Adidas: GILT Free

I saw a sale event on GILT for Adidas’ Porsche Design merchandise hit my inbox, so of course I initially took it as an opportunity to bash a perennially unprofitable business. But I pinged my colleague and Retail expert Eric Levine for his 2-cents, and wanted to share his unedited response.


McGough: Bad for ADI – again?


Levine: I don’t think so.  The market fluffed-off LULU a month or so ago when they had a similar event.  This site is probably the best example of a tasteful clearance channel the industry has seen.  The reason why it works so well is 1) it’s a limited time event and 2) they merchandise it like the product is being sold at full price.  I actually think the brands like it.  From a volume standpoint, it’s not big enough for people to get worried.  This is not like topsiders showing up at Costco by the pallet-load.


Adidas: GILT Free - adi

Slouching Towards Wall Street… Notes for the Week Ending Friday, August 28, 2009

Ben Bernanke and the Half-Baked Fed – Expecto Disaster


Duh! – Goldman’s First Call Clients Do Better


Freedom Of Dis-Information – Will No One Rid Me Of This Meddlesome Newsmedia?



Fed Up

Humans do have a knack of choosing precisely those things that are worst for them.

- Albus Dumbledore, “Harry Potter and the Sorcerer’s Stone” 


The case for a single Systemic Risk Regulator was made recently, and eloquently, (Financial Times, 25 August, “Why The Fed Should Be Given More Powers”) by Roger Altman, who has acted at a high level in both the public and private sectors.  He is well positioned to see the reasonableness of putting the Fed in charge of systemic risk, and to see the fallacies – wastefulness, political deviousness and outright impossibility not least among them – of alternative proposals.


But Altman winds up his well-reasoned argument in favor of systemic oversight by segueing into an “assumed close” that would make even a stockbroker think twice.


Having rightly argued that the Fed already oversees really big banks, and so could easily add some really, really big banks, some totally large banks, and even some awesomely humongous banks to its docket without learning a new skill set – having accurately pointed out the fecklessness of “today’s crazy-quilt and discredited regulatory system” – having noted in passing numerous institutions such as AIG, Bear Stearns and Long Term Capital Management which, though not tied to the government, were nevertheless bailed out by the Fed – and having nailed the “proposed council of regulators” as a scam designed to permit a small set of  bureaucrats with warring political agendas to keep close tabs on each other’s activities – in short, having made plenty of sense in the wind-up, Altman’s pitch is so wild it seems intended to slay the umpire.


“It is true that the Fed did not execute its regulatory duties satisfactorily during the immediate pre-crisis period.  But we had the financial equivalent of a perfect storm, and none of the world’s leading regulators saw it coming.” 


“… did not execute its regulatory duties satisfactorily…”?  Translation: don’t blame the Fed for not knowing what they were doing – they were only the world’s most important central bankers.  Look at your own self-directed IRA and tell me if you could have done any better.


“Moreover,” continues Altman, for readers weaned on Shakespearean irony, “the Fed appears to have learnt its lesson.”


We are not quite sure what lesson that was, but we think it may have something to do with parroting every step of Secretary Paulson, keeping our @#$%&*! Mouth shut when Secretary Geithner is in the room, and patiently explaining to Congress, as though they were a roomful of idiot children (perhaps apt, at that…) that we acted on advice of counsel, and counsel told us what we were doing was not illegal – you got a problem with that? 


Then – for those of us who find the comedy of Andrew Dice Clay perplexing in its subtlety – Altman drives home the point of this exercise: “Finally, Mr. Bernanke has led the Fed with skill.”


If you are sensitive to the manipulation of language, you will note the jarring switch in Mr. Altman’s presentation.  After spending several paragraphs discussing the Fed as an institution, Mr. Altman introduces his endorsement of Bernanke with the word “Finally” – effectively tying Mr. Bernanke’s personal qualifications to the structure and history of an institution.  This non-sequitur is precisely – or perhaps we should say, rhetorically imprecisely – the kind of muddled thinking that is being shopped to the public as the major media chime in to help Washington and Wall Street promote their own self-interested narratives.  It makes sense to us that the Fed is uniquely situated to take on additional oversight authority – perhaps even significant additional authority.


It does not follow that the current Chairman is the right man for the job.


Contrary to what you were taught in your high school Civics class, those in power rely not on the consent of the governed, but on their ignorance.


