Unemployment is a disaster. Why is the market surprised?


Our model portfolio is limited to investments in the securities universe. This is by design, since the majority of investors in the US do not actively participate in the futures, physical commodity or spot currency markets and a founding principal of our firm was to make our work accessible and useful to investors of all types. As a result, we deploy our investment ideas in the non-security markets via ETF and ETN products, many of which have structural features that can be non-intuitive. We have recently received a number of inquiries regarding the products that we use to gain exposure to oil as a commodity.


The two most liquid products are the United States Oil Fund, and ETF that trades under the ticker USO, and the iPath Oil ETN, which trades with the symbol OIL.


USO, as an ETF, is a company that holds futures contracts on oil (primarily front month NYMEX and ICE contracts) as well as swaps and treasuries. The fund presents exposure to oil that can be traded like a stock inside a securities account. From a tax perspective, the fact that the company issues k-1 created tax complexities for some holders. OIL, on the other hand, is an Exchange Traded Note that provides a potentially simpler tax scenario for investors, but which also creates credit risk on investors since it is ultimately a debt security issued by a division of Barclays.


The chart below illustrates how significantly both products have underperformed the continuous front month contract for NYMEX Light Sweet Crude year-to-date  --the benchmark they were created to emulate.




This divergence is a result of a structural feature: While the continuous front month contract is calculated hypothetically, both USO and OIL must roll into successive contracts on a monthly basis to replicate the economic exposure. As a result, period of steep contango –such as the market experienced during the start of the year in the wake of collapsing prices, will have a negative impact on USO and OIL as they roll into newer, more expensive contracts.  In the charts below we illustrate the steep maturity curve which created a divergence in returns.






As the curve steepness moderated, the products began to trade with a close correlation again with an underperformance factor “baked in” going forward (unless of course the curve inverts, creating positive divergence for holders of USO and OIL).


We strive to provide actionable tactical ideas in our model portfolio and, as such, the liquidity of these products and near term correlation to front month futures makes them the best tools available. For subscribers who execute in non securities markets, either spot, futures or OTC swaps or for those who have a different investment duration than that of our model portfolio, these ETFs and ETNs may not be the best option.



Andrew Barber



Bear Cubs

Headwinds Ahead for the Eurozone


As we have measured the health of the European patient this year, we’ve anchored our thesis on a critical catalyst: employment.  We’ve held that Eurozone unemployment would rise into year-end and next year and that would create a grave headwind for the improving fundamentals that we’ve seen across multiple metrics and contribute to economic divergence between individual countries over the intermediate term.


Today Eurostat reported the Eurozone jobless rate rose to 9.6% in August from 9.5% in the previous month. The upturn came as no surprise: we’ve forecast a sequential rise in joblessness across the region as the part-time jobs that buoyed employment over the last months for numerous countries expire into year-end. This rollover occurs as employers, who under government pressure and inducements, opted for part-time contracts rather than outright layoffs face the choice of calling workers back full-time or not. As we move out in duration we’d expect the total rate to tack on at least another 100 bps as we enter the new year, with significant national divergence.  


Certainly a rise in unemployment should grind into economic performance, however we’ve yet to see this make an impact across all fundamental measures.  Importantly, forward-looking European confidence rose in September to 82.8 (the highest level in 12 months) and the manufacturing Purchase Managers’ Index rose in the Eurozone to 49.3, with manufacturing improving for the three largest economies sequentially:  German and Italian manufacturing improved to 49.6 and 47.6 but held below the 50 level signaling contraction, while the index for French manufacturing shot up to 53.0 from 50.8 in August, holding its level in expansionary territory.


Importantly consumer spending should deteriorate alongside sentiment as unemployment rises.  Although a lagging indicator, retail sales released this week for Germany fell 1.5% in August sequentially, an inflection point from July’s +0.7% reading. Further, Eurozone retail sales as measured by Reuter’s PMI held below the 50 level in August, with sequential improvement for France and Italy and a decline in Germany to 47.9.  


