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Chasing Tail

“Everything should be made as simple as possible, but not simpler.”
-Albert Einstein
Simple is as simple does. For now, the driver of macro market moves remains the direction of the US Dollar. While I understand that correlations in global macro trends are not perpetual, I also appreciate that they can remain simple and profitable for as long as they want to.
No matter where you go this morning, there it is – that US Dollar finally has some semblance of a bid, and most things priced in dollars are for sale. Will this last 3 hours, 3 days, or 3 weeks? We will have to let Mr. Macro decide. We will then have to manage risk accordingly.
Last week, the US Dollar continued to crash. I know, I know – Washington gets paid to be willfully blind on this score, but that doesn’t mean that the score ceases to exist. It’s global this time, and the Chinese are watching more than just tire tariffs…
The Burning Buck lost another -1.8% on the week, taking the 2009 currency crash to -14% since March (yes, President Obama – that’s “the truth”). Ben Bernanke should dust off some of his pre-1930 history books and take a gander at what was happening around the world to currencies like Germany’s at the time. The world has never seen an outright currency crash in a major economy that didn’t carry far reaching consequences.
In the face of the US Dollar hitting fresh YTD-lows last week, the US stock market hit fresh YTD-highs. In the short term, this surely made anyone long this setup smile. In the intermediate term, this will surely lead to a Reflation Rotation (year-over-year deflation becoming inflation in Q4). In the long term, you know that plenty of things associated with this alarming long term TAIL will be dead.
The TAIL is what we call our longest term duration here at Research Edge. The TAIL is also where bad things happen versus expectations. The TAIL can also be subbed for what Nassim Taleb coined a Black Swan. Not all tails are the same…
Chasing TAIL isn’t a bad day job - from a risk management perspective that is! Our definition of an investment TAIL is simply something we have observed fortifying itself over a duration of 3 years or less. In sharp contrast to a Black Swan type tail event (defined on the tails of a probability curve), our TAILs are proactively predictable. They are basically long term investment trends.
I don’t mean to mix metaphors or mathematical terms here. Rather, I mean to submit that different risk management models compliment one another. I have learned a great deal from Nassim Taleb. He is one of the world’s pre-eminent risk managers for a simple reason – he has his own process and it’s grounded in math. One of Taleb’s “Ten Principles for a Black Swan-proof world” is to “counter-balance complexity with simplicity” – that’s a beautiful mathematical conclusion.
Chaos (or Complexity) Theory is one of the most relevant mathematical revelations in modern history. How many people manage your money in this interconnected and dynamic ecosystem called the global marketplace using it? That’s a tail I’d like to see some perceived to be money mavens chew on…
Back to chasing the TAIL. In our intraday Macro note today, I’ll be posting our “Chart of The Week.” While this point is clear enough for a monkey to understand when showing it with a picture (and colors), let me make it emphatically one more time with prose – the US Dollar’s TAIL is BROKEN.
So, even though the US Dollar has a +0.55% bid this morning, don’t mistake that with anything other than an immediate term TRADE that you can proactively manage risk around. Across all three of our investment durations (TRADE, TREND, and TAIL), the Buck is Burning. Here are those levels:
1.      TAIL = $82.86

2.      TREND = $79.39

3.      TRADE = $78.37

In our risk management model, we call this a Bearish Formation. That’s simply when the TAIL line remains above the TREND line, and the TREND line remains above the TRADE line. This is where you get paid to chase TAILs. They can, and will, remain dominant for longer than plenty a super “smart” monkey in this business can remain solvent.
So what do we do with this today? For one, don’t freak out and call for a crash in everything priced in US Dollars. The Crash Callers continue to get run-over in 2009. Take comfort in them being, predictably, on the bid to cover. Provided that we don’t see a breakout and close above the $78.37 immediate term TRADE line in the US Dollar, take the market’s associated weakness with a US Dollar UP day as an opportunity to cover some shorts and buy things priced in bucks that are red.
That’s it. Simple is as simple does. My immediate term TRADE line of support for the SP500 is 1019.
Best of luck out there this week,


VXX – iPath VIX We bought volatility horribly the first time on 9/3. With the VIX testing our 23 level of support on 9/10, we added to the position.  

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.

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.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. With the FTSE reaching a YTD high on 9/9, we shorted EWU.

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).

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.



