Slouching Towards Wall Street… Notes for the Week Ending Friday, November 20, 2009

Cookie Monster On The Economy – Me Like… Recovery!!!


He Who Sees No Bubbles – That Not Good, Keemosabee


And: Goldman Apologizes.  Goldman Gives Back.  Goldman Cancels Christmas Party. 



The Shape Of Things To Come


This week Sesame Street celebrated its 40th anniversary.  Jim Henson, creator of the Muppets, is no longer with us, but he lived to see his handiwork change the world in ways television’s earliest proponents dreamed of.  Odd though it may seem now, television’s pioneers were of mixed emotions regarding the new medium.


Edward R. Murrow, the father of broadcast journalism, crossed over from radio to television with trepidation, fearing that the medium would stifle the imagination.  Still, early visionaries saw this invention as a tool that would educate the world.  CBS producer George Crothers created the weekly program Lamp Unto My Feet which, through its dramatizations and scholarly discussions, promoted religious understanding and tolerance.  The year was 1948, and tolerance was in short supply.  The next year Paul Tripp launched Mr. I. Magination, a weekly show that encouraged children to use their imagination and learn about the world.


Now we honor Sesame Street, a spiritual descendant of Tripp’s efforts to use television to stimulate children intellectually.  Sesame Street exemplifies all that is best about television.  It has taught generations of kids to spell and count, and has helped them to encounter a diverse world without sacrificing their own unique identity.


Speaking of the letters of the alphabet, here’s a group of people that could use an education.


We continue to be barraged by an alphabet soup of economic forecasts.  First there was the V-shaped recovery.  Then the concern of a double-dip recession led to the W-shaped recovery.  Some economists think the trough will last longer and the recovery lead off slower, leading to a U-shaped graph.  Others – not forecasting a double-dip, but less sanguine about the strength of the recovery – think the recovery will be L-shaped.


Into this mix, we would like to introduce the letter that says it all.  Today’s economic crisis is brought to you by the letter Q.  Indeed, we are calling for a Q-shaped recovery, in which the markets get pulled back into the endless cycle of boom, bust and Ponzification, while wealth keeps escaping out the tail, being siphoned off to the Usual Suspects. 


The average investor – which is most people in the world with cash in their bank account and a roof over their head – will be buffeted by the ups and downs of the market, spurred on by the self-dealing of the professionals who exhort them to buy each new investment product.

National governments will rush clunking down the corridors of power like knights in thousand-pound suits of chain mail, swinging the crushing mace of excess regulation at the marketplace, a weapon that lands with devastating force, though always wide of the mark.  Within three to five years after the consensus of Wall Street, Washington and the press announce themselves satisfied that the situation is under control (think “Mission Accomplished”) fresh bubbles will burst worldwide, sowing civil unrest and massive economic hardship.


It may pay to meditate on that next bubble – which neither governments nor financial pundits will successfully predict.  We do not yet know where it will originate, but the world it roils will be changed substantially from the world we saw trampled as we entered into the current bubble a mere two years ago.


By the time the next bubble pops, China will have reached an accommodation for its massive holdings in US Treasury debt.  This may take the form of forcing the US to establish a floor valuation for the dollar.  Secretary Geithner recently came out swinging – rhetorically, if not actually – in favor of a strong dollar, and his single biggest customer may decide it’s time for him to put up or shut up.  Our currency is, to use an unfortunate turn of phrase, no longer worth the paper it is printed on.  This is lost on no one.  Indeed, the more one’s wealth is tied up in dollars, the more painfully one recognizes this.  We foresaw the Fed sitting on its hands while other nations rushed in to prop up the dollar, for fear their own currencies would appreciate into crisis, and this has been happening everywhere but China. 


China and the US are locked in a Mexican standoff over the value of the yuan.  The Chinese will not stand down and have called us out on the obvious fact that the US has engineered the mother of all carry trades with our combination of a weak dollar and negative interest rates.  The Financial Times reports (20 November, “Short-Term US Interest Rates Turn Negative”) this week’s Treasury issue saw bidders pay a premium, meaning the buyers will actually give money back to the Treasury when these bills mature in January.  The inevitable result of this is that the Fed is beggaring-thy-neighbor into a global round of forcing everyone else to bail us out.


By the time the next global crisis strikes, the Chinese will have resolved this disequilibrium.  This may be as simple as forcing the US back onto the gold standard, or by making us acknowledge the dollar to be a Basket Case, and having the dollar pegged to a basket that includes the Yuan, the Euro, the Brazilian Real, and IMF Special Drawing Rights.  The consensus today appears to be that the dollar will not remain the world’s source of liquidity forever, but also that it is in no imminent danger of losing its place.  We think a transitional arrangement might evolve.  Clearly, the Chinese would push for one that will give them increased leverage as they continue to hold onto their Treasurys, meanwhile closing out those other pesky currencies like the Yen and the Ruble.


