Two MACRO data points that highlight one common theme – INFLATION - that only a few can see!


Today, we learned that the National Federation of Independent Business Optimism Index dropped to 86.8 in March from 88.0 in February, the lowest level since July 2009.  Small businesses are the engine of job growth in the US and they are growing more concerned about sales trends and profitability.  Seven of the index’s 10 components declined in March and two were unchanged from February.   Small businesses are typically the first ones to see the consumer come back, and by and large, they are not seeing a pickup in demand.  More importantly, how likely is it that they are going to hire workers in significant numbers any time soon? 


Second, small businesses are less confident about the economy and profitability because the consumer is pinched and inflation is on the rise.  Prices of goods imported into the U.S. rose 0.7% in March following a revised 0.2% drop in February.   The free money polices of the FED and other central banks are pushing the envelope of global growth and pushing up commodities prices, but businesses haven't been able to pass the higher costs onto a weakened consumer. 


Backing out the cost of higher petroleum prices, import prices fell 0.2% in March, allowing the FED to argue that interest rates need to stay near zero for an “extended period” to heal the economy.


The FED will also need to ignore more data on inflation tomorrow.  Due for release tomorrow is the March 2010 CPI data which should show inflation accelerating, thanks to higher oil and gasoline prices, as well as to the slowly spreading broad impact of higher energy costs. 


A gambling man would favor something on the plus-side of consensus expectations. 


Howard Penney

Managing Director





A Very Sad Secular Chart: US Trade Deficit

Darius Dale and I were just grinding through US government data and had to keep pulling the curtain back to prior decades until we found one that actually showed a US Trade Surplus. Not months; not years; decades. You have to go back to 1976 before this chart registers anything that resembles a surplus (i.e. more exports than imports).


As we headed into the late 1970’s, the Keynesians were as willfully blind to the prospects for importing inflation are they are right here and now. But, as they say, nothing focuses the mind like a good ole hanging would in the ole West… and as harsh as that might sound, its the political metaphor to consider when these conflicted and compromised politicians promise that Americans will never have inflation and that interest rates will never go up.


You can look at this chart for what it is and tell me if you think running a national trade deficit policy has done anything but add to the cyclicality of a jobless economy. On a cumulative basis, the most recent decade (2000-2009) didn’t create any net jobs. ZERO. Why? Well, that’s easy. We import asset inflation and ignore it until we have a crisis; then we cut rates to zero and hope and pray that the world will consider this trade deficit chart a healthy solution.


Now there is always hope that we will have a Reagan revival and that we will get this trade deficit in order, but until the data supports that idea, it will be nothing but that – a hope. Hope is not an investment process.


This morning’s US Trade Deficit hooked down again to almost -$40B from January’s -$37B. I understand that a billion dollars aint what it used to be, but neither is a political hanging or the Coinage Act of 1792 (where a politician would be sentenced to death for debasing the currency of the citizenry).


This is a very sad long term secular chart, indeed. The world economy is starting to hold us accountable to what we are trying to ignore.



Keith R. McCullough
Chief Executive Officer


A Very Sad Secular Chart: US Trade Deficit - US Trade Deficit Long Term

R3: RL: Bonjour Paris



April 13, 2010





After almost three full years, Ralph Lauren is set to launch its Paris flagship store on the Boulevard Saint Germain.  This often discussed property has been a measurable drag on EBIT and earnings since the company began paying rent in August 2007.  With its opening only days away, RL is now poised to ramp not only sales and profits, but to greatly expand the company’s brand presence in the key Paris market.  We estimate that the company is likely paying $1,000 per foot for the 23,000 square foot flagship, or $23 million annually.  Certainly not a rounding error!  This equates to about a $0.15 annual drag on earnings for each of the last couple of years since the company was assigned the lease.  Further drilling down, the rent alone was a drag of ~100bps of retail segment EBIT margin or ~50bps to company-wide EBIT margins in fiscal 2010. 


