Quote Of The Week: Bill Ackman

“While PSIV and Target stock have declined materially, we still believe our fundamental investment case for Target stock will ultimately be realized, although not within the original timeframe we had initially estimated,”
-Bill Ackman

Indeed Bill, indeed… timing and sizing in this business are everything.

As the winners and losers on Wall Street continue to reveal themselves, the New Reality will perpetuate investor demand for transparency, accountability, and trust.

The Liquidity Crisis of October/November of 2008 was marked to market by a SP500 closing price on November 20th of 752. While that freak-out low is now -15.4% lower than Friday’s close, this doesn’t mean that those land locked in their own Illiquidity Crisis (private equity, concentrated activists, etc…) wont continue to fear monger investors, blaming their timing and sizing mistakes on the narrative fallacy of a “Depression” and the like…

If there are two factors we want you to own in your portfolios, they are: Liquidity and Duration. Don’t be locked into illiquid investments, and don’t let your money manager be held hostage to the duration that other investors force upon them.

Keith R. McCullough
CEO / Chief Investment Officer

Chart Of The Week: When The Nasty, Is Good...

Despite it not being mainstream economic thought yet, I continue to anchor on the US Dollar being the lead indicator for the US stock market. In the immediate term, what is bad for the US$ is going to be good for the stock market.

This week was the 1st week of 2009 where the US Dollar declined on a week over week basis. Importantly, the buck didn’t stop going up until we received these two nasty economic reports show in the chart below (jobless claims, and the unemployment report). I’ve been saying this for the last few weeks, and I’ll say it again, and again, the worse the economic data gets, the better it is for the stock market – nasty news (including socializing Wall Street’s losses) breaks the buck’s upward momentum. Deflating the Dollar, re-flates the stock market.

The SP500 was +5.2% this week, and the US Dollar was down -0.66%. If they break the buck by another 300-600 basis points, you better not be bearish like this market’s consensus is. This Thursday-Friday move was a powerful preview of what can happen when everyone expects the nasty.

Keith R. McCullough
CEO / Chief Investment Officer

US Market Performance: Week Ended 2/6/09

Index Performance:

Week Ended 2/6/09:
DJ +3.5%, SP500 +5.2%, Nasdaq +7.8%, Russell2000 +6.1%

2009 Year-To-Date:
DJ (5.6%), SP500 (3.8%), Nasdaq +0.9%, Russell2000 (5.8%)

Keith R. McCullough
CEO / Chief Investment Officer

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GIL: Follow the 'Leader'?

I don’t believe in GIL’s strategy or sustainability of returns, but the Q looks OK to me, and the CEO is buying again after selling 250% higher. This guy can trade his stock. Follow the ‘leader’?

This quarter should be abysmal, with a 3,000bp sequential slowdown in sales, and a 1,000bp erosion in margins. Yes, you read that right, I did not err with too many zeros. It would take a lot for me to ever turn fundamentally positive on the trajectory of this company’s margins long-term, as it is growing into slower growth businesses where it is a price taker with increased capital requirements to sustain growth and profitability. That’s not a disaster scenario as long as management realizes it. This team does not.

But few things are linear in this business. After missing and/or guiding down for the past six quarters, 1Q09 should mark the bottom for GIL. Note that the CEO sold 3.6mm shares of stock about this time last year – just before the business completely fell apart and over $4bn in equity value went away. Well…at least he avoided losing $130mm in his own capital.

Here are a few considerations on the quarter.
1) Revenue:
a. Negatives: 1) Pricing down 7-9% at a minimum, and GIL does not benefit from price increases granted by WMT to the extent as Hanesbrands and Fruit due to meaningfully less exposure. 2) FX has been a 1.5% tailwind over the past year. At current FX cross rates, this reverts to a -1.5% headwind. 3) Prewett acquisition has helped revs for the past 11 months. GIL shows 1 quarter of that in this quarter, which helps by 4% in total, but then we’re back to relying on organic growth – where GIL has struggled.

b. Positives: 1) 1Q is the least significant revenue quarter. 2) There’s a 5-10% volume opportunity this year from Europe, with a call option on Japan and Mexico. 3) The US mass retail underwear program started in 3Q, which still leaves some yy growth for 2 more quarters.

2) Margins: a) GIL comps in 1Q against a 600bp margin boost due to mix last year. b) Inventories were +32% at the end of 4Q relative to 27% growth in sales. That’s not great, but does not make me too queasy. c) The biggest negative is also emerging into a positive. Cotton will be a crushing blow to GIL this quarter. Every penny in cotton prices equals about $0.035 in EPS. With cotton having been cut by $0.30 to about $0.50 over the past nine months, we’re approaching the inflection point where the 9-12-month gap from purchase to booking as COGS on the P&L shows up in earnings.

3) Capex/Working Cap: Capital expenditures should be up by about $15mm off a base of ~$100mm in ’09 to expand the DR facility and Rio Nance One. This should add an incremental 7-8mm dozens of annual capacity (8%). Keep in mind that there should also be $70mm of additional working capital to support growth in 2010 and the cash payment resulting from the CRA audit (~$17mm).


While we don’t have the Aristocrat Leisure Q4 figures (the Aussie’s don’t report quarters), all the other major players have reported. The chart below provides market share trends for the gaming suppliers. After 2 quarters of market share losses, WMS regained some of its lost share, coming in close to 20%, in-line with BYI’s share. BYI appeared to lose about 4 percentage points. BYI typically outperforms in the replacement market but Q4 contained a higher percentage of slots into new and expanded casinos. IGT lost a few percentage points but at 38%, its share remains well above the Q1 2008 low of 30%.


For the third consecutive month consumer inflation in Brazil declined on a year-over-year basis according to data released today, sparking speculation that Banco Central do Brasil President Meirelles will cut rates next month. Despite the fact that inflation is still 1.25% higher than the government’s target level, the central bank is now forecasting that the target will be met by year end which, when combined with the relatively sky high Selic rate of 12.66%, leaves Meirelles with seemingly more than enough room to cut when the Bank board meets on March 10th.

The numbers for the broad IPCA show that, for the most part, price pressure seems to be cooling (interestingly, the decline in transportation costs was driven by big decreases in the cost of new and used cars, a factor which largely offset significant increases in metropolitan public transport costs). Below is a breakout for some of the major basket components in January :


The component of primary concern remains food. Despite declining biofuel prices, food costs rose 0.68% broadly for the month while the IPCA 15 , which specifically tracks consumer inflation in major cities only, showed an increase of 0.72% M/M in January, up from 0.32% in December. This increase has been attributed to speculation that a drought in southern Brazil will curtail output this year. Agriculture Minister Reinhold Stephanes has publicly stated that grain production may drop as much as 8% in 2009 versus last year. Some of the biggest increases in the IPCA 15 food price basket were potatoes at +11.87% for the month and fruits at +2.41%. President Lula’s government has arguably made significant strides in reducing poverty; but with nearly 35 million people still living on less than 125 Reais per month (~$55) it is unlikely that the populist leadership will be willing to risk increased food costs regardless of the impact on growth. As such, Meirelles faces real limits in his ability to cut deeply.

Even with food costs still a cause for concern, we continue to be bullish on Brazil and believe that the same prudent management that proved successful in expanding the middle class while still somewhat keeping a lid on inflation during the bubble could now help domestic consumption offset cooling external demand enough to sustain positive growth levels.

We are long the Brazilian equity market via the ETF EWZ.

Andrew Barber

Matthew Hedrick

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