Journalist Chris Hedges, in his new book Empire of Illusion, quotes the following statistics gleaned from various nationwide adult literacy organizations, the US Census Bureau, and special reporting by ABC news:


“There are 7 million illiterate Americans.  Another 27 million are unable to read well enough to complete a job application, and 30 million can’t read a simple sentence.  There are some 50 million who read at a fourth- or fifth-grade level.  Nearly a third of the nation’s population is illiterate of barely literate…”


If that doesn’t scare you enough, you may want to read Susan Straight’s essay in the New York Times Book Review (30 August, “Reading By The Numbers”) about Accelerated Reader, “a ‘reading management’ software system that helps teachers track student reading through computerized comprehension tests and awards students points for books they read based on length and difficulty, as measured by a scientifically researched readability rating.”


According to Ms. Straight, the Accelerated Reader program is currently in use in over 75,000 schools, and students compete for points by doing extracurricular reading.  In many schools, students with the highest number of points receive prizes.  The largest number of points available in the Accelerated Reader system is 44 points for Harry Potter and the Order of the Phoenix.  To Kill a Mockingbird is worth only 15 points – “Hamlet”, a mere seven.


If you want to know why there is such an unbridgeable chasm between the Haves and the Have-Nots in this country, you need only look at our educational system.  This system has now bred a giant new intellectual middle class – a bourgeoisie of the mind.  Can it actually be that we have an educational system in this country that not only rewards children for reading Harry Potter, but penalizes them for reading Shakespeare?


These folks – the ones who read at fifth-grade level and better – are the ones who turn up at town hall meetings, the ones who run our factories and drive our buses and trains, who manufacture and maintain and repair our heavy machinery, who teach our children sixth-grade science.  And who vote.


To the Haves and the Have-Nots, we have now added the Think-They-Haves, an intellectual Great Unwashed who believe they understand the world.  And while the Haves are busy manipulating the dialogue – and the Have-Nots are cursing and stewing, but largely not voting (so that’s all right, you see) – the Think-They-Haves closely follow everything from Screeching Heads on alleged news television networks, to news media couching obvious political messages in language that no longer maintains even the fiction of impartiality, to editorial pages spewing unsubstantiable venom, to the vapid self justification that passes for political debate – right down to the gorgeous lapidary orations of our President who speaks softly, but has yet to brandish a stick of any consequence.


Eloquent arguments like Mr. Altman’s are key to keeping a lid on dissatisfaction and dissent.  Any fiction writer knows the way to draw a reader into a tale is to make the setting and details as realistic as possible.  The reader is drawn in, because it is an emotional process, not an intellectual one.


Mr. Altman argues for the Federal Reserve as an institution, the importance of its flexibility at key points in our financial history, and the sheer massiveness of its existing structure – all cogent arguments for a well-tailored expansion of its oversight powers.


But Mr. Bernanke’s personal qualifications to serve as Fed Chairman are not “further” to the historical argument.  Chairman Greenspan, whatever his shortcomings may have been, spent over thirty years advising industry, analyzing the details of markets and the global marketplace to come up with business recommendations that made economic sense.  By all accounts, he was pretty good at that.  After all, it got him to Washington.


Chairman Bernanke has spent his life in academia.  Critics worry his finger will not be firm or quick enough on the trigger when it comes time to do the dirty work of tightening.  So far, like a rookie stockbroker, he has learned his job on the job, making mistakes with other people’s money. 


We are not comforted, because the job of a Fed Chairman is to prevent disaster.  Remaining calm in a crisis is hardly an endorsement when the crisis is of one’s own making.


The Wall Street Journal reports (26 August, “Calm In Crisis Won Fed Job”) “Wall Street economists enthusiastically endorsed” President Obama’s re-appointment of Bernanke.  Economists polled are overwhelmingly in favor of Mr. Bernanke repeating as Fed Chairman.  This crowd – who famously have predicted eight out of the last three depressions – are now being presented to the Think-They-Have readership to affirm Bernanke’s qualifications for the job.  People who make a living by consistently getting it wrong for the people who manage your money are falling over one another to endorse the Get-It-Wronger In Chief.


If you are confused by all this, it’s OK.  Clearly, you wanted to understand how power works, and you read Harry Potter instead of Shakespeare’s Henry IV plays.  You won on points.  Congratulations.  You probably think Mr. Bernanke is a pretty amazing guy.


Expecto Patronum!




Huddle Up!


If winning isn’t everything, then why do they keep score?

-         Vince Lombardi


“Goldman’s Trading Tips Reward Its Biggest Clients”, shrieks the headline on page one of the Wall Street Journal (24 August).  This is a revelation on the order of – “Two plus two equals four?  Why wasn’t I informed of this?!”


A follow-up story reports (WSJ, 27 August, “Goldman Subpoenaed On Huddles”) that William Galvin, Massachusetts’s chief financial regulator, has subpoenaed Goldman’s records on the weekly trading huddles.  “Internal documents reviewed by the Journal show that at times, these short-term trading tips differed from Goldman’s long-term research.”  