Eurozone inflation has also been a main focal point for us. September’s initial CPI reading of -0.3% year-over-year released this week was surprising directionally (if confirmed); we expected an incremental rise off of the August -0.2% number, as energy prices on an annual compare move the dial into (mild) inflationary territory. While we may need to push forward our timing slightly, the data suggests that food prices also drove the number deflationary.  This of course is a net benefit for consumers, who’ve also realized purchasing power with a strong Euro versus the USD.


Returning to our thesis that all European economies were “not created equal”, inflation is running a variant levels across countries. Spain measured -1% in September Y/Y, [from -0.8% in August Y/Y] while Italy recorded +0.3% in Sept. Y/Y. We continue to hold that German inflation should be flat to moderately positive over the next two quarters [from an initial reading of -0.3% in September Y/Y], a set-up we like as the economy returns to growth.  


The take-away here is that countries that were levered up into last year’s crash (like Spain or Ireland) should see deeper deflationary numbers (Irish CPI at -2.4% in August Y/Y), which should extend recovery on the TAIL (3 years of less) and put the ECB in a precarious position when it considers raising rates. 


All of this has led us to become incrementally more bearish on Europe’s advanced economies, many of which are faced with rising government budget deficits that will force them (in some cases) to cut public spending and raise taxes, placing additional downward pressure on economic performance on the TAIL. The IMF today issued its updated projections on global growth and forecasts the Eurozone to grow a paltry +0.3% in 2010, while Central and Eastern Europe should grow 1.8% and Russia 1.5% next year. The release suggests commodity producing countries and the emerging economies should drive global growth, with Brazil and Mexico forecast to expand 3.5%; the Emerging market and developing economies 5.1%; China 9.0%; and Developing Asia 7.3%. 


We’re currently long Germany via EWG in our model portfolio.


Matthew Hedrick


Bear Cubs - a1


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Earlier this week certain media outlets mentioned the possibility of a new destination casino in Surrey, British Columbia. We think this is highly unlikely.


On September 24th, the Surrey North Delta Leader published an article on three applicants proposing a destination casino in Surrey, BC.  Clearly a new casino in BC would not be positive for Great Canadian. However, shareholders can relax; the probability of Surrey getting a destination casino anytime in the intermediate future is highly unlikely.


One article mentions that the  town of Surrey has three pending applications for gaming facilities.  Two of the applications are for a destination casino, one of which proposed a C$100MM project with a 200-room hotel and 800-seat convention center. The third application is to spend C$25MM to upgrade an existing bingo hall.  Apparently, several of Surrey's council members have spoken out in favor of a destination casino.


Curiously, the article doesn't mention the BCLC (British Columbian Lottery Commission), the organization in charge of managing and operating all gaming in the province of British Columbia.  The article also omits the small issue of the  moratorium on new licenses in BC, which will pose a pretty tall obstacle for the two new applicants.  We suspect that this is why the BCLC was not cited in the article.




Today, O’Charley’s Inc. announced that it has named Wilson Craft Concept President of O’Charley’s Restaurants.  Wilson’s knowledge of the bar and grill space comes from the 21 years he spent at Brinker International, where he served as the President of Chili’s Grill and Bar.  More recently, he worked for Phil Hickey, CHUX’s chairman of the Board, at LongHorn Steakhouse before it was acquired by Darden Restaurants.   


Operationally, CHUX is still challenged given the difficult environment.  For years the CHUX story has lacked a strong management team.  The addition of Wilson Craft to the CHUX management team changes things in that regard.  The big question now is how much it will cost him to implement the changes he needs to get the business back on track.


CHUX - BIG HIRE - CHUX stock price chart

ICON: Where are the Slides?

ICON: Where are the Slides?

