Japanese export data for January registered at an abysmal -45.7% year-over-year. The decline in demand for Japanese products was felt hardest in the US, where the sequential decline exceeded 50% on a one, two, and three year basis. Imports declined 31.7% Y/Y for the month.

As job cuts pick up pace, Japan appears poised to submerge back into stagnation for a prolonged period as it waits helplessly for returning demand from abroad.

Although it is anticipated that Prime Minister Aso’s government will introduce new stimulus plans as the fiscal year draws to a close in March, internal data points like domestic auto sales (Toyota registered January sales at home that are the lowest since they began releasing data in 2001) and anecdotal media reports suggest that the Japanese consumers have begun to hoarding cash as they did during the “lost decade”, leaving the odds heavily stacked against any attempt to kick start internal demand.

The USA better be very careful in letting her Dollar reflate. The output of the Japanese Yen reflating in January is as ugly as it gets.

Andrew Barber

CROX: Consider the Bone

In answer to the title, a bone = a stock near a buck. I realize that many institutions can't even consider a name like this. But that does not mean that I ignore it. The institutions that will end up caring the most are the strategic buyers.
Let’s accept a hard reality about Crocs. It is a brand. Period. Is it overdistributed, overhyped, and is the core product super ugly??? Yes, yes and yes. But where this company got itself into trouble is by not appreciating the core customer/business, and trying to grow it into fashion areas. Make no mistake – this is not like Ugg (which is better than Crocs). We don’t have to watch trends with the teenybopper crowd. They never wore Crocs anyway. Will a whole host of 8 year olds be wearing them this summer? You bet. Will a good international brand manager (the new CEO comes from Reebok Int’l – one of the few businesses at Reebok that worked) leverage that on a global scale? Why not?

I’m not saying that Crocs is a growth company. In fact, let’s assume the opposite. Let’s say that either the new CEO or a strategic buyer scoops up this company, takes the top line from the $847mm peak down to a core of $400mm and runs at an 8% margin (I can defend this rate six ways til Sunday). At $1.40, it suggests that this thing is trading at less than 2x EBITDA. Each 1x turn by that math is about $45mm in Enterprise Value. Not bad off a base of $86.

Is it scary to buy a name like this whose product is in a decline, management is in question, and 4Q financials have yet to be finalized? You betcha. Could there be accounting adjustments and charges under the new CEO? Probably. But this is a tough business to commit all-out accounting fraud to the extent that it will take an established brand with net cash and put it into bankruptcy.

I remain floored that no one has bought this at an $86mm EV.

If it’s not going bust, BUY THE BONE!

EYE ON GERMANY: More Negative Data Points with a Pinch of Optimism

Today the Federal Statistics Office in Germany reported the following Q4 ‘08 data on a quarterly basis:

-Exports declined 7.3%
-GDP fell a seasonally adjusted -2.1%
-Consumer Spending dropped -0.1%

Additionally, IFO sentiment data released yesterday was marginally worse, yet in line with estimates.

IFO Sentiment data for February registered a tick downward with the Business Climate index (based on a survey of 7,000 executives) at 82.6, down from 83 in January, in line with expectations that the index wouldn’t move dramatically. The Ifo’s gauge of current conditions also fell, declining to 84.3 from 86.8, while the measure of expectations rose to 80.9 from 79.5. A separate survey, the ZEW, reported that German investor confidence rose to -5.8 in February from -31 in the previous month, the biggest jump in 15 years.

German data remains a primary focus for us, as it is the country with the largest European economy and the strongest credit (based on yield). Germany provides an important pillar for which to compare the relative health of Europe against.

The DAX has had numerous nasty closes in the last two weeks and is down -19.01% YTD. That’s worse than the YTD performance of the SP500. Despite the anticipation of Chancellor Merkel’s stimulus program, which at 1.6% of GDP is the biggest spending package in Europe, the economy cannot recover from domestic tax cuts and infrastructure investments alone. In Keynesian economic policy does anyone trust?