There is also the possibility of serious civil unrest in China, as those dissatisfied with their government’s policies grow bolder.  The error the West made in its analysis of Tiananmen Square was the self-satisfied notion that the Chinese wanted to be like us –where what they really wanted was the freedom to be like themselves.    


A Wall Street Journal Opinion piece (20 November, “The China President Obama Didn’t See”) claims there may be over 100 million Chinese practicing a secret form of Christianity, driven underground by their refusal to hew to the official policy that prohibits evangelizing and, of course, protest.  Christianity may be one of the most important hotbeds of a nascent protest movement.  The Journal piece says that “dissident intellectuals have been attracted to Christianity” as more and more “well-educated city dwellers turn away from Communist Party atheism.”


While we believe this will act as a destabilizing force in Chinese society, we caution against anyone thinking the embrace of a Western faith will draw its Chinese adherents any closer to our way of life.  Rather, this is likely to be a uniquely Chinese form of Christianity that has little truck with the west.  What, after all, have we done for them lately?


Religion forced underground has always been a catalyst for social upheaval.  While the façade of government might is incredibly sturdy, once it cracks even a little, the ensuing flood can be cataclysmic.  We have a scary vision of China, either returning to the harsh repression of Tiananmen, or falling victim to social revolution on a scale to dwarf what we have witnessed in Iran.  


Speaking of Iran, there will be another game-changer as well.  By the time the next financial crisis strikes, Iran will have nuclear weapons. 


Looking for a safe place to invest that battered 401K?  As you peruse those endless lists of mutual funds that all look mind-numbingly the same, don’t forget to factor in the precarious state of the dollar, the ascendancy of the Chinese-Brazilian economic and political axis, a billion unhappy Chinese, and a re-armed Hezbollah, implicitly backed by tactical nuclear weapons. 


To the cycle of Boom and Bust, now add Blam!!!


As you feel yourself being sucked into the vortex, remember that the politicians and bankers who doggedly persist in keeping us locked in this endless cycle will always continue to pay themselves.  This is a Zero Sum Game: they get Some, and we get Zero.  See that little curl at the bottom of the letter?  Underneath the endless cycle is that squiggly little tail where the money just keeps draining out and draining out…


Today’s economic forecast was brought to you by the letter Q, and by the numbers All, and None.




Unreservedly Fed Up


Philip Booth, editorial director of the Institute of Economic Affairs, writes in the Financial Times (13 November, “Ethics Alone Will Not Prevent Financial Crises”) “when the government signals that some banks are too big to fail… banks grow big.”  The “unintended” consequence of government meddling in the private sector is that it promotes the very activities it seeks to hinder.   Dead on the money, Mr. Booth.  In the old days, Capitalism used to mean that anyone could succeed – and that anyone could fail.  By coining the phrase “too big to fail”, the government de facto created a new category.  Is it any wonder that firms rushed to sign up?


The giant financial institutions’ problems were solved with the stroke of a pen.  They are all squealing with delight at the announcement that they are Too Big To Fail, like Moliere’s M. Jourdain, who is thrilled to learn that he has been speaking in prose all his life.


“Once governments interfere to the extent they have,” Booth observes, ‘we do not know what behaviour creates wealth and what behaviour feeds the boom.” 


The government does not merely tolerate this behavior, it actively fosters it.  The Wall Street Journal reports (19 November, “Pimco’s New Job Raises Concerns”) that the National Association of Insurance Commissioners has hired Pimco to “estimate losses in insurers’ holdings of residential-mortgage bonds, estimates regulators will use to determine for 2009 the capital insurers must hold to back these bonds up.”  Last week we learned the NAIC was planning to take this job away from the ratings agencies for fear of conflicts of interest, as insurance companies resorted to the old practice of shopping for the best rating for the distressed instruments languishing in their portfolios.


This week, the NAIC has hit upon the capital idea of taking one of the largest players in the world of money – a firm that manages funds for both insurance companies and state pensions – and making them the arbiter of credit worthiness. 


Pimco, needless to say, is tickled.  They have expressed themselves as being “extremely honored to have been selected by NAIC for this important assignment.”  Their rigid internal controls notwithstanding – they have assured the world their information barriers will prevent conflicts – it should be patently obvious that this has the potential to lead to trouble.


Pimco already works for the federal government.  It managed the emergency commercial paper program, and currently purchases mortgages for the Fed.  We do not question Pimco’s abilities, nor their integrity in forthrightly handling the new responsibilities.  But by asking Pimco to take on a job which creates such obvious potential for conflict, the NAIC is setting them up to be next on the list of firms to become a target of public ire, and Congressional investigation.  Pimco is clearly well suited for this task, and will no doubt execute with integrity.  But there are countless other shoes to drop in the asset-backed portfolios, and Pimco risks being vilified down the road for taking on what will, in retrospect, be called an unavoidable conflict.


