Ball Underwater: SP500 Levels, Refreshed...

At around this time last week, we were staring at the associated market impact of the US Dollar being that Ball Underwater that was released to the upside. As the Buck broke-out, equities broke down (taking the SP500 down for a -3.5% correction in 4-days).


Today, we’re seeing quite the opposite. As global risk managers sell that Dollar back down to new YTD lows (down -0.93% to $77.30), the REFLATION trade is back! (Energy, XLE, and Basic Materials, XLB, are the 2 best performing sectors in our 9 S&P Sector study, trading +3% and 1.4% on the day, respectively).


Gold is trading > $1000/oz. Oil is trading straight back up above its immediate term TRADE line at $71.12/barrel. Copper is making new YTD highs.


Dollar down = Ball Underwater. As simple as this inverse correlation sounds is as simple as simple does.  


After doing a lot of covering/buying on Wednesday of last week, I have been doing a lot of nothing for the last few days. Why? Well, A) I get the fundamental short case against the US Dollar (its once again broken across all 3 of our investment durations) and B) I’m happy watching one of the 24 stocks and/or ETFs we are long in the virtual portfolio find this last gasp of air.


Where does the air run out of the REFLATION trade? I’m sticking with the high-side of what we called our Range Rover line (updated 5 weeks ago at 1041 on the SPX).


My newly established lines of immediate term support for the SP500 are 1015 and 1008 (dotted green lines in the chart below). Intermediate term TREND support is now 952.



Keith R. McCullough
Chief Executive Officer


Ball Underwater: SP500 Levels, Refreshed...  - a1


Slouching Towards Wall Street… Notes for the Week Ending Friday, September 4, 2009

Read It And Weep


We have just read the report from the Office of the Inspector General of the SEC, Case No. OIG-509, “Investigation of the Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme”.


After reading this sorry document – the 22 page Executive Summary of a 450-pager to be delivered in the coming weeks – we can say with all sincerity that we truly hope there was massive fraud and criminal deception at multiple levels within the Commission.  We have been dealing with regulators for the better part of three decades, and we have seen some humdingers.  But even we are not so cynical as to believe the SEC is as incompetent as the Inspector General’s report makes them out to be.


Even a saint would come away with a ruffled feather and a diminished opinion of human nature after reading this report.  An unmistakable whiff of fraud, meddling and deliberate cover-up emanates from nearly every paragraph of this horrifying document.


This Executive Summary is required reading for everyone who works in the finance industry – as well as for everyone who invests, anyone who cares about how our government works, anyone who either believes in, or doesn’t believe in the capitalist system, and anyone whose life stands to be affected by the foibles of human nature.  The voters of this nation should have it emblazoned on the insides of their eyelids in laser-hot day-glo letters.  The government has failed its citizenry.  The SEC is surely to blame, but they are not to be blamed alone.


The morning after this document came to light, former SEC Chair Harvey Pitt found himself under the bright lights of the Bloomberg TV studio, defending with sad and weary mien the embattled Commission, and praising Chairman Schapiro for the job she is doing in upgrading the Commission’s staff and strengthening its mandate.


But then, Pitt would have to defend the Commission, wouldn’t he?  As would just about everyone involved with this sorry enterprise.


The OIG report finds that, as early as 1992, the SEC came into possession of information that, if followed up on in even  rudimentary fashion, would have brought Madoff’s scheme to light, and the game would have been over then and there.


Meanwhile, the Summary contains references too numerous to mention of moments where a dismally under-qualified staff of examiners actually came up with something so blatantly out of order that even they suspected it was wrong – and where senior SEC staffers overseeing the examination either failed to follow up, or specifically instructed the junior examiners to abandon a line of inquiry.


In one apparent case of routine regulatory numbskullery, a team of examiners was sent to Madoff’s offices because allegations had surfaced of improper dealings in the firm’s advisory business.  Once there, the team set about looking for evidence of front running.  When it was pointed out that this was not the reason investigators had been sent in, the SEC staffer in charge responded that, he knew that front-running was not the charge at issue, but that his team’s expertise was in analyzing front running, so they were performing a front running investigation.


(“What are you doing on your hands and knees?”

“I lost a contact lens.”

“Where?  Here on the floor?”

“No. Over there in the corner.”

“So why aren’t you looking over there in the corner?”

“There’s more light here.”)


The OIG’s Summary recounts six separate complaints brought to the SEC’s attention regarding Madoff’s business.  Two of them were from Madoff investors – which meant that even under the Commission’s own inane internal unwritten guidelines, they had to follow them up.  A third was actually submitted three times, each more detailed than the previous.


