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US Market Performance: Week Ended 2/13/09...

Index Performance:

Week Ended 2/13/09:
DJ (5.2%), SP500 (4.8%), Nasdaq (3.6%), Russell (4.8%)

FEB 09’ To-Date:
DJ (1.9%), SP500 +0.1%, Nasdaq +3.9%, Russell +1.1%

2009 Year-To-Date:
DJ (10.6%), SP500 (8.5%), Nasdaq (2.7%), Russell (10.2%)

Keith R. McCullough
CEO / Chief Investment Officer

"No Drama" Obama's Nasty Breakdown...

This week saw Darwin’s 200th birthday. Unfortunately we live in politically charged times where socialization/intervention is the solution of US Government choice versus Darwin’s. At a point, the rules of survival of the fittest will take hold, however – they always do. In the meantime, they will be measured, real time.

One of these measures is the confidence interval of the American people. In both the Rasmussen poll and this real time February report from the University of Michigan (see charts), “no drama” Obama is starting to see a nasty breakdown. After seeing a nice lift out of its November hole, this confidence report of 56.2 versus the 61.2 we saw a few weeks ago has rolled over, hard.

If Obama gets a NO confidence vote from a world stage that blessed him with some of the highest approval rating ever, eventually it will catch up to the US Dollar. US Dollar weakness will beget strength in the US stock market. This is a perverse relationship, but at least it’s Darwinian.

Keith R. McCullough
CEO & Chief Investment Officer


You won’t have time to read all 1,071 of the stimulus bill but that’s ok. Neither will any of the members of congress and they will still vote on it. Trust us, the provision allowing for a 5 year deferral of taxes associated with buying back discounted debt is in there. We’ve spoken extensively on the deleveraging aspects of a discounted bond buyback strategy even with the tax implications. This will only make the strategy even more deleveraging.

The trick of course is to balance the benefits of buying back bonds with potentially damaging the bank relationships. Buying back discounted bonds generally transfers value away from the senior bank debt holders. We’ll leave that up to the companies to decide but it’s nice to have the lower cost option.

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"Neither shall you allege the example of the many as an excuse for doing wrong."
-Exodus 23:2
After the market close last night, I went for a run. It was windy and getting dark, and I could see my friend, the raccoon, taking cover in his usual spot in this great big old tree near the end of my road. He’s one of them fat 15 pound garbage eating raccoons. He thinks he’s smart… but I know where he sleeps when he thinks no one is looking. The end of his tail is a dead giveaway…
Raccoons, like some people in the hedge fund community, have a distinct facial mask. They genuinely believe that they are smarter than everyone else. They are extremely sensitive and, per Wikipedia, they “are able to remember the solution to tasks up to three years later.” Traffic accidents, and now short squeezes, are two of their most common causes of death.
Having spent the last decade hanging around the hedge fund community, I have come to appreciate the quality of research originated by some of the most upstanding and thoughtful people I have ever met. I am fortunate enough to now call a lot of those people both friends and clients. It is both a pleasure and a privilege to do business with all of you. You are the men and women who are going to lead us out of this mess. You are men and women of principle.
I have also met a lot of raccoons in this business. They like to steal, collude, and trade ahead of other people’s work. Ordinarily, I would preface that comment with “unfortunately”… but I actually feel blessed to have met these creatures, analyzed where they sleep, and figured out the patterns by which they operate.
For some of you whose attention I have at this stage of my missive… yes, I am talking to you. Did you really think you were getting away with not paying for our research? I am now telling you that I have been watching you, and keeping really good notes. It’s not just the bankers who are going to be held accountable to the rules of The New Reality. Sorry.
Yesterday, at 3:18PM I posted a note to our Macro clients that was titled “Covering/Buying: SP500 Levels Into The Close” (www.researchedgellc.com <http://www.researchedgellc.com> ). Making that call ended up generating a tremendous amount of feedback, so let me thank all of you for your very kind words and compliments last night. While I have spent the better part of my career on the “buy side” of information flow, I finally understand the power of helping other teams win rather than just my own. It’s a wonderful feeling.
After an outstanding 25 point (+3%) move in the SP500 in the last hour of trading, what do we do now? Do we chase the raccoons and the gold diggers? Do we hold back? Do we do nothing? As corporate America has been taught to say on their conference calls, these are all “great questions”… and my answer is quite simple – stay with the proactive plan that we’ve had in place. Everything has a price.
In my “Gold Diggers” note yesterday I said “my downside target for the SP500 is 808. I am short the Dow, and I still think that the US market continues to make higher lows on selloffs.” The only part of that strategy that I have to edit is that I am no longer short the Dow – I covered it at 3:22PM in the Hedgeye Portfolio, and I will be looking to re-short it when it’s up. The SP500 still has -3% immediate term downside from last night’s 835 close. Nothing has changed here, other than price.
The price of gold has backed off of the predictable “Fast Money” immediate term high that we signaled, trading down to $935/oz so far this morning. I am in that  “Trade” (on the short side) for a 3% move, partly because I love to play the game, and partly because I love shining the flashlight on raccoons. While a 3% move isn’t going to make a man rich on a principal basis, it does solidify one’s principles. Wall Street, sometimes, has a hard time delineating the difference between those two words – they are pronounced the same, but have materially different definitions.
If you’re mantra is “make money” – that’s cool. That’s capitalism, and I support your message. All the while, don’t forget that in The New Reality, you will be held accountable for how you made that money. If you asked for bailout moneys, you are going to be regulated. If you are in a Madoff camp, you are going to be unearthed. If you are found taking other people’s intellectual property, or trading ahead of non-public material information, you will have the flashlight shone on you.
As we head into President’s day weekend, rather than pointing fingers at partisan politicians and pandering banking CEOs alike, I think we should all take a few steps back, put the crackberries down, and think long and hard about how we can take our financial system back from the raccoons.
They, of course, aren’t just “hedgies” and bankers. This is an urban migration that has been around for a long time. They are in your neighborhoods. They “allege the example of the many as an excuse for doing wrong.” They will be smoked out of their holes. We can all figure out where they sleep – all we have to do is look.
Have a relaxing weekend with your families and loved ones – we all need it.


