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Slouching Towards Wall Street… Notes for the Week Ending Friday, October 2, 2009

Calling A Spade A Spade – Calling Everything A Spade


Mass Market Health Care – Going Over-The-Counter?


New Rules Of The Pond – The Small Fry Don’t Get Thrown Back Any More


And: In The Driver’s Seat – When Free Speech Becomes Expensive Speech




How Do You Say That In Newspeak?


Nothing is so difficult as not deceiving oneself.

          - Ludwig Wittgenstein


Readers of this Screed are aware of our hyper-sensitivity to the use of language.  A recent example of how word selection skews the debate comes from the Opinion Page of the Wall Street Journal (2 October, “Intelligence Averts another Attack”), where former US Attorney General Michael Mukasey urges Congress to renew, if not expand, facilities granted to US intelligence agencies which are set to expire at the end of this year.  Arguing his case, Judge Mukasey points to successes that have come from the use of roving wiretaps, pen register phone records, and “lone wolf” surveillance authority.


Judge Mukasey opens his argument by stating “one would think” recent events, intelligence successes – notably the arrest of Najibullah Zazi, accused of plotting to blow up the New York subway system – “would generate support for the intelligence-gathering tools that protect this country from Muslim fanatics.”


The debate over the efficacy and appropriateness of enhanced intelligence gathering is of great importance to both the safety and the moral self-image of this nation, and should properly be carried out in public.  Spokespersons on all sides should make their arguments both reasoned and well informed, and without the monolithic rejection of dissenting opinions that characterizes today’s screech-alogue, where much of the news media are barely distinguishable from Jerry Springer (with apologies to Mr. Springer for comparing him to certain so-called “news” networks).


We are dismayed at Judge Mukasey’s use of a phrase which, in this context, amounts to fear-mongering. 


Why does this concern us so?  Because the reality is that there are large numbers of Moslems who are angry at the West, and at the United States in particular.  Whether or not we agree with their gripes, the more we pigeonhole those who disagree with our nation’s policies into visible categories, the more we prevent dialogue.  Yes, we have had intelligence successes.  But the exclusive application of intelligence gathering, interrogations and military action, unaccompanied by aggressive efforts at economic and political rapprochement, is a long-term losing proposition. 


What are “Muslim fanatics” to the average American?  For starters, they are dark-skinned.  They wear loose-fitting clothes and head coverings.  They live in countries none of us ever visited on summer vacation or for Junior Year Abroad.  The men have facial hair, and the women have no faces at all, being covered by the veil.  They have funny-sounding names and speak languages we did not study in high school. They eat with their hands, and they practice a religion that exhorts its followers to kill their enemies.


To state the excessively obvious, we currently have a President who fits some of these characteristics, and we recall that one of the objections raised to the Obama candidacy was the falsehood that he was a Moslem.  As though that would disqualify someone from being President of the United States…?


We are mindful of Judge Muksaey’s personal involvement with terror.  You may recall he was the judge who presided over the trial of Omar Adbel Rahman – the “Blind Sheikh” – convicted of plotting to bomb office buildings in New York.  You may have forgotten that a detail of US Marshalls were assigned to act as his bodyguards because of death threats he received during the proceedings.  There appears to have been disagreement within the Justice Department as to whether these threats were credible; nonetheless, the “Eagle Detail” continued to protect Mukasey for some seven years, at a cost to taxpayers of $28 million.


Giving Judge Mukasey credit for personal bravery and integrity, and assuming he is chagrined at the notion the taxpayers were on the hook for such a stiff bill because of the nation’s inability to root out terror at its source, we nonetheless urge participants in this debate to refrain from making inflammatory statements.  The fact is, by opening his opinion piece with the words “protect this country from Muslim fanatics,” Judge Mukasey has already won a significant percentage of his readership, who will read the piece predisposed to agree with every argument the Judge makes – to accept unquestioningly the policies he is promoting, and to vote accordingly.


Thus is debate eviscerated by the very people who should be presenting a clear vision of the facts to the public.


It is no longer sufficient to be well informed.  We must be informed about the agendas of those who inform us.  While the shape-shifting phenomenon we call “militant Islam,” or “Muslim fanaticism” continues to pose a threat, it is hardly the only threat.  By hitting superficial Hot Buttons designed to stoke public outrage, commentators effectively stifle debate.  Today’s very real public uncertainty – over military threats, over terrorism, over the economy – is conflated with the basest strains of racism and xenophobia.  The message to the reader or viewer or listener is: do not bother to be any better informed.  I have told you all you need to know. 


With this approach, we risk not fixing today’s problems, and shall not prevent tomorrow’s tragedy.




When Is A Medical Procedure Not A Medical Procedure?


New York Times reports (29 September, “Abortion Fight Complicates Debate On Health Care”) that President Obama appears to have painted himself into a political corner as he tries to square his campaign promise to safeguard a woman’s right to choose, with the clamor of anti-abortion voices in Congress.  “Abortion opponents in both the House and the Senate are seeking to block the millions of middle- and lower-income people who might receive federal insurance subsidies to help them buy health care coverage from using the money on plans that cover abortion.”


