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Eye on Transparency: What's In Your Wallet?

While my morning macro research process entails going through private equity deals and/or deals being speculated upon, the proverbial well on this front has been running cyclically dry as of late. In order to fill the void, investment banks and asset managers have been friendly enough to replenish my notebook.

The problem is, of course, that these data points continue to be alarming. Consider the top 2 from this morning's news run:

1. UBS and Swiss bankers being issued a "John Doe Summons" in order to unearth Americans with "secret" banking accounts (i.e. Tax Fraud)??

2. Legg Mason "entering agreements to protect 3 money market funds"??

Without wasting any more keystrokes, I think you can come to your own conclusions on how dire the state of affairs has become in this country.

KM

The June ISM: Another Stagflating Report ...

No change in new orders; No change in the absolute level of 50 versus the May report. Prices paid inflated another +5.2% month over month however. Slowing growth as inflation accelerates = Stagflation.

You don't need a PhD in Economics from Yale to figure this out.
KM

Issuing A New Downside Target For The S&P500

As the facts change my models do. My short term target for the S&P 500 is now 1258. The US market "Trade" and "Trend" are both in a negative position. This is an ominous combination.

KM

(picture: http://www.americanbear.org/shared/images/homepage/black-bear.jpg)

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MASSIVE OMINOUS NUGGETT

Here's a nugget that gets me even more beared-up about footwear margins in 1H09. Chinese export data released last night shows that almost half of the shoemakers in China's Pearl River Delta closed shop in the first half. I repeat - they lost 2,331 producers out of about 4,750 (49%).

Government officials suggested a trend whereby the big got bigger, the smaller have sought out niche markets, and the middle ranks have been going away. Yes, capacity is consolidating, and we'll see more. Bad, obviously, for most companies doing business with them.

Another telling statistic is that 1.35bn pairs were shipped in the first 5 months of the year - a decline of 15.5%. That said, export dollars actually rose 9.4%. This is especially significant in that the dollar value of shoes sourced in the Guangdong province account for about $10bn US. Even if I assume that only a third of these are destined for the US athletic market, it still represents about 2/3 of the market.

Ok, so let's get this straight. Half of the capacity in the most important region for global footwear production has gone bust, and there was a subsequent 2,600bp gap in unit production vs. price (in US$). This brings me back to one of the themes in the footwear space that I've outlined quite a bit (see all of my earlier industry postings) - investors are not cautious enough on margins in this space.

Exhibit courtesy of Hong Kong Trader

VEGAS: A HOT SUMMER (FOR CUSTOMERS)

Judging by the new room promotion at The Venetian, demand for Las Vegas has cooled considerably. The Venetian is offering a room rate based on the forecasted temperature. I guess a Las Vegas hotel makes more money with that promo than say one in Thunder Bay, Ontario. However, a $100 room at one of the nicest hotels in Las Vegas is a hot deal for customers but chilling for investors. For patrons looking for a step up in quality, the Four Seasons is offering a free room with a 2 night stay. Hopefully, the Four Seasons Hotel Macao, Cotai Strip will do a little better when it opens on October 1st.

I've written extensively on the coming margin compression from room rate pressure so I won't rehash much here. See Mean Margin Reversion... posted on 6/22/08 and More Margin Context... also posted on 6/22. Suffice it to say that most of the big expansion in property level margins over the past 15 years was driven by room rate increases. The Las Vegas model aims to hold occupancies to drive casino visits. Not good for room rates and margins in this environment.

Goldman (GS): Short Against Lehman Long...

The levered long momentum investing community marked Goldman Sachs at and all time high of $247.92/share on the last day of their month on October 31, 2007. There is no irony in that date or pricing. What a difference 9 months makes.

While the stock is down -29% from that high, it continues to make lower highs on rallies, and lower lows on selloffs. If in fact the rumor mongers are right, and someone is looking to "take under" Lehman (LEH), Goldman would be on the short list of companies with the theoretical liquidity and currency to do so. If Goldman bids for Lehman, I want to be short GS.

I do not want to be naked long any brokerage stock. Long LEH, short GS (using a $176.86 stop loss).

KM

(chart courtesy of stockcharts.com)

Hedgeye Statistics

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

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%
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