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Slouching Towards Wall Street… Notes for the Week Ending Friday, October 23, 2009

Special Halloween Edition


Monkey Mind – The Zen Of The Financial Markets


Out Of House And Home – Washington Plays Both Ends Against The Middle


Funny Money – Why The Bifurcated Dollar Just Might Matter



Trick Or Treat! – Slouching To The Parade In Search Of Bernie Madoff





Zen masters describe a phenomenon called “Monkey Mind” – the human propensity to grab indiscriminately everything that enters our field of perception and ascribe importance to it.  Our central nervous system, a reptilian throwback, is exquisitely tuned to attribute life-or-death importance to anything new.  Monkey Mind doesn’t let things go, but concocts elaborate back-stories for the most meaningless of events.  The process happens in an instant, but its effects can last a lifetime.  Indeed, they are usually transmitted across generations as prejudices, political and social attitudes, and religion.


Monkey Mind learns nothing from experience and demonstrates clearly the difference between Content and Information.  It grabs at everything in a panic and, since it never knows what is really going on, it experiences tremendous hope, and deadly fear.  This makes human beings perfect customers and explains the success of generations of stockbrokers and politicians, as well as the behavior of the stock market.


Writing in the Wall Street Journal (27 October, “Efficient Market Theory And The Crisis”) Wharton Professor Jeremy Siegel leaps to the defense of the Efficient Market Hypothesis – the theory that all available information is, at all times, embedded in all security prices. 


Professor Siegel lists several factors that contributed to the recent implosion in the financial markets: regulators believed the banks were properly assessing credit risk, and making corresponding offsets; credit agencies and banks relied on flawed risk models; and the markets had been lulled into a sense of security because of, among other things, academic studies showing that first mortgages were incredibly safe.  He also mentions the distinction between the partnership model and the public company, or shareholder model of the financial firm and argues that risk levels were different when senior partners had substantial skin in the game. 


Indeed, EMH models should be updated to account for the fact that senior managements of both corporations and financial firms care far less than they used to about shielding their shareholders from risk, now that they do not have to.  Indeed, by promoting Too Big To Fail into a protected class, the current Administration gives the force of law to management neglect of shareholder interests.


Allow us to introduce The Efficient Monkey Hypothesis.


The Hypothesis says: we know that people, left to their own devices, will destroy the system.  This manifests in wars, environmental disasters, genocide, market meltdowns, and a host of other human-created disruptions which cyclically repeat throughout history.  In the financial markets, this has led to tearing down the regulatory protections in order to let the rich get richer.


Now, instead of reinstituting a firm barrier between different functions which properly require different risk approaches, the Obama Administration proposes a Systemic Risk Regulator who will have a secret TBTF list.  Shareholders and customers of a bank will not be entitled to know that their institution is deemed TBTF, which seems to violate SEC disclosure rules – though we don’t much like the SEC’s chances of forcing the hand held by Geithner and Bernanke.


Permit us, once again, to flog our dead horse.  Perhaps we should say, our dead monkey? 


There are risk, audit and compliance professionals in the industry who have had great success at identifying problem areas, creating programs to prevent problems from arising, and convinced management to undertake such programs.  Note that, to succeed as a compliance professional, you really need to do all three. 


The systemic risk oversight function can be handled only by people who know risk when they see it.


Our hypothesis is that there exist Efficient Monkeys – people who, through trial and error, persistence, orneriness, or just plain dumb luck, have come to understand significant bits of the workings of the financial system.  We have flogged this monkey repeatedly, recommending that the only way to pursue the SEC’s program of cleaning up the industry is to set loose teams of people who have caught the bad guys before.  The fact that the SEC can not launch such a program is a clear indication that actually cleaning up the industry is not an agency priority.


Teams of Efficient Monkeys should be deployed throughout the system, headed by a Chief Monkey – someone like Paul Volcker who has proven his ability to grab and hold onto all the bananas that really matter.  If there is to be a Systemic Risk Regulator, it should be staffed by people who have effectively managed risk – not by academics and career politicians.

Our screed of two weeks ago was headlined “Market Crash Anniversary Edition,” since it ran on October 19th.  One reader wrote in that he had seen only one other media mention of the anniversary.  Indeed, we wonder how many readers even got the reference.  In historical terms, 1987 was not that long ago.  But in Monkey Years, it never even happened. 


Those who fail to learn the lessons of history are… no different from anyone else.  Let’s get teams of people who have proven they are not monkeys and put them to work saving this system before it’s too late.




