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Slouching Towards Wall Street… Notes for the Week Ending Friday, November 27, 2009

The Perils Of The Dollar – In _____ We Trust


Voter Turnout – The I Don’t Cares Have It


Corporate Governance – Best Practices, Or No Practices?


And: The Cubs Win The World Series – The Check Is In The Mail – Wall Street Makes A Sell Recommendation



Brother, Can You Spare A Dimon?


Our CEO, Keith McCullough, got some good air play on Bloomberg TV last week, where he is also a contributing editor.  He was called on to pronounce upon the dollar, and in response to a pointed question suggested it would make sense for President Obama to fire Treasury Secretary Geithner.  This is a Zeitgeist sort of thing, with members of Congress – even in the President’s own party – calling for Geithner to step down.  What Washington may not know, unless they are Research Edge subscribers, is that Keith has been bearish on Mr. Geithner and his posse since the word Go.  To this heap feel free to add special adviser Summers, and special mention to Fed Chairman Bernanke (whom we have dubbed He Who Sees No Bubbles), all of whom seem to be taking turns putting the screws to the citizenry.


When asked whether getting rid of the Treasury Secretary was really the solution, Keith observed wryly that neither the President nor the Treasury Secretary was solely to blame for the state of the economy.  To be fair, he observed, we should probably fire Congress.  But how likely is that?


That, of course, started us thinking.


The government’s basic job is to manage the resources of the nation for the benefit of its citizens.  Critical to this function is ensuring a level of fairness, and one of the defining debates throughout the history of the republic is whether such fairness is best expressed in equivalent access, or equivalent outcome.


There is one thing that everyone seems to agree on today: the financial markets model is broken, and we have not yet come anywhere near fixing it, regardless of who is supposed to be the primary beneficiary.


Frankly, we are puzzled by what goes on – or fails to go on – in Washington.  Fed Chairman Bernanke, for example, is a brilliant academic economist.  We are perplexed by his consistently bland approach to the markets, and his insistence that there is no clear evidence of asset price bubbles.  He Who Sees No Bubbles appears to be operating awfully closely with Secretary Geithner, which we believe is a legacy of the Paulson/Geithner partnership, and not the natural order of market oversight.  Secretary Geithner appears only too happy to perpetuate this hand-in-glove arrangement, and those who want to take bank oversight out of the hands of the Fed should gain traction from this too-cozy relationship.


Secretary Geithner, for his part, persistently steps away from the falling dollar, rather than muscling his way into the fight.  We are aware of the old adage about a fish stinking from the head, but President Obama is clearly guided by his economic team, rather than calling the shots himself.  Thus, we believe Treasury policy is being set by Messrs Geithner and summers, and not at all by the President.  Nor, alas, by Paul Volcker.


By now it has become trite to observe that Candidate Obama charged into the fray with brilliance and audacity, and that a frightening change took hold once he was inaugurated.  Gone is the charging warrior who campaigned so effectively.  President Obama’s new name is Man Afraid Of His Shadow.  The Presidential timidity does not bode well for America and the world.


We believe the refusal to stanch the hemorrhaging of the dollar is not merely the product of presidential timidity, but there must be a program at work.  In our simplistic view of the world there are winners and losers, but no cooperators.  The best we can figure out is that Summers, Geithner and Bernanke view the crashing dollar as an inverse bubble and are waiting for it to pop in a massive melt-up as dollar investors worldwide panic.  This is projected to transpire some time in the first quarter, so their temporizing may turn out to have been a genius bit of footwork. 


If this is the game plan, we wonder whether Jamie Dimon, one of the great financial executives of all time, would want to step into Geithner’s shoes.  In an ideal world Jamie Dimon, who built a career on managing risk, would be a great choice for the job.  But so would Paul Volcker, who is the only one in the room with a demonstrated track record of taking the marketplace by the throat in the face of political criticism.  We wonder whether this well has already been poisoned beyond recovery.


There are steps the US could be taking to strengthen the foundation of the dollar – which is the credibility of the financial system.  Instead of addressing root causes, however, we are expending enormous amounts of time and energy beating up on traders’ and bankers’ compensation and calling Lloyd Blankfein dirty names.  Our political leadership have shown themselves largely to be a shameful passel of hypocrites who care nothing for their own posterity, and everything for their own posteriors.


Rather than attacking the mechanism of market capitalism, it behooves Washington to set public policy that supports economic and political stability.  Chief among these objectives is sustainable job creation, which leads to secure housing markets, sustainable growth in individual savings, and political stability.


