Obama Approval Rating Hitting New Lows

According to the Rasmussen Daily Tracking poll, President Obama’s approval rating has hit literally the lowest approval rating of his Presidency.   After bouncing back from -14 rating (the difference between strongly approve and strongly disapprove) on August 23rd, his rating is now back in negative double digit territory at -10.


While -10 is not as low as the reading on August 23rd, the internals of the poll have hit serious extremes.  Total disapprove is now at 52%, while strongly disapprove is at 42%.  Both of these are the worst readings of Obama’s Presidency and these internals suggest that ultimately the index will retest those lows.


In contrast, the Real Clear Politics polling aggregate still suggests that President Obama’s rating remains in positive territory.   As of the most recent reading on this poll aggregate, Obama’s approval rating is 51.7, which is positive, but, once again, the worst rating of his Presidency.  In addition, this poll aggregate is distorted by an outlier poll from the Washington Post and ABC News which suggested that Obama’s approval rating was 57.  If we set aside this outlier, then Obama’s approval rating is even lower in the aggregate. 


While we can debate whether President Obama has been effective or ineffective, to some extent that facts don’t lie so the debate is frivolous.  Both the Rasmussen Daily Tracking Poll, which is reputed to be right leaning, and the broader poll aggregate from Real Clear Politics suggest that Obama has reached an all time low in approval.  He entered the Presidency with sky high approval ratings and has since crashed down to earth, and in rather expedient fashion.


The primary culprit for this decline in approval appears to be the health care debate. 


We have a friend that is a partisan Democrat and she outright blames the Republicans for hijacking the debate, and that point has some merit.  The Republicans have not offered a real alternative to “Obamacare”, but have rather attacked the proposed legislation based on its potential extreme outcomes.  In effect, Republicans have combated the legislation by fear mongering.  While this Republican fear mongering has impacted Obama’s popularity and the popular view of healthcare reform, President Obama also shares the blame of the poor perception of heath care reform.


The Dean of Columbia Business School, R. Glenn Hubbard, articulated this point effectively in an op-ed in the New York Times this weekend.  As part of the op-ed, he wrote the following:


In the case of health care reform, we also need two debates. The first is over how to reform insurance arrangements to reduce cost growth and provide better value for the money spent. The second should be about access to health care. To achieve these goals, the president could embrace a compromise of tax and regulatory reform for cost containment, and progressive intervention to offer assistance to low-income individuals. But President Obama, like his predecessor, has been unwilling to let go of his campaign goals even as his words fuel intense partisan debate and obstruct his ultimate objective of improving health care value.


Dean Hubbard was comparing his experience attempting to reform Social Security while working for then President Bush, with the current healthcare reform attempt. 


Given the sky high costs associated with healthcare in America and the fact that many are uninsured, there is clearly a reform plan that works and will better serve Americans in the future.  As with the Social Security debate, the ability for the President to articulate the debate on the correct terms is critical.


President Obama’s primary issue is that he may have actually picked the wrong fight. 


While healthcare in the United States certainly has its issues, especially on the cost side, generally speaking voters are not all that dissatisfied with the care they receive. According to another recent Rasmussen poll:


“There’s also the reality that 74% of voters rate the quality of care they now receive as good or excellent. And 50% fear that if Congress passes health-care reform, it will lead to a decline in the quality of that care.”


Thus, according to this poll, American voters are not dissatisfied with their current care, but incredibly concerned that their care will decline if health-care is “reformed”.   President Obama is taking his shot with healthcare, but it has had a major impact on his popularity, which will take a long time to recover and likely have a major impact on mid-term elections, and his ability to win future legislative battles.


Daryl G. Jones
Managing Director


Obama Approval Rating Hitting New Lows - a1


Chart of The Week: Compression

If there is a metaphor for the 2009 Meltup, it’s the yield curve. In the chart below, Andrew Barber and I have outlined one of our most relevant takeaways from last week in global macro: the rolling over of the 3-month moving-average in the Yield Spread (10-year minus 2-year US Treasury Yields).


We’ve been using this Breaking/Burning Buck as a tagline for REFLATION since Q209. It maps this chart and it simply concludes that the best way to understand why everything priced in US Dollars can REFLATE is to follow the money. As the US Dollar is held underwater, everything priced in those Dollars is buoyed. And, as the Buck Burns, the Bankers get paid.


