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OCTOBER 2, 2009





This morning Bloomberg made the call that our commodities guru, Andrew Barber, made in August (see our 8/28 note). Simply put, stress in the cotton supply chain likely created a floor for cotton prices in the mid $0.50s, and even today’s $0.61 has few fundamental reasons to fall.


With no change in the data out of China (the August report has yet be released) the incremental weakness has stemmed from persistent droughts in India along with regional issues in Brazil where commodity shortages in Argentina have producers rotating to more profitable crops.


Another dynamic worth noting is continued consolidation of the cotton industry’s traders. According to a Bloomberg report this morning, four major traders now control more than 50% of cotton trading worldwide. Not only do smaller traders play a critical role in price liquidity, but they also help mitigate both soft and hard collusion within the industry. Further consolidation means increased spreads and volatility. Heading into ’10, this translates to ‘long pricing power’ and short commodity exposure. Below are the key factors that we outlined back in August:


Stockpiles:  The most recent data point from China, released by the National Development and Reform Commission, was that China imported 131,400 tons in July, which was down 38% yy albeit a slight improvement from 41% yy declines in the 1H. This has led to a tightening of world stocks as reflected in a global stocks-to-use ratio of 51.0% in August down from 51.3% in July. In addition, there has been recent speculation that China might increase cotton volume import quotas over concerns that state stockpiles will not be able to supplement the shortage of supply. Since China is the world’s largest cotton importer, this could be bullish as it relates to future cotton prices.


Production: Global production levels are down with the U.S. at its lowest level in 11 years and estimates for India’s output (world’s second largest producer) is down 15-20% because of drought conditions.


Demand: We’re not making a bull case around global consumer demand, but we find it very difficult to make a compelling bear case. Inventories in the global system of both raw and finished product remain fairly low, healthy, and in synch with current consumer demand. Looking at all the different scenarios, we think it’s more likely than not that demand moves up over the next six months. Inventories are tight around holiday, and then wer’e looking at spring/summer ’10 where we comped against not only a horrible recession, but a weather-impacted period where many consumers simply extended the prior year’s wardrobe. There’s going to be pent up demand at some point.

If we actually start to emerge from this global recession with cotton stockpiles low, production down, and demand picking up on the margin, I’d hate to be on the short side of cotton exposure.

Of course, the theme here will be long pricing power (brands and large retailers), and short commodity exposure (Gildan and to a lesser extent Hanesbrands). It’s too early to see this play out in 2H09, but it will be an increasingly important theme in 2010.






Some Notable Call Outs


  • Amazon UK has launched its standalone footwear and handbag site Javari.co.uk. Javari.co.uk is based on Amazon’s Japanese footwear site Javari.jp, which launched in March. Amazon has sold shoes since 2007, but said that a standalone site will enable it to attract a larger range of brand names. We’re still rather amazed at how retail investors generally don’t realize the power and influence as Amazon scales into these new categories. Amazon has already owned footwear site Endless.com and in June acquired Zappos. Don’t be one of those people that starts to quantify the impact because a blowup in another name in the supply chain is telling you to.


  • Meetings at both Skechers and K-Swiss headquarters this week support our contention that FL is looking to broaden its product portfolio under new CEO Ken Hicks. Lady Footlocker is now carrying Shape-ups and spring orders for K-Swiss’s Tubes (running shoes) are expected to be solidified over the next month.


  • Early testing of Shape-ups in Europe is positive if not better than early domestic demand. Not only is interest accelerating to comparable levels at a faster rate, but demand from men accounts for nearly 30% of sales in Europe. By comparison, the vast majority of domestic demand is from women and children.




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends...


  • ICON bounced yesterday after its blo up earlier in the week, but on dramatically lower volume. Too early to say if its found a bottom here.
  • BIG and WAG are up on all durations of price and volume.
  • Not fun to be a Household Durable yesterday. The space was off 4x the market with meaningful pick up in volume.
  • Overstock is still one of the best three-week performers, but is losing price momentum while gaining steam on volume. Interesting turn on an oft hated name.
  • PAG, MHO, FBN, SKS, and SPF are worth noting for negative performance on all durations with volume up across the board.






-Wal-Mart further taps into India & China; Marks down 100 holiday toys to $10 - The world's biggest retailer Wal-Mart is going to further expand its presence in new markets of India and China. As Asia will lead the global economy to recover, the retailer will speed up expansion in the region. It currently operates at about 630 locations in China, India and Japan, with 24%of its sales coming from its international division. Just in time for early holiday shoppers, the $10 toy section at Wal-Mart stores is back. This year the "rollbacks" have been expanded to more than 100 toys. Featured licensed toys in Wal-Mart's promotion include Transformers: Revenge of the Fallen deluxe action figures; Barbie Cut and Style Rapunzel; and Littlest Pet Shop Online Animals and play pack sets. <fashionnetasia.com> <licensemag.com>


-India emerging as the leading organic cotton producer - Indian textile companies are going to take up a leading share in the global organic textile production as the country is emerging as the important organic cotton producer, said Selvam Daniel, Managing Director, global certification body ECOCERT India. "In 2007-08, global organic cotton production increased by 152% to 145,872 metric tons or 668,581 bales," said Daniel. <fashionnetasia.com>