A weakening dollar should be an absolute bonanza for the nation’s exporters.  Why it is not is because Washington has allowed so much to go to waste on inefficient industries – like, why we are not exporting automobiles – and because economic policy, law and regulation have done nothing to discourage the diversion of talent from industry to financial engineering.  Our most dynamic sector for the past generation has been the creation of new financial products, which we exported like crazy.  These, notably, are now selling even less well overseas than our cars and trucks.


The dollar is a contract.  Everyone in the world agrees and accepts the store of value represented by that piece of crumpled green paper.  The contract now bears the signature of Tim Geithner, who is presiding over the greatest crisis in confidence this contract has weathered in a very long time.  We do not ascribe cynicism to Secretary Geithner in his handling of the financial crisis.  We believe he is firmly convinced he has done the right thing – or perhaps the only thing possible – throughout his tenure, both at the New York Fed, where he was rather clear-sighted, and now at Treasury, where things have gotten quite muddy.


The problem here is just this muddiness.  The United States is projecting uncertainty to the world.  In this environment, our stock is falling, as represented by our share certificate: that piece of paper bearing Timothy Geithner’s signature.


While firing the CEO of General Motors and imposing pay caps on financial firms that have received billions in government funding is popular, it goes nowhere near addressing the core issues of corporate governance, which no one wants to talk about.  Congress is too conflicted to force real change, as it could mean turning off the spigot of Wall Street largesse.  Truth be told, while the senior executives, traders and bankers at Goldman Sachs and AIG have taken home compensation packages that stirred public outrage, the second biggest group of beneficiaries of these firms’ “excessive” earnings have been Washington insiders.  From lobbyists to Congressional and Presidential campaigns, Wall Street cash is everywhere.


Want to talk about conflicts of interest?  Let’s not kid ourselves, folks.


Jamie Dimon’s name cropped up in the odd article in the financial press in the past few weeks – clearly a trial balloon in the early stages of the debate.  We think it is premature for Man Afraid Of His Shadow to toss Geithner out on his ear.  The President’s approval ratings have not sunk low enough, and there is not clear catalyst necessitating a major change in order to score public relations points.  At the same time, President Obama’s silence, while his boy is being smacked about on the Hill, is not a good sign.  Taken together with the press musings about “Secretary Dimon” this seems to be creating the space for President Obama to make his move, if his advisors deem it smart.  Secretary Geithner, for his part, gave as good as he got in the jostling – something our President seems incapable of doing no matter where he shows up.


What we like about Jamie Dimon is he is not only a genius at risk management, he is also a tough executive who is not above knocking heads together.  This is a great combination for a new Treasury Secretary, or a new Fed Chairman, for that matter.


Given the thanklessness of the task, the failure of the President to utter a peep in defense of a Secretary on whom he has so much riding, and the feckless nastiness of Congress, we wonder why a man of Dimon’s accomplishments would want such a job.  It couldn’t be just for the thrill of seeing his own signature on a dollar bill.




One Person, No Vote


Those who cast the votes decide nothing.  Those who count the votes decide everything.

                                      -  Joseph Stalin


Pity the poor individual investor.  Everything we see about the way people manage their own finances leads us to conclude we really are a nation of dupes.  Speaking of corporate governance issues, the Wall Street Journal cites a troubling statistic (23 November, “Proxy-Voting Advocates Pool Resources On The Web”).  In 2007, some 20% of individual investors at 1,363 public companies voted proxies.  This figure is bad enough.  It shows not merely apathy, but a conviction on the part of the average investor that their own vote literally does not count.


The next year, 2008, on the heels of a new SEC rule allowing companies to distribute proxy materials on line, rather than in the mail, those same companies saw average individual investor participation in proxy voting drop from 20%, down to thirteen percent, a drop of almost one-third.  Never mind that most individual investors don’t know what a proxy is, or that shareholders actually own the company – and theoretically have a say in how the company is run.  The latest technological advances have had the screwball effect of making shareholder access to corporate decision-making even more difficult.


The Journal article quotes one expert on corporate accountability as saying online proxy voting is “under the radar”.  The average shareholder does not have the tools to assess and decide in the proxy voting process.  Apparently the introduction of on-line proxy statements and voting has made this process measurably less efficient.  This was perhaps foreseeable in the wake of the SEC rule permitting on-line prospectus delivery.  What individual investors did not read when they received it in the mail, they now don’t even know where to find.  If the average retail investor can not find a regulatory filing on the internet, what does that say about the overall level of sophistication of the investing public?  Note to all compliance officers out there: time for a Suitability reality check. 


