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R3: JNY, BEBE, Twitter, Reebok

R3: REQUIRED RETAIL READING

December 10, 2010

 

 

 

RESEARCH ANECDOTES 

  • Just what every kid needs.  Gucci launched an iPad app that allows users to dress up a virtual kid in the brand’s just launched children’s line.  While the paper doll motif is somewhat clever, we wonder just how many children will be asking their parents to replace their Dora apps with Gucci’s Playground?
  • According to the Pew Research Center, one in ten internet users are Twitter users.  Approximately 74% of Americans use the internet, which implies about 6% of the entire population is now Tweeting.  Interestingly, females outpace males by about 1/3 with their Twitter usage.
  • Just as Bebe introduced its latest resort collection for the company’s Kardashian line, the company’s president also indicated that the collaboration with the pop-culture icons may also be nearing an end.  So much for a long-term partnership – “at Bebe we need to move with fashion and we want to be first in the fashion world with everybody else and not fall behind. We are definitely assessing the situation.”  

OUR TAKE ON OVERNIGHT NEWS

 

Jones Group to License Kids' Brands The Jones Group is taking its children's’ footwear business out of house. The company’s portfolio of kids' brands, which includes Nine West, Sam & Libby and Mootsies Tootsies, has been licensed to Edison, N.J.-based LJP International, the firm founded by children’s market veteran Larry Paparo. The Dockers boys’ line will not continue under the new partnership. Current Nine West kids’ exec Joe Truglio will join LJP as director of sales. Rick Paterno, group president of footwear for Jones, said the move, which will be effective Jan. 1, is a logical one. “While kids’ has always been a good business for us, it’s somewhat outside our core competency. We’re a women’s house and that’s what we’re experts at,” Paterno said. “This licensing arrangement gives the children’s business a dedicated focus from Larry and his team, while still allowing us to control the design and direction of the product.” Paparo, whose company has extensive sourcing networks in China and Brazil, had been working with Jones for some time as a production agent for its kids’ lines. “We think Larry will do a fantastic job running the business,” Paterno said. “He has his ear closer to the children’s market and really understands it, and he has great relationships in the marketplace.” <WWD>  

Hedgeye Retail’s Take: While kids footwear may not be a “core competency” of Jones, it’s also likely that recent top management departures have forced the footwear division to clean house.  

 

Innovation Out of Reebok - Reebok International Ltd. and Cambridge, MA-based MC10, Inc. announced an R&D collaboration to create a new class of athletic apparel and equipment, combining market leading sport design with advanced electronics. Reebok said the collaboration will use MC10's conformal electronics platform and Reebok's design capability to bring new products to the athletics market. When combined with Reebok's heritage of innovation for the athlete, MC10's proprietary approach to making high performance electronics "skin like" and invisible to the wearer will enable entirely new classes of intelligent sports equipment and apparel. Reebok also noted that it has a strong history of innovation with iconic products in the sporting goods industry like The Pump, and more recently EasyTone, and ZigTech. <SportsOneSource>

Hedgeye Retail’s Take:  We see this collaboration going one of two ways – using innovative technology to enhance performance intelligence in athletic apparel product (positive); or harnessing electromagnetic currents to stimulate muscles in order to encourage weight loss at all times (just bad). Yes, a bit tongue-in-cheek, but pushing the brands as the next great innovator seems a bit of a stretch.

 

Burberry Expanding in India - The Burberry team hit India this week with much fanfare and for a simple reason — to celebrate its presence in the emerging market, which company executives consider key for the brand’s global retail expansion. Chief executive officer Angela Ahrendts and chief creative officer Christopher Bailey, on his first trip to India, arrived in Mumbai earlier this week, and on Thursday night, descended on the Aer Bar at the city’s Four Seasons Hotel roof terrace for a fete with 200 guests. This being Burberry, there had to be a distinct Brit flavor to the affair, so the brand flew in musician Rory Cottam from English band The Cheek, who appears in Burberry’s fall campaign and did a DJ set that night. Indian musicians and brothers Aman and Ayaan also gave a live acoustic set, and Indian DJ Aqeel spun tunes. There are four Burberry stores in India. The brand has a presence at the Palladium Mall in Mumbai, the Emporio Mall in New Delhi, UB City Mall in Bangalore and the Taj Krishna hotel in Hyderabad. The brand will open a fifth unit at Oberoi Hotel in New Delhi this month. The stores are operated by Burberry India, a joint venture with Genesis Colors that was unveiled late last year. “This was my first visit to India,” said Bailey, who has kept the brand’s Facebook fans abreast of the trip. “It’s a country that we are so excited by. They have a huge appreciation for luxury and Britishness, so being there and meeting everyone and feeling the energy behind the country was incredible and we had a great night in Mumbai.” <WWD>

