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Slouching Towards Wall Street… Notes for the Week Ending Friday, December 4, 2009

No Regulation, Radio


The New York Times (2 December, “Black Caucus Seeks To Ease Radio’s Woes”) describes what looks like a pathetically transparent example of the conflicted intertwining of business, politics and the media.


Inner City Radio, a New York company co-founded by prominent New York politician Percy Sutton, owns 17 commercial stations nationwide.  According to the Times, it “faces a possible financial collapse because of pressure by Goldman Sachs and GE Capital to repay nearly $230 million in debt.”  The story goes on to describe ways in which the Congressional Black Caucus has tried to use its leverage to score greater visibility for the ways in which minority-owned businesses have been hurt by the financial crisis.  The lobbyist retained by Inner City is Paul A. Braithwaite, former executive director of the Congressional Black Caucus, and a former senior aide to New York Senator Charles Schumer.  Braithwaite “said the financial crisis has had a particular impact on the radio industry,” citing declines in advertising revenues, and changes in the way audience ratings are computed. 


Barney Frank has gotten into the act here as well.  According to the story, he has arranged for Caucus members to meet with Secretary Geithner and White House Chief of Staff Rahm Emanuel.  Frank also has had discussions with companies regarding Inner City.  Frank declined to name any of the companies with whom he has spoken, but he did not deny that one of their initials might be “GS”.


The article also points out that the Obama administration “did not believe it was appropriate to pressure financial institutions to make concessions for specific loans or businesses.”  In other words, the President believes it is inappropriate to introduce politics into the political process.  Go figure.


We do not learn how the “pressure” from Goldman and GE is any different in the case of Inner City than on any other debtor.  Our guess is that Goldman, being in the risk management business, wants the risk cleaned up and are likely treating Inner City no differently than any other debtor with a similar risk profile.


Times Chief Financial Correspondent Floyd Norris, in his blog (3 December, “The Goldman Veto”) wonders how this story might have been reported if, say, during the 1998 Asian financial crisis, “a group of Republican legislators had threatened to block legislation unless a contributor to their campaign received special treatment.”  


We are not sure what the Times’ take on the story is, and why it has chosen to report it in just these terms.  Can it be that a major New York City newspaper is shocked to discover that there is Politics going on in Washington?  Norris is pretty clear in seeing this as a conflict, but neither his commentary nor the underlying story presents any statistics relating to minority-owned businesses, or to the effect of the financial crisis on smaller independent radio broadcast companies.  On the other side of the argument, it makes no attempt to argue the creeping obsolescence of radio in the internet age. 


We find this journalistic approach disappointing.  In the absence of any analysis, readers will fall back on their own prejudices.  For our part, we suspect the Caucus may have a point.  They certainly have an opportunity.  In the world of politics, it would be a crime to waste it. 




As Easy As AAA, BBB, CCC


We have been reading up on the rating agencies’ new-found zeal for assessing risk – something you no doubt thought they were always paid to do.  On the premise that nothing happens in a vacuum, we note that it is only a few short weeks since the National Association of Insurance Commissioners (NAIC), the body representing state insurance commissioners, took the rating of asset backed securities out of the hands of the rating agencies and handed it to Pimco.


In the same time frame, we noted stories such as “Fitch Raises Alarm At Impact Of $98bn Refinancing On European Real Estate” (Financial Times, 24 November).


Cynics – among whom we surely count ourselves – will take a dim view of Fitch now warning that it will be difficult to refinance European securitized real estate debt due to mature in 2014.  The article says there have been declines in the value of the underlying properties of over 40% in the UK and Europe, and that “much of the debt struck at high loan-to-value in the boom years is in breach of covenants.”  Some are wondering where Fitch was when these loans were structured.


A little arm-twisting seems to have been the order of the day at S&P.  The Financial Times reports “S&P To Clarify Rankings On Capital Strength” (Financial Times, 25 November), on the heels of a newly-issued report “ranking 45 of the world’s leading financial institutions by a new risk adjusted capital (RAC) ratio designed to better capture balance sheet strength.”  The report was based on bank balance sheets as of the end of June, and thus does not take into account any housecleaning institutions may have undertaken. 


Investors might be comforted at the introduction of a more robust risk measure for bank capital.  The banks, apparently, were not, and rushed to lobby S&P to issue corrective statements.  Capital adequacy being a highly sensitive topic, banks wanted immediate credit for steps they have taken since the end of June to bolster capital.  The actual effect on the banks might be to raise questions about what kind of scrambling they had to do to boost capital since the second quarter.  UBS, for example, complained that the methodology failed to account for SFr 19 billion proceeds from the mandatory conversion of notes held by the Swiss government.  Six billion Francs worth of these notes were converted in August and are now part of the bank’s capital.  Duly noted, says S&P.  Oh and, says UBS, we are due to get another SFr 13 billion in March 2010.  Please be so kind as to credit that to us now.  We’re sure you’ll find a way.


We will refrain from overly praising the ratings agencies, but it is clear that they are significantly tightening standards in areas where it has often paid for them to remain lax.


And they are calling public attention to problems.  “Mortgage Backed Securities Downgrades Warning,” reports the Financial Times (24 November) citing over $150 billion in loans backed by commercial mortgages due to mature by 2012.  Moody’s does not foresee a strong rebound in the sector, so they are predicting rounds of ratings reductions.  While the article makes no mention of the D-word (“default”) if you are an insurance company, your capital stands to be severely impaired by a ratings downgrade of your portfolio.


