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Bin Laden May Be Dead, But Risk Is Still On

There is no question the United States has achieved a moral victory by finding and killing Al Qaeda leader Osama bin Laden.   More practically, the implications relating to geopolitical risk are much less certain.  While some would argue that killing the head of al-Qaeda is a positive development, there is also a credible case to be made that this action could potentially accelerate terrorist activity if bin Laden is perceived as a martyr by his brethren.


In assessing the impact of the death of bin Laden, it is important to note that he has been on the run from U.S. Special Forces for almost a decade.  While figuratively bin Laden remained the head of al-Qaeda, there is no doubt that being on the run reduced his effectiveness from a operational leadership perspective.   Practically, with the entire CIA looking for him and a massive award on his head, bin Laden realistically didn’t have the capability to micro manage al-Qaeda operations.  Therefore it is unlikely that the killing of bin Laden will dramatically reduce the threat from al-Qaeda in the short term.


Stepping back for a moment, it is also important to note that the very nature and organization of al-Qaeda remains very much in question.  There are some analysts that question whether al-Qaeda is as organized as is often portrayed by the press.  In fact, as Marc Sagemen, a former CIA agent based in Islamabad, and author of Leaderless Jihad: Terror Networks in the Twenty-First Century, wrote:


“There is no umbrella organization.  We like to create a mythical entity called al-Qaeda in our minds, but that is not the reality we are dealing with.”


This is a controversial position and is widely disputed, but the reality is that al-Qaeda is most certainly not organized akin to a Western criminal organization with specific command and control functions.


To this point, as of 2004 it was estimated that almost two-thirds of the senior leadership of al-Qaeda had either been captured or killed.  If this were a typical American crime family, it would be safe to assume the family would be out of business.  This has not been the case for al-Qeada.  In fact, the July 2005 London bombings purportedly occurred without specific leadership from abroad.  Conversely, the 2009 plot by three Londoners to detonate seven bombs on airliners bound for North America was tied directly to al-Qaeda.  These actions suggest that al-Qaeda is alive and well despite this loss of “leadership.”


While al-Qaeda, as led by bin Laden, may have at a point in history provided funding or training for some of these groups, currently many them, as characterized by the 2005 London bombings, likely work largely independently.  In fact, while bin Laden had at one time bankrolled al-Qaeda, his ability over the past decade to do so was limited by the fact that he was cut off from the family fortune; and even if he still had some independent wealth, moving those funds would have likely given U.S. operatives information as to his whereabouts.


Conceptually, Bin Laden’s key role over the past decade seemed to have been to fan the flames of discord against the United States, and the Western world generally.  In this effort, he was certainly successful and the al-Qaeda network will likely need to fill this vacuum.


Ultimately, the real legacy of Bin Laden is the hundreds of thousands of operatives that have been trained in al-Qaeda terrorist camps.  In fact, Gary Bernsten, a former senior ranking CIA official, and author of Jawbreaker, has estimated this number to be as high as 800,000.  Despite the death of bin Laden, this large group of like-minded Islamic terrorists continues to exist.


It is also important to note that, based on the evidence, al-Qaeda activities are typically planned years in advance of when they are actually intended to occur.  Therefore even if bin Laden were more directly involved in orchestrating broader terrorist activities of the al-Qaeda network then we believe he was, it is still not likely that any potential attacks currently in the pipeline would necessarily be thrown off course.  The primary example of this process is the September 11th attacks in the United States.  According to reports, the idea for these attacks was germinated in 1996 and planning began in 1998, which was a full three years before they occurred.


Not surprisingly, equity markets, as a proxy of investors’ propensity to accept more risk, have completely shaken off any potential positive impact of bin Laden’s death.  This is partially because of the points outlined above, which suggest that killing bin Laden likely won’t halt terrorist activity in the intermediate term, but also because there is real potential that bin Laden’s death accelerates terrorist activity on the basis of avenging bin Laden.  In fact, Hamas earlier today started stirring such emotions by stating the following in a press release:


“We condemn the assassination and the killing of an Arab holy warrior. We ask God to offer him mercy with the true believers and the martyrs."


