“China, despite the slump of 2012-2013, has recovered its growth momentum and is economically dominant.”
That’s my rumor this morning. Got one? How many more do we need from conflicted and compromised central planners of Keynesian states to keep this no-volume stock market ball in the air? This is really getting sad to watch.
Markets don’t lie; politicians do. The aforementioned quote isn’t a lie; it’s a potential long-term risk management scenario. Looking at our core Growth & Inflation macro model for China in 2013, it’s actually a very credible one.
The forecast comes from the introduction of a book I just started reading called “Eclipse – Living In The Shadow of China’s Economic Dominance.” Since it was published by the Peterson Institute, at least some of the people sleeping in Washington right now have seen it. They don’t even have to read it. The cover is red and shows Obama bowing to Premier Wen.
Back to the Global Macro Grind…
If I’ve written this 100x in the last 5 years, I’ve said it 1000x – if you lose the trust of The People, you will lose the mother’s milk of markets – inflows. The more markets depend on baseless rumors for intraday moves, the less inflows you are going to have.
Actually, never mind inflows – at this point what you should be really worried about as an asset manager are outflows. Some people are stupid with their money. Most people aren’t – at least not after you burn them 3, 4, or 5 times with the same thing.
Q: What is that thing? A: Growth.
If you don’t have growth, a government certainly can’t manufacture it. Remember Obama’s economic “advisors” (Christina Romer and Jared Bernstein) promising a government spending multiplier on $800B of 1.5x? Lol. Thank God they’re both gone.
What you need to do is what the #FairShare crowd can’t handle - let it slow. Then growth slows to a point from which it can recover. When Growth Slows at a slower rate, we start to think about getting long; really long (like we did in 2009).
When it comes to Chinese growth, genius observers of the last 2 years of reported news will tell you that it’s slower than where it was in 2009-2010. Newsflash: that’s why the Chinese stock market was down double digits for each of the last 2 years. Markets discount future expectations.
Today, we’re trying to measure the slope of Chinese growth (we model the same for 86 countries in our model) and when it’s most likely to slow at a slower rate. When running our predictive tracking algorithms, we consider Growth & Inflation on all 3 of our risk management durations:
- TRADE (3 weeks or less) = we see Chinese growth slowing at an ACCELERATING rate
- TREND (3 months or more) = we see Chinese growth slowing at a SLOWER rate
- TAIL (3 years or less) = we see Chinese growth re-ACCELERATING at some point in 2013-2014
We use real-time market signals and high-frequency economic data to make risk managed research statements. We don’t take a survey or tell you how Chinese growth “feels.” The only feel I can give you about Global Growth Expectations right now is that they still feel heavy. And they will until Hatzius and Hyman cut their growth estimates to where the growth data currently resides.
Q: What’s the only way out of this thing? A: Strong Dollar.
That’s the only thing that will Deflate The Inflation of commodity prices. That’s the only thing that matters, on the margin, to the 71% of US Consumption growth that drives US GDP. That’s also the biggest thing that will allow China to cut rates, aggressively.
So instead of begging for bailouts and whatever other rumor some Keynesian can concoct in the next 4 hours of trading, let’s keep pressuring the political elite to get out of the way. Out with the academic dogma, we want our Dollar back.
With the US Dollar Index up for 4 consecutive weeks, it’s working.
- American Purchasing Power (USD) is up +4%
- Oil prices are down -15%
- US Consumer Discretionary stocks (XLY) are now the best performing Sector in the S&P 500 (+11.1% YTD)
Get the Dollar right, and you’ll get America right. If we don’t, by 2013 we’ll be stranded on an island of hopeless growth like Japan and Europe are, begging for the Chinese to bail us out.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $104.48-108.43, $81.53-82.61, $1.25-1.27, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, May 25, 2012
PONTE 16 INVESTOR HOPING TO SET UP THE MAINLAND'S FIRST CASINO ON HAINAN ISLAND Macau Business
According to Business Daily, Hoffman Ma Ho Man, deputy chairman of Success Universe Group, which owns a 49% stake in Ponte 16, a JV with SJM, said he has a commercial interest in talking up Hainan’s gaming prospects as he would like to bid to operate a casino there if the opportunity arises.
