The Macau Metro Monitor.  December 15th, 2009




The People’s Bank of China yesterday relaxed restrictions on yuan transactions for Macau residents.  The central bank said Macau residents would soon be able to exchange the equivalent of 20,000 yuan (HK$22,704) per person per day, up from 6,000 yuan.  Macau residents will also be allowed to write yuan-denominated checks for purchases in Guangdong.  The PBOC announcement of the yuan business expansion comes as Beijing prepares to celebrate the 10th anniversary of Macau's handover to the mainland on December 20.




Hong Kong Chief Executive Donald Tsang Yam-kuen has said that the government will try to keep toll rates for the Hong Kong-Zhuhai-Macau Bridge as low as possible.  Tsang said the three governments would continue to work together to ensure the bridge was properly managed.


Across the board the market finished higher on Monday; the S&P 500 closed up 0.7% on the day.  The tone was set early with an energy M&A deal where XOM is buying XTO.  Also, news that Abu Dhabi will provide $10B to Dubai provided an easing to sovereign debt contagion concerns.  While the S&P 500 closed at a higher-high, the financials are still broken on both TRADE and TREND, while Energy is broken on TRADE.


For the balance of the week the MACRO calendar will dominate the news cycle.  We are looking forward to several key data points in the next two days, including inflation numbers (PPI on Tues, CPI on Wed), Housing Starts on Wed and the results from the FOMC meeting on Wednesday. 


Looking at the Producer Price Index (PPI), the most recent reports have been generally to the upside of expectations.  Currently, Bloomberg has a 0.8% MoM number versus 0.3% the month before.


On Wednesday, Consumer Price Index (CPI) for November 2009 will be reported.   The consensus estimates for the seasonally-adjusted November CPI is 0.4% according to Bloomberg versus 0.3% in October.  Given the implied relative strength of gasoline and food prices in the November retail sales data, an upside surprise to consensus is a better than average possibility.


This is what matters most.  A consensus report would boost year-to-year CPI inflation from minus 0.2% in October to roughly a positive 1.9% in November.  The November CPI data will officially end the recent period of formal DEFLATION.


The RECOVERY trade was in full force yesterday as the Materials (XLB), Industrials (XLI) and Energy (XLE) were the three top performing sectors.  The bottoms three were Financials (XLF), Utilities (XLU) and Consumer Staples (XLP).  It’s noted that every sector was up on the day and six sectors outperformed the S&P 500. 


Yesterday, the natural gas sector benefited from XOM’s acquisition of XTO.  Naturally the transaction increased speculation concerning further M&A activity in natural gas.  Materials (XLB) was the best performing sector, with Metals and Mining stocks leading the way. 


The Financials (XLF) continue to underperform, after being among the worst performers last week, but managed to end the day with a small gain. C and MBIA were the two worst performing stocks in the XLF. 


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 17 points or 0.5% upside and 1.5% downside.  At the time of writing the major market futures are trading slightly lower.


In early trading today, crude oil is trading lower as the dollar is moving higher.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.78) and Sell Trade (74.30).


In London Gold is trading lower by 0.7% to $1,118.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,089) and Sell Trade ($1,148). 


Copper in London is lower as the dollar strengthened.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.26).


In early trading today the US Dollar is up trading at +0.7% amid speculation improving economic data in the U.S. will require the Federal Reserve to signal an exit from easing policies intended to combat the recession.


Inflation is back!


Howard Penney

Managing Director















YUM used its annual analyst meeting to focus the investment community on where the growth is.  Pizza Hut and KFC in the US – forget-about-it. 


Last week, Yum Brands hosted its annual analyst meeting in New York City.  Prior to the meeting, the company put forth its 2010 EPS growth goal of at least 10%.  So, the focus of the meeting was on the company’s ability to get to 10%.


At the analyst meeting, YUM quantified its same-store sales assumptions underlying the earnings target.  In 2010, YUM sees 2% same-store sales growth world-wide.  Given the current environment and the pickle the US business is in, this target is aggressive.  To management’s credit, they even stated that they have no clue when comps will turn positive…


Looking at the three key business units, management’s outlook assumes 2% comparable sales growth in China, 3% at YRI and 2% for the US.  Let’s just say management is counting on a consumer recovery in 2H10 and the benefits of easy comparisons.  The current trends and outlook suggest that this will be very difficult to attain.


Global unit growth is the key driver to incremental profitability at YUM, especially in China.  In 2010, YUM expects at least 475 new restaurant openings in mainland China, or 13-14% growth.  Guidance is for 15% operating profit growth.  Currently, China generates about 33% of the company’s operating profits. 