One explicit way that the Bankers of America get paid is via the steepening of the yield curve. Borrow for free on the short end and then lend long at higher rates. Tell the Street you had a great quarter and keep justifying this pig-out on the yield curve by calling it whatever you like – just tell your depositors we are having a Great Depression.


One way to visualize this is to look at the chart below. The lowest point  on the chart is 127 basis points (December 26, 2008). The highest point came on June 4th, 2009 – when I’d argue that we heard the peak of Great Depression storytelling out of Washington. That peak, was the mother of all peaks. A Yield Spread of 276 basis points was not only the highest on this chart, but the highest we have EVER seen. Ever, of course, is a long time.


Now what you are seeing is COMPRESSION. Compression, on the margin, is bad. Bad for Bankers that is. Good for the US Dollar. Good for US Consumers…


Mr. Market definitely cares about this. Look at what compression did to the US stock market (Financials in particular) during the last phase where we saw this 3-month moving average rollover (Q408 to Q109). The rest, is history…


Keith R. McCullough
Chief Executive Officer


Chart of The Week: Compression - cotw aug 28 b



    AUGUST 31, 2009



    Another month is set to pass, and another month where retail will have continued its charge forward. The key driver, of course, has been earnings revisions. As we’ve been banking on since March, earnings revisions have driven this horse down the stretch over the summer. Three months ago, we were looking at 12-month forward consensus earnings growth expectations of -15%, and that’s since climbed by 39 points to +24%. Yes, a 39% up-shift in earnings power. Yeah, we all know that the market discounted the sell-side’s estimate mismatch from reality long before it showed up in reactive research reports, but interestingly enough, the group’s multiple is HIGHER today than it was when earnings estimates were still in the tank. We’re looking at 16x earnings – near peak levels – on 24% earnings growth estimates. This is the same period, mind you, where retail’s short interest remained consistently at the high end of all industry groups at 14% of float. The bottom line is that retail outperformed the S&P by 2.4% this month-to-date, 9.5% over the past three months, and 26.0% since August of ’08. Yes, that’s an annualized rate of 28.8%, 38.0% and 26.0%, respectively. Yes, that spells O-u-c-h to those that are not allowed to be bullish. But that’s history…

    What’s the setup now? Simply put, to put fresh money in this group, you need to argue multiple expansion beyond 16x. I cannot imagine I can find a single sane person that would argue that (heck, maybe that’s bullish in itself). In fact, we’ve already started to see the delta on earnings revisions flatten out (not good). But more likely, we’d need to argue that 24% earnings growth is too conservative. That was easy 3-6 months ago. But not quite today. Now we start getting to the point where we need to argue a good ‘ol fashioned demand recovery instead of simply gross margin stabilization, SG&A cuts and lower capex. Could we see a snapback in spending in spring ’10 as we anniversary a weather impacted 2009 at the same time we see a slight economic recovery? Yes. But I consider that a false start, and one that I’m not going to pay up for today. I still like the names where I see either meaningful earnings deviation, or those that are M&A targets (which should pick up in early ’10). Favorites continue to be smaller-focused, such as UA, PSS, LIZ, KSWS. I don’t like VFC, TJX, ROST, GIL, and TBL.





    Some Notable Call Outs


  • While Tiffany’s U.S same store sales still remain under pressure, the spread in performance between the New York metro region and the rest of the chain is narrowing. In the recently reported second quarter, U.S same store sales declined by 27%, with the nine New York stores down 29%. The trend in the NYC area showed a measurable improvement vs. Q1, when the group of nine stores posted a 40% decline. The 5th Avenue flagship store continues to suffer from large declines in European tourist traffic year over year.


  • In an effort to improve its marketing aimed at growing the women’s line, Under Armour has been conducting agency reviews to choose a firm that will lead this campaign. Historically, UA has not used full-service outside agencies for ad campaigns but has instead used consultants and design houses in collaboration with its internal marketing department. We look forward to hearing more about these efforts and any potential marketing changes focused on women. Given the huge opportunity to differentiate the brand between its core male and female demographics, we see great potential form any changes that lead to a more feminine message geared towards women athletes. The company has often been criticized for portraying a very male-oriented macho image even in its effort to grow its women’s apparel business.