Regulators receive a lot of “tips”, many of which are so vague as to be useless – or clearly motivated by personal hostility.  One of the unwritten rules of regulatory investigations is that they can not follow up on everything, so a sort of regulatory triage takes place, in which first priority is given to allegations from insiders – partners of a money manager, C-level executives of a public company, supervisors, senior bankers or head traders in brokerage firms.  Red flag status is also accorded to tips received from immediate family – spouses are best – especially when the family member in question is part of the business enterprise.


As to other tips, unfortunately we see clearly how even the most detailed presentations were tossed aside.  We have read Markopolous’ report to the SEC.  It reads like a doctoral thesis.  For a senior SEC supervisor to toss it aside requires a significant level of willful negligence.  We hear the staffer in question had a personal animosity to Mr. Markopolous, and so she did not pass his report on to others who might take a closer look at Madoff’s business.  She no doubt taught Mr. Markopolous a lesson he won’t soon forget!


On top of the complaints, SEC examiners in an unrelated routine examination of another hedge fund came across internal emails describing with great specificity the fund’s own due diligence on Madoff, describing in detail why Madoff’s returns were not credible.  The fund’s internal emails identified red flags, including “(1) incredible and highly unusual fills for equity trades; (2) misrepresentation of his options trading; (3) secrecy; (4) auditor; (5) unusually consistent and non-volatile returns over several years; and (6) fee structure.”  The OIG report goes on to describe another internal email which “provided a step-by-step analysis of why Madoff must be misrepresenting his options trading.”


This email was neither the first, nor by any means the only report to come to the SEC’s attention raising serious suspicions as to whether Madoff was trading at all.  Many of these were based on a simple analysis that compared options volume reported by Madoff to his customers, with volume actually traded on the options exchanges on the days in question.  The presence of repeated, consistent vast discrepancies should have occasioned someone at the SEC to merely duplicate the exercise – we have heard arguments about SEC examiners being junior, not well enough trained to catch out a Madoff, but how much training does one require to pull a month’s worth of Madoff customer account statements and place a call to the CBOE to see whether the numbers match?


How about two substantial articles in well-regarded publications – Barrons’ and MAR Hedge – raising serious questions about Madoff’s operation?  The OIG report says Lori Richards – then head of Enforcement – “reviewed the Barron’s article in May 2001 and sent a copy to an Associate Director in OCIE shortly thereafter, with a note on the top stating that Arvedlund [author of the Barron’s article] is ‘very good’ and that ‘This is a great exam for us!’”


Not only did OCIE not open an investigation, the OIG report says “there is no record of anyone else in OCIE reviewing the Barron’s article until several years later.”  In other words: Lori Richards was the only person in her entire chain of command who actually read the newspapers – presumably this was part of the skills set that qualified her to head the Enforcement Division.  In keeping with her aggressive move to upgrade the Commission, we understand Chairman Schapiro intends to designate multiple Barron’s readers, to avoid a gap in coverage now that Richards is leaving.


The fact that never, at any time in any of the examinations or investigations launched by the SEC into Madoff’s business, did any SEC examiner call any third party to verify anything – not trading volume, not customer positions, not customer assets, not trades, executions, orders – nothing, means not merely that the SEC fell down on the job. 


The failure, in the course of an investigation, to independently verify any aspect of Madoff’s business is not an “oversight” or a “failure” on the part of the SEC staff.  It is not even a colossal and tragic blunder.  It is criminal negligence, pure and simple. 


We have sat through many a routine firm examination – NASD, SEC, exchanges, state regulators, we’ve dealt with them all.  Among the very first documents requested by an examiner is the trades blotter.  And one of the first steps an examination team does in a firm-wide review is to verify trading with the clearing firm or prime broker.  There are two simple reasons for doing this.  The first reason is to verify that the firm is keeping accurate records – or honest ones.  Since every firm knows its examiners will request the blotters, and that the blotters will be compared with the clearing firm’s records, there is high incentive to maintain accurate blotters.


The second reason examiners always verify a firm’s blotters with an independent source is – imagine what would happen to a regulator who failed to obtain third-party verification, and then it turned out to be a fraud?


Can you imagine such a thing?  Neither could Harvey Pitt.


Poor Harvey, sitting there ruefully wagging his head over the demise of what he characterized as a good – nay, a “great” agency.  Since part of Madoff’s scamming took place during Pitt’s tenure as SEC chair, he would naturally have to defend the staff and their actions.  This he did by speaking of how “dedicated” and “principled” so many of them are.  To be sure, Pitt also said – and it was his position historically, we recall – that the Commission was “over-lawyered”, with too many attorneys, and not enough market practitioners.