All indications are that Goldman has compliance procedures in place to ensure that a) the short-term ideas given in these huddles do not conflict with their own published research, and b) the firm’s proprietary traders do not trade on these huddle ideas before the firm’s customers.  Lawyers and compliance officers will note that trading ideas can “differ from” published research (see WSJ quote above) without “conflicting” with it.  If you don’t like the way that hair splits, write to Congress.  Really.


Morgan Stanley publishes short-term ideas on a website, making them available to everyone, and making them transparent for those who wish to compare them with Morgan’s published long-term research.  But Goldman appears to be doing nothing more than following the tried-and-true Wall Street practice of giving favored clients a First Call, and we wonder why this is an issue.


First Call is what folks pay for.  It is the very definition of scarcity value.  Any salesman will tell you their biggest accounts get their first call.  That is how they keep them as their biggest accounts.  And Goldman’s practice, according to the news reports, appears to be the gold standard in the world of Wall Street research. 


First calls are, by definition, immediate action items, and there is no inherent conflict with longer duration research.  Short term moves come from many factors which have no connection to company fundamentals.  Indeed, since short-term moves are often tied to market forces, political or economic events, or cyclical events such as options expiration, the “huddle calls” typically require a very different risk profile than that associated with the written long-term report.  There are legitimately many investors for whom current brokerage standards would deem these huddle calls to be unsuitable investment advice.


Wall Street has always relied on long-term oriented research reports to feed the brokerage model.  A research report spells out events which will take time to unfold – typically at least two quarters – giving brokers time to build positions in the stock.  Successful retail stockbrokers typically build positions of over 100,000 shares of a stock, and their book will hold five or more such positions.  A steady flow of research reports means the brokers roll those positions every two to three months, as the time frame of the reports fall due. 


Note that this process does not rely on the research report being accurate.  If it works, great.  If not – let’s sell this piece of junk that isn’t working, and use the proceeds to buy a new position.  Either way, the broker has a document to support selling one stock, and buying another one, generating a double payday.  If it’s in print, it must be true.


By attacking the practice of the “huddle”, regulators are questioning the fundamental structure of the Wall Street business model.  A new definition of accessibility to information may be in the offing.  Meanwhile, legislation and rule-making define what makes market information “available”, and they provide the functional exemption for trading calls to be decoupled from longer-term published research.  It will take more than a state regulator going head to head with Goldman Sachs to change fundamental Wall Street practices.


Everyone comes first on Wall Street, Mr. Galvin.  But some are more first than others.




Yo – What’s The 411?


The Freedom Of Information Act (FOIA) was signed into law by Lyndon Johnson in 1966.  Its purpose is to provide disclosure of information controlled by the government, subject to certain defined restrictions and exemptions.


The latest FOIA filing in the news concerns Bloomberg LP v. Board of Governors of the Federal Reserve System, No. 08-CV-9595 (S.D.N.Y. Aug. 24, 2009).  Chief US District Judge Loretta Preska has ruled that the Board of governors of the Federal Reserve System must turn over the names of the banks and other institutions that have borrowed from the Federal Reserve Discount Window. 


How bad is that?  The Fed is appealing, claiming these institutions will suffer irreparable harm if their identity is released.  With so much money on the hook, we wonder at what point sunlight becomes the order of the day. 


In a wrinkle designed to make this process unworkable, the Federal Reserve Board deems itself at arm’s length from the individual Fed banks, each of which is a separate corporation.  Federal agencies – the Fed board is one – are required to respond to FOIA requests, based on specified procedures.  The Federal Reserve Bank of New York (FRBNY) does not consider itself subject to the provisions of FOIA and therefore never implemented FOIA procedures. 


FRBNY is the Fed Bank primarily responsible for the Fed’s open market trading – the one that is aggressively hiring Wall Street traders as they expand their brief, taking positions in instruments that never existed before, and using money that never existed before to do it.


In this scenario, the potential for confusion and human error – to say nothing of fraud – is ramping up.  It will be increasingly difficult for the public to gain access to what FRBNY is doing, unless the FOIA can be made to stick.


For now, it seems institutions will be identified only when there is a problem that is too big to cover up.  The FRBNY will go to Chairman Bernanke, Bernanke will go to Geithner, and Geithner will dump it in President Obama’s lap, making it effectively our problem. 


First it was the Bush-Paulson process.  Now it is the Obama-Geithner process.  But all along it was, and looks set to remain, the Bernanke Fed.  This Fed has written an open-ended IOU to the world, based on the evanescent Full Faith and Credit of the US government, issuing debt at a clip that may soon make us pine for the subprime mortgage market.


The Fed Board took the position that discount window borrowings constitute trade secrets of the firms involved, a defined FOIA exemption.  Put in plain English: if we tell you which financial institutions come to us because they have liquidity problems, it would reveal that… well… they have liquidity problems.


