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Macau Q4 EBITDA share update



Our calculations show Macau 2010 gaming EBITDA was close to US$4BN, almost doubling that of 2009.  For some perspective, Las Vegas Strip EBITDA in FY 2010 (ended in June) was US$1.6BN.  Macau’s Q4 EBITDA was 20% higher than Q3.  As the charts below show, EBITDA market share had major shifts in Q4 2010. 






The standout loser was LVS, giving up more than 5% in EBITDA share, mostly to WYNN and MGM.  This is somewhat surprising since this is Sheldon Adelson’s favorite Macau metric.  LVS’s Q4 EBITDA share loss was primarily attributed to relatively poor top-line performance, with lower table rev share (particularly VIP) and lower VIP Rolling Chip share.  


If the Macau gaming market continues its stellar run in 2011, these EBITDA market dynamics may not mean much.  But for now, it’s interesting to see who’s getting a bigger or smaller chunk of the burgeoning cash pie in Macau.

What’s Next for Brazil?

Conclusion: We don’t anticipate the Brazilian government’s latest attempt to curb the real’s appreciation to be successful, and thus, we remain in wait-and-watch mode on Brazilian equities and Brazilian fixed-income securities. If, however, the real starts to weaken materially, we want to be short both Brazilian equities and bonds.


Position: For clarity, let’s revisit our recent calls on Brazilian assets: 

  • May 2010: Bearish on Brazilian Equities
  • June 2010: Bullish on the Brazilian Real
  • July/August 2010: Bullish on Brazilian Equities
  • November 2010: Bearish on Brazilian Bonds and Bearish on Brazilian Equities
  • March 2011: Less Bearish on Brazilian Equities (wait-&-watch mode) 

Late yesterday, the Brazilian government decided to implement further measures in the latest installment in a series of attempts to stem the real’s appreciation. Up nearly 55% since it bottomed in December ’08 and +1.6% YTD, the real’s persistent strength continues to be a thorn in the side of Brazilian exporters and policy-makers alike.


Perhaps more so than previous efforts, the latest measures are more directly targeted towards cooling speculation than actually stemming inflows of capital. This is positive on the margin, especially considering Brazil’s long-term capital needs to build out its woeful infrastructure in the coming years.


Whether or not the newly imposed +6% tax on international corporate debt sales and loans with an average minimum maturity of up to 360 days actually weakens the currency over the intermediate term remains to be seen, as the real’s gains YTD have been driven by longer-term fundamentals and USD weakness, rather than the performance of Brazilian financial markets.


In fact, central bank data suggest net foreign currency inflows in 2011 are actually much more linked to long-term investment and not just speculation. Indeed, the yield-chasing flows to Brazil’s equity and bond market have slowed measurably, as foreign investment in Brazilian stocks and bonds fell (-91.4%) YoY in Jan to $206M, while foreign direct investment grew +393% YoY to $3B. Altogether, net foreign currency inflows for 2011 YTD ($24.4B) already exceed the full year 2010 total.


The 6% tax is in addition to the already-established 5.38% tax on loans up to 90 days and the newly announced +400bps hike in the foreign consumer credit card transactions tax to 6.38%. Today’s measures are a continuation of recent attempts to curb real appreciation, which include:  tripling a tax on foreign purchases of Brazilian fixed-income securities to 6% in October, buying $18.8B US dollars in the spot market in the first three months of 2011 alone (45% of full-year 2010 total), buying US dollar in the futures market for the first time in 21 months, and raising reserve requirements on short dollar-positions held by local banks in January.


All told, we don’t expect these latest measures to materially weaken the real over the intermediate term. If, however, the Brazilian government is successful in weakening the real, we want to be outright short Brazilian local currency bonds, a position supported by (hypothetical) currency weakness and incremental inflationary pressure driven by rising import costs.