Looking for a way out of this morass, the NAIC has come up with a new source of money: income-tax accounting.  The Wall Street Journal reports (28-29 November, “Insurers Nearing Regulatory Victory”) that the state insurance regulators have called for favorable treatment of “deferred tax assets.”  This looks set to add over $11 billion to insurers’ capital with the stroke of a pen.


Time would appear to be running short for the insurers.  The House Financial Services Committee just approved legislation to create a national supervisor for insurers (Financial Times, 4 December, “Systemic Risks Of Insurers In Spotlight”.)  This new office will not regulate insurance, but will coordinate information at a high level to help create policy, respond to crisis, and mitigate risks to the financial system.


This is becoming necessary, not only practically, but politically.  European Central Bank president Jean-Claude Trichet has told the European regulators that he considers large insurance companies to be “systematically important institutions,” and as the capital base of major insurers has been chopped down significantly, their ability to pay claims in large crisis situations may soon be called into question.


The FT article points out that “there have been times when life insurers have been forced to sell certain assets, for example equities during the dotcom stock market crash.”  The new proposed European capital rules will, it is hoped, influence insurers’ behavior and the management of their portfolios. 


The Financial Stability Board, the international central bankers’ group, recently added six insurers to its list of “systemically important cross border institutions”, which means our domestic insurance industry will also come under scrutiny.  In prophylactically confronting the tide of global opinion, US regulators are taking swift steps to beef up domestic insurers’ capital.  We are puzzled as to why the regulators themselves are pushing for this to be done by accounting legerdemain, rather than by requiring the insurance companies to forsake the behavior that got them into capital trouble in the first place.


Speaking of behavior modification, the Financial Times (5-6 December, “Legal Rulings Show Banks Will Pay For Their Follies”) mentions recent legal rulings in which major banks are being called to account for predatory, inappropriate, and just plain dumb lending practices.


In the case of a Florida homebuilder, Tousa, “a bankruptcy judge ruled that Citigroup and other banks made fraudulent transfers when they lent Tousa about $500m in 2007.”  Less than six months after receiving half a billion dollars in bank loans, Tousa filed for bankruptcy.


Pulling no punches, bankruptcy court Judge John Olson found the lenders were “grossly negligent” and “should have known the company was insolvent.”  The judge might have been tipped of by two items relating to the loan.  One is that Tousa’s CEO stood to receive a $4.5 million bonus, largely contingent on closing the financing.  The other is that Tousa had retained global consulting group Alix Partners to provide the solvency opinion that Citigroup had required as a condition of issuing the loan.  The FT reports Tousa “agreed to pay $2m if Alix opined that Tousa would still be solvent after the loan, but would pay only time charges and costs if it did not so opine.”


We are not sure whether to burst into shrieks of outrage, or uncontrollable giggles.  At the present juncture in our financial history, it boggles the imagination that corporate governance at Citigroup is still so lacking that they actually participated in such a transaction.  Indeed, if Citi knew of the contractual arrangement between Tousa and Alix – and they had a right to that information, as a $500 million loan hung in the balance – it would appear they had an obligation to their shareholders to nix the deal.  They may have even had a regulatory obligation to report the Tousa / Alix contract to the SEC.


Having blamed the ratings agencies for their role in creating the meltdown – as touched upon for example in SIGTARP Neil Barofsky’s report on the AIG bailout – the regulators have doubled back and are attacking the rating agencies for trying to raise their own standards.  We bet the next thing will be attacks on “activist judges” such as Judge Olson.  Jed Rakoff, the judge who kicked the SEC / BofA settlement back into the mudpit, should take note.  With the markets strong once again, no one cares much about transparency or responsible corporate governance.




The Rock-Bottom Line


A casual stroll through the lunatic asylum shows that faith does not prove anything.

                        - Friedrich Nietzsche


Speaking of the New York Times, a CEO who has crossed battleaxes with Floyd Norris on more than one occasion is back in the news again – and in Norris’ blog.


Our colleague, retail analyst Eric Levine, recently posted that Overstock.com is offering more holiday discounts and contests than ever before, a strategy that has produced a return to positive growth, according to Overstock CEO Patrick Byrne.


We scratched our head when we read this, because we remembered an item in last week’s Financial Times (24 November, “Overstock”) which mentions that “After a decade in business, Overstock has never turned a profit and its shares have slumped 80 percent over five years…”  Levine goes on to quote CEO Byrne reporting that Black Friday had produced their biggest single sales day ever, only to be eclipsed by Cyber Monday, which trounced their Friday sales by thirteen percent.


Byrne, for those of you whose chief leisure activity is minding your own business, has issued numerous public statements over the years as he sounded off about illegal naked short selling and the ways in which these dastards have ganged up on his stock, among others.  We have read some of these rants, and they are generally well reasoned and, we think, largely on the money.  If Byrne has committed a sin in his public statements, it has been to reveal the seamy underside of how this bit of Wall Street takes your money. 


The political winds have been blowing against Byrne.  At the SEC, Chairman Schapiro has done a masterful job of Doing Nothing to Great Fanfare over the political firestorm about short sellers.  We think this was probably well advised, in light of the immense disservice done to the markets when the crisis burst like a pus bubble and regulators threw on “emergency” bans against shorting.