In a political environment noted for its rabid partisanship, this issue appears to be fostering consensus, as the Republicans are being joined by what the Times characterizes as “moderate Democrats.”


“Moderate”?  President Clinton was widely congratulated on running a “centrist” administration.  The reality is that, in many critical areas, he trashed the traditionally liberal Democratic agenda and sold out to the right wing.  If not to the “extreme right” Republicans, then certainly not to the “center-left” Republicans. Clinton’s programs embraced what we might call “moderate radical right” Republican principles and made them mainstream.


It was Clinton who trashed Glass-Steagall, essentially handing control of the nation’s financial marketplace to the participants themselves, effectively sidelining both Congressional and regulatory oversight.  “Centrist”?


It was Clinton who pushed through NAFTA.  The one-sided character of this treaty, lacking as it was in labor, social and environmental protections, is arguably a primary cause of the civil war gripping Mexico today.  Though the screeching heads on the alleged news shows would have us believe otherwise, the typical Mexican would rather be working in a factory at a fair wage, and with decent working conditions, than running cocaine across the border.  NAFTA, by forcing local manufacturers out of business, is a principal factor in the dramatic increase in drug trafficking and drug-related violence in the past decade.


No politician will dare make the observation in public that we condone this situation – and blame it all on the Mexicans – because they are dark-skinned third worlders.  Instead, we blame them for wanting to sneak into the United States and steal our jobs, our education and our health care.  Why is no one north of the border willing to stand up for our next door neighbors?  It must be that we are all “Centrists”.


President Obama is continuing the corporate welfare state fostered by every administration since Reagan’s “trickle-down economics” posited that the best way to make the poor less poor, was to make the rich more rich.  President Clinton turns out to have been a down-trickler of substantial proportions.  Also a South-trickler, in his insistence that a richer and more wanton America would somehow fan the embers of prosperity south of the border.  Fan the embers he did, and the conflagration continues to rage out of control.


The intellectual legerdemain by which the agenda of the far right became repackaged as “centrism” has done much to force real debate out of public awareness.  The business-media-political complex is increasingly dedicated to discrediting dissent.  One doesn’t even have to look to the Rush Limbaughs of the world to see that the notion of a “loyal opposition” is long gone.  It has been replaced by members of Congress shouting “you lie!” at the President, and by the Speaker of the House accusing citizens who oppose her positions of being Nazis and thugs.


The denigration of dissent in this country has led to a widening of the dialogue gap.  Today the debate is owned by those who seem to own everything else.  We fear the squelching of legitimate grievances will lead to an explosion as the voices of intelligent debate and honest disagreement are thrust aside by those who shriek the loudest and pay the most.  What suffers is economic and political freedom, to say nothing of the moral standing of our society.  It is in environments like this that societies snap and violence erupts.  Hank Paulson’s visions of marshal law have not yet faded from the horizon.


Meanwhile, in terms of health care, we predict that free enterprise will save the day.  As reported by our retail analysts (Levine’s Lowdown, 30 September) Walgreen, in their fourth quarter conference call, “confirmed that the flu season is off to a record start.  The company has already distributed more than twice as many flu shots this year so far vs. the entire flu season last year.”


As they continue their marketing plan to become America’s low-cost standard health-care provider of choice, we predict Walgreen will open low-cost abortion clinics at select locations.  Not to be outdone, we can’t wait to see what Amazon will offer – and how ‘bout that new iPhone download?!  Talk about a killer app! 





D.K. Market Integrity


Dictum meum pactum (“My word is my bond”)

                   - Motto of the London Stock Exchange


We hear the following story from some smaller market participants.  We have tried to track down outside confirmation, but without success.  Nonetheless, this appears to have happened on more than one occasion, and we have sufficient faith in our sources to present this for what it’s worth.  We sincerely hope it turns out to be a fairy tale.  We fear it shall not.


This emerged as the tale of a ne’er do well junior clerk on a major bank trading desk.  He was contacting traders at smaller firms with whom his desk executes.  In his conversations, he held himself out as a trader looking to fill customer orders.  Our clerk never actually executed any trades, but he got his name around, and people started thinking he’s important.  In hopes of one day winning his business, traders were sending him to Yankee and Knick games, and taking him to dinner at Nobu.


One fine day, our clerk slipped up and actually gave an order to a trader who makes markets in hard-to-trade securities.  When he tries to get it printed, he is passed to the head of the bank’s desk who (a) denies the trade was a good trade, (b) informs the trader that his clerk had no authority to enter trades, and that anyway his is a principal desk and does not handle customer business.  The trader, after letting the initial shock wear off, tells the head of the Major Bank Trading Desk that, of course, he assumes they will break the trade – which is a couple of hundred thousand shares of an illiquid stock.


The head of the bank’s desk replied, “Management’s policy is, you have to take us to arbitration.”