Not to be to myopic but I was very interested to see how management handled the issue over sales trends in China.  I would note that they don’t talk about cannibalization anymore.  That being said, they have not changed their stance – it’s an economic issue.  As management sees it, the Chinese consumers have not recovered from two specific economic shocks.  The first one came in the middle of 2008 after the earthquake struck.  Prior to the earthquake, the company was posting double-digit same-store sales growth and 20% unit growth.


The second one came at the end of 2008 when the financial crisis struck and the consumer got even more cautious.  Same-store sales growth in China slowed rather significantly in 4Q08 on a 1-year basis and has remained weak for all of 2009.  The company was lapping difficult comparisons in the first half of 2009, but same-store sales were flat in Q3 and are expected to be -3% in Q4, despite the relatively easier comparisons in the back half of the year.   


Regardless of comparisons, 2-year average trends more accurately show where trends are headed.  Last year on YUM’s 4Q08 earnings call, CEO David Novak highlighted this fact when he said, “Given the strong results we were lapping in the second half of 2007, it makes sense to look at two-year growth rates to gain a greater understanding of China trends. When examining two-year trends for the China Division’s system-sales growth you will find that fourth quarter growth was 49%, just three points below the first half’s strong results, an improvement of four points over the third quarter.”  It is important to remember that Mr. Novak pointed us to look at 2-year trends when comparable sales growth in China came in at 1% in 4Q08 following 12% growth in 1Q08, 14% in 2Q08 and 5% in 3Q08.  On a 2-year basis, same-store sales trends improved in 4Q08 on a sequential basis from 3Q08 so Mr. Novak highlighted this improvement to justify the slowdown in 1-year numbers.  To that end, two-year average trends have gotten sequentially worse every quarter since then and will turn negative in 4Q09, assuming management’s outlook for -3% is correct. 




At its meeting last week, management said the continued softness is just a function of “lapping what we were running against.”  To that, I would respond that YUM is already lapping easier comparisons in 2H09 and more importantly, two-year average trends continue to come down.


Management also said the real test of current trends will come when they start to lap “the bad bad economy.”  We are already there.  As management stated in its presentation, the second “economic shock” came at the end of 2008.  Same-store sales in China were -1% in December 2008 so we are lapping the beginning of that impact in Q4 and comparable sales are expected to come in -3%. 


Importantly, management said “we still feel that there's no basic fundamental change in China,” which I viewed as justification for continued unit growth.  The extent at which management is bound and determined to keep the unit growth machine going was summed up when Mr. Novak said “We could drop our sales 20%-25% and open restaurants until the cows come home - So that's what we plan on doing.”    


My biggest take away from the meeting was that YUM management will do its best going forward to keep the investment community focused on China, YRI and Taco Bell.  Yum’s U.S. business accounts for 40% of the company’s global operating profits and Taco Bell accounts for 60% of the US.  With the US KFC and Pizza Hut businesses in secular decline, I would not be surprised if these businesses combined account for less than 20% of US operating profits in the coming years.  If it were not for the overseas potential of these brands, I see no need for the company to keep either brand.  For now, however, these businesses still matter.  Management may want to divert our attention to other areas of growth, but current trends at KFC and Pizza Hut are extremely concerning and need to be addressed.


Yum expects to focus much of its domestic efforts on refranchising KFC and Pizza Hut and expanding business at Taco Bell.  Thus, higher scrutiny on where Taco Bell is going is important.  According to management, Taco Bell’s success relies largely on its “branded value” perception and new products offering multiple proteins, a launch of balanced options (drive-thru diet) and day part expansion (breakfast).


I have a hard time believing that the latter two – the drive-thru diet and breakfast - will have any impact on sales any time soon.  Breakfast is so competitive and the real estate strategy for Taco Bell over the years did not contemplate offering breakfast (locations not conducive to morning rush hour traffic).  Therefore, the company will have a very difficult time building that day part.    The idea that YUM will be able to shift consumers’ mindsets to believe that they can lose weight at Taco Bell seems crazy to me and will not “change the category.” 


The Drive-Thru Diet will launch December 27 in order to take advantage of consumers making New Year's resolutions.  On January 1st Christine Dougherty will be to Taco Bell what Jared is to Subway.  According to YUM, Christine has lost 54 pounds over the last two years eating off the Drive-Thru Diet!  She has apparently been eating fast food between 12 to 15 times a month.  Some of those occasions were at Taco Bell, while others were at other brands.   


YUM is calling it the Drive-Thru Diet because they are trying to take on Subway directly while highlighting that Subway does not have drive-thrus.  The two key attributes of QSR are convenience and value.  With Taco Bell being the value leader in the category, management is trying to capture some “better for you” food customers.  Good luck with this one!


