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The Mother of Bankruptcy Rate Decouplings

Apparel/footwear retail bankruptcies completely decoupled from banks, non-apparel retail, and just about every other consumer sub-sector. That will change.

Bank failures are taking center stage in the news, which is more than fair. But what about retail bankruptcies? The two charts below illustrate the change in retail bankruptcies we’ve seen over time. Is it me, or is anyone else floored that retail bankruptcies have trended up along with the cycle and are now running close to record pace through 1H08, but the number of textile and apparel retailers remains early nonexistent. I don’t care what anyone tells me, the declining rate over the past five years has been due to a sourcing-induced margin bubble. This is absolutely done, as I’ve stated in much of my apparel macro work.

There is no fundamental reason why apparel should be exempt from a retail bankruptcy cycle. We’ll start seeing more of them go under.

MRT – WHY IS THIS A GOOD USE OF CAPITAL?

That’s right buy back stock! Apparently the management of MRT thinks it’s a good idea to spend its capital buying back stock. On Friday, MRT filed an 8K stating “The Fourth Amendment to the Credit Agreement includes changes which provide flexibility for the Company to repurchase up to a maximum of $20.0 million of the Company’s capital stock over the term of the Credit Agreement (subject to approval by the Company’s Board of Directors) by increasing the existing $10 million cap on such stock repurchases by an additional $10 million.”

Maybe I’m too negative, but MRT does not need to be buying back stock. Adding additional leverage on the company’s balance sheet will only limit the duration the company has to navigate the current cycle. Increased leverage removes operating flexibility at a time when operating flexibility is a premium. It is important to note that MRT’s EBIT has declined over 25% over the past 12-months.

It’s amazing to think that news like this is still possible!


  • Even with a significant decline in capital spending MRT is not generating any free cash flow.


Fewer Cranes in the Skyline

The 50 Billion Dirham lending facility created by the Central Bank of the United Arab Emirates last week helped ease concerns over short term liquidity issues in the Dubai real estate markets but it has not been able to stem the concerns over slowing development going forward. Local media outlets have recently begun to feature bearish sentiment from developers like Mohammed Nimer from the Moafaq Al Gaddah property development department, while bank analyst estimates for property value declines range from 5 to 15% in the near term.

The declining share price of local construction and development firms are only the most visible manifestation of the cooling pace of new building starts –from scrap prices in the US driven by Gulf rebar demand to worker remittances critical to the Philippine economy, the massive Dubai construction boom of the past decade has truly been a global phenomenon. Though UAE leaders are anxious to project the image of an economy insulated from global turmoil by the flowing torrent of petrodollars, stock investors enriched by that same oil money have begun taking their chips off the table.

Andrew Barber
Director


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Shipping capacity available

While CNBC, and the consensus investment community broadly, have been focused on the global credit situation, we have had our “Eye” on the Baltic Dry Index, which is making multi-year lows. The Baltic Dry Index is a proxy for world trade as it tracks shipping rates for large ships that move dry goods and commodities around the globe.

The chart below outlines rates for Capemax, SupraMax, Panamax and Handysize ships, whose day rates have imploded since the July/August 2008 time frame. Collectively these ship types transport more than 95% of the dry bulk goods (primarily cement, coal, iron ore, and grain) around the world.

As per Wikipedia:

“Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.”

We couldn’t have said it better. Declining shipping rates means growth is slowing and will likely continue to slow. For those “Fast Money” enthusiasts who believe global growth is going to bail out the U.S. economy, it may be time to study the chart below.

It’s global this time, indeed.

Daryl Jones
Managing Director

Solid Gold: Yes - I'm Staying Long GLD today in the Portfolio...

I received a lot of questions on why I bought gold last week. As long as the US government stays the course, de-valuing the US Dollar and levering up the US' Balance Sheet, I’m bullish on gold. I have a 96% position in cash, and a 3% position in yellow rocks – that works today.
  • My immediate term target for gold is $946/oz.
    KM
chart courtesy of stockcharts.com

GOODBAII!

Visitation to Hawaii took a steep dive in August - down 17.3% from the same period last year. We suspected that the Hawaiian tourism industry had tough times ahead (see “IN TIMES LIKE THESE ALOHA MEANS GOODBYE , 9/20), and the August figures, while ugly, are no surprise to us. The factors we outlined in our 9/20 post continue to hold. The weakening global economy, stronger dollar, and less airline capacity have outweighed the significant discounting. The deals are not attracting more visitors. Furthermore, the visitors that are going to Hawaii are spending less – 18% less in August – than in previous years. This clearly indicates that we are seeing a genuine downturn in the tourism industry rather than any sort of transient blip. Hawaii has been among the most robust markets but is now in serious difficulty. This is yet another glaring signal that HOT and other lodging companies must heed when outlining their guidance. In order to be credible, EBITDA and EPS estimates need to be reduced by 10-15% and 20-25%, respectively, partly due to Hawaii.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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