This gives us yet another opportunity to lay into one of our favorite flogging ponies – and to note that, while we continue to beat it, this horse is still far from dead.  We have raised numerous times the notion of bringing a high-visibility team of Wall Street professionals to the SEC.  The process whereby young talent goes from law school to the SEC, and thence to Wall Street, is exactly backwards and has resulted in, for one thing, Bernie Madoff.


We will briefly repeat our strong recommendation that the SEC bring in a team of industry compliance professionals and hand the examination and investigation process over to them.  In the few cases we are aware of where this has been tried, the professionals in question found themselves smack up against a brick wall of bureaucratic nit picking and internecine feuding over resources and authority occasioned by the Kafkaesque hierarchy of job grades and examination schedules.  While this is traditionally exactly the way to run a government bureaucracy, this is no way to regulate the world’s most important financial marketplace.


We are greatly encouraged by the Commission’s volte face under Chairman Schapiro.  In her Statement on the Release of the Executive Summary of the Inspector General’s Report, Schapiro mentioned that the SEC has already filed twice as many restraining orders related to Ponzi schemes as were filed in the comparable period a year ago.  Underlying all our criticizing, we have a fundamental respect for Mary Schapiro and the job she has done throughout her career. 


Where John Thain harmonized technologies to make the NYSE much more powerful, Mary Schapiro was stuck, in her tenure as NASD Chair, with having to harmonize personalities in her efforts to merge the NASD and NYSE cultures.  It is a testament to her perseverance and patience that she accomplished this thankless task.  Having spent two decades supervising these folks, we would sooner boil and eat our own scrotum than have to get a stadium full of financial professionals to work with one another.


That being said, any increase in enforcement, investigations and surveillance is an invidious comparison, when put alongside the Cox SEC.  Same store comps are going to be great when measuring against a property that was shuttered last year.  We know the Commission will be far more effective under Chairman Schapiro than under her predecessor.  The question is whether Chairman Schapiro will have the political will to make some nasty decisions – and, in the process, enemies – and whether Congress and the President will back her up.  Otherwise the accomplishments of her first year as SEC Chair will be recorded with an asterisk, and the hoped-for Change We Can Believe In will be reduced to Chump Change.


We are waiting with fearful anticipation for the full report, which we shall force ourselves to read cover to cover.  Make no mistake: while our experience dealing with regulators has frequently left us with a sense of the pathetic, we nonetheless feel an acute sting of embarrassment for an industry that has come to this sorry state, and profound personal chagrin at being a part of this, however remote from the squalid epicenter.  The shame of Bernie Madoff and his thieving associates – surely, no one believes he did this all himself – is a shame that permeates the financial industry.  The shame of those willing to benefit from Madoff’s “garden variety” fraud, who considered it “business as usual”, is a moral tragedy that tears at the very fabric of our society.  The opprobrium we heap upon the bunglers at the SEC is a shame in which we are mired too.  Truly, this brush has tarred us all.




Now it can be told.  Speaking unabashedly from the front page of the Forward (4 September, “Crazy Eddie’s Cousin, A Former Fraudster, Speaks Out On Syrian ‘Subculture Of Crime’”), Sam Antar – cousin of “Crazy Eddie” Eddie Antar – told it like it is regarding the scandal that hit over the summer.  The arrest of several dozen New Jersey politicians, together with five prominent Rabbis (and a Moslem – let’s not forget the Moslem!) sparked outrage and “I told you so” from nearly every quarter.  Speaking on condition of publicity, Sam Antar spilled what beans he held regarding corruption in certain circles within the community where he grew up, and with whom he still has close ties.


Antar, who served as CFO of Crazy Eddie’s, was indicted along with his cousin, an uncle and other officers of the company.  In a journalistic passage that cleverly parodies the cadences of penitential prayer, the Forward article describes Antar’s “almost gleeful” willingness to discuss his past misdeeds.  “He lied.  He committed fraud.  He skimmed money.  He misled investigators.”


Antar’s version of the story is, his cousin and the other family members were going to blame the whole fraud on him – so he blamed it on them.  He turned state’s evidence, and got off with a suspended sentence, while his cousin and uncle went to prison.


Antar, who continued to live in the Syrian Jewish community after the scandal, believes he was largely left alone because, even though he turned on other members of the community, they were his own family.  In this community noted for being close-knit, blood is thicker than Arak.


The mainstream financial press, meanwhile, has run stories about the Madoff trustee gearing up to go after charities and claw back monies they withdrew from their Madoff accounts in the years before the scandal broke.