-Clean Energy Bill May Increase Costs for Textile Sector - Climate change proposals before Congress could exact a toll on the U.S. textile industry, which will face a substantial increase in operating costs that could potentially jeopardize tens of thousands of U.S. jobs, according to a report released Thursday. President Obama has made clean-energy/climate-change legislation one of the pillars of his domestic agenda, and Congress is moving on the issue. Sens. Barbara Boxer (D., Calif.) and John Kerry (D., Mass.) unveiled a draft bill Wednesday kicking off Senate consideration for the first time this year. The legislation would mandate a 20 percent reduction in greenhouse gas emissions from 2005 levels by 2020. The House approved a bill in June that would cap greenhouse gas emissions beginning in 2012 and seek to reduce them 17 percent by 2020, relative to emissions in 2005 as a base year. <wwd.com>


-Pets at Home assesses IPO potential - Specialist retailer Pets at Home has moved closer to a flotation with the appointment of JP Morgan Cazenove as joint sponsor, joint bookrunner and joint global coordinator.JP Morgan Cazenove will “examine the options for a potential IPO of the company in 2010, subject to market conditions”, the retailer revealed. <retail-week.com>


-Nike Denies it Re-Signed Michael Vick; Quits Board of U.S. Chamber - Nike Inc. is denying a report that it signed Michael Vick to an endorsement contract. The Associated Press had said that the endorsement deal was announced during a panel discussion at the Sports Sponsorship Symposium by Michael Principe, the managing director of BEST, the agency that represents Vick. Nike spokesman Kejuan Wilkins said no endorsement deal is in place. In other news, Nike said it would resign from the board of the United States Chamber of Commerce, becoming the latest company to break with the group over climate policy. Nike said, however, that it would remain a member of the chamber, unlike three large utilities — Pacific Gas and Electric, PNM Resources and Exelon — which recently announced plans to pull out. The chamber has been under fire for its outspoken resistance to potential carbon regulation from the Environmental Protection Agency or from Congress. <sportsonesource.com>


-CIT Mulls Restructuring as Deadline Arrives - The fashion and retail industry again held its breath Thursday as CIT Group Inc. attempted to stave off bankruptcy for the second time in three months, this time with an exchange offer to eliminate 35 percent of its debt. Fashion industry executives and their lawyers, accountants and consultants were only somewhat reassured by word that, if CIT does go bankrupt, it would be the parent holding company that files Chapter 11 and not operating subsidiaries such as the commercial services arm responsible for the majority of factoring in the apparel industry. A prepackaged Chapter 11 is understood to be developed in case the debt swap fails. <wwd.com>


-Burberry Says Japanese Royalty Payments to Increase Next Year - Burberry Group Plc, Britain’s largest luxury goods maker, said royalty payments from its Japanese licensing partners will increase from next year, boosting annual operating profit by about 4 million pounds ($6.4 million). <bloomberg.com>


-Heelys' New CEO Elected to Board - Heelys Inc. said it has elected current CEO and President Thomas Hansen to its board of directors, according to a filing with the Securities & Exchange Commission. Hansen joined Carrollton-based Heelys in August, replacing former CEO Donald Carroll, who resigned. Hansen had worked in product development and marketing for about 30 years, before joining the company. <sportsonesource.com>


-CVS Union Critics Say FTC Seeks More Information - A union group that alleges anti- competitive practices by CVS Caremark Corp. said U.S. regulators have requested an additional meeting to discuss the issue. Officials of Change to Win, a 6 million-member union federation, said they have an Oct. 15 meeting with staff of the Federal Trade Commission on the group’s contention that the 2007 merger that created CVS Caremark has raised prescription drug prices. FTC Chairman Jonathan Leibowitz declined to comment on the possibility of a formal investigation. <bloomberg.com>


-Zara’s UK operations knocked by £20m pre-tax loss - Zara UK, the UK subsidiary of Spanish fashion giant Inditex, has slumped into the red. The group, which operates the eponymous chain, Pull and Bear, Massimo Dutti and Bershka in the UK, suffered a pre-tax loss of £20m in the year to January 31, versus a £4.5m profit the year before. <drapersonline.com>




Yesterday, stocks suffered their biggest one-day decline since July 2nd.   The RECOVERY theme was delivered a blow from a disappointing data point from the manufacturing sector.  More importantly, a larger-than-expected jump in initial jobless claims, created some concern about the release of September nonfarm payrolls due out shortly.  I would also note that RISK MEASURES were elevated yesterday, with the VIX +10.4%, its biggest one-day spike since September 1st.


Surprisingly the Consumer Discretionary (XLY) slightly outperformed the S&P 500, despite the jump in initial claims.  The RESTAURANTS underperformed the S&P 500 with Full Service (FSR) getting hit the hardest, declining 4.1%.  Overall, the decline in the restaurant stocks was on very light volume.