Out Of House And Home


NY Times chief financial correspondent Floyd Norris blogged last week (http://norris.blogs.nytimes.com/ 28 October, “A Tale of Two Markets”) about the squeezing of the middle class homeowner.  At 38%, the spread between average home prices and the median price – the midpoint in the overall price range – is the highest it has ever been.  This means that both cheaper homes and higher-priced ones are now selling better than they have been, but “those between $200,000 and $400,000 are getting the lowest market share in years.”


Norris thinks “the recovering stock market may have provided more courage (and cash) for those in the higher-end market.”


We think this points to a looming reversal of trend and ultimately, a radical redefinition of The American Dream.  Underlying both pricing in residential real estate markets, and the structure of residential mortgages, is the pattern of people selling a home after 5 years.  Non-fixed rate residential mortgages generally come with a rate reset within the 5-7 year window.  We leave it to historians of mortgage finance to determine whether the bankers espied a broad social trend and adjusted their financings accordingly, or created a financing system that would drive turnover, churning home buyers for origination fees and financing resets.  Needless to say, neither homebuilders nor realtors would have any argument with families being all but compelled to buy a new house every five years.


The pattern, the expectation – the Dream – has always been to trade up.  Whether seeking more square footage, in-ground swimming pools, a better school district or improved access to major urban centers, generations of Americans would never have dreamed of trading down.  Until now.


Washington has rammed through initiatives with reckless lack of concern for the effect on the broadest part of their constituencies.  Trillions of dollars in gifts, loans and guarantees have been thrown at the richest people and institutions in America.  The financial bail-out of financial institutions that were recklessly mismanaged has given the stock market a shot in the arm and enabled banks that would be out of business, but for the bailout, to pay out record bonuses.  All at the expense of the Dollar. 


The Dollar is a contract, based on the world’s agreeing to what it is worth.  (See our next item for a Halloween Fright Night scenario on what that might mean.)  Underpinning the contractual value of the Dollar is the credibility of its ultimate backing.  It’s an odd thing that, as our credibility sinks to generational lows worldwide, the cost of things priced in America’s credibility go up.  This implies that the world understands the American political system is totally corrupt and will sell itself in a heartbeat to the highest bidder.  The world has walked away from the Dollar, but not from things priced in dollars – because the financial marketplace is the domain of the Highest Bidder.  As the credibility of the Nation sinks, the credibility of the plutocracy is reaffirmed.


Observers and well-informed cynics of all stripes have long recognized that we live in a bifurcated society.  This latest housing data is another indication that the Middle Class – always courted, generally abused, inevitably disappointed – are being pulled apart, further widening the gap between the Haves and Have-Nots. 


The term Middle Class no longer means what it once did.  Distinctions of education and career choice no longer define, as today’s middle class comprises everyone from plumbers to physicians.  Washington cares not a whit that helping the wealthiest at the expense of the middle – not to speak of the bottom – has a powerful trickle-down effect to stoke class resentment.  As the gap in housing prices widens, taking with it the upside in home ownership that has long been seen as every American’s birthright, resentment will trickle across the middle, until there will no longer be a Middle.  Of such trends is home-grown social unrest made.




In God We Trust – All Others Pay Cash


The Almighty Dollar – how are the mighty fall’n! – leads a double life.  Appropriate to the Halloween season is the description of the Dollar traveling the world in disguise.  The Wall Street Journal (28 October, “Globally, The Greenback Remains King”) describes the dollar’s not-so-secret life outside this country’s borders.  Currently there is something like one trillion dollars physically in circulation world wide, and an estimated 75% of the physical dollars in circulation are outside of the US. 


One thing not mentioned in the Journal piece is the current value of counterfeit dollars in circulation.  We know that it has been substantial in the recent past – in the 1990’s people claimed the Russian Mafia printed better $100 bills than the US Mint.  These bills were put to liberal use paying off stock promotion scams during those years.  Unlike the global black market in legitimate US currency, this high-quality counterfeit currency was smuggled into the US.  We have no way of knowing how much of it continues to circulate domestically. 


It is our understanding that black market money changers generally know which bills not to take.  We suspect the same may not be true of US money-center banks.


US authorities have a history of giving low priority to certain offshore tax havens and their resident banks.  Our government recently went after the Swiss banks in an all-out assault, while certain island nations in warmer climes did not appear on the radar at all.  When the Swiss bank confrontation was in full kerfuffle, we observed that the Swiss held tremendous levels of dollar deposits, but had failed to support those same dollars by using their reserves to buy US Treasurys.  At the same time, other jurisdictions offering a reasonable degree of secrecy (including numbered accounts, the use of nominee names and the outright refusal to disclose to US tax authorities the existence of accounts), were being ignored.


The US appears to be comfortable with a certain amount of black marketeering and money laundering, as long as it goes on in the right place, and as long as the banks hold a sufficient percentage of their reserves in US Treasurys.  Meanwhile, the global stability of the paper dollar rests on a convergence of factors. 