What will have in impact will be the new value product offering and new proteins being introduced in 2010.  Taco Bell will be generating a significant amount of new product news and three new proteins – (1) the Beefy 5-Layer Burrito (which could sell for 89 cents each), (2) Pacific Shrimp Tacos ($2.79 each), its new seafood entry and (3) Grilled Cantina Tacos (includes pork).  All of the new products will shift the concept away from the typical “spicy” Mexican flavor. 


All in all the investment community was very bullish on YUM and they do communicate a positive story.  The “growth till the cows come home” strategy is China will one day be a problem for YUM -- timing on this issue is critical.  Same-store sales trends in China are weak in 4Q09 despite easy comparisons. 


The trends in the US have put incremental pressure on management to keeping the China operations without issues.  For now management is getting a free pass on sales trends in China, but for how much longer?

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Slouching Towards Wall Street… Notes for the Week Ending Friday, December 11, 2009

Bubble, Bubble, Toil And Trouble


A new front is opening in the credit wars.  The twist is that the much-maligned ratings agencies are starting to look as much like the heroes of this crisis as they were the bad guys of the last one.


We now live in a supercharged economic reality.  Our financial system has left such stale concepts as the Business Cycle in the dust.  Financial collisions that used to occur with some predictability every few years are now piling on thick and fast as the linkages between crises become more entangled.  Hallucinatory whorls of active, developing, and incipient bubbles in our economy surround us.  Think: Hyman Minsky on a very bad acid trip.


Masterfully overseen by Great Chief He Who Sees No Bubbles (Bernanke), the braves are mustering, sharpening their weapons and daubing themselves liberally with war-paint.  But so far the war drums have yet to sound.  Meanwhile, there’s trouble brewing in the Badlands of Credit.


The National Association of Insurance Commissioners has, as we anticipated, approved the plan to change the classification of certain tax-deferred assets on the books of insurance companies, a move “expected to add more than $11 billion in capital to life insurers’ balance sheets at year-end” (WSJ, 8 December, “Accounting Change Boon For Insurers”).


We note that this measure was initially proposed by the American Council of Life Insurers, an industry group, as a temporary emergency measure designed to tide insurers over as last year’s financial meltdown roiled the markets.  The purpose at the time was to avoid insurers being forced to liquidate portfolio holdings at fire sale prices.  Simply put, they wanted to buy time.  The NAIC didn’t go for the idea at the time.  Now, on consideration, they made it permanent.  Now the insurers have all the time they need.


The simple message is either: we are in a permanent state of crises; or, everyone else is scamming the markets left and right, why shouldn’t you guys?  Either way, this represents a clear step down in the quality of actual financial coverage of insurers’ obligations.  We are trying to figure out how the insurers can use this to best advantage.  Maybe they will do a program like frequent flyer miles.  Did you lose your husband?  Oh, and we see he had a million-dollar policy.  Well, you can either get the payment all in cash, or, if you prefer, we will give you $1.5 million in tax credits that you can use to offset your income, thereby freeing up your other money.


Before you laugh, the Journal reports “consumer groups have complained that these are paper assets that won’t help pay claims if companies hit the skids.”  The obvious solution is to transfer the tax benefit to the beneficiaries, in lieu of cash.  Obviously, at a premium.  Consumer advocates take note.  Lobbyists, start your engines.


We note that, in all the brouhaha about financial markets reform, there has been no recent mention of cracking down on the ratings agencies, no serious discussion of addressing the deeply conflicted model that let – inexorably, many would maintain – to the debacle wherein trillions of dollars’ worth of AAA-rated paper went up in smoke. 


On the other side, we are getting the nasty feeling that Health Care Reform may turn out to be nothing more than a government-sanctioned multi trillion-dollar gift to the insurance industry that will make Secretary Paulson’s bait and switch with the bank rescue dollars look like chump change.  If, in fact, 30-40 million new policy holders are to be added to the rolls, private insurers will need to bolster their capital significantly.  How handy if, instead of socking away cash reserves, they can get regulators to redefine assets.  In the world of money, a tax break is only an “asset” once it is realized, cashed and deposited in the bank.  The insurance commissioners appear to be swapping one moral hazard for another.


The NAIC is not alone.  The Journal also reports (8 December, “What Zions Considers A Loss”) the tribulations of Zions Bancorp, who apparently have avoided recognizing hits to their capital by taking advantage of the new rule for valuing “stressed debt securities.”  You may remember that Congress, which loves tinkering with things they don’t understand, beat the Financial Accounting Standards Board liberally about the head over the subject of “mark to market” accounting which, Congress scolded the FASB, was causing undue hardship to companies that really had their portfolios under control, and were being forced to take unreasonable write-downs.  (Goldman Sachs was not one of them, by the way.  You may remember that they mark everything to market every day.  It’s called managing risk.)