“Dream as if you’ll live forever. Live as if you’ll die today.”
-James Dean
Fatally dying in a car crash at the age of 24, James Dean lived a very short, but influential life. Dean’s life reminds me that risk management starts when I get in the car every morning. Penning my morning missive doesn’t happen in a vacuum.
When some people in this business think of risk management, they don’t think of their returns dying today. Some hope. Some dream. Some wakeup having made so much money that they are numb to the mortality of living a life levered long.
I wake-up at 4AM. I fill my thermos with coffee. I play the macro game that’s in front of me.
I don’t need to be bullish. I don’t need to be bearish. I don’t need to crash.
Today starts with yesterday. My feet are on the floor early. My coffee tastes the same. On 9/24 I called it an Outside Reversal. Today, I’ll call yesterday a major immediate term TRADE line breakdown. Combined, these two mathematical realities are bearish. If you’d like to dream that a +58% rally from the March lows is going to live forever, dream on…
The SP500 is -4% off its 2009 YTD high, and Japan’s Nikkei is down -4% in the last 48 hours. The two largest cars in the world’s economy (USA and Japan) have just had immediate term price momentum car crashes. Now is not the time to “buy and hold.” Now is the time to proactively prepare for potential collateral damage…
In “Rebel Without a Cause”, James Dean played a teenager with some serious angst. Don’t be that teenager this morning. Be an adult. Remove the emotion, and deal with the risk management lines that matter:
1.      SP500 immediate term TRADE support is now resistance at 1040 (Nikkei TRADE line resistance is up at 10,343)

2.      SP500 intermediate term TREND support is down at 981; that’s -4.7% lower and in play for the 1st time in 13 trading days

3.      US Dollar immediate term TRADE resistance = $77.24; support is at a higher-low = $76.08 (higher-lows of support for the Burning Buck is brand new)

Before they came public, some of the Partners at Goldman would ask, “can you make money by yourself, alone in the room?” That’s a really good question, and whenever I am on a bad performance run, I always ask myself the same…
If you were to lock me in a room and only give me one live market quote that I could use to manage the risk associated with the US stock market, it would definitely be that of the US Dollar.
What if the Buck stops Burning? What happens to all of the REFLATION trades? Well, rather than have a qualitative discussion about this, let’s look at yesterday’s math:
1.      The US Dollar was up +0.71%

2.      The SP500 was down -2.6%

3.      The SP Sector Financials (XLF) were -4.4%, and Basic Materials (XLB) -3.9%

There’s your risk. Car crashes are easy to see after they occur. Everything Burning Buck has been a buoy for everything priced in those bucks. Whether they be the US Dollar denominated toxic debts or Dr. Copper’s leverage to a down Dollar’s price, it’s all one and the same. If you want to play chicken with this next oncoming car, go right ahead. But I am warning you that objects in this inverse correlation’s rear view mirror are much closer than they appear.
Other than ultimately ending this non-scientific Greenspan/Bernanke Doctrine of ZERO percent returns on the savings accounts of this country’s citizenry, what else can get the Buck to stop Burning?
1.      The Fed’s Balance Sheet: it stopped going up this week! That’s the 1st week in the last 8, dropping by -$17.6B to $2.14 Trillion

2.      Federal Reserve Hawks: add Richmond Fed Head, Jeffrey Lacker, to the growing list of those who have made US$ bullish comments in the past week

3.      Unemployment: something better than a jobless recovery is Buck Bullish

But my oh my, Keith – ‘some of these things just won’t be good for my equity portfolio tomorrow’… or will they be?
We live in a time where we submit that crashing our currency is going to end well. We live in a time where we calculate the health of the economy using the price of a stock market. We live in a time of US Equity centric bull market dreamers….
It’s time to start living for our clients, as if the returns associated with a Burning Buck of the last 6 months can die today.
It is said that James Dean’s last words were, "That guy's gotta stop… He’ll see us…”
Mr. Macro Market doesn’t need to see any of us, and he crashes versus expectations, both ways…

Best of luck out there today,




EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. 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.

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.

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. We like defensible growth with an M&A tailwind. 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.

USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads just put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

XLP – SPDR Consumer Staples Looking for low-beta short exposure to US Consumer spending. Consumer Staples short interest is low, and the stocks are over-owned.  

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 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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ZAIA TO GET THE AXE? destination-macau.com

LVS is considering cutting a show from the Venetian: Cirque du Soleil’s Zaia. “Well-placed sources” are cited in saying that a year-end closing in a possibility for the show.  DM believes that the move would amount to giving up too soon on a big audience that Zaia could begin to draw once the brand develops.  City of Dreams is preparing to launch its own show in the near future.




Viva Macau is looking to fly directly into Melbourne, should negotiations with the Victorian Government and Melbourne airport go smoothly.  The airline is also talking to other Australian cities about establishing direct flights from Macau in place of the proposed Macau-Melbourne flight.  Government officials in the State of Victoria are pushing for the Macau-Melbourne route to go ahead. The direct route would allow Crown to attract high rollers to its recently opened City of Dreams casino in Macau from Melbourne.

Unemployment is a disaster. Why is the market surprised?

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