One factor is rigid exchange controls in many countries whose currencies do not travel well.  Countries mentioned in the article include Nigeria, Vietnam and Venezuela, none of which has a currency in current contention to replace the Dollar as the world’s reserve.  Artificial exchange rates, pegs, and other forms of manipulation create arbitrage opportunities between what a government says its currency is worth, and what the world says it is worth.


Currencies are relative prices.  The relationship between the Dollar, the Venezuelan Bolivar and the Euro tells us at any given moment what the world thinks of the liquidity, stability and overall safety of each geopolitical entity.  Exchanging your local currency for dollars on the black market, and paying higher than the official exchange rate, says you think your government is lying.  For the money changer, dollars are worth the premium because they have a liquidity and transferability the local currency lacks.  Black market currency dealings represent unfettered capitalism.  And, as sharp as one needs to be not to get cheated, robbed or killed, it doesn’t take a genius to figure out that, if your government won’t let you buy something the whole rest of the world wants, you can make money selling it.


At one end of the spectrum the street dealers, back-alley money changers swap fistfuls of local currency for tourist dollars.  Tourists spend the local currency in restaurants and hotels, in taxicabs and in the stores where they load up on clothing and trinkets to bring back home.  When they leave, the shopkeepers and hotel owners and taxi drivers head back to the money changers and swap their local currency back into dollars as the only reliable liquid store of wealth. 


At the other end, where dollars move internationally, there are more barriers.  It is an odd disconnect.  In the world of legitimate bank transactions, the amounts of physical dollars held offshore are considered insignificant.  Trillions of dollars move electronically in global banking and financial market transactions, supplemented by the trillions of value recorded at deposit-taking institutions, and on the books of central banks, sovereign wealth funds and other government institutions. 

Street changers and merchants feel the pinch from a declining dollar, and occasionally they tighten their markets, rather than take losses on their holdings.  But the black market cash handlers quoted in the Journal article tend to remain optimistic about their trade.  The consensus appears to be that nothing will replace the dollar any time soon. 


But when it does?  We don’t know when global economic events will force the disconnect between international banking and back-alley money changing to reconnect, but like any other market, it must surely be subject to sudden, unexpected and game-changing disruption. 


Nigeria, highlighted in the Journal, recently embarked on two bold initiatives.  One is the direct sharing of oil revenues with the Niger Delta, where rebel groups have for years disrupted oil production in their efforts to force the government to share oil revenues with the local population.  This proposal is fraught with political problems, including objections from other regions that want an equivalent deal, and the resumption of hostilities if the deal takes too long to put together.


Nigeria also is readying some $10 billion in corporate bond issues (Financial Times, 22 October, “Nigeria Poised For Push Into Corporate Bonds”).  It is a safe bet that, if open warfare resumes in the Delta, the country’s corporate debt will not be as attractive to outside investors.  Rather than become a leader of African economic development, a Nigerian setback would have broad-ranging implications for its neighbors.


US policy makers would do well to consider that upheaval in a shadow economy always leads to unrest.  The global dollar black market supports substantial portions of the world’s population who either trade the dollars themselves, whose livelihood is tied to cash transactions in dollars, or whose life savings have been converted from illiquid local currency into dollar bills.  The people of the United States have taken the bank bailout lying down and have been all too willing to allow the government to rob the poor to pay the rich.  People in other parts of the world may not be so acquiescent.




Jailhouse Rock


I got myself in a terrible situation. It’s a nightmare.

          - Bernie Madoff


In what must have been a quiet week for news, the Financial Times could come up with no more timely and compelling lead story than “Madoff ‘Amazed’ At Escaping 2006 Check,” (31 October/1 November).  Those who have read the SEC Inspector General’s report on the string of failures surrounding the Madoff matter already know the details of this story.  The “news” – as reported by our colleague Michelle Leder in this weekend’s Footnoted posting (“Friday Night Lights”) snuck some six thousand pages of Madoff-related filings into the public record by posting them in the late window – the SEC filing window stays open for 90 mnutes after market close.  We think companies that post their filings at the last minute on a Friday generally don’t want to call too much attention to themselves.  From what we have seen of the Madoff case, this shoe probably fits the SEC.


Among the items filed was a transcript of a jailhouse conversation with the SEC Inspector General in which Madoff said he was “worried every time” the SEC audited his operation, because his scam was “basic stuff”.


Anything else going on with Bernie that we might want to hear about?


Reports filtering out of the Butner Federal Correctional Complex paint an odd picture of Madoff’s new life.  An article posted in the Orthodox Jewish website Vos Iz Neias? (21 October, “Court Documents Reveal Madoff’s New Friends”) describes Madoff’s late-night walks around the exercise yard, and says he spends a fair amount of time socializing with former Mafia Boss Carmine Persico and Jonathan Pollard, imprisoned for passing US intelligence information to Israel.