Hedgeye Retail’s Take: While not nearly the same opportunity as China, the UK/India history is certainly one that should help build the re-emergence of the British luxury brand.  Keep in mind that the luxury biz in India is highly concentrated on a handful of urban centers, which for now makes substantial unit growth a challenge (despite housing the world’s second largest population). 

 

Mulberry Opens Flagship Amidst Strong Demand - Profits at Mulberry Group PLC more than tripled in the six months to Sept. 30 to 3.3 million pounds, or $4.9 million, from 1 million pounds, or $1.5 million, on the back of strong, full-price sales growth in robust markets including the U.K. and the U.S. And sales show no signs of flagging: In the ten weeks to Dec. 4, Mulberry said global retail sales rose 47 percent, and that full-year performance was likely to exceed market expectations. The spring 2011 wholesale order book is 91 percent higher than last year and orders have not yet closed, the firm said. The group reported the results Thursday, just days after opening a 5,400-square-foot flagship store at 50 Bond Street, an open, environmentally-friendly space that showcases the brand’s accessories and ready to wear together for the first time. “It’s the largest single-floor space on Bond Street – there aren’t even any pillars,” said Godfrey Davis, chairman and chief executive, during a walk-through. “And it was a logical move for us. Finally, we’re all on one floor.” Mulberry’s former shop, at number 42, was smaller, narrow and on various levels. <WWD>

Hedgeye Retail’s Take: While not likely a key influence in the UK, we wonder if the company’s second collaboration with Target has been a key driver of the brand’s growth here in the U.S.  Unfortunately the company’s nine Target SKU’s are now sold out.

 

Luxury Watch Retail Expansion Continues - Officine Panerai has retail expansion on its timetable. The storied watch brand, which was founded in 1860 and bought by Compagnie Financière Richemont SA in 1997, currently sells its watches in only 500 points of sale around the world, including around 100 locations in the U.S. There are also 24 company-owned boutiques worldwide, with three in the U.S., on Madison Avenue in New York, Beverly Hills and the latest addition, Boca Raton, Fla., which opened in September. Over the next several years, Panerai will add significantly to its retail stable, revealed chief executive officer Angelo Bonati. “In three years, we will grow to 100 stores,” he said. “We’re convinced that opening boutiques is the right [strategy]” to attract Panerai’s customers. London and Paris will be added over the next three months and, within three years, six to seven stores will open in key luxury markets in the U.S., as well as additional units in Europe, the Middle East and Asia. <WWD>

Hedgeye Retail’s Take: The surge in luxury watch demand is driving a notable push for retail expansion of late – recall Omega made an even more aggressive announcement just last month. While demand is certainly present heading into the holidays, one has to question just how sustainable demand will be as brands ramp store growth into the 2H of 2011.  

 

PPR Primed to Offload Conforama - French retail-to-luxury group PPR said it has entered into exclusive negotiations with South Africa’s Steinhoff International Holding Ltd. for the sale of furniture chain Conforama for 1.2 billion euros, or $1.58 billion at current exchange. Under the terms of the deal, Steinhoff would also take over Conforama’s debt to PPR, an undisclosed sum. “This planned cession to a global furniture sector player is a major strategic opportunity for Conforama,” PPR chairman and chief executive officer François-Henri Pinault stated. “Steinhoff International has an intimate understanding of Conforama’s business and the two companies operate in complementary markets.”PPR has said it wants to sell its retail assets, including music, books and electronics retailer Fnac, in order to fund expansion in the lifestyle segment, which should eventually dwarf its luxury division, Gucci Group. With 41,000 employees, Steinhoff is already one of the largest furniture and household goods suppliers in Europe and had been looking to reinforce its position in France and other territories. Natixis analyst Boris Bourdet estimated Conforama’s debt at roughly 400 million euros, or $529 million, which would bring the total purchase price to around 1.6 billion euros, or $2.12 billion. <WWD>

Hedgeye Retail’s Take: Lots underway going into yearend for CEO Pinault with the pending sale of PPR’s furniture business while at the same time revisiting the acquisition of a skate/lifestyle brand. Recent headlines (and the market) suggest the company is near a deal with Quicksilver, though apparently Billabong is also under consideration. Given the prospect of capital gains tax relief, the urgency to close deals before year end is less pressing, but the reality is that activity is likely to accelerate.

