prev

Slouching Towards Wall Street… Notes for the Week Ending Friday, November 6, 2009

The Efficient Regulator Hypothesis – The SEC Beats The Index Funds

 

He Hate Me – Mary Schapiro And The Extreme Regulatory League

 

And:

 

Brush Up Your Shakespeare – The Efficient Shylock Hypothesis

 

 

Value Proposition

 

It’s been a busy week for SEC Enforcement Chief Robert Khuzami.

 

It started when the CEO and the former Chief Compliance Officer of Value Line agreed to a settlement that will cost them $45 million and see them barred from the industry and from holding executive positions in public companies (4 November, SEC release 2009-234, “SEC Sues Value Line Inc. And Two Senior Officers For $24 Million Fraudulent Scheme”).

 

The SEC Order covers activity spanning the period from 1986 through 2004, during which time Value Line, as adviser to the Value Line Funds, ran a self-dealing bonanza called the “commission recapture program.” 

 

“Value Line arranged for one of three unaffiliated brokers to execute, clear and settle the Funds’ trades at a discounted commission rate of $.02 to $.01 per share.  Instead of passing this discount on to the funds, Value Line had the unaffiliated brokers bill the funds $.0488 per share and then ‘rebate’ $.0288 to $.0388 per share to VLS.”  This arrangement resulted in VLS receiving “over $24 million in bogus brokerage commissions.”  Please note that the scammers were paid substantially more than the brokers who facilitated these transactions.  A penny here, a penny there...

 

Here’s why we particularly like this outcome.  It shows Khuzami as a thorough and serious practitioner in the public sector, winning big settlements that actually make a difference.

 

Here’s why we don’t like this outcome.  Who on earth was responsible for auditing Value Line for the past 23 years?

 

The alleged activity started in 1986 and ran for eighteen years.  It did not take the SEC two decades to build its case.  Is there another allegation of massive SEC failure lurking beneath the surface?  Judge Rakoff (of whom more below) did well to reject the SEC’s rush to settle the B of A case.  We would be well served to see his insistence on full transparency applied across the board.  Indeed, it may be unavoidable.  We get the sinking feeling that the SEC has done nothing since the days of Arthur Levitt.  In Wall Street’s Monkey Years, that’s a long, long time.

 

 

 

Somebody Up There Hates Me

 

Does Mary Schapiro stare in the mirror each morning troubled by the thought that God might be out to get her?  It seems nothing short of divine orneriness that the first massive Enforcement case brought on her watch should be assigned to none other than Judge Jed Rakoff, who has already shown the Commission the back of his learned hand in the Bank of America settlement.

 

Here’s our theory on the BofA settlement: We give Schapiro credit for brilliant political maneuvering.  Realizing she could never force full clarity through the layers of political protections built up around Ken Lewis, Schapiro rushed through a clearly flawed settlement.  Knowing that Judge Rakoff would reject it, Schapiro stage-managed the political coup of the year by getting clarity forced upon the case, while continuing the tough political balancing act that brought her to this high position.  Fantasy, you ask?  Chairman Schapiro has been around a long time.  We wouldn’t put it past her.

 

Now, however, the stakes are significantly higher, and Chairman Schapiro may not be in a position to finesse this one.

 

There was much sound and fury at Friday’s press conference, with assurances of more arrests to come, and a highly articulate Enforcement Director Khuzami telling the world in no uncertain terms that the Bad Guys are on notice.

 

We think Khuzami is not the kind of Enforcement official to go off half-cocked.  Our immediate take on the Rajaratnam arrest was that Khuzami is too good to go public with anything less than a slam-dunk case.  The SEC, its credibility already shredded beyond repair, can’t risk a billionaire perp walk unless it’s a dead cert.

 

But as the saying goes, Man proposes, and God disposes.  And in the judicial lottery, God disposed the case that could make or break the future of America’s regulatory system into the hands of a judge who has a very noisy bee in his judicial bonnet over the SEC’s disregard for its own highest brief, which is to ensure the integrity of the marketplace.

 

In America, plaintiffs get two bites at the apple.  The ability of injured parties to bring both criminal and civil cases is an odd legal structure, not standard in the rest of the world.  It played well with OJ Simpson, who was not convicted in the criminal trial but was found against for substantial damages in the civil trial.  The higher standard of Reasonable Doubt in a criminal case is designed to protect against prosecutorial abuse, while the broader Preponderance of Evidence applied in civil cases protects the interests of the injured by bringing the jury’s decision down to common sense.