It is not clear whether the three of them hang out together, or whether Bernie alternates between the other two.


We tried to envision the movie that will one day be made of these chats.  Sort of an End Of Days version of “My Dinner With Andre”. 


Also of note in SEC Inspector General Kotz’s jailhouse interview with Madoff was the mention of one William Ostrow, an SEC examiner whom Madoff called “an obnoxious guy.”  Madoff recounted that “Ostrow wore an SEC jacket with the word ‘enforcement’ emblazoned across the back,” which “caused an uproar” in the office.  Madoff saysOstrow was so confrontational that they almost came to blows.


For those who doubt he could handle himself in a fight, Bernie has shown ‘em what Madoff is Made Of.  The New York Post reports (13 October, “Bernie’s Bruising Battle – Over Stocks!”) Madoff came out the winner in his first prison-yard scrap, touched off by a heated debate over – yep – the stock market.  When Madoff’s 60-something opponent shoved him, the former NASDAQ Chairman tore into him with both hands, flooring him and then towering over his cowed attacker, “red-faced and glaring.”  Madoff, reports the Post, “paid a consultant for a crash course in prison culture and survival tips” before going into the slammer.  Looks like that was money well spent – though we wonder whose money it was.  Perhaps the prison survival instructor will be clawed back. 


Tough though he might be, Bernie may be on his last legs.  Madoff has confided in fellow prisoners that he is suffering from advanced cancer and doesn’t have long to live.  The Post reported (2 September, “Bernie ‘Dying’ In Jail”) that Bernie has become a New Age celebrity in the slammer, being courted by numerous gangs and buddying up with the prison’s gay posse (the Post hastens to assure us “the relationships are purely platonic”).  The facility also houses a Native American group, and Bernie has been a regular participant in their prayer services and purification rituals, which include him sweating bare-chested over burning hot rocks and smoking a peace pipe.


This sounds like just the kind of place the new crop of hedge fund managers will want to hunker down for the next couple of decades.  We hear Raj has already put in dibs on a bunk down the corridor.  Kind of makes us think of summer camp.  Or maybe boarding school.  You know – Lord Of The Flies.


By the way, the New York Times (12 October, “Trick Or Treat: The Madoff Halloween Mask”) reports that Rubie’s Costume Company came out with a Bernie Madoff Halloween mask in time for this week’s holiday.  We watched the Greenwich Village Halloween Parade this year, where we saw several Michael Jacksons, tons of Roman Gladiators.  Superman and Batman were there in profusion, as was Wonder Woman.  We even spotted Waldo.  All these were mixed in among a rain-soaked flood of people dressed in black, their faces made up in death-white and liberally spattered with blood.  It looked like a cross between an Oakland Raiders fan fest and a Fellini film.  But we didn’t see a single Bernie Madoff.


Still, Rubie’s, the creator of the mask, said they sold out their initial run of 15,000 Bernie Madoff masks in the first week they were on the market and were gearing up to produce more.  There’s no denying it – we do love our rogues. 


Slouching Towards Wall Street… Notes for the Week Ending Friday, October 23, 2009 - bernie


Trick or treat!




On Friday the UUP, which is the etf for the U.S. dollar index, was up 0.6%, putting the dollar back above the TRADE line.  As a consequence the S&P 500 got smoked closing at 1,036, down 2.8% on the day.  The S&P 500 has closed down four out of the five trading days last week and closed down 4% on the week. 


On a thematic basis last week’s decline was due to a move out of riskier assets and those sectors levered to an economic recovery and the U.S. Dollar underperformed the most; Financials, Energy and Materials were the worst performers last week. 


The return of the risk trade was more obvious, as the VIX rose 23.9% on Friday and 37.8% last week. Given the strength in the economy it’s rational to expect a slightly more hawkish tone out of this Wednesday's FOMC meeting. On the MACRO front, the Chicago PMI improved to 54.2 in October from 46.1 in September, ahead of consensus expectations of 49 and the highest level since September of 2008.


On Friday, the Financials were the worst performing sector, after posting their biggest one-day rally since July 13th the day before.  Life insurance companies and rumors about CIT and other riskier names were the big pressure points.  This morning CIT officially opted to seek court protection via bankruptcy.  Common stock holders will be mostly wiped out and the U.S. Treasury Department has indicated they won’t recoup much, if any, of their $2.3BN investment.   The lender funds roughly 1 million businesses (including some professional hockey teams!), so arguably this resolution may lead to loosening of credit, on the margin.