It would appear that some larger banks, a number of which are sitting on TARP billions, have stopped reconciling trade errors with smaller operators, when the errors go against the bank.


Our friends at major firms have heard nothing about this – and our friends who run liquid market-making desks ditto.  But our circle of smaller operators have reported this as becoming almost common practice when the try to reconcile unfavorable trade breaks with major houses.


The smaller firms have no choice but to eat losses on discrepancies that go against them.  The cost to an operation of going to arbitration is simply too great, as none of the proceeds of the transaction would be available until there was a settlement or an award.  A fourteen million-dollar discrepancy is a rounding error to a major bank.  To an independent market maker, it is life or death, and they will eat a loss of a few cents on a hundred thousand shares, rather than not have food on the table.


If this is in fact going on, it bodes ill for our industry.  It would mean the big banks, by using the letter of the law, will consistently  squeeze smaller operators, many of whom stand to be driven out of business. 


The age-old standard of reconciling trade differences, regardless of the relative power of market participants, guaranteed protection and market integrity to customers and professionals alike.  By flexing their capital muscles, the large banks will bring this system to its knees.  Despite the hysteria in the press at the time, Lehman and Bear and Merrill Lynch were not the End of Wall Street.  Goldman and Morgan becoming banks was not the End of Wall Street.  Even Madoff was not the End of Wall Street.  But if this practice spreads, then it really is Game Over for the financial markets as we know them.  The fall of the Berlin Wall and the Soviet Union marked the end of the Dictatorship of the Proletariat.  It has now been replaced by the Dictatorship of the Billionaire-iat.    We hardly think this is what President Obama had in mind when he spoke of reforming the financial markets.





The Conflict Of The Unconflicted


To shoot a man because one disagrees with his interpretation of Darwin or Hegel is a sinister tribute to the supremacy of ideas in human affairs – but a tribute nevertheless.

                   - George Steiner


Research Edge was founded on a simple vision: the old model of Wall Street sell-side research is broken, and there is a crying need for unconflicted investment research – research that emanates from a neutral analysis of the available facts and that is not driven by the need to create transactions.


We thought this was so good, we all cast our lot together with CEO and founder Keith McCullough.  Keith was drawn to this approach as a moral imperative, and we share his vision.


Apparently so do you, because our subscriber base continues to grow.  Whether our readers follow all our ideas or not, they are nearly unanimous in praise of the unique clarity of our analytical approach.


We now read the story of Audit Integrity, a provider of “forensic risk analysis” and related in-depth company analyses for investors.  Featured in Forbes Magazine’s “Best Managed Companies in America” (January 2004) Audit Integrity boasts a highly qualified analytical team and has received positive mention in the press for its new service: a forensic accounting approach to identifying bankruptcy-prone companies.


Now, one of those companies has decided it does not care to have such a bright light shone in its eyes.

Our neighbors at Integrity Research Associates (www.integrity-research.com, 2 October, “Audit In The Hot Seat?”) report “this past week the parent of the rental company Hertz filed a law suit against the forensic research firm Audit Integrity for defamation over a report which suggested the car rental company could go bankrupt.”


Audit Integrity introduced its bankruptcy monitoring product last month, and published a list of public companies it considers at risk.  Hertz was one of them.


A spokesman for Hertz said Audit Integrity was “spreading misinformation” and that “the situation was so unfair that the lawsuit was warranted.”


The Hertz public relations team did not mention statements in the company’s most recent 10K referring to what steps the company might have to take “If our cash flows and capital resources are insufficient to fund our debt service obligation,” such that “alternative measures may not be successful and may not permit us to meet scheduled debt service obligations.”


Audit Integrity’s lawyers will no doubt point to this language as supporting the research firm’s position that Hertz is, by its own admission, on shaky ground.  Hertz’ attorneys will predictably say it is boilerplate, and that any public company needs to have a statement to this effect in its financials.


That “boilerplate” can be used as a colorable defense seems to fly in the face of the notion of transparency in reporting.  A company either is, or is not in a predictably precarious financial situation.  Auditors who hedge their opinion to cover every remotest eventuality are providing not an opinion, but a meaningless cut-and-paste text collage.  An opinion based on this approach is a fantasy. 


Meanwhile, companies that rely on boilerplate to win lawsuits are merely gaming the system.  The larger question is how far do current accounting reporting standards rely on intentional obfuscation, and who will call the accounting firms, the CFOs and the boards of directors out on it?  What does it say about the transparency of our marketplace that companies can make a successful business out of uncovering key financial information that public companies have hidden from their shareholders – with the assistance of expensive accounting firms, paid for by those very shareholders?


Right or wrong on their bankruptcy call, Audit Integrity has come up with something that bears a closer look.  And clearly, they have touched a nerve.





The Vitriol Of Tyrol


Long noted for their neutrality and their ability to guard others’ secrets, the Swiss have done a complete U-turn.  Things started out badly when the US started leaning on them over bank secrecy.  You may recall that we linked the ferocity of the US attack at least in part to the refusal of the Swiss to take large quantities of US Treasury securities into their managed accounts.  This was, admittedly, just a notion – based on nothing more than the observation that Switzerland has lots of OPM (Other People’s Money) and lots of its own securities to invest it in.