Raccoons - etfs021309


Locals Las Vegas gaming revenues declined 6% YoY in December. This is the second straight sequential improvement following a 25% YoY decline in October. North Las Vegas was the standout, driven by the opening of Station Casinos’ Aliante. Excluding North Las Vegas, the remainder of the locals market still declined only 9%. December 2008 was held back by 1 fewer Saturday.

The locals Las Vegas market could be an interesting one for a variety of reasons. This was the growth market in the country for years until housing crashed 2007, and now is one of worst markets.

• Las Vegas housing prices fell earlier and harder than most of the country which could drive an earlier turn around. Moreover, the Vegas housing market is among the Nation’s most efficient, since regulatory hurdles (permitting, environmental, etc.) are limited. Prices correct faster.
• Largest operator likely to go into bankruptcy – Station Casinos is already attempting to restructure through a pre-packaged bankruptcy. Capital and promotional spending in the market is likely to be constrained for quite some time.
• Population still growing – Here is one of the major differentiators. Unlike most gaming markets, a desired climate, no state income tax, and a low cost of living are still driving population growth.
• Huge retiree population – Las Vegas has a larger retiree population than any other gaming market. Retirees have more time and money to spend on gambling. A rising interest environment directly boosts gaming revenues as well.

The near term will still be challenging but I think 2010 will be a growth year as outlined in our 2/5/09 post “THE LAS VEGAS LOCALS MODEL”. If interest rates rise, it could be a very good year.

Sequential pick up in revenues

GIL: Single-Digit Purgatory

GIL has been exposed for what it is – a poorly run company that has lost its offensive weapon to maintain margin as it grows into lower margin businesses. There’s no turning back now.

I’m kicking myself over this one. GIL has long been my favorite name to short. Not only was I not there to capture today’s alpha but I fell into the trap of thinking that expectations were nearing bottom.

Lesson: When you feel so strongly that 1) management is flat-out bad, 2) they’re making the wrong strategic decisions and investing capital in higher-risk, lower return business, and 3) they're feeding a different message that the Street actually believes, then 4) stick to your guns – especially when it is at a 20% premium to the group.

A few big picture points.
1) The triangulation and rate of change between sales, inventories and gross margins was more out of whack than almost any company I have ever seen. You know that SIGMA chart we use (Sales/Inventory Gross Margin Analysis) that tracks profitability and the components thereof? We literally need to recreate it for GIL this quarter because inventories were so out of whack (+31% vs. sales-27%). See chart below.

2) Note to CEO: C’mon Glenn, you have a good base business. Why do you need to grow into all these new categories where you have minimal control and visibility over pricing and orders? In such an abysmal quarter, your market share in core T-shirts was up 4 points to 54%, and fleece share was up 3 points to 52%. And yet total sales were down 27%! Don’t you 'get it' that it’s not just the economy that’s causing your problems? All these challenges began when you ran out of sourcing savings that you used to max out share in this core, and then started to grow into a secularly-challenged business (private label for Wal*Mart) without a big cost save to pad your margins and use as an offensive pricing weapon?

3) Best quote of the conference call (per Thompson transcript) – in answer to a question to Glenn Chamandy about price discounting philosophy. “…part of pricing strategy is to try and gain as much share as possible, but the reality is that there’s a point where no return in terms of spending my good money after bad money.” I agree with the philosophical view, but I’ve never heard a CEO use the term ‘my money’ when referring to the P&L on a call with investors. Glenn, isn’t it ‘our money’ when speaking to fellow shareholders? Maybe this is McGough being petty. But the comment rubbed me the wrong way.

4) So what’s GIL worth? Every story has its price. I think it’s safe to say that the halo that has rested on the crown of this bad boy has finally been lifted, stomped on, and left for dead. So we know that the 10x-20x EBITDA multiples of yesteryear are history. Now what? I have no reason to think that GIL will earn over a buck in any of the next 3 years. In fact, this year I can model anything from $0.80 to ($0.20) – no kidding. Remember that vertically owned and operated basic apparel brands have historically traded hands for 3-5x EBITDA – and those are BRANDS (i.e. Fruit and VF Intimates, to name two). Why should GIL (i.e. no brand) trade higher? Better top line? Perhaps. But the company is proving that anything beyond the screen-printing/T shirt business is both margin and return-dilutive. I think this stock is in single-digit purgatory for a long time.

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