Into this fray have stepped some new web sites that compile proxy information and give guidance on voting.  MoxyVote.com is the site featured in the WSJ article.  Its web site bears the heading “30% of shares are held by individual investors, but most have no voice in the boardroom.  Let’s change that.”  The site combines access to current proxy issues, with social networking.  It has a useful list of forthcoming proxies, showing the date windows for on-line voting.  And there is a list of Advocates, outfits such as The Nathan Cummings Foundation and Investors Against Genocide who stand ready to weigh in on social issues.  As of this writing, none of the top ten advocates had an opinion on any current proxy, so the site was more a curiosity than a source of a juicy story.  Still, it is a new website.


As the social networking generation become increasingly aware of their own finances, this type of website should grow in importance.  All change happens from the ground up.  It is a fool’s errand to wait for Congress to pass a law that will change the financial markets.  We can hope, though, that the increase in outrage will translate into a rejection of shareholder apathy.


In a related matter, also mentioned in the Journal story, the new NYSE proxy voting rule goes into effect in January.  The standard practice of brokerage firms voting proxies on behalf of their customers will end, and the rule of one person, one vote, will reassert itself – at least for those 30% of shares held by individuals.  In the past, brokerage firms consistently voted their customers’ proxies in favor of management proposals.  This has resulted in some questionable outcomes, including the recent votes for the board of directors of Citigroup and Bank of America, where it appears broker votes resulted in reinstating directors where were opposed by a substantial majority of shareholders who actually cast ballots.


The Council of Institutional Investors, a corporate governance advocacy group, estimates that as much as 85% of the shares of public companies are held in street name at brokerage firms.  These are the shares the brokers get to vote under the old system.  The NYSE has asked the SEC to do away with broker voting in the past, but the SEC under Chairman Cox did not address their request.  It was not until July of this year, under Chairman Schapiro, that the SEC voted to end the practice of broker voting.  Even then, the vote was 3-2, leaving open the question of whether those in government truly believe the American public are incapable of acting in their own best interest.


MoxyVote.com was created by the partners of TFS Capital LLC, an investment adviser based in Richmond, VA.  They say they intend to remain at arm’s length, and not use the website to advance their own investment agenda.  TFS say they think the website is “a good business idea.”  Clearly, if it takes off, it will enhance both the corporate governance process, and the bank accounts of the TFS partners who created it.  A win all around, we would say.


It is early days yet in the world of on-line advocacy.  It is too early to be skeptical, but perhaps not too early to be hopeful.




Some Explaining To Do


The NASDAQ stock market recently closed their comments period on a proposal for Corporate Governance “Best Practices”.  Among the observations in their Proposal were examples of non-US markets.  “The corporate governance model widely followed around the world is often referred to as ‘comply or disclose’ or ‘comply or explain.’”  The new proposal may give some flexibility to issuers – in that an explanation may be proffered in a case where otherwise delisting may be mandated.  It also seeks to establish greater transparency for investors, precisely because of the “disclose” or “explain” provisions it suggests.


This proposal goes at least part way to the heart of the matter, and perhaps explains why we are so hopelessly mired in an inefficient regulatory system.


The proposal asks questions such as “Should the company develop a process to facilitate shareholder communication with directors…?” and wonders whether there should be a limit placed on the number of boards a director may serve on.  “To facilitate independent board leadership,” asks the Proposal, “should the company either have an independent Chairman or an independent Lead Director?”  Forgive us for being thick-headed – we thought these were givens.


Forget attacking Lloyd Blankfein’s paycheck.  If Congress is serious about financial reform, they need to get inside the corporate boardroom.  You know, where all those campaign contributions come from?  Wall Street executives paying themselves should be the least of Washington’s worries.  After all, it is just folks doing what they do – and it is transparent.  The financial services industry is capital intensive: it takes a lot of money to make a lot of money, and the people who generate the revenues expect to take home fifty percent or more of what they bring in.


There is plenty of rhetoric about short-term orientation, but spanking Wall Street it Macy’s window does nothing.  The way into the financial markets is through the tax code, and through accounting standards.


Creating a tax structure that rewards long-term holding of assets, or revenues generated over longer periods of time, would force bankers and traders to rethink their approach.  Creating tax structures that favor job-creating investments and legitimate business hedging are a way to coax cooperation out of the financial sector.  Similarly, creating accounting standards that bring out the risk in different asset classes should push companies to behave differently.  Lloyd Blankfein and we agree, for example, that mark to market is the way to fly.  The notion that a company can make up its own valuation for an illiquid asset and get an auditor to sign off on it is ludicrous and monumentally irresponsible.  Goldman’s own internal risk management includes a rigorous daily Worst Case valuation of all its assets.  It doesn’t seem to have hurt their profitability, nor their share price.


