Slouching Towards Wall Street… Notes for the Week Ending Friday, September 18, 2009

Streetballs – Obama Takes Wall Street To The Pavement


Settler Trouble – An Opinion On An Opinion


And: Dead To Rights – 6’, Granite Headstn, Rvr Vu




Speech Impediment

When all is said and done, much more is said than done.

                             - Anonymous


President Obama must be wishing he could trade places with Anonymous.  Anonymous is a world-renowned author of sayings ranging from the fiendishly witty, to the profoundly pithy.  Anonymous is quoted every bit as much as the Bible and Shakespeare, and with no less reverence.  Most important of all, while everyone knows Anonymous and know many of Anonymous’ sayings, no one can name a single thing that Anonymous actually did.  And yet, Anonymous is held in universal high esteem.  Our analysis indicates that Anonymous is universally revered, because he had the good sense to always speak wisely, and leave it at that.


President Obama shares certain characteristics with Anonymous.  Both are noted for saying profound things – which stir thought but in the end beget no action.  Both are known for their ability to get crowds nodding in warm agreement at their words, then walking away leaving their listeners to ask “but now what?”  And both are noted for their ability to eloquently support any point of view – so much so that one is often at a loss to know exactly where they stand on an issue.  So many similarities…


You notice that you never see the two of them together?  Coincidence…?


And so it was in the revered tradition of Anonymous that last week President Obama, true to form, saw a major problem – and said something about it.


Before we get into the story, here’s the punch line: the markets ticked up after Obama’s Wall Street speech, because the professionals realized the President is pandering to them.


The President has “sought ideas and input from industry leaders, policy experts, academics, consumer advocates, and the broader public. And we've worked closely with leaders in the Senate and House, including Senators Chris Dodd and Richard Shelby, and Congressman Barney Frank, who are now working to pass regulatory reform through Congress.”


Translation: The financial system has been assassinated and democratic society around the world is in mortal peril.  Round up the usual suspects.


For all the eloquent noise in the President’s talk – much of it worthy of Anonymous himself – there are moments when he managed to address what actually went wrong.  The “loopholes that were at the heart of the crisis. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators often lacked accountability for inaction. These weaknesses in oversight engendered systematic, and systemic, abuse.  Under existing rules, some companies can actually shop for the regulator of their choice – and others, like hedge funds, can operate outside of the regulatory system altogether. We've seen the development of financial instruments, like derivatives and credit default swaps, without anyone examining the risks or regulating all of the players. And we've seen lenders profit by providing loans to borrowers who they knew would never repay, because the lender offloaded the loan and the consequences to someone else. Those who refuse to game the system are at a disadvantage.”


Many of the key problems of Wall Street are neatly summed up here.  But the conclusions drawn by the President are not unambiguous winners.


A Consumer Protection Commission.  Isn’t that fundamentally  every regulator’s brief: to protect the consumer?  Whether it be an individual trading her IRA, who is victimized by her broker – or a Fortune 100 corporation that can not ship its manufactured products across country without paying millions of dollars in bribes to the transport companies – the job of a government regulator is to establish standards and prevent abuses.  There is neither mystery not magic to any of this.  Nor is it sufficient to point fingers at the Great Stone Wall erected by former SEC Chairman Cox, nor to chastise the SEC staffers who prevented their junior reports from investigating Madoff.


The plain fact is that, in every aspect of its underlying mission of market integrity and consumer protection, the government of this nation has failed its citizens.  President Obama sailed into office on the mantra of Yes We Can.  Everything he has done since taking office seems to reveal that the real underlying message is – Well, We Might…  Significantly absent from the President’s speech was any hint of playing hardball. 


For example: Wall Street executives are forever admonishing their supervisory and compliance personnel “You can’t just impose compliance procedures on our salesmen and traders.  They’ll leave!”


In short: any time you throw up a roadblock in front of the wicked, they find a new route.  And Obama publicly caved in to this as well, acknowledging that regulation should not be so harsh as to drive business overseas.


So if we’re going to ask the very people who got us into this mess to give us the solutions, if we’re not going to make regulation “onerous” or “burdensome”, but instead reassure the powerful that we will keep their seats warm and cozy for them so they don’t have to go setting up shop in Andorra and Macedonia – then what exactly is it we are going to do, Mr. President?


As Peter Tosh sings, “Everybody want to go to Heaven, but nobody want die.”  The pathetic dithering in Washington makes it clear that this country has long since been sold to the highest bidder.  Can it really be that America can not take steps to prevent environmental disaster because it will cost money?  Can it really be that we will not provide medical insurance to 40,000,000 of our citizens unless the insurance companies and medical providers can be guaranteed they will make a profit on it?  The “Greatest Nation on Earth” (are we still allowed to call it that?) has been brought to its knees by its unquestioning embrace of the profit motive, to the exclusion of any notion of proper business practices.