What the SEC chose not to touch was the variety of mechanisms that make naked short selling possible – and that still exist.  These include lack of controls on Easy To Borrow lists, where the same securities can be shorted multiple times, and by multiple customers, without an actual count of securities available for borrow.  And no one has any notion of how many shares of how many different issues are floating around in “Ex Clearing” contracts where they will never have to be reported as unsettled short sales, and thus never be bought in.


Byrne has attacked Norris before as being part of a press cabal that plays to the SEC’s hand, determined to turn a blind eye to what is going on and – in Byrne’s analysis – promoting exactly the illegitimate activity from which Overstock’s stock has suffered.


Byrne has now come up with a new one.  In a dispute over the recognition of revenues, Overstock has fired not one, but two auditors – first PriceWaterhouse, and now Grant Thornton.  This was after the SEC questioned certain accounting assumptions, and Overstock and Grant Thornton got into an imbroglio over whether the auditor had, in fact, signed off on a formal opinion on the transactions under review.


Byrne and Grant Thornton have exchanged public statements accusing each other of lying.  Overstock has said there are a plenty of audit firms out there that would love their business, but they are not going to retain a new auditor until they get a clear resolution, which will require a definitive statement from the SEC.  In the meantime, in order not to be delinquent in making its required filings, Overstock has taken the unusual – we think unique in regulatory history – step of filing an unaudited 10Q.  In explaining the situation to Overstock shareholders, Byrne issued a letter that opens with a quote from philosopher Friedrich Nietzsche: “All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.”


As near as we can tell, the amount of money at issue in the transactions being questioned by the SEC is $785,000.  This does not strike us as even a material amount for a company that reported $195 million in gross revenues for the quarter ended September 30.  Given Byrne’s public image as a CEO who clings tenaciously to principle, we are not surprised to see him going after his auditors.  And who knows?  Maybe he will emerge both victorious and right.


But we admit to being perplexed as to why a CEO of a company that has not turned a profit in a decade would want to call such attention to himself.  We caught Overstock’s holiday season commercials recently.  It features a quartet all dressed in white singing, to the tune of “Jingle Bells”, “Oh-Oh-Oh!  The Big-Big ‘O’”.


Byrne’s statement about the big jump in Black Friday and Cyber Monday sales might hold a clue to the company’s overall performance.  “Promotions have been good for us,” said Byrne, “and we switched to free shipping for the whole season.  We’ve never done this much discounting before.”


For all his entertainment value as a CEO, we wonder whether Overstock’s “Big, Big ‘O’” will be just as big this year as in the past.




Let’s Assume We Had An Economy


It’s been a challenging year for us all.

                        - Ben Bernanke


Economists are famous for working from assumptions.  In his recent job interview, Fed Chairman Ben “I Really Need This Job” Bernanke attempted to cajole his interlocutors into sharing his assumption that Fed “expertise” is needed to re-stabilize the nation’s economy.


The nation has been following economists’ assumptions for years.  We followed Chairman Greenspan’s assumptions (the “Maestro”) into an era of irrational exuberance – oddly, the man who identified it appears to have been its single greatest proponent and driving force.


We followed the assumptions of Tim Geithner, among others, when as head of the New York Fed he participated in blowing the lid off bank leverage ratios.  It is fascinating to see Geithner and Blankfein duking it out in the public media – at long distance, to be sure – over whether or not Goldman would have gone out of business but for the government bailout program.  Geithner gave Goldman and their brethren untold miles of rope, with which many – Bear Stearns, Lehman, Merrill Lynch, to name a few – dutifully hanged themselves.  He is now taking credit for cutting down the one firm that never put its own head in the noose and getting into a public urinating competition over it, all the while ignoring the American consumer twisting and convulsing and slowly strangling on the gallows.  In their defense, Goldman Sachs never pretended their job was to do anything other than gulp down as much punch as they could.   Geithner, on the other hand, was one of those charged with controlling access to the booze.


The nation is now not really debating whether to confirm Chairman Bernanke for another term.  There is not much chance of him not being reconfirmed.  The debate comes down more to what assumptions we will buy into, and which ones we will deflect to third parties. 


Astonishingly, Bernanke’s assumption of “expertise” appears to be generally in the ascendant.  The Fed under Greenspan showed considerable expertise in creating the mother of all market bubbles – equities, housing, and risk derivatives.  Bernanke showed considerable expertise in addressing the inflationary / deflationary concerns in the last few months, but the overall lack of Fed expertise to derail the Greenspan bubble express should be more deeply troubling than it is.


Ron Paul’s idea to hold the Fed accountable through an audit mechanism has actually gained traction, but we do not for a moment believe the solution to Fed errors is allowing Congress to tell them how to run their business.  Talk about “expertise”!


Bernanke supporters are doing an odd pat-and-smack as they attempt to head off the political consequences of voting to reconfirm Bernanke.  The Wall Street Journal (4 December, “Greenspan Haunts The Room”) quoted Senator Chris Dodd as praising Berenanke personally, yet saying “the Fed failed terribly in giving us the kind of warnings that we should have.”  It is a bit difficult to separate the man from the institution.  Indeed, the Journal points out that the institution and the man are truly seen as one.


The simple fact that no one wants to face is, it is the people, not the institutions, who make decisions.  People who score tactical victories, and people who make terrible mistakes.  If we could remove that human element from our economic decision-making, we would be golden.  That was the theory behind bringing professional economists to Washington and having them make decisions for us.  Science would rule the day and we would no longer have to worry about human error.