For all the rampant negligence in corporate America, we have not yet seen a move to discipline independent directors, who are well paid for exercising a fiduciary responsibility.  Congress has the power to enforce that responsibility – but perhaps not the will, given the entanglements between the nether regions of Washington and the upper reaches of corporate America.  Congress continues to stoke short-termism by not forcing the issue on responsible corporate governance.  Increased shareholder participation may force some of these issues, but it would be nice to see Washington take more of an interest in how policies affect the Little Guy.  Remember the Little Guy?




The Hard Sell


“Slouching Towards Wall Street” acknowledges the tribulations of Brian Kennedy, formerly of Jefferies & Co.  Mr. Kennedy, as described in the Wall Street Journal (20 November, “Analyst ‘Sell’ Call Ends Up As ‘Bye’ Call”) appears to have made a spectacular call on CardioNet, Inc, in a report issued on 24 April of this year.  The Journal says “Mr. Kennedy accurately predicted a dire cut in the price Medicare pays for CardioNet’s remote heart-monitoring system.”  Accordingly, he issued a “Sell” recommendation. 


Mr. Kennedy’s Sell recommendation on CardioNet was among only 8% of Jefferies’ overall analyst recommendations this year.  That fits the overall profile of Wall Street where on average only about 7% of analyst recommendations actually say “Sell.”  The Journal article points out that investors who followed Mr. Kennedy’s call would have been spared losses of up to 75% in the price of the stock. 


Great call, we would say. 


Apparently, we would be wrong.


Mr. Kennedy claims a senior Jefferies analyst attacked him for “rocking the boat.”  CardioNet took a more sensible approach.  They publicly accused Jefferies of failing to do proper due diligence, then fired off a letter to FINRA in which they “suggested the Jefferies report may have been part of a plot to enrich CardioNet short sellers.”


Mr. Kennedy, meanwhile, says the Jefferies analyst research committee “blocked him from releasing more detailed information on how he made his call.”  Such information included conversations with Medicare contractors responsible for setting reimbursement rates for CardioNet’s systems, conversations that Mr. Kennedy said provided important information.


Within two days of Mr. Kennedy’s report coming out, Citi reiterated its Buy rating on CardioNet, specifically calling into question the Jefferies report.  Citi, a CardioNet underwriter, was joined by Leerink Swann, another CardioNet underwriter, which reiterated its own Buy rating “within hours of Mr. Kennedy’s report.”  Jefferies is not a CardioNet underwriter.


In June, CardioNet announced that certain private insurers were cutting their reimbursement rates.  But the bombshell came in July, when the company announced that Medicare was cutting reimbursement almost in half.  CardioNet’s CEO – the one who wrote the letter accusing Jefferies of abetting the short sellers – said that the Medicare rate cut means CardioNet “will not be able to sustain operations as a stand-alone company.”  This was pretty much what Mr. Kennedy had predicted, according to the Journal article.  It seems Mr. Kennedy was speaking to the right people and asking the right questions, something other analysts following the stock may have failed to do. 


“Mr. Kennedy quit his job in July,” reports the Journal.  He is looking for work at an independent research firm. 


The wave of the future, sort of thing.


Moshe Silver

Chief Compliance Officer




 November 30, 2009





The setup for this week is not great, even if you’re not Dubai or Tiger. The group has performed well, and the delta with news flow should be incrementally negative. Still emerging opportunity with footwear that could last at least throughout 2010. How long apparel can hang on is measured in weeks not quarters.



Happy Cyber Monday!  By the end of today, 100 million people are expected to shop online taking advantage of deals across almost every ecommerce site.  For comparison, roughly 195 million people actually shopped online or in a physical store over the Thursday to Sunday period following Thanksgiving. Unfortunately for Tiger Woods, that’s probably about the same number of people (in the US) who are being barraged with ‘news’ of his incident on Thanksgiving.  C’mon…is this for real? Dubai is melting down financially and the media is talking about whether Tiger’s Dubai golf course will finish according to plan? Two people pinged me over the weekend asking if I thought Nike would alter its financial support if any of the allegations are true. No disrespect to those that asked me – but that’s simply ridiculous. I will never speculate on or justify the personal behavior of another human (especially without knowing all the facts), but since his famous putt-off at age 2 vs. Bob Hope on the Mike Douglas Show in 1978, he has been untouchable. Now, perhaps we will actually realize that the guy is human. And unless something transpired to alter his golf DNA, he will remain one of the fiercest competitors in sports.


