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SEA CHANGE: HONG KONG TRIMS YUAN HOLDINGS

History and geography have always led Hong Kong’s merchants to be pragmatic traders. Invasion, colonial rule, war and natural disasters have been reoccurring themes over the course of five centuries of almost uninterrupted trade on the Island. This trade resilience is a testament to remarkable timing skill.

The most recent figures released by the special district’s monetary authority suggest that -ever pragmatic, Hong Kong’s residents have been limiting their additions in Yuan holdings as the currency begins to slow in trajectory due to intervention and the cooling of global growth expectations.

Andrew Barber
Director

EYE ON PUTIN POWER: COLD WIND BLOWING FROM THE EAST

Belarus today became the fifth nation to appeal to the IMF for help as the credit meltdown continues to knock small, leveraged economies over like dominoes.

As the crisis spreads, the division between pro Russian and pro Western states is becoming increasingly pronounced. Anti-Russian former Soviet states Belarus and the Ukraine –as well as former satellite Hungary, have been relatively warmly received as they reach westward for help. The aid pledged by the western powers to help Georgia rebuild after this summer’s conflict now exceeded $4 Billion.

Meanwhile the much heralded Russian loan for Iceland has, as of yet, failed to materialize and the flight of capital from Moscow banks continues. The Russian Navy –which looks about as seaworthy as the Russian stock market, arrives in Venezuela just in time to see their South American comrades sink into the abyss as plummeting oil prices bankrupt Higo Chavez’s grand socialist experiment.

The Pro Russian block is experiencing a rapid reversal of fortune as credit replaces oil as the most coveted commodity on earth. The large financial Infrastructure of the US, EU & Japan have been weakened dramatically, but they remain the undisputed strong hands at the poker table.

If these trends continue the Threat to Putin’s global influence are considerable. That is not a positive data point for stability.

Andrew Barber
Director

PFCB – A New Risk Factor in the 10Q

I just finished reading the PFCB and noticed that the company added a new risk factor to its 10Q. PFCB is now specifically talking about new stores taking more time to reach maturity. I can only conclude that management is seeing a “new” trend in the stores it has opened recently. Not that we need to find another negative for a casual dining company, it’s an interesting development. This also help explain why they reduced new store openings again!

The following is the new text from the 10Q filed yesterday:

“As of June 29, September 28, 2008, there have been no material changes to these risk factors. factors other than the change of the following.

Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results as well as result in impairment of the long-lived assets of our restaurants.

We operated 182 full service Bistro restaurants, 165 quick casual Pei Wei restaurants as of September 28, 2008, 48 of which opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. We cannot be assured that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations as well as result in impairment of long-lived assets of our restaurants.”

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

EMPLOYMENT: INITIAL CLAIMS DISPOINT THE BULLS

After two consecutive weeks where jobless claims came in lower than expected, today’s number arrived higher than forecasts at 478, 000; 10,000 more than the economists surveyed by Bloomberg and breaking the short lived winning streak for bulls looking for signs of stability.

Traders know that in a period of extreme market volatility, picking a top or bottom is very difficult –in a period of extreme economic volatility the same principal holds true. The trend in job losses has not shown signs of directional change yet.

Andrew Barber
Director

September Casual Dining Trends – Plain Ugly

Casual dining same-store sales declined 3.8% in September with traffic falling 6.5%. The casual dining industry has not experienced a traffic decline of this magnitude going back to 2000, and now this is the third consecutive month of 6%-plus declines. Looking at the chart below, I think Burt Vivian, president of P.F. Chang’s China Bistro, described it best yesterday, “In short, July and August were not pretty. September was just plain ugly.”


SKX: Predictably Disastrous. Numbers Still Too High

No, Skechers is not missing and guiding down because of a ‘weak retail environment’ or ‘tough consumer’ as management suggests that they are. It is because the confluence of factors that allowed this company to triple its margins over 4 years has hit its breaking point. Its’ sales/inventory/margin triangulation has shifted into the worst place possible (see Exhibit below) and I think it is destined to stay there for quite some time. Unfortunately, the company still does not believe it. They did not set expectations low enough. I won’t touch this stock until it approaches $5.

I’ll repeat the narrative I threw out to clients on September 3.
A) Over the past four years, a shift in fashion towards low profile (SKX sweet spot) accelerates growth and propels margins from 0% to 9%.

B) Low profile growth finally losing share to Performance – starting this fall.

C) Along the way, SKX opens up more high-fixed –cost company-owned retail stores to get product to consumers despite less interest from retail.

D) SKX broadened wholesale distribution to more marginal channels (Goody’s, Mervyn’s).

E) SKX is taking its next leg of growth overseas. Grows more aggressively into Hong Kong and Macao with a goal to triple sales there in 3-years. Maybe they should have thought of this 3-years ago before a 20% run in FX? FX moves are always hindsight 20/20, but this is another example of a poorly managed company in this space deploying capital reactively. Proactive always wins in my book. I think Skechers’ recent announcement that it is expanding its Asian JV with the Onwel Group is another nail in the coffin.

F) SKX has become more litigious, suing a smaller brand after years of fighting against economic harm from knocking off styles.

G) In August, SKX bid for Heely’s. C’mon team Greenberg…Are you serious??

H) We have not even started talking about losing space in Asian factories to more established brands, and increased cost pressure SKX will see starting in 1Q due to higher FOB costs (freight on board – or total fully loaded import cost). This will be a margin crimper.

There’s no doubt in my mind that margins are getting cut in half here – as I’ve noted since my initial June 4th note (SKX: Can It Really Be This Simple?).

I’ve got EPS going from $1.70 in ’08 to $0.85 in ’09, and EBITDA declining by a similar magnitude. The bottom line is that I would not even think of buying this stock until it was at a 3x EBITDA multiple on my numbers. That equals $5.10.

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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