While the exact ramp of store productivity is still unknown, it is fair to say that the worst is now behind for the company’s P&L as it relates to the trophy Paris property.  Expect much fanfare in the press and in the city of Paris over the coming weeks with store’s official opening.  And of course, expect to see a reduction in the earnings drag that can be wholly attributed to the 17th century townhouse below…


R3: RL: Bonjour Paris - RL Paris





  • According to a study by Retail Systems Research, retailers in the near-term are allocating funds towards IT projects that directly impact the consumer experience on the selling floor. For example, upgraded and modern POS systems were the most budgeted item for this year, with 18% of respondents indicating they would be spending on this area. Personal scanners, self-service scales, product information kiosks, and employee training technology are the second most budgeted item, with at least 14% of respondents indicating they would be budgeting at least one of these items.





R3: RL: Bonjour Paris - Calendar





Ocean Freight Overcapacity Issues - Ocean freight carriers will spend years trying to cope with a substantial overcapacity problem. In addition, importers’ reliance on West Coast ports as the primary entry point for Asian-manufactured goods may wane by mid-decade because of the expansion of the locks in the Panama Canal which is expect to be complete in 2014. Ocean carriers such as Maersk, APL Lines, Evergreen Line and Hanjin Shipping were hit hard by the dip in trade volume. That blow was compounded by their pre-recession investments to order new and larger ships. Although trade volume has started to rise again, it will take years for the level of imports to catch up with overcapacity. The amount of idled capacity still hovers around 10%. Most industry watchers acknowledge that 2010 will show improvement over 2009 and that freight rates will rebound somewhat, but a number of major lines have projected 2010 still won’t be profitable. <>


China Seeks WTO Probe of EU Duties on Shoes - The European Commission rejected Beijing's call for a formal investigation by the World Trade Organization of of EU charges on Chinese shoes. In December, Brussels extended import duties of up to 16.5% on Chinese shoes, claiming that they unfairly undercut the cost of EU producers, but Beijing lodged a complaint with the WTO in February and on Monday called for a formal inquiry panel. The case is being closely watched because it is only the second time that Beijing, which joined the WTO in 2001, is seeking to use the world trade body to challenge EU tariffs following a formal complaint last summer about duties on metal fasteners. <>


Pakistan Government Expects $10 bn Textile Exports - Pakistan expects to ship $10 bn worth of textile exports despite the energy crisis, which has crippled the industrial output. “We have fixed an ambitious export target of $25 billion till 2014 in the new five year textile policy for 2010/15 with 2 times value addition target,” said Mirza Baig. He underplayed claims by the value-added textile sector that Pakistani industries were shifting to Bangladesh. Pakistan has emerged as one of the major cotton textile product suppliers in the world market with 30% of world yarn trade and 8% of cotton fabric, but its total textile exports are only $7.4 bn which accounts for only 1.2% of the over all share. <>


R3: RL: Bonjour Paris - Apparel Imports Pakistan


UK March Retail Sales - Clothing and footwear sales growth slowed in March after a strong February as economic uncertainty caused shoppers to hold back on non-essential purchases. UK retail sales values rose 4.4% on a like-for-like basis from March 2009. Food sales were boosted by Easter purchasing falling in March this year but April last year. For non-food, consumer caution in the face of economic and political uncertainty favored essentials and replacements over discretionary items. Clothing and footwear slowed but homewares improved, helped by mid-season sales and promotions.  <>


TK Maxx Woman Concept Store Launches in London - Off-price retailer TK Maxx has launched its new women-only concept in southwest London, mixing designer bargains with cheap-as-chips brands. <>


Jos. A. Bank To Open Factory Outlets - The 473-unit Hampstead, Md.-based retailer said Monday it plans to test the concept with five stores this year, and, if successful, could add 50 to 75 units around the U.S. in 2011 and beyond. JOSB has been looking at the factory outlet concept for a long time as a potential brand extension. The company operates seven outlets, but they’re older units, scattered around the country, that carry clearance merchandise and are not located in A-list centers. <>