It is our religion, and our fanaticism will be our undoing.


Wall Street was satisfied with Obama’s speech, because the biggest players will just continue to get bigger and bigger.  Washington – ably aided and abetted by the press – will go after the SEC, and not Goldman Sachs.  


A Consumer Protection Agency?  We love it!  Another layer of bureaucrats to tell the other bureaucrats what new forms need to be filled out.  A systemic risk regulator?  Bring it on!  We’ll keep moving the parts of the puzzle around so it always looks like someone else’s fault – and with senior Wall Street executives whispering in their ear, the Fed and Treasury are not likely to pull any surprises, especially when any adverse outcome will hinder repayment of the TARP Trillions.


Those who were terrified that Obama would socialize America were right after all.  Except his redistribution of wealth is going up the ladder, not down.  All because no one in Washington is willing to tell people “this will cost money”.


America was once the greatest country on earth.  Right now there is a Greatness vacuum, but America does not have the political will to make the tough economic policy choices that would propel us back to a position of prominence.  As our CEO, Keith McCullough says of many of the ill-advised programs being promulgated by our already-failed government, this is another thing that will end badly.


Or, as Peter Tosh sings, “You never miss your water ‘till your well run dry.”




I’ll Be The Judge Of That


When one reads of Settlement Expansion in the press, one is likely to think about tension between Israel and the Palestinian Authority.  But we have our own form of unbridled encroachment going on right here in the US, aided and abetted by everyone from the courts, to Congress, to the press.  Despite the widespread acknowledgement that it is contributing to disaster, there has been no sign of a settlement freeze.


And then along came Jed.


We welcome the recent article by Columbia Law School professor John Coffee (New York Law Journal, 17 September, “The End of Phony Deterrence?  SEC v. Bank of America” – available on the web at which asks, “With Southern District Judge Jed Rakoff’s blistering decision on Monday, rejecting the proposed settlement between the SEC and Bank of America Corporation, two key questions come to the fore: (1) Will this decision change SEC enforcement practices, which today invite corporate executives to purchase immunity for themselves with their shareholders’ money? and (2) Who is minding the store at the SEC so as to enable its litigators to shoot themselves in both feet?” 


Professor Coffee predicts that the SEC’s conduct in this matter “could haunt the SEC for years.”


Too right, we say.


This was the Commission that Chairman Schapiro vowed to turn around, bringing a number of cases right off the bat.  Now, it appears she has made such a feast out of low-hanging fruit that she is woozy with excess.  The B of A settlement represents the lowest of all: the shareholders’ cash.


Professor Coffee quotes Judge Rakoff’s decision as exposing a “cynical relationship between the parties.”  “The SEC gets to claim that it is exposing wrongdoing.”  Meanwhile, “the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.”


When you look at it that way, it really is a win/win.


Professor Coffee is onto something deeper than just the BofA fiasco – and for our money, Chairman Schapiro should be bounced for signing off on this.  The fact that President Obama failed to pull her in for a good woodshedding only adds to his aura.  “Yes We Can!” is turning into “Awww – I Couldn’t…”  Next stop is – “Oh s**t!  Did I do that?!”


The culture of settlements is a time-honored one in the American practice of law.  Most lawyers, as the saying goes, don’t know how to find the courthouse steps – because their standing practice is always to settle cases.  Indeed, among tort practitioners, lawyers who refuse to settle are often seen as dogs in the manger, standing in the way of the proper flow of the legal give and take.  One of the ingrained characteristics of the American practice of law has been the one-third contingency fee.  We remember going through a number of arbitration and court cases before learning – naïve that we were – that the 33% figure is a convention.  Nothing in the canon of legal ethics or practices points to the figure of 1/3 of damages recovered as a fair – or “standard” – fee for legal representation.  For years, though, it was a given.  Thus did large segments of the legal profession evolve from advocates whose role was to win justice for their clients, to a cartel whose job was to ensure steady income from deep-pocketed corporate defendants.


Addressing the SEC’s practice of pushing for settlements, Professor Coffee calls this the “sale of indulgences” by the regulatory agencies, and urges the SEC Inspector General to follow up with a full inquiry into the SEC’s handling of the BofA matter.


Professor Coffee cites an SEC policy statement from 2006 that explicitly acknowledges that the Commission’s prior record in such high-profile matters had been weak.  Quoting from the Commission’s statement: “Where the shareholders have been victimized by the violative conduct, or the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from culpable individual offenders acting for a corporation.”


Judge Rakoff was incredulous, among other aspects of this mess, that the SEC staff’s reason for not digging deeper was their understanding that BofA’s executives and board had relied on guidance of counsel.


We have previously observed this widespread lying down before the legal profession.  Congress, in their recent hearings on the BofA / Merrill transaction, accepted Fed Chairman Bernanke’s version of the events with an excess of restraint after Chairman Bernanke testified that he had acted in consultation with the Fed’s lawyers. 