We’re still waiting.


Meanwhile Senator Jim Bunning addressed Bernanke saying, “Now I want to read a quote to you, Mr. Greesnp—“  Can’t shake the ghost, can we?


After the laughter died down, Senator Bunning corrected himself and said, “Mr. Bernanke.  That’s a Freudian slip, believe me.”


We all know what a Freudian Slip is: it’s when you say one thing, when you really mean your mother.


Moshe Silver

Chief Compliance Officer


Chart of The Week: Unemployment Read Through

Friday’s drop in the unemployment rate to 10% had a major impact on the short end of the US Treasury curve, the price of the US Dollar Index, and the price of Gold.


On a week-over week basis, these 3 moves were as follows:

  1. US Dollar Index +1.5%, closing above its immediate term TRADE line of $75.36
  2. 2-year Treasury yields shooting up +22% to close the week at +0.83% versus +0.68% in the week prior
  3. Gold prices dropped 6% from the intra-week highs, and down for the 1st week in the last 5

In the Chart of The Week, Matt Hedrick and I show what the currency and bond markets wanted Ben Bernanke to see. What matters here, as always, is what happened on the margin.


That big green arrow in the bar chart dropping from a +40bps sequential acceleration in the unemployment rate to 10.2% (October) to the minus -20bps monthly deceleration (November) is the largest delta we have seen on a month-to-month basis going back to when this crisis in US employment began.


He Who Sees No Bubbles (Bernanke) obviously saw some pop (gold and 2-year Treasuries) on Friday. Yes, they are both priced in US Dollars. No, they didn’t crash. But they did pop.


The Federal Reserve continues to maintain a policy of “exceptional and extended” that we (and now the bond, gold, and currency markets) , consider UNREASONABLE and UNSUSTAINABLE.


ZERO is not a perpetual rate policy. Just get it over with Ben, and raise by 50 beeps. The market is already discounting the move.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Unemployment Read Through - unemploy10


Chart of The Week: Unemployment Read Through - bpchange


YUM – What is wrong with this picture?

There is still no rational explanation for the decline in sales trends in YUM’s China business.


Given the sequential deceleration in same-store sales trends in China there are many unanswered questions as to WHY.


(1)    The trends suggest that there are bigger issues with the Chinese consumer or there may be issues with the concept.


(2)    YUM’s aggressive posture toward unit growth might be generating self inflicted issues that are complicating the country’s economic issues. 


With all three of YUM’s key business units now seeing declining same-store sales, 2010 will be a challenging year for the company.  The US business is in a free fall with same-store sales down 8% in 4Q09.  The issues in the US are obvious and will be very difficult to correct without a major investment by the company.  Given that management guided to 5% operating profit growth in the US in 2010, it must be relying on increased cost cutting to drive that growth so there does not seem to be much room for significant investment in the business. 


YRI’s comparable sales turned negative in 4Q09 as well, down 1%.  YRI is primarily franchised, but the top line still matters, just to a lesser degree.


This brings us to China and the question about why business is declining so rapidly.  YUM’s future is extremely dependent on China and continued growth in the country.  As the story goes, China has billions of consumers and can support tens of thousands of units.  Unfortunately, less than a ¼ of them can actually afford to go to the concept.  


To be clear – there continues to be unit growth opportunities for YUM in China.  The fact remains, however, that the company is growing too fast in that market.  Supporting the company’s claim that the slowdown in sales trends in China is attributable to the Chinese economy is the fact that McDonald’s is not doing well either.  In response to the changing tone of business in China, McDonald’s has slowed unit growth. 


I have been making the claim that YUM should slow its growth in China for the better part of a year and from where I sit, it’s more imperative now.  It does not matter if the decline in demand stems from YUM-specific issues or from economic pressures on the Chinese consumer.  Either way, declining sales suggest that the economic model is changing and so are returns. 


Senior management does not agree with my assessment of the growth related issues in China, and has said that I am too US-centric in my analysis.  I might just be a typical US restaurant analyst and I might not fully understand the China story.  That being said, I do understand the math behind declining same store sales!



YUM – What is wrong with this picture? - YUM China SSS



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Retail First Look: Peak on Peak is Not Sustainable


December 7, 2009





EPS season is largely over. Macro season begins. Conviction (as measured by volume) is decelerating for retail – counter to what we see in the market. Add that to peak multiples on recovery earnings, and we’re setting up for a big bifurcation in 2010. That’s only 4 weeks away.



Earnings season is largely over, and now it’s Macro time through year-end. The Retail space is hanging right in there with the market – but where’s the conviction? S&P volumes (the best gauge of conviction) are flat to up, while Retail Sector volume is decelerating sharply. This is the first time we’ve seen this all quarter. On the same token, we’re looking at 20x p/e valuation on 20% consensus bottom-up 12-month forward earnings growth expectations. So let me get this straight… before the March 9th low, we had trough multiples on depressed earnings, and now we seeing peak multiples on recovery earnings. I’m not going to make valuation calls here, because the reality is that there are certain names that DESERVE to be expensive. But in maintaining the integrity of a bell curve, there are others that deserve to be cheap. That’s what we’re not seeing. I’m sticking with my view that we’ll begin to see a massive bifurcation in both cash flow trajectory and valuations intra-sector beginning in 2010.