 

Enter the SEC, which has a mandate to keep the markets clean – in other words, to rout out criminal activity – but does not have the ability to bring criminal prosecutions.  Typically, the SEC teams up with the US Attorney’s office to run cases which are filed together, but prosecuted separately.  The criminal case generally precedes the civil case, for a number of reasons.

 

First, if a criminal conviction is won, or a plea bargain struck, that takes the bad guys out of circulation with immediate effect, and saves time and taxpayer dollars.

 

But there are tactical reasons for bringing the criminal case first, not the least of which is the extensive discovery process in a civil case, which enables the accused to see every shred of evidence that will be used against them, and gives defense counsel time to prepare.

 

One of the uglier outcomes of the SEC two-step occurs when the government loses the criminal case, and the Commission starts all over again with a civil case.  This is tremendously disruptive to the lives of the defendants who, having gone through months of grueling hearings where they spent millions of dollars on representation, now must start from scratch with a different standard of proof.  In addition, in order to fully prepare their case, the SEC often does not even bring the civil suit until many months after the criminal case is closed.  Defendants often have to cool their heels for a year in between winning in criminal court, and being dragged into civil court.

 

As far as batting average goes, the SEC is about a .500 player when it comes to insider trading.  This means it wins half the cases it brings.  It also means it loses half of them.  If we were looking for a lawyer to represent us, we would not settle for someone who lost half the time.  Why should the taxpayers have to finance this kind of performance?  And isn’t the most important marketplace in the world entitled to better? 

 

We think Congress must create clearer standards for insider trading, and give the SEC more resources to attack specific cases.  It is political cowardice to saddle a regulatory agency with a messy, unclear set of standards, then excoriate them for not winning more convictions – but then, cowardice is the bread and butter of politics.

 

We do not go so far as some who say that insider trading is a positive process, because it gets more information into the system.  We can’t take that position seriously – and we find it troubling that editorials masquerading as reportage have found their way into the pages of the mainstream press suggesting that insider trading is good for the markets. 

 

As just one example, the Wall Street Journal ran a piece in their weekend section (24 October, “Learning To Love Insider Trading”) that claims insider trading makes markets more efficient by getting the information into the price of the stocks in question.  This is linguistic legerdemain.  “Efficient” markets do not mean “better” markets, or “fairer” markets.  Rather, the Efficient Market Hypothesis posits that all available information is reflected in the price of a stock at any given moment.  But note that all information being “reflected” does not mean the stock in question is trading at the “right” price, but only at the price that all current buyers and sellers agree to.  At best, in market efficiency, the “real” price comes out eventually, but it can be a long-drawn process, which is why Market Efficiency looks best when paired with that other academic standard, Buy And Hold.

 

There has been a flurry of articles lately on the Efficient Market Hypothesis as a culprit creating the conditions precedent for the latest market meltdown.  It is true that the institution of the MBA and the PhD economist lend a patina of academic credibility to the business of buying and selling pieces of paper using other people’s money.  But it is a substantial reach from an academic paper by a Chicago PhD to the series of miscalculations, mistakes of fact, negligence in oversight, and occasional outright lies that connect a busted mortgage on a single-family home in Western Pennsylvania to the 40% decline in your 401K.

 

Market efficiency, then, does not guarantee fairness.  That is the job of our lawmakers and regulators.  Our market model is based on a guarantee of equal access.  If all available information is embedded in a stock’s price, then it is the job of the individual investor or analyst to tease it out and determine whether the stock is priced correctly.  Those who are better at understanding information will profit.  Those who use information not available to the rest of the marketplace violate a fundamental principle of the system.  The American capitalist model is predicated on fairness, and we believe we have the right to demand that of the System and its participants, as well as of the theoreticians who support that system. 

 

American capitalism, predicated on guaranteed opportunity, abhors the notion of guaranteed outcome.  Information that finds its way unnoticed into a stock’s price will yield a superior outcome – in the form of financial reward – for those able to identify it first.  In this form, the efficient market is like a vast field where we know there is a buried treasure.  If we all dig, someone will find it.  All who come with shovel in hand are willing to accept the risk that someone else may find the treasure.  Everyone has an equal chance of being disappointed.

 

Misappropriating corporate information is stealing the treasure before the official start of digging season.  We do not agree that insider trading adds to even a hypothetical form of Market Efficiency, as the information does not immediately enter the price of the stock.  It is not available to any normal means of accessing market information.

