Long Taiwan: Floodgates Waiting To Open

“….the delicate balance across the Taiwan Strait will continue to Challenge the wisdom and strength of the government in Beijing” 


Su Guaning, President of NTU, quoted in an interview in The Business Times Singapore on how China’s economy will evolve in the coming decade.



The gravitational pull of the mainland is becoming ever stronger for Taiwanese companies in advance of the historic memorandum of understanding on financial supervision that is expected to be signed in November. This is just the latest link between the two states since Beijing seized on the global recession as an opportunity to thaw relations. As “panda diplomacy” has evolved beyond symbolic gestures with the introduction of direct trade and travel and direct investments by PROC companies, the pace of development has quickened.



In the past month the number of Taiwanese firms seeking to take advantage of the accord by establishing partnerships on the mainland have grown rapidly, with prospectors ranging from the Taiwan Stock Exchange and leading brokerage Fubon Securities opening discussions with Shanghai counterpart to Sanyang Industry’s partnership with Chinese bus manufacturer Xiamen King to develop modern coach line vehicles for the mainland market. 



Rising from only 3% of total exports a decade ago to nearly 30% of the total today, the rising mainland consumer base has become THE critical growth market for Taiwanese technology and communications firms.  This closer relationship is driving more than just exports, YTD the TAIX has traded with a strong correlation to mainland equities, racking up an R2 just shy of 90% YTD (see charts).


Long Taiwan: Floodgates Waiting To Open - a1


Long Taiwan: Floodgates Waiting To Open - a2



As the economic ties continue to draw the island nation closer to Beijing, it is important to note that the political and cultural obstacles remaining are immense. Officially the PROC government regards the island as a rebellious district rather than a separate state (let alone sovereign nation). A recent reminder of the long standing military tension was the conviction of US DOD employee James Wilbur Fondren two weeks ago. Fondren had been passing on sensitive pentagon documents from 2004 to 2008 regarding strategic planning for joint US/Taiwanese joint defense to a Taiwanese citizen posing as an operative for his government who was in fact an agent for Beijing. 


We are long Taiwanese equities via EWT as a tactical play on rising Chinese consumer demand. In the long term, for better or worse, the two economies are intertwined. It remains to be seen if the common economic advantages of the current initiatives will lead to a political partnership equally as equitable.


Andrew Barber


Slouching Towards Wall Street… Notes for the Week Ending Friday, October 9, 2009

Unemployment-Gate – What Didn’t The Government Know, And When Didn’t They Know It?



Dirty Harry To SEC: Make My Day



Pandit To Sheila Bair: Make My Day



Dollar To The World: Make My Day








Floyd Norris shared a story in his blog (2 October, “Recession?  What Recession?”) hinting that Bank of America may not be the only major institution to withhold key information from its shareholders.



“In early 2008,” writes Norris, “a small band of people were arguing that we were in a recession. But the conventional wisdom – including at the Federal Reserve – was that the employment numbers said otherwise.”  “Otherwise” as is, “you don’t go into recession when you are losing 60,000 jobs a month.”



We can all agree that 60,000 jobs do not a recession make.  But Norris says Bureau of Labor Statistics dramatically underestimated the number of jobs lost.  The total projections of less than 6 million were enough to shake folks up – but the current estimates have been revised to in excess of eight million.  This is not a rounding error. 



Is this another example of those smart enough to actually predict trends going to work on Wall Street, where they can make a fortune – and the government taking the leavings?  Why do We The People have to rely on folks who couldn’t make the grade in the real world?






We are currently witnessing the prosecution of BofA’s management for sharing Bad News with their shareholders – but hiding how Truly Bad the news was.  Was their rationale that they could fudge an explanation after the fact?  That somehow if they ignored the extra few billion in losses, it might go away?  That the shareholders and the markets would be more focused on the receipt of the billions of dollars in government aid, and figure it would all come out in the wash?  By trying to rush through a settlement, the SEC would rob us of the opportunity to hear the testimony of BofA’s managers and directors, which is the only way we might learn any of this information.



It’s bad enough to contemplate The Evil We Know, which is a government process riddled with sheer incompetence.  Still worse would be the evil that we didn’t know: maybe they actually did have a firm handle on the unemployment trends and tampered with the early estimates.  This may have been testing the waters with respect to levels of acceptable public panic.  Or maybe they were just hoping that, by the time the actual figures came to light, either there would be significant improvements to point to, or some other problem would arise to make it seem insignificant. 



When we can’t even get the SEC to investigate a possible multi billion-dollar fraud involving the nation’s premier financial institutions, who will investigate the BLS and the Administration?  Andrew Cuomo, are you reading this?