The Journal story reports that Zions held $2.12 billion of preferred securities issued by banks, all in a CDO (collateralized debt obligation) structure.  While the current market value of these CDOs is $1.1 billion, “Zions has taken $712 million of market losses on the CDOs through equity,” which means it does not affect their regulatory capital.  Thus hath Congress wrought.


In the current climate it is exceedingly difficult to see how Washington is supposed to impose restraint in the form of new financial markets oversight and tightened regulation.  No sooner does an industry show itself to be fiscally impossibly irresponsible, than Congress steps in and does its own legislative engineering, every bit as clever as Wall Street’s financial engineering.  It makes sense that Bernanke continues to pander.  He’s up against the brickest of brick walls.  What’s a central banker to do?


There’s more.  Morgan Stanley says that Zions’ risk model predicted a 35% chance of default by United Commercial Bank, one of the issuers whose preferreds are in Zions’ CDO portfolio.  United was seized by regulators last month which, as the Journal observes, “almost certainly means its preferreds are worth zero.”  In their defense, a Zions spokesman said “modeling default was hard, because ‘fraud was involved’ at United Commercial.”   Fair enough, though if we were bank regulators, we would immediately demand to see Zions’ due diligence file on United Commercial. 


Now, it can only be a total coincidence that, right next to the WSJ story about the accounting change benefiting the insurers to the tune of $11 large, is a headline that reads “Moody’s Puts US, UK On Chopping Block.”  The story refers to “an effort, spurred by investor demand, to examine the creditworthiness of the world’s most highly rated countries.”  There are currently 17 AAA-rated countries, and Moody’s said the US and UK ratings largely depend on “the vigor of the economic recovery and the willingness of governments to shrink the deficits.”  Moody’s says the US requires a “credible fiscal consolidation strategy” to curtail both the amount of our debt outstanding, and the associated interest costs.


Deficit shrinking, in our simplistic model – have we reminded you lately that we are not trained economists? – emanates from having cash on hand.  Which is to say, savings in the bank.  People saving money – paying themselves first.  Which is to say the implication of the Moody’s report is that a zero interest rate is not working.  It would also seem to imply that, contrary to President Obama’s exhortation of this week, it may not be feasible for us to “spend our way out of this recession.” 


Rather, by spending borrowed money, we will be beggaring our neighbor all the way to – at least – a credit ratings downgrade.  Oh yes, and then there’s the part about the US no longer being Top Dog.  Chief He Who Sees No Bubbles will need great medicine if he is going to keep this country from going to the Happy Hunting Ground.




A Load Of Bull?


Former Merrill Lynch employees are “delighted” at Bank of America’s decision to restore the old Merrill bull logo.  The Wall Street Journal (8 December, “BofA Yields On Return Of Merrill Bull”) reports that Merrill bankers may now have the bull logo restored to their business cards.


We couldn’t help recalling the famous Business Week cover story “The Death Of Equities” that coincided with the launch of the great bull market of the 1980’s.  That cover, famously, was graced (or should we say “disgraced”?) with a snorting bull.  Is the new-old Merrill thunderer likewise a contrary indicator?  Of course, if the business of managing money is really the business of having money to manage, then it’s all about marketing, don’t you see.  Which means that the bull on the business card is a darned sight more important than what they are actually putting into your portfolio.


Lest you take this as a cheap shot against Merrill’s brokers, let us remind you that financial firms create their own product, then pump it through their distribution pipeline, right into your retirement account.  Merrill, in case you forgot, is the company that sold itself in a desperate last-ditch transaction because they lost… we forget… how many billions was that?  They lost this money by leaping into the various derivatives markets with both feet because defrocked Chairman Stan O’Neal couldn’t see Merrill not participating in what everyone else was doing.  In fact, Merrill’s only really smart market transaction in years was selling itself to BofA at what turned out to be a way above-market price.  Brokers are led by their management.  Beware the next round of packaged product bearing the bull.


In what has to count as one of the daftest statements to emerge from a banking firm this year, the Journal story quotes a Merrill staffer as saying “Merrill without the bull is like Superman without a cape.”  BofA declined to comment.  No kidding.




Light-Saber Rattling


The on-line edition of the German magazine Der Spiegel (10 December) reports a ghostly light bursting in the Norwegian sky on Wednesday night.  Residents of the Arctic Circle town of Tromso beheld what many of them believed was a UFO.  The appearance is captured nicely on a video clip featured in the story, courtesy of Reuters/Scanpix.