Retail First Look: Peak on Peak is Not Sustainable - 1


Retail First Look: Peak on Peak is Not Sustainable - 2


Retail First Look: Peak on Peak is Not Sustainable - 3




  • As several of the companies we identified in our research on NOL Carry Backs on Nov 8th (i.e. TLB, CHRS, LIZ, & DDS) report earnings, the issue is becoming more impactful to results. CHRS reported last week and spoke in more detail about the NOL benefit and what they could expect to receive, and TLB reports tomorrow morning. With volatility amongst small-caps likely to remain high, this item is a positive ‘stocking stuffer’ for a select few that could use it. Other than LIZ, TLB is one of the more significant beneficiaries of this bill.
  • As the rumors continue surrounding Amazon’s potential purchase of European private-sale operator, Vente-Privee, a new site is gaining attention and investors. One Kings Lane has just landed an investment from Kleiner Perkins, adding to the growing list of private-sale operators attracting private equity and/or M&A attention. One Kings Lane offers discounted home furnishings over a sales period that usually lasts 72 hours.
  • The introduction of video games in Big Lots assortment during Q3 helped to drive an increase in the teens for the company’s electronics category. The company continues to expand its offering in electronics and is benefitting from increased SKU counts in televisions, DVD’s, and digital cameras.
  • More than half of all retailers are embracing social networking this holiday season in an effort to drive sales and brand awareness. This compares to only 4% of retailers using similar marketing techniques in 2007. Of those using social media, 76% are on Facebook and 50% are on Twitter.




Nike Opens Nike 6.0/Hurley/Converse Concept Store - Art and community combined with shopping at 225 Forest Thursday night. The concept store, which sells Hurley, Converse and Nike 6.0 products, hosted a release party for Munny World. Kids, teens and adults customized the faceless vinyl figures with permanent markers, stickers, spikes and fabric to create their own unique toy. Hosting events with a wide appeal is one way the store, at 225 Forest Ave., stands out from other surf or skate shops, said Adrian Nyman, senior vice president of branding for Hurley. "We really want to make this more about creativity," he said. Themes of art and community run throughout the store, which opened in July. The centerpiece is a painting that spans the store's two stories, created by artist Dalek with help from Laguna Beach High School students. Much of the materials used to build the store's interior are recycled. For Thursday's event, a DJ played records while locals shopped, crafted their new Munny or snacked on vegan cupcakes. "We want to have a relationship," Nyman said. "It's definitely a consumer experience." <ocregister.com>


U.S. Retail Hiring Rate Rose to Highest Level in 2009 - Hiring by U.S. discount, grocery, restaurant and specialty chains in November rose to the highest level in 2009, signaling that retailers may be anticipating a gradual recovery in consumer spending, a monthly survey found. In November, 3.87 percent of applications resulted in hires, the most this year according to seasonally adjusted figures compiled by software maker Kronos Inc. Job applications last month fell to 1.27 million, the lowest since March, after 10 straight months of increases, the closely held Chelmsford, Massachusetts-based company said today in a statement. While these are classic signs of a gradual, post-recession recovery, last month’s hiring increase might be a “spill over” from October, as retailers delayed the peak season for taking on employees, Robert Yerex, Kronos’s chief economist, said by telephone Dec. 4 from Beaverton, Oregon.  <bloomberg.com>


U.S. Department Stores Add 7,500 Jobs in Nov. - Retailers increased payrolls in November in anticipation of the holiday shopping season as the U.S. unemployment rate dropped unexpectedly and employers cut the fewest jobs since the recession started. Department stores added 7,500 jobs to employ 1.52 million people, recouping part of the revised 12,400 jobs cut from payrolls in October, the Labor Department said Friday. Specialty stores added 900 jobs to employ 1.41 million workers, after a revised decline of 600 jobs in October and an increase in payrolls in September. The unemployment rate fell to 10 percent in November after reaching a 26-year high of 10.2 percent in October, and the economy shed just 11,000 jobs, following three months of job losses averaging 135,000 a month. Although losses continued in manufacturing and construction, the private services sector added jobs for the first time since December 2007. <wwd.com>


Macy's, Sunglass Hut Strike Eyewear Deal - Luxottica Group has signed an agreement with Macy’s Inc. for its Sunglass Hut unit to serve as the sole operator of the retailer’s in-store sunglass departments. Macy’s will be the only U.S. department store to house Sunglass Hut shops. Beginning this spring, Macy’s will open an additional 430 Sunglass Hut departments, bringing its total to 670 by spring 2011. The new locations will operate as leased units. “Through this agreement, Macy’s is able to offer a comprehensive assortment of sun eyewear, including brands not previously available in all Macy’s stores,” said Ron Klein, Macy’s chief stores officer. “Sunglasses are an important fashion and functional accessory for our customers. Going forward with Sunglass Hut, we will be able to offer a wider choice of styles, supported by the high level of service associated with Macy’s.” Through the partnership, Sunglass Hut wants to strengthen its presence in the U.S. The retailer operates in more than 2,000 locations worldwide, including the Caribbean, Europe, Australia, Asia, the Middle East and South Africa.  <wwd.com>