We certainly won’t suggest that the world is not a better place with the death of bin Laden, but it is not quite clear that is a safer place, or that geopolitical risk premiums should be reset lower as a result.   While the head of the serpent has been cut off, the snake is still very much alive and remains poised to strike.


Daryl G. Jones

Managing Director


In preparation for HYATT’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HYATT’s Q4 earnings call.




  • “During the quarter, we saw continuation of the operating trends we began to see earlier in the year, as business continued to strengthen across the system. Almost 70% of our full service hotels worldwide showed improvements in average daily rate.”
  • “In terms of future asset sales, relative to the exploration that we started last year on a group of 11 assets, we may sell one more asset, which would conclude that process”
  • [In 4Q owned hotels] “RevPAR results were negatively impacted by approximately 400 basis points due to renovation at five owned properties.”
  • “Operating margins at comparable owned and leased hotels increased by 210 basis points in the fourth quarter. Approximately half of the reported margin improvement was a result of improved operating performance. The other half was due to items such as property tax refunds at a few hotel and other non-recurring items.”
  • “The group revenue pace for 2011 is positive. Group revenue booked during the fourth quarter of 2010 for 2011 was up over 20% as compared to group revenue booked during the fourth quarter of 2009 for 2010.”
  • “As for transient revenue, slightly higher rates resulted in higher revenues compared to the fourth quarter of 2009.”
  • “Corporate negotiated business segments represents approximately 10% of our business in North America. With the majority of the negotiations complete, we expect a mid-to-high single-digit increase in corporate rates in 2011.”
  • “Approximately 30% of full-service hotels in North America paid incentive fees in 2010… The number of international hotels paying incentive fees in 2010 was about the same as that in 2009, at about 80%.”
  • 2011 Guidance:
    • Capex: $380-400MM
      • “Our maintenance CapEx that we’re looking at is between 5% and 6% of owned hotel revenue”
      • “While we do not anticipate these renovations to significantly disrupt revenues, given that we’re scheduling most of the work to be done during the slower months, the capital expenditures for these renovations are above and beyond what we would consider a normal maintenance plan.”
    • D&A: $280-290MM
    • Interest expense: $50MM
    • “This year we plan to open about 15 hotels”
    • [SG&A]: “As we think about ‘11, we believe we will have inflation in terms of merit increases. We believe that we will be adding some incremental resources relative to supporting the development activities, largely in the areas of real estate, finance and legal. And we look at our head count on a very thoughtful basis. And the head count that we add incrementally is truly driven by growth in other related activities.”
  • “We estimate that during the first three quarters of 2011, the cumulative negative impact of the renovations at our five owned hotels will be approximately 300 to 350 basis points to owned and leased RevPAR, and approximately $20 million to $25 million of EBITDA. This impact will be front-loaded, with the biggest impact in the first quarter... So if you’re going to split it between quarter one, quarter two, quarter three, I would say the mix will be more like 40% in quarter one, 30% in quarter two, and 30% in quarter three. The fact of the matter is, the number of rooms that we are taking out of inventory for renovation purposes, relative – in quarter one for example, relative to quarter four is up by about 20%.”
  • “The hotels that we sold during the fourth quarter, the 2010 full year pro forma EBITDA would have been approximately $7 million. Second, we had some one-time factors in 2010 such as a timeshare settlement, which increased EBITDA in the first quarter, and non-recurring items, which helped margin growth during the fourth quarter”
  • Q: “Business momentum …. in January and early February”         
    • A: “Like the others, the weather has hurt us. We’ve also had renovation. And I said earlier, the impact of renovation in the first quarter is going to be a little higher relative to the rest of the year just because we are taking advantage of, A, the momentum on renovation and, B, the slower top line growth. Internationally, the trends that we are seeing in the quarter continue. And overall, relative to our performance, North America looks slightly hurt relative to the weather, but international continues to chug along.”
  • [Group business] “The business that is in our books as we step into 2011 is a little over 70%. And that’s in line with our expectations. That we have now – if you look forward, traditionally the business in 2012 and 2013, it’s a little difficult to predict because the visibility continues to be lower. The windows haven’t lengthened from that perspective. But traditionally at this time of the year, one would see about 40% of the business for 2012 booked and about 25% of the business for 2013.”
  • “If you define peak as ‘07, we had 59% of the hotels in North America paying incentive fees at that point of time...So international peak, again, defined as ‘07 is a little north of 90%.”