Slouching Towards Wall Street… Notes for the Week Ending Friday, December 11, 2009 - norge


The story mercifully did not make a connection between the rising, flaming, bursting and quickly vanishing star in the Norwegian skies, and the appearance the following morning on Norwegian soil of President Barak Obama.  Obama has disappointed his host nation by spending a mere 24 hours on Norwegian soil, rather than staying on for the customary several days of pomp and festivities surrounding the Nobel Prizes.  To be sure, the world hopes the disappointments will end there, and that Obama’s star will gain in intensity, and not flicker out like the apparition.


Tromso is at the northern tip of Norway, almost as far away from Oslo as a Norwegian city can be.  Still, it was Norway.  Not, for example, Finland.


Thoughts of ghosts, meteors and visitors from outer space were  dispelled when it turned out the phenomenon was a failed test firing of an atomic rocket from a Russian submarine.  The rocket, an SS-N-30 Bulava, faltered and exploded in midair, bringing a spectacular show to the residents of the northern Norwegian town, and an ignominious end to the test shot.


The Bulava rocket, with a reach of 8000 kilometers, stands at the forefront of Russia’s modernization of its atomic arsenal.  It is no doubt important for Russia to show renewed atomic might as they head to the table to negotiate a replacement for START, which expired on December 5th.  It is interesting to note that the Bulava rockets have failed in most of their test firings.  The Spiegel quotes sources saying that nine of the 13 test firings have been failures just like this one.


It can only be a coincidence that Russia blows up a rocket in the sky over Norway on the eve of President Obama’s appearance in Oslo.  No one would be so crass as to do such a thing on purpose.


President Obama, for his part, acknowledged that there is such a thing as a Just War, in pursuit of a Just Peace – perhaps an oblique hint to America’s potential adversaries.  We wish to encourage careful attention to grammar.  Sometimes a war is a Just War.  Sometimes a war is Just a War.




Damned If You Don’t


To turn a million dollars into ten million dollars is work.  To turn a hundred million into a hundred and ten million is inevitable.

                                      - Edgar Bronfman


It makes money to take money.


In days of yore, when the likes of Lehman, Bear and Goldman were partnerships, the business model was custodianship.  No more.  The standard model on Wall Street for a generation now has been the Exit Strategy model.  Exiting one’s old model only makes sense once that model no longer has vitality.  As the economic dynamism underlying the partnership model started to erode, partners of old-line Wall Street firms regretfully started moving towards the exits, trying to salvage what was left of the value of the holdings that generations of their predecessors had so lovingly husbanded.


Oh, wait… that wasn’t what happened at all.  As the bull market of the 1980’s spun out of control, price became a primary factor, and the recognition of how great a valuation could be realized in the public market replaced the partnership model.  Under the old model, the partners as a group were rewarded based on the overall performance of the partnership.  What they took out was a function of what they had contributed.  Making money to take money.  No longer.


Ace Greenberg, CEO of Bear Stearns, famously observed during the market ramp-up of the early 80’s that such large concentrations of wealth would necessarily attract society’s most undesirable elements.  Little did he realize that he and his partners in Investment Banking Inc. would come to be seen as the very thing he warned against.


Bear Stearns, early to the party, went public in 1985, Lehman in 1994, and Goldman Sachs – the great ogre, to read the popular press – in 1999.


Now Bear is gone, and Lehman is gone.  We can not tell what the future holds for Goldman Sachs, but the immediate future looks like a long unpleasant slog through the press where they will be ceaselessly vilified – by populists for a token act that means nothing; by capitalists for caving to the populists.


The top thirty Goldman executives will take this year’s compensation in what the firm is calling Shares At Risk.  The Risk is that the shares can be taken back if the management committee deems that an individual executive “engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks.”  In other words, Goldman’s management committee are once again behaving like partners.  Just in time, perhaps, to see their franchise crumble.


Still, it is not clear what the determining factor will be to bring a charge of “materially improper risk analysis.”  Since that is not the Goldman way, we are left with the uncomfortable feeling that it will come down to profitability.  If a partner lose money for the firm, they can take his shares away.


Not only the popular press (think “giant face-sucking squid” in the pages of Rolling Stone), but even the government – replete though it is with Goldman alumni – is squaring off versus Blankfein & Co.  We are not the only ones who think it significant that the Geith-father, interviewed on Bloomberg TV, pooh-poohed the notion that Goldman would have survived without the TARP.  Tim Geithner’s presumed exit strategy from Washington, as a future executive at Goldman Sachs, suddenly looks in doubt, and he appears not to care.  After all he has done for them, Goldman embarrassed him by not showing proper (read “any”) gratitude. 