Just in passing, we don’t for a moment believe the NAIC could be motivated by a desire to protect the industry they oversee.  We only mention this in light of the clearly unrelated item (WSJ, 16 November, “Banks’ Safety Net Fraying”) that reports on an apparent act of contrition by the major ratings agencies.  It seems that Standard & Poor’s has decided to treat banks that received government assistance much in the way baseball views players who have admitted to using steroids.  In awarding their asterisks, S&P may well be rocking a very large boat.  Says the Journal, “S&P gives Citigroup a single-A rating, but adds that it would be rated triple-B-minus, four notches lower, with no assistance.”  The article goes on to report that, thanks to government funding, “Morgan Stanley and Bank of America get a three-notch lift.  Even Goldman Sachs Group enjoys a two-notch benefit.”  Should such granular scrutiny be turned to the insurers’ portfolios, there’s no telling where it might lead.


Secretary Geithner was outed this week by none other than the SIGTARP – the Special Inspector General of TARP – who announced the bizarre finding that the Fed did not believe AIG’s tottering CDS posed a systemic risk.  What, then, was the rationale for paying them off in full, and not requiring the banks on the other side of those transactions to take a substantial haircut – or, indeed, to lose out altogether?


Congress’ response is, increasingly, to insist that Geithner must go, and many urge throwing in Larry Summers for good measure.  Secretary Geithner’s response is that it is very easy to criticize after the fact.  We accept that, but somewhere in the midst of all this, we keep coming back to the fact that AIG got $180 billion of our money, and that a lot of that was handed over to Goldman et al without asking for anything in return.  Oh well, we guess you had to be there…


While we are on the subject of government stoking conflict in the financial sector, we caught banking analyst Meredith Whitney on Bloomberg Radio this week.  She said the Fed’s balance sheet is now up to about one-third Fannie and Freddie-type paper – mortgage-backed securities that would be worthless but for the Mark To Market Of Last Resort.  At the same time, she says major bank balance sheets average some twenty percent holdings of just this type of paper which are counted in their capital.  To this we add our own Broad Street Irregulars who report seeing the same Cusip numbers of new Treasury issues appearing in less than thirty days of issue on the books of the Fed.  The nation’s entire financial system looks like a cycle of auto-Ponzification. 


Banking institutions classed as TBTF are sustained only by a Fed that stands willing to take their worthless paper onto its books at an artificial price.  If our Broad Street Irregulars are accurate, and the Government is buying back substantial chunks of its own newly-issued debt, then what percentage of the Fed’s own balance sheet has any actual market value?


Fed Chairman Bernanke gave a speech last Monday in which he remarked “It’s not obvious to me in any case that there’s any large misalignments currently in the US financial system.”


Will someone please show this man how to get to Sesame Street?




The Goldman, The Badman, And The Uglyman


I like big fat men like you.  When they fall they make more noise.

          - Tuco in “The Good, the Bad and the Ugly”


Realizing that they are now damned if they do, and damned if they don’t, Goldman Sachs has decided to do.  They are preparing to pay out record compensation to their employees, in recognition of a record year.


Suddenly they are getting flak from a most unexpected quarter: their own shareholders.  An as-yet anonymous group of Goldman investors have contacted Blankfein & Co urging them to exercise restraint.  We are not privy to their identity, but clearly they are important enough to make the front pages.  In fact, there is no better group to urge this.  Government, you may be shocked to learn, has neither the ability nor (harrumph!) the standing to legislate morality to Wall Street, or to anyone.  Like Rumpelstiltskin, Goldman has an uncanny ability to spin gold out of straw.  It is a given in their business model that profits are shared with those who generated them.  Indeed, Goldman is one of the few financial firms that fosters any kind of team spirit.  In an industry notorious for Lone Wolves, Goldman pays bonuses based on the overall performance of the firm.  For those who have never worked in the belly of the beast of Wall Street, it is not immediately obvious how unusual this is. 


Yes, Goldman is noted for ruthlessness, for obsessive pursuit of profits, for people whose entire lives mean nothing but the pursuit of money – and later, of power.  But let’s not put too fine a point on it.  Practically everyone who works on Wall Street wishes they could work for Goldman Sachs.  Goldman is hated, more than anything, because they consistently personify the pinnacle of success in the industry. 


Blankfein has been accused of having a tin ear where public sentiment is concerned.  But in fact there is nothing he can say to win approval.  By Wall Street standards, Goldman runs an ethical business.  They do not break the law, they do not purposely send widows and orphans to the poor house.  But they do capitalize on every advantage, and do not stop to weep if their competitors suffer.