Capital markets activities softened last week as IPOs performed both poorly and, in the case of AEI, were postponed.  Both RailAmerica and Select Medical, which are private equity portfolio companies, reduced their offerings.  While AEI, which is a former unit of Enron, pulled it’s offering entirely.  With $4.2BN of private equity sales in the pipeline, there looks to be a future overhang of stock on the market and on private equity portfolios alike.


On Friday, Material (XLB) and commodity equities also underperformed with the dampened momentum surrounding the economic recovery theme and the accompanying strength in the dollar.  In the energy sector, E&Ps suffered their biggest one-day loss since June 22nd.


The three best performing sectors were Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU); all three sectors were the relative outperformers today with the defensive rotation in the market.  Although, it should be noted that all of sectors were down on the day. 


Today, the set up for the S&P 500 is: TRADE (1,031) and TREND is positive (1,021).   The Research Edge quantitative models have 6 of 9 sectors in the S&P 500 positive on TREND and 0 of 9 sectors are positive from the TRADE duration.  Materials, Financials and Utilities are all broken on both durations.  This is the first time since March 2009 that any sector was broken on both durations. 


The Research Edge Quant models have 2.5% upside and 0.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up small to the upside. 


The Research Edge MACRO Team.






Retail First Look: CIT??? Focus on Banker Bonanza

Retail First Look: CIT??? Focus on Banker Bonanza

November 2, 2009





I’ve had three emails thus far today asking for insight on CIT bankruptcy. Please excuse what may come across as a flippant comment, but any retailer that gets caught up in CIT going under is just flat-out irresponsible.


The filing noted $71 billion in assets and $64.9 billion in debts, with Bank of America as the largest of 100,000 unsecured creditors (BAC alone is owed $7.5bn). Bank of New York, the second largest unsecured creditor, is owed $3.2 billion. The next 75 unsecured creditors total about $35bn. Bank exposure is off the chart, while Retail exposure is minimal – which is a meaningful change from when these concerns first crept up in July.   Here’s an excerpt from our July 17th report on the topic that is important to revisit…


People are asking all the wrong questions about CIT - it's not about direct exposure to CIT - but rather derivative exposure to a) the small, non-public companies that will be hurt, and 2) the private equity portfolios that will be pushed to brink.

With CIT on the ropes, we're getting barraged with speculation related to which companies have exposure to CIT financed receivables.  In addition to the work we're recently published, there are a couple of facts to consider before making broad generalizations...

  1. According to the American Apparel and Footwear Association, 60% of the factoring volume in apparel/footwear is exposed to CIT. Yes, this is a scary number at face value.
  2. But it's smaller than one might think when put into context. CIT disclosed that in 2007 its factor exposure to the footwear industry was $2bn. We also know that this is a $60bn industry at retail, or which about $35-$40bn is wholesale (here the exposure lies).
  3. Stronger companies with exposure to CIT have been shifting away from CIT over the past 3 months as they played offense given what was coming down the pike.
  4. These 'exposure' numbers thrown around are annual. Yet we should be thinking of them as a snapshot in time - and a snapshot in time taken at the beginning of summer, when working capital needs in this area of the supply chain are low.

One of the most important points we can't forget is that CIT operates BOTH a factoring business and a commercial lending business.  Some larger companies, including GIII, have revolving credit agreements that include CIT as part of their lending consortium.  However, this is quite different than having CIT as a "factor".  Factoring is a transactional based process which is conducted on an invoice by invoice basis.  In general, it is not cost effective for a larger company to use CIT for this service.  With that in mind, CIT has 300,000 small and medium sized customers of which the majority are producing annual revenues of $10m or less.

What does all this add up to? There's no company-specific call as it relates to individual exposure to CIT. But where the juice lies is related to 1) the rate of bankruptcies of small, non-public companies, and 2) the private equity hangover.  The first point is pretty simple. The second is more complex.

What do I mean by pe hangover? Take a look back over 4 years at all the LBO transactions in retail. These were done when cost of capital was falling, and halfway decent ideas made millions for Average Joe Private Equity Guy. Now private equity firms are saddled with many weak businesses that are barely profitable - and that's before paying interest expense in a rising cost of capital environment.  So what does this all add up to? We need to drill down on the portfolio of each major private equity player to assess the domino effect.  For example, Leonard Greene owns Sports Authority, PetCo and part of Whole Foods. If PetCo goes punk, then there's less of an appetite to invest in TSA, which ultimately raises the prospect of filing for protection. The derivative play would be a positive one for Dick's in the case of TSA, and PetSmart in the case of PetCo.  These are just illustrative examples, but I think you get the point.


This also plays into our ‘Banker Bonanza’ theme, which we outlined on our 4Q Themes and Outlook call on Friday. Please let us know if you did not get a chance to participate and would like to.