 

Outdoor Product Sales Rise in November - The outdoor market outperformed the broader markets in November posting an impressive 8.7% retail sales increase versus the same month in 2009.  Footwear category sales were up 9.6% (largely due to late-arriving winter boot sales), apparel category sales were up 11.7% and hardgoods category sales grew 4.1% over the same time period in 2009. Aggressive promotions, pent-up consumer demand and colder weather patterns combined to drive retail chains and outdoor vendors to their best November in four years.  According to retail point-of-sale data compiled by SportScanInfo for OIA VantagePoint™, sales trends in the outdoor market are mirroring the trends at retail overall, with luxury and specialty out-performing lower-end stores and the Internet channel continuing to take market share from traditional brick and mortar business. Despite higher than anticipated unemployment and tax uncertainties, holiday gift-giving and winter weather patterns combined to loosen consumer purse strings.  Sales motivators began shifting in November, with consumers driven both by wants and needs instead of just needs.  For example, Winter Boots made up 36.0 % of total outdoor footwear sales in November 2010, while comprising only 8.8 % of sales for the entirety of third quarter 2010 (retail calendar third quarter is August-October). <SportsOneSource>

Hedgeye Retail’s Take: primarily a function of two factors, the obvious is favorable weather, less obvious is the fact that holiday creep continues to push consumer purchasing earlier and earlier.

 

 


Inflation Signals In Europe

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)

 

We continue to point out in our macro research that we see global inflation accelerating. Below we show charts of the German Wholesale Prices Index that registered +7.8% in November year-over-year and the UK Producer Price Index that rose +3.9% in November year-over-year (see charts below).   

 

Inflation Signals In Europe - a1

 

Inflation Signals In Europe - a2

 

Points to consider:

  • We’d expect increases in wholesale and producer prices to be "pushed" to the consumer = bearish for consumer.
  • While UK PPI is sequentially lower, the elevated level will put addition pressure on the BOE to address headline inflation that has stood above its target rate for the last 8 months.
  • The UK Statistical Report noted that the rise in PPI mainly reflected price rises in petroleum products (including duty), food products and computer, electrical and optical products.
  • The German Wholesale Price Index is making higher highs despite more difficult annual comps.
  • The weakness in the EUR-USD  in Q2 of this year should encourage inflationary pressures on the comp beginning in 2Q11 (see chart below).

Inflation Signals In Europe - a3

 

As Keith pointed out in the Early Look this morning, the price of everyday consumer goods (commodities) have signaled huge inflationary gains over the last three months, despite the highly politicized and manipulated US CPI figure that stands at a mere +1.2% in October year-over-year. In case you missed it, here’s a look at these price moves.

  1.  Crude Oil = +18.2%
  2. Natural Gas = +20.8%
  3. Heating Oil = +18.2%
  4. Gold = +10.1%
  5. Silver = +41.2%
  6. Palladium = +38.3%
  7. Copper = +17.3%
  8. Cocoa = +12.3%
  9. Cotton = +52.4%
  10. Lumber = +19.8%
  11. Orange Juice = +16.5%
  12. Sugar = +35.5%
  13. Corn = +24.2%
  14. Oats = +27.9%
  15. Rice = +20.5%
  16. Soybeans = +23.6%
  17. Wheat = +10.3%

Suffice it to say, inflation is showing up in Europe. For the major economies on the continent, we believe the most current “threat” of inflation, which needs to be addressed, is in the UK. That said, Eurozone countries should begin seeing higher inflation, especially if our bullish intermediate term call on oil is correct, and as comps from a weaker EUR show up beginning in 2Q11.

 

Matthew Hedrick

Analyst


YUM – AS BOLD AS EVER

YUM continues to pursue an aggressive growth strategy.  Here is a recap of their analyst day that occurred this week in New York.