Make My Day



You’ve got to ask yourself one question: “Do I feel lucky?” 

 -  “Dirty Harry”



“Dirty” Harry Markopolos appeared last weekend before the Investment Management Consultants Association Professional Development Conference.  His remarks, recorded for posterity by the press (Financial Planning, 5 October) include the following gem:  “The SEC has to get better, or die, or be killed.”  Shades of the original Dirty Harry Callahan, who says shooting people is all right, as long as the right people get shot.



The simple fact it, despite everyone’s high hopes for Mary Schapiro (well, perhaps not quite everyone…) the “new” SEC has thus far done little to make us sanguine about the future of the financial markets. 



The step-up in Enforcement actions since Chairman Schapiro took over appears to be merely the effect of removing the shackles of the Cox era.  This is an invidious comparison and does not speak to increased dynamism at the Commission. 

For a more telling comparison, look to the statements of new SEC Enforcement Chief Robert Khuzami in response to the SEC’s failures in the Madoff matter.  In an important address to the New York Bar Association in August, he spoke with pride of “the most impressive organization response to criticism I have ever witnessed.”  In the aftermath of Madoff, Khuzami stated the SEC had opened 10% more investigations (525 versus 474), obtained 118% more orders granting the Commission subpoena power (275 versus 126), filed 147% more Temporary Restraining Orders (52, ,compared to 21) as compared against the same period in 2009.



These figures fail to impress us.  The alacrity with which these actions came tumbling forth made it clear they were old files that had been thrown into enforced dust-gathering in the do-nothing Cox days.  Merely taking the cuffs off created a flurry of activity, as quashed files were resurrected.  While it is appropriate for Chairman Schapiro to say “Do something!  Do anything!” we must wait for next year’s Enforcement actions to see what the current staff will produce.



In the same speech, Khuzami said the Enforcement Division would focus on “building strong cases so that defendants settle quickly on the Commission’s terms or face a trial unit armed with compelling evidence.”



There are three problems with this.  First, the Commission’s excessive reliance on lawyers.  The Commission continues to hire lawyers – and continues to refuse to create programs that might attract seasoned Wall Street professionals.  Lawyers almost never go to court.  Rather, their whole training, and the caste of the American legal system, is to seek settlements.  Actors who play lawyers go to court – the typical practicing attorney in the US can’t tell whether he is standing in front of the courthouse, or the post office.



Even when the SEC manages to hire a highly qualified market professional, they waste the opportunity by mummifying them in bureaucratic red tape and by making them subject to the vagaries of the government pay grade system.  While Khuzami spoke enthusiastically about his program to deploy seasoned SEC staff to best advantage, it is still not the same as bringing in market professionals. 



We wish to take this opportunity – yet again – to promote our own idea of hiring fifty of the top compliance and operations professionals on the Street, giving them a three-year mandate and a staff of accountants and lawyers.  Markopolos, in his recent presentation, said the SEC needs to “hire capital markets people instead of lawyers.”  We couldn’t agree more.  Not to put too fine a point on it, the refusal to recast the Commission in a more effective form is clear proof that the SEC – from junior staff, up to the Chairman – do not want to revolutionize the regulation of the markets.



The second problem we find is that perpetuating the practice of seeking to settle every case promotes a legacy of conflict of interest, as highlighted by Judge Rakoff’s very public excoriation of the Commission for its attempt to push through the $33 million settlement with Bank of America.  The deal is so egregiously insufficient as to imply government strong-arming.  Chairman Schapiro’s judgment is subject to being clouded by political pandering – for example, her initiative to promote shareholders voting directly for board members was likely a sop to the labor unions – and the longstanding symbiotic relationship between Wall Street and its regulators does not look set to change. 



The practice of making settlements is the time-honored tradition whereby Wall Street agrees to be taxed for driving recklessly on the toll road of the American marketplace.  A review of the FINRA website shows a monthly litany of fines from $5,000-$50,000 for the unavoidable ministerial infractions that beset the trading desks of major firms – late trade reporting, out of sequence reports, failure to timely display an order.  When committed by major firms, these infractions are more often than not mere oversights or carelessness.  Cynical anti-capitalists notwithstanding, Goldman Sachs does not make its money by skimming pennies from customer orders.  The largest and most substantial Wall Street firms recognize the value of their franchise and are noted for particularly robust Compliance and risk-management departments – Goldman and JP Morgan are standout examples. 



By pushing for more settlements, Khuzami reaffirms the inherently corrupt Old System – one that places the regulators at the very bottom of the food chain, reinforces the supremacy of those with money, and does everything possible not to rock the boat.