Here’s a tip: as Professor Coffee points out, the SEC does not have to prove “scienter” – state of mind or malicious intent – to obtain a finding of negligence in a proxy matter.  The SEC staff were at a loss because BofA might have relied on opinions of counsel – but since they did not waive privilege, the SEC staff could not challenge the opinions (which they were not sure existed in the first place…)  but had they obtained access to the opinions, the SEC could have challenged them in court.  But they never even determined that these opinions existed…


We wondered at the time why the SEC did not simply find BofA negligent – thereby forcing them to cough up the opinions of their lawyers – if, indeed, they exist.  Hint to the SEC: you (of all people!) should know that, just because a lawyer says something is legal, doesn’t make it so.  And the regulatory agencies – and Congress – have the right to determine whether an opinion of counsel is valid, or at the very least to challenge it in court.  That the SEC failed to do so in this matter looks to us to be gross negligence.


One political problem is, if Chairman Schapiro forced BofA to cough up its legal opinions, would Congress not have to yank Chairman Bernanke back and make him do the same?  And former Secretary Paulson?  The Obama Justice Department hovered perilously close to challenging previous Department legal opinions, as a means to charge individuals with crimes regarding alleged torture of detainees during the Bush administration.  That they have not done so is likely not for fear they will lose, but some smart staffer probably looked out over the halls of Congress and whispered “Pandora’s box”.


Where will it end?  Apparently not here, and not today. 


As reported in Bloomberg (21 September, “SEC Bid to Speed Probes, Win Esteem Stumbles on Bank of America”) new Director of Enforcement Robert Khuzami exhorted the troops on his first day in his new position to adopt the “four S’s – for strategic, swift, smart, and successful.”  Khuzami says his objective is “to build strong cases, then compel defendants to settle quickly on the commission’s terms or face evidence in court.”  (Emphasis added)


Mary Schapiro, the New Broom, apparently is adept at the Old Trick of sweeping under the carpet, and plans to take it to a new level in her term as Chair of the Commission.


That bit about facing evidence in court is the only way there will ever be any transparency in the securities industry.  If people knew the real truth about what went on with Madoff, we suspect the outrage would reach to the Capitol building.  His guilty plea enabled him to avoid a trial, and robbed us of the explanation that we are rightfully entitled to.


The SEC’s BofA settlement is no less scandalous and should be seen as grounds for serious disciplining and censure of Chairman Schapiro, at the very least.


We suspect Chairman Schapiro was nervous about this matter.  Professor Coffee points out that, in a departure from standard SEC practice in such high-profile enforcement cases, the SEC office of the general counsel appears to run from this settlement like the plague.  Professor Coffee points out that, in keeping with standard SEC procedure, given the importance of the BofA case, high-ranking counsel should have signed the Commission’s briefs.  In the event, “the Commission’s two memoranda submitted to Judge Rakoff were signed only by the SEC’s associate regional director.”  Professor Coffee thinks this case might have been “orphaned because no senior official wanted to accept responsibility.”


We offer one observation in defense of the SEC’s approach: the days of the Trust Busters are behind us.  Gone is public sentiment for going after the Robber Barons, and the government is not about to slap cuffs onto the hands that feed them so sumptuously.  The world has fallen definitively under the sway of Gordon Gekko’s dictum that Greed Is Good.  Beyond being Good, the excesses of Wall Street have come to be viewed romantically, and greed is seen as being downright virtuous. The free-market capitalist democracy that was America is hurtling towards becoming the world’s leading piratocracy, where government – aided and abetted by a decidedly un-free press – continues to mount vast programs designed to steal from the poor, and give to the rich. 


The argument goes that, in a free market system, shareholders stand to reap the benefit of performance and thus, when performance goes negative, they deserve to be wiped out.  Alas, the SEC’s blatant theft of shareholder cash to shield those responsible for this fraud fits right into this Sheriff of Nottingham economy.  The Bush and Obama administrations have made not a single bean about bankrupting this nation to save the jobs – and personal wealth – of incompetent and corrupt senior managements, labor unions, and political cronies.  The American taxpayer – and in their wake, the rest of the world – have transmigrated to a new incarnation as Shareholder of Last Resort. 


Meanwhile, New York AG Andrew Cuomo is swinging his bat.  Love him or hate him, his office is bringing actual charges against real people in this miserable affair, and we have hopes that a head or two will roll.  At last, Robin Hood may be on the way. 


Professor Coffee’s full and dreary picture of the depths inhabited by this bottom-feeding Agency – the SEC – ends with the observation that the SEC Office of the Inspector General has not seen fit to look into the culture of settlements at the SEC and the way in which investigations are handled and settlements negotiated.


We wonder when they will get around to it.