 

Chief Executive Officer, David Novak, and his team gave a detailed presentation today in midtown NYC and their overall strategy remains unchanged.  As they presented it, their four-pronged strategy is:

 

1) Build leading brands in China in every single category

Hedgeye take: An incredibly strong business and much of the future sentiment around the stock will be anchored on the performance of the China division.

2) Drive aggressive, international expansion and build strong brands everywhere

Hedgeye take: Herein is lies a risk for the company’s “aggressive growth” strategy.  Incremental international “growth” related capital is moving toward the lower return western part of Europe

3) Dramatically improve U.S. brand positions, consistency, and returns

Hedgeye take: Apart from the Taco Bell and the franchise revenue stream, the US business is not competitive and is in a continued, long-term, secular decline

4) Drive industry leading long-term shareholder and franchisee value

Hedgeye take: This significant growth profile will limit the amount of cash returned to shareholders relative to the past 5 years.

 

I have some thoughts to share on the respective segments, as they were discussed today, and then I will conclude with some thoughts on the company’s guidance and overall strategy heading into 2011. 

 

 

China


China’s performance remains impressive and management is as bullish as ever on prospects for that market.  YUM plans to further improve asset utilization in the near future with breakfast being rolled out in all stores, delivery being implemented and also 24-hour service on a limited basis (just over 1,000 stores).  KFC is opening in cities where no competitors exist and are currently in 650 cities in China.  Management was repeatedly citing a Euromonitor source outlining the projected 650m Chinese that will make up the Consuming Class in 2020 versus the 2010 total of 450m. 

 

Overall, the division is focused on its aim to continue growing aggressively in China.  The company is appropriately focused on cities and transport hubs.  It was interesting to see that the company breaks cities into six tiers.  While I was unable to find a specific definition for these tiers, it follows that Shanghai and other large, developed cities are Tier 1 cities and smaller cities such as Xinghua in the Jiangsu Province are Tier 5 cities.  In 2010, 15% of total builds were Tier 1, 33% were Tier 2, and 52% were Tier 3-6.  It is interesting to note that operating margins have stayed relatively flat versus nine years ago despite growth being more focused on lower tier (higher margin) cities in recent years.  This obviously implies that margins have declined for YUM in Tier 1 markets.  There is a 500-800bps difference between T1 cities and the balance of the country.  This was explained to us as being mainly attributable to higher rent expense in T1 cities.  Given that operating margins are so much higher in other cities the contraction is not overly problematic, but the trends are important to watch.

 

China accounts for 37% of the company’s operating profit and I think it is now unwise to be negative on YUM unless one is also negative on China.  YUM’s management team is “all in” as it relates to China and this is evident in their guidance for 2011.  The “ongoing” growth target remains 15% on an annual basis and embedded in that number are assumptions of double-digit percent unit growth, at least 4% of comparable restaurant sales growth, and moderate G&A leverage.  The 4% same-store sales imply a significant step up in two-year trends and I believe it may be slightly aggressive but top line trends remain robust.

 

Their earnings guidance also takes into account expected inflation levels of 5% on the Food & Paper line coming from 6-to-7% inflation in chicken (45% of mix) and 2% inflation for packaging.  Management’s projection of 12% inflation in labor due to ongoing government requirements is a double-edged sword for Yum since consumers have more money but labor costs go up for their China division.  Obviously one edge of that sword is sharper than the other and this will negatively impact earnings.  Management seemed confident that sales leverage and the scale that exists in China would enable them to overcome these headwinds in 2011.

 

 

United States

 

The United States is a relatively difficult market for YUM and the company is investing less and less (as a percentage of total) in the division as a result, preferring to increase their focus on China and emerging markets.  In 1998, 78% of YUM’s operating profit came from U.S. operations.  At present that figure is 35% and the company projects that it will shrink further, to 25%, by 2015. 

 

For now, though, the U.S. remains an important market and the company is struggling to stimulate the KFC business and readily admits that no silver bullet is forthcoming.   Taco Bell drives 60% of U.S. operating income.  For 2010, 376 (over 2x the 2009 number) remodels will be carried out and management are stepping up the pace of new unit growth for the concept.  The “Bold Goal” is to build 8,000 Taco Bells in the U.S.  The slide management presented to illustrate this point showed the number of Burger King restaurants in the U.S. as a comparison, which is roughly 7,300.  This is not an especially useful comparison given the intrinsically different natures of the two concepts and the fact that Burger King, many could argue, could stand needs to close many of its stores. 