Phil Mickelson and the Golfsmith Challenge - Phil Mickelson captured his third green jacket Sunday at Augusta and triggered the fulfillment of an estimated $1 mm promotion undertaken by Golfsmith International Holding. As announced last month, any Golfsmith customer who purchased a new Callaway Diablo Edge, FT-Tour or FT-iZ driver between March 12th and April 7th, would receive a full refund if Mickelson won the year's first Major tournament as part of Golfsmith's "If Phil Wins, You Win" promotion. Golfsmith and Callaway, which provides the clubs that Mickelson used to win with at Augusta, made an insurance investment that eliminated any financial risk associated with the promotion. <>


LVMH Beats Estimates for Q1 - Revenues at LVMH Moet Hennessy Louis Vuitton rose 11% (13% organic) in Q1 as demand for luxury goods rebounded in the United States and Europe and retailers began re-stocking their shelves with Champagne, watches and jewelry. In organic terms, the world’s largest luxury goods maker reported double-digit increases across all its business divisions: up 10% in fashion and leather goods; 12% in perfumes and cosmetics; 13% in selective retailing; 20% in wines and spirits; and 34% in watches and jewelry. <>


Kellwood Cuts Costs - Usually companies outsource to save money, but at Kellwood Co., doing the unexpected and bringing the tech department in-house — plus hiring 54 new employees to staff it — saved it $3.6 mm in only five months. After a reorganization, acquisitions including Vince, new ownership and new financing transformed the company and saved it from bankruptcy, the old IT organization was no longer relevant or needed. The company’s top priorities for this year are to support new acquisitions with e-commerce and retail technology, and to move the whole company to one reporting and dashboard system. The company uses Gerber for product data management, Oracle for financials and Manhattan Associates for warehouse management. <>




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Off Price Retail: Gourmet Salami

Flash-fashion retailer Gilt Group has resorted to selling capicola and salami. No Joke. This shows 1) the lack of scalability of this model in a singular category, and 2) difficulty in finding higher-end apparel for off-price channels (ROST and TJX).




In what is either a sign of the apocalypse, or just an indication that these ‘internet luxury auction models’ are simply not scalable, off-price flash sale retailer Gilt Group offered cured meats on Monday. Yes, we’re talking gourmet salamis. This plays right into the biggest challenge for these businesses – which is the consistent depth/breath of goods. That’s why we’ve seen these forums evolve into other categories like travel. But capicola? C’mon…


Interestingly, this non-apparel offering coincides with other anecdotes we’ve come across suggesting that higher-end off-pricers are having trouble sourcing goods. The luxury players that were happy to sell inventory into the online channel, are now reverting back to their old Saks, Neiman, and Barney’s ways.


Off Price Retail: Gourmet Salami - GourmetSausage


Companies in PE crosshairs have been leading the way over the past week.


On March 17th, I wrote about a selection of companies that could be on the “A” list for a private equity transaction: CAKE, PFCB, MSSR, TXRH, BOBE, EAT, CHUX, RRGB, PEET, and CPKI.  CKR was already, by then, being targeted by parties interested in acquiring the chain.  In the past week, restaurant stocks have been performing strongly.  As the rumor mill has gained steam, and CPKI has confirmed that the firm has hired Moelis & Company to explore financial and strategic alternatives.  The chart below illustrates clearly that the “A” list, plus CKR, has strongly outperformed over the past week. 


TALES OF THE TAPE - alist413


In terms of upgrades/downgrades, CAKE was moved from “conviction buy” to “buy”.  Estimates were lowered at PFCB based on the unfavorable impact of winter weather in February, calendar shifts, and near-term pressure from promotions and product enhancements.  PFCB's shares are still rated “outperform”, however.  YUM and KKD are reporting this week.  As can be seen in the table below, KKD has been strongly outperforming its peers.


TALES OF THE TAPE - stcok 413


TALES OF THE TAPE - commod 413


Howard Penney

Managing Director


“I do not want Fannie and Freddie to be just another bank… I do not want the same kind of focus on safety and soundness.”

-Barney Frank (September 25, 2003)


In his recently released “The End of Wall Street”, Roger Lowenstein kicks off a chapter titled, “To The Crossroads” with that quote from the House of American Perceived Wisdoms. As we try to figure out where the US stock market goes after a +76.9% rally, we should always remember that Congress helped create a massive hole in America’s balance sheet that the Chinese will never forget.


