prev

Be The Change

“Be the change that you want to see in the world”
-Gandhi

On October 9th, 2007, the S&P 500 was trading at 1,562. It “was global this time” and oh boy was it levered up long. Tomorrow all of the said geniuses of “Investment Banking Inc.” can celebrate the anniversary of what was the most hyped global stock market mania in world history.

Having been in print with this call since November of 2007, I do not have to feel shame this morning like some should. I have been reading some quarterly hedge fund letters this week, and it’s almost as if they want you to believe that this is all “ok”, because “everyone missed this.” Surely, after the S&P 500 has lost -36% of its value, plenty of people did, but who should pay for the cardinal money management sin of not proactively preparing for risk? The client?

I quoted Gandhi this morning because some of these said “market savants” may very well need an alternative spiritual vehicle to find resolve. For those who didn’t allocate a healthy percentage of their assets to cash, prayer may very well be all that’s left. On 9/19/08 I made the call for a stock market crash (“Beware October 3rd, 2008”, www.researchedgellc.com), so I don’t have to sit here and feel bad about this. Since that call, the S&P 500 has dropped -21%. That’s not a victory lap. That’s the math.

The market has been down now for 5 days in a row. Dropping 15%, this puts the crash in the top 3 largest 5 day drops in US market history. Yesterday, today and tomorrow are days that you should be buying stocks, not yelling at one another, and pointing fingers. That’s what losers do.

Yesterday I moved our Portfolio to the following allocation: Cash 79%, Stocks 18% stocks, and 3% Gold. Today, I’ll be selling my yellow rocks and upping my allocation to stocks. This will be done at a measured pace. There is no reason to be running right now. This is what capitalism is; being proactively prepared to seize opportunity when your competition is most vulnerable. That’s not my or Gandhi’s religion. That’s called winning.

What we need here is some leadership, and I for one am not going to bury my head for the sake of looking “humble”, and hide on you today. I was up at 4am, and my investment team was in this office by 530am. We may not be as smart as the said “hedgie” masters of the universe. Some of them will be the first to tell you as much… but we will outwork them, and we do have a plan this morning. It’s the same plan we had yesterday. The only facts that have changed are prices. They are lower. BUY STOCKS.

The US Federal Reserve is going to cut rates and drop money from the heavenly skies this morning, so at least the predictable has occurred. Asian stocks markets crashed overnight, but the issues in international markets are not new to you if you have been reading anything we have been saying for the past 9 months. The British are issuing a $87B bailout program for 8 of their banks. The Russians and Indonesians have halted trading in their respective socialist stock markets. The South Korean Won dove -5.1% leaving it at below its level it saw during the Asian Crisis in 1997-98. Stock markets from Egypt to Austria are down -12 and -9%. The “carry trade” in the Yen is ending, swiftly, and wiping out hedge funds, globally. They are de-leveraging in unison at the bottom. BUY STOCKS.

Merrill Lynch is downgrading the transportation stocks this morning. This is despicable. Where were these bankers and brokers in October 2007? Why weren’t their bosses dialing up their buddy Chris Cox as the SEC getting a ban on long buying?? Unfortunately (for him), Ken Lewis at Bank of America is choking on that compromised and conflicted banking/brokerage unit this morning. His stock got priced at $22 last night, down from $38 at the beginning of the month! That’s a -42% drop. John Mack’s Morgan Stanley is down -28% since that same day. Short selling was banned – where are the evil doer short sellers now? Who are you guys going to point fingers at this morning? Get a mirror.

If you sense an aggressive tone in my key strokes this morning, you should. These said leaders of ‘Investment Banking Inc.’ should be sold short to zero. They took care of themselves before the client. Marcus Goldman is rolling in his grave this morning. He’d have advised the same; it’s time to BUY STOCKS.

Replace their definition of transparency and accountability with some advice that will be here for you when it matters most. We’re here for you. We’ve been winning our whole lives, and we’re not going to stop now. Game time starts in 1 hour and 30 minutes. “Be the change that you want to see in the world.”

KM



The ‘Forever Perplexing’ Bid

‘Forever 21’ stepped in as the first bid 149 Mervyn’s stores. This is bizarre on many levels. If it goes through, there’s impact on several others due to competitive overlap.