 

In terms of guidance for 2011, the company is forecasting 6% operating profit for Taco Bell U.S. in 2011 and 3% for “Rest of U.S.”, which, if you take Taco Bell as 60% of operating income, implies overall profit growth of 4.8% for the entire U.S. Division.  Taco Bell’s guidance assumes “modest” unit growth, 3% comparable restaurant sales growth, and “modest” G&A leverage for the year.  Specific guidance for KFC and Pizza Hut within the U.S. Division were conspicuous by their absence.  The lack of disclosure doesn’t bode well for their respective performances in 2011.

 

Overall, I expect the U.S. business to continue to be a drag for YUM.  Despite best efforts, KFC is struggling and I do not believe any of the initiatives mentioned at the Analyst Day, such as increasing sandwich mix, will yield improved margins.  Again, comparisons of markets (in this case U.S. versus U.K.) may be interesting but do not necessarily offer a winning solution from a strategy standpoint.   The refranchising strategy that the company is pursuing with KFC should insulate the company’s bottom line from the weaknesses in that business somewhat, but alongside the bold (and brave) pronouncements that defined the other segments of the presentation, the management’s tone during commentary on the U.S. market was decidedly cautious.  Goal number 3, of the 4 pronged strategy outlined at the outset of the presentation, to “dramatically improve U.S. brand positions, consistency, and returns”, will definitely be the most difficult of all 2011 goals for Yum Brands.

 

 

YRI

 

This was an interesting part of the presentation.  YUM is aggressively pursuing growth opportunities in select emerging markets, such as Indonesia, Malaysia, Thailand, and others.  The thesis is similar to YUM’s China stance; the consuming class population is set to grow at an even faster rate in “YRI Emerging” markets than in China; set to grow to 2 billion by 2020 from 1.1 billion today versus 450 million to 650 million over the same period in China. 

 

Management was particularly enthusiastic about the prospects for growth via the Asia Franchise Business Unit.  There are 4,500 units in operation within these countries where six franchisees own 75% of the units.  GDP growth in many of these emerging markets in Asia, such as Malaysia, Thailand, Indonesia, and Vietnam is expected to greatly exceed that of the U.S./Euro area over the next 30 years and, as with the China thesis, it is not hard to understand the appeal.   This was truly a presentation of bold statements, from start to finish, and the YRI section held its own in that regard, showing the 7.5 YUM stores per million people in the Asia FBU division versus the 60 YUM stores per million people in the U.S.  Undoubtedly the Asia FBU number will grow, but I don’t understand the significance of the (probably over-saturated) U.S. number in this context.

 

 

Africa

 

One of YUM’s goals for 2011 is to “drive aggressive, international expansion and build strong brands everywhere”.  Apparently, they meant it.  Africa, putting the “A” in “BRICA”, is on the “ground floor of growth”, according to YUM.  This is a plan that is in its embryonic stages so it would be wrong of me to be hypercritical at this stage but the thesis certainly did not seem water-tight to me.  The GM of the Africa effort made some statements that alarmed me within an otherwise interesting and well-delivered presentation. 

 

One of these was that “Africa has good governance”.  I’m not an expert on Africa’s political economy but, merely by following the news, I know that the level of political stability in many African nations is far from good.  This is true for several of the nations cited by management as targets for unit expansion with stories abounding of political unrest regularly.  A simple news search online can illustrate my point. 

 

I don’t think that this will significantly impact YUM’s earnings power but there are certainly better uses of capital, in my opinion.  While the long term debt schedule included in YUM’s folder of slides that was provided for the presentation shows that the company has access to cheap capital, it may not last forever.  David Novak underlined the company’s commitment to “watch returns manically” but the company could rue investing capital in some of the African markets mentioned should their projections be overly bullish.  

 

Projections are only as useful as the assumptions implicit in them and I would submit that the estimate of Africa’s GDP hitting $2.6T in 2020 is not very useful given the length of time and the politically and economically volatile nature of African political economies.  Again, the extent to which the company will lever itself to the African markets is as yet unknown and can be assumed, for now, to be small.  Perhaps this new direction is allied with Chinese investment in Africa, given how important China is as a market for YUM, but I hope that they proceed with more caution than was communicated in the presentation yesterday.