The setup for retail this week is not great. We’re largely through earnings, with a  few stragglers this week. But then we have Sales day on Thursday, which will naturally be focused on buying patterns around Black Friday. Even in a good economy this commentary does not live up to the hype given the dissipating importance of this period as it relates to share of holiday spending. And let’s let the facts speak for themselves, on a 3-day, 1 week, 3-week and 3-month basis – retail has held its own with this market. In addition, weather remains unfavorable for cold-weather apparel – which is likely to come out as well. Remember that early season  cold weather apparel (fleece, shells, jackets and coats) were 3x better than any of the past 5-years. Recent trends add credence to the view that these sales were simply pulled forward at full price. This does not set up for a big negative earnings event in 4Q, but it does limit the upside we’ve been seeing over the past 3 quarters.


Names to play: UA, PSS, FL, RL, DECK, BBBY, and NKE (after the quarter).

Names to avoid: ROST, TRLG, JCP, COLM, DKS, VSI (after the print), and TJX.




  • Timberland entered a licensing & distribution deal with Reliance Brands in India. Though economics are not clear, this is good at face value for TBL. The company probably should not ignore over a billion Indian consumers – especially given how dang hot the brand is in China. But we’d caution that there are major cultural, climate and utility differences between a brand entering the boot market in each of these countries. China is a slam-dunk, but we’re definitely not sold on India.
  • With all the talk about the warm weather and its impact on sales of seasonal apparel, we’d like to point out one of the more extreme weather facts from the month.  For the first time in 46 years, the state of Minnesota had its first snow-free November, with temperatures hovering 8-14 degrees above average throughout most of the month.
  • In one of the more unique promotions we’ve seen in the apparel industry in a while, outerwear brand Weatherproof has launched a “Coats for Clunkers” campaign.  The effort is aimed at driving donations of used coats for New York Cares.  In return for donating a used coat at Penn Station on December 14-16, customers will receive a $100 credit for use towards the purchase of a  new coat on coatsforclunkers.com.  The company also hopes to build national awareness of the NY program in hope that other brands will join in the “Clunkers” effort.




NRF: Holiday Shopping Kicks Off with More Spending Less - As the closely-watched Black Friday weekend wound down, a National Retail Federation survey conducted over the weekend confirms the expected: more people spent less. According to NRF’s Black Friday shopping survey, conducted by BIGresearch, 195 million shoppers visited stores and websites over Black Friday weekend*, up from 172 million last year. However, the average spending over the weekend dropped to $343.31 per person from $372.57 a year ago. Total spending reached an estimated $41.2 billion. Shoppers’ destination of choice over the past weekend seemed to be department stores, with nearly half (49.4%) of holiday shoppers visiting at least one, a 12.9% increase from last year. Discount retailers took an uncharacteristic back seat, with 43.2% of holiday shoppers heading to discount stores over the weekend and another 7.8% heading to outlet stores.** Shoppers also visited electronics stores (29.0%), clothing stores (22.9%), and grocery stores (19.6%). As millions of shoppers gear up for Cyber Monday, one-fourth of Americans shopping over the weekend (28.5%) were shopping online. <sportsonesource.com>


Borders begins 'closing down' Sales while interested buyers circle - Borders has commenced ‘closing down’ Sales in all its stores as interested parties circle the business. The bookseller, which collapsed into administration on Thursday, launched the Sales in all 45 stores on Saturday, putting pressure on its rivals in the crucial Christmas trading period. A spokesman for the administrator MCR said Borders had been planning a sale for last weekend for some time. He described them as “stock clearance sales” as oppose to closing down sales, and added that MCR was conducting a “parallel strategy” - selling off stock while trying to find a buyer for the business as a going concern. He said MCR had received “lots of interest in the Borders and Books etc brand”. MCR joint administrator Phil Duffy said: “We are conducting closing down sales while we continue to seek a purchaser for all or some of the company’s stores.” The Sale will be a blow to rivals including Waterstone’s, WHSmith, Tesco, Asda and Amazon. <retail-week.com>


Armani, Cavalli Go Online to Boost Holiday Sales - Italian fashion houses including Giorgio Armani SpA and Valentino Fashion Group SpA, which have traditionally spurned the Internet, are testing Web stores this holiday season in a quest for new sources of revenue. The worst recession since World War II and Italian acceptance of Internet buying -- even for big-ticket items -- is sparking greater use of Web shops in the luxury-goods industry. Designer Roberto Cavalli and shoemaker Salvatore Ferragamo SpA have both opened e-stores in the past five weeks. “I expect a significant boom in online luxury sales during the Christmas period,” said Alessandro Perego, a professor in charge of research on e-commerce at Milan Politecnico’s School of Management. “In the past year the number of Web sites has increased substantially. I expect growth rates in 2010 to match or beat this year’s.”  <bloomberg.com>