It is not the job of Lloyd Blankfein to put a stop to this.  If anything, the shareholders are the proper agents of this transformation.  They actually own the company, and they are the ones both responsible for, and capable of demanding accountability on the part of management.  If they don’t complain to their CEO, who are we to kvetch?


If we can fault Blankfein for anything, it is his efforts to smooth things over.  As reported, for example, by the Financial Times (18 November, “Goldman Apologises For Crisis And Pledges $500m To Small Business”) the firm is taking steps calculated to burnish its public image.


To put it in perspective: $500 million over five years is not a lot of money for Goldman Sachs.  The stated target of these funds is “small business” – Main Street.  Goldman’s $500 million is small beer in context, both of its own finances, and of the magnitude of the problems facing America.  It is a major step, however, if other financial institutions fall in line.  We applaud Goldman for showing leadership, and we wonder whether any other firms will follow.  Goldman is already being taken to task for the paucity of its offer.  The FT article starts off by observing that the amount is “about 2.3 per cent of its estimated bonus and salary pool for 2009”.  They just can’t win.  And they won’t unless it becomes a movement.  We wonder whether the shareholders of any other banks will pressure them to follow Goldman’s lead.  With no other takers, Goldman’s gesture will be seen as cynical and criticized as too little, too late.


Oh, and a final word to Mr. Blankfein.  Forget the apology.  Apologizing went out of fashion earlier this year.  No one is listening.  You can beat your breast all you want, but you can’t hold a candle to the Apologizers’ Gallery that paraded across our television screens earlier this year.


In the month of February alone, John Thain apologized to Maria Bartiromo for his wastebasket; William Ackman apologized to his investors for Target; the heads of Royal Bank of Scotland and of England’s HBOS bank apologized to Parliament for their banks’ rotten judgment – the standout was Fred “The Shred” Goodwin of RBS who offered up this heartfelt plea: “I apologized in full and I’m happy to do so again.”


And of course, Mr. Blankfein, let us not forget the Apologizer-In-Chief who, after being caught with his Presidential trousers around his ankles over the succession of tax cheats he tried to name to his cabinet, bravely told the American people “I take full responsibility”.  Let’s face it, apologizing is done.  You can’t even win on that score.


What’s a Blankfein to do?


For our money, Mr. Blankfein, we think you just keep on doing what you are doing.  Cynical as we are – and knowing full well that, in the dirty, nepotistic and conflicted world of Washington and Wall Street, Timothy Geithner will probably be working for you by the end of President Obama’s first term –we think you are doing just fine.


Moshe Silver

Chief Compliance Officer


RETAIL FIRST LOOK: Black Friday Month…Week…Day 2009


 November 23, 2009





With Black Friday week now upon us, retailers are taking a slightly different approach with deals designed to boost earlier sales this year. We’ve already commented on several companies who have turned Black Friday into a weekly event throughout the month (Sears), but over this past weekend the real push began.  Many retailers including Kohl’s, Target, Wal-Mart, Best Buy, Amazon, and JCPenney are now offering Black Friday 2009 pre-sale deals.   Given that almost every circular has been leaked by now, it is interesting to note that online deals are not terribly different than those that will be available on Friday. Yes, there will still be plenty of loss-leading doorbusters for the most avid shoppers to fight their way through, but this increased “pre-sale” activity really makes us wonder.  Is it really worth all the hassle to get in line at midnight on Thursday night to save $50 on a $700 TV?  To some, the answer is most defninitely yes.  But to others, the internet is making it incredibly easy to comparison shop and locate the best deals even before Black Friday officially occurs. 


Most importantly, the industry has set these plans up well in advance.  Inventories are tight, and promotional plans over the next seven days have been locked in for months.  So while “Black Friday” is now a universal term for “let the shopping games begin,” we caution that all this excitement is just one small portion of the next six weeks worth of holiday angst and speculation. 





  • Add luxury department store Barney’s to Ron Burkle’s (Yucaipa) holdings in the retail/apparel space. According to new reports, Burkle and his firm have been buying Barney’s bank debt from Citi. Yucaipa also recently reported a 16.8% stake in Barnes & Noble and is also known to be the owner of specialty store chain Scoop and P Diddy’s clothing line, Sean John.
  • Hibbett Sporting Good management noted that the company is well positioned to take advantage of current trends in the licensed apparel business. Strong performance in college football from Texas and Alabama coupled with the NFL’s Saints are lining up well with HIBB store base in these markets. If Alabama were able to compete (and possibly win) in the national, championship game, HIBB believes it could be a “few million” dollar sales opportunity.
  • Footlocker management noted that weak sales trends seen in the month of October have continued into November. The promotional environment has been aggressive by some competitors, but Footlocker does not except to be overly promotional given that its inventories have been managed inline with sales trends. Weakness is consistent across the store base (malls, urban, and off-mall) and across all regions. On the product side, the categories of basketball and running are also weak.





