Nasty Charts: Japan Hitting The Rocks!

February Customs office trade data arrived overnight, confirming what everyone watching already knew: Japanese exports, while marginally higher than in January, have declined YTD to the lowest absolute levels in a decade and the lowest year-over-year levels in more than 30 years.

Prime Minister Aso is hard at work on a third stimulus program as carmakers and electronics producers step up the pace of layoffs, but the truth is that there is little that the government can do now to fix the problems that Japan faces. As an export dependent economy which sells big ticket consumer products to wealthy European and North American markets, the Japanese are hostage to declining demand from their clients that can only be offset by a weakened Yen.

We have been short the Japanese equity market –and wrong, for the past week because we anticipated that the BOJ’s attempts to weaken the Yen through a treasury repurchase program would not stem the tide of Dollar-devaluation driven by the Fed’s own massive repurchase. Japanese public debt currently stands at 170% of GDP, so a 1.8 trillion Yen per month debt purchase by BOJ seems unlikely in the long term to protect yields or the currency as the government prepares additional stimulus measures that may easily add 15 to 20 trillion in debt issuance in this round alone.

We have also heavily discounted the impact of any increase in internal demand spurred by the BOJ’s bank loan program; which I see as essentially a margin-call-reset for underwater stock portfolios that cannot possibly convince Japanese consumers to stop hoarding savings to the extent that it will offset contracting external demand meaningfully.

The Yen has weakened against the dollar and we are now down by nearly -4% on our short as the Japanese equity markets are trading on a one factor basis, a factor which I was flat footed on tactically and which has cost us.

We continue to view the Japanese market negatively. After the “lost decade” another prolonged period of rising unemployment (and, critically, underemployment) will wreak further social havoc -keeping a lid on domestic consumption and leaving Japanese firms to wait for a rebound in US and EU spending.

Importantly, the competitive capacities of the ASEAN manufacturing centers (not to mention South Korea and Taiwan) seem better postured top participate in the growth of Chinese consumption. We continue to have a negative bias on the Japanese equity markets, but must trade it tactically. We remain short the Japanese etf, EWJ.

Andrew Barber

In US Housing Turning, Does Anyone Trust?

We have been very consistent with our message on housing, which has implications for the consumer. Since the beginning of the year we have said, the housing market will bottom in 2Q09. The last five data points on housing could actually prove us wrong; it may actually have happened in 1Q09!

Today, the Commerce Department reported that new home sales nationwide rebounded by 4.7% in February after hitting a record low in January (the government also revised January's sales pace for new homes to 322,000 units, up from the 309,000). The February sales pace was still down 41.1% compared with February 2008.

We also saw a small improvement in Inventories of unsold homes as they fell by 2.9% to 330,000 in February; a 12.2 month supply given the current pace of sales. Last February, there was a 9.2-month supply of unsold homes. Given the potential for revisions, these government statistics require 3-5 months of data to establish trend line sales.

This statistic alone is not an affirmation of the bottom, so let’s look at the environment for signs of a potential recovery in housing:
(1) Overall affordability measures are the best in years
(2) Mortgage rates are at generational lows
(3) Mortgage applications are up significantly
(4) Significant government incentives
(5) Homebuilders are up significantly in the past two months
(6) Lower home prices

The last piece of the housing puzzle will be price. When consumers feel that the value of home prices have stopped going down, the incentive to buy improves dramatically. We believe the inflection point on price, as measured by the Case/Shiller index, will occur in 2Q09.

Howard Penney
Managing Director

FL: Readying the War Chest?

Did anyone catch Foot Locker’s announcement that it entered into a 4-year revolving credit facility? Now why would a retailer with zero debt, $400mm in cash, and relatively predictable cash flow need this? Yes, there is a New Reality out there, and maybe the company is proactively managing for any additional ugliness to come. But this management team rarely does anything proactively. My money is on FL prepping to buy an asset on the cheap. Its acquisition history is spotty at best, but at least it’s better than its plans to grow new concepts organically (remember Footquarters?). The perfect add-on for Foot Locker? Hibbett Sporting Goods. The only problem there is that Dick’s would want it too.

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Eye On Leadership: Jake DeSantis


There is a resignation letter in the Op Ed section of the NY Times today addressed from to AIG CEO Edward Liddy. I recommend that you take a moment to read it.

I am proud to call myself a friend of Jake DeSantis.