Dave McTague Leaves Liz Claiborne - Dave McTague, executive vice president of the Partnered Brands division, left the company Friday. McTague is the latest to depart in the wake of the October deal to license the flagship brand to J.C. Penney Co. Inc. That move, which also shifted the Isaac Mizrahi-designed Liz Claiborne New York line to QVC, cost 115 Claiborne employees their jobs, although 15 were offered positions at QVC. “The operating strategy and landscape of the Partnered Brands portfolio has changed dramatically in the past two-and-a-half years,” said William L. McComb, chief executive officer. “In light of this, Dave’s departure and the new distribution strategy for the Liz Claiborne brand franchise, we are rethinking the management structure of the Partnered Brands business segment. I thank Dave for working so hard on behalf of Liz Claiborne Inc. during his tenure here and wish him well in the future.” <wwd.com>


E-retailers offer plenty of holiday deals, but pull back on free shipping - Among the top 100 online retailers, 68 offered free shipping offers for the week of Monday, Nov. 30, a slight drop from 71 the prior week, according to a survey by Internet Retailer. In the comparable week a year ago, 66 offered free shipping. In addition, 62 retailers in the top 100 also presented major promotional displays on their home pages—many with discounts of up 50%—and more than 40 followed up with special e-mail offers to shoppers who had signed up for e-mail promotions. Five retailers introduced free shipping offers for the week, including QVC and Abercrombie & Fitch Co. Meanwhile, Apple dropped its $50 minimum order to qualify for free shopping, allowing free shipping on all items. Among the retailers that changed their free-shipping offers, several restricted the benefit. <internetretailer.com>


Zappos.com Offers an Actual World Catalog - A company that could be the model for Internet retailing success is peddling goods by paper as well as by pixels. Zappos Life, the catalog of the virtual seller of shoes, is also advertising handbags, jewelry, clothing and fragrances. Zappos.com, the online seller of shoes and other merchandise that was recently acquired by Amazon, is mailing 750,000 copies of a printed catalog to consumers. The catalog, timed for holiday shopping, bears the title Zappos Life and has a fashion and designer focus, offering products like handbags, jewelry, clothing and fragrances in addition to the Zappos.com mainstay, footwear. Among the brands featured in the fashion catalog are Cole Haan, Guess, Calvin Klein, Lucky, Stila, True Religion and Stuart Weitzman. They can be bought on the Zappos.com Web site or by calling a toll-free telephone number. (The catalog can also be read at zapposlife.com.) <nytimes.com>


Intimacy Chain to Open Second Manhattan Unit - Intimacy, an eight-store chain specializing in bra fitting, plans to open its second store in Manhattan on Dec. 18, said Susan Nethero, founder and chief executive officer. The boutique, located at 62nd Street and Third Avenue, is 2,500 square feet with 11 dressing rooms occupying about half the square footage. Intimacy’s existing unit at 90th Street and Madison Avenue is 1,100 square feet and has sales of about $3,000 a square foot, Nethero said. Other units average $2,500 a square foot. Nethero, who plans to have 25 stores by 2014, attributed part of Intimacy’s rapid expansion to “the Oprah effect.” She has appeared on “The Oprah Winfrey Show” five times in the past five years talking about “bra violations” and showing how a properly fitted bra can transform a woman’s figure and style.  <wwd.com>


Phoenix Footwear Secures $4.5 Million Credit Revolver - Phoenix Footwear Group, Inc. said it has entered into a new two year, secured revolving credit facility with First Community Financial, a division of Pacific Western Bank. The facility replaces the company's previous credit facility with Wells Fargo Business Credit 9NYSE: WFC). The new credit facility provides for a line of credit up to $4.5 million, subject to a borrowing base limit, and as of December 4, 2009, has $2.0 million in borrowings, net of cash, outstanding under the new facility.  <tradingmarkets.com>


China to Maintain Policies, Boost Consumption in 2010 - China’s top leaders pledged to maintain a “moderately” loose monetary policy stance and “proactive” fiscal policies next year to bolster growth in the world’s third-largest economy. The government will ensure policy continuity, boost consumer spending and adjust growth models, the official Xinhua news agency reported, citing the annual central economic work conference between Dec. 5 and today in Beijing. President Hu Jintao and Premier Wen Jiabao attended the meeting, Xinhua said. Chinese policy makers are weighing the potential threat from inflation and asset bubbles against the need to maintain stimulus measures to create jobs and sustain the nation’s rebound from the slowest growth in almost a decade. The Communist Party’s Politburo said last month that existing monetary and fiscal policies would be maintained in 2010 and Premier Wen rebuffed calls for the yuan to strengthen. <bloomberg.com>


How social network investments can boost natural search results - While social media results currently account for only about 7% of the search engine listings of 1,000 branded keywords reviewed in a recent study, that percentage is likely to grow significantly in 2010, making social media a significant opportunity for brands seeking to show up more prominently in search results, according to the study, “The State of Search,” from digital marketing agency 360i. That opportunity stems from the fact that most current search results listings draw from social media venues that are not controlled by the brand, according to 360i. The report found that 77% of the YouTube, Twitter and Facebook listings that appeared for brand searches in a cross-industry review of the top 100 U.S. brand advertisers were controlled by a party other than the marketer.  <internetretailer.com>