Germany, as an exceptionally export dependent economy, is equally levered to the health of the global economy. As the global recession continues so too wane, so does the world’s appetite for German goods. GDP slumped 2.1% in Q4 ’08 on a quarterly basis (the biggest drop in 22 years) and the economy is estimated to contract 2.5% this year according to the IMF.

We expect the ECB to reduce its benchmark at least 50bps to 1.5% at its next policy meeting on March 5, which will in part benefit countries like Germany by weakening the Euro to make exports more attractive. Despite the bearish data points from Q4, the jump in investor confidence is bullish on the margin, and one of the many factors we’ll have our Eye on.

Matthew Hedrick

Early Look

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Dealing With Hope

“A leader is a dealer in hope”
~ Napoleon Bonaparte
From The Wrestlers to the Raccoons out there in this marketplace, President Obama has his hands full. There is no doubt that this man inspires hope – and he did his best in changing his tone to a more hopeful one in last night’s address – but hope, as we say here at Research Edge, is not an investment process.
Napoleon proved that inspiring men to fight for you is the best way to win. He also proved that when hope morphs into doubt, your fate falls by that very same sword. Make no mistake folks, the breaking down through the November 20th support levels that we saw on Monday matters. The Crisis of Credibility that this country faces will not be resolved by a bear market rally, or a good speech.
Yesterday, I had twice as good a day as I had a bad one on Monday. That’s how it goes when you sign up to dance with a bear that you’ve beaten before. Once you are locked into that cage match, and the entire market calls you dead – the only thing you can do is trust your process, bury your head into that bear’s chest, and know in your gut that that’s the one moment that you’ve proactively prepared for.
The SP500 closed up a strong +4% yesterday at 773, pairing its YTD losses for 2009 back to -14.4%. Volatility (measured by the VIX index) took an elbow smash to the forehead at down -14% on the day, while volume on the NYSE ripped the hair off the short seller’s head, moving +10% versus Monday. The squeezing of temples in the Financials (XLF) was pronounced – the XLF ETF closed up +12% on the day. Citigroup (C), which we said (on our Monday morning client call) could put on a +35% move from Friday’s close, tagged the bears in the butt for a +22% gain, taking its cumulative move from last week’s “nationalization” low to +33%. I don’t want to touch Citigroup here.
The market’s breadth expanded alongside accelerating volume into the close. The Advance/Decline line on the NYSE was 81% for advancers versus 17% decliners by the time the bell rang. One, Two, Three… the daily dance with the bear was won.
Now what Mr. Wrestler? Well, as one of the finest of Wall Street memes goes – “that’s a great question.” And I’ve already locked my answer on the tape – selling into the close was the prudent move to make. When you look at the last 150 years of trading in this country, not selling anything on +3-6% up days during bear markets would render me part of the thundering herd. I don’t do herds.
Make no mistake, fully loaded with whatever hope our new President wants to issue, the intermediate “Trend” in this market remains bearish. Unless we can close above 824 in the SP500, that will not change. Can you position yourself in the cage match to make bullish immediate term “Trade” moves? You tell me … some people say they “don’t do trading”… others said they didn’t “do macro” either. I do both.
Until the next bull market returns, this is a market that needs to either be traded or avoided. If you “have to be invested”, I suggest you trade your exposures even more aggressively. Otherwise, you may as well dress up like a WWF Wrestler and keep pretending that “investing for the long run” works right here and now.
In our Asset Allocation Portfolio, by the time yesterday’s bell rang, I’d sold down the exposure that I grossed up in US Equities from 29% to 18%. I held onto that long position I bought in the QQQQ (Nasdaq) at 3:27PM EST on Monday, and while I don’t know if that print looks lucky or brave, it really worries me.
Whether you are pretending to be a wrestler or risk manager, I think you should always be worried. You can and will be wrong – so the best process is to perpetually question the validity of why you think you can be right. I never used to worry. Between the years 2000 and 2004, I’d built up such a consistently solid performance run that I got cocksure of myself, like a lot of men and women of the hedge fund gridiron do… then I got body slammed for a quarter and, trust me, it had an impact.
I’ve trained myself to worry about being wrong, because that’s what you should do when serving as a fiduciary for other people’s money. They worry about their hard earned money every day, and given the level of socialization rhetoric brewing in this country right now, so should you.
President Obama,
Thank you for your message last night. But today is another day in the ring for we who are wrestling the bear. No matter where you think this market is going this morning, there it is. My advice for you, Mr. President, is the same as it has been – break the buck. Until you figure this out, you will not stop deflation. Irving Fisher was of this view, and John Maynard Keynes was not. Last night you said, “I, get it…”… but do you really? Fisher vs. Keynes – it’s going to be a cage match, and all I can do right now is hope that you “get” that message.
I remain short gold and short Asia. In the USA, my new downside support level in the SP500 is 732, and immediate term upside target is 793. At down -5% vs. +3%, the risk in this market once again stands taller than the reward. Trade and tread carefully…
Best of luck out there today,