 

Those who argue that corporate information belongs to the corporation, that corporations should be permitted to define the parameters of treatment of such information, fail to take into account the fundamental point that market information belongs not to the company or its agents, but to the marketplace.  We should be leery of making intellectually feeble leaps such as tying the SEC’s defeat in the Mark Cuban case to the allegations surrounding Octopussy and his ring of informants.  Insider trading, of the type alleged in the current case, is not Fraud on Google, or Fraud on Intel.  It is Fraud on the Markets.

 

The integrity of our marketplace rests on disclosure.  The economics of the marketplace stipulate that a public company is worth more than a private company because of public availability of information.  We are all in favor of smart people outsmarting less smart people, whether in the form of algorithmic statistical arbitrage, high-frequency trading, or developing proprietary models to project earnings more accurately than the competition.  But it is dangerous to allow the misappropriating of information to be sold to the public as a Greater Good.  It is not.

 

We understand that the US Attorney’s office and the SEC had not yet fully coordinated their information, when they learned that Rajaratnam was planning to leave the country.  Fearing he had gotten wind of the pending indictment and was about to vanish, they nabbed him and perp-marched him out to the full complement of news media and TV cameras.

 

Playing their part in the legal minuet, the SEC filed their formal complaint along with the US Attorney.  In it, they referenced wiretap records which, because of the haste triggered by Rajaratnam’s arrest, they had not yet seen.  Figuring they would run the standard give-and-go, the SEC assumed the US Attorney would start with the criminal case, giving the Commission time to backtrack and fill in the blanks.

 

But then along came Judge Rakoff and said in essence, you filed your case, now bring your case.  This seems to have thrown the SEC team for a loop.  It appears they tried to get a stay, entering into a convoluted deal with the defendants’ counsel wherein the defense would petition the court for a 90-day continuance, in return for which the SEC would share the wiretap information with the defense.  Judge Rakoff didn’t go for that either.  As of this writing, both the US Attorney’s criminal case, and the SEC’s civil case are set to go forward. 

 

Adding a further level of complexity is the sheer number of individual scams alleged.  The SEC’s case indicates that many roads lead to Galleon, but a significant number completely bypass the hedge fund and its employees.  It will be a tough prosecutorial balancing act to keep all the players in the courtroom, and there is always the risk that a setback in one case might lead to the unraveling of others. 

 

One thing is for sure: there is no regulatory, legal or legislative structure that can prevent bad people from doing bad things.  Both the Value Line case and the metastasizing insider cases revolving around Galleon include key participation by those designated as guardians of the system. Compliance officers and lawyers lie at the heart of these massive fraud allegations, which reaffirms the verity that our system needs both a robust framework, and robust enforcement.

 

Judge Rakoff has thrown down the gauntlet to the SEC.  What’s at stake is nothing less than the credibility of our marketplace, and the SEC’s ability to guarantee that credibility.  If the SEC stumbles along, plays .500 ball, and comes up with a slapdash settlement, based on hasty legal work, the country and the markets will be the worse for it.  For those who, like Harry Markopolous, have stated that the SEC “should die,” this will be a good outcome.  For those who believe the SEC is a necessary entity that needs a serious retooling, it would be devastating to see this high-profile case go by the boards.

 

The game is on.

 

We think Khuzami is the man for this job.  He is plenty tough.  He spoke highly of his legal team and, given what we know to be his standard for performance, he may not be exaggerating.  We think Chairman Schapiro, for all the political pressure she has to deal with, is putting together an admirable team.  For the sake of our markets, we sincerely hope the new SEC Enforcement team will be equal to the challenge.

 

 

 

Hail, Mary!

 

The SEC has announced its new head of the New York Office of Compliance Inspections and Examinations (3 November, Release 2009-231, “Norm Champ Named Associate Regional Director For Examinations In SEC New York Regional Office”).  Norm Champ will be taking over the Commission’s highest visibility compliance examinations position, and we are delighted that Chairman Schapiro has snagged such an outstanding executive for this job.

 

Champ’s academic credentials include Princeton (summa cum laude), a Fullbright Scholarship at King’s College, London, and a Harvard law degree (cum laude).  He left the law firm of Davis Polk & Wardwell to serve as General Counsel at Chilton Investment Company, a major global hedge fund operator.  This is a real win for the Commission.  Champ brings to the job a world-class mix of background, experience and operating knowledge of the markets.  Like his predecessor in the job, Tom Biolsi, Champ has the operating knowledge of the markets to know where the Commission should be looking – and where they should not be wasting their resources.  We even suspect Mr. Champ may have the intestinal fortitude to push past the bureaucracy and actually get things done.  We applaud Chairman Schapiro on this appointment. 