It’s important to keep in mind that the real’s ~10% appreciation over the last 12 months has acted as a governor on Brazilian CPI. Should that reverse, we could continue to see the central bank struggle to rein in accelerating inflation. Not ironically, the central bank raised it 2011 CPI outlook to +60bps to 5.6% alongside the release of yesterday’s FX intervention measures.


Further, with the central bank raising its inflation forecast and credit growth accelerating far beyond the Tombini’s +15 YoY target, we could foresee a scenario whereby the central bank continues to raise interest rates beyond the upcoming monetary policy meeting on April 19-20. That would be counter to current consensus expectations of a pause after that meeting and would be incrementally bearish for Brazilian equities over the intermediate term.


What’s Next for Brazil? - 1


If the status quo remains from an inflation expectations perspective and a foreign exchange rate perspective, we’d still continue to urge caution on Brazilian equities, as they are broken from an intermediate-term TREND perspective. We’d need to see a sustained breakout above the TREND line on the Bovespa before we’re comfortable getting long Brazilian equities, as that would signal to us Brazilian Stagflation is fully priced into the market.


What’s Next for Brazil? - 2


On the flip side, a breakout in global financial market volatility stemming from the buy-side reacting to a reported deceleration in US and global growth that we’ve been calling for will surely put a damp on non-energy related risk assets over the medium term.


For more on the intermediate term outlook on Brazil, please refer to the more comprehensive report we published last week titled “Brazilian Tug-of-War”. Please email us if you need a copy.


Darius Dale


Flailing Bull: SP500 Levels, Refreshed



I should have paid more attention to how many people disagreed with my “Short Covering Opportunity” call on March 16th. Evidently a lot of people who weren’t hedged slapped on short exposure at the YTD lows. Evidently “should have” still only works in a liberally organized game of Canadian horseshoes (with beverages).


From an intermediate-term TREND and long-term TAIL perspective, nothing has changed. The SP500 continues to make a series of lower-highs on low volume. From an immediate-term TRADE perspective, the immediate-term range has tightened up to 1. On the margin, that’s less bearish than what we outlined last Wednesday. Higher prices do that.


Back to the intermediate-to-long-term, if the SP500 were to breakout above 1343 … and volume started accelerating on the upside… and the VIX breaks down through long-term support (15.44)… then one of those 2 duration statements will render itself void – the intermediate-term TREND will turn bullish. Long-term, like Japan, we think the outlook for a country attempting to manipulate asset prices through Fiat Fool monetary policy will fall on its own sword of expectations…


Being Duration Agnostic has helped us Wait & Watch for 1. That’s where I’ll put my second bullet in this Flailing Bull.



Keith R. McCullough
Chief Executive Officer


Flailing Bull: SP500 Levels, Refreshed - 3

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R3: SHOO, EBAY, KSS, and EU anti-dumping tax removal



March 30, 2011






  • In another example of retailers beginning to shift towards Central American countries for production, Steve Madden’s management reiterated that they expect roughly 25% of their women’s shoe line to come from Mexico this year. From a competitive standpoint, modestly higher costs are offset by both the absence of a duty and faster turnaround.
  • According to a recent filing, Blockbuster indicated it would be closing another 186 stores by the end of the month, bringing the current tally to 1,145 since filing for bankruptcy protection back in September. The current tally accounts for nearly 1/3 of the retailer’s original store base -- significantly exceeding the original estimate of 500-800. In addition to shuttered Movie Gallery locations, Blockbuster stores represent one of the primary sources for additional door expansion at HIBB.
  • With top-line growth in both Tommy Bahama and Lilly Pulitzer driven by strength in direct-to-consumer, it’s worth noting that e-commerce represents 6% and over 10% of each brand’s total volume respectively. For smaller brands like these, higher than average exposure to the DTC sales channel should drive above average growth. 
  • Let’s not look past this EBay Deal for GSI Commerce.  While it may not be a retail landscape-changer, it is certainly relevant. Here’s a few thoughts… 
      • GSIC owns Rue La La – one of the most successful ‘exclusive flash-fashion’ sites out there.
      • But while the headline sounds like Rue La La is the crown jewel, the reality is that EBAY is divesting 70% of it along with GSIC’s sports merchandise operation, and Shoprunner (GSIC’s e-commerce retail aggregator). 
      • Why? This deal is all about strengthening the company’s fulfillment and customer service operations and hopefully narrowing the gap with Amazon.
      • While Amazon has partnered with retailers and brands to fulfill their e-commerce businesses (check out Amazon Prime…there are thousands of examples), with the biggest being Target, EBay is nowhere on the map. With this deal, it automatically includes a customer list including Polo, Donna Karan, Levi, Aeropostale, and Dick’s Sporting Goods.