Spending by Consumers Probably Increased: U.S. Economy Preview  - Consumer spending probably rebounded in October, showing that mounting unemployment is restraining, not derailing, the biggest part of the U.S. economy, analysts said before reports this week. Purchases increased 0.5 percent after dropping by the same amount in September, according to the median estimate of 61 economists surveyed by Bloomberg News before a Commerce Department report due Nov. 25. Other figures may show orders for durable goods and home sales climbed. Consumers added to their wardrobes, frequented restaurants and bought more automobiles last month even after the government’s trade-in incentive expired. A jobless rate that is projected to remain above 10 percent through the first half of next year means households will still be hard-pressed to boost spending further, limiting their contribution to growth. <>


Europe Manufacturing, Services Expansion Accelerates - Europe’s services and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession in more than 60 years. A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was the highest since November 2007. A reading above 50 indicates expansion. The European economy is gathering strength after global governments spent billions on stimulus measures to encourage spending. While euro-area exports increased the most in more than a year in September, the euro’s strength is making goods less competitive abroad just as rising unemployment undermines consumer spending, threatening the recovery.  <>


European Footwear Importers Encouraged by EC Vote - As expected, the European Commission Anti-Dumping Advisory Committee voted 15 to 10 last week against renewing anti-dumping duties set to expire this year for leather footwear from China and Vietnam.  The committee consists largely of technocrats appointed by the trade or finance ministries of each member country, the majority of which tend to favor more open trade. Observers still expect the full European Commission to push for a 15-month extension of the anti-dumping duties to placate shoe producers in Southern Europe. The European Outdoor Group (EOG), which represents several major U.S. footwear brands, said it will continue lobbying trade ministers against renewing the duties, which tax Chinese and Vietnamese leather footwear imports at 16.5% and 10% respectively. The EOG represents Columba Sportswear, Merrell, The North Face, Timberland as well as a handful of European outdoor footwear brands.  <>


South African Economy Rebounds as World Cup Nears - South Africa’s spending to host the 2010 FIFA World Cup, the world’s most-watched sporting event, and a rebound in manufacturing may have pulled the economy out of its first recession in 17 years in the third quarter. The economy expanded an annualized 0.5 percent in the three months through September, ending three consecutive quarters of contraction, according to the median estimate of 23 economists surveyed by Bloomberg. Statistics South Africa will release the data at 11:30 a.m. in Pretoria tomorrow. <>


Macy’s, Kohl’s Gain by Promoting Housewares for Frugal Holidays - Blenders and sweaters may rise in popularity this holiday season as consumers seek to replenish kitchens and wardrobes rather than spend money on luxury gifts. Macy’s Inc. is promoting oven mitts that are meant to be used as stockings and can be stuffed with kitchen gadgets. Wal- Mart Stores Inc. had its strongest sales in sleepwear, socks and underwear in the third quarter, the company said this month. “We’re going to see a gift-giving frame of mind that is more utility focused,” said Stephen Cardino, vice president and fashion director of Macy’s home division, in a telephone interview. “The kitchen’s the heart of the home now.” <>


Tesla to go public soon - Electric car maker Tesla Motors Inc. reportedly plans to go public soon in what would be the first IPO for a U.S. automaker since Ford Motor Co. in 1956. Reuters cited two unnamed sources Friday afternoon that it said are familiar with the matter but didn't give a specific time frame. Palo Alto-based Tesla's Chairman Elon Musk has said in the past that he thought the six-year-old company could do an IPO by this year. But that was before last fall's stock market dive. <>


Douglas Jumps Most in 8 Months as Mueller Buys Stake - Douglas Holding AG, Europe’s largest makeup and perfume retailer, rose the most in eight months in Frankfurt trading after confirming that competitor Mueller Ltd. & Co. KG bought a stake in the company. Closely-held Mueller purchased a 3 percent holding, Douglas said today in an e-mailed statement. Erwin Mueller, the billionaire owner of Germany’s fourth-largest drugstore chain, plans to raise the stake to 18 percent and wants to combine the companies’ purchasing, Focus magazine reported today, without citing anyone. Switzerland’s Bank Sarasin & Cie. AG has bought 14 percent for Mueller over the past few months, Focus said. <>


Retailers aren’t waiting to offer Black Friday deals - The day after Thanksgiving, also known as Black Friday, is no longer the kickoff for holiday bargains. In fact, several prominent multichannel retailers, including J.C. Penney, Sam’s Club and Best Buy are promoting Black Friday sales more than a week in advance. Dell and other retailers are extending Black Friday offers via e-mail. Some of the deals, are tailored to Black Friday-like, door buster sales at specific times. For instance, both J.C. Penney and Sears plan sales tomorrow starting at 7 a.m. (the J.C. Penney sale ends at 1 p.m., the Sears sale ends at 12 p.m.). Sam’s Club will preview its sale Monday via e-mail and text messages, and allow shoppers to purchase the featured items two days later, the day before Thanksgiving on the web. Other retailers, like Best Buy are already offering a condensed version of their Black Friday offers both in-store and on the web. <>