SEPTEMBER 14, 2009





How can we not comment on the insider selling at KSS on Thursday and Friday.  Five insiders sold a total of 814k shares for about $45mm, marking the first insider open market sale at KSS since April 2007. If there’s any good news, it’s that in 2007 (with the stock at about $75) management sold about $215mm, and the previous cluster in 2006 was for $126mm.  But with 70% of the 20 analysts sporting Buy ratings, the remainder at ‘Hold’ and absolutely no one at ‘Sell,’ this is a major call out. So is the fact that price targets are only 5% above current value and short interest has been declining over the past three months and now sits below 6%. But when I look at our SIGMA, which shows that KSS is starting to anniversary positive Gross Margin swings over the past five quarters, SG&A compares should begin to get tougher, and capex as % of sales is at trough, it makes the consensus view of 60bp margin expansion next year and 13% EPS growth tougher to bank on. Simply put, this name is the poster child for the kind of consumer name where we need to bet to a meaningful recovery in consumer spending in order to make it work.  


1. Red arrows represent insider sells, while green represent buys.




2. Sell-side sentiment remains overwhelmingly positive 




3. Short interest has been heading lower 




4. SIGMA setup relies upon organic comp and SG&A leverage. 






Some Notable Call Outs


  • Following in the footsteps of GameStop and Best Buy, Toys R Us announced that is introducing a used video game exchange program. Customers can trade in used video games in return for a credit to be used towards any future purchase in store or online. It is unclear if Toys R Us is also selling the used games. Toys R Us offers a gift card in exchange for the trade-in whereas GameStop offers cash. Early experience with the new Toys R Us program suggest they are offering slightly higher trade- in values vs. GameStop.


  • When asked about the sustainability of the large amount of goods in the market for sale to off price retailers, Burlington Coat Factory’s CEO suggested obtaining inventory has never been a problem. His comments mimic the unanimous view from all off-pricers that there is always inventory available, no matter what the economic backdrop might be at any given time.


  • In an effort to differentiate itself from Target and Wal*Mart, Kmart is testing a program in Michigan that targets unemployed consumers. The program called Smart Assist offers a 20% discount towards purchases of private brands. Aside from driving incremental traffic, the program is also generating positive buzz in the media as the company competes head to head with WMT and TGT.





-Most footwear vendors say the recovery will be long, sluggish and have lasting effects on the industry - “This has been a wakeup call to the fundamental business models that had been in play,” said Angel Martinez, president and CEO of Deckers Outdoor Corp. Martinez said that for years the footwear market was unnaturally active, fueled by credit-card spending and money from home equity loans. As a result, the market grew at an artificial, unsustainable rate. Jerry Turner, chairman and CEO American Sporting Goods, said the slow recovery would be the new reality for manufacturers and retailers of all stripes. “There was so much false spending going on out there, with consumers using credit cards and borrowing on their homes, that there is no recovery from that. It was false. There’s no going back to that,” he said. “So there will be less business out there ... and it will take strong discipline on the part of anyone in business to grow profitably.” Wolverine Footwear Group President Ted Gedra said the company’s lean business practices have helped lessen the impact of the sour economy. Still, he said, the company had been forced to prioritize its investment spending. For example, in the Wolverine brand business, spending has been focused on lifestyle positioning, while the company’s core workboot business is centered on new technologies such as its Contour Welt construction. The “new normal,” as some have termed the current economy, has prompted Glendale, Wis.-based Weyco Group’s Florsheim brand to play to its strengths, shifting inventory deeper for core shoes and away from specialty items. “We used to be a little more aggressive with seasonal shoes,” said Tom Florsheim, Weyco chairman and CEO. “Now we’re about stocking inventory on our core shoes. [But] we’re really built for tough times. We run a very lean company.” K-Swiss expects another lasting effect of the recession could be a prolonged consumer focus on value, whether that means a lower price or a higher perceived merit. “That means you have to run your business very lean and tight forever,” said K-Swiss CEO Steven Nichols. “The recession could end, but I don’t think times are going to be spectacular.” To energize the value component of the company’s products, Nichols said K-Swiss was making significant investments in research and development and new technologies. “We’re probably putting more money into design and development than we ever have,” he said. “We’re doing things regardless of where the business is now.” <wwd.com/footwear-news>