Bid, Ask – Last Sale


Last week we wrote about Wall Street’s project to securitize life insurance policies (“And Now It’s Time To Play ‘You Bet Your Life’”).  In a related story, the Wall Street Journal (24 September, “Where Real Estate Is Still Hot”) reports on the burgeoning secondary market in grave sites – people down on their luck are selling their own intended final resting places, seeking to raise quick cash.


The Journal reports that many individuals have decided to “trade down”, from a full-out funeral to cremation.  A quick check on-line indicates that cremations go for as little as $1000 – far less than the cost of the traditional funeral, as several websites assure us.  Cremations are also pitched as environmentally friendly.  They use far less wood than caskets, no concrete is poured into the ground, and there are no embalming fluids to leach into the ground.


And of course, cremation has a smaller… er… footprint.


The Journal article helpfully gives tips on pitfalls to be aware of when buying or selling a gravesite.  Sellers should make sure the cemetery will permit transfer of title, while buyers should obtain verification of the actual owner of record.  (Wouldn’t it be embarrassing to bring Dad’s fancy coffin to your prize plot, only to see the Mahoney family shoveling dirt onto Aunt Sally?  Talk about bait and switch…!)


Companies mentioned in the article include such names as Grave Solutions and Caskets-N-More.


As this business heats up, will majors get into it?  Will Wal-Mart offer a range of affordable urns?  Will Home Depot produce a DIY casket kit?  Will Toys R Us offer a “Little Chiseler Do-It-Yourself Headstone”?


We would not be surprised if the Wall Street firms planning to securitize billions of dollars of viaticals also buy up large quantities of gravesites.  In B-School they call that Vertical Integration.


Looking Under the Surface to Find Differing Trends



Over the past few weeks we have heard from many companies speaking at conferences, reporting earnings, or just in our normal course of research.  The economic health and purchasing behavior of the American consumer remains top of mind for everyone.  As I listened to Rite Aid’s call yesterday, I was reminded that there is still a tremendous amount of uncertainty facing many U.S consumers.  Non-discretionary, consumables driven retailers are painting quite a different picture than those in the mall.  Contrary to grocers, most anecdotes and data points suggest sales of apparel and footwear are showing signs of acceleration during September.  Many of us have heard the talk about improving trends, but let’s take a look at some quotes highlighting the other side of the story:


9/10/09, Mike Duke, Wal-Mart CEO:  “…we talk about even years past that the end-of-month cycle, when you would see some drop-off in selling and then on the first of the month, when customers get paid, then you see acceleration. Of course, during this period of time, that is exaggerated even more. So the drop-off at the end of the month and the pickup at the first of the month on the paycheck cycle is even more pronounced than it would be in the past.”


“And it is really interesting seeing the customers that come in on midnight and the increase in sales of that period after midnight on the first of the month. I think in some ways, it really shows that strain on that end-of-month cycle.”


“When you look at specific product sales, it is in some ways challenging for all of us to think about, but it is part of getting to know customers with the drop-off in sales of even very basic items like infant formula at the end of the month and then the spike in sales on the first and second of the month. And it shows that, over these last few quarters, our customers have been under strain, but our customer now is smarter and enjoys being smarter about purchasing even during difficult times and this will continue on into the future.”


9/10/09, Steve Burd, Safeway CEO:  “Our private label volumes have routinely been running at a growth rate 10 times that of national brands.”


“I would, however, say that I think the trading-down that took several quarters to become complete across all categories is now pretty pervasive and it's hard to imagine that there's more room to trade down from where we are.”


In response to a question about growth in food stamp usage, “Yes. I would tell you that the last time I looked at those numbers, it was more pronounced than 50%. I don't know if the number I have in mind -- is it the US number? We're probably closer to 70%.”


9/15/09, Randy McMullen, Kroger President/COO: “Consistent with the past two quarters, customers are buying more of what have they need and less of what they want.” 


“Another trend we are seeing is in food stamps and other benefits. Government data indicates an increase in these benefits due to the economy. At Kroger, we are seeing an even sharper increase in our sales from customers using food stamps.”


“We're seeing a change in the customer behavior in our store a little bit. For instance, the end of the month selling is noticeably lower levels than what it used to be. So, it's more impacted. We saw that through this last quarter and we actually saw earlier signs of it before but I think it's even more clear now.” 


“But the picture, as we see it, is people are spending money when they need to. That is for meals for the day or for the week but they're only spending what they need to. And then, they're having to come back a little bit more often.”


“…it's a pretty clear picture that the consumers around the US and the customers of Kroger are experiencing some trauma in this environment.”


9/24/09, Mary Sammons, Rite Aid CEO:  “As for front end sales although we've seen improvement in September they continue to be negatively impacted by a value driven customer searching for discounts buying more items on sale than they have in the past.”


- Eric Levine


an they have in the past.”