Meantime, we wonder why it is Goldman that everyone loves to hate, while other financial firms are being waved under the wire.  In what appears to be a race to the bottom, BofA gets to trash their shareholders by raising billions in the public equity marketplace.  Citi is going to be next.  The government is playing this new game of one-on-one with the big failed banks, yanking them this way and that as they scramble to repay the TARP.  In the short term, Geithner and his paymaster President Obama can point to the “profits” the “taxpayer” has reaped (we are waiting to see the line item in our 2010 tax return), meanwhile they are conspiring to wreck the markets.  The difference is they are doing it with toxic equity, not toxic debt, so the only ones to suffer will be the Greater Fools – that is, those who actually buy the stuff.  Wonder how much BofA stock your pension fund manager has bought recently?  They don’t have to disclose that.  You can see their positions at year end, but not the timing of purchases or prices paid.  Conspiracy?  Perish the thought…


If there were a World Series of finance, Goldman would be the winner hands down.  Goldman is the New York Yankees of Wall Street, with a profile and a track record of success that make other banks drool – and, like the Yankees, folks who don’t love ‘em, really, really hate ‘em.  Rather then being patted on the back for making risk management the mainstay of their business, they find themselves in the tumbrel heading for the execution ground.  Meanwhile, untold numbers of financial firms are being loopholed through in the Swiss cheese document that is the Financial Reform Act.


According to the Wall Street Journal (11 December, “Loopholes Lurk In Bank Bill”) there are provisions buried in the House financial regulatory reform bill that, while not specifying individual companies, are clearly designed to exempt specific financial firms from the provisions of the newly beefed-up regulation.  The articles cites GE and USAA as two examples. 


GE we have all heard of.  Its CEO, Jeff Immelt, no doubt has not been advised that apologies are so Last Year.  The Financial Times (10 December, “Immelt Rues ‘Terrible’ Executive Greed That Fuelled Inequality”) quotes Immelt as saying “We are at the end of a difficult generation of business leadership… tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits.”  Wall Street has the historical memory of a gnat, and no objection was raised to Immelt’s eulogy of Sound Management.  This, even though his predecessor Jack Welch left a conglomerate on the verge of collapse, but which for years had been flogged as the paragon of sound corporate management.


The other company mention in the Journal article – USAA – “caters to members of the military and their families, to so-called fraternal benefit societies.”  The article reports that USAA is “one of the country’s 50 largest federally insured financial companies.”  It is also one of the top dispenser of lobbying dollars, spending $5 million in the first 9 months of 2009 alone, which the WSJ reports is more than Wells Fargo and more than – get this – Bank of America.


As far as risk management at USAA is concerned, one need look no farther than the assurance from none other than Financial Services Chairman Barney Frank: “There’s no remote prospect of them being a problem.”  Feel better?


Goldman Sachs, meanwhile, is probably best served by being most hated.  We encourage them to embrace this status, keep their chin on their chest, and keep swingin’ at the ball.


Goldman traditionally has the best information in the marketplace.  Not inside information, just plain good market information.  They are literally everywhere, and they see everything.  We are mindful of this as we read reports of Goldman bankers buying guns.  Bloomberg columnist Alice Schroeder reported that “very senior” Goldman executives are acquiring guns for “a combination of personal protection and wealth protection.”


Goldman’s efforts at PR are a clear waste of effort.  Their recent half-billion forkover to help out small businesses got not a Thank You.  Maybe, as Schroeder suggests, they should be bailing out underwater homeowners.  Maybe – speaking of underwater homeowners – they should divert a few billion to save the people of the Maldives before their island nation is swallowed by the ocean.  One might think that, given their track record of success, Goldman could single-handedly cure global climate change.


But no one is inviting them to make a contribution.  Where would Geither, Summers, Obama et al be if Goldman actually succeeded?


The barricaded lives of Goldman’s executives are a chilling metaphor for the future of capitalism in America.  In the irrational world of regulatory incompetence, government and press dishonesty, and misdirected public rage, Goldman’s executives buying guns is the best proof of the Efficient Market.  Let us hope it will not be the last.


Moshe Silver

Chief Compliance Officer


Chart of The Week: Petrodollars

For those who didn’t know that oil is priced in dollars, now they know.


The chart below outlines the price moves we have seen in the last 3 weeks:

  1. Week of November 23rd: USD locks in its YTD bottom, trading down -1% week-over week and oil stops going up, closing down -2% wk/wk
  2. Week of November 30th : USD rallies sharply, closing +1.5% wk/wk, and oil closes the week down another -1%
  3. Week of December 7th: USD closes up for the 2nd consecutive week (up +0.84%), and oil finally gets smoked, losing another -7% wk/wk

Now we can either argue that the price of WTIC Oil topped first, providing us a lead indicator for a Bottoming of the Buck, or we can argue that continued strength in the US Dollar has perpetuated weakness in the oil price. We don’t have to argue either. We’d accept both arguments as fair.