In preparation for BYD’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from BYD’s Q4 earnings call.




  • “While we expect to return to year-over-year growth in the second quarter, we also expect that the first quarter of the year may reflect a slight decline versus last year. This is due in large part to tough comparisons, not a fundamental shift in our business. Recall that the first quarter of 2010 was one of the strongest quarters in the Las Vegas Locals region we had experienced in several years as the economy appeared to be picking up steam, consumers were spending, and it appeared a full recovery was underway. Unfortunately, the recovery slowed dramatically in the second quarter, most notably due to the flash crash in May of 2010.”
  • “Our first quarter has been impacted by severe weather in the Midwest and South regions. Nevertheless, we do expect to see strong sequential growth in revenue and EBITDA between the fourth quarter of 2010 and the first quarter of this year.”
  • [re: convention business pickup] “During the first two quarters of 2011, we have also seen evidence of this at our own properties. We are projecting that our group business at our Las Vegas properties will be up 15% year-over-year.”
  • “We’re also encouraged by early signs of a broader recovery in the Las Vegas market. For example, taxable sales were up nearly 3% in southern Nevada in December. This was the third straight month of improvement with five of the last six months showing year-over-year growth, signaling that consumers are starting to spend a little bit more.”
  • “A $5 increase in spend per visit would result in growth of $20 million to $25 million annually in EBITDA in the Las Vegas Locals region alone.”
  • “We’re increasingly encouraged by the outlook for the locals market. Although we should note that the promotional environment continues to be highly competitive. In fact, our largest locals competitor unveiled an unusually aggressive advertising and promotional campaign in February… they have not had an effect on our Las Vegas Locals operations. Despite this promotional activity, our coin-in and customer traffic have grown since they launched their campaign.”
  • “Higher expenses at our Hawaiian charter operation impacted regional results in the fourth quarter. Fuel costs have been rising sharply in recent months, so we expect higher charter expenses to remain a factor in upcoming quarters. Despite this, we are encouraged by strength in our business volumes. Rated play from our Hawaiian customer segment rose in the fourth quarter and it was up again in January and February.”
  • “We project that winter weather has cost the MSR [Midwest and South] nearly $3 million in EBITDA during the first 60 days of the year, though when weather’s not a factor, business levels are meeting our expectations throughout the region.”
  • “We’re still going to see significant growth between Q4 and Q1 as we did last year. It’s just we will probably fall short of last year’s Q1 for those reasons. Part of it was weather once again, and part of it is just a strong Q1 last year.”
  • “And despite horrible weather, Borgata maintained slot win at prior year levels in January and captured a record 21% share of the Atlantic City slot market. This marked the second straight month we set a new record in slot share.”
  • “Corporate expense is projected for 2011 to be approximately $40 million to $42 million, and that amount should be spread relatively evenly throughout the year.”
  • “For 2011 we expect consolidated depreciation expense to be approximately $195 million to $200 million, about $130 million to $135 million attributable to Boyd and the remaining to Borgata.”
  • “We expect share-based comp to be approximately $12 million for 2011.”
  • “Assuming three-month LIBOR stays in the 50 to 75 basis points range throughout this year, we expect Boyd’s interest expense to range from $145 million to $150 million in 2011, Borgata’s interest expense to be approximately $85 million to $87 million. Therefore consolidated interest expense should be reported between $230 million and $237 million for 2011.”
  • “We expect the tax rate to be approximately 35% for 2011.”
  • “Most of the upward trajectory on the revenue line is related to the frequency number as opposed to the spend per visit at this point.”
  • “Borgata’s maintenance capital run rate is about $15 million and then they had the $50 million room remodel project of which about half of that will be spent in 2011. So for Borgata, it’s the $15 million maintenance plus the approximate $25 million room remodel to get to about $40 million for Borgata for 2011 and probably a similar amount in 2012. For Boyd, our maintenance capital run rate right now is about $50 million.”
  • “Cash rooms in the Las Vegas market overall accounts for roughly, let’s call it 25% to 30% of our overall business mix and that would exclude things like wholesalers and other things, more FIT and convention business, more I’ll call them oriented customers. As far as the trending is concerned, the trends are actually continuing to strengthen in the second quarter.”
  • “ On flat net revenues, you will have a positive impact on the EBITDA line.”