Finally, the third problem with Khuzami’s position is the role of the courts.  The idea that a defendant might fear showing up in court to face SEC charges is almost laughable.  Read the OIG report on the SEC’s mishandling of the Madoff affair if you don’t believe us.  The case-building standards and practices within the organization have been so pathetically weak, and in such widespread fashion, and so very persistently over such a long period – many believe the Commission went into a tailspin after Arthur Levitt’s tenure – there is barely a peg on which to hang a prosecutorial hat.



Wall Street defendants can afford better lawyers than the SEC can ever come up with.  The problem they face is the cost of time: time may work in one’s favor in a commercial litigation, but in the government one faces an adversary with a bottomless pit of time.  Moreover, when a firm sees that a judgment will likely go against them, why do the regulators allow them to settle?



In the retail brokerage business, brokers who generate large numbers of complaints are often coaxed into submitting a voluntary resignation.  It is so much easier for a firm to file a voluntary U5 (termination of employment filing) than to explain what kind of problems the broker caused, and why the firm itself should not be held liable for failure to supervise.  This has resulted in literally thousands – if not tens of thousands – of fraudulent referrals throughout the industry, as dishonest brokers have been given a clean bill of health by employer after employer and have gone on to pillage customer accounts at a succession of firms.



In what way is the regulatory process substantially different?  A firm or individual that makes a settlement – and which is not required to admit to any improper activity – is free to continue in business. The art or managing money, as we all know, is the art of having money to manage.  And the key to accessing OPM is marketing, marketing, marketing.  The financial markets are replete with Elmer Gantry types who don their red vests each morning and – believe it or not – always come home with a new sucker.  When the sucker asks the salesman why he made a settlement with the SEC, the answer is always, “It was a business decision: either settle now, or spend the next five years, and possibly millions of dollars in legal fees to win the case.”  By making a policy statement that the SEC will actively seek to force settlements, rather than convictions, Khuzami is signaling to Wall Street that they shouldn’t worry.  Things aren’t really going to change all that much.  Downright scary, we say.



As an example, if Ken Lewis is guilty of defrauding investors, then he should be found guilty and jailed accordingly.  Allowing him to weasel out by paying – whether with his own money or anyone else’s – discredits the system.  And how about this?  What if he’s innocent?  Khuzami has boldly announced to the world that the “new” SEC is setting out to beef up the system whereby no one will ever really know what goes on, and criminals will be pampered instead of caught.



We think a more forceful approach to Enforcement would be to dedicate a portion of the judicial system to expedited hearings for the SEC to bring litigation.  The more standing in court with the possibility of an adverse judgment, becomes a reality, the less managements will be inclined to cut corners, and the more vigilant boards of directors might be.  A new legislative package that gives the SEC enhanced subpoena power, that makes it costly and difficult to bring retaliative lawsuits, and that leads to an expedited hearing process before highly qualified judges could work wonders.



Wall Street has been likened to the Wild West, where gunslingers roam free and fire at will.  If bankers, brokers and traders knew they would face conviction for their misdeeds, might prove a strong corrective to the worst offenders.  The world of finance is not yet like the world of professional football.  Unlike the NFL, on Wall Street having a felony conviction still poses a stumbling block to one’s career.  



Markopolos’ remarks are a rehash of what we have already heard – from him, and from the SEC OIG report.  Still, it is worth reminding the public how dismally ill-served we are by our elected officials, and by the political appointments they make.  Finally, as Markopolos came to the end of his presentation, he dished out one last bit of criticism, saying “if the SEC was asleep, the banking regulators were comatose.”


This appears to put Goldman Sachs and Morgan Stanley in the truly enviable position of arbitraging one set of clueless regulators against another set whom they appear to have snugly in their pocket.  When they converted to bank holding companies, these firms switched primary regulator from the SEC (clueless) to the Fed (back pocket). 


As an aside, we are not the only ones who think the government officials charged with overseeing the financial system are compromised.  For a hoot with teeth, see of 17 September, “The Geithner-To-Goldman Clock,” in which Henry Blodgett – yes, that Henry Blodgett – predicts Tim Geithner will leave the public sector and join Goldman Sachs one year into President Obama’s second term. 


Some in the financial press have expressed their sympathy (Reuters, 11 June, “Goldman Could Shed Commercial Bank Charter”), saying the new banks “faced significantly tighter regulation and much closer supervision by bank examiners from several government agencies.”  You can’t seriously believe these various agencies have a chance against Goldman or Morgan, given their interlocked relationships with Treasury, the New York Fed, and the White House.  And now that the SEC is on record as committed to a new round of high-stakes Business As Usual, it looks like clear sailing for the robber barons once again.


