Thank goodness for refundable deposits. Rather than invest in a low return project in Kansas near the Oklahoma border, PENN walked away and got its deposit back. It’s not a question of funding. PENN could have easily developed and paid for the $265 million project. However, the demographics, local economy, and competition from Oklahoma justified an investment of roughly half that amount. The project works at $125 million. Kansas required more. Stay tuned, I’m not entirely sure this is over.

It’s good to see that the $1.5bn in excess liquidity is not burning a hole in their pocket. This is yet another example of PENN management being good stewards of shareholder capital.
Cherokee county borders Oklahoma

Chinese Retail Sales Topping?

Tops are processes, not points. Below we have attached a 10 year chart of Chinese Retail Sales. Since this morning's report incorporated the Olympic lift, it behooves us not to ask 'The Question' - is +23% annualized growth as good as it gets? We think it is.

On an absolute dollar basis, food inputs are a huge component of these figures. Keep in mind that this data is drawn from the immediate build up to the Olympic Games and, according to Bloomberg, NBC retail data includes “commodities sold to government agencies, institutions, social organizations, and military and armed police units”. With an army of police and military security on hand for the games in Beijing as well as 1.7 million “Citizen Volunteers” that all needed to be fed , that number may have seen a significant uptick in July due to bulk purchasing.

Keith McCullough & Andrew Barber
Research Edge LLC

Plastic Banners

“One of life’s most painful moments comes when we must admit that we didn’t do our homework, that we are not prepared.”
-Merlin Olson

For you Los Angeles Rams fans, Olson remains, The Man. During his 15 year NFL career, Olson proactively prepared himself physically for the ultimate test of mind over matter, and never missed a single game in 15 years. As global market participants are forced to deal with Dick Fuld’s self assessed “whac-a-mole” reactive management style, I can only hope that the next “leaders” of our financial system consider being proactive risk managers in their pre-game preparation. They are playing with your money. That’s a game with the highest of stakes.

‘The Question’ as we like to call it, as to how this game ends, is no longer about Lehman, or how a “consortium” of financial firms dealing with their own internal angst can put humpty dumpty back together again. ‘The Question’ is what will emerge from all of this? After Lehman, will it be Merrill Lynch or Goldman Sachs? After them, what’s left? What is the structure of this industry going to look like 3, 6, and 9 months from now? If that’s too “short term” for you, that’s really too bad – there is a duration mismatch between your investment time horizon and the game clock. Capital markets wait for no one.

As I walked out of Grand Central Station’s north exit yesterday, and emerged onto the sidewalk outside of what had always been Bear Stearns, I couldn’t help but realize that the only thing that had changed about that building was the blue wallboard, scaffolding, and a few makeshift “JP Morgan” plastic banners. What’s really changed within that building? The business model of its prior tenant has been compromised, but what happens there now is just as conflicted and constrained. The “Trend” here will be to rebuild Wall Street’s operating structure. Changing the names will only protract this inevitable feeling we all wakeup to every morning. As John Wooden would have said, “if you didn’t have time to do it right, when will you have time to do this over”.

This morning is not unlike any other. Game time is 9:30AM, and stocks, bonds, and commodities will be marked to market once again. As Tom Hanks famously said in ‘A League of Their Own’, “there’s no crying in baseball!”, and there’s certainly no crying on a trading desk. Remember that fancy investment banking idea of “marking to model” – there’s no more of that either. This trading game is called free market capitalism, and you better be proactively prepared to dance with the daily facts.

This morning’s facts are more of the same. There is a massive elephant on the field called the global economy, and he’s slowing, big time. If you didn’t see that picture I posted on the portal yesterday, you should check it out. That elephant is still playing “whac-a-mole” alongside Fuld, and the gophers of this globally interconnected market place are popping up are all over the map. Europe reported a horrendous industrial production growth number for July of -1.7% year over year, and Japan reported a Q2 year over year GDP growth rate of down -3%. In China, industrial production growth for the month of august came in at a 6 year low, so now the revisionist historians can tell you why the Chinese stock market has lost 2/3 of its value in 9 months. Stock markets are leading indicators. Economic reports are trailing facts that remind you what you proactively prepared for or flat out missed.

