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Five Things You Need to Know: Heat Cools Retail Sales; Minyanville Presents: Retail Sales Chill Chart; FOMC Minutes Reveal Impenetrable Language, Red Herrings and Headfakery; Hedge Fund Pricing Tactics; Hedge Fund Pricing: Art or Science?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Heat Cools Retail Sales

U.S. retail sales in September rose at the slowest pace in five months as consumers cut back spending because of unseasonably warm weather, the International Council of Shopping Centers and UBS Securities (UBS) said in a preliminary statement, according to Bloomberg.

  • Sales at stores open at least 12 months gained 2% from a year earlier.
  • That's the smallest since same-store sales increase since sales fell 1.9% in April.
  • The results were on the low end of the ICSC's forecast of 2% to 2.5%.
  • Last month was the eighth-warmest September since 1895, according to Planalytics Inc., Bloomberg said.
  • Wal-Mart (WMT) earlier this month lowered prices on some toys more than two weeks earlier than 2006.
  • And Target (TGT) on Sep. 24 cut its monthly sales forecast in half.

2. Minyanville Presents: Retail Sales Chill Chart

Clearly, weather is critical for retailers. If it's too hot sales will melt like plastic flamingos glued to a scorching hot apartment radiator (don't ask). If it's too cold sales will freeze like something freezing in a freezer, except the sales will not technically be in a real freezer, which is clearly impossible, unless the things being sold are supposed to be frozen, like Tater-Tots, but this has nothing to do with that.

To help traders and investors keep tabs on how weather is impacting their retail stocks, Minyanville has designed a special retail sales Chill Chart. Now it is possible to know, at-a-glance, how the weather is impacting your favorite retailer.

3. FOMC Minutes Reveal Impenetrable Language, Red Herrings and Headfakery

This afternoon at 2 p.m. EST the Federal Reserve will release the minutes of the September 18 meeting of the Federal Reserve Open Market Committee.

  • What are the Fed Minutes?
  • The FOMC, the committee of the Federal Reserve that meets to discuss and set monetary policy, first began publishing the minutes of their meetings in 2005 on a three week delayed basis - you know, to clean up the transcript and perhaps edit out all the profanity and off-color jokes - just kidding!
  • Previously, the Fed would release the "Statement" accompanying their monetary policy decisions and that would be that; the belief was that anything markets need to know would be contained in the statement.
  • Today's minutes will be closely watched for hints of the key drivers behind the 50 basis points rate cut on Sep. 18.
  • Specifically, what "developments" have "increased the uncertainty surrounding the economic outlook"?
  • What exactly is the FOMC monitoring to judge that credit tightening is abating, and what is being evaluated to judge "adverse effects on the broader economy"?

4. Hedge Fund Pricing Tactics

According to the Wall Street Journal, new research says managers may pick the most flattering prices when valuing illiquid securities in an effort to help performance.

  • The study used a hedge-fund database from the University of Massachusetts to analyze monthly returns from 4,268 hedge funds with varying investment styles from 1994 to 2005, the Journal reported.
  • It found a significant difference in the number of funds reporting a slight gain compared with a slight loss in any given month.
  • That difference was most pronounced for funds that trade illiquid securities.
  • The difference didn't show up in funds that primarily trade stocks or futures contracts, which makes sense because those are active markets where the securities have easily obtained prices.
  • "Hedge-fund managers purposefully avoid reporting losses by marking up the value of their portfolios," the authors of the study, Nicolas P.B. Bollen, an associate finance professor at Vanderbilt University, and Veronika K. Pool, an assistant finance professor at Indiana University, wrote.
  • Valuation of illiquid securities first became an issue this summer when two Bear Stearns (BSC) hedge funds blew up.
  • One of the funds initially reported a 6.5% loss for April, but investors learned a few weeks later that the fund was actually down about 20%.

5. Hedge Fund Pricing: Art or Science?

Today's Number Four item on Hedge Fund Pricing raises the question: Is hedge fund pricing an art or a science?

  • We believe it's more of an art.
  • But not every hedge fund manager has the creativity necessary to turn a 65% loss into a small gain.
  • For example, in July Bear Stearns sent a very weak artistic letter to its clients warning that the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds were having "pricing issues."
  • Here is a copy of that letter as it appeared in the Telegraph (UK).
  • Minyanville's in-house Creative Hedge Fund Pricing Director spent more than 10 minutes this morning going over the Bear Stearns letter to see how it could have been improved from an artistic pricing standpoint.
  • Below are excerpts from the Bear Stearns letter, along with the Creative Hedge Fund Pricing Director's revisions.

"A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the funds. This process has been much more time-consuming than in prior months due to increasingly difficult market conditions."

Creative Revisions (in italics):
"A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the funds. This process has been much more time-consuming than in prior months due to what we are confident will be returns that you will find impossible to believe."

"As you know, in early June, the Funds were faced with investor redemption requests and margin calls that they were unable to meet."

Creative Revisions (in italics):
"As you know, in early June, the Funds were faced with investor requests for additional investment opportunities and official inquiries from people with whom we work closely seeking additional capital that we weighed carefully, but ultimately determined did not meet the Funds' current needs."

"As a result, counterparties moved to seize collateral or otherwise terminate financing arrangements they had with the Funds."

Creative Revisions (in italics):
"The path of the righteous man is beset on all sides by the iniquities of the selfish and the tyranny of evil men."

"During June, the Funds experienced significant declines in the value of their assets resulting in losses of net asset value."

Creative Revisions (in italics):
"Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother's keeper and the finder of lost children."

"The Funds' reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities. Fund managers and account executives have been informing the Funds' investors of the significant deterioration in performance for May and June."

Creative Revisions (in italics):
"And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon thee!"

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