Where will the next major regulatory disaster come from?  Clearly, regulatory and legislative fecklessness are built into this corrupt and conflicted system, and the possibilities for implosion are limitless.  There will continue to be plenty of jaw-jaw, but no real change-change.



No Comment Required


Some stories not only tell themselves, they comment on themselves.  When the Government ordered Citigroup to undertake a thorough review of their operations, the company brought in an independent auditor – of their choosing.  To no one’s great astonishment, the conclusions were positive, with CEO Pandit singled out for praise.


FDIC Chair Sheila Bair is not buying it (Wall Street Journal, 9 October, “Review Of Citi Draws Wary FDIC Response”), the implication being that she is no more sanguine about Pandit & Co’s ability to run a faltering behemoth now that he has received high marks from his fellow troglodytes at Citi.


It is difficult for us to fault Egon Zehnder, the highly-respected international executive search firm that produced the report.  Indeed, Pandit-pandering market commentators are crawling the web, saying Bair has been “kicked in the teeth”, (, “Why It’s Time For Sheila Bail To Apologize To Citi’s Pandit”), and this tale may end with Ms. Bair being served a dish of corbeau a la Pandit.  Whether or not she consumes it will be a different story. 


We remember – alas, we have since lost our copy – a lavishly produced report done for Bear Stearns by a major business consulting firm.  Bound and glossy and chock full of photos, charts and tables, the key conclusion of the report was that Bear had established such a deep-rooted and consistent culture of risk management, of oversight and of performance, and of managerial excellence, that it would take a succession of bad judgment calls, made and followed consistently over a number of years by a large number of employees and senior managers, to undermine the stability of the firm.



‘Nuff sed?



Beggar Thy World


Suck up the float, or you will sink in the moat.

 - Stu Travis, “The Big Man”



It’s fascinating to watch one’s own ideas coming back, recycled as someone else’s insight.  Not to say that great minds might not think alike, but in the world of economic and market analysis, this must be tempered by the awareness that professionals often make statements with great conviction which, upon review, are found to be completely at odds with statements they made in the very recent past – and with no less fervor.



Our CEO, Keith McCullough, has been hammering home the theme of “Dollar Down Causes Everything Else To Go Up In Price.”  To his credit, he has been unwavering in this approach.  To his greater credit, he has been right.  (Frankly, this part of his presentation has become so predictable that we use it as an opportunity to pour a fresh cup of coffee when he launches it in the morning call.)  You would think, in fact, someone else might pick up on it.



In recent months, even the “best” financial media have most frequently addressed this phenomenon by saying “the drop in the dollar was caused by the rise in the price of____”  Plug in your asset of choice: oil, gold, S&P 500, etc.  Precious few of them bother to look at the mechanism from the other side.



Now we have a high-profile bandwagon-hopper in the person of David Malpass, president of Encima Global and former chief economist of Bear Stearns.  Writing in the Wall Street Journal (8 October, “The Weak-Dollar Threat To Prosperity”) Malpass quotes Pimco’s Bill Gross as musing that the Obama Administration must have an undisclosed plan to continue to weaken the dollar.  Gross observes that “one of the ways a country gets out from under its debt burden is to devalue.”



Malpass proceeds to make, well, pretty precisely Keith’s case for the weakening dollar causing everything else to go up in value.  We admit to being mathematically semi-literate. In college we studied “Humanities”.  But we understand this.  It is a simple arithmetical relationship of one price to another.  Adjusted for other factors that influence equilibrium, they have to balance, otherwise there is an arbitrage opportunity. 



Malpass is of course not infallible.  He has been taken to task for his position, while at Bear, that capital gains are an equivalent to savings in an economy.  This is all to the good for someone who gets paid by folks who sell securities for a living, but holds less water from the perspective of the buyers of those securities – particularly if they are acolytes of the gospel of Buy and Hold, who see the Hold go up in smoke.



A follow-up to this piece is a WSJ editorial (9 October, “The Dollar Adrift”) that warns “the more immediate danger – in the coming months – would be if the fall of the dollar becomes a rout.”  This juxtaposes with a line buried in a Financial Times story (9 October, “Dollar Bounces After Bernanke Exit Comments”).  “After Thursday’s session of heavy intervention by Asian central banks to stem the appreciation of their currencies against the dollar, many of those watched their currencies weaken further.” 