Some Notable Call Outs


  • There are two new players entering the hot growth category of online only, limited time sales.  Saks Fifth Avenue is now offering limited time offers on its website while popular newsletter, Daily Candy is launching SWIRL.  Both sites aim to mimic the success of Gilt and Rue La La. 


  • Zeta interactive is a research firm which monitors the mention or “buzz” of retailers across a wide range of social media sites and blogs.  According to the firms latest study, Amazon.com was the most positively mentioned e-commerce site, with a whopping 96% of all references polled coming in positive for the month of September.  Target and Wal-Mart rounded out the top 3 on the list.


  • Aside from using Twitter as a way to broadcast marketing messages to customers, Best Buy is using it to enable its workforce to answer customer questions and concerns.  Since July, Best Buy’s “Twelpforce”  has added 2,100 employees to its network that responds to customer Tweets (over 12,000 so far).  A quick check of Twelpforce website shows that consumers are extremely active in looking for product advice as well as technical tips (and impressively all requests are confined to 140 characters or less!).





-Sanofi-Aventis to Acquire Oenobiol - Sanofi-Aventis said it would acquire Laboratoire Oenobiol, the French maker of nutritional, health and beauty supplements. Terms were not disclosed. Founded in 1985, Oenobiol has annual revenues of 57.2 million euros, or $84.8 million at current exchange. Eighty-five percent of its business is generated in France, with the rest stemming from countries such as Italy, Spain, Belgium, Poland and Portugal. The deal is expected to close in the fourth quarter of this year. <wwd.com>


-China’s Exceed in Talks to Buy, Partner With Overseas Brands - Exceed Company Ltd., a Chinese sportswear company that began trading in the U.S. this year, is in talks about acquiring or partnering with brands to sell in the world’s most populous country. The company makes mid-priced sportswear, shoes and accessories under its Xidelong label in China and will use the proceeds from its U.S. listing to expand in the world’s most populous country, Lin said. It plans to add about 2,200 company owned and franchised Xidelong-brand stores through 2011 to the 3,400 now operating. New brands would be sold through their own single-label stores. <bloomberg.com>


-EU: Anti-dumping shoe tariffs engender disharmony among Member States - The EU Member States are gearing up for a tough round of discussions in upcoming Anti-Dumping Committee meetings, especially the one planned for 19 November 2009, with the proposal of extending a 15-month anti-dumping duties on Asia footwear ranking high on the agenda. The  existing rates anti-dumping duties on footwear with leather upppers from China and Vietnam are 16.5% and 10% respectively. Despite that fact that global footwear retailers such as Adidas, Puma, Sebago and Timberland all said to oppose the extension of duties, the Member States are likewise fiercely divided, with the usual leading protectionist Member State, namely Italy, pushing for the measures. <fashionnetasia.com>


-Walmart.com leads in e-commerce traffic growth - Walmart.com saw a 10% jump in traffic last month compared to a year earlier, Nielsen reports. Verizon Wireless, however, saw the biggest traffic growth increase for the month. Its traffic rose 14%. Once again, eBay and Amazon battled for the No. 1 slot in terms of traffic to retail sites for the month. In September, Amazon beat eBay with 51.51 million visitors. EBay posted 50.61 million unique visitors. <internetretailer.com>


-Estée Lauder Posts Profits of $140.7M - The Estée Lauder Cos. Inc.’s fiscal year got off to a strong start, leading the company to raise its guidance for the rest of the year. Cost cuts helped push Lauder’s first-quarter profits up more than 175 percent, beating the beauty firm’s expectations. Lauder registered profits of $140.7 million, or 71 cents a diluted share, on a 3.7 percent decline in net sales to $1.83 billion, helped by the sell-in of new products and gains in travel retail. Selling, general and administrative expenses for the quarter ended Sept. 30 fell more than $161 million, or 12.3 percent, from a year earlier. <wwd.com>


-In Brief: Jenna Lyons Awarded $1M Cash Bonus - Jenna Lyons, creative director of J. Crew Group Inc., has been awarded a one-time cash bonus of $1 million in recognition of her service to the company. She would be required to return the full bonus if her employment with the firm ends before Oct. 27, 2011, and half of it if she were to leave between that date and Oct. 27, 2013, unless the separation were a result of termination without cause or departure for good reason, as defined by her employment contract. J. Crew has weathered the recession better than many of its specialty store competitors and this month raised its third-quarter guidance by about 50 percent, to a range of between 54 cents and 59 cents a diluted share. <wwd.com>


-Kidswear most resilient sector in recession - Kidswear has been the most resilient clothing sector during the recession, according to a report from market analyst Verdict. The report also said that the closure of Woolworths late last year released £250m of market share for competitors. The largest growth in market share has been seen by the supermarkets and value retailers such as Asda, Tesco and Primark. 