Vietnamese Industry supports EC removal of footwear tariffs - Vietnam’s Foreign Ministry spokesperson welcomes the decision of the European Commission (EC) to lift anti-dumping tariffs on Vietnamese leather-capped shoes, according to Vietnam Business News. Nguyen Phuong Nga has recently made the comment at a regular meeting of the Foreign Ministry in Hanoi, saying “The EC decision to remove the anti-dumping tariffs levied on Vietnamese leather-capped shoes from March 31, 2011 is suitable to real production and exports in Vietnam”. <FashionNetAsia>

Hedgeye Retail’s Take: This is commonsensical, but the end of a 5-year anti-dumping duty couldn’t have come at a better time for branded footwear manufacturers and retailers alike. For domestic companies with exposure to Europe like TBL, these duties have accounted for as much as a 100bps operating margin drag in the past. We suspect any margin contribution realized from the move will be used to offset current cost inflation and pricing pressures.


Kohl's to Open Distribution Center - Kohl's Corp. plans to open a distribution center in July in Maryland that will create about 1,200 jobs over the next three years. The department store operator said Tuesday that the Edgewood, Md., facility will fulfill online orders. It anticipates hiring more than 200 full- and part-time employees when the center opens in July. Kohl's reports that its online revenue climbed more than 50 percent last year. The Menomonee Falls, Wis., company anticipates $1 billion in online sales in 2011. Kohl's will have a total of 12 distribution centers across the U.S. with the addition of the Maryland facility. This will be its third distribution center focused on serving online customers, with other locations in San Bernardino, Calif., and Monroe, Ohio. <BusinessWeek>

Hedgeye Retail’s Take: With e-commerce accounting for roughly 25% of KSS’ top-line growth last year, this move should be no surprise. According to the release, the company expects to continue a substantial ramp in online sales with plans to expand capacity at the facility by nearly 2x in 2012.


Levi's will Pay $1 Million in Back Wages - Levi Strauss & Co. has agreed to pay more than $1 million in overtime back wages to 596 employees after the U.S. Department of Labor turned up wage and hour violations. The Labor Department Wage & Hour division’s San Francisco district office said it conducted a two-year investigation and found that Levi’s misclassified several groups of workers in the company’s U.S. stores, including assistant store managers at newly acquired stores, exempting them from overtime. The agency said Levi’s failed to record all hours employees worked in its payroll system. “Instead, the misclassified assistant store managers were required to work off-the-clock during late-night closings, early morning openings and staffing shortages,” the agency said. In addition to the assistant store managers, several administrative employees working at the company’s headquarters were also misclassified as exempt from the Fair Labor Standards Act and owed overtime, according to the Labor Department. As part of the agreement with the DOL, Levi’s has agreed to pay the back wages and made a commitment to upgrade its time and attendance system.  <WWD>

Hedgeye Retail’s Take: This amounts to about $1,675 per person.  The reality is that we’ve seen lawsuits related to overtime ‘oversights’ like this across all types industries over the last several years – perhaps the most high profile was Wal-Mart’s $86mm settlement last year.