Some Notable Call Outs

  • Pearl Jam’s latest album, Backspacer, was released Sunday and is on track to become the No. 1 album in the U.S in its first week of sales. Interestingly, this success was achieved through exclusive distribution arrangements with Target, iTunes, Pearl Jam’s website, and independent music stores (are there that many left?). As part of Target’s marketing and merchandising of the album, the retailer is also selling a limited edition t-shirt in collaboration with Loomstate with all proceeds going to charity.


  • Zappos’ prospects for growth, tie-in with Amazon, and unique brand positioning all likely contributed to a hotly contested competition for the company’s advertising business. Approximately 100 agencies participated in the recent review. Most surprising was the relatively small amount of business that was up grabs, at least for now. Zappos spent only $12 million on measured media in 2008 on a gross sales base of over $800 million. So far this year, Zappos has only spent $2 million. As the facts continue to come out post Amazon’s acquisition, the uniqueness of Zappos certainly continues to be revealed.


  • In an interview this week CEO Susan Lyne of Gilt Groupe, the luxury online discount retailer, discussed the concept of retail as ‘repackaged entertainment’ whereby better retailers are able to grab customers in the ‘first act.’ With new product daily and no inventory to speak of, Gilt’s concept allows it to do just that. When asked for other retailers that stand out in this regard, Lyne highlighted offline retailer J. Crew’s The Collection Store in NYC and Zara.  Whether you consider it ‘entertainment’ or not, the company’s growth leaves it looking to fill more than 100 positions, as the concept continues to gain share of wallet and mind. (Check out the interview)




-Signs of export-led recovery in China - The China Leather Industries Association (CLIA) has reported that the value of the sector's exports (including footwear) for the month of July fell by 10% compared to July 2008. In the overall context of collapse in world trade since September 2008, a fall of 10% is almost comforting. When seen in terms of the total value of industry exports for the first seven months of 2009, the total export decline was just 7.5% compared to last year. Total exports for the first seven months of 2009 still managed to reach US$22.1 billion. In addition, the CLIA pointed out that the pace of year-on-year decline is now slowing, having reduced by 0.8% from the previous month.



-Big Names Join WWF Climate Savers Program - Nike is one of 22 participants, including HP, National Geographic, The Coca-Cola Company, IBM, and Johnson & Johnson, in WWF’s Climate Savers program. Collectively, WWF’s Climate Savers partners will reduce emissions by an estimated 50 million tons by 2010, an amount equivalent to the annual emissions of Switzerland. Overall, the partners say these efforts are resulting in greater operational efficiency and significant cost reductions. <>


-Unilever to Buy Sara Lee Soaps in Biggest Purchase Since 2000 -  Unilever, the maker of Dove soap, agreed to buy Sara Lee Corp.’s personal-care and European detergent unit for 1.28 billion euros ($1.88 billion), gaining Sanex shower gel in its biggest purchase in nine years. Unilever, based in London and Rotterdam, will pay cash for the business, which makes Duschdas and Radox soap and had sales of more than 750 million euros for the year ending June 2009, according to a statement today. Sara Lee, which has been shedding units to focus on coffee and food, said the proceeds would help it buy back up to $1 billion in stock. <>


-JBS merges with Bertin to form the world’s biggest tanner - JBS, the world's leading beef and protein products producer, has agreed to merge with Bertin SA, following the recent purchase earlier this year of Brazilian tanning group BMZ by JBS, combined with the tanning capacity of Bracol, Bertin's leather division, to become the largest leather processor in the world by volume.  <>


-Rite Aid Lowers Its Forecast, Citing ‘Tough Economy’ -  Rite Aid Corp., the third-largest U.S. drugstore chain, cut its full-year forecast, saying it expects customers will remain focused on discounts in a “tough economy.” The shares declined 12 percent. The net loss for the fiscal year will be $390 million to $615 million, the Camp Hill, Pennsylvania-based company said today in a statement. Sales will be as much as $26.2 billion, Rite Aid said. In June, the company forecast a loss of $265 million to $490 million.



-ASICS to Open First U.S. Store, Expands into Golf and Lacrosse - ASICS plans to open its first store in the U.S. this fall. At an event showcasing its spring 2010 collections in New York City,  ASICS officials also revealed plans to enter the golf and lacrosse categories in the U.S. for the first time.  <>


-H&M Third-Quarter Profits Rise 4 Percent -  Hennes & Mauritz AB, the world’s third-largest fashion retailer, beat expectations with a 4 percent rise in third-quarter net profit, but reported a worse-than-expected sales drop in August, reflecting a shortage of marked-down inventories. Without providing a specific outlook for 2009, H&M said it remains “positive toward future expansion” and accelerated its store expansion plan to open 240 stores in the full year, up from 225 previously expected. The Swedish fast-fashion company also revealed plans to start online sales in the U.K. beginning next fall, following rival Inditex’s move to sell its cheap-chic brand Zara online in 2010. H&M’s online shop is available for customers in Sweden, Denmark, Finland, Norway, the Netherlands, Germany and Austria. <>


