prev

Eye on Leadership... Moammar Kadafi?

Bizarre photo for the day. Now that Libya is back in good graces with the West, we will start seeing this cat in the news again. He looks like he is dressed for a Morris Day and The Time reunion show.

Andrew Barber
Director

Vietnamese Dominos

The highest inflation rate in 16 years out of Vietnam should not be ignored. The dominos could very well fall in a path that leads to footwear bankruptcies and M&A.

Last night, Hanoi government officials reported 28% growth in inflation, and cut economic growth estimates to 6.5-7% from 8%. “Our goals are to achieve 7% economic growth, and inflation at 25%.” Gee guys, thanks for aiming high in the most stagflationary environment Vietnam has seen since the mid-1990s.
  • The good news for the footwear and apparel industry is that exposure here is not huge – only 4% of US consumption is sourced in Vietnam. Not the case for Nike and Adidas, however. These guys have more diversified manufacturing bases, but source roughly 1/3 of their respective footwear in Vietnam (Nike is 33%, and Adi is 30%).
  • This scares me big-time. And it’s got to be scaring the two largest footwear companies in the industry. This will pressure margins in calendar ’09, and more importantly, it will cause disruption for the little guys that they’re not currently planning for.
  • Think about it… Nike wakes up one morning and realizes that it needs to pay an extra 20% to cover wages in Vietnam. Yes, it will make its partner there whole to some degree. But it will also find capacity in China, Indonesia and Thailand that is currently occupied by smaller competitors, and muscle them out of their space.
  • This is bad for Nike and bad for Adi, but will not destroy their margins. This will take margins away from everyone else in the industry, who will try as hard as possible to push the pain off to the next guy in line. This is when marginal brands and retailers take a massive hit (Skechers, Brown Shoe, DSW, and even Dick’s), the big guys hang in there and print numbers that are ‘less bad’ than the group, and good brands with poor management teams get taken out (Timberland).
  • This space is going to be fun…
Don't ignore the inflation trend in Vietnam!
Nike and Adidas are well diversified (away from China) but are over-exposed to Vietnam for sourcing product.

And the Unemployment River Card Is... A Six.1

On 8/21/08 I posted a note titled "Get Ready For A 6-7% Unemployment Rate "... so this morning's "surprise" to the Street is not one to you or to us. Accountability and Transparency is paramount to our research promise.

This morning's unemployment rate was printed at +6.1%. This is a new 5 year high. No, this is not good - but it's not a new revelation to people who aren't living Wall Street's narrative fallacy that the global market contagion wouldn’t spill over to Main Street.

We are still early innings of an accelerating unemployment cycle. This isn't just about the "credit cycle". See the "Trend" in US jobless claims below. Math is hard to debate.
KM

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Liquidity Watch: Revisiting the TED Spread Charts

Spreads continue to widen. This isn't new - people are just being forced to pay attention to it. Andrew Barber updated both the 6 month and 10 year charts of the TED Spread below (3 month US Treasuries vs. 3 month LIBOR).
KM

US Market Is Oversold, Finally, For a "Trade"...

My model has an S&P500 downside oversold target level of 1221.98. I've been getting longer in the last hour for a "Trade". The downward "Trend" in this market remains, but I am deploying more of this concentrated virtual cash position I've been carrying.

I've moved from 81% to 79% cash.
KM

IS A DEALER PHASE OUT POSSIBLE?

The Excalibur is trying an interesting experiment with important ramifications for the industry, both good and bad. The poker floor at the casino is now completely automated (no dealers). In no way am I predicting a dealer free casino environment any time soon. However, it is conceivable at some point. Remember, people thought a coinless slot floor couldn’t exist until SunCoast opened with 100% ticket in/ticket out machines. Shuffle Master, IGT, and Aristocrat all offer electronic blackjack, roulette, craps, etc. These electronic table systems (ETS) are completely interactive; patrons actually play at the same table together, just without dealers. SHFL is on an annual revenue run rate of almost $30m from ETS so it is already a real business.

So what are the benefits? The clear positive to the gaming industry of ETS is reduced labor costs. To get an idea of magnitude, roughly half of MGM’s revenues goes to labor. The employee base is not comprised of all dealers, of course. But could MGM improve EBITDA margins by 10% by eliminating dealers? Holding everything else constant, maybe.

The key, as always, is the consumer. If the consumer doesn’t embrace ETS then it won’t happen, no matter how much labor it saves. The cost benefits of cashless gaming were apparent long before SunCoast proved the consumer would adapt. The second hurdle may already be tripping up Excalibur. Nobody wants to lose their job. New technology always displaces and disrupts and ETS would be no different. As the Las Vegas Review-Journal reported, some dealers are vocally not happy with MGM. A total of 40 dealers were let go, although the company did promise to find them jobs at other MGM casinos. I’ve written extensively on the growing influence of labor unions on the gaming industry, particularly if Obama wins the presidency. ETS would be one more issue for the labor bosses to pounce on.

Poker ETS at Excalibur

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next