Japan's Amaterrace to Develop Custom eVent Fabrications - GE’s award-winning eVent membrane technology will be paired with Amaterrace’s proprietary knowledge of lamination to create several new air-permeable fabrics never before seen in the outdoor industry. “Together with Amaterrace, we’re using GE membranes to create air-permeable windproof softshells and fleeces, woven-backed hardshells and windproof air permeable shells and liners,” said Glenn Crowther, product line leader for performance fabrics at GE. “Amaterrace has been instrumental in developing these ranges and we’re proud that GE’s membrane technology is a part of that. These are new-to-world, high performance laminates.” Amaterrace, based in Osaka, Japan, supplies Japanese smart fabrics and laminations to outdoor clients both in Japan and around the world. The company, founded in 2003, uses cutting-edge techniques and materials to create custom made or demand oriented waterproof/breathable and high performance fabrics with one of the best task force PT (production teams) in Japanese textile industries. <SportsOneSource>

Hedgeye Retail’s Take: Innovation continues in the space. While it sounds similar to Columbia’s OutDry technology that was acquired last year, COLM already has product in stores and on shelves. All we need is for a small, cool edgy brand to pick up the technology, come up with a hard-hitting marketing campaign, and clean-up.  Yes, this is what UnderArmour did.


L.A. Stores Affected as Economy Bites - The retail map here has been completely redrawn as multiline boutiques and stores from small labels have disappeared. With retail nationwide exhibiting signs of health as the recession eases, the comparable weakness of Southern California specialty stores has been remarkable for its persistence and its ability to hobble even stalwarts of the shopping scene. Blue Bee, the former Santa Barbara touchstone that once had six stores lining State Street before unceremoniously closing earlier this month, and iconic Los Angeles retailer Lisa Kline, which has gone from four stores to soon consolidating into a single men’s location on Robertson Boulevard, are the latest postscripts on this prolonged period of local retail decay that has sparked questions about the future of stores vital to cultivating the SoCal style that’s been exported around the world. <WWD>

Hedgeye Retail’s Take: Interesting to see these callouts. This is not  the bottom, however. No change here unfortunately with continued weakness in southern California echoed by Oxford Industry on last night’s call highlighting persistent challenges for the company’s Tommy Bahama business.


TPP Pact Negotiations at Critical Stage  - The Trans-Pacific Partnership trade negotiations are hitting a critical stage and the fashion industry is gearing up for a contentious battle in a high-stakes game of trade that will impact billions of dollars in commerce. The Obama administration is holding the sixth round of negotiations with eight other countries this week in Singapore in an ambitious effort to create a free trade area in the Asia-Pacific region with Vietnam, Singapore, Australia, Peru, Brunei, New Zealand, Chile and Malaysia. With the goal of completing a framework agreement by the next APEC meeting in Honolulu in November, negotiators are closing in on important areas that will have a direct impact on the fashion industry. Among the key issues to be determined are a textile rule of origin, a possible separate textile chapter, a tariff phaseout schedule on textile imports, and “cumulation,” which would allow apparel to be produced and textile inputs to be supplied and manufactured within any of the TPP partner countries and still receive duty free treatment. <WWD>

Hedgeye Retail’s Take: The government’s position in establishing a framework with domestic companies to look to countries in Central and South America as alternative production sources is gaining strength.



Buy the Market on Valuation?

This note was originally published March 28, 2011 at 15:40 in Macro

Conclusion:  Based on Shiller’s CAPE P/E multiple, the market is at least one standard deviation overvalued.  Further, corporate margins are at 30-year highs, which suggest it is unlikely that earnings will grow into their multiple.


When Keith and other members of our team appear on CNBC and other major media outlets to discuss the markets and investments, it gives us a keen ability to really focus on consensus’ best ideas and the associated storytelling.  A key consensus reason often given to increase long exposure to the US equity market is valuation.


As a graduate of the Value Investing Program at the Columbia University, I’m all for value, but, as always, a valuation is only as good as its assumptions.  Attempting to value a stock is difficult enough given all the relevant assumptions needed, but attempting to project those earnings for an entire market, like say the SP500, only magnifies the complexity and, really, likelihood of error.