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VFC: Hurry Up and Wait


Conclusion: The Punchline on the stock is that if you’re a longer-term holder and don’t mind seeing the recent weakness continue, then hang in there. If you like buying good quality companies at great prices, then wait. We think you’ll still get your chance.



VFC is always a tough company to bet against. It has a portfolio of better-than-average brands, managed by far-better-than-average-individuals who have an exceptional track record of managing the street. It’s got the size and scope of touch points in its supply chain that make it a great partner, a tough competitor, and dangerous target for vendors or retailers to go to looking to improve their respective cash cycles at the expense of VFC.  It has a healthy balance sheet, and is one of the few apparel companies that is successfully growing outside the U.S..  The bottom line is that If you believe VFC’s plan that it can add $5Bn in sales and $5 in EPS – organically – over 5-years, then this stock is flat out cheap.


But 5-years is a long time. And we think most would agree with us in saying that  making an investment decision in today’s market based on valuation would be both foolish and costly.  Also, let’s not forget that VFC has a portfolio of brands, and it’s going to be very difficult for a company with a portfolio – even an above average one – to outgrow the industry – in a profitable way – 2-3x in this environment. Ralph Lauren? Yes. Calvin Klein? Yes. Nike? Yes. VFC? I dunno. And we think that the realization of margin outlook in this space will get worse before it gets better. VFC can’t sit that one out.


The Punchline on the stock is that if you’re a longer-term holder and don’t mind seeing the recent weakness continue, then hang in there. If you like buying good quality companies at great prices, then wait. We think you’ll still get your chance.




Bull Case:

  • Revenues were strong in the quarter up +12% coming in 2-3 points ahead of expectations. While both Outdoor & Action Sports and Jeanswear continue to drive sales and fall bookings remain strong, the three smaller coalitions (Contemporary, Sportswear, and Imagewear) all came in significantly above expectations. Combined, these ‘little three’ account for ~70% of Jeanswear revenues and have contributed little in terms of growth over the last several years. Further improvement here would take pressure off the two biggest segments and drivers of growth.
  • One of the more bullish takeaways from the call is that initial price increases in Jeanswear have been taken by consumers better than anticipated and has impacted unit volume less than expected. While a select few in retail are planning for a 1-for-1 relationship between higher prices and unit volume impact, management noted during the March analyst day that they were planning for a 2-to-1 scenario whereby for every 10% increase in prices they expect a 5% decline in units. So far, this has proven conservative. To say we are in the early innings of this game is a massive understatement, but undoubtedly a positive change on the margin.
  • Operating profit came strong against the toughest compare for the year. Now, there was a 40bps contribution from an accounting change (we’ll hit on below), but excluding that profitability was better than expected driven largely by better than expected Jeanswear margins. Importantly, it’s not just that domestic margins were down less than expected (still down -130bps), but that higher margin international sales were up 50%. VF’s international Jeanswear business is the company’s most profitable – to see sales up over 50% here in the quarter is very bullish as it relates to VF’s ability to offset domestic margin pressure. It also suggests that full-year expectations for margins to be down -100bps in Jeanswear could ultimately prove conservative.
  • In the first quarter out of the gate since the company’s 5-year strategic growth plan was laid out, coalition performance is coming in on-track if not slightly above as noted above. Yes, 5% of the way into the plan is early indeed, but the precedent is important and positive.
  • While definitely not a long term positive for anyone affiliated with the US Consumer, the fact of the matter is that 30% of VFC’s revenue comes from consumers outside of US borders, a crashing US dollar will continue to give VFC tailwind to offset commodity costs.

