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Eye On India: Singh Takes The Helm...

Singh is taking personal control of the Finance Ministry; this is a mistake…

Prime Minister Manmohan Singh probably understands the Indian economy more intimately than anyone else on earth. An Oxford PHD who served as both governor of the Reserve Bank and finance Minister, Singh’s leadership in the 1990’s set the stage for the miraculous rise of India as a major economic power. Taking the opportunity presented by the terrorist attacks in Mumbai, Singh has shuffled Palaniappan Chidambaram to lead the home ministry and assumed control of the finance portfolio personally.

The temptation for Singh is understandable, but the decision is foolhardy. With global demand in freefall and credit markets frozen, the potential impact on growth on the India’s economy and fragile society (where over 25% of the population lives in miserable poverty) is disastrous. Singh’s credibility as a leader may do much to restore confidence but, like a football coach that decides to suit up and run onto the field as quarterback himself, Singh’s decision to take on another ministry (he already runs six others) subverts the chain of command.

Singh’s decision will divide his focus during the most serious national security crisis his nation has faced in decades and will force him to manage the economy day-to-day while preparing for a tough election this year.

Export data released today by the Ministry for commerce shows what Singh is up against with a year-over-year decline of 12.1%, the first decline since 2001. If you read our post on Friday you know that we found Minister Chidambaram’s assertion that domestic demand will make up for contracting foreign markets absurd. Singh taking the reins may shore up investor confidence in the near term, but even he can’t fight the tide of cooling global growth.

We are short the Indian market via IFN.

Andrew Barber
Director

LULU Nugget: Breaking My Own Rule

I can’t stand when people go into one or two stores and think that they can extrapolate sales for an entire chain. It’s near impossible to do accurately. But this is one example I could not resist.

Here are a couple photos from the store inside one of the most exclusive spa resorts in the US. Every garment of apparel was 20% off for the ‘pre-winter sale.’ This included The North Face, Marmot and Patagonia. The ONLY brand in the entire store not on sale was Lululemon. Why? “Because it is the only one we don’t have to discount” according to the manager.

China Update: Yuan and PMI

“Hank the Tank” is heading to Beijing …

When Secretary Paulson arrives in Beijing this week, a major topic of discussion will be currency policy. The Yuan has risen over 20% since the Chinese government allowed it to float in 2005, but in recent weeks the “Trend” has come under pressure. Friday’s decline of 0.7% to 6.8848 USD was the largest single day drop since the fixed exchange rate ended in 2005. Chinese rhetoric changed last week. They, like us, feel they have the right to let their currency depreciate in order to stimulate export growth.

“Hank the Tank” has been exceedingly diplomatic with Chinese leaders about currency manipulation throughout his tenure and in this final major financial summit between the two nations before the inauguration it is doubtful that he will change his tone in the final stretch. Hank “The Market Tank” is going to march into China and tell them to let their currency appreciate. The Chinese will smile and hear, but we highly doubt they listen.

For now the data continues to support a weaker Yuan, whether with the tacit approval of the government or not. PMI declined to 40.9 in November from 45.2 in October according to the CLSA survey released today, the largest one month decline since the survey started in 2004 (a separate survey run by NBS had comparable figures). As exports continue to cool, the Chinese case for a weaker Yuan (to sustain growth) is bolstered by massive state holdings in USD denominated assets: the amount held directly in US treasuries alone now exceeds 10% of GDP.

We are long the Chinese market via FXI; regardless of long term currency policy, we believe that in the near-term the equity market there will feel the benefits of strong government stimulus policies, competitive dominance in manufacturing and sustainable domestic demand growth.

Andrew Barber
Director

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The New Deal

"Every organization must be prepared to abandon everything it does to survive in the future."
~ Peter Drucker

The worst part about the long weekend is that it’s over. Time with my family is always the most important to me. This Thanksgiving we had plenty to be thankful for, including this wonderful opportunity to be a part of a great team that’s fighting the good fight, helping rebuild of one of America’s most precious industries, the US Financial Industry.

As it has been for the last 6-9 months, studying the Depression was part of my weekend reading assignments. I am definitely thankful that my wife puts up with me on this front – losing myself in “The Forgotten Man” or “FDR” doesn’t exactly make me the most exciting husband to be around! The more I study Roosevelt, however, the more I have come to appreciate his challenging the loss of corporate America’s moral compass.