 

With hires like Robert Khuzami, and now Norm Champ, Chairman Schapiro gives us reason to hope that the SEC may one day be able to do its job.  Talk about leveling the playing field.

 

 

 

Brush Up Your Shakespeare

 

O, what a goodly outside falsehood hath!

                   - Shakespeare, “Merchant of Venice

 

The Wall Street Journal featured Yale economist John Geanakoplos (3 November, “Crisis Compels Economists To Reach For New Paradigm”) whose work focuses largely on the nature of collateral, a critical yet under-studied component of the financial marketplace.  The article attributes Geanakopolos’ focus to an insight gained from reading Shakespeare’s “Merchant of Venice”, which is focused on “collateral, with the money lender Shylock demanding a particularly onerous form of recompense if his loan wasn’t repaid.” 

 

Professor Geanakoplos’ work appears to be vitally important to the current economic debate, and we hope it will be brought out of the lecture hall in included in a meaningful way in future discussion.

 

But the article got us musing.  For “Merchant” holds more fundamental and broad-ranging messages for America today.

 

“Merchant of Venice” and “Othello” are Shakespeare’s only plays set in Venice.  In Shakespeare’s intellectual world, the Republic of Venice enjoyed a fabled status, along the lines of an idealized New York City.  It was a free city-state founded on principles of commerce.  It guaranteed equal treatment of its citizens and equal access to its financial markets, business and international trade.

 

In both of his Venetian plays, Shakespeare tests the limits of the ideal society’s tolerance by planting in their midst – and in a role as savior of their way of life – an outsider who is foreign to their culture in every respect.  Both Shylock and Othello are culturally, racially, and religiously foreign to their adopted city.  When the clash of cultures erupts Venice, rather than stay true to its stated principles, reverts to a base type and crushes them both.  Both plays are about the clash between policy and reality, about what happens when a society’s legal protections are put to the test in an existential crisis. 

 

To quote a line variously attributed to Henry Louis Gates, Jr. and H. Rap Brown, “When white folks say “justice’, they mean “just us white folks’”.

 

 “Merchant”, once a staple of high school literature classes, has fallen on hard times because of misplaced political correctness.  But the failure to engage on difficult social phenomena such as racism is the surest guarantee they will be perpetuated. 

 

A serious reading of the play shows Shylock to be the most flexible and fascinatingly protean character in the Shakespeare canon.  There is literally no wrong way to depict Shylock, and the character has been played to great success as a hero, a villain, a clown, a tragic figure, a man of noble spirit, a conniver, a Moses-like lawgiver, a dastard, and a fool.  Even a cursory study of Shakespeare’s life and times reveals that his own Catholic family suffered religious persecution at the hands of England’s then-dominant Protestants – indeed, his wife’s cousin was publicly executed for being a Jesuit.  Hardly the recipe to turn the subtlest observer of human nature into a bigot.

 

Shakespeare’s misunderstood masterpiece has much to teach us today, as our society transitions from a bastion of equal opportunity to a Goldmanocracy.  The promise of equal treatment and equal access was written on a piece of paper that is becoming increasingly inconvenient in the current environment.  We look for it soon to be declared irrelevant.

 

America is The Forgotten Man.  Our money is out of money.  Our markets are out of credibility.  Our political system is rotten.  Washington sends flu vaccine, not to our schools, but to Goldman Sachs.  Our Treasury Secretary, like a stockbroker who has just wiped out his best customer, begs the world to “give us one more shot.”  Washington pumps trillions of dollars to Wall Street, which proceeds to pay all-time record bonuses.  While true unemployment ramps up to 17%, Washington masks reality with bogus statistics like “jobs saved.”  The newsmedia, instead of cogently revealing all this for public debate, are a hate-mongering shriek-fest, and we increasingly suspect that our next door neighbors are stocking weapons in their cellars.  When we are come to pay our pound of flesh, shall we be required to deliver it wrapped in the Constitution? 

 

If you prick us, do we not bleed?