Mitchells Take Control of Wilkes Bashford - It’s a done deal — the Mitchells are the new owners of Wilkes Bashford. A bankruptcy court in San Francisco on Wednesday approved the sale of the San Francisco-based luxury specialty store to Ed Mitchell West LLC for $4.6 million in cash. “The judge approved everything,” said Bob Mitchell, co-president of the $100 million Connecticut-based retailer that owns Mitchells in Westport, Conn., Richards in Greenwich, Conn., and Marshs in Huntington, N.Y. “There were no other bids and the creditors all supported the plan.” The acquisition gives the Mitchells a beachhead on the West Coast, where they can be players in the luxury men’s wear sector in the San Francisco Bay area. The Mitchells have purchased the inventory, trademark and fixtures of the business, not its liabilities.  <wwd.com>


Dunay Jewels Get Auction Approval - Henry Dunay Designs Inc., one of fine jewelry’s venerable names, is going to auction. The company, founded by its namesake more than 50 years ago, won court approval on Wednesday to auction Dunay’s jewelry inventory at the U.S. Bankruptcy Court in Manhattan. Henry Dunay sold his pieces, which start at about $4,000 and reach as much as $500,000, to Bergdorf Goodman, Neiman Marcus and independent retailers around the world. The auction is set for Dec. 16. The firm filed for Chapter 11 bankruptcy protection in June, a symbol of how hard the recession had hurt the sector.  <wwd.com>


UK: Textile job losses slowed down - UK's textile job losses has been slowed down although the country's economy will experience a slow recovery, said a survey conducted by Clifton Asset Management. The survey, of more than 1,000 businesses, revealed that 28% of firms have cut jobs over the past six months, down from 34% in the last survey. However, most of the small businesses believe that the worst of the recession maybe over but it will take another year or more to recover. <fashionnetasia.com>


Christmas Shopping 2010 - Discounts, scarcity and luxury - A survey carried out in London and reported on CNN on November 25th indicated that 40% of retailers intended to offer discounts for the 2009 Christmas season compared to 90% in the comparable period in 2008. With nothing being certain for this Christmas sales period due to rising unemployment and volatile retail sales and consumer confidence indices in both Europe and the US, other measures are being taken at retail level to limit the discount blood-letting which has badly wounded the retail luxury market this year. <fashionnetasia.com>


Zac Posen to Design for Target - Zac Posen, who has dressed stars such as Kate Winslet, Gwyneth Paltrow and Jennifer Lopez, will be the next limited edition designer of Target’s Go International series. Posen’s Go International collection will be available at most Target stores nationwide and online at Target.com from April 25 through May 30. Go International, which focuses on young or emerging designers, has, since 2007, featured Erin Fetherston, Jovovich-Hawk, Rogan, Richard Chai, Jonathan Saunders, Thakoon and Tracy Feith. Next month, Target will introduce Rodarte, the collection designed by sisters Kate and Laura Mulleavy. Target did not disclose prices for Posen’s collection, but previous Go collections have been in the $14.99 to $149.99 range. Posen’s own collection is priced from $900 to $12,000, with custom pieces fetching upward of $20,000. <wwd.com>


JA Apparel Names CFO - Tom DeCarlo has been promoted to senior vice president and chief financial officer of JA Apparel. DeCarlo, who has been with JA since 2004, most recently as vice president of finance and controller, had been serving as the head of financial operations since the previous cfo, Eric Spiel, left the company earlier this year. In July, DeCarlo was also given oversight of the company’s human resource operations. As cfo, DeCarlo, who has more than 20 years of experience in retail, wholesale, manufacturing and consumer product industries, will oversee all financial functions of the privately held company. He reports to Staff. <wwd.com>


EU Study Warns of China's Manufacturing Overcapacity - China is producing too much, especially in large sectors like steel and concrete, and its manufacturing overcapacity damages domestic and global economies, according to a new study from the European Union Chamber of Commerce in China. Overcapacity “is a strangely understudied and seldom-examined phenomenon, and one whose influence is even more widely felt in the aftermath of the economic crisis,” the EU Chamber said in its report released Thursday. The global financial crisis highlighted China’s overcapacity problem, which was mopped up to a large extent in previous years by high demand from the U.S. and Europe. With that demand greatly diminished in the wake of the downturn and savings rates beginning to rise, China’s overproduction across a variety of sectors is now more apparent, the report said. “The economic crisis has throttled demand for exports from China at a time when even more investment, spurred by the Chinese government’s massive stimulus package, is being pumped by some local decision makers into building new plants and adding unnecessary capacity,” the report said.  <wwd.com>