Best Buy sees bump in traffic, Nielsen Online reports - Best Buy saw an 18% jump in year-over-year traffic for October, attracting 14.68 million unique visitors, Nielsen Online reports. and both registered 16% traffic increases to 3.82 million and 3.23 million unique visitors, respectively. Meanwhile, there were 82% fewer unique visitors to the relaunched web site than there were a year earlier to the site of Circuit City Stores Inc., which went bankrupt this year. is now owned by Systemax, owner of such e-retail sites as and  <>


Manhattan Retail Rents Decline Overall - It helps, but with the economy still volatile and unsteady, even location isn’t a guarantee that retail rents in Manhattan’s top shopping corridors will rise. Asking rents declined in 11 of 16 prime retail districts between fall 2008 and fall 2009, according to a new survey by the Real Estate Board of New York, a 12,000-member group representing commercial and residential property owners, builders and brokers, among others. Overall average asking rents for retail space in Manhattan fell 9 percent to $117 a square foot from fall 2008 to fall 2009, the report said. <>


Chanel Reopens in San Francisco - Chanel Inc. has reopened its boutique here after a major refurbishment that transformed the narrow, three-floor building’s interior and exterior. This was the first redo of Chanel’s 7,900-square-foot store since it opened in 1988 as the first luxury fashion boutique to locate on Maiden Lane, a two-block gated pedestrian street off Union Square where Marc Jacobs, Hermès, Prada and Tory Burch are now located. The renovation took eight months, requiring the boutique to move to a temporary location next door.  <>


Nike Appoints UW Provost to Board - NIKE, Inc. has appointed Phyllis M. Wise, Ph.D. to its board of directors. Wise, 64, is the EVP and Provost of the University of Washington, where she is also professor of physiology and biophysics, biology, and obstetrics and gynecology. "Dr. Wise’s outstanding academic career, experience as a respected university leader and administrator of a multi-billion-dollar budget for the University of Washington, is a rare combination that makes her an ideal addition to our board,” said Philip H. Knight, Nike Founder and Chairman. “We look forward to her contributions to expand Nike’s position as the industry leader in innovation.” Wise was appointed VP and provost of the University of Washington in August 2005 and became EVP in September 2007. <>


Head of Walmart Latin America to Exit - Vicente Truis has announced his departure as executive vice president, president and chief executive officer of Walmart Latin America. He leaves after serving less than five months in the role. Walmart has not reported Truis' reasons for his exit, nor an announcement of a replacement. Prior to beginning his Latin America role, Truis served as the executive vice president, president and chief executive officer of Walmart Asia. And before that, he spent 11 years leading the retailer's Brazil operations. <>


With Sands China priced, it all comes down to your Singapore assumption. EBITDA above $600 million drives the LVS ex-Macau below 10x 2011 EV/EBITDA.



Sands China priced, not surprisingly, at the low end of the range.  At $1.34 per share (HK$10.38 on the Hong Kong Stock Exchange) and without the green shoe, total proceeds were $2.5 billion.  Now that we have an idea at what the market values the LVS Macau operations, we can back out the implied value of "what's left" in the LVS empire - namely the US operations and, of course, the wild card that is Sands Marina in Singapore.


We think that there are two ways to look at LVS once Sands China has a publicly traded float:

  1. Backing out the minority interest in Sands China that LVS doesn't own - calculating the implied value of US operations + Marina Bay Sands + 70% of Sands China
  2. Backing out all the entire value of Sands China and seeing what the implied value for just the US and Singapore piece

At  $16.35, LVS is trading at 11.6x 2011 EV/EBITDA and 9.7x 2012 EV/EBITDA.  We need to look past 2010 because Marina Bay Singapore will not contribute EBITDA for a full year and Lots 5&6 in Macau won't contribute at all.  The valuation actually looks attractive, especially considering that part of the valuation is in Macau where LVS pays no corporate taxes on gaming profits (at least for now).  The debatable valuation range on the US operations is probably tight (8-10x).  On the other hand, there is a lot of uncertainty surrounding Singapore since many of the gaming regulations have yet to be established and the government has made it pretty clear that they are more interested in attracting general tourism dollars rather than creating a new gaming mecca.