 

Moshe Silver

Chief Compliance Officer

 


The Boot Heat Map

If there’s one category that is clearly resonating with consumers (i.e women) it’s boots.  For the first time in almost 5 years, the commentary surrounding fashion boots this early in the selling season has not been more positive.  To be fair, retailers started hinting at a possible trend beginning in late July, but the business really started to take off this past month and is setting up well for the remainder of the year.  While it is sometimes challenging to discern between general commentary on the category and specifics, one fact is clear.  The current trend is being driven primarily by women’s fashion boots while at the same time cold-weather/seasonal product is also off to a solid start. 

 

It’s too early to make a weather call on the entire season, but early sell through on functional cold weather product is a big positive for margins and ASP’s.  Ultimately a strong boot season should bode well for most that have material exposure to the category.  Importantly, boots carry higher ASP’s, which is especially meaningful when comping against last year’s aggressive promotional activity. 

 

For better perspective on what the boot category has meant historically, we took a look at 5 years worth of commentary on the topic.  Bottom line, it’s been a while since boots were hot and we can’t ignore one of the few product trends in all of retail that has a chance to really drive some upside. 

 

 

The Boot Heat Map - Boots  1 11 09

The Boot Heat Map - Boots 2 11 09

 

 

Eric Levine

Director

 

 


Chart of The Week: Volume Vanishes...

Like Roubini and Houdini, the bearish side of this market’s daily trading volume has vanished. The short sellers of everything Great Depressionista may be out of supply on the buy-to-cover side of the US market. It has been a long 9 months of short covering. October 2009 may very well have signaled the crescendo.

 

In the Chart of The Week that Matt Hedrick and I put together you’ll take away two very important points:

  1. The SP500 selloff from its YTD high (1097) came on accelerating daily/weekly volume studies
  2. The SP500 rally from its most recent higher-low (1036) came on decelerating daily/weekly volume studies

While volume is only one factor in our multi-factor risk management model, it’s a critical one, particularly when combined with price momentum.

 

Provided that volumes remain light on the up moves, and the SP500 fails to make a higher-YTD-high versus that established on October 19th, 2009, the probabilities continue to heighten that the YTD highs for 2009 are in.

 

Fully realizing that the SP500 is trading up a +1.3% at 1083 today, my risk management process still leads me to make this call.

 

“You’ll miss 100% of the shots you don’t take”

-Wayne Gretzky

 

Keith R. McCullough
Chief Executive Officer

 

Chart of The Week: Volume Vanishes...  - Houdini

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

MCD - SOME ADJUSTMENTS NEEDED

MCD’s headline numbers look better than real underlying trends.

 

MCD reported October same-store sales this morning and headline numbers look better than real underlying trends.  Global comparable sales grew 3.3%, with the U.S. -0.1%, Europe +6.4% and APMEA +4.7%.  According to MCD’s press release, “In October 2009, this calendar shift/trading day adjustment consisted of one less Wednesday and one more Saturday compared with October 2008. The resulting adjustment varied by area of the world, ranging from approximately +1.0% to +1.7%.”

 

Relative to my sales preview note (please refer to my November 6 post titled “MCD – October Sales Preview”), reported U.S. numbers look NEUTRAL and Europe and APMEA look GOOD.  Even adjusting for the positive 1% to 1.7% calendar shift, Europe and APMEA’s numbers would still fall within the sales ranges that I outlined as GOOD as it would signal a return to the 7%-plus 2-year average levels MCD has experienced for the greater part of the year in both segments.

 

In the U.S., adjusting for the calendar shift, same-store sales trends came in BAD relative to the ranges I provided in the preview.  Either way, same-store sales declined for the first time since March 2008.  Two-year average trends declined sequentially by 90 to 125 bps, depending on the magnitude of the calendar shift impact in the U.S (1% - 1.7%). 

 

For reference, this calendar shift will reverse when MCD reports November same-store sales trends on December 8 so November headline numbers will look worse than the actual underlying trends.

 

MCD - SOME ADJUSTMENTS NEEDED  - mcdusa

MCD - SOME ADJUSTMENTS NEEDED  - mcdeursss

MCD - SOME ADJUSTMENTS NEEDED  - mcdamp


US STRATEGY – Burn Buck Burn

US STRATEGY – Burn Buck Burn

 

The S&P 500 has been up for five days in a row, rising 0.3% on Friday.  While a weaker-than-expected October employment report pressured the market early on, although the S&P 500 spent most of the day around the unchanged level.  