Call us cynical – please! – but we are convinced that all the biggest charities that invested with Madoff knew he was doing something highly immoral – or outright illegal.  The problem was, they were betting on the wrong crime.


Bernie started his career by taking advantage of a weakness in the system.  The weakness was called Spreads, and by rebating firms for their order flow, Bernie ended up pocketing most of the spread, while filling the customers on their respective sides of the market.  The seller got the bid price, the buyer paid the offer – Bernie paid a penny to each side, and kept ten and a-half cents.  God’s in His heaven, all’s right with the world.


The fine line separating commerce and crime is a fascinating topic, and Madoff’s tale may yet prove a laboratory for the analysis.  Where does an entrepreneur who exploits a weakness in the market slip over into being a criminal?  At what point does taking advantage of a market inefficiency become immoral – and finally, illegal?  And at what point does society intervene and place boundaries to this behavior?


Financial professionals who invested serious money with Madoff did so partly on the strength of his position in the marketplace – the unassailability of the man with whom many of them had traded in earlier times, who bestrode the financial world like a colossus – one foot planted in the shadowy world of third-market trading where he could manipulate the hell out of every trade that came his way; the other crushing the windpipe of the regulators in his capacity as Chairman of NASDAQ and senior advisor to the SEC.


Then there were senior foundation officers at the charities that gave Bernie millions – tens or even hundreds of millions.  These were intelligent, dedicated and hard-working professionals, generally people who understood the working of the markets.  While they did not go to the length – quite simple, really – of third party verification of the Madoff Magic there were many who assiduously teased apart the monthly statements sent to them by Madoff & Co, and who kept coming to the conclusion that he was front running and skimming pennies off customer trades – in effect picking off his own customers, as well as pocketing the spread. 


They figured out that Bernie was committing a low-level fraud on a massive scale, taking undisclosed bits and pieces, then doling them out to this investors.  To keep the performance steady, they thought he was doling out the profit in lean months, then holding back more for himself when he had good ones.


Imagine their surprise when they discovered that – yes – Bernie was breaking the law and stealing money; but – no – he wasn’t breaking that law, and he wasn’t giving them the money.  Bernie broke an altogether different law, and he kept all the money for himself.


Aside from questioning just how “due” the due diligence was of these firms that were responsible for billions of dollars of foundation money, does it not seem reasonable that they should be clawed back on money they withdrew – especially if they believed they were receiving the proceeds of illicit activity?


As the rabbis in Sam Antar’s community can tell you, among the primary reasons God destroyed the world with the Flood in the time of Noah was the prevalence of a kind of theft we today call “victimless crime.”  It is the equivalent of skimming the third and fourth decimal places of interest-bearing bank balances; the equivalent of entering fictitious orders to manipulate the price of stock in the marketplace.  The equivalent of pocketing the spread, when no one on either side of the trade expected to share in it anyway.


These crimes are victimless, because no one gets hurt.  Actually, no one knows they have been hurt.  And isn’t that the same thing?


But someone does get rich.  How can it be that one person is becoming monumentally wealthy at the expense of others, yet the others appear to not be losing anything?


If you can figure that out, you are way too smart to work at the SEC. 



Moshe Silver

Chief Compliance Officer


Chart of The Week: Stagflation

A handful of thoughtful investors in our exclusive Macro Research network have started asking me what I think about US Treasury Bonds working higher at the same time as Gold is raging higher. I think it boils down to one word  - stagflation.


As the Burning Buck gets absolutely torched (down a big -1.4% today alone), the US Government is going to sponsor imported inflation in Q4 (when y/y deflation becomes y/y inflation). That’s why the Prices Paid component of the August ISM report was up +18% sequentially (month-over-month). That’s why Gold was up +4% last week. That’s why gold and other stable foreign currencies like the Euro are making new YTD highs relative to the US Dollar again today.


Understanding that the US Bond market smells stagnant growth AND that the US Federal Reserve is as politicized as it has ever been could be one and the same thing. There has never been a country that has sustainably attracted mass investment (foreign inflows) with ZERO as their base rate return AHEAD of accelerating Consumer and Producer Price readings. As a result, growth oriented risk capital is leaving America.


Don’t take my word for it. Look at the recent TIC Report (Treasury Capital Inflows). It’s getting flat out nasty. While the world’s central bankers may be buying non-growth oriented US Treasuries (supporting the Treasury market), they are nowhere to be found buying agency debt or anything American-risk for that matter. Instead, they are buying gold, copper, oil, foreign currencies – you name it. Anything other than the currency of a country who is about to enter the danger zone of economic stagflation.