According to Ma, Hainan has approval in principle from the central government for a casino. “A condition of getting the casino licence is that the central government will not support Hainan [financially]. It gives RMB30 billion [MOP37.85 billion] to RMB40 billion to Hainan per year. So Hainan would need to survive by getting the tax from the gaming," said Ma.
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Could eke out growth in April despite calendar setback
April may have rebounded from an unlucky March on the Strip. We're projecting April Strip gaming revenues to be up low to mid-single digits (+1 to +5%), assuming normal hold percentages. McCarran Airport traffic in April grew 2.7% while taxi trips fell 3.2% YoY. With April 2012 having two fewer weekend days than April 2011, any growth in the month should be seen as encouraging.
As always, baccarat is a wildcard. Baccarat volume and hold have been quite volatile the last few months but if we assume normal bacc hold along with an easy volume comp (-29%), bacc revenues could rebound in April. We expect modest slot revenue growth, driven by a low slot hold comparison (6.8%) and a continuation of the recent slot volume strength (YoY growth in 10 out of the last 12 months).
Here are our projections:
We contintue to like SAFM on the the LONG side of the "chicken trade" and BWLD SHORT!
SAFM: While the tone from management has been cautious, we see declining corn prices and tight chicken supply over the next 18 months as strong positives for the stock. SAFM’s superior balance sheet, versus its peers, helps its position as the industry turns. Intermediate term risk is seasonality in the stock Jul-Sep.
Our conviction remains high on this one. Keith taking advantage of today's low-volume pop to add to our short position.
We've included additional detail on our short thesis below as outlined in our 5/9 report "CRI: Short It."
5/9/2012 11:29 pm
CRI: Short it
Nearly all the factors that kept this stock grinding higher while estimates came down last year are either slowing, or flat-out reversing, on the margin. We really like the 3/1 odds on the short side.
We think Carter’s is shaping up as a short again. After nearly a year of perceived positive factors at its back, we think that opacity related to organic earnings power will be gone, and competitive challenges will emerge at a time when it is shifting away from harvesting its prior investments, and will need to put capital in to its model that will put a ceiling on margin improvement at a minimum, and likely create meaningful downside if our industry call for increased competition and margin pressure comes to fruition. With that, sales deceleration is a near certainty barring another acquisition, and valuation is sitting near the seven-year peak.
We say ‘shaping up as a short again’ with full awareness that it did not do what we thought it should have done in 2011. In fact, we went into 2011 with estimates for the year at $1.75 and the consensus at $2.40. By year’s end, the Street came down, and down and down by 21%, and CRI earned an adjusted $1.94 (before $0.15 Bonnie Togs accretion). Yet the stock literally defied gravity and went the exact opposite direction – gaining 35% for the year (vs. virtually flat performance for S&P, RTH and the MVRX).
If there’s one rule of retail investing that we’ve learned over time, it’s that earnings revision is the key factor in determining the direction of a stock. Pull up thefunction on your bloomberg. With 9 stocks out of 10, you’re going to see that the stock price tracks (or leads) earnings in a very tight band. Take a look at NKE, AAPL, GIL earnings revisions vs. the stock (all courtesy of Bloomberg).
Now look at CRI. HUH?
Whenever we talked to people about this name, we were given the same bull factors ad nauseam:
1) The company had the toughest COGS comps in 2H11, in advance of which it took up prices by 10%. In doing the math, a 10% increase on a $10 product at retail almost entirely outweighs a 25% increase in a $3-4 product cost.
2) At the same time, CRI was boosting its off-price sales from 1% of total in 2010 to 4% in 2011, and while this would ordinarily be dilutive to margins, it was enough to help leverage SG&A.
3) While both of these two factors played out, CRI benefitted from the addition of the Bonnie Togs acquisition, which boosted sales by an average of 6% per quarter – again, a factor that (with some minor cuts to acquired SG&A) helped leverage SG&A at the greatest rate in nearly a decade.