  • A visit to a mall in the NY area over the weekend revealed extremely light inventory at an Abercrombie and Fitch. Signs of tight inventory control were extremely visible to the consumer, as racks were spaced with 2-3 inches between hanging garments and stacked items were maxed out at 4-5 high. Interestingly, the clearance rooms in the back of the store and the full priced middle rooms were so thin on inventory there were actually multiple empty shelves on the wall. If I didn’t know any better, I may have thought this location was preparing to close. Staff levels were also extremely thin, with not even one employee per room visible. It is not wise to make a characterization based on one store visit, but with the key BTS season ramping up, this was eye-opening to see first-hand. 


  • Having been an owner of Anchor Blue (a casual-apparel chain) since 2003, Sun Capital has reacquired a majority stake in the company through the bankruptcy process. Given the increased ownership stake coupled with the likelihood of some losses along the way (on the company’s way into bankruptcy in May) it appears Sun has “traded” this asset on and off over the past 6 years. Sun Capital has now seen about 12 portfolio companies go bankrupt since the beginning of 2008.



    -Footwear M&A show signs of pick up in coming quarters - After several seasons of silence on the mergers-and-acquisitions front, the footwear industry is beginning to see signs that deals might pick up over the next several quarters. Several companies are flush with cash and have been vocal in their hunt for strategic opportunities in the contracting vendor environment. Still, most analysts believe it is unlikely the market will see any large-scale deals until at least the end of 2010, calling last month’s $979 million marriage between and an anomaly. Acquisitions are a major focus at Iconix Brand Group Inc., which has said it is looking to get a deal done by the end of 2009. Cash rich Steven Madden's  management has said there are three acquisition targets on the firm’s radar, and analysts speculate that a men’s or women’s fashion brand with a similar demographic could be synergistic. Even Skechers USA Inc., which has completed few buyout deals since its inception, recently said that the abundance of small, niche companies available in the marketplace could be a path for expansion, especially since the company has $257 million in cash to spend. <>


    -Contemporary apparel commit to fashion forward and realistic pricing - Makers of contemporary and young contemporary apparel are renewing their commitment to a more fashion-forward sensibility, lowering wholesale pricing and in some cases, launching divisions to address a wider customer base and reel in new business. Although faced with tepid retail sales, embattled lenders and buyers plagued by dwindling budgets and wary customers, contemporary and young contemporary companies are aiming to cut costs, not aesthetics. <>


    -Recession showing signs of retreat - Luxury firms like Hermès and Tiffany continue to feel the squeeze; the world’s largest beauty company, L’Oréal, is coming under increasing pricing pressure from consumers reluctant to buy more expensive shampoo, and the second-largest discount retailer, Carrefour, is still working on a massive restructuring to prepare for an eventual upturn. But while executives remain extraordinarily cautious, there is a growing sense at those firms, as well as companies ranging from J. Crew to Guess, that things may have bottomed out across the board. Ceo’s have begun to talk expansion and growth rather than cutbacks and retrenchment, plotting new store openings and trying to grab even more market share. <>


    -Japan's Retail Sales Fall for 11th Month on Employment Woes, Poor Weather - Japan’s retail sales fell for an 11th month in July, extending the longest losing streak since 2003, as poor weather and a worsening job market kept shoppers at home. <>


    -Garment manufacturers in Nepal receiving more international orders - Garment manufacturers in Nepal are expecting market revival as the industry has been recently receiving more international inquires and orders from the US and India, according to president of Garment Association of Nepal Prashant Pokhrel. In the first seven months of the ongoing year, there was a slump of 56% in garment export to the US. During this period Nepal exported US $4.1 million worth of RMGs against its shipment of $9.4 million during the same period last year. However, the industry experienced an 8% increase in exports in July after a fall for eight consecutive months, according to GAN. In the meantime, the tabling of a bill at the US Senate to allow preferential entry for Nepali garments has also contributed to the increased orders. Although the country has been receiving more inquiries for garments, the actual orders received are not enough to keep the factories running for the whole year, said the official. Just seven or eight garment factories are working now and if bulk orders are received from international markets, 36 more garment factories can be reopened at short notice. <>


    -UK optimism over the rest of the year - Although UK's high street sales fell for the fourth consecutive months to August, retailers have shown optimism about the outlook in the rest of the year. According to its monthly Distributive Trades Survey, 34% of retailers expressed that their sales volume in the year to August had risen, while 51% said they fell. The resulting balance in August of -16% was similar to sales declines in the previous three months but was better than expected. A similar fall in sales is predicted for September (-14%). Towards the end of the year, a balance of just -2% of retailers are expected, the least negative outlook for nearly two years. <>