Finally – and only a crackpot conspiracy theorist could see a tie-in here – we note several stories this week around the British initiative to bolster their banking sector by requiring banks to dramatically increase their percentage of reserve holdings, and specifically to hold those reserves in “high quality liquid instruments” – regulator-speak for government bonds.  If a similar initiative makes its way through Congress, we will be treated to the happy vision of Asian central bankers frantically trashing their own economies to prop up our currency, joined by our own mightiest financial institutions as stepped-up buyers-and-holders of Treasury debt.  It appears the emerging plan is to suck in the world’s bankers and their economies, until the Fed can manage a sharp spike up in the dollar – media pundits have been forecasting such a move in the first quarter of 2010.  As long as Washington keeps the dollar weak, it remains the currency of choice for the carry trade.  A ten percent surge in the value of the dollar will presumably unleash the mother of all short squeezes.

And then everything will be all right again.  Don’t you see?



For the time being, rhetoric and cash-box rattling aside, the Dollar is firmly on the throne, with no heir apparent.  As we go to press, it looks like Bernanke and Summers are counting on a little well-timed jaw-jaw to motivate bankers around the world to chomp down another cyanide capsule.  Like we used to say in the neighborhood – it’s good to be king.

Chart of The Week: Octobers

“Since golden October declined into somber November, and the apples were gathered and stored, and the land became brown sharp points of death in a waste of water and mud.”

-T.S. Elliott



Sometimes it’s hard to take a step back from the mania of the moment. Our trading screens remind us that risk management is a daily exercise. Our crackberry culture reminds us that markets will wait for no one. This is crazy. We need to take a step back before we manage risk going forward. Let’s get real crazy and take TWO steps back. Let’s think about the recent Octobers:



  1. In October of 2007, the “smart” money thought everything was going to get LBO’d…
  2. In October of 2008, the “smart” money thought you could be short the US Consumer for life…


Now its October of 2009, and I don’t know if there is any of that “smart” money left!



While the upward price momentum of everything priced in Burning Bucks is becoming consensus. What we have learned over the course of the last 3 Octobers is that consensus can remain a pain trade until plenty a “smart” money player is taken right out of the game.



Looking at the chart below, you can see the massive melt-ups in what we call Reflation’s Rotation (from y/y deflation to y/y reported inflation). While we don’t yet have reported year-over-year inflation yet in the US, they have started to reported it (CPI) in the UK. The UK gets to import y/y inflation first - primarily because the pound got pounded first.



In the end, the Buck Burning will equate to the same reported inflation in Q4/Q1 as we lap the bombed out compares in the price of everything in this chart. Bernanke’s Depression (in prices) started last October.



Both the price of copper and oil (in US Dollars) are still making lower-highs for 2009 YTD. That said, the price of oil, in this chart shows you that it still has plenty of runway to the upside from a mean reversion perspective vs. copper and gold. All that said, I think we need to see lower-lows in the US Dollar in order to get that Oil price headed there.



We shorted oil today.




Keith R. McCullough
Chief Executive Officer


Chart of The Week: Octobers - a1




October 12, 2009





There’s a notable call out in reconciling the latest apparel import price data with CPI. The punchline is that after a six-month time period where margin dollars increased, they narrowed meaningfully last month. Still a positive spread – implying that margins are still getting better – but at a far lesser rate. So many people look at CPI and raw material pricing data in yy % terms, but that’s simply inaccurate. Remember that the average retail price for an apparel garment is about $10, while the import price is about $3.50. So a 1% change in retail price equates to about a 3% change in import price to keep the margin equation in balance. So we measure the actual dollar spread between costs to consumers vs. the industry. On average, the spread is about a dime per garment. That might not seem like much, but at about 30 bn garments per year, we’re talking about $3bn in ‘margin jump ball’ injected into the industry per year – or about 100bp in margin. THAT’s why these stats matter. That’s also why I’m surprised to see that spread go near zero – just at the time (4Q) when the investing world at large thinks that 4Q will be a cakewalk.









Some Notable Call Outs


  • Li & Fung is getting louder about acquisitions. Currently the biggest supplier of apparel and toys to US Mass Retail, said it’s considering acquisitions of several U.S. companies with hundreds of millions of dollars in annual sales. The company has a $1 billion acquisition fund, and is eyeing “multi-hundred-million-dollar-sales companies” in the U.S., said President Bruce Rockowitz. Li & Fung may make “a series of acquisitions” within the coming months, and is also looking at companies in Europe and in Hong Kong, he said.


  • As some retailers still try to figure out their ecommerce strategies, the effort is now expanding to m-commerce. By the end of this year about 50% of traditional retailers are expected to have mobile websites, up from 20% at the end of 2008. For now the biggest hurdle to mobile commerce is the consumer’s hesitancy to share sensitive credit card or personal information via a smartphone device. Expect credit card network operators including Visa and MasterCard to begin promoting safety and security as they roll out mobile strategies of their own.