For those that do not know Forever 21, it is a fast-fashion retailer targeting trendy teens and 20-somethings (but as usual skews higher). The product sells at prices up to 80% off comparably designed product elsewhere in the market. Is the quality the same? No way. But the customer is one that buys the product, wears it 5 times, and then uses it as a car wash rag.

This has ‘disruption’ written all over it. Consider the facts.

1) Forever 21 has 430 stores, and is looking to buy 149 new ones. This is a lot to digest.

2) Mervyn’s average store size was 80,000 square feet, while Forever 21’s stores are 10-20,000 sq ft. It has one larger format flagship store – but even that is only 40,000 feet. Expertise here in mega-box formats is nil – and launching 149 at once? What are they thinking?? Maybe the plan is to partition off half the store and sub-lease, but that’s not my read thus far.

3) Note that this company’s past acquisitions have been smaller in size. It bought both Gadzooks and then 44 Rampage stores from Charlotte Ruse in 2005.

4) Korea funding what the US market can’t. I don’t see how the company can afford this on its own. This is a small growth retailer with about $1.3bn in revs, $200mm in EBIT, and not a whole lot of free cash to speak of. With such poor accesses to capital, how is this possible?? We can’t even hide behind the ‘lease everything’ argument, because 60% of the real estate is owned. Unless there’s a complex sale-leaseback transaction, this thing will be tough to fund. I guess that’s where support from Korea comes in. That’s where CEO Do-Won-Chang founded (and funded) the chain as the first store’s Clerk, Janitor, Buyer, and Salesman (credit where it’s due to his success). That checkbook in Korea runs deep…

5) Who can be impacted? Check out the pic below. We ran the analysis on what percent of each retailers’ stores fall in a 1, 3 and 5 mile radius to one of the Mervyn’s stores. We included footwear retailers – as 15% of Forever 21’s sales come from (extremely inexpensive) footwear (look out DSW). The bottom line is that Wet Seal, Ross Stores, and DSW have the greatest overlap. Aeropostale, American Eagle and JC Penney are next in line.

Alcoa (AA) Kicks Off EPS Season With A Punt

So is Alcoa a cyclical?

After falling over -60% since the "Fast Money" mania bought everything "that hurt if you dropped it on your foot", I think the answer is implied. Alcoa missed earnings big here on the close. They are "suspending" their share repurchase program. Some of these management teams only buy back stock at the top, fancy that. Embarrassing.
  • Next support is $13.27
    KM
chart courtesy of stockcharts.com

Hedgeye Statistics

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

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Cold Chill: A Russian bail out facility for Iceland

Why does Island, a nation of 300,000 with a GDP of only $20 B matter? As the son of the former commander of the army of Iceland -a ceremonial title formerly assigned to the highest ranking NATO army commander on the Island at any given moment , I have some quick insights:

• Iceland is the only member of NATO that does not have a military.
• Through a long standing treaty the United Stated is bound to defend the sovereignty of the tiny island nation against any aggressor.
• The US shut down our cold war base at Keflavik in 2006 and no longer hold a lease for permanent facility there.
• Iceland holds a critical a strategic position in the North Atlantic, overlooking Russia’s only outlet into that sea.

Apart from the absurdity of the level at which the Icelandic government are attempting to peg their currency at the level they have chosen (the chart attached below show the official exchange rates, dealer banks have reportedly shown levels as much as 30% lower than the lowest level quoted here over the past 2 days) the Russian bailout also has to be leaving EU and NATO leader with knots in their stomachs: with Putin employing the Chavez method of diplomacy through distressed lending they must now consider the formerly unthinkable possibility of a Russian presence in the North Atlantic.

Andrew Barber
Director
Research Edge LLC

TYPO: SP500 Levels

1022 was the 3pm price, and 1004.33 is our buy/cover for a "Trade" line.

My typo, appologies.
KM

Refreshing Our SP500 Trading levels for the close...

As our business grows and we move to more tailored Macro relationships with our core constituency of RE Macro clients, we need to continue to improve how we express our investment process.

See the chart below. The code is simple: red is bad, green is good.

Our overhead "Trend" line for the SPX is 1196.04.
Our buy/cover for a "Trade" line for the SPX is 1104.33.
Our sell/short the bounce line for the SPX is 1127.55.

Our quant models refresh every 90 minutes. These levels incorporate a cash price in the SPX of 1222 at 3PM.

Be patient, but realize that there is plenty of performance to pick up if you trade this volatility well. Process trumps emotion.
KM

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next