    -In Style: Laid Back - Laid-back styling is going to be a strong note for summer, with vintage-inspired details such as shell beading for women and printed canvas for men creating effortless, down-to-earth looks. Fringe trims and easy slides are working in concert to create a casual vibe. <>


    -Under Armour is hoping for a slam dunk with a new viral video starring NBA point guard Brandon Jennings - The two-minute documentary-style spot, called “Back :02 Practice,” was shot on location in the Milwaukee Bucks’ old neighborhood in South Central Los Angeles and shows the young athlete hard at work on the court and outfitted, naturally, in a pair of customized Under Armour sneakers. A second video, with freestyle skier Jen Hudak, highlights the brand’s running footwear. Both spots were directed by Douglas Sloan of New York-based IContent and are airing on, YouTube, and other sites. Though the Baltimore-based company’s basketball shoes have not yet rolled out to retail stores, the firm has been wear testing them with college teams since last spring, and Jennings has been in them for almost a year, according to a company spokesperson. In addition, last week, Under Armour announced it would sponsor 23 boys’ and girls’ high school basketball teams for the 2009-10 season as part of its Undeniable program. <>



    -Ralph Lauren to Open Up to 15 China Stores Yearly as U.S. Sales `Flatten' - Polo Ralph Lauren Corp., designer of Chaps and Club Monaco clothing, plans to open as many as 15 stores annually in Hong Kong and China as U.S. sales slow. <>


    -Oakley CEO steps down - David Scott Olivet has stepped down as CEO of Oakley, according to the Orange County Business Journal. Colin Baden, president of Oakley since 1999, has taken over as CEO. <>


    -A line of premium footwear by Timberland will land in select nationwide Saks Fifth Avenue stores in September - A pop-up shop will also launch at the flagship location in New York City. The collection features hand-sewn boat shoes (a Saks' exclusive), as well as styles from the brand's boot company and Abington lines. The NYC Saks pop-up shop will be open from Sept. 9 to Sept. 20. "We are proud to partner with Saks Fifth Avenue, a retailer that shares our history of style and commitment to modern craftsmanship," says Tom Lucas, vice president of sales for Timberland North America. "As part of this debut, Timberland will be featuring our highest-echelon premium footwear collections and we are excited to see the response from Saks customers, who are known for their discerning taste and appreciation for premium quality and authentic style." <>


    -K-Swiss parties in New York with tennis stars to celebrate spring 2010 line - K-Swiss brought its California sports aesthetic to New York for a tennis-themed party celebrating the spring ’10 line and some of its featured athletes (including Vera Zvonareva, who’ll be testing her skill on court in Queens, and longtime spokeswoman Anna Kournikova). K-Swiss put its people to work on the runway, along with recently named skate line creative director and pro skater Greg Lutzka (at left). Lutzka told Insider the company was close to signing more skaters to its team, which should be finalized by the end of the year. He also spilled the specs for the signature skate shoe he will release next year: suede with a three-piece toe, vulcanized sole and high- and low-top versions. <>


    -Fabolous at Foot Locker - Brooklyn-based rapper Fabolous stepped out in a Manhattan Foot Locker last week to support his partnership with Reebok and its new Classic Remix collection. While fans flocked to meet the “Throw It in the Bag” artist, Fab dished to Insider on his personal sneaker style. “Right now, I am digging high-tops, but it all depends on what I’m wearing,” he said, noting that comfort and fashion are key to a successful stage look. And when on tour, he never misses a chance to eye new swag. “I like to stop in all the hot spots across the country and see what’s new in the stores.” The Classic Remix Tour will next take Fab to New Orleans, Miami, Houston and Atlanta. <>