-Unfortunately, Adidas won’t be producing the pink-and-yellow Barricade V shoe inscribed with the word “believe,” worn by 17-year-old tennis sensation Melanie Oudin during her phenomenal U.S. Open run. But there is a workaround for tennis fans desperate to pay homage: The company invites them to make their own via the Mi Adidas Website. “We will not be doing any mass production, [but] fans can go onto Miadidas.com — which is exactly the same way [Oudin] did it — and customize their shoes with ‘believe’ or whatever else inspires them,” said a company spokeswoman. Despite her loss to Denmark’s Caroline Wozniacki on Sept. 9, Oudin certainly secured a spot in tennis history last week and will likely become a familiar face for the athletic brand. “She will probably be a lot more prominent in terms of our tennis athletes,” said the Adidas rep.  <wwd.com/footwear-news>


-Footwear News survey says kids footwear sales are up - Channel checking 6 private family footwear stores yielded the results that children's footwear is selling.  <wwd.com/footwear-news>


-Ralph Lauren’s Rugby tosses a second ball into the mobile commerce scrum - Right now retail mobile apps are battling in a rugby-like scrum, fighting for the attention and subsequent downloads that move them high on the list of popular apps in an app store. Ralph Lauren’s Rugby brand today entered the fray with a mobile app targeting young adult fashion consumers who want to personalize what they buy and how they buy it. The new iPhone app expands Ralph Lauren’s already considerable presence in m-commerce. The retailer operates two transactional mobile sites, m.RalphLauren.com and Rugby.com/mobile, and both Polo and Rugby use text messaging in their marketing programs.  <internetretailer.com>


-Traffic fails to make the grade at computer and electronics e-retailers - Despite school days lurking right around the corner, consumers weren’t looking online for laptops or other gadgets to help them in school in July, at least not as much as last year. Most of the top 10 e-retailers in terms of traffic that sell computers and consumer electronics posted drops in unique visitors, Nielsen Online says. Gamestop was the traffic winner with a 25% rise compared to last year. On the other end of the spectrum, Circuit City posted a 73% decline. The top multi-category computers and electronics online shopping destinations in July with unique visitors in millions this year and last and growth from prior year, according to Nielsen Online, were: Best Buy, 14.36, 13.90, 3%, eBay Electronics, 4.89, 7.72, -33%, Gamestop.com, 4.06, 3.24, 25%, OSTG, 3.70, 4.10, -10%, Newegg.com, 3.24, 3.97, -18%, Circuit City, 3.21, 11.76, -73%, TigerDirect.com, 3.11, 3.56, -13%, eBay Computers, 2.09, 4.28, -51%, Sony Electronics, 1.54, 1.70, -10%, Samsung, 1.38, 1.62, -15%. <internetretailer.com>


-Yahoo! Inc. is selling a stake in Alibaba.com Ltd. - The operator of China’s biggest trading Web site, for as much as HK$1.17 billion ($151 million), according to the terms of the sale obtained by Bloomberg News. UBS AG, the sole bookrunner, is placing 57.5 million shares at an indicated price range of HK$19.80 to HK$20.30 apiece, the terms showed. That’s 6.4 percent to 4 percent less than Alibaba’s closing price in Hong Kong today and the number of shares is equivalent to a 1.1 percent stake. Sunnyvale, California-based Yahoo, owner of the second- biggest U.S. Internet search engine, is selling Alibaba shares after the Chinese company’s stock almost quadrupled in Hong Kong trading this year. Alibaba rose 3.7 percent to HK$21.15 in Hong Kong today, while the city’s benchmark Hang Seng Index fell 1.1 percent.  <bloomberg.com>


-John Lewis has relaunched its online fashion offer and is set to drive sales by 30% this year - The site, at www.johnlewis.com/fashion, gives shoppers access to over 200 fashion and beauty brands and includes updated search and navigation technology. The department store plans to add £70m to John Lewis’ online fashion sales by 2011. Fashion sales represent about 6% of johnlewis.com’s total sales and the department store is set to grow that by 30% this year. It will launch more than 100 new brands online across all categories. Brands available online will include Lulu Guinness, Steve Madden, Belstaff, Hudson Jeans, Elie Tahari, Mulberry, Ralph Lauren, Orla Kiely, Paul & Joe Sister, Nicole Farhi and Paul Costelloe. John Lewis Direct managing director Robin Terrell said: “Fashion online is one of the biggest business opportunities for John Lewis over the next three years and there will be a significant step change in our customers’ shopping experience online. <drapersonline.com>


