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THE UPSIDE OF THE CREDIT CRUNCH

We continue to believe that MPEL’s City of Dreams will be the only new casino/hotel to open in 2009. The LVS construction delay on Lots 5 and 6 that came to light this weekend certainly bolster our case. While Galaxy Entertainment hasn’t announced any pushback on the planned 2009 opening of its Cotai Megaresort, I believe that is forthcoming. There is nothing like a trip to Macau to get the full picture. Having guys permanently stationed on the ground there doesn’t hurt either.

Macau supply growth is slowing down. That is good for Macau operators. Despite its inability to pull in the financing, this is good news for LVS as well. They still have their covenant issues in Q4 but one step at a time. WYNN looks to be in the driver seat here. All we need is for Beijing to loosen the reins in visitation and/or the Macau government to tighten the reins on junket commissions. Following my trip to Macau, I believe both will happen.

Two 900 lb Gorillas Drop the Gloves

There’s yet another patent infringement suit on the tape. This one is Nike and Wal*Mart – and predicting the outcome is a slam dunk.

Nike is suing Wal*Mart for patent infringement as it relates to its Shox design. So many of these cases are in the gray area that could really go either way – but this one is a no brainer. Check out the image below. The interesting thought here is whether or not Nike brought this upon itself when it bought Starter and took the product to Wal*Mart at reduced price points on shared Nike designs. One could argue that perhaps Nike gave Wal*Mart a taste of improved profit offering before it pulled the plug, and WMT wants to keep the torch lit. You can just as easily argue that WMT attempted to stick it to Nike by selling replicas of Nike Shox at $13 – an 80% price cut from the real McCoy. Either way, the McCoy is, in fact, real.

Nike will probably end up netting $50-$100mm in a settlement out of this one (similar to recent Adidas and Payless precedents), but more importantly it will have its designs yanked out of WMT

Crystal

Lead, follow or get out of the way!
-George S. Patton

During times like this, it doesn’t get much simpler than that quote. During times of crisis, winners and losers emerge. Adversity makes the winners stronger, and the circle of support for new leaders fortifies itself. Republican military General, Colin Powell, gets this as clearly as General Patton did. When Jack Nicholson asked in, ‘A Few Good Men’ (1992), “Are We clear?”… Tom Cruise replied, “crystal.” We are seeing things crystal clear this morning. It’s a great day for trading.

Whether it’s Powell supporting Obama or Yankee fans supporting the Tampa Bay Rays, it’s all one and the same. At the end of the day, Americans love winners. Last week, the S&P500 was a winner, closing +4.6% on the week at 940. This was the first positive week of performance for the US market in a month, and it certainly put a smile on my face. We’re charging towards the +9% gross performance line for the year to date, and there is nothing quite like having the positive energy associated with momentum at your back.

Asian stock markets have diverged from US trading as of late, and this is something that we find fascinating. Asian economies are finding a way to be self sufficient. They better, because America’s balance sheet doesn’t have much to give them anymore. While the cover of this week’s ‘The Economist’ is titled “Capitalism At Bay”, and everyone from the media to Wall Street is begging for socialist government supports, the Chinese are marching to the beat of their own drums.

Remember those Chinese drum beaters during the opening ceremonies of this summer’s Olympics? I do… this is not a country that should be underestimated, ever. Those Chinese synchronized divers don’t miss! Are they our partners? Are they our creditors? Could they be neither? Whose call is it if they want to change course? So many questions… and the answers are not “crystal clear”.

What is “crystal” this morning is their performance. Hong Kong led Asian stock markets higher overnight, closing +5.3% at 15,323 on the Hang Seng, while China closed up for the second consecutive day at +2.3%. We are long both of these geographies via the EWH and FXI exchange traded funds. Interestingly, these two markets rallied out of what was a negative Chinese GDP report. China reported Q3 GDP of +9% - this was a good 100 basis points below consensus, and marks the 5th straight quarter of economic growth slowing, but guess what? This isn’t new news! We have been calling for China’s growth to slow for all of this year, so we think we can own the debate as to when this will turn. We think that sequential acceleration in Chinese GDP growth could be less than 9 months away. Don’t wait until then to get long.

