GES 3Q Ammo For You

In prep for the Guess? quarter, here’s a margin walk and our SIGMA analysis. This company has one of the worst top line trajectories and biggest 2-year margin risk in retail, in my opinion.

Yeah, the stock looks cheap at 2-3x EBITDA. But short interest is down to only 6% of the float, and I think margins are going from 17.7% to the low teens over 2 years as the extent to which the company has overearned in a favorable FX and sourcing environment puts the margin structure back in check (simply put, GES printed too much profit at the expense of reinvesting). There are other names that are nearly as cheap with margins and returns heading in the right direction (i.e., Ralph Lauren, and smaller cap names like Payless, Hibbett Sporting Goods and Finish Line).

US Employment Trends: Still Dancing with the Bear

When I shorted SPY’s at 11am this morning, my inbox caught a bid. For whatever reason, people don’t like it as much when I am on the bearish side of the “Trade” versus the bullish side. I’m cool with it though. This is a full contact sport.

Anyway, one of the main counterpunches I am getting today is that “Keith, look at the math, jobless claims were better.” While this is true in isolation (on a one week basis), this math doesn’t confirm anything other than the negative “Trend” in the US employment picture. Weekly jobless claims were down week over week to 509,000, but that’s because last week was a nosebleed peak (look at the chart). The way my math works is using the 4 week moving average. On that score, jobless claims we’re UP by another 6,000 jobs testing new cycle highs at 525,000.

Math and narratives dance to whatever tune the assigns them. My process is what it is. If you want to get long this market ahead of tomorrow’s monthly employment report, have fun with that. I’m short that idea at SP500 874.

Quote Of The Day: On UVA's Endowment

“To be sure, this is a startlingly large loss... When put into appropriate context, however, it starts to seem less disturbing.”
-Chris Brightman, CEO of The University Of Virginia Investment Management

Apparently Mr. Brightman has lost a "B" in the last 4 months... as in one billion dollars. But, when you consider that within the realm of his own narrative fallacy, it's not so bad. Everything is relative right?

Disturbing times we live in, indeed. Thank God that the governing principles of Transparency and Accountability are finding their way into the once hallowed halls of institutional investing.

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The Las Vegas locals market is in rough shape and the aggregate numbers will continue to look ugly. The only positive for the market is that housing and employment began deteriorating earlier than the rest of the country and could pull out of it earlier. Unfortunately, we are not there yet.
  • So what does a company do in this environment? I say capitalize. Crush the competition. Boyd Gaming has this opportunity. BYD’s primary (and larger) competitor is Station Casino. With their bonds trading at between 8 and 30 cents on the dollar, Station is facing a high probability bankruptcy. BYD, on the other hand, is one of the few gamers with significant liquidity. I think BYD should aggressively utilize this huge competitive advantage. An effective strategy would be to advertise and market heavily, treat employees well, and most importantly, keep the slot product fresh.
  • There is a lot of market share to take (see the 1st chart). Station generated over $1.2bn in net gaming revenues over the past 4 quarters versus only $800 million for BYD. Assuming just a 2% increase in share (see 2nd chart), BYD could generate an incremental $33m in EBITDA, translating into $0.23 in EPS or 33% of the 2009 consensus estimate of $0.70.
  • BYD still faces uncertainty in the locals Las Vegas market and numbers are likely to go lower. However, the company seems to have a tremendous opportunity to capitalize on its liquidity and build market share. The results may not be immediately evident, but long-term gains could be substantial.

Devaluating A Currency: Free Money Has A Price

This morning both the ECB and Bank Of England put on their reactive management caps and cut rates as aggressively as they ever have. Now that we are looking at pending negative real interest rates in Europe, the revisionist historians can remind you that this is generally bad for one’s home currency (see the chart below, the British Pound has been pounded).

Interestingly, European stock markets sold off hard on these reactive management decisions. Bounces in free falling equity markets (like the UK) are actually higher than those you’ll see in bull markets. Don’t confuse short term hope with reality.

Gordon Brown has forced his socialist hand onto the table of the British elite. Tax rates on those earning over 150,000 pounds are being hiked to 45%. There is no question that this is not a good thing for consumer spending in the UK. However, the open question remains as to what those British pounds are actually worth.

We remain short the UK via the EWU etf.

Is He Flattening A Big Fat Bubble?

We talked about this credit market relationship being a major risk back in April/May. Notwithstanding that we are coming in from a higher nominal level of rates, the fact remains that a flattening of the US yield curve is negative within the parameters of our multi factor risk management model.

It didn’t pay to ignore this relationship 9 months ago, and I don’t think it does today. Effectively, the yield curve is flattening because the US Federal Reserve is going to cut rates to zero (on a real basis to negative). Additionally, we have a Treasurry Secretary who apparently sees no problem floating trial balloons out to the marketplace that the US Government “could” cut or cap US mortgage rates to/at 4-5%. Not only does that rhetoric crush the long end of the curve, it leads the almighty US Consumer to a scarier place – saving!

Dear Hank,

He/She who saveth, spendeth less…

The US Economy has a 70% weight in Consumer Spending.

If you think you can create an expectation for ultra low long term mortgage rates, and the Amerian consumer isnt going to bake that into the cake of their decision making process (ie wait for lower rates), you are smoking something that we didn’t this morning here at Research Edge.

Flattening curves crush returns for the only American Capitalist who remains relevant. He or she who wants to borrow short and lend long, needs to see a spread and rate of return.

The head of the US Treasury should also consider what his #1 customer (China) might do with their bonds – if the Chinese realize that no rate of return on their bonds is not a risk worth taking, their selling will create the loudest bubble popping that we have heard in some time – the popping of the long term bond market bubble.

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