Now that famous Swiss bank secrecy has evaporated, they appear to be making up for lost time in other areas as well.


This week they arrested filmmaker Roman Polanski, wanted in the US since 1978 for drugging and raping a 13 year-old girl.


This may be Switzerland’s way of getting in a free shot at the US.  Isn’t this just what we need at this juncture?  While the President and all the leaders of the G20 are moving heaven and earth to rationalize the global economic system, Secretary of State Clinton is being publicly importuned by the President of Poland to intercede on behalf of a self-confessed child rapist.  There is no graceful exit for this for Secretary Clinton, and it is a distraction the world hardly needs. 


We are puzzled at the vociferous support and outright adulation that Polanski has garnered over this affair.  We are all for the power of repentance to change a person’s life – but we don’t think  that being forced to accept the Oscar in absentia constitutes just punishment for raping a child. 


In a sign that things may truly be changing, we found a bit of wry humor in the unlikeliest of places.  Reporting on the story (29 September, “Director Polanski Files For Release”) Al Jazeera went out of its way to mention that a petition protesting Polanski’s detention was signed by Woody Allen.


Well he just would, wouldn’t he?



Moshe Silver

Chief Compliance Officer


Chart of The Week: Volatility Is Back

With the US stock market hitting its intraday highs here in the morning session, the Volatility Index (VIX) is hitting its intraday low. The SP500 is currently +1.1% at 1035 and the VIX is down -4.3% at 27.46.


That’s the most immediate of immediate term (as in 3 hours) views! It’s also rear-view. Prospectively, you learn a lot from that rear-view data. Despite this morning’s moves, I see three very dominant macro lines to consider:

  1. SP500 immediate term TRADE resistance 1040
  2. US Dollar immediate term TRADE support $76.09
  3. VIX intermediate term TREND support 26.19

Andrew Barber and I chose the VIX as the Chart of The Week, not knowing what this morning would bring – and to some extent, using the 3-factor risk management model of SPX/USD/VIX above, we didn’t really care. Provided that the VIX holds this newly established intermediate term line of support, we know what our strategy will be.


Context here is critical (see chart). The VIX has put on a powerful +20% move in the last 2 weeks. This happened right on time, with US Equities failing to make higher-highs after the critical Outside Reversal day of September 23rd.


From a long term TAIL perspective (red line in the chart below), the VIX is broken. But that line includes the highest VIX readings EVER (not in this chart, Q408). Overall, the point here is to Acknowledge Reality. As the US Dollar makes higher-lows, and the SP500 is making lower-highs, the VIX is breaking out on both an immediate and an intermediate term basis, with no resistance of consequence until it gets closer to 40.


As opposed to where we stood in US Equities for most of Q2/Q3 (buyers of equity weakness), for now we are sellers of US equity strength.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Volatility Is Back - a1


Anticipating Solid September Sales

Anticipating Solid September Sales

OCTOBER 5, 2009




Another month has passed and we all know what that means. Same store sales day is Thursday with the reporting of September sales results. As we have pointed out in the past, the relevance of sales day ex- Wal-Mart is shrinking, but we still can’t ignore the inherent volatility, speculation, and excitement that this day is sure to bring.


So what do we know heading into Thursday’s report? First, there is no question September was a good month for same store sales. Reported results will largely be positive on an absolute basis driven in part by the Labor Day shift earlier in the month, in part by easing comparisons (both on a weekly basis and for the month) and to a lesser extent a slight uptick in overall apparel/footwear demand. Over the course of the past five weeks, the marketplace has ranged outright euphoric (at the beginning of the month) to generally positive.


Additionally, we have heard specific commentary from PVH and WRC, both commenting on a sequential pick up in their respective retail businesses. PVH also suggested that the department store channel was seeing an uptick and went on say that some Fall orders were being pulled forward to meet current demand. The weekly SportscanInfo apparel and NPD Footwear data also showed that September was a better month, although trends in both data feeds did show sequential deceleration over the past three weeks.


Anticipating Solid September Sales - 1


I am pretty sure the combination of very positive whispers surrounding September sales, coupled with confirmation of these trends from a handful of retailers leaves expectations high as we approach the reporting of actual results. Remember this month marks the beginning of a four month period where year over year comparisons for almost every retailer will ease to some of the lowest levels in recent history. There is no question inventories are tight (and light), comparisons are easy, and underlying demand is stable. Ultimately the set up for a trade on Thursday’s results hinges on expectations and not on reality. The reality is the results will look good and will continue to fare well for the next few months. None of this is new of course, this is a set up investors, The Street, and the retailers have all been anticipating for several months now. Recognizing it is both difficult and usually inaccurate to make a bold sales day prediction, I still believe that the day may be ultimately be marked by relative disappointment. That’s not to say reported trends and commentary won’t be positive, it’s just highly anticipated at this point.