  • In an effort to get a jump start on the competition as well as the hype surrounding Black Friday, Toys R Us is expected to be open on Thanksgiving Day. Healthy competition and media attention is certainly part retail landscape, but there has to be some line drawn as it pertains to employee satisfaction. We wonder if any other retailers will follow, leaving their employees with just Christmas and Easter as the only two holidays guaranteed to be off.


  • A reminder that the next U.S census is approaching and it will be measured as of April 1, 2010. As always, the census will have implications for all kinds of issues and businesses, including retailers. This massive “research” project which will examine the composition and demographics of the U.S population is expected to cost $15 billion to complete. Results will begin to be made public in spring 2011.





-U.S. Imports Fall in August, Trade Gap Narrows - Textile and apparel imports to the U.S. continued their long decline in August, with Vietnam posting the only increase among major suppliers. The Commerce Department’s Office of Textiles & Apparel said Friday industry imports fell 9.8 percent to 4.2 billion square meter equivalents in August compared with a year earlier. The total volume of imports of textiles and apparel to the U.S. in August was the highest for any month this year, but in year-over-year comparisons imports have been declining since February 2008. Apparel imports fell 6.4 percent to 2 billion SME and textile imports dropped 12.7 percent to 2.2 billion SME. Imports of textiles and apparel from China dropped 0.7 percent to 2.1 billion SME in the month compared with August 2008. Apparel imports from China increased 9.1 percent for the month to 961 million SME, while textile imports from China fell 8 percent to 1.1 billion SME. <>


-Argentina: Threat of tannery closures recedes as companies accept lower level activity - Information obtained from the Argentine Tannery Association CICA indicates that the threat of tannery closures has receded since the height of the financial and business crisis in the country last January. Tanneries are still well stocked with hides, mainly salted and in storage, as the kill was accelerated in reaction to the worst drought in 60 years which killed thousands of head. The premature kill of smaller animals has led to a reduction in larger hides for upholstery and with many smaller hides now available, tanneries are reorienting their business towards footwear production. The collapse in car sales world-wide has forces tanneries to diversify and change strategy instead of having all their eggs in one "automobile" basket. <>


-European Commission Calls on Hungary to Change its VAT Reimbursement - The European Commission has called on Hungary to modify the relevant provisions of its VAT legislation which preclude Hungarian taxable persons from claiming reimbursement of input VAT where the underlying supply has not been financially settled by the taxable person. The request takes the form of a reasoned opinion, the second step of infringement procedure enshrined in Article 226 of the EC Treaty. The Hungarian VAT Act grants taxable persons the option to choose between carrying forward their excess VAT (which results from deductible VAT exceeding payable VAT in a tax period) to the next tax period or immediately claiming the refund of it. <>


-McCarthy Puts Under Armour on the Offensive - Two months after taking over as captain of Under Armour’s footwear business, Gene McCarthy is drawing up a playbook that aims to offset the company’s weak sneaker sales. While the Baltimore-based company made big bets earlier this year on the debut of its running shoe, footwear revenues fell 19% in the second quarter, leading to major markdowns on inventory. Under Armour will report third-quarter results later this month, but analysts do not expect footwear figures to be much better. To combat that, McCarthy — who previously served as co-president of Timberland and worked for two decades as a Nike executive, with a stint at Reebok in between — said he is focused on building up the company’s design talent so its footwear has a “distinct design language unique to our brand.” McCarthy is also in the process of overhauling sourcing and development and is fine-tuning footwear distribution. <>


-LVMH to Freeze Hiring, Salaries in 2010 - LVMH Moet Hennessy Louis Vuitton SA plans to freeze hiring and salaries in 2010 after a stagnation in sales and earnings this year, La Lettre de L’Expansion reported, without saying how it got the information. The company’s wines and spirits unit is showing a sales decline of 42 percent, La Lettre said. Overall 2009 revenue will rise 0.2 percent and net income will gain 0.1 percent, the newsletter said. LVMH is planning an acquisition in perfumes and cosmetics, according to La Lettre. <>


-Marks & Spencer May Speed Up Non-U.K., Internet Retail Plans - Marks & Spencer Group Plc, the clothing retailer fighting two years of declining sales in its home British market, may announce plans for more international stores and an enlarged online offering tomorrow. Finance Director Ian Dyson is scheduled to speak to analysts and investors in London, and Britain’s biggest clothing retailer by revenue has said he will discuss “developments” outside the U.K., without giving more details.