American history always finds its hero. For whatever brief period of time, Franklin Roosevelt earned that respect. Let me be clear, I am not making the case here for FDR’s economic accomplishments. I am calling out a man who calmed a nation. He was an objective man who found answers in what he used to call his “brain trust” – a group of academics and intellectuals that weren’t part of the Wall Street groupthink. He was a man of principle whose voice powered over his physical ailments. He was a man of integrity. He led by example.

The summary point of my studying FDR’s rise to the Presidency is that the economic realities between now and the Great Depression are very different; however, the credibility issues associated with American leadership are very similar. Roosevelt said that the Depression was the result “of the lack of honor of men in high places.” Think about that. Then think about what we have gone through in the last 12-18 months.

When I woke up this morning thinking about whether or not it’s the right call to be completely sold out of my US Equity position (we are now short the S&P500 via the SPY), I couldn’t help but conclude that the depression some are feeling in the halls of their own financial institutions is very real, because it should be. Inflexible organizations that don’t change will probably go away.

Now that November has passed, we’re looking back on an S&P500 that was down almost 8% for the month while the Chinese stock market appreciated closer to +9%. History is always crystal clear. Facts remain the toughest tonic for compromised credibility to swallow. Gold shone brightly in November as well, closing the month +13%. How could that be? Maybe the clear cut answer for Obamerica’s “New Reality”, like Roosevelt’s “New Deal”, is going to be to attempt to re-flate.

Re-flation isn’t a word… at least not one that has found its way into the Street’s narrative fallacy yet. Everyone from CNBC to Prince Alalweed is busy trying to convince you that deflation is going to last forever and that bankers who have flip-flopped jerseys are the answer to your leadership prayers. Re-flation is what Roosevelt initially tried to accomplish in 1933 by inflating gold and de-flating the US Dollar. Since there was a cat named Hitler introduced into the global macro picture in 1934, it’s not entirely clear how the domestic re-flation story would have played out. As Hitler’s regionalist and racist intentions became clear, the world hunkered down and repatriated their dollars closer to home.

Fortunately, today’s “New Reality” doesn’t have a Hitler. While we have the nuisances of Chavez, Ahmadinejad, and Putin, the power of their collective voice diminishes alongside the price of oil. Re-flating will most definitely turn up their non-sensical volume again, so if you’re in that inflation camp, be careful what you wish for.

In Asia, those living in India and Pakistan are waking up to the dire realities that are associated with expedited deflation. Commodity price erosion is not only a function of weakening economic demand, but it ignites the beasts of social unrest. When people are losing money and killing one another, bad things happen. If these two countries weren’t stationed at the heart of the world map’s panic button, I’d be less concerned. Make no mistake, the canaries in these coal mines have nuclear capabilities. No matter what the mass media told you on Friday doesn’t change the fact that a major geopolitical risk card was just turned face up on the world’s economic table.

Whether it’s old geo-political associations or old boy networks, we need to be prepared to “abandon everything” to survive in this uncertain future. This Thanksgiving allowed us all to pause, and give thanks… but today is December 1st… and “The New Reality” of a globally interconnected marketplace will be waiting for no one. We need to open our minds to new ideas, or someone in China will first. Americans want to win and so do I. I’ll take the lead from FDR, “I pledge you, I pledge myself to a new deal for the American people.”

Best of luck out there in December,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold fell by 1.7% in trading this morning, the first decline in 3 sessions.

TIP –iShares Lehman TIPS Bond –2 & 10 year treasury yields sank to record lows of 0.95% and 2.88%, respectively.

OIL - iPath ETN Crude Oil –Light Sweet Crude futures fell below $52 per barrel in trading this morning despite statements made by OPEC leaders that further production cuts in December were likely.

EWG – iShares Germany - Retail sales fell by 1.6% s.a. in October from September, according to data released today by the Federal Statistics Office.

FXI –iShares China – PMI data issued by CLSA declined to 40.9 in November from 45.2 in October, the largest one month decline since the purchasing manager’s survey was begun in 2004 (a PMI managed by NBS declined by a comparable amount). The yuan declined by 0.7% to 6.8848 USD, the largest single day drop since the fixed exchange rate ended in 2005.

Short ETFs

SPY –S&P 500 DR –S&P 500 futures traded as low as 870.9 before 7AM this morning.