The House That Leverage Built

“This nation will remain the land of the free only so long as it is the home of the brave.”
-Elmer Davis
Last week’s news out of Dubai brought me back to a talk that former Goldman CEO and head of the US Treasury, Robert Rubin, gave earlier this year at the Yale Law School. When asked about the future risk of Sovereign defaults, Rubin said, "There is no risk of any defaults on sovereign debt globally."
Here are 3 more fascinating revelations from Rubin at that April 2009 speech that I have in my notebook:
1.      "No one saw the extreme confluences of events that led to this recession."

2.      "The most important academic experience for my career in finance was my first year class at Harvard in Greek Philosophy."

3.       "A key problem in our Democracy is that our electorate is not informed."

In prior centuries, when the Wizards of Perceived Financial Wisdom couldn’t be YouTubed (held accountable for what comes out of their mouths), Rubin would have gotten away with saying some of these things. Maybe that’s why he has been suspiciously missing from the current economic debate. Apparently, The House that Leverage Built didn’t come with a warranty.
Economic historian, Niall Ferguson, recently titled a chapter in The Ascent of Money, “Safe As Houses.” It’s a must read historical account of the perceived safety Westerners ascribe to real estate. Ferguson calls the British, “The Property Owning Aristocracy”, and Americans, “The Property Owning Democracy.”
Maybe we should call the boys in Dubai, The Property Owning Insolvency. The only thing harder than building a levered up Disneyland on man-made ocean sandcastles has to be having worked at both the Treasury and Fed overseeing this American leverage-fest for the last 20 years and retaining your job. If the land they call The Kingdom got their Dubai World, America got Robert Rubin’s protégé, Timmy Geithner,
This morning, as the United Arab Emirates central bank proclaims that they are easing credit and “standing behind” the country’s banks, I cannot help but think of Hank The Market Tank Paulson. Yeah, you can call the crisis local to the Middle East. But the resolve is the same. He Who Sees No Bubbles (Bernanke) has Geithner’s banker buddies backs too. Standing behind those who levered up America is perceived to be what will keep this the home of the brave. Perception can be very deceiving.
“A key problem” for us commoners who think debt piled upon debt is bad is probably that we, like the electorate, are “not informed.” That said, there are a few economists in our camp. Hyman Minsky submitted that economic crisis is born out of a capitalist economy that creates debt financed speculation on asset prices. This creates asset price bubbles. They pop. Then, as prices collapse, we “stand behind” them, re-lever them, and set them up for their next fall.
I know, I know. This is coming from some math guys who shun the perceived wisdoms of Debtor nations like Japan and now the USA. What we really need here is a lawyer like Rubin who knows how to really lever up a return and teach us how a Greek Philosopher would approach this moral conundrum.
Back to reality. Last week’s action in marked-to-market prices came on very light volumes, but we are starting to see some cracks in global equity and commodity market foundations. In addition to Dubai, here’s what those who are not paid to be willfully blind might see:
1.      US Financial Stocks (XLF) broke our intermediate term TREND line of support = $14.69

2.      US Small Cap Stocks (RUT, Russell 2000) broke our intermediate term TREND line of support = 589

3.      Japanese Stocks got smoked again – they remain broken on both TREND (3 months or more) and TRADE (3 weeks or less) durations

4.      South Korea’s KOSPI index broke its intermediate term TREND line of support = 1615

5.      Oil has finally broken its immediate term TRADE line of support ($78.79/barrel), despite the US Dollar having closed down again week-over-week

6.      2-year US Treasury yields are testing their lowest levels since December of 2008 (prior to that you need to go all the way back to 1938 for lower-lows)

So what do we do now? In the Asset Allocation Model we called an immediate-term top in the price of Gold on Wednesday, and cut that position in half. On Friday, at one point gold was having a freak-out session, so we bought what we sold back. This isn’t rocket science. This is called risk management.
At Wednesday’s YTD high in the SP500 (1110) we also raised our position in Cash to 67%, then we used Friday’s weakness to invest 7% of that cash at lower prices. We took our Allocation to US Equities up to 10%, splitting between a 7% position in Tech (XLK) and a 3% position in Utilities (XLU).
On the International Equity side of the ledger, we covered our short position in Korea (EWY) and bought back our bullish position on China (CAF). Prior to the Thursday-Friday selloff in International Equity markets we actually cut our position in International Equities to ZERO. That’s the first time we had done that this year. Again, we call that managing risk.
Samuel Johnson said that “bravery has no place when it can avail nothing.” This Thanksgiving reminded me that America remains the home of the brave. But not on every score of this country’s financial leadership. Far from it. We should be very afraid of the Wizards of Perceived Financial Wisdom and The House That Leverage Built.