4) And how could we forget the ultimate response? “The market is flat, I’m clawing to hang on to my return/loss for the year, and you expect me to short the stock of a company that Berkshire Partners is not-so-slowly taking private?
Now what have we got?
1) The good news is that CRI starts to anniversary its higher product costs (that’s the bull case), but unfortunately, it starts to anniversary its pricing initiatives as well. It’s all too often that people adjust one without the other. There are, after all, two components to gross margin. Costs are forecastable. But prices to consumers – especially for a company where 40% of sales come from vertically-owned-retail – are DEFINITELY not.
2) Off price sales should come down from 4% of sales last year, to about 2% this year. Yes, that’s good for gross margin. But on top of other factors impacting top line, it will make any form of SG&A leverage very difficult.
3) Bonnie Togs is still there. But it is officially anniversaried. Now it and Carter’s each need to grow on their own without the benefit of basic acquisition accounting helping the situation.
4) Expectations are lofty – at or above company guidance for sales and EPS.
- Revenue: Consensus at $2,370mm – ABOVE guidance of $2,300mm – $2,342mm.
- EPS: 2012 Consensus at $2.61 – ABOVE guidance of $2.51-$2.61
- Consensus EPS of $3.28 for 2013, and $3.63 for 2014. We’re at $2.70 and $3.00, respectively.
- With all these other factors no longer in CRI’s favor, we have a tough time stomaching the premise that thechart on bloomberg maintains its scant correlation under these circumstances with a 20% earnings reduction.
- If our estimates prove right, there’s no reason this stock can’t see the low-mid $30s. But under the most bullish consensus expectations, we still have a tough time getting this name in the upper $50s. We like the 3/1 odds of a short here.
5) And lastly…the “Berkshire is Buying” argument is pretty much dead in the water. Yes, they’re selling on the margin.
Historical context is important here...
We were asked a couple of weeks ago by a top client as to why CRI traded at such a high EV/Sales ratio (2.1x) circa 2005. Our answer sounded something like this:
This was when CRI achieved cult stock status. There were several factors, all related to post IPO action.
The pitch on the IPO was…
a) Shift away from basics into playwear
b) Shift from traditional dept store biz to serving 1) mass channels, and 2) company-owned retail.
c) CRI had new arrangements with Li&Fung – through which it cut its sourcing costs by nearly 1/3 and passed right through to consumers in the form of lower prices to gain share.
d) Remember that this period (ending April 2007 when LIZ went Ka-Boom) was easy for apparel retail. You could be an average brand and run at peak margins without much effort. The environment allowed CRI to sell into three completely distinct channels with like product without stepping on each other’s toes – and the Street was not only oblivious, but it also gave CRI’s multiple credit for this as a big positive.
e) Then in 2005 CRI bought Osh Kosh. In the ensuing 2-years, they cut employee count from 400 to less than 100. Margins went up temporarily, before growth slowed and the story became outwardly and visibly broken.
f) Pretty soon thereafter, people realized that this name was not infallible – that it can’t sell the same stuff through Target, Kohl’s, Macy’s and its own stores -- and that it can’t cut costs to keep margins high in the face of slowing growth.
g) Fred Rowan (CEO) got fired in 2008, and since then, the Mike Casey era has taken hold. Definitely a better regime. But there was just as much financial engineering as anything else (he was former CFO). CRI had to button up policies due to a markdown irregularity accounting issue w KSS, as well as an exec being charged with fraud and insider trading by SEC in 2010. Nonetheless, it’s got a long way to go before it’s worthy of ‘cult stock’ status again. Our point is that today it is sitting at 1.25x EV/Sales. That’s well below the prior peak of 2.1x, but the old peak is just that…the OLD peak. It need not apply any more.
Playwear has nearly doubled as a percent of CRI’s total over the past ten years. ‘Baby’ is a very defendable business – the Carter’s brand goes a long way with a new Mom swaddling her newborn. But in the Playwear category, it competes with everything from Children’s place, to Old Navy, to JC Penney and Wal-Mart private label. Not a place to hang your hat on.
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