Stride Rite Children's Group Appoints President - The Stride Rite Children's Group (SRCG) unit of Collective Brands Performance + Lifestyle Group announced that it has appointed Sharon John as its unit president. John will lead SRCG and its expanding portfolio of brands including Stride Rite, Robeez, Saucony Kids, Sperry Top-Sider Kids, Keds Kids, Jessica Simpson Kids, Tommy Hilfiger Kids, and more. SRCG said John has extensive experience in Children's brands, marketing to moms and kids, and strong licensing, product development and innovation expertise at such companies as Hasbro, Inc. and Mattel, Inc., among others. John will begin in her new role in late December and report to Gregg Ribatt, president and chief executive officer of the Collective Brands Performance + Lifestyle Group. She will head up all functions of the SRCG team including product creation, sales, marketing, merchandise planning and distribution, as well as retail which includes retail merchandising and operations of more than 350 Stride Rite stores. <sportsonesource.com>


John Lewis reports best-ever week - John Lewis has recorded its best-ever week, with sales in the week to Saturday December 5 £1m ahead of its previous record week set in 2007. Sales at John Lewis during the period were £102.4m, 13.8% up on the same week last year. The figure also represents a 6% rise on the equivalent week in 2007, when figures were not impacted by the turbulent trading conditions seen in 2008 following the banking collapse. Records were smashed in departments including gifts and online arm johnlewis.com reported its highest sales for one week. John Lewis said that this week is the earliest time in the Christmas season that the department store recorded a figure in excess of £100m. John Lewis added that branches across the country revealed that shoppers are buying gifts and preparing for a family Christmas at home. <drapersonline.com>


German Manufacturing Orders Unexpectedly Declined in October - German factory orders unexpectedly fell for the first time in eight months in October, led by a decline in export demand. Orders, adjusted for seasonal swings and inflation, dropped 2.1 percent from September, when they rose 1.3 percent, the Economy Ministry in Berlin said today. Economists expected a 0.8 percent gain in October, according to the median of 38 estimates in a Bloomberg News survey. Orders were 8.5 percent lower than a year earlier. Germany’s economic recovery may slow as the impact of government stimulus measures, such as the now-expired cash-for- clunkers program, dissipate and the stronger euro erodes export revenues. Daimler AG, the world’s second-largest maker of luxury cars, said last week that it will shift production of its best- selling Mercedes-Benz C-Class model to Alabama to reduce its reliance on German factories and take advantage of the cheaper dollar.  <bloomberg.com>


Brazil ends the year with a sharp fall in exports - In November Brazilian leather exports grew by 11% compared to the same month of 2008. Consolidated figures from January to November show a fall of 42% with US$1.028 billion exported in leather and hides compared to US$1.782 billion in 2008. In other words, Brazilian tanneries did not manage to sell a total of US$754 million in leather internationally. After registering falls which in their worst moments reached 60% the sector has been gradually recovering. In October, the decline was limited to a somewhat better 18%. Nevertheless, with only one month to go before the end of the year the data available clearly illustrates the difficulties experienced by the sector this year. The December figures will round off the final result of 2009 and give the definitive shortfall compared to 2008, when US$1.88 billion were exported. <fashionnetasia.com>

Geithner Groupthink Inc.

“When your work speaks for itself, don’t interrupt.”
-Henry Kaiser

Now that one economic crisis is out of the way, it is time to proactively manage toward not perpetuating another one. This morning we are being reminded that risk management is a daily and global exercise. Gold, Greece (down -3%), and the United Arab Emirates (down -6%) are getting rocked.
If there is one thing that Americans should realize by now, it is that reactive risk management doesn’t work. Today, our immediate-term focus should be on the economic leadership being provided to President Obama by his Wizards of Perceived Financial Wisdom. These guys impose serious systemic risk.
For starters, within the first 3 minutes of Tim Geithner’s Friday interview with Bloomberg’s Al Hunt, take his word for it:
1.      “I’m not an economist.”

2.      “Economists don’t know much about the future.”

3.      “Personally, I wouldn’t associate myself with any estimates on what these things might actually do.”

Ok. Maybe you shouldn’t take his word for it. You definitely shouldn’t have taken his word for it when it comes to filing his own taxes. I guess he’s not really an economics or a tax guy. He’s just the head of the US Treasury and former head of the New York Federal Reserve (2003).
At one point in Friday’s interview, when asked about what grade he would give himself, Geithner proclaimed “I am a very tough grader.” Then he suggested we grade him “by the policies we create.”
Uh, ok…
Not to be “very tough” on you Timmy, but if I only started with the policies that you helped established post 2003 at the New York Fed, this would be embarrassing enough. You know, some of the bigger policy moves, like signing off on the elimination of leverage ratios for the 5 major levered long banks. Timmy, you don’t want us to audit all of the policy you have signed off on or been a part of creating since you joined the Treasury in 1988 do you?
Here’s some advice. Stop blaming Goldman for compensation practices that you signed off on, and resign. This will save the US some credibility before it is too late. You are now trying to save your political career by throwing bankers under a bus that you drove. You are now arguing that “we want to see fundamental constraints in how senior executives are paid.” I just want fundamental constrains on how you were able to empower the system to pay them.
Need more history on Geithner other than where he worked and what policy he implemented? Look no further than one of his mentors - Larry Summers. Rather than take my (Jack Meyer’s) word for it, just read the Boston Globe article by Beth Healy last week titled, “Harvard Ignored Warnings About Investments.” That will get you up to speed on how a forefather of Geithner Groupthink Inc. (Summers) thought about managing risk.
In that article, Harvard professor, Harry Lewis nails my overall point on the matter right on the head in saying, “Whether or not anyone in particular made a mistake in this situation, it shows a fundamental structural problem. The power is just in the hands of too few people with too little accountability.’’
Geithner called this an “era of irresponsibility in high bonuses.” I call it an era of unbelievable incompetence. That’s all I have to say about that.
This morning, away from waking up to a reminder that interest rates on the short end of the US Treasury curve cannot stay at ZERO forever, we are being reminded that things priced in dollars, including petrodollars, go down when the price of dollars goes up. Fancy that.
I called 3 things bubbles last week. All 3 had different durations:
1.       Gold = immediate term