Bear Case:

  • Management’s revised year-end guidance implies they’re taking down the back half. Despite beating the quarter by $0.23 and adding $0.10 of Fx contribution, guidance was only taken up by $0.15.
  • Q1 was a lower quality beat. Half of which came from one-time items including $0.08 from more favorable tax adjustment. The other item embedded in the beat came from a change in inventory accounting to FIFO from LIFO ($0.04 in EPS) that will bring remaining coalitions into a consistent reporting structure. We can appreciate the need for establishing a consistent reporting standard across all businesses, but the timing of this change really bugs us. The net effect of it makes it such that VFC’s sales are booked at product cost that was set 3-6 months ago instead of 1-2 months (our estimate). In a rising raw materials environment, this FIFO is your friend. Again, we’re not beating VFC up for complying with this standard, but why not years ago when the businesses in question were acquired?
  • Management cautioned that Q2 results would be the most challenging of the year. Pressures both on gross margin as well as SG&A are likely to lead to operating margin compression for the quarter. In addition to timing pressures between price increases and higher costs, the company also highlighted that it suffered the complete destruction of one of its Jeanswear DCs in Tuscaloosa, AL creating inventory disruption concerns. On the SG&A line, higher spend on both advertising and technology are going to make it challenging to leverage investments in the quarter. As a result, management is relying increasingly on 2H execution to meet year-end targets not something we like to see given the setup we have going into the 2H in retail. These guys will make it happen, and can execute through a tragedy like this better than almost anyone. But we still need to count the cost.
  • Near-term, the top-line comp setup gets increasingly more difficult. The company has posted some impressive growth numbers recently on top of considerably easier compares (nothing more than +2%), but that shifts significantly as we look out over the next three quarters with a +7%, +7%, and +11% coming down the pipe. Is this insurmountable? No – especially with all the inventory on hand. But it certainly ups the ante for the core growth engines and requires the ancillary coalitions to also start picking up the slack.
  • While not a major risk, let’s watch Levi’s even closer as a competitor as they’ll be introducing its Denizen brand to Target this summer. Originally launched last year specifically for the Chinese market, the brand will be priced at the lower end of its signature Levi line at $20-$30 adding more competition to the low-end denim market. VFC’s Wrangler line is currently the price leader at Target with opening price points at $12.99.
  • Last, but certainly not least, is the a substantial negative change in the cash conversion cycle (see chart below), as a meaningful uptick in inventory more than offset nice improvement in payables. In addition, this is the third quarter of sequentially higher inventory growth. While this might give the company a cost advantage heading into the 2H, it also increases fashion risk as they need to ‘make the call’ on fashion that much earlier. It’s also worth highlighting that the last time we saw a deterioration in yy change in the cash conversion cycle of this magnitude back in Q3 of 2007, shares fell -17% over the following 3-months.
  • This SIGMA Chart is NOT VFC’s Friend. It was heading towards the lower left quadrant, and took an uncharacteristic swing to the right. Usually we see companies of VFC’s caliber swing to the upper left, which get’s them into “manage the balance sheet” mode. VFC is clearly in investing mode by building working capital ahead of 2H. That’s cool, in fact most companies in this space HAVE TO do this given how low inventories have been drawn down over the past two years.  But the only companies it will work for are those that have the process to a) ensure that they are ‘on trend’ with their designs, and b) are putting the appropriate marketing dollars to work in order to connect with their consumer.

All in, we’re pretty much in-line, shaking out at $1.05 for Q2 and $7.16 for the year, which has us a penny above and $0.04 below the Street’s revised numbers, respectively. In the end, we’ve got a name trading at 14.0x earnings, and 9.2x EBITDA, which we don’t find particularly compelling.