Eric Levine   




Some Notable Call Outs  


  • Warnaco sized up their international business potential with a focus on retail store expansion. With same store sales from international stores up 3.3% Q3 to date (an acceleration from Q2 which was up 1%), WRC believes they can double their current 1000 store base in 5 years. Over that same time frame, 30% of total revenue would be driven from CK international retail. Asia and Europe will remain the key markets to obtaining this goal.


  • As a result of conservative inventory management, Columbia Sportswear has not taken a speculative inventory position on Fall apparel/outerwear as it has traditionally done in the past. Recall that the highly outerwear-dependent fourth quarter can often be impacted by weather anomalies, leading to both upside and downside depending on the level of at-once ordering. Any uptick in holiday demand due to inclement weather or overall demand this year will likely drive better margins but will not have a meaningful impact on revenue.





-Baby Boomers led the decade’s consumer spending spree, but Generations X and Y will likely be at the forefront of a recovery - Panelists at Retail Forward’s 2009 Strategic Outlook Conference on “Retail Renewal” at the Marriott Marquis, Frank Badillo, vice president and senior economist at Retail Forward, said the U.S. should see a pickup in GDP growth in the fourth quarter, with an uptick in GDP throughout 2010. Badillo expects the younger generations to help boost the specialty channel, which is where that demographic segment typically shops. Boomers, however, are the core shoppers at department stores, and they are focused on rebuilding savings and equity drained by the recession. Lois Huff, senior vice president, said while Boomers still constitute a large share of the population and spending power, the “engine of the Boomer has run out of gas.” Gen Xers haven’t pulled back nearly as severely as Boomers in the past year, and Gen Y has been constrained even less, she said. <wwd.com/retail-news>


-Top US sport participation report - Over the past eight years, team sports participation has fluctuated up and down, affected both by social trends and economic headwinds. Below, the most popular team sports among athletes six years and older and their changes since the start of the decade: 1) Basketball, Participation 26.3 million, 8-YR Change: 0.1%, The ultimate court sport continues to dominate all others when it comes to participation in the U.S. Consistently likeable since its origin, basketball is an affordable activity for children, teens and adults, particularly in the current recession. And while many companies are bullish on the b-ball market, Nike has pulled out all the stops, releasing a number of innovative designs in 2009, including the Hypermax, Zoom Soldier and Shox Vision. 2) Baseball, Participation 15 million, 8-YR Change: -5.2%, Though it’s still considered “America’s pastime,” baseball has seen a significant decline in participation among Little Leaguers, possibly because there are more sporting options for kids now than in the past. Nike, yet again, scores as the MLB footwear of choice, especially among the New York teams, the Yankees and the Mets. 3) Outdoor Soccer, Participation 14.2 million, 8-YR Change: N/A*, The international language of the sports world is played in more than 200 countries, and has become one of the most popular, co-ed sports in the U.S. Helping to fuel the flames are product collaborations such as David Beckham’s deal with Adidas last year to create Beckham Predator PowerSwerve TRX FG soccer cleats, the same cleats he wore during the 2006 FIFA World Cup. 4) Volleyball, Participation 8.2 million, 8-YR Change: N/A*, Volleyball is spiking in popularity among high schools and colleges in the U.S. Though most athletes tend to favor a relaxing game on the beach, an estimated 46 million Americans play this physically demanding court sport. Players must be able to leap, dive and perform to their fullest, and many have said they favor gel-cushioned Asics sneakers for indoor games. 5) Football, Participation 7.7 million, 8-YR Change: -6.5%, Football has seen a heavy drop in participation over the last few years, especially when it comes to organized and sanctioned play, which has been surpassed by casual, pick-up games. The SGMA estimates the trend may have something to do with families feeling the economic pinch. Nevertheless, footwear firms such as Under Armour continue to have faith in this rough-and-tumble sport. <wwd.com/footwear-news>


-Sally Beauty Holdings Inc. said Friday its Beauty Systems Group LLC subsidiary has acquired Schoeneman Beauty Supply Inc. for $61 million - The acquisition, which will help BSG increase its national presence, particularly in the Northeast, is expected to add slightly to the Denton, Tex.-based company’s earnings per share in 2010. Upon full integration of Schoeneman, the hair products and beauty supplies distributor also anticipates cost synergies to be realized, which will further enhance EPS in 2011. “This acquisition directly supports BSG’s strategy of extending our distribution reach in important geographic regions of the U.S.,” said BSG president John Golliher. “We expect this combination to provide us with a greater opportunity to compete in Pennsylvania, southern New Jersey, Delaware and West Virginia.” <wwd.com/business-news>