IFN - iShares India – Export data for October showed a year-over-year decline of 12.1% , the first decline since 2001.Finance minister Palaniappan Chidambaram has been appointed to head the Home Ministry after in the wake of the terrorist attacks in Mumbai, with Prime Minister Singh assuming control of the finance portfolio personally. The seven month ban on trading futures for basic commodities such as rubber and soybean oil was lifted by Prime Minister Singh’s administration in light of declining inflation levels.

EWU – iShares United Kingdom – PMI data measured by the The Chartered Institute of Purchasing and Supply was released today at the lowest level since 1992, with the Index registering at 34.4.

UUP – U.S. Dollar Index – The USD is weakening against the Yen this morning.

EWJ – iShares Japan –The BOJ board will hold an emergency meeting tomorrow to discuss options to increase liquidity for corporate borrowers. Labor ministry statistics show that monthly wages declined by 0.1% year-over-year in October, the first decline YTD.

FXY – CurrencyShares Japanese Yen Trust – The yen climbed 1.2 % to 119.18 EUR and 94.13 USD this morning.

Keith R. McCullough
CEO & Chief Investment Officer


Eye on Columbia vs. The North Face (VFC)

The North Face has been the rock star of VFC’s portfolio for the past three years. Similarly, Columbia Sportswear has been the perennial share-loser in the Outerwear category. Recent data suggests that the tides may be turning, which is consistent with my view on each company.

The chart below shows that The North Face dollar share in the sporting goods channel is on a downtrend – hitting parity with year-ago levels after 12 months of impressive share gains. Average price point (a proxy for retailer discounting activity) is flattish to down slightly. Conversely, we’re seeing both average price and dollar market share pick up for Columbia. Note that Columbia’s 20% share of the category in this channel is dwarfed by TNF’s 65%.

I usually don’t get too bent out of shape about this data, but there a couple of things I’d point out. 1) I track the real trends on a trailing 3 week basis, and this is the 3rd week in a row we’re seeing such gains for COLM. I think we can say that this is more than a simple blip. 2) I’ve warmed to COLM in a more meaningful way over the past six months, largely due to the increased investment spending it is allocating to its core content. COLM has been a share loser for a long time – bc it has not invested enough. This share gain is probably not an accident.

As it relates to TNF – it is important to note that the Brand is incrementally growing in its own retail stores. As such, more marginal distribution channels (some of which are in the sample analyzed) are likely seeing smaller allocations. That’s smart from where I am sitting. But that said, I’m not sold yet on TNF’s retail strategy. The company has not proven that it ‘gets retail.’ It’s easy to make money in a store when a brand is hot. But when a brand is cooling, that’s where being a good retailer makes a difference, and is where I think VFC will expose its weakness.
Source: SportscanINFO

LV LOCALS: HOUSING TRUMPS EVERYTHING

The Las Vegas locals market is not like the other regional markets. As we showed in our 11/26/08 post, “A POSITIVE CATALYST? THAT WOULD BE A GAS!”, the macro factors driving gaming revenues in the regional (riverboat) markets have been housing prices, gas prices, and unemployment levels. In Las Vegas, housing is the only macro variable that matters.

On the surface, this looks pretty bad for Boyd Gaming and Station Casinos, both of which have significant exposure to the LV locals market. The sharp decline in gas prices probably won’t help this troubled market. Changes in gas prices have had an immaterial impact on gaming revenues historically. The reason is probably that since Nevada is an unlimited license jurisdiction, unlike other markets, most Las Vegas residents are probably only a die’s throw away from a casino.

Of course, the more obvious piece of the bad news puzzle is housing. The LV housing index has fallen on a year over year basis since February 2007, and the YoY change is down sequentially for a whopping 48 consecutive months. The good news is that Las Vegas housing prices began declining much earlier than the average US market and there are some signs of stabilization. Prices barely fell in October vs. September. Prices have been down so much (30%+) and for so long that gaming revenues probably already reflect the housing impact. Analysts’ projections probably do as well.

The positive for Boyd is that expectations for the LV locals market are very low. Moreover, it’s main competitor in the market is Station Casinos, a private company near bankruptcy. Whether Station goes into bankruptcy or not, Boyd has a huge competitive advantage because of its liquidity. See our recent post, “HOW TO STEAL MARKET SHARE”. Station doesn’t have the cash to upgrade the slot floor or be competitive on the marketing/promotional front. Boyd does.


Locals LV revs track housing prices very closely

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