-Finish Line Struggles in Q2 - The second quarter was unkind to the Finish Line Inc., as a tardy back-to-school season kept spending at a minimum. As a result of a $12.6 million loss, or 23 cents a share, from the discontinued operations of its Man Alive unit, Finish Line reported a second-quarter loss of $900,000, or 2 cents. During the second quarter of 2008, the Indianapolis-based company posted a $13.1 million profit, or 24 cents a share. Same-store sales dropped 9.9 percent for the quarter, versus a 4.9 percent increase last year. Sales dipped by 11 percent to $298.7 million, from $337 million in the year-ago period. <>


-Foot Locker Opens Fourth House of Hoops;  Plans Stores in Europe - Foot Locker opened its fourth House of Hoops store at the Cherry Hill Mall in South Jersey. The location is only the fourth House of Hoops in the U.S. and the first in the suburbs. <>


-Hanesbrands Agrees To Pay $13.8M To Strengthen Pension Plan - Hanesbrands Inc., the parent of Champion, reached a $13.8 million settlement with the Pension Benefit Guaranty Corp., agreeing to strengthen the funding of its retirement plan. Under the agreement, the underwear and hosiery apparel maker put $7 million into the pension plan this month and will make an additional $6.8 million payment within a year. The payments are in addition to any required contributions to the plan. <>


-Shoppers reluctant to splash out at Christmas - A third of consumers intend to spend less this Christmas than they did last, indicating retailers will need to be at the top of their game to reap rewards during the traditional golden sales period. Exclusive research by ICM for Retail Week shows that consumers remain reluctant to splash out. Last December was the worst Christmas on record for the sector, when like-for-likes fell 3.3%. The ICM study reveals that only 9% of consumers plan to increase their spending this year, but half plan to maintain it at last year’s level. <>


-Geiger Stepping Down at Aéropostale - Julian Geiger, the only chief executive officer in the history of Aéropostale Inc. and the chief architect of the growth and success of the teen retailer, will step down from his post at the end of the company’s current fiscal year on Jan. 31. Geiger, who has been ceo of the specialty store chain since 1996, will continue to serve as chairman. He will be succeeded by two of the firm’s existing managers, Mindy Meads and Thomas Johnson, who will serve as co-ceo’s upon Geiger’s departure. On the same date, Michael J. Cunningham will be elevated to president and chief financial officer.  <>


-Gordon Bros. Wins Finlay Auction - Gordon Brothers Retail Partners on Thursday won the bidding auction for Finlay Enterprises Inc. The liquidation firm had been the stalking-horse bidder for the liquidation of Finlay’s assets. Finlay filed for Chapter 11 bankruptcy court protection in August in Manhattan. Manhattan bankruptcy court approval of the winning bid is still required and a hearing is set for today. According to Finlay, Gordon Brothers will conduct “store closing” sales at all the jewelry firm’s retail locations and its two distributions centers. <> looks to raise $47.7 million through an IPO - Online vitamin and health products retailer Inc. is planning an initial public offering of stock to repay debt, fund capital expenditures and provide working capital. The company expects to raise about $47.7 million, based on an average share price of $12. <>


-Canada refusing import ban on cat and dog fur - Canada will continue to import cat and dog fur despite a ban adopted by the United States and the UK to avoid undermining the country's position against the implementation of foreign import bands on Canadian seal products. This summer, the European Unionvoted to ban seal products from Canada, upsetting Canada's Conservative government, which plans to contest this at the World Trade Organization. <>


-Li & Fung to participate at first-ever Sustainable Fashion Forum - Fashion Access, a fair organized by APLF Ltd, is launching Sustainable Fashion Forum in order to meet the evolving needs of the fashion professionals. The event will bring together industry experts to explore the challenges of achieving sustainable fashion, and present ideas that are accessible and practical to fashion businesses.  <>






LULU: John Currie, CFO, sold 20,000shs ($460k) after exercising the right to buy 22,000 shares nearly 50% of total common holdings.


JCG: Jenna Lyons, Creative Director, sold 56,848shs ($2.1mm) after exercising the right to buy ~71,848 shares roughly 25% of total common holdings.


ROST: James Fassio, EVP, sold 8,225shs ($399k)after exercising the right to buy 8,225 shares less than 5% of total common holdings.