 

 

Conclusion

 

At the end of the day, the strategy of “building brands everywhere” and “growing in China till the cows come home” works until it doesn’t.  I’m not suggesting that management won’t stay focused on returns but it will be important to monitor what they do more closely than what they say.  Bold statements have set great expectations and it will be important for the company to retain its discipline – something it purports to do – and not become married to a mantra of growing “everywhere”.  A change in the macro environment, pertaining to individual companies or to the company’s cost of capital, could be a future risk.

 

Overall, the company remains an impressive organization but the more it stretches itself, developing new brands and new markets, the more investment it will take to maintain current performance.  The 500+ person team employed in almost every province in China is just one example of the infrastructure YUM has built for itself in certain international markets.  All in all, no revelations were revealed during yesterday’s meeting.  Management was extremely positive and as bold as ever in their projections and outlook for the business.    Given the company’s significant growth profile, how the company invests its incremental cash is a vital determinant of the stock price.  By that score, as shown in the charts below, 2010 has been a very strong year for YUM.

 

YUM – AS BOLD AS EVER - china roiic

 

YUM – AS BOLD AS EVER - us roiic

 

YUM – AS BOLD AS EVER - yri roii

 

Howard Penney

Managing Director


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THE M3: VENETIAN RAID; GALAXY BONDS; JUNKET COMMISSION TAX; CHINA; TIGER AIRWAYS

The Macau Metro Monitor, December 10th, 2010

 

VICE SQUAD RAIDS CASINO HOURS AFTER OWNER ADELSON FLIES IN SCMP

According to Macau police, a total of 110 mainland women believed to be prostitutes and 22 other people thought to be controlling them were detained at the Venetian.  A Sands spokeswoman said the Venetian had a policy outlawing sex workers on the premises.  She said  "His [Adelson's] arrival is not connected with any of the current issues happening. It's a regular board meeting that was scheduled."

 

A Macau insider said such raids on the city's casinos were not uncommon but were usually right before "sensitive" occasions such as the visits of state officials to the city.  "A police operation was carried out before the arrival of Premier Wen Jiabao last month and other casinos have been the subject of similar action. But everyone in Macau knows what sort of attention an action like this at the Venetian will attract," the insider said.

 

DIM-SUM JUNK BONDS LURE GALAXY YIELDING LESS THAN WYNN, MGM: CHINA CREDIT Bloomberg

Galaxy sold $1.38BN yuan of three-year notes yielding 4.625%--58 basis points less than similar- maturity investment-grade bonds in Shanghai.  The bond yield was also lower than that of MGM's 2016 notes (10.05%) and WYNN's 2020 first-mortgage notes (6.39%).  According to S&P, the bonds were the first speculative-grade corporate debt offered in Hong Kong’s yuan market.  A person familiar with the deal said Galaxy's sale attracted 14 billion yuan of orders.  Galaxy said it will use money from the bonds for non-gambling businesses and general corporate use.

 

MACAU GOVERNMENT TOOK MOP250 MILLION IN TAXES ON JUNKET COMMISSIONS IN 2009 macaubusiness.com

The government pocketed MOP250 million (US$31 million) in taxes on commissions paid by casinos to junket promoters last year, 4.4% more than in 2008.  A final withholding tax of 5 percent is levied on commissions paid by gaming operators to junket promoters.  The amount of tax collected last year implies that casino operators paid MOP5 billion in commissions.

CHINA RAISES BANKS' RESERVE RATIOS AGAIN Reuters

On Dec20, Required Reserve Ratios will increase by 50 basis points to 18.5%, a record high for the majority of the China's banks.


CHINA'S NOVEMBER PROPERTY PRICES RISE AT SLOWEST PACE IN A YEAR ON CURBS Bloomberg

In November, China's home prices in 70 cities climbed 7.7% YoY and increased 0.3% MoM.

 

BUDGET CARRIER TIGER AIRWAYS CARRIES 464,000 PASSENGERS IN NOV Channel News Asia

Singapore-listed budget carrier Tiger Airways said it carried 464,000 passengers in November, up 10% YoY.  However, the load factor edged down by one % point to 86% in the same period.


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 10, 2010

 

As we look at today’s set up for the S&P 500, the range is 35 points or -1.54% downside to 1214 and 1.30% upside to 1249.  Equity futures are trading above fair value in the wake of yesterday's financial-led gains. Trading in Asia and Europe has proved mixed.  To coincide with the start of China's Central Economic Work Conference, authorities have raised their bank reserve requirement.  Today's data highlights include Dec preliminary U of M Consumer Confidence and Oct Trade Balance.

