1) Could see low to mid teen unit volume declines in Q1 and Q2, improving to flat vs. last year – this could be mitigated by incremental promotion opportunities in spring and BTS. (Bill Nictakis noted that outerwear orders are up 25% for Spring and BTS. Outerwear is 28% of total.)
2) Net net is annual sales decline of 4-5% (Street is -7%) assuming similar consumer behavior with scenario of down 8% if Q4 has similar decline as 2008.
3) Goal for GM rate to increase 10-100bps above 2008
4) Cotton costs easing after 1Q
a. Q1 +$15mm ($0.74/lb)
b. Q2 -$8mm ($0.49/lb)
c. Q3 -$12mm (0.49/lb)
d. Q4 30% locked at $0.45 could save $20mm
Annual tailwind of $25mm (+$0.20 to EPS)
5) Pension expense of $21mm in 2009 (~$0.18 EPS impact) compared to $12mm income in 2008 – will remain at these levels until market conditions improve
6) Goal to reduce media and IT by $40mm – mostly in 1H
7) $250mm over 3 yrs after spinoff
8) $222mm announced to date
9) Goal in 2009 to announce final restructuring charges during year
Interest details will become available when amendment is solidified.
LT tax rate 22%-25% (bottom of range in 2009)
2009 1H operating profit depressed below 2009
CapEx: $300-$350mm over 3 yrs
2009: $100-$130mm in 2009
WC: needs now ~$50-$75mm reduce Inventory to $1.15B by early 2010
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At down -17.7% for 2009 to date, and down -52% from the 2007 peak, the question for the US market from here is will it enter a Depression? Provided that our government figures out that the best way to ensure that deflation decelerates is to break the buck (de-value the Dollar), I do not think we are going to enter anything that resembles an unemployment rate of 15-23%, and the mother-load of all deflations from today’s prices (i.e. The Great Depression).
Bernanke seems to be suggesting this morning that the US market will recover within the span of a year. Explicitly, this morning he is saying "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
While Wall Street/Washington’s latest meme of prefacing everything it says with “in my view” is annoying (it implies that everyone else on the team may not agree – that’s not a team anyone can trust), Bernanke is finally “making a call” here, with an explicit duration. If Wall Street wanted specificity – that’s as close to what we have received from Bernanke to-date when it comes to timing the turn. He is also mapping out the timing of spending both the TALF (term auction lending facility) and the CAP (Capital Assistance Program). On the margin, this is progress when it comes to transparency/timing.
Economic bottoms are processes, not points. Our US Strategist, Howard Penney, and I believe that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, so the timing of Bernanke’s 2009 bottoming process is in line with ours.
Importantly, we “make calls” based on delta’s here at Research Edge. So, to be clear, our call is that year over year deflation in US home pricing gets less toxic. Put another way, going from toxic to bad is good – and we think this starts to play out on the asset side of the US Consumer’s portfolio come Q2. The prices associated with both American homes and portfolios will go down at a lesser rate. This will build confidence from its current record low base.
Ensuring that deflation slows is best accomplished by breaking the US Dollar’s current upward momentum. Ben Bernanke, now is the time to do what you can to break the buck.
Keith R. McCullough
CEO & Chief Investment Officer
“Be not the slave of your own past.”
-Ralph Waldo Emerson
My favorite movie of this past year was The Wrestler. I think, mostly, because I was empathizing with Randy “The Ram” Robinson’s (Mickey Rourke) daily struggle. No, I don’t mean the dope and the vices – I mean the wrestling. Getting up every morning to write this note has its challenges, particularly on days after I get pile driven. At the end of the day, I have to find a way to shake it off, slap my elbows, and get myself back in the ring.
I used to be an athlete. Now I’m a risk manager. It’s taken me a decade to come to appreciate that the physical preparation and mental discipline required to win in both of these arenas is very similar. No matter what happens to me out there in the market place on the day prior, come 4AM the next day, there I am.
I am accountable to my teammates, clients, and myself for the call that I have been making that the SP500 wouldn’t make a lower low versus the one locked in on November 20th, 2008. Yesterday, the SP500 got rammed into the mat for a -3.5% down day, closing at 743, which is -1.1% versus where I thought it could go. Instead of making excuses or pointing fingers, the best thing to do here is wipe the blood off my lip, get up off the mat, and get ready for today.
My wife, Laura, didn’t put me in a sleeper hold – so I didn’t sleep much last night – I don’t know how anyone who is serving as a fiduciary in this financial system does on a night after a big loss. In our Asset Allocation Portfolio, I had my team down -0.73% on the day yesterday. For me, having not lost money all of last year, this was a very bad day. For the 2009 to-date, this puts my real time performance at down -3.16%. That’s a net number, and I am not proud of it.
For the year to-date, the SP500 is now down -17.7%, and has dropped over -52% off the top ropes of that 2007 WrestleMania peak. If I woke up every morning trying to outperform on a relative basis, some in this business would consider having positive absolute performance over this 16 month span acceptable. And that’s fine – but my goal is to put up a positive absolute number in our Asset Allocation Portfolio in 2009. I’ll let everyone else worry about what their goals are. I have 10 full months left – and this cage match with the bear that I am currently in is far from over.
