emerged from the recession in the second quarter - Japan’s gross domestic product increased 0.9% in April-June from the previous quarter, expanding at an annualized rate of 3.7% and growing for the first time in five quarters, the country’s Cabinet Office said. The figure came in slightly lower than economists’ expectations for 1% quarterly growth and 3.9% annualized growth. Last week, data from France and Germany showed that both of those countries have also emerged from recession, defined as two consecutive quarters of economic contraction.  <>


-The waiting continues in the hard-hit contemporary retail market - While merchants wait for the next big trend that will spur consumers to get over their reluctance to buy, the finance executives in the back office struggle to pay bills and keep credit flowing. As a result, many of their vendors are waiting for payment as well. The result has been sharp sales declines for stores and an increasingly complex credit picture for their suppliers. And the pressure appears to be building on retailers in the sector, from Intermix to Barneys New York’s Co-op, Calypso to Scoop. Barneys New York had problems with factors not approving credit in the past year, in part because of a lack of financial information from its Dubai-based owner Istithmar, which ultimately gave the chain a $25 million cash infusion. Neiman Marcus Group, owned by private equity firms TPG and Warburg Pincus, has also been hurt by sagging sales, and factors tightened credit earlier this year. The concern surrounding Neiman seems to have eased a bit, so there’s little concern now about its contemporary Cusp concept.  <>


-Walmart to Sell Kiss's First New Music in 11 Years in Exclusive Agreement - Wal-Mart Stores Inc., the world’s largest retailer, will offer a $12 CD set with rock band Kiss’s first new music in 11 years, and plans to expand into other merchandise licensed by the group. <>


-H&M reports July sales figures - Comp trends getting sequentially better since -9% May, -5% June, and now -3% July.  Sales figures are accelerating as well since 0% May, 4% June, and 7% July. 








 JOEZ: Suhail Rizvi, Director, sold ~162,000shs ($114k) for R-2 Group Holdings as the Managing Member of the LLC


NILE: Susan Bell, Senior VP, sold 3,500shs ($189k) after acquiring the right to buy 3,500 options.


ANN: Christine Beauchamp, President, AnnTaylor Stores, sold 3,457shs ($41k) less than 5% of common holdings.


Focusing The Mind

“Sharp downward movements do that… they focus the mind, like a good hanging used to do in the Old West.”
-Judge Roy Bean
Despite Friday’s US equity market selloff coming on one of the lower volume days of the month, this morning’s follow through selling in Asia and Europe has us focusing the mind…
Last week’s catalyst of Bernanke pandering is now in the rear-view. Today’s risk management task is to look forward. Now you are seeing a US Dollar strengthen in international currency trading. Almost every time that happens, you’ll see weakness in everything priced in dollars. Commodities are trading lower right now, as are US stock market futures. This shouldn’t be a surprise.
The manic media will be looking to build a narrative around the weakness in the US futures. I’ve already heard “Japanese GDP being lower than expected” at least half a dozen times since I woke up. For one, I am short Japan (via the EWJ etf) so I have every reason to support this view – but the reality is that it’s a ridiculous reason to explain away all that’s changed in the last 48 hours of global macro market news-flow.
Contrary to what you may be hearing parroted around the Street, I thought the economic news out of both Japan (+3.7% Q2 GDP) and Singapore (-8.5% non-oil exports) were more positive than negative. I thought the foreign direct investment drop in China (-36%) was more negative than positive. I am long China and short Japan. I have no room to infuse my personal confirmation bias into these economic read-throughs. They are what they are - no matter what my positioning.
If you wake up every morning looking for data points to support your portfolio’s positioning, you are probably not going to be a winner in this game over the long term. If you wake up chasing the SP500 to a new YTD high on Thursday (1,012), and scrambling to make sales this morning down at another higher-low (989) you are just going to frustrate yourself and your clients.
Have your own investment process. Make it malleable and repeatable. Buy low; sell high.
On Thursday, I sold my Freeport McMoran (FCX) and Southern Copper (PCU), then I shorted Apple (AAPL). Why? when everyone is chasing things in this tape, you have to find a way to focus your mind and book gains. You also have to be able to short other people’s hopes. You have to have the ability to maintain opposing thoughts in your mind and still fade the market. You have to find ways to win.
On Dollar down days, the Bankers, Debtors, and Politicians get paid – meanwhile American commoners and the Chinese government get plugged. One of the main reasons why the US stock market failed to make a higher-high on Friday was just that. The US Consumer gets this trade – he isn’t stupid. Friday’s Michigan Consumer Confidence reading flashed another lower-high, catching those who don’t get what the American consumer does off-sides.
This morning’s USA TODAY/Gallup Poll reveals that, “57% of adults say the stimulus package is having no impact on the economy or making it worse… 60% doubt that the stimulus plan will help the economy in the years ahead… 18% say it has done anything to help improve their personal situation…”…
As the US Dollar tested new YTD lows last week, the US stock market made new YTD highs. All the while, Chinese stocks started to fall. Again, this makes sense  - if you believe me that the Chinese don’t like this US Dollar Devaluation any more than the American Saver does.
Last night, the Chinese stock market got hammered, trading down another -5.8%. Since it peaked on August the 4th at 3,471, the Shanghai Composite has seen a -17% correction. Never mind a correction – for a country, that’s a crash!
So what to do here this morning? Run around like chickens with our heads cut off yelping for bananas? Uh, no – chickens don’t eat bananas. Let’s just take a deep breath, and remind ourselves that the Buck can start to Burn again just as quickly as it stopped going down. This remains the global macro trade that continues to matter. It won’t forever – but until forever comes, don’t fight it – capitalize on it.
I have immediate term TRADE downside support levels for the SP500 and Nasdaq at 989 and 1,965, respectively. Immediate term TRADE upside resistance for both US indices  is now 1,015 (SP500) and 2,019 (Nasdaq).
Best of luck out there this week,


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, which posted a positive Q2 GDP number.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient 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.

VXX – iPath VIX
As the market rolled over and volatility spiked, we shorted the VXX on 8/13.

UUP – U.S. Dollar Index 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.