Not only is Jake among the most intelligent and honorable people that I have ever encountered; he is also a warm, soft spoken man who exudes humility and decency. He and his wife have quietly done a tremendous amount of work to help others through the years, not the flashy photo ops that politicians and corporate leaders favor as they try to force camels through needle’s eyes; but the quiet, hands-on work in their own community and abroad that reflects a genuine commitment to the greater good. That he should find himself and his colleagues vilified in the court of public opinion so unfairly is an exceedingly cruel twist of fate.

In retaining dignity and integrity in the face of the rabid stupidity and cowardice of our elected officials and corporate leaders, who are now desperately seeking scapegoats to obscure their own guilt and are aided by a vile and corrupted popular press, Jake is an example for all of the honest men and women who work in the US financial services industries.

Andrew Barber

Andrew Barber

Weekly Apparel Trends: ‘Better Than Bad’

SportscanINFO Numbers this week looked sequentially better for the industry overall, and the sports retailers in particular (i.e. the Dick’s, Foot Lockers and Hibbetts of the world). Total industry sales are still negative, but continue to sequentially improve. In addition, sports retailers were +2.9% for the week, with flat units and 3% boost in price point. I particularly like looking at the 3-week trailing trends, and we have not seen a sustained directional change like this in about 3 months.


Our conclusions are largely the same as our thoughts in our 2/26/09 post “CRUISING TOWARDS STABILITY” with the big difference that RCL & CCL have had huge rallies… and aren’t as cheap. CCL confirmed that lower pricing have allowed bookings to find some stability, 1H09 bookings aren’t as bad as some have feared, ship financing is still available, and lower fuel costs are a huge tailwind. CCL also confirmed that there is little visibility and, given the shorter term booking, 2H09 will likely be worse than expected and higher end product is fairing much worse.

Now that everyone is on the same page and stocks have had a healthy run, we remain concerned about 2010 capacity issues and that the street is too high in their expectations. We seem to be back to the fundamentals being awful vs. worrying about the credit and the near-term. Unfortunately, CCL’s release and earnings call didn’t provide any insight to change our intermediate and longer term concerns surrounding capacity increases, demographics, and the sustainability of the decent European trends.

The following is a “youtube” of our 2/26 post reconciled with CCL’s earnings release and conference call.

“Wave season may be better than feared, Europe is holding up (surprise), and overall bookings are stabilizing.”

CCL confirmed that European demand is holding up better than NA demand for a myriad of reasons:
- Less penetration
- Europeans don’t rely on credit to purchase cruises
- More vacation time/it’s a local trip/etc

However, on a dollar basis yields will clearly be quite bad with the FX drag although not as bad as before the recent dollar move and CCL has already factored this into their guidance

“RCL and CCL are down 83% and 54%, respectively, from their 52 week highs.”

CCL has rallied 17.4% since our note and is probably trading into the mid-teens on our trough 2010 estimate

“However, there has been no deterioration since the tough Q4. Pricing is probably down 10‐15% but consumers are responding, which is serving to stabilize the market. On the margin, the wave season and pace of forward bookings are probably a bit better than what the market is expecting. Here are some observations about current trends:”

• “Near term yield, revenue, and earnings guidance still looks reasonable”

CCL beat Q109 expectations by a large margin, partially helped by business that was booked before the fall meltdown and 45% decrease in fuel prices. Clearly RCL won’t have the same fuel benefit because of its hedges. 2Q09 guidance is right in line with consensus

• “Looks like industry has restored booking volume and price equilibrium (granted at lower pricing) post last quarter. That has gotten the ball rolling again for a more normalized pace of business”

CCL confirmed the statement above

• “Wave season, seems to have not tapered off yet and bookings are going at a healthy pace (again, at lower prices with greater incentives being offered).”

CCL confirmed the statement above

• “Europe has been surprisingly robust, especially the UK, despite the large capacity additions.”

CCL confirmed the statement above

• “There will be a big mix shift towards cheaper cruise options (shorter, inner cabin booking vs. balcony, closer ports).”

CCL confirmed the statement above

• “Alaska is faring poorly because of this mix shift and due to the short booking window. People are just not booking for Q3 yet.”

Booking pace is poor with occupancies down and pricing down materially for Alaskan and exotic cruises. CCL blamed this weakness in Alaska partly on the $50 tax surcharge; we suspect this is a small part of the problem compared to the cost of the flight to get to the port of departure and overall cost of the cruise. CCL also spoke about competitors taking capacity out of Alaska and following suit. The issue is that they are simply shifting capacity to another market, and they don’t really have any healthy markets … just “less bad” ones. Not being able to take out capacity is a huge structural issue for this industry, given that even at current depressed levels ships are still FCF positive and everyone is managing the business for cash right now.

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