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Corporate Leadership?

This "IBS session on Corporate Governance with Vikram Pandit '86, CEO of Citigroup" should be really interesting. Columbia has it promoted under "Capital Markets and Investment Leadership."

Hopefully someone asks Pandit about his tactical leadership approach in selling Citigroup shareholders his hedge fund, Old Lane, then imploding it.

Wall Street likes to pay people who "make money". It’s how you "make money" that counts.
KM
The Bandit On Leadership - see Columbia's website for details...

Who Do You Trust?

So what was it this time that freaked everyone out? Democrats can blame Hank Paulson’s intraday “covered bonds” speech. Republicans can blame Barack Obama coming home from his world tour to host a Paul Volcker sponsored “economic summit”. Portfolio Managers can blame their analysts. Traders who bought into the “buy the banks” call from last week, can blame themselves. John Thain can blame himself.

The reality is that it is month end this week, and we have an oversupply of “Fast Money” chasing weekly and monthly performance. What happens to fast money when oil and fertilizer stocks stop working? Buy the Financials? Nice try. All of a sudden nothing is working, and the market factor that remains most misunderstood is that which you will not see until it has unwound. Do people out there legitimately think that this bear market is not going to take down a massive equity levered hedge fund? C’mon. Tail risk in this market continues to intensify.

It’s time to get real here. Even Bush and Obama will agree with each other now on that. Bush called Wall Street “drunk” last week, and Obama called it “irresponsible” this week. Make no mistake – this is the brave new world of US Election year populism. In the end it’s going to equate to higher cost of capital and less access to it. Re-regulation will follow. After that’s all said and done, the market’s headlines will be littered with 30 something year olds who blew up hedge funds, alongside 50 something year old sell siders like Vikram Pandit who launched his and did the same.

Obama is too young and naïve to be President, but the 51 year old Pandit Bandit is old enough to run America’s largest bank? Tech wrecks, Carly Fiorina and Meg Whitman weren’t good enough to keep their respective stock prices from falling, but now they’re good enough to advise team McCain on solving this economic mess? Whitman is 51 and Fiorina 53, fyi. Volcker is the only one in this political circus who is older than John McCain. He and McCain should team up – together they’re 151 years old!

This has nothing to do with age. Going forward, this is going to have everything to do with integrity and sound judgment. Who is going to mark their assets to market? Who is going to put the principles in their business ahead of principal? When a handshake means something again, we’ll all be better off.

Don’t look for that from Merrill’s new CEO, John Thain, who assured investors on his July 17th conference call that ``we believe that we are in a very comfortable spot in terms of our capital''. This morning Thain has Merrill taking another $5.7B write-down and raising $8.5B worth of stock. Are you kidding me?

Asia took that Merrill news and pounded both stocks and currencies. Chinese equities (which I am long) were down -1.8%. Japanese equities (which I am short) closed down another -1.5%. There was no economic news out of China, but Japan reported its highest unemployment rate since September 2006. Japan is re-entering the dark hole of negative real growth. Meanwhile India raised rates by a higher than expected 50 basis points to 9%, and investors ran for the exits again, closing the BSE Sensex down a sharp -3.9%. Taiwan lost -3% and Korea was down -2%. A crisis of confidence in the leadership of the US banking system is not going to help any asset class, globally.

John Thain now joins Vikram Pandit (Citigroup) and Dick Fuld (Lehman) as the current CEO flag bearers of Wall Street. In a ‘You Tube’-less and internet-less world, where transparency wasn’t such a powerful real time accountability tool, they may actually have gotten away with this kind of ‘say one thing - do the other’, behavior. Now, the rules are changing, and the whole world is watching. Who do you trust?

KM



DKS: Prepare to Whack-A-Mole

Given the disproportionate impact sell-side upgrades/downgrades have had on stocks as of late, when I saw that GS upgraded DKS this morning, I thought it would provide a good ‘ol Whack-A-Mole opportunity on a high-conviction negative fundamental call whose stock I have eased up on as it retraced to the teens.

I guess not. The stock closed down on the day despite the upgrade. Even in a lousy tape – this is a bad signal.

Granted, the call sounded something like “We think the quarter is ugly, and the stock is probably headed lower, but we’re taking the month of August off and want to be in print as having called the miss, and telling everybody to buy into it.” I was a little surprised by weakness of the call itself, as I think the analyst there is one of the better ones in this space. But it’s still a Goldman Sachs upgrade and should have decent impact in itself.

One of the key factors that people hit me with is that DKS is cheap. But they said it was cheap at $30. Then $25. Then $20. Read my 5/22 post for the full thesis on DKS. There’s no reason why 6.5-7x EBITDA needs to be trough value for a name like this – especially if cash flow growth slows and/or goes negative over the next year.