    -Foot Locker teams with Gen2Media Corp to launch an exclusive, ad-supported internet television channel - Gen2Media Corporation, a fully integrated digital media, technology and marketing company, today announced that it has teamed with Foot Locker, Inc. (NYSE:FL), the New York-based specialty athletic retailer, to launch an exclusive, interactive, ad-supported Internet television channel that will be available for viewing on Foot Locker's web site later this fall. Powered by Gen2's proprietary, patent-pending video publishing platform and Smart Content Management System(tm), FootLockerOnlineTV will showcase custom video programming and digital advertising specially created to appeal to millions of visitors that collectively frequent Foot Locker's web properties each month. Bob Stephan, Director, Partner Marketing at, stated, "With Gen2's Partnership, we look forward to providing our web visitors with an even more vibrant and engaging online experience through on-demand delivery of high impact, professionally-produced video programming that is both informative and entertaining. We also expect that the diverse and flexible ad serving opportunities that Gen2's video publishing platform enables will also be an exciting opportunity for potential advertisers who may be interested in messaging our large and loyal following of athletic footwear and apparel enthusiasts."  <>


    -Mass merchants lead retail categories with a 15% rise in July traffic - With the sharpest increase in traffic at, mass merchants and wholesale clubs posted a 14.8% year-over-year increase in the number of unique web site visitors in July to lead five other retail categories measured by Compete. <>


    -Talbots dresses up its web site with a new look and more personalization - An updated rich media application on the retooled lets visitors shop by outfit and see recommended shoes and accessories. The revamped site runs on an ATG e-commerce platform Talbot`s installed last year. <>


    -American Apparel introduces another strange idea with Bag-O-Scraps - You've got to hand it to American Apparel, they're always finding new ways to make tired cotton and spandex duds into something exciting and marketable. In perhaps it's more extreme permutation, American Apparel will now be bypassing design and production altogether and opting to sell the Bag-O-Scraps, which the AA website describes as: "collected cuttings from some of your favorite fun fabrics from around the American Apparel factory to make one-of-a-kind bags of scrap fabrics. Use them for all sorts of arts and crafts. Make clever jewelry, accessories, a card for your grandma or a colorful hanging sculpture for your apartment. Each bag comes with a zine (printed on scrap paper, of course) with five fun and easy scrap projects, complete with how-to instructions." It'll be interesting to see the kinds of designs AA wearers who buy the Bag-O-Scraps will be able to come up with, and whether they will be more or less scantily clad than their current models. <>



    -Analysts take on Genesco - Analysts said troubles in the economy and uncertainty in the skate market could hinder Genesco Inc.’s earnings prospects until late in the year, even after the company beat expectations during its second quarter. There is worry about the skate shoe category, which is a big part of Journeys’ mix.  Some analysts are hesitant about Q3 and point towards Q4 as the recovery point.  The CEO said the chain had adopted a more promotional position heading into fall, citing the wider distribution plans of some vendors, which is increasing competition. Nevertheless, he said he felt positive about the retailer’s product assortment. <>


    -Analysts applauded the leadership of DSW Inc.’s recently appointed president and CEO, Michael MacDonald - Some analysts liked DSW's ability to cut down on costs, which had not been focused on as much in the past by DSW.  Analysts seem to like the direction the new CEO is steering the company. During the quarter seasonal sandals, early demand for fall boots, pumps, and comfort shoes drove sales, but men’s shoes remained weak. The new CEO said that the company remains committed to the strategy of providing a trend-right product assortment, value and convenience, and pointed to an action plan to better execute on those core areas of the business. He declined to outline the specifics, but said consumers would begin seeing elements of the new initiative this fall. <>


    -Analysts cautioned that sluggish sales trends and an increased reliance on promotions could hurt Brown Shoe’s bottom line. Although Brown had tried to rely less on the buy-one-get-one strategy at its Famous Footwear stores, it was forced to reintroduce BOGO in June and plans to continue the promotion throughout the back-to-school season. “We changed our promotional cadence early in the [second] quarter in favor of single-pair promotions,” Brown President and COO Diane Sullivan said on a conference call. <>


    -Saucony is getting women into the gym with its new women's cross training shoe the Grid Virtue - Saucony may have made its name in running, but the Lexington, Mass.-based brand (a division of Topeka, Kan.-based Collective Brands Inc.) is getting women into the gym with its new women’s-specific cross-training shoe, the Grid Virtue (at left). The $75 style adds more lateral support than Saucony’s traditional running silhouettes for the side-to-side motions of training. The lightweight 9.7-oz. model has a forefoot groove to accommodate spin-class bike pedals, and also features a bunion screen on the toebox to relieve pressure in an area where women traditionally need flexibility. The Grid Virtue will be available at sporting goods and family accounts. <>



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


    08/28/2009 10:29 AM

    SELLING PSS $15.69

    McGough doesn't like the stock into the EPS print. He likes it coming out of the print. Selling high in order to manage risk around the event. KM


    08/28/2009 12:51 PM

    COVERING AZO $147.26

    Covering on red. I think people are figuring out what the Cash for Clangers program means... KM


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Duration Mismatch

“If a man takes no thought about what is distant, he will find sorrow near at hand.”