From Dubai World to Citigroup, Robert Rubin and Tim Geithner were brave enough to submit that they saw none of this coming. I suggest you take their word for that. They won’t see what’s coming next either.
My immediate term support and resistance lines for the SP500 are 1081 and 1102.
Best of luck out there today,


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally.

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).

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.

FXY – CurrencyShares Japanese Yen We took the opportunity to short a 14-year high in the Japanese Yen on 11/27.  The BOJ will definitely be intervening if the unintended consequences of a Geithner Buck Burning persists.


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.

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.

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The Macau Metro Monitor.  November 30th, 2009.



Shares of LVS’ Macau unit fell more than 10% on its Hong Kong debut on Monday.  Chairman Sheldon Adelson dismissed the drop, telling reporters, “there is no reason to think a little bump in the road is going to last”.  The Sands’ underwhelming first day follows several disappointing listings in Hong Kong recently, including Minsheng Banking and Wynn Macau.  Sands raised US$2.5 billion from the IPO – less than the US$3.4 billion that executives had expected.





Chief executive Edmund Ho Hau Wah has announced China’s approval of a Macau government proposal to reclaim 3.6 square kilometers of land.  The Macau Post Daily has stated that the land reclamation is for the creation of a “new urban zone”.  Macau’s current land area amounts to 29.2 square kilometers; the proposed land reclamation project will increase Macau’s land area by 12.3%.




Macau’s gross domestic product, in real terms, expanded 8.2% year-over-year in the third quarter.  The rise ends three quarters of contraction.  In the first and second quarters, the GDP contracted by a revised 12% and 15.3% respectively.  


I’m not referring to Tiger Woods, but the Financials (XLF).  The XLF is the first sector to break TRADE and TREND!


After a mini crisis on Friday, the market looks to open modestly higher today as some of the fears from the Dubai debt crisis are mitigated and the focus is holiday sales trends.  The S&P 500 closed down 1.7% on Friday and has now been down five of the last seven days.  On Friday the S&P 500 held the 1,081 TRADE line in quiet post-holiday trading. 


The Dubai World credit issue has taken the wind out of the sails of commodities and commodity stocks, which have been the biggest beneficiaries of the RECOVERY trade.   The Dollar rose 0.2% on the day and volatility surged as the VIX rose 21% on the day. 


The Holiday shortened week was relatively quiet one with the Dow and the S&P 500 basically unchanged on the week.  The NASDAQ declined 0.4% and Russell 2000 1.3%.   Last week the MACRO calendar provided some better-than-expected economic data on the employment and housing picture.  Also adding to the positive tone was increased M&A activity and some better than expected earnings and guidance from some selected retail names.   


On Friday, four sectors outperformed the S&P 500, but every sector was down on the day.   Consumer Staples (XLP), Healthcare (XLV) and Technology (XLK) were the best performing sectors.   The

relative outperformance came from renewed momentum in the SAFETY trade due to the strong dollar and weak commodities. 


The worst performing sectors were Materials (XLB), Financials (XLF) and Consumer Discretionary (XLY).  The XLF is the first sector to break both key durations - TRADE and TREND.  The Energy sector (XLE) is the other sector to be broken on the TRADE duration.  Within the XLF, Insurance and Diversified Financials were the worst performing industries and regional banks were the best performing names.  The three best performing names in the XLF were STI, PBCT and HCBK.


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 21 points or 1% upside and 1% downside.  At the time of writing the major market futures are down slightly.


Crude oil is trading higher on U.A.E. backing of the Dubai Banks and a weaker dollar.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.31) and Sell Trade (75.49).


On Friday, Gold dropped over 4%, but it remains in a bullish formation from a TREND and TRADE perspective.    The Research Edge Quant models have the following levels for GOLD – buy Trade (1,163) and Sell Trade (1,190).


Copper is higher in early as concerns of Dubai World eases.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.18). 


Howard Penney

Managing Director















The Economic Data calendar for the week of the 30th of November through the 4th of December is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on. 





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 80.51%
  • SHORT SIGNALS 78.32%