When President Obama asked China’s President Hu Jintao for a “more market oriented rate” yesterday in Washington, one has to wonder if that smile on Hu’s face was kindly asking the President of the United States ‘are you kidding me?’


In the face of the US Government marking the rate of return on Fed funds at ZERO percent, telling the Chinese to mark-to-market is the height of hypocrisy. Sure, the Chinese have their own accounting issues, but so do we, and it’s about time our President recognizes this as fact. This has nothing to do with China’s LGFV’s (Local Government Financing Vehicles). This has everything to do with America marking US government deficits and liabilities to model.


Now that Congress is back in session, if you want to see Barney Frank, Tim Geithner, and Ben Bernanke do the collective squirm, have your local Congressman ask any of them if GSE debt (Fannie and Freddie) is sovereign debt? Simple question; simple answer. Not unlike a low quality company that tries to keep their sordid secrets off-balance sheet, this is exactly what America has signed off on letting our politicians of the Bubble in American Politics do – it’s called marked-to-model.


GSE debt is backed by the US government and is, therefore, sovereign debt. You don’t have to take my word for it. Ask our largest creditor what they think. If it quacks and swims in a circle, it’s a one-legged duck.


Some “free marketers” of the Reagan revival will quickly come to the rescue of the US Treasury market and pronounce their proclamation of faith that Treasuries trade in a liquid market and are therefore trading marked-to-market. That’s all good, fine (and theoretical) and, to a degree I might actually agree with part of that argument if you push me out long enough on the curve. But reality is that the Fed Funds Rate is keeping the short end of the curve artificially depressed (or marked-to-model).


So my simpleton suggestion this morning is that we take a good hard long look in the mirror before we start trumpeting our once vaunted system of American Capitalism and see this for what it has become. Greece getting a short term bailout by European government officials who decided to mark Greek debt 200 basis points under the marked-to-market rate is simply a roadmap to our very own perdition.


Funding long term debt obligations by borrowing short on a conflicted and compromised government rate is the opposite of what we should have learned from the last 24 months of this mess. These American and Western European politicians aren’t doing anything different right now with sovereign debts than what Bernanke and Paulson attempted to have Wall Street bankers do in the early stages of 2008. It’s pathetic.


We can’t do this for much longer or the Chinese and Japanese are going to start doing exactly what we taught them to do, which is get out when something smells like it’s going down the path of a debt spiral. While hope is not an investment process, I can only pray that they don’t start doing this aggressively any time soon.


China has been a net seller of Treasuries for the past 3 months. This doesn’t include the March data, and in the month of March we saw a ton of Treasury selling on the short end of curve (2-year yields went from 0.8% at the beginning of March to 1.1% in a straight line = +37.5%). Can you imagine where interest rates would be if President Obama heeded his own advice and marked the Fed Funds rate at a “more market oriented rate”?


The Piggy Banker Spread is 10 basis points (0.10%) off its record wide levels in America. Again, the government’s choice has been to bailout financiers who need to borrow short to attempt to invest long, and that is what it is. Who underwrites this spread? You do. You don’t get the savings rates of return that Chinese, Australian and Brazilian citizens do because the ideology of the Greenspan and Bernanke Feds continues to be marking your savings rate to model, below the level of inflation.


Below the level of inflation? Yes. Expected inflation is one of the main drivers the long end of the Treasury curve in the last month. You see, the further you push out on the curve, the further away you get from the Fed’s marks. That’s why the yield spread (Piggy Banker Spread) between 10-year and 2-year rates is +282 basis points wide this morning.


Both the long end of the Treasury market and the US Dollar are marked-to-market more appropriately than the short end – Bernanke has politicized that just like Greenspan did. Meanwhile, both Mr. Currency and Mr. Bond Market see the inflation that will be reported here in the USA tomorrow, however compromised and conflicted that government calculation may be.


My immediate term support and resistance levels for the SP500 are now 1184 and 1201, respectively. If this note read as angry, it should have. Re-reading Lowenstein’s account of what caused this mess has reminded me of my greatest fear. With the stock market back up, we may have learned nothing.


Best of luck out there today,



Marked-To-Model - OBAMA


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