There are a lot of things about this business that are challenging, but what we refer to internally as Duration Mismatch is at the top of the list. With an increasingly interconnected global marketplace changing the facts on our screens every day, the perpetual collision of investment durations creates both noise and opportunity.


Are you really an investor “for the long run”, or does that narrative only apply to your money manager who has learned that the art of managing money is having money to manage? Are you a short term “trader”, or are you a risk manager? Are you allowed to change as the facts change or does your investment mandate draw a box around your head? Do you own your duration?


By learning the hard way (losing money), I have come to the conclusion that it’s best to be duration agnostic. You show me a market that crashes to the upside for a +52% move since March 9th, 2009, and I’ll show you a market that I would have liked to have bought and held for that duration. You show me a market that crashed -57% like it did from October 10th, 2007 to the downside, and I’ll show the efficacy of daily risk management. Everything has a time and a price.


In the US market this morning I am presented with the following durations to consider:


  1. Immediate term TRADE = bullish (month end)
  2. Intermediate term TREND = bullish (provided that the Buck continues to Burn)
  3. Long term TAIL = bearish


The beauty of Wall Street is that, not only do people fancy themselves as some of the most intelligent people on earth, they actually are. That beauty provides tremendous opportunities. Being too intelligent quite often results in having duration mismatch.


Whether it was all of the “smart people” being short the US Housing stocks in Q2 of 2004 or their being short the US stock market in Q2 of 2009, it’s all one and the same. It’s called being too early. Timing in this business is everything. Show me a fund manager that has crushed it every year for the last 9 years, and I will show you Bernie Madoff.


Back to durations here in the US stock market, here are my immediate term TRADE levels of risk management this morning:


  1. SP500 support = 1017, resistance = 1041
  2. Nasdaq support = 2006, resistance = 2058
  3. Dow support = 9452, resistance = 9703


In the immediate term, I remain long the Nasdaq and short the Dow. In the intermediate term, that setup of long liquidity (Nasdaq) and short leverage (Dow) continues to prove to be a winning strategy (Nasdaq is +28.6% YTD and the Dow is +8.8%). In the long term, as cost of capital rises and access to it continues to tighten, I want to maintain this investment “style” – again, long liquidity, short leverage.


In the long term “we are all dead” – we don’t need Keynes to reveal that, but for whatever reason when considering investment durations, his whisper is always reminding us of investor mortality. Successful investment durations and styles are not perpetual. Our risk management role, in the long term, is to constantly evaluate the immediate term relevance of these strategies and their effectiveness.


In today’s long term, these are the two most important global macro factors: The US Dollar’s price and Chinese demand.


In today’s immediate term, the US Dollar Index remains broken and so is China’s Shanghai Index. Yes, one of those things is not like the other. China breaking down through both the immediate term TRADE line (3166) and the intermediate term TREND line (2962) is as new as last Wednesday (on 8/26, China closed above the TREND line). That’s why we sold out of it.


Context is always critical. We have been bullish on China since December of 2008, and Andrew Barber called for a -17% correction when we published our long term “China Black Book.” But after last night’s -6.7% smack down in the local Shanghai Composite exchange, there are no “buts”… we’ve already played the risk management hand that is in front of us, and if we hadn’t, we would be doing so, and promptly, this morning.


Early last week, we booked another gain in the China closed end fund (CAF) and replaced that stylistic Chinese exposure via the lower volatility, lower beta H-shares (EWH) in Hong Kong. While we are still bullish on China for the “long run.” That doesn’t mean we have to own it at every time and price.


Whether you are long China here or short US Energy stocks on the heels of a big merger Monday (Baker Hughes $5.5B for BJ Services), everything has a time and a price. Every investment’s success is largely determined by timing. Every day our goal remains managing how “smart” we think we are alongside our greatest risk, Duration Mismatch.


Best of luck out there this week,






XLV– SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.


EWZ – iShares BrazilPresident Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.