-Aldo Group is betting on its retail expertise for a new business called Aldo Retail Services - The division, which last month took on Sixty Group as its first client, includes an a la carte offering of retail-development services, from store operations and merchandising to accounts payable and retail portfolio management. “Any brick-and-mortar retailer in 2009 has to be looking at every way to leverage the investments they’ve made,” said David Bensadoun, Aldo’s group VP for global retail. “We see this primarily as a way to leverage our own expertise to help brands in which retail is not their core business.” Bensadoun said that Sixty Group, which will take advantage of Aldo’s store operations and real estate portfolio management services for the U.S. market, represents Aldo’s target client: “Someone who is already an established brand with good wholesale accounts and a few flagship stores, but who is looking to build a small retail chain of 25 to 100 stores.” While Aldo probably will not work with direct footwear competitors in the contemporary space, Bensadoun said shoe brands in the comfort, kids’ or discount arena would be targets for its retail services division. <wwd.com/footwear-news>


-Again, Coach Inc. has accused Target Corp. of selling unauthorized reproductions of its handbags - In a complaint filed Oct. 1 in U.S. District Court in Manhattan, the New York-based accessories maker alleged Target has sold knockoffs of its Patchwork and Ergo designs. Coach said it spotted the items for sale at the retailer at some time over the summer. “Target is not authorized by Coach to manufacture, distribute, advertise, offer for sale, and/or sell merchandise bearing Ergo Designs or the Signature Patchwork Designs or designs confusingly similar there to,” the brand’s attorneys wrote. Minneapolis-based Target did not return a call Friday seeking comment on the allegations. Coach is seeking an injunction against the items’ further sale, profits from infringing goods sold, attorneys’ fees and unspecified damages. <wwd.com/business-news>


-Perry Ellis International has promoted John Voith to president of sportswear and golf division - The new post will place Voith at the head of the company’s growing golf business and core sportswear brands, which include Cubavera and Axist. Voith joined the company in 2000, and most recently served as executive vice president of the sportswear division. <wwd.com/business-news>


-Retail employment levels remained lean in September as the U.S. economy continued to shed jobs, putting a crimp into hopes for the holiday season - Department stores cut 2,200 jobs in September to employ 1.53 million, after adding jobs in August for the first time since May, the Labor Department said Friday. Specialty stores added 1,600 jobs to employ 1.41 million, but didn’t erase a significant drop in August, when 9,500 specialty store jobs were eliminated. <wwd.com/business-news>


-Burberry increases profit expectations after re-negotiating Japanese apparel license - Burberry said it expects to boost operating profits by $6.4 million in the year ending March 2010 after re-negotiating its Japanese apparel license with two local partners. The company said it had drawn up a new agreement with its current licensees Sanyo Shokai Ltd. and Mitsui & Co. Ltd. The new deal foresees higher royalty payments than previously planned for the 2009-10 fiscal year, and fewer years on the license. Burberry's agreement will now expire in June 2015 rather than 2020. <wwd.com/business-news>


-When it comes to racking up big sales in a tough economy, some savvy kids’ retailers are finding it pays to think small - While powerhouse children’s companies with lots of manufacturing and marketing muscle continue to have an edge, independent retailers are increasingly turning to newer, boutique brands to differentiate themselves in today’s competitive market. According to retailers, smaller brands have a fresh approach to design and, more important, distinct brand messaging. Those strengths are turning indie labels such as Pediped, Morgan & Milo and See Kai Run into bonafide shoe brands. <wwd.com/footwear-news>


-Europe Retail Sales Drop for 15th Month as Unemployment Rises - European retail sales fell for a 15th month in August as rising unemployment curbed consumer spending. Store revenue in the 16-nation euro region declined 2.6 percent from a year earlier after sliding 1.9 percent in July, the European Union’s statistics office in Luxembourg said today. Economists predicted a drop of 2.4 percent, according to the median of 13 forecasts in a Bloomberg News survey. From the prior month, sales fell 0.2 percent. Hennes & Mauritz AB, Europe’s second- biggest clothing retailer, said on Sept. 24 that a sales decline worsened in August with revenue at stores open at least a year dropping 11%. <bloomberg.com>


-IMF Statement about Asian Economies - Even with this good news Asia is facing a key time since unemployment will increase in the coming years while political leaders from the region will have to face up to the challenge of consolidating a new model based on greater internal private demand, stated Singh during a press conference held at the Annual Meeting of the IMF and World Bank. According to IMF forecasts published this week, Asia as a whole will grow by 2.8% this year and by 5.8% in 2010. Asian countries were badly hit during the worst recession in recent years, according to Singh, who stated that Asian exports fell by 30%; there was capital flight and a sharp decline in production. <fashionnetasia.com>


-Wal-Mart Bodegas Lift Profit in Mexican Recession - Wal-Mart de Mexico SAB, Latin America’s largest retailer, is profiting from the worst recession since the 1930s by offering smaller, cheaper products to Mexicans at its Bodega Express shops. Walmex, as the Mexico City-based retailer is known, will report this week a 12 percent increase in third-quarter net income to 3.66 billion pesos ($266 million), according to the average analyst estimate. A rise would mark the fourth straight quarterly advance in earnings. <bloomberg.com>