-CVS, Walgreen Have Spot Flu-Vaccine Shortages as Demand Surges - CVS Caremark Corp. and Walgreen Co., the two largest U.S. drugstore chains, are experiencing spot shortages of seasonal-flu vaccines because of increased demand. CVS MinuteClinics in Austin, Texas, and New York ran out of the seasonal-flu vaccine within the past week before restocking, according to calls to 13 stores by Bloomberg News. Calls to eight Walgreen stores in Manhattan on Oct. 5 determined none had it at the time. There are also shortages in the South and Southeast, said James Cohn, a Walgreen spokesman.

Demand for seasonal-flu vaccinations has soared because of public awareness of the H1N1 virus, known as swine flu, Cohn said. Walgreen administered twice as many doses in September as in the entire 2008 flu season, he said. <>


-Asda is Top Clothing Retailer in Britain - According to TNS data, Asda has become Britain's biggest clothing retailer with its George brand achieving 10.1 percent market share. The growth was driven largely by school uniforms and womenswear. "Our objective was to be No. 1 by volume by 2011, so we're 18 months early," Anthony Thompson, George's managing director, told The Times. <>


-DKNY Jeans set to be launched this month in India -DLF Brands Ltd, the retail and lifestyle division of DLF Ltd, today announced its agreement with Christina Ong’s Club 21 Group, the international licensee for DKNY Jeans, to launch the brand following the successful introduction of the DKNY brand in the Indian market earlier this year. The first two DKNY JEANS stores will be launched in New Delhi in October 2009 at DLF Place, Saket and the DLF Promenade, Vasant Kunj. Both the DKNY and DKNY JEANS brands are owned by Donna Karan International, Inc. and are sold in India under license. <>


-eBay India launches Global EasyBuy - eBay India (, India’s leading eCommerce Marketplace, today announced the launch of Global EasyBuy - The International Online Shopping Destination - which provides Indian shoppers with instant access to an unprecedented 18 million products. Global EasyBuy ( is aimed at redefining the Indian retail landscape and will provide savvy Indian shoppers access to the world’s hottest labels and coolest brands from the comfort of their home. <>


-Chloé Awarded $7.2M in Infringement Suit - A federal court on Friday entered a $7.2 million default judgment against a Los Angeles supplier after he failed to respond to an infringement lawsuit filed by Chloé. According to court documents, Mohammed Alexander Zarafshan, who did business as Alexander Zar, was aware of the 2006 suit and initially gave a deposition in the case, but never formally answered the complaint. A judge can enter a default judgment if a defendant fails to respond within a given time. <>


-Trovata, Forever 21 Settle Lawsuit - Trovata and Forever 21 have settled the lawsuit that Trovata brought against the fast-fashion chain alleging it willfully and intentionally copied its designs on seven garments in 2007. The settlement comes just as a second trial was set to begin in the case this Tuesday, Oct. 13. The companies have recently resolved their differences to their mutual satisfaction, without any admission as to liability, and the action has been dismissed. The terms of settlement are confidential. <>


-Chanel to Open Shanghai Boutique - Chanel is gearing up to make a splash in Shanghai on Dec. 3, when it will stage a fashion show for a luxury pre-fall collection and open an art-filled 5,160-square-foot boutique in the Peninsula hotel on the historic Bund riverfront promenade. <>

US Strategy - Earnings Season Looms

On Friday, the S&P 500 closed at 1,071, up 0.6% on the day.  Day five of the S&P 500’s rally as the momentum behind the recovery trade continued all week; volume was shockingly low. 


Last week the S&P rose 4.5% as the MACRO calendar provided some positive momentum.  The bullish tone stemmed from the ISM numbers on Monday and continued through Wednesday and Alcoa's relatively upbeat release into Thursday's better than expected jobless claims and retail reports.  The catalysts in the coming week will be comprised of major earnings reports, which include: top banks JPMorgan, Goldman Sachs, Citigroup, and Bank of America, report this week along with Google, Southwest Airlines, Intel, IBM, General Electric, and Johnson & Johnson.


Friday’s portfolio activity included shorting the XHB – the Homebuilders ETF.  We were the bulls on a Q2 housing turn last December.  Now Keith and I are getting cautious on housing in 1H 2010.  As rates head higher, access to capital tightening is not good for the early cycle home builders.  Additionally, without help from Washington the housing market is not healthy enough to stand on its own two feet and the $8,000 tax credit is expected to expire at the end of November.


The dollar index was up 0.7% on the heels of Ben Bernanke's comments after recovering from a 14-month low hit Thursday.  The VIX declined for the fifth straight day and is now down 14% over the past week. 