Dealing With Hope - etfs022509


Steve Wynn is a capitalist. He also built his business from nothing, the epitome of the small business owner, and treats his employees well, in good times and bad (no layoffs). He’s also an honest capitalist. He’s also an honest capitalist with some valuable, real world, and thoughtful insight more relevant now than ever before. This man understands economics and the dangerous political tide we are all facing. All were clearly evident in yesterday’s conference call.

Here is Mr. Wynn referring to the convention business his company lost after President Obama’s negative comments on companies’ outings to Las Vegas:

“If that’s that class warfare or as I mentioned earlier that capitalism needs to be punished, if that is part of the mentality of this administration we’re in for a worse time than we expected….I created 4,000 or 5,000 new jobs here, does that make us a bad guy? How many new jobs did Uncle Sam create? Zero.”

Nor was he one-sided in his criticisms:

“…the political leadership from Washington was completely lacking in the first $350 or $400 billion they spent last year. So, that money went down the drain and didn’t produce the kind of result it was suppose to. Theoretically there was suppose to be some smart people on the job paying attention to this like the Secretary of Treasury and people like that, the former chairman of Goldman Sachs….this last stimulus program that has come out of Washington is more of a welfare program than a real jobs creation program in spite of what the President says.”

On the honesty and transparency front, Mr. Wynn spoke openly about the difficult environment and didn’t try to sugar coat it in any way. He talked down an overly excited sell side analyst who was trying to justify his buy rating. Wynn provided an education on why the low hold % was not just bad luck. Rather, it was also due to the lower velocity of actual gambling when chips are taken out (see our post “WYNN WON’T BE WINNING AS MUCH” for a more detailed discussion). The low hold percentage will continue, Mr. Wynn said. He didn’t have to volunteer this analysis but he did.

This corporate transparency should be applauded.


Some on the sell side will be trying to normalize the low Q4 table hold percentage generated by WYNN in Las Vegas. This isn’t appropriate as Steve Wynn transparently discussed last night.

As we wrote about in our 9/18/08 post, “HOLD % AS A HEDGE TO DROP IS BREAKING DOWN”, when players spend less time gambling, the hold % becomes distorted. Unlike slot machines, table games are not computerized. The actual amount wagered cannot be measured. Only the amount of chips exchanged for cash can be determined. If gambler walks around for an hour with $100 worth of chips in his pocket, the drop will be the same as the one that gambles. Obviously, the casino win will differ.

WYNN/Encore Las Vegas produced a 15% hold versus a normal 21-24%, resulting in a $25-30 million hit to EBITDA on properties that generated only $33 million in EBITDA. That’s the superficial analysis. Now the real analysis: hold percentage is likely to remain depressed in this economic state. Assuming that half of the hold delta was actual “bad luck”, the LV properties significantly missed estimates.

It’s not all bad for WYNN. Wynn Macau actually put up a decent quarter that was pretty much in-line with consensus. Wynn’s commentary about Macau was surprisingly positive, unlike the very somber tone of the Las Vegas discussion.

The stock deserves to go down today but it has already been hammered so much that it may find a bottom pretty quickly. We’ve consistently predicted a disastrous WYNN Q4 since our 12/10/08 post on Macau so it should not have been a huge surprise.