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Yielding no Yield

For those tracking my Partner Keith’s macro work, you know that he’s taken the Hedgeye Portfolio (sadly) to 96% cash. What little long exposure we like here at Research Edge is geared towards yield. In that vein, I ran a screen starting over a group of 447 global textile, apparel, and footwear brands, retailers, and sourcing companies I in search of yield.

Not much hope… The first point worth noting is that the first US company on the list (Blythe) was number 64 on the list with a yield of 4.1%. No other US company over 4%. The average non-US company, however, was 6.3%. Yes, there are differences in risk profile associated with small public companies in third world countries that throw off this comparison to some extent. But even relative to both historical and US equity market standards, this space is not particularly cheap on a yield basis.


Sign of the Fashion Apocalypse

Think back to August 2007 for a minute. Jones Apparel Group auctions off Barney’s and a bidding war ensues between Japan’s Fast Retailing and Istithmar -- a government-backed Dubai firm. We all know who won. Why is it no surprise that the company backed by oil money beat the one who is trying to acquire luxury assets to escape exposure to a local economy that has average 1.35% over 10 years?

Well, Dubai is at it again. The Dubai International Financial Center (owned by the Dubai government), has taken a majority stake in Villa Moda, which operates seven multi-brand ‘emporiums’ in the Gulf region and roughly 50 designer shops for brand such as Gucci, Prada, and Dolce & Gabbana. These are super high-end shops with price tags that border on ridiculous to 99% of America (most of Wall Street included).

Rational for the government cash infusion? Fueling a new global growth push. Probably not a bad idea given that few others could afford such a move. For Villa Moda’s sake, let’s just hope there are enough people left who want to pay $300 for a pair of cashmere socks.

By the way, check out the site. Some interesting brand call outs. They sell Seven (VFC) but not Ralph Lauren, Adidas but not Nike. Several other interesting notes…

TBL: Duty Issue is Back and Better than Ever

As usual, this issue is misunderstood. When it comes up, TBL trades down, though I think the opposite should happen relative to earnings expectations.
The issue surrounding EU anti-dumping duties on Chinese and Vietnamese leather goods reared its head again last week. I’ve had more than a few inquiries given its importance to Timberland, but the bottom line is that I think this is a non-event, and would even go as far as to say that the backdrop supports a positive change over the next 12 months.

As backdrop, two years ago, the EU imposed anti-dumping duties on product imported from China and Vietnam to protect local suppliers. Given TBL’s exposure to Europe (1/3 of total), this cost the company $9-$10mm or ~100bps in EBIT margin (Big on a 5.7% base). This duty expires on October 8th, which triggers a review process that could extend the duties by upwards of one year.

The important point here is that I don’t have any duty recapture in my model, and my sense is that the Street’s models do not either. If they do, then expectations are way too low on other operating metrics.

I’d also note that the EU is under more pressure to remove these anti-dumping duties today than 2 years ago. Whether or not the duties were even necessary was a hot debate in the first place given the vast difference in quality and label for European brands vs. those made in Asia. Now – with a weaker consumer spending environment and higher inflation, consumer interest groups such as EuroCommerce, BEUC and AEDT are leading a unified push to bring said duties to an end. If this were to occur, I’d have to take up my estimates for TBL, which are already above consensus.

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The Chart The Investment Bankers Didn't Focus On...

As I sit here reviewing this week's macro economic data, this chart jumps right off the page. This week, compromised groupthink obviously took over the crisis management of the entire US Financial System, but that does not mean that the economic facts underpinning it cease to exist.

This month's Industrial Production growth number moved to negative on a year over year basis (see chart). On its own, this is obviously bad. Together, with a strengthened US Dollar, this is going to get worse. US Exports will be choked off by both the slowing global economic cycle, and the relative competitiveness of the US currency versus those currencies that are in the midst of swan diving internationally.

Hank Paulson obviously didn’t have an investment process like we have here at Research Edge to foresee this local or global slowdown. The chart below actually maps his time at the Treasury since he left Goldman. He, Lloyd Blankfein, John Mack, John Thain, and Vikram Pandit can run around getting the US government to regulate their clients (banning short selling). That is only going to make this worse. It's time to regulate those who don't know how to proactively foresee economic and/or systemic risk - the investment bankers.

KM

Who Has Your Hedge Fund's Back?

Rather than regulating themselves, "Investment Banking Inc" has decided to pull out all the stops and have their colleagues who run the US Government regulate their clients!

This is embarrassing, on many levels. The clients are going to have to the underwrite the new rules of illiquidity and volatility that the government and bulge bracket investment banks are creating.

Below is a prospectus for what that once vaunted "bulge bracket" could look like come 2009. At a minimum we'll need a new bracket that still puts clients above their own compromised P&L.

Keith McCullough & Andrew Barber
Research Edge LLC

IN THESE TIMES ALOHA MEANS GOODBYE

It’s been a glorious seven year run. Unfortunately, 2008 will prove to be the first year since 2001 when visitation to Hawaii turned negative. And it’s getting worse. Visitation fell over 10% in both June and July. August shouldn’t be much better. We’ve got more up to date hotel metric data and it is even uglier. While the hotels are trying to maintain rate, ADRs have ranged from 1% to -4% the last few weeks, occupancy is plunging. RevPAR has consistently been in the range of -6% to -16%. So what’s going on?

• It’s global this time! That’s not good.
• Stronger dollar. US no longer “on sale”.
• Aloha and ATA airlines shutting down has slammed the Hawaiian tourist economy. By far the primary manner of travel to Hawaii is via air. Hawaii has lost over 1m annual seats from east coast alone.
• The price of fuel is a dominant factor in the health of the Hawaiian tourism industry. Kelvin Bloom, President of ResortQuest Hawaii, states that Hawaii, as the most isolated land mass on the planet, is facing severe long term problems due to the current fuel crisis. “Airlines won’t fly flights that don’t yield. Las Vegas is an example of this”.
• July, traditionally one of the strongest months of the year, saw a 6.5% hit to occupancy and a decline in room rates. High-end markets such as Maui, which attracts affluent vacationers, took the steepest decline in July. Visitation from Japanese, corporate meeting groups, and honeymooners declined by 11.7%, 26.7%, and 24.2% respectively.

So who is exposed? HOT maintains 5% of its domestic hotel rooms in Hawaii. Worse, 30% of HOT’s timeshare revenue was derived in Hawaii. Timeshare is not an immaterial business for HOT, generating 25% of total company revenue. I’ve analyzed HOT’s 3 most important markets: NYC, London, and now Hawaii. Trends are getting worse in all of those markets with no signs of stability. Somehow, the sell side still believes EBITDA will grow next year. In my modest opinion, EBITDA estimates still need to come down 10-15% and EPS estimates reduced by 20-25%.


I hear crickets chirping
Hotel metrics are falling off the Hawaiian cliffs

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