Regardless of our ability to actually project the earnings for a company or market accurately, valuation multiples themselves can provide an important gauge of investor sentiment.   Simply put, in extremes of serious stock investing euphoria valuations are high.  In contrast, in periods when investors are extremely concerned about the outlook for equities, stock market valuations are depressed.  Thus the power of the stock market crowd in aggregate will provide us some insightful contrarian indicators.


In the chart directly below, we’ve highlighted Professor Robert Shiller’s (our neighbor across the street at Yale’s School of Management) long term Cyclically Adjusted P/E chart for the SP500.  Over time, the valuation of the U.S. stock market has varied widely.  Based on Professor Shiller’s work, the lowest P/E multiple for the broad market was 4.8x in December 1920, while the highest P/E multiple came in December 1999 at 44.2x.


Buy the Market on Valuation? - 1


Currently, the valuation according to Shiller’s analysis is 23.6x earnings, which is well above the long run average of 16.4x.  In fact, the current valuation of SP500 composite is more than one standard deviation above its long run average.  So, while this is not necessarily an extreme overvaluation, the market is clearly not cheap on this basis.  The chart above shows this well graphically, as valuation is just starting to breakout above its historical range.


By way of background, Professor Shiller uses what is called CAPE, or Cyclically Adjusted Price to Earnings.  In terms of the numerator, or price, Shiller uses the monthly average of daily closes for the SP500.  To derive the earnings data, in this instance the denominator, Professor Shiller uses the quarterly earnings data from the SP500’s website and utilizes an interpolation to provide earnings data by month.  He then adjusts both the numerator and denominator for inflation using CPI from the Bureau of Labor Statistics.  Finally, the inflation adjusted price is divided by an average of ten years of real monthly earnings to determine the CAPE.


Obviously, market valuation is one of many factors to consider, but certainly the stock market is not cheap.   The key push back on this call out is that future earnings growth will drive the overall P/E of the market lower, so perhaps the market is not as expensive as it appears.  Our key issue with the earnings growth argument is based on slower than expected GDP growth both domestically and abroad and a limited ability of corporations to expand margins.


On the second point related to corporate margins, profit margins in the United States are at near all-time highs on various calculations.   In fact, as highlighted in the chart below, our calculations using BEA data show that both EBITDA and EBIT margins are at/near 30-year highs.   Needless to say, the margin expansion argument is somewhat difficult to make given that backdrop and the potential for mean reversion. 


Buy the Market on Valuation? - 2


In the face of near all-time high margins, a stock market that is at a stretched valuation, and sequentially slowing domestic and global growth, it is becoming increasingly difficult to make the “valuation” argument to buy equities.  That said, as long as The Bernank keeps interest rates at zero, investors are at least marginally incentivized to take some equity risk, but, to be clear, it is risky.


Daryl G. Jones

Managing Director


Notable news items and price action from the past twenty-four hours.

  • Goldman’s 2011 GLOBAL PROTEIN CONFERENCE (8:00am TSN, 8:45 SFD, 9:45 PPC, 10:30 SAFM)
  • PEET was raised to neutral from sell at Janney Capital.
  • DPZ UK - Sales +11.2% y/y to £132.3M; SSS +4.2% - company notes that total SSS is impacted by the performance of the Republic of Ireland stores where trading conditions have continued to deteriorate during the period; Ireland comps are (10.5%), while UK comps are +5.5% (7.8% excluding VAT increase).
  • DRI - The slowdown in The Olive Garden sales trends appear to more secular that the company may have suggested on last week’s conference call.  DRI announced today that 700 Olive Gardens will be remodeled by June 2013.  Is the company playing offence or defense?
  • DIN has seen 40 of its IHOP restaurants change hands from Quantum Management to private investment firm Argonne Capital Group.
  • The number of announced job cuts fell in March to 41,528, down from 50,702 in February. Cuts during the first quarter of 130,749 were at their lowest since 1995.




Howard Penney

Managing Director

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