As we wrote about in "LVS: CREDIT OPTIONS AND OUTCOMES" on 2/28/09, it's hard to make an argument that there is much value in the US operations.  So the value of "what's left" at LVS largely hinges on your opinion of how much EBITDA Marina Bay Sands can generate.  If you believe that Marina Bay Sands can generate north of $600MM EBITDA, the implied stub valuation is not too expensive at 10x 2011E EBITDA.   





For us, $600MM is the pivot EBITDA for Singapore. Getting LVS ex-Macau at under 10x 2011 EV/EBITDA begins to look attractive.  We are currently projecting over $700 million of EBITDA for Singapore although we must admit we don't feel overly confident in that number.  We remain concerned with the potential slow ramp of the business given the high likelihood of a low junket presence.

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EAT – Management Changes

In this environment changes of this magnitude are not meaningless!


After the close on Friday, EAT announced that after 28 years Todd Diener was stepping down “immediately.”  Todd is being replaced by Wyman Roberts as president of the Chili’s Grill & Bar and On the Border Mexican Grill & Cantina.


So why would Todd be stepping down so suddenly (appears sudden at least to an outsider) right when the organization needs him most?  Over three months ago Brinker announced a sweeping overhaul of the Chili’s brand. 


Here are some of my initial thoughts and possible scenarios:


(1)    Todd is tired – Turning Chili’s around is going to take a lot of work – 28 years is a long time and he would rather be playing golf.


(2)    He was not happy about internal changes.  If it was his decision to leave, he must not be happy about the new direction of the Chili’s brand. 


(3)    This last point would lead you to believe that the cost to fix the brand is going to be much higher than management initially thought. 


(4)    If it was not his decision to leave, I can only guess that current business trends are not seeing much of an improvement (under his direction).


Even without having all of the details, the timing of Todd’s departure is odd.  It’s very hard to come up with a scenario in which this departure is good news for EAT (Management must have realized this which might explain the timing of the release).  Not to take anything away from Wyman Roberts, but dislocation within the Chili’s system due to Todd’s departure should not be underestimated. 




He Who Sees No Bubbles

“Of course not, but the authorities decided it that way, and they are the ones that rule.”
Geronimo was a famous Apache warrior and medicine man who fought plenty a battle against the authorities in this country. Last week, Daryl Jones wrote a great morning missive about the American legend. At the same time, DJ brilliantly introduced a new nickname for Ben Bernanke – He Who Sees No Bubbles.
Since I am usually the author of making up names for people here at the firm, this was a welcome change. I can only use the Squirrel Hunter joke so many times. While Geithner’s sense of perceived wisdom is a joke and anyone with a YouTube who has watched him knows what I mean. Time reveals all truths.
This morning the New York Post is floating the idea that Chief of Walking Bull Government at JP Morgan,  Jamie Dimon, is interested in taking Timmy Geithner’s job. While that, on the margin, would definitely be US Dollar bullish, we don’t expect to hear such an announcement anytime soon.
One of the most bullish factors helping the Bombed Out Buck register an uncharacteristic +0.6% week-over-week gain last week was the call for Geithner’s resignation. Again, that was bullish for what we call an immediate term US Dollar TRADE. Unfortunately, the intermediate term TREND is for Geithner to continue to rule. The best way to ensure a weak US Dollar policy, is for Obama to keep Geithner in his seat.
Whether you like it or not, Bernanke and Geithner are, as Geronimo would say, “the ones that rule” – at least for now. While it may be bullish for immediate term stock market prices, in the long term, this will make what we knew as American Capitalism, dead.

Great Depressionista
turned He Who Sees No Bubbles hopefully has a few history textbooks that date past 1938. Most economic historians will recall that the US Government dropped short term interest rates to 0.05% in 1938, stoking a annual stock market gain of +25% that year.*Special note to He Who Sees No Bubbles: from 1939 onward, the US stock market cratered, losing 34% of its value over the course of 3 long hard years.
You don’t have to call upon the Apache spiritual insights and sing to the heavens at Turkey Creek to get a signal as to why the stock market lost its upward price momentum after 1938. Once those that rule cut rates to ZERO, the only way for them to go was UP!
The rate of return on 3-month Treasuries is lower this morning than it was at the lows of 1938. This morning, you basically pay “the ones that rule” in this country to hold your hard earned savings.
That special rate of return = 0.01% (minus real-world inflation). Yes, Jamie Dimon’s timing to exit JPM is, as usual, very much on point. He gets this. If you ran a Government sponsored bank,  you would too. Borrow at ZERO, then lend long to your citizenry – this is as good as it gets!
The US Dollar is getting hammered this morning, trading down -0.8% (for a world reserve currency, that’s a big one-day drop), and markets from lands far and wide have a distinct speculative smell of Geronimo’s good ole American West.
Using marked-to-market, real-time prices, commoners like me have the following macro levels to flash into He Who Sees No Bubbles:
1.      SP500 futures indicated up almost a full 1%, taking YTD gains to 22% (only 3% away from 1938’s YTD gain!)

