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Prentice Needed the Research Edge...

Now that my performance is back (I had a bad quarter in Q2 of last year -I was too bearish at the market top I guess), if I had a $100 for every time someone in the hedge fund business approached me to run money in "Consumer" land, I may not have as much $ as Prentice Capital has lost year to date, but I'd have plenty enough to fund the next leg of my firm's software development!

As most of you know, I used to be a PM in the hedge fund business, following Global Consumer. Michael Zimmerman, who runs Prentice, has been a competitor of mine since his days working for SAC Capital. Playing at the highest level, I think we both had pretty good runs since 1999. In the past few years, past performance has seemingly provided us both with the opportunity to start our own firms.

Past performance in this business is never a predictor of long term future returns, unfortunately. How hard you play the game doesn't always equate to winning it either. That said, I'm always up for a game, and I get up early.

Michael played tennis at Harvard, so I'd have to line up with my intern Jeff Dawson (Captain of Yale's 2008 Tennis team), if he wants to dance with me on clay. We hockey players are really slow when off the ice. I'd have to play 2 on 1 to even come close!

The market game is a different one however. There I'm happy to play head to head. I called the Morgan Stanley Retail Index out as a short in mid May (see attached, MVR Index), and it has since lost 24% of its value.

Looking at this article in section C1 of the WSJ, Jenny Strasburg has Prentice down -46% year to date, with "almost half of that drop happened during June as the value of the firm's stock and debt investments in retailers plummeted."

There is a winner and a loser in every trade. Mine, fortuitously, has been to leave the hedge fund community, take the short side on the industry, and build a global macro research process that is transparent and saves people money.

Maybe Prentice can become a client!

Play hard, and shake hands when it's over. This game is one of the best in the world.
KM

Scary Chart Of The Day: US Dollar; Going Lower...

Here's an outlook from a confidant of mine who manages 40% of the risk in the fixed income book of a major bond house...

KM
------
"Something is not making sense here"

There is a high probability that the US Government will back Fannie and Freddie. OK? But that doubles the debt...

Yet US Treasury rates are barely unchanged today and swap spreads are barely tighter...

The US Dollar not moving enough...

The "Trade" I see here is sell US Treasury rates, receive on UST swap rates in smaller size, and SELL the US dollar....

-The Bond Guy
(chart courtesy of stockcharts.com)

Volatility (VIX) up another +10%: Thanks Hank...

I've been hammering on why I think the VIX is in a bull market. We have "hammerin' Hank" Paulson's confusion to thank for this. This may be one of the worst performances in the history of the US Treasury.

At 28, the VIX is stair stepping towards my target range of 31-32. If the US stock market continues to crash the boards, that target will look very conservative.

Hedge Funds are blowing up. You will see that news hit the tape, after the fact, not before.

KM

(picture: http://www.finfacts.com/irelandbusinessnews/uploads/bushpaulsondec032007.jpg)

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The Great Capacity Squeeze

In my post yesterday, I noted that there was noise out of China that the government might ease the tax burden of Chinese exporters who have been crushed by rising wage costs, raw materials, RMB, etc... Based on another set of reports, it looks like that will happen as speculated. I learned some new facts in my research.

What did I already know? That 2,331, or 49% of the footwear factories in the Dongguan province closed over the past year. What I did not know is that there were another 7,500 in other industries that closed as well, making the tally about 16% of total plant count. My estimate is that about 4,000 were apparel. In addition, what spurred the government's action is its estimate that there will be another 10,000 factories close down over the next six months - even with their stimulus.

As noted yesterday, the magnitude of tax relief equates to about $0.45 on a $100 (retail) garment. When I account for the fact that just shy of 40% of our apparel is sourced in China, then we're talking about $0.18 in total benefit - or less than 0.2%. There's no way in my opinion that this comes close to offsetting pricing pressure we're going to see in '09 after another 3-4000 apparel plants close shop. This balance of power pendulum still has plenty room to swing. And it ain't in our favor. 2009 margins are going down.

The Street Out of Its Cotton Picking Mind?

Here's an interesting chart by my colleague Andrew Barber showing price/volume on NYMEX cotton contracts. Our key takeaway is how complacent this market has become. Volume = conviction, and the biggest volume days over the past 6 months were usually down price days. The market thinks that cotton prices are coming down. At 5-8% of the retail cost of the average apparel garment, the industry better hope that the market is right.

History Points To More Ugliness

Today's 4%+ comp numbers hide how bad things are in apparel land. While the numbers appear consistently bad with 6 out of 7 consecutive down months, they were down 13 months ending Nov 1991, and 16 months ending June '03.


Thank you Wal*Mart. You're the only thing that came remotely close to keeping the RTH's head above water today. The MVRX (a better gauge for the apparel retailers as it is equal-weighted) was down a whopping 3.49%. But with the help of a 5.8% ex-gas comp, WMT was ONLY down 80bps.

Were sales results bad? Yes and no. In aggregate they were actually pretty dang good - up about 4.5% with a 70bp acceleration in the 2-year run-rate. Yes, there was a lot of noise around weather, rebate checks and calendar. But overall, these numbers are not recession-like at face value.

But the bifurcation between sectors is very hairy. Discounters' comps are ramping meaningfully, which is largely due to food inflation, and to a lesser extent, the consumer trading down on discretionary items. But the department stores and apparel retailers were flat-out awful, with nearly every one missing plan.

Here's an interesting stat for you. Apparel comps are down 6 out of 7 months in a row at an average rate of 5.1%. Sounds big, huh? But we also saw negative comps for 16 months straight (March '02 'til June '03) at an average rate of 3.3%, and for the 13 month period ending November 1991 (avg 2.0%). I'd argue that the consumer is in worse shape today, and for the next 2 years, than in either of those periods.

I'm not holding my breath for this to reverse course anytime soon.

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