Pleasure's Hook

“Do not bite at the bait of pleasure, till you know there is no hook beneath it.”
-Thomas Jefferson
Among other things, Thomas Jefferson was an archaeologist, an architect, and a horticulturalist. He was a Macro Man, of sorts, who subscribed to a multi-factor model of self education. Per Wikipedia, “he idealized the independent yeoman farmer, distrusted cities and financiers, and favored states’ rights and a strictly limited federal government.”
As the 3rd President of the United States, Jefferson’s writings certainly left an impression on me. I think the man left one on a lot of other people too. Whether his vision of America fits into today’s Gong Show of American style Financial leadership is not clear. That’s sad.
When I write about the US Federal Reserve being as politicized as it has ever been, or when I chirp about the Hank Paulsonites at the US Treasury, I am not being politically partisan (remember, I am a Canadian hockey player!). When it comes to the perceived financial wisdom of this nation’s “leaders”, its not about Bush or Obama. It’s not about Republicans versus Democrats either. It’s about competence. It’s about being right.
Is it right to value a country’s economic health by measure of her stock market? Is it right to measure it by the value of her currency? Is it right to use one measurement and not the other?
In 2009, whether you came to understand the inverse correlation between America’s currency and everything priced in that currency or not, you are now forced to pay attention. From a macro perspective, this call makes or breaks your year. As the Buck Burned, now we know that US Debtors, Bankers, and Politicians got paid. Eventually, investors taking advantage of this twice in a 40 year US Dollar Sale did too. All the while, bullish or bearish, we all knew there was a hook.
What’s the hook? It’s Pleasure’s. Unless you are a reptile, it’s stored nicely right there in your thick mammal neocortex. When prices of things you own go up, you feel good. When those prices go down, you don’t. That’s it.
Now that the US Government has completely crashed America’s currency, you know the hook was America losing her credibility as the long standing fiduciary of the Global Financial System. How does that feel? Or does anyone’s limbic system feel that?
The headlines coming out of today’s G-20 meetings in Pittsburgh are going to be what the Germans, Chinese, and Russians make them. As I sit here and watch the replay of Timmy Geithner’s remarks, I am simply saddened. America’s voice of thought leadership in financial matters has been compromised and diluted. That’s the hook.
Pleasure’s Hook is the US Dollar. Since 2:45PM EST on Wednesday, post Ben Bernanke pandering to a Japanese style rate of return (ZERO), the US Dollar marked and rallied +1.5% from her YTD low. Over that same time frame, the SP500 has corrected -2.5%. That’s the hook.
To be clear, the US Dollar remains broken, across all 3 of my investment durations, and it will continue to be unless it can find some level of hope coming out of the G-20 that stops the Chinese from selling their credits. China is now The Creditor. America is the Debtor. That’s the hook.
Hope is not an investment process, so don’t bet on my selling everything I own (that’s priced in US Dollars), until the math tells me that the US Dollar has bottomed. This morning, after the Squirrel Hunter Secretary of the Treasury proclaimed his mystery of faith: “We expect, as I think countries expect around the world, the dollar to retain that position for a very long time”, guess what the Buck did? You got it – it Burned. It’s embarrassing.
Having met with plenty a Chinese business person, I will assure you of this. They will do a lot of 3 things in the next 3 days into and out of the G-20: 1. Smile, 2. Nod, and 3. Sell.
Sell? Sell what? The Chinese are a net seller of US Treasuries and US Dollars. This is something that anyone who isn’t paid to be willfully blind to the actual data knows. This is not good, but this is also not new. This Chinese stopped buying in Q1. They started selling in Q2. Since. Since March, the US Dollar has lost -15% of her value.
With the US Dollar Index trading down another -0.23% so far this morning (Germany’s Merkel comments pending), here are my levels on the US Dollar Risk Management:
1.      Immediate term support at the YTD low of $75.81. Immediate term resistance at my TRADE line = $77.53

2.      Intermediate term TREND resistance= $78.91

3.      Long term TAIL resistance = $82.79

So what do you do with these lines? Well, I wait and watch for the real-time US Dollar price to move around them. Then I manage risk accordingly. In hockey, my Dad called this “Read and React.” When the USD goes up like it did yesterday (+0.76%), I cover and buy stuff. When the USD goes down, I short and sell stuff. Some people call that trading. I call it Risk Management of my invested exposure. Johnny Keynes himself was a currency trader don’t forget.
Burning Man, US Dollar style, has plenty of unintended consequences. As the Japanese Yen hits new intermediate term highs (at 90.45 this morning versus USD), Japan’s bureaucrat bankers are managing a little risk for themselves. Some in Asia are calling this “repatriation.” Having been the poster child of currency carry trading abuse for lost decades, if anyone understands what happens to foreign fund flows into your country when you debauch your currency, its Japan!
Nomura, Japan’s largest banking/brokerage outfit, is ah, NO-MORa this morning! In one of the largest liquidity raises I have seen in a long long time, the Japanese bankers issued 800 MILLION shares (30% of the outstanding) to whatever lost soul had it in them to buy these shares last night. Nomura’s stock dropped -16% on the “deal”, leading Japan’s Nikkei to a -2.6% smack-down close overnight.
I know what John Mack at Morgan Stanley thinks about all of this. Check out the risk management of his resume as of late and, while you are at it, don’t forget that MS is part Japanese now too!
I wonder what Thomas Jefferson would think of Japanese style banking meeting the American kind that he never thought he’d see…
My immediate term risk/reward levels for the SP500 are 1045 (TRADE line support) and 1061 resistance. I’ll be selling into the strength associated with Pleasure’s Hook, at a price.
Have a great weekend with your families,



EWG – iShares Germany
Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and balanced budget to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy. Merkel looks to be in the driver’s seat for re-election on September 27th, while her coalition partners are less certain.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

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.