-Retail sales in London in August were at their lowest in four years, according to the London Retail Sales Monitor - Sales for the four weeks to August 29 were down 5.9% on last year, the first time they have fallen this year, following a strong seven months. It is also the biggest like-for-like drop since August 2005. Overall UK retail sales dropped 0.1%, marking the first time this year that London has performed worse than the UK as a whole. Clothing and footwear performed worse than food. The fall in London was due in part to better August weather prompting people to spend their time outdoors, as well as visitors from the Middle East returning home earlier this year, as Ramadan began earlier. <drapersonline.com>


-Gap making more of a presence in UK with a pop-up shop for 19 days - Gap opened a 40th anniversary pop-up store in Kingley Count, off London’s Regent Street. The two floor store is one of a quartet of pop-ups marking the event. The first opened last month in Los Angeles last month followed by London, New York and Paris. The London store has two floors, will trade for 19 days and 69 hours (the original Gap store opened in 1969) and on opening day 69 pairs of jeans were on offer for, yes, £19.69. <retail-week.com>


-Glassware and gifts brand Designs by Lolita is unveiling a home accessories collection - by Avanti Linens this fall at Macy's stores. The line includes beach towels ($24.99) and other accessories for bath, kitchen, bed, bar and beach. The beach towels, which feature a fiber-reactive print on the front and has a drink recipe on the back, will first hit in November at Macy's stores in South Florida. A nationwide rollout will follow in the spring. More product release dates and retail partners will be announced in October. <licensemag.com>


-Indian retailers are upbeat once again as consumption picks up indicating more money coming in to the hands of customers - Researchers say that private consumption continues to grow at double digit - Rs18 trillion projected for 2010 and that modern retail is expected to further spur consumption and catalyze speedier economic growth while technology brings in efficiencies in every sphere of retail and contribution. These will be the broad agenda at India’s mega retail convention, India Retail Forum (IRF) ’09, scheduled on 16th & 17th September at the Renaissance, Mumbai. <indiaretailing.com>







  • Kevin Mansell, Chairman, President & CEO, sold 138,000shs ($7.8mm) nearly 50% of total common holdings, but closer to 10% of total holdings including options.
  • John Herma, Director, sold 100,000shs ($5.7mm) less than 2% of total common holdings.
  • Bill Kellogg, Director, sold 300,000shs ($16.7mm) less than 4% of total common holdings.
  • Frank Sica, Director, sold 1,000shs (55k) less than 5% of total common holdings.
  • Peter Sommerhauser, Director, sold 35,000shs (~$2M) nearly 30% of total common holdings.
  • (Thursday 9/10) Lawrence Montgomery, Director, sold 240,000shs ($13.1mm) nearly 35% of total common holdings.


DKS: Ed Stack, Chairman & CEO, sold 50,000shs ($1.1mm) after exercising the right to buy 50,000 shares less than 1% of total common holdings.


FOSL: Ken Anderson, Director, sold 6,750shs ($190k) after exercising the right to buy 6,750 shares roughly 50% of total common holdings.


GES: Michael Relich, SVP & CIO, sold 6,697shs ($240k) nearly 25% of total common holdings.


VLCM: Richard Woolcott, Chairman & CEO, sold 20,000shs ($300k) less than 1% pursuant to a 10b5-1 plan.




MACAU’S HOTEL GUESTS UP 18% IN JULY macaunews.com.mo

525,731 guests stayed at Macau’s 86 hotels in July, according to figures from the Macau Statistics and Census Service.  This represents an increase of 17.9% from June and a decrease of 10.5% compared to the same month in 2008.  Occupancy fell 10.8% year-over-year to 68.1%.  Guests from the mainland and Hong Kong accounted for 43.3% and 29.3% of all guests in July, respectively.


The number of package tour visitors rose 42.7% in July from the preceding month but decreased 35.7% year-over-year; mainlanders accounted for 62.5% of all package tour arrivals in July.



Wynn Resorts Ltd. has received Hong Kong regulatory approval to list its Macau casino operations in the city in a $1 billion initial public offering.  The road show for the share sale will start on September 21 and listing on the Hong Kong stock exchange is scheduled for October 9.  The company plans to sell a 20% stake in Macau operations in the IPO.  Wynn generated over half of its $723 million second quarter net revenues for the quarter ending June 30 from its Macau operations. 

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One Year Later: To hell and (almost) back?