Below, we have attached the metaphor for this foreign fund flow trade – the chart of NYMEX Gold. While we have it immediate term overbought north of $1009/oz, the long term setup here is very attractive. Any time we have our longest dated duration (the TAIL line = $889/oz) underpinning both the TREND ($945/oz) and TRADE ($953/oz) lines of price momentum, we call that a Bullish Formation.


Anytime a Bullish Formation is met with accelerating volume and accommodative volatility studies, we are paid to pay attention. Gold remains in a bull market. US centric stagflation remains the world’s rightly placed future concern.




Keith R. McCullough
Chief Executive Officer


Chart of The Week: Stagflation - a1


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%


MCD is scheduled to report August comparable sales tomorrow. 


U.S. (facing a 4.5% comparison from last year)

Good: +3.5% or better would signal that the company is maintaining its 4%-plus 2-year average trend.  If the number comes in at 5% or better, it would point to a sequential acceleration in 2- year trends from July.


Neutral: +2.5% to +3.5% would signal a sequential slowdown in 2-year average trends from July, but would point to trends that are still better than what we saw in June.  July 2-year average trends improved 185 bps on a sequential basis from June.


Bad: < +2.5% would signal a return to the May and June 2-year average trend levels.  Anything below +1% would signal a slowdown even from the already depressed June level.




Europe (facing a difficult 11.6% comparison from last year)

Good: +4.0% or better would signal an acceleration in 2-year average trends.  A number better than 4.4% would represent an 8%-plus 2-year average trend.


Neutral: +2.0% to +4.0% would signal that the company is maintaining its 2-year average trend from July.


Bad: < +2.0% would point to a sequential slowdown in 2-year average trends from July.  Although a 2% number would still represent 6%-plus 2-year trends, investors are accustomed to 5%-plus reported numbers on a 1-year basis so a number below 2% would be alarming.  A result worse than flat YOY performance would signal a return to June levels.




APMEA (facing a difficult 10.0% comparison from last year)

Good: +3.0% or better would signal an improvement in 2-year average trends on a sequential basis from July.  Anything better than 4% would represent a return to 7%-plus 2-year average trend levels.


Neutral: +1.0% to +3.0% would signal an acceleration from June and July 2-year average trend levels, which had slowed rather significantly from prior months.


Bad: < +1% - A flat to +1% result would still signal a slight acceleration in 2-year average trends from June and July, but like Europe, I think a number below 1% on a 1-year basis would be alarming to investors that are accustomed to 5%-plus results out of the APMEA segment.  A reported -0.5% to -1% would point to 2-year average trends that are similar to the already slowed trends in June and July.









Here’s the post-Labor Day setup.

Now that the masses are back from the Hamptons and en route to the Goldman retail conference, let’s take a quick look at the setup. On the margin, it reinforces the point we’ve been making over the past 2 weeks that the pendulum is shifting to the downside, and if you want to own a name in this space, you’ve gotta be super confident in meaningful earnings beats or takeout potential.  Here are some notables…

  1. Earnings revision factor flattened out for retail last week. It is still a healthy +25%, but marks the first time since June that it did not go up week on week.
  2. In looking at earnings trajectory for the 1462 companies in the S&P 1500 composite that have reported 2Q, the major call out is the rate of change in earnings expectations. Consumer Discretionary EPS growth expectations have gone from -16.7% to -3.4% for CY09 from March 1 through today. That delta is 2x the next closest group, which is Tech.
  3. Retail is trading at 15.5x those expectations. Not egregious, but absolutely not cheap by any means.
  4. As Zach elaborated on in Friday’s First Look, our SIGMA is headed in the right direction. Inventory/sales ratio looking good for the industry, and the margin setup for next two quarters is in check. But I struggle to find anyone that doesn’t know this and is positioned accordingly.
  5. Note that 30% of retail is in the “Sweet Spot” meaning that sales are outpacing inventories and margin delta is positive. We have to look back to early 2007 to find such a high percentage of companies in this zone.








Some Notable Call Outs


  • Despite having many years of growth ahead, the total ecommerce channel is now expected to post its first decline ever in 2009. According to interactive firm eMarketer, the ecommerce sector will decline by 3.1% this year (excluding online travel and ticket sales). However, the same study suggests growth will resume to 5.5% in 2010 and at a double digit rate in 2011.


  • We don’t often think about Toys R Us much anymore given it’s now in private hands and is no longer the largest toy seller. However, the company has been on mini-acquisition spree lately, acquiring trademarks and IP that have long been icons in the industry. Toys R Us is now the owner of: FAO Schwartz,,,, and KB Toys. With all these brands now in-house, it will be interesting to see how the company markets each of them over the holiday period.