Asian trading was also stoked by India cutting interest rates by a full percentage point to 8%. This is not a wise move by India’s government, but it’s a move that they are hostage to making. In a politicized world of central banking manias, there is little that a bureaucratic government like this can do but be who they are – populist bureaucrats. Despite making moneys easier to find, India’s Sensex Index still underperformed Hong Kong, closing +2.5%. We covered our short position in the India Fund (IFN) profitably last week, so look for us to re-short it on strength. India’s inflation rate is running +11.4% year over year as of their last weekly report. China’s inflation (reported this morning) has dropped to +4.6%. Hopefully, the broker who sold you the “Chindia” idea last year isn’t your broker today. China and India are not the same. Email those “it’s global this time” savants a map.

European stock markets look good for the second trading session in a row. The problem, of course, is that they can’t string together a “Rays rally” of 3 days. We like 3’s here at Research Edge because the laws of mathematics do. We do not like European stock markets generally. We are long Germany via the EWG etf and short the UK and Austria via the EWU and EWO etfs. Germany printed a surprisingly high producer price inflation level this morning of +8.3% year over year growth. This was well ahead of our estimate, but upon further review doesn’t surprise us given the currency oriented inflation Europe is being forced to swallow right now. The Euro was actually flat week over week at 1.34. Stability instead of volatility is what currency markets are in need of right now, globally.

The US Dollar is the currency we have recently taken a short position in via the UUP exchange traded fund. We are looking to buy Canadian Dollars, and we posted a note on as much to our Research Edge Macro clients this weekend titled “Going Loonie” (www.researchedgellc.com, 10/19/08). Not all cash is created equal, and since we are so exposed to US denominated cash (in the Hedgeye Portfolio Allocation model we have a 76% cash position), we need to find ways to diversify. This is by no means an easy exercise.

That said, the easiest path for us to take this morning is to stay the course and lead by example with our process. “Great calls” may win games in this business, but repeatable processes win championships. “Lead, follow, or get out of the way.”

Have a great week,
KM



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Headline Of The Week:

"Hedge Fund withdrawls surge to $43B in September" -FT

I know, I know... we had this call 9 months ago... so I will let the media take it from here.

However, one quote comes to mind when I think about all of the pushback that I got from the said industry savants:

"Nobody is thinking of you... unless you tell them about their faults...
Then you can be sure that they are thinking about you...
They are thinking about killing you!"
-Roger Rosenblatt (PBS and Time Contributor)

I, and many of you, have been overpaid to analyze industries with a fine tooth comb. Why it was so contrarian to take a step back and analyze our own industry from a supply perspective will remain a question in my mind for the rest of my life.
KM

US Market Performance: Week Ended 10/17/08...

Index Performance:

Week Ended 10/17/08:
DowJones +4.8%, SP500 +4.6%, Nasdaq +3.8%, Russell2000 +0.8%

October & Q408 To Date:
DowJones (18.4%), SP500 (19.4%), Nasdaq (18.2%), Russell2000 (22.5%)

2008 Year To Date:
DowJones (33.3%), SP500 (36.0%), Nasdaq (35.5%), Russell2000 (31.3%)

UA: Maintaining Dominance in Compression

I’m always fascinated by the market share trends in the Compression category – the place where Under Armour made its mark. The key call out above all else is that despite virtually every brand placing a massive bulls-eye on UA’s back, its share has held in remarkably well at about 76% of the space (which is still growing double digit, by the way). Nike stands at about 17% -- which represents a 2-3 point gain from a year ago (on a ttm basis) – proving that Nike is the only brand that could give UA a run (or a jog) for its money in the compression arena. The two trade off share points rather consistently (See Exhibit 1), but UA still maintains 4.5x the share as Nike at a time when Nike will incrementally shift resources toward combating UA in footwear. Bottom line is that UA remains squarely in the pole position here.

Perhaps the biggest point is that no other brand has greater than 2% of this space. No kidding… Adidas and Reebok own the NFL license, and have some other incredibly valuable sports marketing assets in the US (Notre Dame, The Yankees, David Beckham, Yao/McGrady, etc…) – and have combined share of less than 1%. Is this a massive opportunity for Adidas? Yes. But it was an opportunity as well 3 years ago and its share has actually been cut in half during that time period. When an ‘opportunity’ remains present for that long, I consider it a ‘failure.’

Zach Brown/Brian McGough

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