The August explosion in Macau has lifted September expectations off the charts, especially given it is the first easy comparison. Not so fast. Business has been slow so far.



My Macau guys are telling me to slow down on my September expections.  Business has been surprisingly slow so far in September, nothing like August.  We’re not exactly sure why yet but walk-throughs and conversations with mid-level casino employees suggest that there has been a marked slowdown in traffic, in both the Mass and VIP segments. 


One explanation could be related to Hong Kong.  A lot of the growth in August was from Hong Kong.  You could see it at the pools which were packed in August.  Chinese mainlanders don’t go to the pools.  With families in back-to-school mode, the Hong Kong kicker is gone. 


Another factor, as suggested by a client of mine, might be customers delaying their Macau trip until October.  There are more holiday days in October of this year versus last year and, of course, the celebration of the 50th anniversary of the founding of The People's Republic of China begins October 1st.


Investor expectations are pretty high for September given the August boom, despite 40% growth last year, and the September comp is the first easy one in a long time.  The volatility of the stocks to short term catalysts make this a tricky trade.  September is likely to disappoint lofty expectations, but October could be a big month, although expectations are pretty high for that month already.


                                                                       SEPTEMBER IS A WHOLE DIFFERENT MONTH - Total Macau Revenue August



“The better part of valor is discretion”
– William Shakespeare



Thanks Bill, and the better or necessary part of consumer spending is the staples.  Necessity is why staples are also called non-discretionary.  With their discretion, will consumers be so valorous as to empty their wallets for things they want, rather than need?  The almost vertical trajectory of discretionary consumer stocks suggests yes.  On the contrary, sound analysis indicates that consumers face an almost impenetrable ceiling, triple fortified by the Three S’s:  Savings rate, Stagflation, and Share of wallet.  I’d add consumer credit (bad) to the mix but it doesn’t begin with an S, we like 3s, and our macro team will be addressing this topic shortly.


So while Geithner may say that “things are better than 3 months ago, 6 months ago, before this recession began”, I would ask two questions:  By what metric and for whom?  Geithner’s preferred metric lately, it appears, is the rate of change or the “less bad” thesis that Research Edge was espousing when everyone else thought the world was falling apart (March 9th ring a bell?).  The stock market has already discounted “less bad”, then “stability”, and now is viewing the consumer as in “recovery” mode.  This is what scares me.


“Recovery mode” implies, well…recovery.  I’m certainly not seeing it in the consumer discretionary sectors of gaming, lodging, and leisure that comprise my analytical vertical.  Is business less bad?  Maybe, but I think the comparisons are just getting easier.  The consumer is not necessarily getting stronger.


“Recovery mode” also implies some lasting duration.  We are very worried about Q4 from a macro and consumer perspective.  The threat of stagflation is real, maybe coming as soon as Q4.  Stagflation is a consumer killer.  In a stagflation environment, fewer consumers have jobs and the ones that do can’t buy as much as before.  Will you take credit for that too, Mr. Geithner, when it happens?  Your policies and your predecessor’s policies (as well as the Bernanke constant) have created a fertile environment for potentially massive inflation, yet unemployment continues to grow.  Sure unemployment is growing at a slower rate (10% but it could’ve been 10.5%!).  Congratulations - pop the champagne – at least the French consumer discretionary industry will benefit.


So if I’m out of work (thankfully I’m not) and my purchasing power begins to decline at an accelerating rate (rate of change cuts both ways Tim), am I really going to buy that 2nd boat, 8th Coach bag, or book that 3rd cruise this year, or will I feed my family.  Want versus need.


This also gets us to the share of the wallet question.  In an inflationary economy, a larger part of consumer spending will go to non-discretionary items.  With stagflation, the size of the wallet shrinks.  One of my industries has a third problem:  even within the consumer discretionary segment, casino spending is shrinking as a % of Personal Consumption Expenditures (PCE) for the first time in 25 years.  Now that’s a triple whammy!


So what do we do?  Be careful and manage risk.  We can’t ignore the warning signs just because the stock market and consumer stocks are going up.  Timing, as always, is critical.  This is where I defer to our timing tutor, Keith McCullough.


On a separate note, I will be taking many moments of silence today to contemplate what happened exactly 8 years ago on a beautiful, sunny Tuesday morning.  The events of 9/11 had an impact on virtually every American.  The impact was personal for many of us living/working in NYC that day.  We move forward in part by looking back.


Todd Jordan

Managing Director

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