Put in plainer English: if we tell you which firms are in trouble, then you’ll know.


The Obama Administration’s attempts to overhaul the financial system are thus far focused on depressingly low-hanging fruit, to the extent of appearing profoundly dishonest.


In the wake of BofA and Merrill-gate, the total mess made of the nation’s automotive industry, and what appears to be a long-term accounting shell game at GE, it takes neither imagination nor courage to propose empowering shareholders to restructure boards of directors.


FINRA and the SEC are not breaking new ground when they announce ETFs may not be suitable for all investors.  FINRA and the SEC are themselves at fault for never requiring brokers to know anything about these products.  Nor does the SEC score points when it draws the line at flash orders, which when used in markets such as Nasdaq actually violate the marketplace’s mandate for price discovery.


Chairman Bernanke, meanwhile, invokes “advice of counsel” in testifying before Congress about his involvement in the BofA takeover of Merrill.  Government lawyers told us that what we were doing was all right, he told his interlocutors.  Amazingly, it was left at that – no doubt because all members of the Congressional panel have their own lawyers.


Arthur Levitt has been on Bloomberg TV recently, where he spoke bluntly against the nonsensical regulatory debate about short selling; he explained clearly that high-frequency trading is part of how the market works – while flash orders on exchanges are not: the one should be encouraged, as it improves price discovery; the other should be prohibited, because it violates the exchanges’ mandate. 


Love him or hate him, Levitt’s tenure as the bull in the SEC’s china shop contributed significantly to the strength of American market capitalism.  Under his guidance – some would say “bullying” – as SEC Chairman, the markets were dragged kicking and screaming to an unprecedented level of transparency.  Suddenly, Mom and Pop investor could come into the marketplace and feel safe.  And they did.  And so did the rest of the world.


President Obama – who won an election that could, itself, be characterized as low-hanging fruit – will not score points by advancing a timid program.  Underlying the FOIA debate is a deeper truth: that, for every secret unmasked at the top, there are dozens more that remain hidden.  There is a reason we call it “rooting out” corruption.  The part we can see above ground is not the part we need to worry about.




Malicious In Tent


The night and its sky… its stars, its moon… its moon, and staying awake till the dawn…

- Oum Kalsoum, “’Alf Leyla wa-Leyla”(“One Thousand Nights and a Night”)


In a controversy worthy of Gilbert and Sullivan, the town of Englewood, NJ, has mounted a battle against both Arabs and Jews, focused on the nomadic lifestyle of the one, and the suburban sprawl of the other.


The town of Englewood was abuzz with the rumor that Libya’s Moammar Gadhafi planned to set up his presidential tent in their town during his forthcoming United Nations visit.  This was the straw that broke the camel’s hump in another long-simmering source of local friction, the practice of a local synagogue erecting tents to accommodate visitors for bar mitzvahs (weather permitting, obviously – unlike Mr. Gadhafi’s nomadic forebears, the Jews of Englewood enjoy central heating during winter and do not have to make do with the privations of their own desert-dwelling ancestors.)


We can not blame Englewood for wanting to avoid the inevitable demonstrations outside Colonel Gadhafi’s tent, with the attendant overtime bill for law enforcement and clean-up.  Also, for all we know, there’s a bar mitzvah scheduled for that week.  A pox on both your tents!


The Wall Street Journal found this story too good to resist.  They offered it on page one  (27 August, “A Tents Standoff Pits A Town Against Gadhafi And A Synagogue”) – complete with an unflattering drawing of Col. Gadhafi looking like third runner-up in the Cheech Marin Look-Alike Contest (Over 60 Category).  We thought Gadhafi’s choice might be tied to last month’s highly publicized New Jersey corruption busts – rabbis were featured in the photos, along with Christian politicians, but there was at least one Moslem in the group as well, demonstrating that New Jersey embraces religious tolerance at all levels.


This reminds us of the story of the man who sought psychiatric help because he couldn’t sleep.

“I keep having nightmares, Doc,” he said.

“Tell me about it.”

“Well, I fall asleep, and then I dram I’m a teepee.”

“I see.”

“It’s really scary, and I wake up in a sweat.  Then, when I fall asleep again, I have the dream again, only this time I’m a wigwam.”

“I see.”

“Doc, I toss and turn all night, and all night I don’t know whether I’m a teepee or a wigwam.”

“No wonder you can’t sleep,” says the doctor sympathetically.  “You’re two tents.”


Latest reports are that the Colonel has pulled up stakes and is considering other arrangements.  We would be happy to invite him to camp in our back yard and will gladly serve tea in his tent.


His people can contact our people.



Moshe Silver

Chief Compliance Officer


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


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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


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.

Early Look

daily macro intelligence

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