Verdict estimated that the kidswear market will be worth £4.63bn in 2009, down 0.1% on 2008, whereas the clothing market as a whole is estimated to drop 0.6% in 2009. <drapersonline.com>


-Louis Vuitton, Gucci Tap New Japan Chiefs - Both Louis Vuitton and Gucci have made some management changes at the helm of their Japanese businesses. Frederic Morelle, the former head of Vuitton's business in Latin America and South Africa, became president and chief executive of Louis Vuitton Japan as of Oct. 13. <wwd.com>


-Vuitton Opens Dallas Flagship at NorthPark Centre - Louis Vuitton is making a grand statement with its new flagship in NorthPark Center here, and not just because it’s the brand’s biggest store in the city and the first to carry watches. The airy space features a two-story glass wall that faces the serene formal garden in the middle of the mall. It’s the first store to make the most of its proximity to the 1.4-acre park, which transformed a former parking lot when the mall expanded three years ago. It’s also one of only three U.S. stores to feature a significant work of art, a sinewy bronze sculpture called “Suitcase in Exile” commissioned from French artist Vincent Dubourg. <wwd.com>




RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): XLY, ROST


10/30/2009 10:18 AM


Re-shorting Howard Penney's view on the US Consumer Discretionary stocks. The sector is finally broken, from an immediate term TRADE perspective. KM


10/30/2009 10:28 AM


McGough and Levine are going to discuss this short thesis on their Retail Strategy call at 11AM. Shorting green here today. KM




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


  • Friday's losses were felt across all retail sectors on positive volume for most, leaving every sector negative across all three durations with the exception of internet/catalogue and family footwear retailers who are the only positive sector on the 3-week.  Apparel, accessories and luxury goods and food and staples performed better than the market while family footwear and sporting goods underperformed.  Food and Staples stands out on the negative side with losses accelerating on each duration supported by strong volume. 
  • HAR, APP, and DFZ are the only stocks that have positive gains across all three durations, each is supported by volume.
  • After spending three weeks on the list of worst performing retailers, APP has been making gains on positive volume across all sectors to be one of three stocks to be positive on all durations with volume confirmation.   
  • TBL stands out as the best 1 week performer after beating earnings expectations. 
  • The worst looking stocks from Friday are ZLC, DDRX, FLWS, CHRS.  The top 9 worst performing stocks of Friday all had strong volume.   
  • CONN and CWTR are significant underperformers on all three durations with positive volume.  These two stocks have been at the bottom of retail for at least two weeks. 
  • Keep an eye on CROX heading into earnings on Thursday.  CROX flashed negative on all 3 durations with volume support. 

Retail First Look: CIT??? Focus on Banker Bonanza - 1


Retail First Look: CIT??? Focus on Banker Bonanza - 2

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The Macau Metro Monitor. November 2, 2009



UNEMPLOYMENT DOWN 0.1% macaudailytimes.com.mo

For the July-September period, the unemployment rate decreased by 0.1% to 3.7%.  Information released by the Statistics and Census Service also stated that Total labor force was 328,000 during the same period, with the employed population decreasing by 3,000 from the previous 316,000.   The real estate and business, hotel, and restaurant industries all registered increases in employment.  Gaming registered a decrease.





China plans to convert a sparsely populated island next to Macau into an international tourist and technology hub.  Officials have revealed that they want the population of Hengqin to go to 200,000 by 2020 from 4,000 today.   Commentators have welcomed the move to attract a different type of tourist to the region.  Business development manager if architectural firm Arquitectonica, Courtney Davis, was stated as saying, “Unlike Las Vegas, Macau is not a family place. Hengqin could offer other forms of tourism, like theme parks and hiking.” 




An update on LVS’ IPO has cited documents and emails sent to investors as sources for details on the upcoming listing.  Sands’ share sale may be 25% bigger than what president Michael Leven had indicated in July.  Pricing of the shares will be fixed on November 19 and trading may start November 30. Documents sent to investors also stated that the company is selling an unspecified number of shares equivalent to a 15% stake in its business in Macau and that the funds will be used to repay loans.





Las Vegas Sands Corp said its Four Seasons apartments in Macau had drawn interest from Japanese and South Korean buyers.  In May, Sheldon Adelson stated that the company was pursuing “public or private” options to boost liquidity and included the sale of the Four Seasons apartment hotel as a possibility.  During a conference call last week, Adelson and president Michael Leven indicated that contact has been made with a “number of people in Japan and Korea” regarding a possible deal.