OCTOBER 1, 2009





In the wake of yesterday’s negative pre-announcement I couldn’t help but take a look at a timeline of Iconix’s historical capital raises and acquisitions.  I also couldn’t ignore the fact that this timeline has typically followed a simple pattern.  Raise capital, make an acquisition, manufacture earnings, and thereby convincing shareholders that they could create more value by doing deals than investors could investing the capital on their own.  Perhaps this is the very root of why today’s 20+% sell off in the shares is so pronounced.  Was management anticipating an accretive and/or noteworthy acquisition to take place during the quarter after it raised $150 million on June 3rd?   I think so.


ICON: Where are the Slides? - Iconix 1


Whether a deal was or was not on the way, we can’t ignore the facts. Recall, that CEO Neil Cole and two directors sold 800,000 shares as part of the offering in early June.  The timing of those insider sales aren’t looking so good right now.  Third quarter guidance was then provided on August 4th, a time in which management would have had at least some visibility into the quarter and the acquisition pipeline.  That brings us to today, sort of…


Clearly something is amiss and credibility is plummeting by the minute.   As late as last week (September 23rd), the company republished its prior guidance in an investor presentation at Credit Suisse’s “Global Brands in China” Conference.  A quick download of the slides from that day in Shanghai could confirm this, although within the last 30 minutes it appears that the file has been removed!   That brings us to this morning, when ICON lowered its EPS expectations for the current quarter and the year, citing slightly weaker sales and higher than anticipated dilution from the equity offering for which they already provided guidance. 


ICON: Where are the Slides? - Iconix 2


If a deal was or is in the works (Mark Ecko Enterprises and Eddie Bauer both mentioned intra-quarter) it is taking longer to consummate.  Perhaps there is no deal at all.  Whatever the case may be, it is clear from the announcement that cash on the balance sheet is not a substitute for growth or consolation for a dilutive equity deal.  Credibility is now the single biggest factor impacting ICON and I am sure that today is just the beginning of a long road ahead for both the shares and management.




Some Notable Call Outs


  • In an effort and offer as many options as possible to cash strapped consumers, Best Buy is launching and testing some new initiatives for the holiday season.  The company is launching its “Pitch In” gift card on October 6th.  The reloadable card connects to an online wish list which in turn allows for friend and relatives to contribute an amount of their choice towards the purchase of a particular item.  Additionally, the company is testing layway in Michigan, but it is unlikely the program will be rolled out nationally before year-end.  Also keep an eye out on substantially increased utilization of Twitter and Facebook to generate marketing buzz.


  • Michelle Leder, our SEC filings expert discovered that Chicos filed an 8K that unredacts (removes sensitive information so that it may be distributed to a broader audience) certain portions of a $55 million credit agreement it entered into back in December. Companies don't unredact stuff voluntarily 8 months later, which means someone -- regulators or some AG -- was asking for this.





-Europe: EC plans anti-dumping on footwear - The European Union is going to extend its anti-dumping measures against Chinese footwear imports next month but the extension to the punitive tariffs will be for two years instead of the normal five, and will exempt children's footwear and sports shoes. Imports of shoes from Vietnam will be exempted from the extension.  <>


-German Retail Sales Unexpectedly Drop on Joblessness; Jobless Numbers Likely to Rise - In Germany retail sales unexpectedly fell in August as concern about rising unemployment kept a lid on consumer spending. Sales, adjusted for inflation and seasonal swings, decreased 1.5 percent from July, when they rose 0.7 percent. Unemployment rose in September. Jobless numbers will likely swell in coming months as companies that are using government-sponsored work programs with shortened hours will be forced to cut jobs eventually, economists said. <>


-China: Luxury auto brands eye 2nd-, 3rd-tier Chinese cities - Luxury automakers are casting their eye to second- and third-tier Chinese cities, when the markets of first-tier cities are becoming saturated, reported in the local press. Audi has shifted the focus of its China expansion from big cities onto small and medium cities. Last year, it located its first Asian city exhibition hall in Ningbo, a port city in the eastern Chinese province of Zhejjiang. <>


-Crocs. Inc. Secures New Asset-Backed Credit Facility - Crocs, Inc. said it has entered into a new asset-backed revolving credit facility with PNC as of Sept. 25, 2009. The agreement provides for up to $30 million in revolving loans which may be used for working capital needs and other items, as stipulated in the agreement. Certain of the company’s subsidiaries were co-borrowers under the agreement.