What we don’t accept is that price moves aren’t “fundamental.” We equate marked-to-market prices to the official score in any professional sport. Market analysts can make up excuses for wins and losses, but at the end of the day all that matters is the score. Prices don’t lie, people do.


Our immediate term TRADE ($75.33) and intermediate term TREND ($76.30) lines for the US Dollar are now flashing bullish.


Our immediate term TRADE ($$77.11) and intermediate term TREND ($74.30) lines for WTIC Oil are now flashing bearish.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Petrodollars - 3wkcorr


RETAIL FIRST LOOK: Case Building Against Dollar Stores


December 14, 2009





Anyone check out the USDA report on food stamp usage? 11% of the population on the program is the highest level in recent history – above any other recessions in the past 40 years. Where do people on food stamps get the most bang for their stamp? Hint…73% of DG’s mix is consumables, and 4% of sales comes from food stamps.



With one out of every eight Americans now receiving food stamps according to a USDA report out late last week, receipts of the government subsidy continue to hit record levels. While inherently bearish for the US economy, one benefactor of this trend is Dollar General for which food stamps now represent roughly 4% of sales. We’d argue that this is yet another unhealthy factor that helped drive this business in recent years. Is it any surprise that consumables are now 73% of the mix at DG (up from 72% yy), and its private label sales are up to 21% of consumables? Nope. Note to dollar store management teams… accelerating growth in your footprint (see our comments last week about these guys being among the few striking new real estate deals) after an unhealthy comp peak driven by a trade-down effect and mix-shift, and unsustainable cash flows is simply not the best capital deployment strategy.  You can’t straight-line business trends into perpetuity – especially when you’re at the top of your game. We firmly believe that DG and others that benefitted from the ‘trade down’ effect over the past two years will be key shorts in 2010.


RETAIL FIRST LOOK: Case Building Against Dollar Stores - Food Stamps Historical Participation Rate


Source: USDA Food and Nutrition Service Program Data;




  • In one of the more aggressive moves to help drive market share gains, Gildan announced that it offered a special distributor inventory devaluation discount to wholesalers when it lowered selling prices in October. This move essentially adjusted customer inventory that was already purchased to reflect the price reduction. The company also announced that it expects selling prices to be down 5% on average in 2010 compared to low-single digit declines realized this year, reflecting further evidence of continued supplier pricing pressure.
  • While the sales performance of Christmas trees varies from region to region so far this holiday season, the overall season is expected to generate $1 billion in sales of natural trees. Additionally, 35% of consumers who celebrate Christmas are expected to purchase trees this year, up from 25% in 2008. A quick search suggests that tree sales are performing well, although weakness is occurring in areas where weather has been challenge.




Nike puts its best footwear forward with two product launches - Nike , the world's largest sportswear company, likes to keep its eye on the ball, writes Jonathan Birchall . Last week, as the world was obsessed about the private life of Tiger Woods, the golf champion who endorses the company's golf brand, Nike pressed ahead with two new product launches. Both reflect its efforts to maintain its premium brands through technical and performance-focused innovation. Its new Total90 Laser III soccer boot costs $200, but includes new design features and links to online soccer coaching sessions. At $165, the Zoom Kobe V basketball shoe will be about $45 more than the current Zoom Kobe IV model, but is about an ounce lighter, using technology developed by Nike for its running shoes launched at last year's Beijing Olympics. The Kobe shoe will also be on sale on New Year's Day in China, Nike's second-largest market, two weeks before it reaches US stores. However, sales in China turned negative this year after the dramatic Olympic-year gains, while US sales have also declined. <>


New Balance Inks New Korean Distributor - New Balance has entered into an exclusive 11-year Korea distribution agreement with E-land, also known as The Group, an integrated fashion and retail company in Korea, as part of the company’s plan to expand its presence in key international markets. The distribution agreement commences on January 1, 2010 and will include New Balance product distribution and a license to design and produce New Balance Lifestyle apparel. “New Balance is proud to partner with The Group, a market innovator and leader in the fashion and retail business in Korea.” says Rob DeMartini, President and CEO, New Balance.  New Balance will also open a New Balance Experience Store in Korea in 2010. The company currently has 187 points of sales in Korea and plans to increase this to 280 by 2012.  New Balance has had a presence in the country since 2000. <>