QQQQ – PowerShares NASDAQ 100We bought Qs on 8/10 and 8/17 to be long the US market. 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. 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.





LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21.


EWJ – iShares Japan –While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.



LVS has handed Barclays its first role in a Hong Kong initial public offering in a decade.  Barclays will work on the deal alongside Goldman Sachs, LVS’ regular advisor, which could net the banks $75MM of fees.   Barclays earned the role by helping secure a crucial debt covenant lifeline from its banks after the casino firm almost breached its Macau loan agreements earlier this year.  Sands owes US$3.2 billion to its Macau lenders out of a total debt pile of US$10.4 billion. 

LVS wants to sell US$2.5 billion worth of shares in its Macau unit to repay debt and restart stalled casino projects.  Sand’s bankers face the challenge of convincing investors that it is a good time to invest in Macau and also that the company, highly indebted and with many projects running over schedule, is an attractive investment.  The timing of WYNN’s $1BN IPO in HK may also impact the success of the offering since many portfolio managers may not have room in their portfolios for both listings.



Construction of the Hong Kong-Zhuhai-Macau Bridge will commence on December 20, on the 10th anniversary of Macau’s return to the motherland.  Zhuhai Vice Mayor Chen Honghui is reported to have announced the date while attending a public function.  The construction of the 29.6km bridge will take five years to complete.  The Bank of China will provide 22 billion Yuan of the total 37.6 billion Yuan of project financing.  The balance of the 70 billion Yuan or $10 billion USD in total investment needed to complete the bridge will be provided by the central government and by the governments of the province of Guangdong and the special administrative regions of Hong Kong and Macau.



Macau’s real gross domestic product contracted 13.7% year-over-year in the second quarter of 2009, following an 11.9% (revised) decline in the first quarter, according to the Statistics and Census Service.  The statistical office said that this was the worst GDP decline since records began.


Taiwan has clearly made a statement by repealing its gaming ban after more than 15 years.  Penghu, Kinmen, and Matsu are possible new gaming jurisdictions.



Referenda coming up in Penghu and possibly Kinmen will determine the fate of gaming in Taiwan.  We believe that the earliest timing of opening would be 2011/2012 with approximately 2,000 slots maximum.  Penghu is the frontrunner at present, with a referendum already scheduled, and the best infrastructure of the three possible new gaming jurisdictions.  The incentives are clear; in the last few years, 5% of visitation to Macau has been from Taiwan.  Below are the details for Penghu.


The Process:

  • Two licenses are expected to be issued
  • The deadline for bidding for licenses is September 21, and the selections will be announced the following day
  • Bids for drawing up a regulatory framework are expected to be announced later this year
  • Bids must include minimum investment levels, the scale of operations, review mechanisms, and potential international investors if any
  • Bids must also address how the proposed project will be differentiated from other gaming markets in the region


The Requirements:

  • Casinos must be established within international tourist resort areas
  • The selected contractor is expected to assist the Minister of Transportation and Communications (MOTC) determine the scope and management of local integrated resorts, including the decision surrounding the mix of gaming and non gaming facilities in future resorts
  • Both domestic and international investment will be welcome but the acceptable percentage of international ownership is to be determined



  • Infrastructure in Penghu (although most advanced of the three possible new gaming locations) needs improvement and ease of travel from China to Penghu needs to be suitable for tourists
  • Airport runway is being extended to accommodate larger passenger jets
  • Charter flights between Penghu and 21 Chinese destinations have been approved and plans to ease visa restrictions for Chinese residents visiting Penghu are underway


Potential bidders:

  • AMZ group has been widely cited as a possible developer. 
    • Navegante Group which operates casinos in Las Vegas and Canada, would be the operator. 
    • AMZ plans on investing $300m to build a give-star 500 room resort in order to win a casino license.  The company owns 11 hectares of land on Penghu.
  • Melco - The head of the Democratic Progressives Party’s Kinmen chapter, Chen Chang-chiang, has been quoted in the press recently as saying that Lawrence Ho toured Kinmen August 7 and expressed a “keen interest” in tapping the market.  Kinmen has also been touted as a possible new casino location.  A referendum on the establishment of casinos may be held there soon (a petition demanding such has been handed in with signatures that need verification).
  • WYNN – We’ve only heard rumors that Wynn is involved but given their success in Macau, it wouldn’t surprise us.

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