-Target Reveals Licensed Gift-Giving Ideas - In response to similar initiatives by competitors Wal-Mart and K-Mart and anticipation of the holiday season, Target has revealed highlights for gift givers—many of which include licensed products. The retailer will offer popular licensed toys, including action figures from Transformers, G.I. Joe and Bakugan, as well as Disney Princess sets. Toys for older kids include an electric guitar from Maroon 5 frontman Adam Levine, the Shaun White Snowboarding video game for Wii and Twilight journals. <licensemag.com>


-Patagonia Footwear and Chaco Restructure Marketing Teams - Wolverine World Wide will put additional marketing and product development support in place for both Patagonia Footwear and Chaco. Entering its fourth year at market and with a growing sales force, Patagonia Footwear will strategically restructure its internal team with Jamie Barbor being appointed to director of Patagonia Footwear and will oversee all facets of the Patagonia Footwear business. <sportsonesource.com>


 -USA Football to Award $1 Million in Grants - USA Football, the sport's national governing body on youth and amateur levels, announced that it will award $1 million in equipment grants to youth and high school football programs across America this fall based on merit and need. USA Football's grant program has assisted the youth and high school football community since 2006 and will have distributed more than $2 million through 2009. USA Football is the official youth football development partner of the NFL, its 32 teams and the NFL Players Association. USA Footballs partners include Under Armour and Riddel.



-Wyclef Jean to Design a Line of Boots for Timberland - Wyclef Jean has taken time out of his busy schedule to co-design a line of eco-friendly footwear with Timberland. The collaboration is part of the company’s EarthKeeper program, which will help with the reforestation project in WJ’s homeland of Haiti. Jean will design 16 styles of footwear; the shoes will be constructed out of recyclable and organic materials. <beanstockd.com>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): NKE 


10/02/2009 09:47 AM


Great call by McGough, shorting the euphoria of the moment out the EPS report. Booking the gain here. KM

Hedgeye Statistics

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

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

Acknowledge Reality

“Information is the currency of democracy.”
-Thomas Jefferson
I wonder what Jefferson would think of America’s currency today. I know what the Chinese think – and that’s not good…
I wonder what the Chinese, Brazilians, and Russians think about the G7 meetings today. After all, the G7 club represents the self-proclaimed leaders of the “industrialized” world (UK, France, Germany, Italy, Japan, Canada, and the US)…
I wonder if Washington and Tokyo realize that the old world of view global economic policy has been compromised…
That shot across the bow that the world heard from Rio de Janeiro to Chicago on Friday was real. The G7 that was formed in 1976 is no longer relevant. The world’s balance of global economic and political power is shifting, big time. It’s time for those who fail to acknowledge reality to wake-up and get with the global macro program.
One of the sharper investors I know sent me a note on Friday, expanding upon the point I made about ex-Goldman Partners. I’ll take her word for it in telling me that the number one differentiator that one of Goldman’s finest saw in themselves versus their competition was a “failure to acknowledge reality.” Pretty simple.
Consider the commentary coming out of the G7 meetings from the Top 2 countries in global GDP this morning (USA and Japan):
1.      US Treasury Secretary: “It is very important to the United States that we continue to have a strong dollar”…

2.      Japan’s Finance Minister: “If currencies show some excessive moves in a biased direction, we will take action”…

Now consider the marked-to-market scoring of these comments:
1.      US Dollar reacts in the OPPOSITE direction of Geithner’s intentions, trading down again to $76.86…

2.      The Japanese Yen (versus USD) is little changed at 89.76

There is no need to comb over the specifics of what these two gentlemen intended to say or the impact they hope to achieve. Hope is not an investment process. Neither is listening to compromised and conflicted G7 countries for global currency strategy.
Japan’s ex-finance minister, Nakagawa, was found dead this weekend. The current Minister of Finance, Hiroshisa Fujii, has only been in office for a few months. At 77 years old, I don’t think I am going to be looking for him to evolve his thinking anytime soon either.
As for Timmy Geithner, can someone get the man a 6 month chart? His aforementioned comment about “continuing to have a strong dollar”, remains a failure to acknowledge reality.
We are short Japan via the EWJ etf. We are short the legacy US Equity benchmark index (the Dow) via the DIA etf. We don’t want to be long of political compromise. We don’t want to be long of financial leverage. We want to own liquidity, sobriety, and unlevered growth.
Look at the Dow and Japan’s Nikkei for the YTD:
1.      Closing down -1.8% last week, the Dow Jones Industrial Average is THE worst performing major stock market in the world at +8.1%

2.      Closing down again last night, the Nikkei is the 2nd worst performing major equity index at +9.2% YTD

After sending the Japanese and American Olympic bids home packing on Friday, Brazil’s stock market charged higher, closing up another +1.2%, taking the Bovespa’s 2009 YTD gain to +63%. Brazil’s exports to China are now outrunning their exports to the USA. Japan’s year-over-year export’s for August were down -36% year-over-year!
The world is changing at its most expedited pace in decades. Japan’s equity market is now broken on both my immediate and intermediate term durations (TRADE and TREND), whereas Brazil remains bullish on both. We must respect and acknowledge this New Reality.