 

Friday’s nonfarm payrolls fell 190,000 in October vs. consensus expectations for a 175,000 decline; there was a net upward revision of 91,000 for the prior two months. In addition, the average work week held at a record-low 33 hours. The unemployment rate rose 40 bps to a 26-year high of 10.2%, fueled by a 589,000 drop in the household survey following declines of 785,000 in September and 392,000 in August.  The positive news came in the form of a better-than-expected 0.3% increase in average hourly earnings and a 34,000 gain in temporary employment.

 

At this stage of the current cycle the labor market is widely expected to be a longer-term recovery overhang, which will be the economic factor allowing the Fed to keep interest rates at all time lows and money free.  This Burning of the Buck has the perverse implication of strengthening U.S. equity markets, to a point.

 

Last Friday the VIX fell 4.9%, now falling for the fifth straight session.  In the past week the VIX fell 21.2% after spiking nearly 38% two weeks ago.

 

The three best performing sectors were the Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB).  The XLI outperformed, with the bulk of the strength coming from GE, which benefited from the sell-side getting more bullish.  The Transports also seemed to benefit from the recent decline in oil prices. 

 

The Consumer Discretionary sector was up due to stronger retail names.  Bank America upgraded the home-improvement retailers LOW and HD, while JPMorgan upgraded Macy’s.  AMZN also benefited from an upgrade at Bernstein. The second best performing name was SBUX on the back of better-than-expected 09Q4 earnings and 2010 guidance. The housing stocks were higher after Credit Suisse jumped on the bandwagon.

 

The worst performing sectors were Utilities (XLU), Energy (XLE) and Financials, all three sectors were down on the day.  The Financials were the worst performing sectors although it was up big on Thursday.  Consumer credit trends and the worse-than-expected October employment data seemed to be the biggest concerns, especially as it relates to the timing of a peak in the write-down cycle.

 

Today, the set up for the S&P 500 is: TRADE (1,065) and TREND is positive (1,030).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 6 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 

 

The Research Edge Quant models have 1% upside and 3.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up, with the U.S. Dollar down versus most major currencies.  We will be selling the strength domestically.  The Buck Burning is good, to a point.

 

The Research Edge MACRO Team.

 

US STRATEGY – Burn Buck Burn - S P500

US STRATEGY – Burn Buck Burn - s pperf


RETAIL FIRST LOOK: THE VOLUME/PRICE TRADE OFF

RETAIL FIRST LOOK: THE VOLUME/PRICE TRADE OFF

November, 9 2009

 

 

TODAY’S CALL OUT

 

 

Risk/reward is looking ugly for the market. There is a bifurcation in retail. Food/Staples, Multi-line Retail, and Apparel looking particularly bad. Sporting Goods, Home Improvement, and to a lesser extent Auto Retail is looking safer.

 

Earnings season for the market in aggregate, is over, and ‘Macro Time’ begins.  This is when it gets fun. Unfortunately, the near-term setup does not look good. Check out Keith’s Early Look this morning – 3.5% near-term downside and only 1% upside – not a good risk reward. One of the key call outs is recent strength in the market on eroding volume statistics. Since volume = conviction, this too, is not good. Let’s translate this to retail, as there are clearly massive overlays.

We break out every publicly-traded retail stock into separate sub-industries – think of it like a broader view of the MVRX.  What we see is that the weighted price change for retail is strengthening while volume is rolling over.  A couple notables by sub-industry…

 

1. Negative Call Outs

  •  
    • Food and Staples Retailing: Volume eroding on relative strength.
    • Multi-line Retail (incl Dept Stores): Sequentially eroding volume over 1-day, 1-week and 3-week with strengthening price.
    • Apparel/Accessories and Lux: Similar to Multi-line, though not quite as severe.

2. Positive Call Outs

  •  
    • Sporting Goods/Athletic Specialty: Sequentially improving volume across durations on price strength.
    • Home Improvement: Same.

 

Pick your spots wisely as the year draws to an end.

 

 

LEVINE’S LOW DOWN

Some Notable Call Outs

 

  • Late Friday it was announced that RadioShack/The Shack will begin selling the IPhone in select locations in the Dallas and new York City regions beginning later this month. In 2010, it is expected that the IPhone will be sold chainwide. While this has long been rumored, it is somewhat curious that the news was relayed late on a Friday with little fanfare. Ultimately this is likely to be a positive for The Shack, but it probably does mean market share losses for others already peddling the coveted device. With 4,470 stores, there likely few if any markets that don’t already have access to the IPhone.