SIGMA: Not the move you want to see

VFC: Hurry Up and Wait - VFC S 4 11


EPS Sandbag History:

VFC: Hurry Up and Wait - VFC EPS Mgmt 4 11

 (Note: Original Expectations reflect consensus estimates 4-months prior to earnings; Company Led Expectations reflect consensus estimates 1-month prior to earnings)




Chinese PMI Slows – And We Like It

Conclusion: We continue to see signs that inflation setup to moderate in China, whilst Chinese GDP growth looks to accelerate relative to the world and the US in particular. We remain bullish on Chinese equities as a result of these factors.


Position: Long Chinese equities (CAF); Long the Chinese yuan (CYB).


After ticking up to 53.4 in March, China’s Manufacturing PMI inflected once again, falling to 52.9 in April. Breaking down the subcomponents of the index, we see broad-based weakness across the board: 

  • New Export Orders ticked down: 51.3 vs. 52.5
  • Backlogs of Orders ticked down: 50.7 vs. 51.4
  • Output ticked down: 55.3 vs. 55.7
  • Imports ticked down: 50.6 vs. 52
  • Employment came in flat at 51.8; the relative “strength” here is confirmed by a recent Hudson Highland Group survey that showed 77% of Chinese firms intend to increase their staff in 2Q, up from 72% in 1Q. 

While we’d generally greet a soft PMI reading like this with negative sentiment – particularly as it relates to investor’s appetites for equities, we actually receive this report in a positive fashion due to the Input Prices subcomponent falling (-2.1) percentage points MoM to 66.2. Late last week, HSBC’s unofficial PMI gauge confirmed this official deceleration, with its Input Prices subcomponent falling to 62.4 in April vs. 69.5 in March.


While still elevated on an absolute level, the slopes of these series continue to trend positively on a six-month basis, which augments our call for slower reported CPI in the back half of this year. As such, we remain bullish on Chinese equities as the PBOC reins in the pace and magnitude of tightening measures.


Chinese PMI Slows – And We Like It - 1


Shifting gears back to the growth side of the equation, there’s no confusing this weekend’s PMI report for something other than what it is: Slowing Growth. While generally, we want to be short equities/equity markets where growth is slowing, we think we are in a very unique and interesting situation with regard to our Chinese equity exposure.


On a relative basis to the US and the rest of the world, Chinese growth is decelerating at a slower pace, which increases the likelihood that international investors once again look to China as a place to buy growth. We maintain that China’s +9.7% 1Q11 GDP growth looks significantly more attractive when US GDP growth has a 1-handle on it. In addition, bearish sentiment around a confluence of known-knowns supports the mean reversion case – both from an absolute price perspective, as well as on a P/E basis. Relative to its historic valuations, China is quite “cheap”. We like it when our catalysts are supported by valuation.


This confluence of factors has us leaning more positive on Chinese equities than PIMCO, who was out this morning reminding the world that Chinese growth is slowing (known) and inflation is accelerating (also known). If their call for “higher than expected” inflation rates in China is predicated on an increase in the velocity of US dollar debasement/commodity inflation, then we’d just as soon be defensive towards any risk assets. A US Currency Crash is not structurally bullish for any of our long positions (except Gold) – particularly when the dust has settled.


Darius Dale


European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions

Position: Long British Pound (FXB)


As is typical for Mondays, we release our weekly European Risk Monitor. While risk continues to trend higher across Europe’s periphery, Greece experienced a noticeable inflection in sovereign cds late last week (see chart below). Despite the turn, we continue to stress that a restructuring of Greek public debt is a question of when, and not if, and therefore we expect cds and government bond yield charts to trend up and to the right for peripheral countries.


European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bankaa


Our European Financial CDS Monitor (below) shows that bank swaps across Europe were mostly tighter week-over-week, tightening for 31 of the 39 referenced entities and widening for 8.


This week we expect both the EUR and GBP to perform well against the USD as both the ECB and BoE continue to signal a hawkish stance on inflation going into interest rate decisions this Thursday. Meanwhile the USD continues to burn, with the US Dollar Index down another -1.4% week-over-week and down for the 14th week out of the last 18 as a credible plan to reduce US debt and deficits remains uncertain.


For more on our positioning on the GBP-USD, see Friday’s Early Look titled “Royal Awareness”.


Matthew Hedrick



European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bank1

European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bank2

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