CoutureLab Goes Brick and Mortar -, the luxury Web site that sells one-off designs and handmade pieces by brands and artisans from around the world, has sent a satellite from cyberspace onto the streets of Mayfair. The site has opened its first brick-and-mortar boutique, a 1,400-square-foot space at 37 Davies Street, between Claridge’s and Selfridges, that offers a look at the CoutureLab offer — and a forum for craftsmen to showcase their work. “A store was always in the plan,” said Carmen Busquets, who founded CoutureLab in 2007 and is one of the investors behind “Sometimes on CoutureLab, you can miss the attention to detail. And consumers get frustrated when they see a one-off item on screen, and it’s already gone.”  <>


All Points East: The Expanding Asian Market - Luxury goods companies and fashion houses shifted their focus Eastward in 2009 with a flurry of store openings and special events. While China and other emerging markets in Asia certainly felt the impact of the economic crisis, they did so to a considerably lesser degree than the U.S., Japan and Europe. And companies eager to offset slumping sales in many corners of the world reached out with increasing frequency to new customers in Hong Kong, Shanghai, Beijing, Singapore, Macau and elsewhere — even Mongolia. Much of this year’s retail expansion activity was focused on China, and for good reason. In a recent report, J.P. Morgan estimated that most companies registered sales growth of more than 40 percent in Mainland China in 2009 as its customer base, including locals and travelers, increased by more than 30 percent. Analysts Melanie Flouquet and Corinna Beckmann forecast the Mainland China consumer base will grow another 25 percent in constant currency terms in 2010, while that of the rest of Asia, excluding Japan, is seen rising 10 percent. <>


Fashion Joins the Social Media Revolution - Social media has turned the fashion world — and just about every other world — upside down. This year, Dolce & Gabbana was so enamored of bloggers, the company sat them in the front row, displacing some department store executives. YouTube has made stars of beauty maven and single mom Lauren Luke, and fictional misfit Fred Figglehorn. Middle-school fashion blogger Tavi Gavinson, 13, skipped classes to attend Marc Jacobs’ runway presentation and other shows. Designer houses like Louis Vuitton are live-streaming their fashion shows; Ralph Lauren, Chanel, DKNY and Gucci are among the many labels with iPhone apps, and Alexander McQueen is tweeting. And now the idea that “if you are not online, your customers will be” is a standard theme at <>


Free-shipping, home-page promos ramp up in drive toward Christmas - Among the top 100 online retailers, 73 offered free shipping deals during the week of Monday, Dec. 7, up from 68 a week ago and the highest total since Internet Retailer began tracking free shipping offers in early November. In the comparable week a year ago, 71 offered free shipping. In addition, 81 retailers in the top 100 also presented major promotional displays on their home pages—many highlighting potential gifts and discounts of 40% or more—and a number of retailers followed up with special e-mail offers to shoppers who had signed up for e-mail promotions. Among the e-mail promotions, one of the most robust was Kohl’s, which sent a different e-mail every day, with offers such as 25-65% off electronics and 50-60% off outerwear. <>


Congress Pushes Trade Office Budget Boost - Congress sent a $447 billion spending bill to President Obama on Sunday that would boost the budgets for the nation’s two top-trade agencies and increase funding for China enforcement offices and trade remedy oversight. The legislation, passed by the House on Friday and the Senate on Sunday, increases appropriations for dozens of government agencies in the 2010 fiscal year, which began Oct. 1, and adheres closely to the priorities of the Obama administration. The majority of Democrats have placed a premium on reshaping the trade agenda by tightening enforcement laws and pursuing trading partners, particularly China, which violate trade rules and hurt U.S. manufacturers. To that end, Congress increased the budget of the Commerce Department’s International Trade administration to $456.2 million from $429.9 million in the 2009 fiscal year. The Import Administration, a division of the ITA that monitors textiles and apparel and investigates antidumping and countervailing duty trade cases, will receive $68.2 million, up from $66 million.  <>


Bill Blass Group Files Suit - Bill Blass Group filed a lawsuit last week in a Manhattan federal court against its former beauty licensee, alleging breach of contract and trademark infringement claims. Blass said in court papers that it terminated its fragrance and cosmetics deal with First American Brands on Nov. 6 after the licensee missed royalty payments. According to the complaint, First American Brands has failed to respond to Blass’ “significant efforts” to contact it. “Given [the] defendant’s patent refusal to communicate, BBG can only assume that this former licensee is proceeding as if the license agreement had not been terminated and is continuing to sell and manufacture products,” Blass’ attorneys wrote. A spokeswoman for First American Brands said Friday she was not aware of the suit and would not comment. Blass is seeking an injunction, $5 million in punitive damages and $150,000 for breach of contract, among other relief. <>