 

  • In the most expensive retail real estate transaction in New York City since November 2008, an investment group purchased the retail square footage of the St. Regis hotel on 5th Avenue for $117 million. The purchase price equates to $4,737/square foot for the 25,000 square foot space. Whether the overall commercial real estate market remains to be seen, but the mid-town location is said be amongst the highest cost per foot retail spaces in the country and perhaps across the entire globe.

 

  • Just hours after Adidas dropped its sponsorship of UCF because Michael Jordan’s son wore Air Jordans in a game, a Facebook boycott has emerged. The Facebook Group, “Boycott of Adidas after they dump UCF over ONE pair of Nikes”, now has 386 members. It seems like this negative publicity is on track to cause Adidas far more damage than the $3 million the company is saving by cancelling its UCF partnership. Yet another reason why companies and brands must stay on top of the latest social networking trends.

 

 

MORNING NEWS 

 

2 IPOs planned for the week of Nov 9 - Dollar General, a KKR-backed small-box discount retailer with 8,700 stores in 35 states, plans to raise $750 million by offering 34,100,000 at a price range of $21.00 to $23.00. At the mid-point of the proposed range, Dollar General will command a market value of $7,672.40 million. Dollar General, which was founded in 1939, booked $11,127 million in sales over the last 12 months. The Goodlettsville, TN-based company plans to list on the NYSE under the symbol DG. Citi, Goldman Sachs, and KKR are the lead underwriters on the deal. Rue21, a value-focused teen fashion retailer with over 500 stores in 43 states, plans to raise $115 million by offering 6,765,437 at a price range of $16.00 to $18.00. The Warrendale, PA-based company plans to list on the NYSE under the symbol RUE. BofA Merrill Lynch , Goldman Sachs, and J.P. Morgan are the lead underwriters on the deal. <renaissancecapital.com>

 

Global Cotton Subsidies Grow in Year - Global support to the cotton industry, including direct subsidies, border measures, crop insurance subsidies and minimum support price regimes, more than doubled in 2008-’09 to $5.9 billion compared with $2.7 billion in 2007-’08, with more than 50 percent provided by the U.S. Bernard Hoekman, World Bank director of international trade, told a forum of World Trade Organization diplomats and experts last week that total U.S. support to cotton production increased to $3.1 billion in 2008-09, up from $888 million in 2007-08, or an equivalent of 50 cents per pound of production. <wwd.com>

 

Wal-Mart kicks off DVD price war; looks to open 40 new stores in India - Just as shoppers are getting closer to their peak holiday shopping days, Wal-Mart Stores Inc. this week escalated the online price war it set off last month with books, offering pre-ordered DVDs priced at $9.98—down from list prices close to $30—and free shipping at Walmart.com. Amazon.com Inc. and Target Corp. countered with their own, slightly less generous, offers on their e-commerce sites. Wal-Mart Stores Inc, the world’s largest retailer, plans to open 40 more cash and carry stores in the country, the Commerce and Industry Minister, Mr Anand Sharma, said here today. In India, Wal-Mart has a wholesale joint venture with the Bharti Group. The first wholesale store was opened in Amritsar on May 30 this year. <internetretailer.com> <indiaretailing.com>

 

Designer Dresses Available Through Netflix Model - For many women, a $1,000 dress is something they admire in the pages of a glossy magazine or see draped on the frame of a celebrity — not an item hanging in their closet. But a nascent Web site called Rent the Runway is hoping to make high-end fashions much more accessible and almost as easy as renting a movie from Netflix. The mail-order service, which finishes the testing phase on Monday, allows women to rent dresses from notable fashion designers like Diane Von Furstenberg, Hervé Léger and Proenza Schouler for roughly one-tenth of what they would cost to buy in a retail store. The rentals run $50 to $200 for a four-night loan and are shipped directly to the customer’s doorstep. <nytimes.com>

 

Judge Approves Fred Leighton Purchase - A bankruptcy judge has signed off on the sale of Fred Leighton to a group of investors that includes former Barneys New York principal Bob Pressman and jewelry firm Kwiat Enterprises. The approval paves the way for the $25.8 million deal to close this week. Kwiat, Och-Ziff Capital Management Group and Pressman’s Triton Equity Partners submitted their bid for the jeweler last month with the backing of Merrill Lynch, Leighton’s largest creditor. Fred Leighton Holding has been in Chapter 11 proceedings since April 2008, when then-owner Ralph Esmerian filed for protection to halt an inventory auction sought by Merrill Lynch. <wwd.com>