  • As the eco-friendly trend in textiles and apparel continues to grow, the FTC is cracking down on environmental claims made by “green focused” manufacturers. The FTC recently charged four sellers of eco-apparel with deceptively labeling products. These manufacturers claimed their goods were made of bamboo, when in fact they were made of rayon. Given this recent crackdown, it is likely retailers will also need to be more diligent in substantiating the claims of their wholesalers before putting environmentally friendly products on their shelves.




-Three creditors of Signature Apparel Group last week sought to force the Rocawear licensee into bankruptcy - The petitioning creditors, representing about $14.9 million in debt past due, filed an involuntary Chapter 7 petition in a Manhattan bankruptcy court on Friday. New York-based Signature manufactures apparel largely for the urban market. It holds licenses for Rocawear in the junior category as well as Artful Dodger, another urban brand. Signature also owns the Fetish trademark, which it relaunched with the rapper Eve for holiday 2008, after the line had separate unsuccessful stints with Marc Ecko Enterprises and Innovo Group. According to court documents, the petitioners are: Hitch & Trail Inc., New York, owed $3.6 million; Talful Ltd., Kwai Chung, New Territories, Hong Kong, $4.8 million, and Harvestway China Ltd., Kowloon, Hong Kong, $6.5 million. The company has 20 days to respond to the petition. <>


-UK comp sales values fell 0.1% - UK retail sales values fell 0.1% on a like-for-like basis from August 2008, when sales had fallen, hit by very wet weather. On a total basis, sales rose 2.2% against a 1.4% gain in August 2008. This August, food sales continued to do better than non-food. Food sales growth edged up only slightly from July's low. Clothing and footwear weakened further. Homewares and furniture sales fell back below year-earlier levels after July's weather- and clearance-driven growth. Non-food non-store sales (internet, mail-order and phone sales) in August were 7.9% higher than a year ago, the weakest since May.  <>


-Home furnishing retailers reap rewards as home purchases start to ramp up - The news on the home front has been a steady increase in home sales for the past few months. Now an e-commerce systems provider reports that heightened interest in home investments may be reflected in increased sales at home furnishings sites. While admittedly unscientific because the data represent sales at only three sites—, and—Avid Commerce LLC reports that sales at the three sites in June were 5.2% higher than sales in May; 33.9% higher in July from June; and 81.1% higher in August from July. The U.S. Department of Commerce reports that new home sales in May were up 4.9% from the prior month; in June, they were up 9.1% from May; and in July, 9.6% from June. <>


-Goal is for India to turn into a global manufacturing hub of textile accessories by increasing the turnover - Indian Textile Accessories & Machinery Manufacturers' Association (ITAMMA) aims to turn India into a global manufacturing hub of textile accessories by increasing the turnover from this textile sub-segment from the current Rs 65 billion to Rs 200 billion by the end of the next decade. The Association is also in the process of transforming itself from a government liaison body to a new role of tying up for technology upgrade n and conducting market research for its members. It is also projecting an increase in exports from Rs 6.5 billion to Rs 10 billion in the next five years, since most of its exporting members have already started focusing on new regions and existing buyer countries like Bangladesh, Vietnam, Indonesia, Pakistan, Uzbekistan and Far-east countries. <>


-Bangladesh asks for a stimulus package for the apparel industry - A member delegation from the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) has met the Finance Minister AMA Muhith to ask for a stimulus package for the industry. While giving out the details of demands requested by the Finance Minister, the President of BKMEA demanded for a 5% stimulus incentive on FOB value of exports. He said, they had also requested that banks not to increase interest rates higher than 10%. Muhith assured the delegation that the garment sector problems and demands will come up for discussion at the second meeting of the taskforce on recession due on September 15-16. <>


-Japan’s Renown Inc. to sell Aquascutum Group Limited to U.K.-based Broadwick Group Limited - Japan’s Renown Inc. said Tuesday it has struck a deal to sell Aquascutum Group Limited to U.K.-based Broadwick Group Limited, a company owned by retail tycoon Harold Tillman and Jaeger ceo Belinda Earl, for an undisclosed price. Renown also said it will sell the Aquascutum trademark for China and the rest of Asia to Hong Kong-based YGM Mart Limited, which had been the brand’s licensee in China. Renown said it will continue to manufacture and distribute the British brand’s products in Japan through a long-term master-licensing agreement with YGM. Renown is in the process of restructuring its business as it grapples with ongoing financial difficulties and weak macroeconomic conditions in its home market of Japan. Last year it put the British brand up for sale. <>