I am now long America via the SPYs and QQQQs (SP500 and Nasdaq). For transparency purposes, I am losing -3.98% on that SPY position, and I am up +0.11% in the QQQQs. I hadn’t bought the Nasdaq until yesterday, so my timing was better than bad there.
In terms of Asset Allocation, I moved from 58% Cash yesterday down to 56%. When I am wrong on a US market call, I don’t buy everything all the way down – I wait. That’s not my religion, that’s my process. I buy things in 3s, giving myself some breathing room so that I can buy things when the bear thinks I am dead. Pretending you are down for the count has its competitive advantages, ask Randy the Ram.
This takes my Asset Allocation in US Equities to 29%. The max exposure I will take to an asset class is 33%, so I still have some pop left to powder this bear with. Since I have been the bear, I know a thing or two about beating one on price.
Everything in markets has a price. At its 743 close, I see less than 1% downside in the SP500 in the immediate term (my downside target is 737), and +7.5% upside to the 799 line. In terms of the Nasdaq, anything below 1381 (6 points from yesterday’s close) moves us into the land of a 3 standard deviation move on the short term duration model that I use. Unless I have fundamental research telling me to do otherwise, I buy or cover on 3 standard deviation moves, always.
I sold our long position in China via the Morgan Stanley closed end China fund (CAF) yesterday. This dropkicks my exposure to International Equities to just under 6%, and I have it all in Brazil (EWZ). When I sold it, China was +26.6% for 2009 to-date. Last night, stocks in Shanghai gave back some of their Ric Flair (WWF Wrestler), closing down -4.6%. Now China is +20.9% for the year to-date, and my process doesn’t have any rules that say you can’t buy something back that you sell.
As I watched Asia trade last night, I was reminded that I do not live there. This has an implication, of course… and that’s quite simply that when your trainer/boss throws in the white towel and you have to stop trading, the last thing a portfolio manager in this business is allowed to do is be levered up long where he doesn’t sleep. People who call themselves “risk managers” in this business call this “taking down your book” – I call it selling what you can, rather than what you should.
Understanding how this dynamic works, I try to take advantage of it. After selling China, I am now effectively naked short Asia via short positions in Hong Kong, India, South Korea. Slum Dog Millionaire didn’t win the Indian stock market any awards last night – the BSE Sensex Index hit a fresh 3 month low, and now the country’s credit rating is being put on “watch.” I have been “watching” this country very closely on the short side for the better part of the last year – guess what Mr. Credit Watcher, it’s bad!
The South Korean won hit new lows last night and continues to be the worst performing wrestler in the Asia Federation of anything called a currency. At down -17% for the year to-date, South Korea’s overly ambitious leader is on the tape this morning calling his new reactive strategy “Emergency Economic Crisis Rescue Mode.” That sounds like one of them “claw moves” from the WWF’s Baron Von Raschke – those too, are bad!
Von Raschke was an American wrestler from Omaha, Nebraska, but he was billed from the “Republic of Germany”…. This morning, no matter where you are from, or what kind of style of wrestler/investor you say you are, my advice is this: be transparent, and be accountable. Win or lose, you are, above all else, a fiduciary of other people’s money.
Best of luck out there today,
• Banks are probably on board – This could possibly be the most important near term takeaway. We doubt that BYD would’ve pursued this offer without clearing it through the banks. The bear case on BYD was the potential for a covenant bust in Q2 or Q3. We think that is highly unlikely and are encouraged with the implied confidence from the banks. Look for Thursday’s earnings announcement on BYD’s liquidity picture which we’ve been arguing is better than rumored.
• Strategic long term synergies – We already could foresee the benefits to BYD of STN entering bankruptcy, just in terms of the competitive landscape. BYD “owning” the LV locals market brings exponentially greater benefits in terms of synergies, marketing efficiencies, and a less promotional environment. The long-term outlook of this market is favorable. Due to low taxes and cost of living, and a favorable climate, population growth should continue, especially among retirees (nice demographic for gaming).
• The price could be right – We calculate the multiple to be about 4.6x 2009 EBITDA, if the Thunder Valley management contract is included, which is unclear, or 6.8X if it is excluded. However, STN OpCo owns $50-75 million in net land value and has $250 million in excess cash. With these additional considerations, the multiples look low. The senior credit debt holders will probably need more than the current offer, even though it is a better offer than that offered by STN management and Colony Capital.
• Accretion – BYD is borrowing incrementally at only 1.625% above LIBOR. This is a huge asset ($2bn of liquidity not due until 2013) that BYD would deploy. Even without the Thunder Valley contract, this deal would be very accretive on a free cash flow and earnings basis.
• The timing is right despite what the sell side is going to tell you – A lot of the sell side will focus on the difficult conditions in the Las Vegas locals market and bad timing. I argue the opposite. Now is the time to pursue a transaction like this. The largest player in the market will be entering bankruptcy. As we noted in our 2/5/09 note “THE LAS VEGAS LOCAL MACRO MODEL”, 2010 could be a growth year due to population and employment growth, and the efficient and early decline of the housing market.
• Regulatory issues should not be a concern – Even though BYD would dominate the locals market with this acquisition, antitrust precedent is not to separate the Strip from the locals market to determine concentration.
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