 

China's Non-wovens and technical textile industry bounces back - Despite a decline in exports due to the financial crisis, industry adjustments, government action and product innovation has kept China's textile industry solvent in the first half of 2009. Entering 2009, China's macroeconomy showed some improvement, including an expansion in the scale of loans and an increase in the purchasing managers index (PMI). The Chinese government increased the ratio of tax refunds on exported textiles and apparel by three times and introduced a series of structural adjustments and revitalization plans for textile industries. These policies have stimulated China's textile economy, which at midyear appeared to be bouncing back. Compared with other parts of the textile industry, nonwovens and technical textiles are recovering more quickly. <fashionnetasia.com>

 

Luxury products no longer being manufactured in Europe - Just as the US leather goods manufacturer Coach manufactures in China and India, Calvin Klein subcontracts in Asia: Tommy Hilfiger and Ralph Lauren polo shirts are sewn in Indonesia. Amongst the Italians, Prada has some of its leather goods made in Turkey and Armani outsources in Eastern Europe and China. The British Burberry company makes its raincoats in the UK but its T-shirts in China. Businesses in the US and the Italians do not have any problems recognizing that they manufacture in other countries. Foreign manufacturing is tending to accelerate especially in prêt-a-porter and accessories. However, for the French this topic is very taboo. <fashionnetasia.com>

 

U.S. Opportunity for Foreign Luxe Firms - The U.S. market still has untapped potential that European luxury goods companies could unlock in their quest for growth markets. So says a research report published Thursday by investment house Bernstein, arguing the U.S., thanks to its sheer size and favorable demographics, provides an “attractive, if not straightforward” opportunity for European luxury companies in the short and medium term. The U.S. luxury market is worth around 44 billion euros, or $65 billion at current exchange, and remains a large fixture on the global luxury landscape, although it presents challenges such as a dispersed resident population, reliance on wholesale distribution and consumers’ appetite for discounts. <wwd.com>

 

Global Retail Rollout for Justin Timberlake’s William Rast Label The brand has launched an aggressive global retail expansion. The premium denim and contemporary sportswear brand, cofounded by Timberlake and his friend Trace Ayala, unveiled its fusion of a Hollywood lifestyle with Tennessee roots in three California stores that opened Nov. 1, heralding the launch of 40 to 50 units by 2012. <wwd.com>

 

La Perla to close nine brands - Italian lingerie firm La Perla is to rationalise its brand portfolio and lower prices in a move it claims will boost its market share. La Perla is to close lingerie and swimwear brands Malizia, Glamour, Anna Club, Aquasuit, Joelle, The Black Label, Limited Edition and Bridal from autumn 10. The La Perla brand portfolio will comprise three brands; La Perla, La Perla Studio and the newly launched Villa Toscana. Villa Toscana forms part of La Perla’s strategy to focus on cosetry with modern twists including laser-cut lace. The Villa Toscana range draws its inspiration from La Perla’s archives and includes pastel colour palettes and flower patterns on innerwear, beachwear and loungewear. <drapersonline.com>

 

Victoria's Secret Opens Sprawling Flagship on Broadway - Victoria’s Secret has amplified its presence on Broadway in SoHo with a new 24,000-square-foot flagship, nearly five times the size of the store it’s replacing one block south. That space will be entirely devoted to Pink. The flagship had a soft opening on Friday. The space for the VS flagship at 591-593 Broadway was assembled by putting two retail properties together: 593 Broadway, formerly a 16,000-square-foot Lounge boutique, and an 8,000-square-foot Eastern Mountain Sports unit at 591 Broadway, in a deal said to be worth more than $100 million. <wwd.com>

 

Burberry Launches Social Networking Site - Burberry will today unveil its own social networking Web site, Artofthetrench.com, an homage to the brand’s trenchcoat. According to creative director Christopher Bailey, the Burberry site is not commercial, but is aimed at engaging the brand’s fans and tapping into their passion for trenchcoats, old and new. <wwd.com>

 

 

INSIDER TRANSACTION ACTIVITY:

 

VLCM: Rene Woolcott, Director, sold 20,000 shares for a gain of $332k.

 

NFLX: Michael Schuh, Director, sold 600 shares after exercising options to buy 600 shares for a net gain of $33k.

 

GPS: Marka Hansen, President-Gap Brand, sold 18,800 shares after exercising options to buy 18,800 shares for a net gain of $164k.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next