Again, I was hoping for the Whack-A-Mole opportunity, as I fully understand that no story is linear (either up or down). Short interest is 21% of the float now – up from 6% about $15 ago. I’d love nothing more than to see this mole pop on a sandbagged quarter.

Brian McGough

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A CASE OF THE SWOOSH BLUES

Some interesting observations about Nike/Under Armour footwear from Jeff Dawson, a Research Edge intern who we are begrudgingly letting return to Yale University for his senior year.

Tobacco Road doesn’t offer much in terms of serenity. The hostile eight mile stretch along the “Fifteen Five-o-One” country road has been stamped by the “Just do it” travelers. It reminds all that one thing is for certain: Nike is boss. Whether you are a Dukie or a Tar Heel, you have the power of the swoosh behind you. Although intense rivals, both universities rep the color blue and whole-heartedly back Nike (NKE).

This Nike euphoria allows foes from rival schools to be friendly. Michael Jordan, a product of UNC basketball, stands as Nike’s poster child while Coach Krzyzewski of Duke University currently represents NKE on behalf of the USA Olympic Basketball team. Interestingly enough, 11 of the 12 NBA players selected to the team are endorsed by NKE and will be wearing the blue NKE Olympic jerseys. That’s a whole lotta blue power for NKE.

So how can UA compete against this blue wave? The answer… break tradition. After sitting through the Under Armour 2008 Investor Appreciation Day call on May 29th, I strictly remember UA stating that they would keep advertising consistent with the specialty idea “Protect this House”. It gives people a mantra… no star athletes. No athlete is bigger than the brand and UA stands by that. Well apparently the case of the SWOOSH BLUES is just too contagious.

Under Armour will now be teaming up with The Sports Authority and Chicago Bear’s star punt returner Devin Hester on ESPN. Devin Hester is well known throughout the league for breaking the NFL record of most punt returns in a season. He is a star. Oh, and by the way, he also wears a blue jersey for the Chicago Bears. Stealing a page out of Nike’s blue history book… I think so.

Only time will tell whether UA’s new footwear additions will help win over some of that blue Nike (NKE) market share. At Research Edge, we think that UA will gain share but it will come right out of Adidas’ and Reebok’s pockets. For the meantime, UA better hope Devin Hester doesn’t run out of bounds at only the 25 yd line.

Some recent Nike market share statistics:
• Nike is up 4.9% for this month’s Year over Year change, while its ASP is up a whopping 11.7%.

• While the Athletic Low Performance Industry is down (21%) Year over Year for the month, Nike’s Low Performance category is a positive 24%. (45 point swing Nike boasts over the Low Performance Industry).

• Nike is gaining upward of 3% YoY total market share for the month of July.

Jeff Dawson
RESEARCH EDGE

HOW WAS YOUR JULY?

Some people were really irritated when I started to write about the hedge fund industry being oversupplied. Usually when I'm irritating people, I am about to be really right.

Tom Cahill at Bloomberg wrote a solid story this morning titled "Hedge Funds May Post Worst Month In 5 Years." From what I am hearing from contacts in the industry, he doesn't look like he'll be far off in that prediction.

In his article he cites the Hedge Fund Research (HFR) Index "of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003."

Clearly the "meme machine" trades of shorting the Financials and buying everything Commodities caused some problems in July - suffice to say, these "Trades", as some “hedgies” like to call them, were a tad crowded, in retrospect.

The meltdown in the hedge fund industry remains one of the most misunderstood market risks. Many of these funds are managed as compensation structures, not real businesses. You won’t hear about the major blowups, until it’s too late. Stay hedged.

KM

Wacky Wheat Moves: Polish drought, Iranian Rumors, and Putin Power

Wheat prices spiked overnight after a slew of bullish news reports from Eastern Europe and the Middle East were digested, only to give up much of the ground in the face of large volume sellers this afternoon.

The big three data points driving market action in the past two sessions are:
  • • The Government Statistical Office of Poland –the third largest EU wheat producer, has predicted this year’s harvest may be as much as 9% lower than last year’s after unseasonably dry weather in June and July damaged crops.
  • • The continued chatter in western media outlets that Iran is about to announce a large wheat purchase that will be spread amongst the US, Canada, Russia and the EU. For its part, the media in Iran has been reporting heavily on grain stock levels -last Monday’s edition of the newspaper E'temad-e Melli carried the headline "Wheat Import and Management crisis in Agricultural Sector".
  • • Russian Vice Prime Minister Viktor Zubkov was quoted in TASS today assuring farmers that "The Agriculture Ministry has been instructed to create an intervention fund of no less than five million tons of food grain and not less than three million tons of fodder grain by mid-August.” The fund is meant to alleviate price pressure resulting from higher yields in central Russia this season.
  • Andrew Barber
    Director
Volume Spiking Over the SEP 08' Contract Prices

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