  • Aastrom Biosciences (ASTM) to offer undisclosed amount of shares
  • Borders Group (BGP): 16 stores to be closed in 4Q, in talks to refinance
  • Capstead Mortgage (CMO) declares 4Q div 39c-shr
  • Cypress Sharpridge Investments (CYS) to offer 10m shrs
  • Esterline Technologies (ESL) sees FY11 EPS above est.
  • Green Mountain Coffee Roasters (GMCR) sees 1Q EPS below est.
  • National Semiconductor (NSM) sees 3Q rev. below est.

PERFORMANCE

  • One day: Dow (0.02%), S&P +0.38%, Nasdaq +0.29%, Russell 2000 +0.47%
  • Month-to-date: Dow +3.31%, S&P +4.44%, Nasdaq +4.47%, Russell +5.59%
  • Quarter-to-date: Dow +5.39%, S&P +8.04%, Nasdaq +10.47%, Russell +13.53%
  • Year-to-date: Dow +9.03%, S&P +10.57%, Nasdaq +15.31%, Russell +22.74%
  • Sector Performance: Financials +1.3%, Telecom +1.1%, Materials +0.4%, Consumer Spls +0.4%, Utilities +0.3%, Energy +0.3%, Industrials +0.2%, Healthcare +0.2%, Tech 0.00%, Consumer Disc (0.02%)

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 354 (+1039)  
  • VOLUME: NYSE 1004.27 (-8.10%)
  • VIX:  17.25 -2.76% YTD PERFORMANCE: -20.43%
  • SPX PUT/CALL RATIO: 1.33 from 2.05 -35.21%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 16.83 0.102 (0.607%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%  
  • YIELD CURVE: 2.59 from 2.63

COMMODITY/GROWTH EXPECTATION:

  • CRB: 316.09 -0.25%
  • Oil: 88.65 +0.10%
  • COPPER: 408.70 -0.33%
  • GOLD: 1,389.30 +0.53%

CURRENCIES:

  • EURO: 1.3222 -0.04%
  • DOLLAR: 80.069 +0.09%

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets trade mixed to higher with peripheral markets lagging.
  • The FTSE100 mainly fluctuated in a narrow range either side of unchanged, while the DAX and CAC have extended early gains to trade near session highs.
  • Chinese trade data underlined the strength in its economy.
  • President Sarkozy and Chancellor Merkel are meeting to discuss the EuroZone crisis ahead of next week's EU Summit.
  • Germany Nov Wholesale Price Index +7.8% y/y vs prior +7.7%
  • France Oct Industrial Production (0.8%) m/m vs con +0.3%
  • UK Nov Core PPI +3.3% y/y vs con +3.5% and prior revised +3.2%

ASIAN MARKTES:

  • Most Asian markets went down today as strong trade figures from China exacerbated fears that the country will raise interest rates.
  • China rose on its trade figure, though volume remained tepid
  • China increased bank reserve ratios
  • Australia finished flat as gains in banks balanced out declines by miners.
  • Hong Kong finished flat, but Chinese property stocks fell on worries about interest rates.
  • Taiwan fell 0.40%              
  • Japan rose 1% early, but quickly reversed course on profit-taking, having reached a seven-month high.
  • McDonald’s Holdings (Japan) fell 2% on lower November comps
  • Japan November corporate goods price index +0.9% y/y. Q4 large-company sentiment (5.0) vs 7.1 seq. November consumer confidence 40.4, +0.9 pts y/y, (0.5 pts) seq.
  • China November trade surplus $22.90B vs $22.3B survey.

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - levels and trends1210

 

THE DAILY OUTLOOK - S P 1210

 

THE DAILY OUTLOOK - vix 1210

 

THE DAILY OUTLOOK - usd 1210

 

THE DAILY OUTLOOK - oil 1210

 

THE DAILY OUTLOOK - gold 1210

 

THE DAILY OUTLOOK - copper 1210

 


Rich Privileges

“One of the privileges of a rich man is that he can afford to be foolish much longer than a poor man.”