2.      Gold prices are hitting new all-time highs this morning, trading up to $1165/oz (yes, all-time is a long time!)

3.      Copper prices are hitting fresh 14-month highs at $3.19/lb (Dr. Copper does have a better forecasting track record than Ben)

For those who are allowed to see price bubbles overseas, check these out:
1.      China closed up another +0.92% at 83.4% YTD

2.      Russia is trading up +1.4% so far this morning at +131% YTD

3.      Norway is trading up +1.9% so far this morning at +50% YTD

Norway? Who cares about Norway? Maybe the “authorities” of perceived wisdoms would like to tell you that Middle Eastern, Russian, and Norwegian stock markets aren’t leading indicators for gas pump inflation – but we don’t wake up here in New Haven having to think what those Who See No Price Bubbles do.
I took my cash position up to 67% in the Asset Allocation Model with the US stock market hitting its YTD high last Tuesday. The market has since corrected -1.7% from that high, but Friday did not represent either an opportunity to press shorts or raise more cash. You see, “the authorities decided it that way.” They want me to save nothing and chase prices higher. You know, like a monkey – so, for now, I will – monkey see, monkey do.
Into week’s end, I invested 7% of that cash into Australian (EWA), Taiwanese (EWT), and American Tech (XLK) stocks last week. Thankfully, I bought them while they were down (Thursday and Friday). On the heels of another sequentially higher Consumer Price Inflation report, plus calls for Geithner’s resignation, the US Dollar was up – but these rational market reactions will only lasts as long as they last. For now, it’s time to go back to a levered land run by He Who Sees No Bubbles.

My immediate term TRADE lines or resistance and support for the SP500 are 1079 and 1115, respectively.
Best of luck out there this week,


XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

EWT – iShares Taiwan We see a pending trade pact with the Chinese as the next positive catalyst. We bought back the bullish TREND position we continue to fundamentally see in Taiwan on 11/20.

EWA – iShares Australia We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20.

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.   

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.

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.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.

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.


On the MACRO front we will be getting important data points as to the health of the consumer.  Specifically, we are looking at data on Housing (existing home sales and Case Shiller), unemployment and consumer confidence.     


Last week the S&P declined for three consecutive days and the dollar index rose on Thursday and Friday.  On Friday the S&P 500 declined 0.3% and finished the day off the worst levels of the day.  Once again the headwinds were strong for the REFLATION/RECOVERY trade with the bounce in the dollar.  The Dollar Index rose 0.48% on Friday.   


The MACRO calendar was quiet on Friday, but there were some disappointing earnings in the Technology and Homebuilding groups.  At 10am today we will be getting some housing data, with the Existing home sales trends.  According to Bloomberg, sales of existing U.S. homes are expected to rise 2.3% from September to a 5.7 million annual rate. 


The data flow over the past month does not support an upside surprise in existing home sales, so the chances that the consensus estimates are too aggressive are high.  Last week mortgage applications declined 2.5% to the lowest level in 12 years.  It was reported yesterday that mortgage delinquencies rose to a seasonally adjusted rate of 9.6% at the end of the 3Q09. 


On Friday, the VIX declined 1.9% and 5.0% over the past week. 


Three sectors increased on Friday – Healthcare (XLV), Utilities (XLU) and Consumer Staples (XLP).  The best performing sector was Healthcare, up 0.7%.   Healthcare was the beneficiary of a rotation into low BETA defensive sectors of the market.  On Friday the big upside came from the pharma group. 


The worst performing sectors were Energy (XLE), Financials (XLF) and Consumer Discretionary (XLY). Last week was a tough one for sectors with leverage to the global RECOVERY theme.   Both Financials and Energy are the only two sectors broken on the TRADE duration.  The Energy (XLE) was the worst performer today as another bounce in the dollar weighed on commodities and commodity equities. December crude on Friday settled ($0.63) at $76.83 a barrel.


The Consumer Discretionary (XLY) underperformed relative to the broader market, as Housing and Media stocks weighed on the ETF.   The worst performing Media names were Gannett and CBS Corporation.  The Oprah news clearly was influencing the performance of CBS on Friday. 


Next to Energy the Financials are significantly underperforming.  Over the past month the XLF is down 3.8%, while the XLE is down 4.7%.  The Banking sector has generally led the group lower and put in a mixed performance on Friday.  Although, once constant is the high RISK groups such as the mortgage insurers and the GSEs continue to underperform. 


From a risk management standpoint, the ranges for the S&P 500, USD Index and the VIX are seen in the charts below.  The range for the S&P 500 is 36 points or 2% upside and 1% downside.  At the time of writing the major market futures are poised to open to the upside.


Howard Penney

Managing Director








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