Asian traders covered their shorts in Japan on the foreseeable GDP news, and the Nikkei finally had an up day, closing +0.93%. However China didn’t budge from its year to date lows, and we continue to see the contagion associated with slowing economic growth spread to other Asian indices. Indonesia was down another -3.5%; India was down -2.7%; and Vietnam lost another -4.2%.

I don’t think Merlin Olson’s “most painful moments” have been felt here in US trading, yet. Once the Lehman soap opera is drained from the CNBC pail, we’re going to be stuck mopping up the floors of the same old buildings, muddying the water again. Structural industry change will take time. Plastic banners blow away in the wind.

Have a great weekend,

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At DIN we have a company operating in an industry in turmoil, with a balance sheet that is leveraged at over 7x. In addition, we have part of the senior management team being fired. Plus, it is pursuing a strategy to create value for shareholders that has little chance of succeeding.

Last but not least, lenders want to make sure they get paid.

Or did I just describe the situation at LEH? Too bad DIN can’t go to the Federal Reserve for help!

One difference: DIN is not getting the same media attention for its significant stock price decline.

GIL: Storms a Brewing

Great analysis here by my top Lieutenant, Casey Flavin, on some implications of the hurricanes on Gildan. We’re clearly running ahead of the ’06 and ’07 pace for storm activity. Gildan’s overseas operations import the majority of cotton (35% of COGS) from the US. Texas, Arkansas and Georgia are the top three cotton-producing states, and we’re starting to see gulf port cities evacuate in advance of Ike. Gildan is already facing macro, industry, and company pressures that I think will intensify and pressure margins that can't support valuation – that’s the real long term call. But after being hit with issues at its Dominican Republic ops last quarter, any form of import disruption to Honduras plants would not be a welcome development.

Brian McGough
  • We are in the midst of peak hurricane season and with Ike bearing down on Texas, it was announced this morning that Galveston and parts of Houston will begin evacuating at noon today. With the memory of Gustov only days old it might seem as if hurricane activity is high this year, well it is. Pressure readings in the tropical Atlantic in August among the lowest on record, an El Nino event that decreases storm activity unlikely this season, and above average water temperatures conditions are prime for an active hurricane season. As a result, forecasters have raised their outlook for major storms this season.

    We are not in the habit of making weather related call outs; however with above average activity so far, we believe there are points to consider.
  • Cotton: According to the latest USDA projections for 2008/09, world cotton production is expected to be down 6% from 2007/08 and U.S. production to be at its lowest in nearly 20 years. Given that Texas, Arkansas, and Georgia are the top three cotton producing states, severe storms in the southeast could further reduce supply and ultimately drive prices higher (note the projected path for Ike). Definitely a consideration for Gildan (GIL) given that cotton is about 35% of COGS, and the majority is imported from the US into its plants in Honduras. Also, given GIL’s Dominican Republic issues in its latest quarter, the last thing it needs now is any Mother Nature-induced supply chain disruption.
  • Shipping: A growing net export position and shift in grain demand for container ships have lead to equipment shortages in the Gulf. This makes it more challenging to catch up when disruptions occur, which have already happened due to Gustov. If more ports are forced to close over the next several weeks, shipment delays could impact companies that export goods or produce offshore.

    Casey Flavin
Most named storms form between the second week in august and the third week in October. Halfway through the 2008 season, we are almost on par with prior season totals (per NOAA).

Footwear: Negative Top Line Data Point

I’m not pulling the alarm yet. But if I am raising an eyebrow over this, I’ve gotta think that some retailers are too.

I’m not loving the incremental change in sales in footwear over the past 1-2 weeks. Keep in mind that footwear was noted as a standout category by many retailers when August sales numbers were released. But since then, sales have decelerated on a 1, 2 and 3-year basis.

I will NEVER get bent out of shape and pull the plug on any investment thesis over a couple weeks of data. I know that inventories out there are clean, and the channel can stomach a slight inventory build. But if I am raising an eyebrow over this, I’ve gotta think that some retailers are as well. Let’s watch this real closely over the next few weeks.
Source: NPD FashionWorld


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