-Department stores added jobs for the first time since May - Department stores added 5,800 jobs last month to employ 1.53 million, but specialty stores cut 9,500 to employ 1.4 million, the Labor Department said Friday. Despite the higher department store jobs figure, the overall landscape for retailers was not bright, economists said. <>


-U.S. discount, grocery and restaurant chains are hiring a larger percentage of job applicants than seven months ago - In July, 2.99 of every 100 applications resulted in a hire, compared with 2.75 in January, a three-year low. The pace of hiring of cashiers, merchandise stockers and other frontline workers in July was less than half that of October 2006, Kronos said. U.S. unemployment rose to a 26-year high of 9.7 percent in August, according to the Labor Department. Retailers fired 10,000 people last month while all U.S. employers trimmed payrolls by 216,000 after slashing 276,000 jobs in July.  <>


-The Action Sports Retail Show will hit the San Diego Convention Center September 10th -12th - ASR will showcase the latest apparel, footwear, swimwear, accessories and hardgood products from over 700 surf, skate, swim, snow, moto, wake, lifestyle and streetwear brands.  Retailers, buyers, brands and athletes will all get a chance to converge and find out about the latest trends in action sports equipment and apparel. The event takes place at the San Diego Convention Center this Thursday thru Saturday. <>


-The skate business may be headed for slower times, as the youth market feels the sting of the down economy - The economic downturn and a sharp reduction in discretionary spending among teens has impacted the market. The rapid expansion in the skate arena over the past few years may be unsustainable and slowing is to be expected. August is the most important month of the year for skate. To see a slowdown this dramatic in the biggest month of the year does not bode well. According to NPD data, for the 12 months ending June 2009, sales of skate shoes declined 13.3% in terms of dollars spent, largely due to a lower average selling price of $31.95, down from $33.30. By contrast, the total athletic footwear market declined 3%, while the average unit price increased to $37.70, from $35.05. <>


-Many retailers are upbeat that fall’s footwear arrival will give them a much-needed boost after a lackluster spring - With inventories at extremely low levels, a number of key department stores and independents were optimistic last week about early reads on the season and said several key boot styles were already registering strong sales. Larger retailers were also hopeful about their prospects for the coming months — and said shoppers were already starting to snap up fall styles. <>


-An official at the Collegiate Licensing Co. predicted that retail sales of college fan merchandise could be down 7% this year - All the leagues have definitely seen declines this year.The North American college sports segment continues to be a major licensing player. <>


-Under Armour launches new ad campaign - Under Armour will be debuting its "Under Armour is Football" advertising campaign this coming weekend in spots that will include Founder and CEO Kevin Plank making a cameo appearance from his days playing youth football. <>


-New York Fashion week kicks off this Thursday with "Fashion's Night Out," a global event spearheaded by Vogue to stimulate store sales - Retailers in eight cities around the world, from Paris and Milan to New Delhi and Beijing, will stay open late to offer a special night of shopping jazzed up with celebrity and designer appearances, musical performances and special events. More than 800 stores in New York, from Payless to Louis Vuitton, are participating in the five-borough event, which is being produced through collaboration among the City of New York, its marketing arm NYC & Company, American Vogue and the Council of Fashion Designers of America. While the event is designed to boost sales, deep discounts won't be part of the night's offerings. To help promote the event, advertising is running on city media assets, including outdoor on bus shelters and kiosks and in New York City's 6,500 taxis. A celebrity-studded PSA created by Laird + Partners has been playing in cab monitors, as well as on TV, online and spread virally through social networks such as Facebook and Twitter. <>


-Walmart dwarfs Target in size, yet it loses out to its rival when it comes to consumer discussions online - Target consumers are much more likely to speak about their shopping experience, according to online buzz monitor Crimson Hexagon, while chatter about Walmart often veered into discussion of the social implications of the retailing giant when it comes to labor practices and local retailers. It examined online chatter on blogs, Twitter, social networks and message boards for a one-month period beginning in mid-July. Overall, Target enjoys mostly positive chatter. About 75% of conversations were positive, according to Crimson Hexagon. Walmart, on the other hand, is discussed in a negative light 61% of the time. One in five shopping conversations touched on low prices. <>





SCVL: Timothy Baker, Exec. VP – Store Operations, sold 6,028shs (~$90k) upon exercising the right to purchase 6,028 shares roughly 10% of common holdings.


ZUMZ: Lynn Kilbourne, President & GMM, sold 9,074 ($127k) or roughly 15% of common holdings.