-Ludwig von Mises

 

This morning’s top global macro headline is ‘China raising rates on reserve requirements in order to fight inflation.’ This shouldn’t be new “news” to anyone who follows Chinese monetary policy closely. China is willing to give-up short-term stock market performance (the Shanghai Composite Index is down -13.3% for the YTD) for long-term price stability. Fancy that.

 

What is inflation? It’s when prices are breaking out to higher-highs over the intermediate-term TREND. In Ludwig von Mises 4th Lecture (“Inflation”, page 52 of Economic Policy) he reminds us that “the most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

 

The Ben Ber-nank’s inflation policy has been crystal clear. Since his decision to engage in Quantitative Guessing part deux at the Groupthink Inc. meetings in Jackson Hole in August, here are the 3-month percentage moves of real-time market prices:

  1. Crude Oil = +18.2%
  2. Natural Gas = +20.8%
  3. Heating Oil = +18.2%
  4. Gold = +10.1%
  5. Silver = +41.2%
  6. Palladium = +38.3%
  7. Copper = +17.3%
  8. Cocoa = +12.3%
  9. Cotton = +52.4%
  10. Lumber = +19.8%
  11. Orange Juice = +16.5%
  12. Sugar = +35.5%
  13. Corn = +24.2%
  14. Oats = +27.9%
  15. Rice = +20.5%
  16. Soybeans = +23.6%
  17. Wheat = +10.3%

Now to be fair to the Fear-mongering Deflationistas who want me to believe that I should accept a ZERO percent rate of return in my savings account in perpetuity, the price of pork bellies was down -1% over the same time period. Maybe, in the short run, I should have stuffed my kids with rice-less, wrap-less, pork burritos for the last 3 months and have told them to like it… no guac.

 

Altogether, in the long run, the Keynesians like to say don’t sweat this short run stuff, because “you’re dead.” While that’s seemingly a convenient and clever answer to starving the world’s poor for a nice year-end US stock market “pop”, as von Mises said, “the fact is that, in the not very long run, inflation does not cure unemployment” either.

 

As the US stock market continues to hit higher-highs on light volume and negative breadth and skew, both global and local bond yields continue to ring the alarm bells of inflation concerns. That’s why the world’s largest bond fund, Bill Gross’ PIMCO Total Return Fund ($250 BILLION in assets under management), has lost 3% of its nominal value in the last 30 days. Inflation is a policy. Inflation is bad for bonds.

 

Every aspect of what’s going on in global macro markets right now makes sense to us other than US stocks going higher. No, that doesn’t mean that every stock market should be going lower. We have a 9% long position in the German stock market and that makes sense to us as countries like Germany and Australia have pseudo-sober monetary and fiscal policy that’s not equating to US style Jobless Stagflation.

 

As a reminder, our intermediate-term global macro outlook for the next 3-6 months is as follows:

  1. Global Growth Slowing
  2. Global Inflation Accelerating
  3. Interconnected Risk Compounding

As hyped up as a US stock market bull wants to get on buying the things that China, India, and Brazil want, is as disinterested as local stock market investors in all 3 of those markets have suddenly become. Two of the three are broken on both our TRADE and TREND durations (India and Brazil) and one of the three (China) is gearing up to release very hawkish inflation data this weekend.

 

In the Hedgeye Chart of The Day (attached) we have outlined this point with a picture of Brazil’s Bovespa. The situation developing in Brazil’s economy is a major global macro risk:

  1. Growth Slowing – Q3 GDP released yesterday showed Brazilian growth slow materially (on a sequential basis) to +6.7% year-over-year versus the +9.2% reported growth of Q2 2010.
  2. Inflation Accelerating – this morning, Brazil’s CPI (Consumer Price Index) jumped to +5.6% for the month of November versus +5.2% reported for October.
  3. Interconnected Risk Compounding – as emerging market debt in Brazil comes off one of its worst monthly performances since the late 90’s , Brazil’s stock market has all of a sudden dropped -7% since the beginning of November.

Remember, market prices don’t lie; politicians do. And think about what Ludwig von Mises said in his 4th Lecture, “Inflation” (in Argentina 1959) when he asked us to “remember that, in the long run, we may all be dead and certainly will be dead. But we should arrange our earthly affairs for the short run in which we have to live.”

 

My immediate term TRADE support and resistance levels for the SP500 are now 1214 and 1249, respectively.

 

Best of luck out there today and enjoy your weekend,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Rich Privileges - BOVESPA


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