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.

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.

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The commission cap, according to DM, will help the concessionaires become more profitable.  There is a valid fear that side-betting could become more prevalent but overall the cap should result in EBITDA growth for the operators.  While the authorities have made it clear that the cap applies to all forms of compensation, cash and non-cash, it is very difficult to measure the non-cash side of the business let alone police it.


DM sees credit as the most important factor for players; they will go wherever they can get the longest credit line.  Having deep pockets and having good debt-collecting agents could now be more crucial to concessionaires’ profitability than ever.  SJM and Galaxy shot up when the commission cap news emerged this week.  Wynn could benefit from the return of customers previously lost due to more aggressive commissions elsewhere. 





SJM has announced its intention to raise HK$2bn from a convertible bond.  With visitation and revenue numbers looking healthy, commission caps coming into place, and the 60th Anniversary of modern China approaching, valuations are being pushed up.  DM speculates that the money will be used either to play the stock market or to fund credit lines for junkets. 

The five-year bond will have a zero coupon and be convertible to SJM stock at a price of HK$2.25 from December 8.  Today’s share price was HK$4.35.





DM cites an analyst’s warning that Macau gaming stocks are becoming inflated and becoming a bubble as overcapacity threatens to drive down ROIC and over-excitement about visa-easing and commission caps push share prices up rapidly.  The one stock that is recommended by this commentator is SJM.  The reasons include, dominant market share, superior ROIC, right market-segment focus, improving profitability and a superior balance sheet. The source also claims that SJM is trading at a discount compared to its peers.





Steve Wynn held a press conference during the week prior to Wynn Macau’s IPO on the Hong Kong stock exchange.  When asked if he feared losing direct-VIP clients to the Singapore resorts when they open early next year, his response was that he has Linda Chen and the don’t (fear losing business to Singapore).  DM exalts Wynn and Chen’s track record in the VIP baccarat business and believe they will continue to outperform in that area when Singapore is open. 


Regarding the stock price, some commentators are claiming that once the stock starts trading at HK$10, much of the upside is priced in.





L’Arc has had a strong few days since opening.  The mass floor is said to have done quite well. It remains to be seen how the business will far when the SJM new business operations team hand over to the L’Arc team.




Japanese August Trade data was released this morning, with export levels registering at a year-over-year decline of 36%. This is the 10th consecutive month in which exports have shown a decline of greater than 25% from the same month in the prior year.


There were some slender positive data points in the otherwise abysmal data, including Motor vehicle exports headed for China which turned positive on a year-over-year basis at 0.53%, although shipments to “The Client in total still declined by 27% over last August. At only slightly more than 5% of the total (greatly diminished) car shipments heading abroad, not enough cars are heading to China to offset the slack demand elsewhere and total vehicle exports came in at -49.8% Y/Y, a marginal sequential improvement after the seven prior months of levels lower than -50%.


We have maintained a short position in Japanese equities via EWJ since the first week of July, sticking to our conviction as the data emerging has continued to indicate nothing but stagnation and frustration for the land of the rising sun regardless of stimulus band aids concocted by the last administration (and with eth ones being proffered by the new government looking equally impotent).


Andrew Barber




HOUSING – Getting Too Comfortable At Home

Today, the NAR reported that sales of existing homes dropped 2.7% month-over-month in August.  Consensus expectations were for home sales to rise 2% in August.


After last month’s bullish new home sales data, we had to take a step back and question the sustainability of the improving housing trends when most consumers continue to suffer.  Clearly, the one big sticking point continues to be high unemployment, which puts real consumer demand in question. 


The slowdown in August (which will likely continue into September) can be attributed to a couple of reasons.  First, we are past the home sales PEAK SEASON (for those consumers with “need based” moves).  Second, the NAR said “first-time” buyers purchased 30% of homes in August which remains unchanged from July.  To that end, it appears that the Government home-buyer stimulant is ending and having less of an impact on sales trends.   


Given the time it takes to buy a new home, it’s less likely that “first time” buyers are going to close in time to take advantage of the Government subsidy.  Therefore, as a % of total buyers, “first time” buyers are going to fall off rather significantly in the coming months. 


Howard Penney

Managing Director


HOUSING – Getting Too Comfortable At Home - a2

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