Poisoned Blade

“Neither a borrower, nor a lender be; for loan oft loses both itself and friend.”
-William Shakespeare
That quote, of course, comes from Hamlet – Shakespeare’s longest tragedy. It’s a story that continues to be interpreted from many perspectives, despite it being over 400 years old.
Wall Street is all about storytelling. The story of the US Dollar serving as the world’s said “reserve currency” is roughly 1/10th of Hamlet’s in age. Since President Nixon abandoned the Gold Standard in 1971, plenty a leveraged loan banker has been paid to create limitless credit on the Buck’s back. Those bankers, by the way, include the central banking kind over at the US Federal Reserve.
Now we can all wake-up this morning and inspire something along the lines of Claudius’ murderous plot, or we can look at the US Dollar hitting new lows this morning for what it is – a credibility crisis that has gone global. One that’s been proactively predictable, for months…
One of the Harvard economic historians whom I respect, Ken Rogoff (former Chief Economist at the International Monetary Fund), said in a Bloomberg interview last week that,
“If the Obama Administration fails to rein in the long-term budget deficits, the dollar is set to decline for decades.”
As in all Shakespearean tragedies, there are multiple plots. The story of the Burning Buck has many. Rogoff’s basic point is grounded in US Fiscal Policy, but there are many others. This blade has already been poisoned. It is doused in US Debt.
Since Friday, here are The New Realities that have knocked the US Dollar down to fresh year-to-date lows:
1.      The Fed’s Balance Sheet expanded for the 4th consecutive week to $2.09T (that’s a “T” as in TRILLION; up $1.2T year-over-year!)

2.      The United Nations is calling for a new Breton Woods agreement this morning (i.e. a new world currency reserve system)

3.      The Gold price has shot above $1006/oz; meanwhile the US Federal Reserve keeps monetizing its debt and maintains ZERO interest rates

Last week, I started to get antsy about the US Dollar threatening to breakout from an immediate term TRADE perspective. The two-day move that got the US Dollar Index above my critical breakout line of $78.52 didn’t hold however. Now we’re right back to digging Ophelia’s grave. The US Dollar is once again broken across all 3 of our investment durations (TRADE, TREND and TAIL). Importantly, the breakdown through the $78 line has only been sustained 1 time in the last 38 years – in Q3 of 2008, right before we crashed.
The difference between the US stock market understanding that $150/barrel oil was bad for 70% of America’s GDP (Consumer Spending) last year, and this year’s setup is that there is that other dominating global macro factor accelerating – Chinese demand.
In sharp contrast to the Q3/Q4 2008 slowdown in China associated with the Olympics, this year we are seeing reported Chinese growth rip the rims right off of those Olympic basketball court hinges. Overnight, Chinese auto sales were reported up huge. At +90% year-over-year growth, that was almost 900,000 cars they sold. I know the “China is crashing” crowd wants to believe that China is making up these numbers. I wonder what Horatio would think of these tales…
On Friday, the Chinese also expanded both institutional fund flows and liquidity for foreign investors. Rather than having to be locked up for 1-year, China is allowing for 3-month liquidity on foreign funds and also expanding the size of funds by 20-25%. This, of course, is good for the fledgling Chinese stock market. Don’t forget that 60% of daily trading there is still retail!
Chinese stocks closed up for the 5th consecutive day, adding another +1.7% to the Shanghai Composite’s impressive YTD gain of +61%. We’re long the less volatile H-shares via the EWH (Hong Kong ETF). The Hang Seng took the Chinese auto sales news very kindly and shot up another +2.1% last night, taking it within 5 points of its YTD high. I don’t think Asia’s bull market in equities could care less about what our squirrel hunter extraordinaire, Timmy Geithner, says about America being the world’s financial “reserve” leader by the way.
After the long weekend, no matter where you go this morning, here we are. The two global macro factors that matter most remain:
1.      Chinese Demand

2.      The US Dollar

However tragic it may feel to hear that the world doesn’t look at America or her currency as it once did, it’s time to accept this for what it is. America’s Hamlet has been pierced by the poisoned blade of leverage. We’ve seen this fatal fencing match play out in slow motion. This is no time to pretend that these blades of currency devaluation aren’t real.
My immediate term TRADE support and resistance levels for the SP500 are 1007 and 1041, respectively. The US Dollar breaking down puts that topside target in play.
Best of luck out there today,


VXX – iPath VIX We bought volatility on its lows on 9/3 ahead of last Friday’s employment report.

XLU – SPDR Utilities We bought some low beta dividend yield on its lows on 9/2. Utilities traded down 1% and they should act ok during stagflation fears.  

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 Kong
The 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.  

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.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

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.

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.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.