-PepsiCo CEO to Spend More on Ads, Push Gatorade for Athletes - the world’s largest snack-food maker, plans to increase advertising spending next year and is readying new Gatorade products to boost consumption, Chairman and Chief Executive Officer Indra Nooyi said. PepsiCo maintained its ad budgets this year, taking advantage of media rates that declined 25 percent to 40 percent, Nooyi, 53, said yesterday in an interview in New York. The company also has shifted more of its spending to digital media, she said. <>


Japan’s Tankan Survey Shows Companies Plan Deeper Spending Cuts - Japanese companies plan to deepen investment cuts as profits slump, inhibiting the recovery from the nation’s worst postwar recession, the central bank’s Tankan survey showed. Large businesses aim to cut spending 10.8 percent this year, more than the 9.4 percent planned three months ago. <>


India: MMF textile exports grow despite downturn - Exports of Indian man-made fibre textiles have reached US$3481 million (Rs.15,863 crores) during 2008-09, representing a growth of nearly 4% in terms of US dollar terms and 18% in terms of rupee compared to that of the previous financial year.



-CIT Group Nears Bankruptcy Again - CIT Group Inc. is trying to hammer out a restructuring plan as bankruptcy once again loomed over the lender, a financial cornerstone to many fashion producers and retailers. At least some fashion companies have tweaked their agreements with CIT or made other financing arrangements. And if a deal can’t be worked out and the 101-year-old lender does become insolvent, it is now expected to have a relatively orderly bankruptcy, mitigating the impact on its clients, financial sources said. <>


Bernard Chaus Inc. See Sales Slip - Bernard Chaus Inc. suffered deeper losses on lower sales during the fourth quarter and fiscal year as growth in its Kenneth Cole licensed business failed to compensate for declines in the Cynthia Steffe and private label product lines. According to the firm’s annual report, filed this week with the Securities and Exchange Commission, the net loss grew to $6 million, or 16 cents a diluted share, in the fourth quarter ended June 30, from a loss of $3.2 million, or 9 cents, in the year-ago quarter. <>


-New pro Fowler signs with Puma for apparel and footwear -Fledgling professional Rickie Fowler, ranked as the nation's top amateur golfer the past two years, has signed on Puma Golf to wear its apparel and footwear. Fowler will be featured in Puma's Spring/Summer 2010 marketing campaigns for the brand, specifically for the golf category. <>


-J.C. Penney rolls out digital coupons for cell phones - J.C. Penney Co. shoppers in Houston now can download digital coupons to their mobile phones, which can be scanned on the phone’s display screen at the cash register. The multichannel retailer will offer coupons nearly every week through the holiday shopping season. <>


-Johnson Outdoors Inc. Refinances Debt - Johnson Outdoors Inc. has refinanced and restructured the company's debt, thereby reducing estimated 2010 borrowing costs by more than 40 percent compared with fiscal year 2009.The highlights of the debt refinancing include: Total debt availability of up to $84.9 million through two new credit facilities secured primarily by the Company's U.S. assets. All related loan agreements have been signed and closed. A revolving credit facility that provides financing of up to $69million which matures in 2012 with availability based on eligible account receivables and inventory. The new financing structure replaces the company's current amended credit agreements which were arranged by JP Morgan Chase and would have matured in 2010. <>


-Blacks Leisure to Close 89 Stores - Blacks Leisure, the U.K. outdoor chain, announced plans to close 89 stores across the group that have not "traded profitably for years". The firm, which operates Millets, Blacks and O'Neill shops, also said it plans to lay off 50 employees at its Northampton head office.