As of Friday, four of the nine sectors outperformed the S&P 500, with every sector positive except Consumer Discretionary and Energy.  The three best performing sectors were Healthcare (XLV), Financials (XLF) and Technology (XLK), while Energy (XLE), Materials (XLB) and Consumer Discretionary (XLY) were the bottom three.  We are currently long the XLV, which we would expect to be buoyed this morning by the announcement from Onyx Pharmaceuticals that they are acquiring privately held Proteolix for $810MM.


Today, the set up for the S&P 500 is: TRADE (1,051) and TREND is positive (991).   Day 1 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.         

Howard Penney
Managing Director


US Strategy - Earnings Season Looms - S P500


US Strategy - Earnings Season Looms - s pperf


US Strategy - Earnings Season Looms - s plevels


Blankfein's Bucks

“Study the past if you would define the future.”

No matter where you go this morning, there’s that Burning Buck consensus again. The #1 headline on Bloomberg is “Dollar Reaches Breaking Point As Banks Shifting Record Reserves Into Euro”…
That article, written by Ye Xie, was very well researched. Xie used the powerful weaponry of math and history. Some of his historical conclusions on US Dollar weightings as a percentage of total central banking reserves came from Barclay’s Steve Englander (former Fed Head), who concluded what we have for quite some time now – this isn’t about a “risk aversion” trade. Moving away from the Burning Buck is mostly about Global Asset Class Diversification.

The levered long glory days of US centric (US currency denominated) global financial dominance are over. Whether his name was Paulson and now Blankfein isn’t the point. The point is that Blankfein is going to be a revisionist historian and start telling the world “we never needed the money.” The problem with Wall Street storytelling, of course, is that until YouTube came along, there was no auditor!
These aren’t political points. They are credibility points. Study the past, and you’ll find that a country’s credibility will define her currency’s future. Mr. Blankfein, I know you are really smart, so be smart this week… and start acting like the accountable leader in US Financial Services that this country needs.
Studying the past is what Englander did, noting that in Q2 of 2009 that 63% of incremental foreign currency fund flows were allocated to buying Euros and Yen. Only 37% went to US Dollars. Going all the way back to 1999, the average share that the greenback would capture was 63%, and total central bank reserves held in US Dollars at the end of Q2 was 62.8%. Yes, per Englander’s math, that was the lowest level of US Dollar representation, ever.
Ever, by my math, is always a long time. In order to define ever, we have to study the past. In the Burning Buck’s case, we simply have to go back to 1971 (when Nixon abandoned the Gold Standard). That’s when the United States of America was benedicted with the almighty power of having a world reserve currency.
What did we do with that power? We levered it up at every turn. We bought into the Washington sponsored mantra of limitless credit creation whenever there was a sniffle in the performance of the “Next Warren Buffett’s” returns (Baron’s called Miller that before he lost 55% of his clients moneys in 2008).
So, when Blankfein reports crushing earnings this week and tells you that becoming a bank holding company was a “long time” pending, just remember two things: the Chinese are watching and the American people are watching. Neither of these massive creditors of US Currency Credibility Lost are as stupid as some of America’s financiers think they are.
Studying the past reminds us that building credibility takes a lifetime, and it takes no time to destroy. While I think that the immediate term TRADE for the US Dollar is Bombed Out,  I don’t see the credibility of our said financial leaders having changed one bit. Please, prove me wrong guys…
Last week the Burning Buck was down -0.90% to close the week at $76.30. That was a higher-low, and this morning we’re monitoring two levels in the US Dollar very closely to see if they hold:
1.      US Dollar Index YTD low = $75.77

2.      US Dollar Index immediate term TRADE resistance = $76.84

With the US Dollar broken across all 3 of our investment durations (TRADE, TREND, and TAIL), there is only hope that it can see a rally that gets it over the immediate term (3-weeks or less) line. Hope is not an investment process. And there isn’t a hope in hell that the US Dollar gets above the long term TAIL line of $82.67 any time soon. That’s the American financial history cross that we will, unfortunately, have to bear.
History now proves that there were no incremental buyers for US Dollars in Q2. Newsflash, there probably weren’t any in Q3 either! Some people, like the aforementioned bullish mean reversion mutual fund investor don’t understand that stocks, currencies, and commodities stop going up not when there are sellers, but when the largest holders stop buying them!
The immediate term risk in this morning’s US market open outruns the reward. This is only the second day in a row that I could say that. After trading up every day last week, studying the past reminds me that as long as the US Dollar doesn’t go up, everything priced in those Burning Bucks will have an opportunity to REFLATE. My immediate term risk/reward levels for the SP500 are now 1051 and 1081, respectively.
Best of luck out there this week,



EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

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.

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

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

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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