2.       Short Term Treasuries = intermediate term

3.       Banker Bonuses = long term

Since gold and 2-year Treasuries are down -6% and -27% since we made that call last Wednesday, Geithner can grade us with an A in proactive risk management. Yes, Timmy - proactive means before risk is revealed, not after.
This morning the Treasury is going to proclaim its mystery of faith suggesting that the “cost” of the TARP is $200B lower than where they thought it would be in August. These flailing politicians are also going to try to convince Americans that these are “savings” and that they are going to help either create jobs or pay down the deficit. Are you kidding me? This is the problem with Geithner Groupthink Inc. – these guys think Americans are that stupid.
Timmy, we know you are not an “economics” guy, but here’s how the math really works. Keeping interest rates at ZERO has funded massive spreads in what we affectionately call the Piggy Banker curve (or Yield Curve). Bankers with the special privileges (that you and the Fed have signed off on) borrow short on the cheap and lend long at some of the highest Yield Spreads EVER to the American citizenry. Then they keep all the moneys, and pay you back with it.
The real “cost” of these Banker bonuses comes out of Americas savings accounts. Geithner helped underwrite his own grading system. It’s not Goldman’s problem. It’s the Savings Rate Stupid. You created the rules of the system. The bankers are doing exactly what you empowered them to do.
My immediate term support and resistance levels for the SP500 are now 1088 and 1117, respectively.
Best of luck out there today,


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).

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.

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 -0.3%. 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 and 12/2.

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.

US STRATEGY – The data no longer supports a weak currency

Taken together - the labor market, the trade picture, corporate profitability and the Fed's free money policy – do not support a weak dollar.  Importantly, the two sectors that have benefitted the most from a weak dollar are signaling that changes are coming.  The Energy (XLE) in BROKEN on TRADE and the Financials XLF is BROKEN on TRADE and TREND. 


On Friday, the S&P 500 finished higher by 0.6% and closed up 1.3% on the week.  The S&P 500 made a lower-high on an outside reversal; TRADE and TREND are bullish.  On Friday the MACRO calendar was more supportive to the RECOVERY trade. 


Friday started off with a bang as the market rallied sharply following a significantly better-than-expected November employment report, with some much needed support for the RECOVERY trade.   Nonfarm payrolls fell 11,000 in November, compared with expectations for a 125K decline.  Last month's decline was the smallest since December of 2007. In addition, there were significant upward revisions to the prior two months, while temporary employment, rose 52,000 in November.  The unemployment rate fell to 10% from 10.2% in October as household employment rose by 227K and the labor force declined by 98K.


While the S&P pushed to another new high for the year, the market could not ignore the sharp bounce in the dollar and the reality that the Fed may have to start unwinding its free money policy sooner than expected.  On Friday the dollar index (DXY) closed up 1.7% to 75.91. As a result commodities and commodity stocks were hit the hardest by the move in the dollar. 


The Materials (XLB) and Energy (XLE) were the two worst performing sectors on Friday.  Within the XLB, precious metals stocks were among the worst performers - DD (7.2%), FCX (4.7%) and NEM (4.3%) were the notable decliners. 


The three best performing sectors were Financials (XLF), Industrials (XLI) and Consumer Discretionary (XLY).  The XLF was the best performer sector after being the worst on Thursday.   The three best performing stocks were MCO +7.7%, PFG +7.0% and KIM +6.5%.  The improvement in the labor market was supportive of a move in the Professional Services (MWW +15% and RHI +11%) and Airlines (which helped the XLI outperform) and other select consumer discretionary names.


Semiconductor stocks finished higher for a fifth straight session Friday with the SOX +2.1%. The latest round of gains was fueled by the strong Q3 earnings and Q4 guidance out of MRVL, which was up +9.3% on the day. 


Volatility got crushed last week, with the VIX down 5.4% on Friday and 14.1% for the week.   


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 35 points or 1% upside and 1.5% downside.  At the time of writing the major market futures are trading slightly lower.


Crude oil is dropping for a fourth day in a row (trading below $75 a barrel) as the dollar is stronger on speculation the Fed will raise rates.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.25) and Sell Trade (78.52).


Gold fell for a third day in Asia after the dollar’s rally hurt gold on Friday.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,134) and Sell Trade (1,187).


Copper is lower for the third day in a row as the dollar is stronger.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.26). 


Howard Penney

Managing Director


US STRATEGY –  The data no longer supports a weak currency - sp1


US STRATEGY –  The data no longer supports a weak currency - usd2


US STRATEGY –  The data no longer supports a weak currency - vix3


US STRATEGY –  The data no longer supports a weak currency - oil4


US STRATEGY –  The data no longer supports a weak currency - gold5


US STRATEGY –  The data no longer supports a weak currency - copper6


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