Last week, it called in administrators to its 11 O'Neill boardwear stores - threatening 90 jobs. It also said a drop in sales during the downturn meant it would breach the terms of its bank loans. Pasted from <>


-K-Swiss Partners with LA Marathon - In support of its recent focus on the technical running market, K-Swiss Inc. has agreed to a multiyear deal with the Los Angeles Marathon to become the official footwear and apparel sponsor. The partnership includes a collaborative effort between K-Swiss and the marathon to produce a full collection of apparel, which will be sold at retail, online and at K-Swiss’ managed and owned stores in Asia. The collection will also sell on race day through various retail “pop-up” stores, as well as at the Expo, a two-day health and wellness convention that coincides with the March 21, 2010, marathon. <>


-Hugo Boss signs Graeme Black to drive womenswear - Hugo Boss has named London-based designer Graeme Black as creative consultant for the Boss Black women’s collection. Black, who will continue to design his signature label, began working for the German company in the spring. Black has collaborated with director of Boss Black womenswear, Karin Busnel. <>


-Gucci Snake Bag Draws Ire in China as Wage Gaps Widen - At China’s newest Gucci store, in Shijiazhuang, snakeskin purses sell for the equivalent of $4,390, about twice the city’s per capita annual income. Next door at Brooks Brothers, button-down shirts go for $190. “Shijiazhuang is becoming very well off,” Brooks Brothers saleswoman Wang Weixia, 24, says of the provincial capital, 291 kilometers (181 miles) southwest of Beijing. “A few years ago it was poor and backwards.” <>



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


09/30/2009 10:21 AM


Keeping a trade a trade. Levine doesn't want me to be short into the analyst event (Friday), and I don't need to be. (easing margin compares here, both current qtr and next). Everything has a time/price. Covering red. KM


09/30/2009 10:37 AM


Another lower all time high for Nike. Great company, great people, and a great price to sell into. McGough owns this debate. The intermediate term view from this price is negative. KM


09/30/2009 03:28 PM


McGough has had me wait, patiently, here on price. His analysis is crystal clear and there is a catalyst next week (see his note on PSS today). Buying red. KM





DECK: Peter Worley, President of Teva, sold 1,500 shares ($128k), 5% of total common holdings.


FINL: Bill Kirkendall, Director, sold 6,000 shares ($60k) after excising the right to buy 5,000 shares, 95% of total common holdings.


GES: Michael Relich, SVP & CIO, sold 1800 shares ($67k), less than 9% of total common holdings.



  • Michael Steinberg, Director, sold 6,750 shares ($189k) after exercising the right to buy 6,750 shares, nearly 60% of total common holdings.
  • Alan Gold, Director, sold 6,700 shares ($188k) after exercising the right to buy 6,700 shares, nearly 35% of total common holdings.



  • Steven Nelson, Vice President, bought 240 shares (nearly $4k), less than 1% of total common holdings.
  • William Dillard, CEO, bought 740 shares ($11k), less than 1% of total common holdings.
  • Robin Sanderford, Vice President Tampa Division, bought 370 shares ($6k), less than 1% of total common holdings.
  • Paul Schroeder, Vice President, General Counsel, bought 450 shares ($7k), less than 1% of total common holdings.
  • Jamie Freeman, Senior Vice President, CFO, bought 560 shares ($8k), less than 1% of total common holdings.
  • Drue Matheny, Executive Vice President, bought 530 shares ($8k), less than 1% of total common holdings.
  • Kent Burnett, Vice President of Phoenix Division, bought 450 shares ($7k), less than 1% of total common holdings.
  • David Terry, Chairman of St. Louis Division, bought 200 shares ($3k), less than 2% of total common holdings.
  • Ales Dillard, President, bought 660 shares ($10k), less than 1% of total common holdings.
  • Burt Squires, Corporate Vice President of Stores, bought 350 shares ($6k), less than 1% of total common holdings.

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