Pascal's Extremes

“Two extremes: to exclude reason, to admit reason only.”
Blaise Pascal was one of the most influential mathematicians of the 17th century. He is most commonly known for his contributions to mechanical calculators, but his work on the arithmetic of triangles still finds its way into our investment meetings here in New Haven.
Pascal’s Triangle is of interest to risk managers because it really provides a basis for measuring probabilities. Our Gaming guru, Todd Jordan, doesn’t come down to my office to play online poker, but Pascal’s conclusions were actually born out of his friend’s interests in gambling problems.
Pascal died at the age of 39, but left this world “in search of the truth.” This, unfortunately, had him go off the deep end of religion from time to time, but at the end of the day, I do respect his quest for making people accountable using Geometry. I can’t imagine today’s Washington/Wall Street listening to him any more than they do Paul Volcker. Stick the math guys in the corner and let the storytelling politicians suck the oxygen out of the room.
The science of mathematics isn’t trivial. Whether it’s a Pascal binomial coefficient or today’s dominating global macro inverse correlation embedded in the price action of the US Dollar, it’s all one and the same. Impossible to refute, after the fact.
Friday’s smack down close of the SP500 (down -2.8% on the day) came on another breakout to the upside of the US Dollar above my immediate term TRADE line of $76.20. Call it alchemy. We math guys just call it the math. REFLATION trades led the market lower (Financials -4.7%, Basic Materials -3.6%).
On the week, the Bombed Out Buck closed UP for the first week in the last four. For the week, the US Dollar was up +1.1%, and virtually everything priced in Dollars was down. On a week-over-week basis, here was the math associated with giving the Buck a Bid:

1.      SP500 -4%, Nasdaq -5.1%, Russell 2000 -6.3%

2.      CRB Commodities Index -3.6% (Oil -4.3%, Copper -2.6%, Gold -1.5%)

3.      Volatility (VIX) +38%!

Again, we know what happens when the US Dollar goes up. There is no need to be extreme about this in any way. Being too bullish when the Dollar is down can hurt you as much as being too bearish when the Dollar is up. We want to avoid being extreme Macro strategists right now. People who missed both the crash and the recovery are being plenty extreme enough. We simply want to watch the US Dollar and make risk management moves accordingly.
Some would argue that last week’s down move in the US stock market was extreme. The math supports that claim. It was the worst week for US equities since May. Others, who either “exclude reason” or “admit reason only”, will have you believe they timed this perfectly and have had this right all along.
Alan Abelson at Barron’s is  a fantastic writer, but his extreme bearishness is as predictable as the sun rising in the east. Right on time, he titled his weekend missive “Going to Extremes”, and went on to quote one of the Depressionistas, David Rosenberg, saying things like “if companies, both financial and non-financial are big believers in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists so excited… why are they still cutting back…”
These guys are funny. They think that they are the only analysts of this American Gong Show to “admit reason.” Sorry guys, Howard Penney and I haven’t been extreme about anything other than not shorting the lows and getting suspiciously quiet at the YTD highs. Reasonable analysts understand that these GDP prints are not going to be sustainable. Your opinions are much further from unique as your missing a +62% stock market move was.
Another extreme view was issued this past week by Bill Gross at PIMCO. I have learned a great deal from this great investing mind over the course of my career, not the least of which is that great players can be wrong. Gross wrote, “my sense is that nominal GDP must show realistic signs of stabilizing near 4% before the Fed would be willing to raise rates.” How convenient for Gross – he runs some of the world’s largest bond funds!
Extreme and self perpetuating views fuel the art of writing about and managing money. After all, the art of managing money Mr. Gross, is having money to manage, right? Since Rosie, Abelson, and I will all agree with your view on the un-sustainability this US economic recovery, should we keep rates for our citizenry at ZERO and create the last mother-load of a bubble in US Treasuries? I’m sure your asset management fees will perform well in that scenario.
I don’t want to be on the sell side or the buy side of extremes unless extreme circumstances call for it (September 2008). Those extremes are usually revealed by the math. It doesn’t have to be Pascal’s, but I’ll surely ask for his model’s mathematical outputs before I start asking for those of perceived Wall Street sages.
In terms of US equities, I have maintained my low exposure. US Equities has the lowest invested exposure in our Asset Allocation Model at 6%. I am long US Healthcare (XLV) and Utilities (XLV), and short the higher beta Consumer Discretionary etf (XLY). I have immediate term TRADE levels for the SP500 of 1031 and 1065, respectively.
Best of luck out there this week,



 EWZ – iShares Brazil
President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

 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.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. TRADE and TREND bearish.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

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.

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.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is finally broken, from an immediate term TRADE perspective.

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

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.

Research Renegades (Bloomberg Cover Story)

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