My immediate term support/resistance lines for the SP500 are now 1022 and 1040, respectively. US Equities now have the lowest allocation in our Global Asset Allocation Model. We’ll continue to manage risk around our Japanese short position, trading it with a bearish bias.
Best of luck out there today,


EWA – iShares Australia EWA has a 30 day SEC dividend yield of 2.74%.  With Glenn Stevens (our favorite central banker) signaling that policy discipline will take precedence over politics, growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

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.

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. 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.

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.




New immigration facilities for Hong Kong residents visiting Macau will be in place by the end of 2009 at the ealiest.  Assistant director of immigration Eric Chan Kwok-ki said that authorities are considering extending “e-channel” facilities to Macau and dispensing with arrival/departure cards for Hong Kong permanent residents.


YUM will likely make the numbers and maintain its FY09 10% EPS growth target.  YUM typically makes the numbers and consistently beats earnings expectations.  With YUM, it is the earnings quality that deserves more attention.  As we saw in 2Q, management optimism about the top line sales will be reined in. 


In 2Q, despite softer than expected sales trends, the company beat street expectations, helped by a significantly lower than expected tax rate.  Management highlighted that although this lower tax rate resulted in the company decreasing its full-year tax rate guidance to 25% from 27%, on a YOY basis, the forecasted tax rate should provide a slight EPS headwind in 2H09.  Additionally, during the 2Q earnings call, management had said it was not anticipating any share repurchases in the back half of the year and that the company’s share count could actually increase in 4Q09, which would have marked the first time the company’s share count had not declined on a YOY basis since 1Q05.  After that earnings call, I was interested to see how YUM would make the numbers with fewer strings to pull.  To that end, YUM announced this week that it would resume buying back stock following the Board’s authorization of a $300 million share repurchase program. 


Unit growth and lower YOY commodity, G&A and interest expenses will all play a factor in making numbers in 3Q09 (and now a lower share count will help to make full-year numbers).  Not all of these earnings drivers fall in the financial engineering category, but along with a lower share count, I would argue (as I always do) that YUM is pushing too hard on unit growth, particularly in China and YRI, as it helps drive earnings growth.  In 3Q09, YUM will continue to push unit development to offset slowing same-store sales growth. 


Like its peers, YUM will benefit from commodity cost favorability in the back half of the year in both the U.S. and China, though the YOY benefit will be of a greater magnitude in the third quarter.  G&A expenses will continue to come down as the company is working to reduce its G&A cost structure by $60 million in the U.S. in FY09 (already achieved $20M in Q1 and $18M in Q2).  YUM’s goal to refranchise 500 units in the U.S. will also help the G&A line going forward.  Commodity costs will not come down forever.  The YOY favorability combined with reduced G&A is working to offset continued sales weakness.  This trend is no different from any other restaurant company right now.  Like we saw earlier this week, DRI beat EPS estimates despite sales weakness, but investors seemed most focused on what the company had to say about sales going forward and that was not good.  I think the same story will play out for YUM. 


YUM already significantly reduced its full-year sales guidance following 2Q results.  Flat same-store sales growth in China for the year is achievable and represents a significant deceleration in 2-year average trends.  The company’s 3% comparable sales growth guidance for YRI assumes the company maintains its 2-year average trends for the balance of the year, which could be at risk.  In the U.S., YUM’s guidance stated that same-store sales will be down slightly.  I am convinced that full-year same-store sales will be down as well, but I would be interested to get some clarity around that “down slightly” guidance and that could prove to be one of the real telling points of the quarter as it relates to YUM’s stock performance following the earnings release. 


In my opinion, investors could be expecting too much out of KFC this quarter.  Yes, the Kentucky Grilled Chicken launch during the second quarter boosted KFC same-store sales to +3% from -7% in Q1 and consistently negative performance prior to that.  Management highlighted that following the initial launch that sales flattened.  As everyone knows, we are in an extremely difficult operating environment and those post-launch results are likely more relevant relative to 3Q performance.  KFC is lapping a -4% comparison but easy comparison no longer matter.  Pizza Hut’s underlying trends will most likely be little changed from 2Q when same-store sales declined 8%.  And Taco Bell, which was up 1% in 2Q, will continue to be pressured by the increased discounting of its peers.  For reference, both Pizza Hut and Taco Bell are facing difficult comparisons from 3Q08 when same-store sales growth was up 8% and 6%, respectively.  Even with these difficult sales trends, U.S. operating profit should continue to improve during the third quarter.  I would expect this operating profit growth and improved margin performance to reverse in the fourth quarter as the company will be lapping its first quarter of growth since 3Q08. 


Management already lowered its full-year U.S. operating profit growth target following 2Q to high single digit growth from up 15%.  I would not be surprised to see this number come in even below the revised guidance.  It would not be the first time YUM’s U.S. operating profit guidance was too optimistic.



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