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ROE – ROC Spreads Looking Peaky

Spreads between ROE and ROC in the apparel and footwear industries are widening. Not a complete shocker given the slowdown in business trends and the fact that the industry is always at least 3-4 quarters behind a change in the cycle in altering its capital investment plans. So ROC is coming down, but ROE is hanging in there as debt levels build. Spreads in the 6% range are not sustainable, as evidenced by the ’01 bottom. When ROE reverts toward the rate of ROC – it does so fast.

This analysis is for 42 core US apparel and footwear companies. But when we go global, and screen all 440 companies that we screen through regularly, things are looking to be well above anything we have seen historically.

August – A Repeat of July

Sanderson Farms’ comments from late August regarding weakened restaurant demand appear to have been spot on. The company had said that August was shaping up like July, and today we learned that casual dining guest traffic was down 6% in August, similar to July’s 6.2% decline. August was actually the strongest month in 2007 from a traffic standpoint, but was still down 1.5% so on a 2-year average basis, traffic trends improved 70 bps from July to down 3.8% (still toxic, in my view). This continued softness heightens our concerns around casual dining operators that seemed to think the worse was behind them in 2Q08 (please refer to my August 30 post titled “Casual Dining Top-Line Risk” for more details). Casual dining same-store sales were down 1.1% in 2Q with traffic down 3.9% while 3Q-to-date (July and August) comparable sales are down 3.8% and traffic has fallen 6.1%.

Falling BRIC: Selloff in Brazil

The Bovespa slid over 5% this morning.

The fear of the turmoil spreading from US financial institutions would have been enough to spark selling in Brazil today, but with an economy so heavily tied to oil, gas and biofuels the post-Ike sell-off in crude only adds insult to injury.

Central Bankers raised the benchmark SELIC rate by 75 basis points last Wednesday in an attempt to control inflation –the 4th time the rate has been raised since April. That intervention may not be enough to help this BRIC find a soft landing.

Andrew Barber
Director

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Liquidity Watch: LIBOR Still Won’t Budge

Revisiting TED spread again. Despite the Fed’s attempts to increase liquidity in the system, LIBOR still has not budged.

The TED spread has obviously widened dramatically since we last discussed it. As you can see the short term cost of liquidity is trading at a big premium. As of this morning, the spread was at the highest levels it has touched since the Bear Stearns collapse back in March.

At that time calm was restored rapidly as JP Morgan emerged as a white knight. With no one there to catch Lehman as it fell and the Jury still out on AIG’s condition, we could well see spreads widen further before they come back down.

Andrew Barber
Director


Ike Gives Refiners a Break

The run up in distillates in advance of Hurricane Ike coupled with a sell-off in crude as the system began to deleverage itself helped refiners with a brief respite in recent sessions as the crack spread (crude vs. Gasoline & heating oil 321) crossed above $17 for the first time since June. With all indications that damage from the storm was minor, gasoline has come back down although crude continues to outpace it.

Andrew Barber
Director


Volatility across the pond

The VSTOXX rose above 34 in today’s session, reaching levels that it has not seen since March. The VSTOXX can tend to track at a slightly higher level than the VIX due to its narrower component focus (EURO STOXX 50) but the European “fear index” still illustrates that fear of financial contagion is just as strong or stronger on the other side of the Atlantic.

Andrew Barber
Director

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