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Another Potential Tailwind for Footwear Supply Chain?

Easing footwear import taxes is probably not at the top of the Obama Administration's agenda, but a bill to do so is gaining support. Payless would be the big winner by a long shot.


The re-introduction of the Affordable Footwear Act to the Senate is the latest potential tailwind for the footwear supply chain. Originally designed to protect the domestic footwear manufacturing sector in the 1930s, the tax is now obsolete with imports accounting for 99% of all shoes sold in the U.S. In 2008, the government collected over $1.7B in duties on imported shoes. This bill would eliminate nearly $800mm in duties by removing the tariffs on all children's footwear as well as lower cost shoes with fabric uppers. While an attempt to pass the bill in 2007 was unsuccessful, it has stronger bipartisan support in Congress this time around. Since this tariff no longer protects domestic jobs and is responsible for up to 40% of the cost of low-end footwear, we can't ignore the potential for some form of the bill to get passed.


So who benefits from a footwear retail perspective if the bill is passed? You want to look for low margin companies with vertical sourcing, branding and retailing bases. Yes, that pretty much makes the top three beneficiaries Payless, Payless and Payless. Collective Brands (Payless) not only has the greatest exposure to children's footwear (see chart), but it is also has the lowest average price point of the group. Therefore, a greater percentage of its women's and men's footwear sales will also be subject to lower tariffs.


Assuming that that figure is approximately one-third, the company could potentially reduce the cost of half its sales by roughly 30% on average. Now how much of that savings gets passed along to the consumer versus printed in profit is anyone's guess - but in the past such price changes ended up being shared fairly evenly throughout the supply chain to the consumer. While it is far from a done deal, the timing could provide further support for a reacceleration of FCF in late 2H F09/ 1H F10.


Casey Flavin

Another Potential Tailwind for Footwear Supply Chain? - AffordableFA1
Another Potential Tailwind for Footwear Supply Chain? - AffordableFA2
Another Potential Tailwind for Footwear Supply Chain? - DiscFootwearCat2


Chart Of The Week: Shaking Hands With The Client

On this morning's 830AM Macro Client call, I was asked what my #1 takeaway was from this past week's G-20 meetings. Rather than hash up some of my prose, there is nothing more powerful that can summarize my thoughts than the picture Andrew Barber and I put together below.


China has the cash. China is America's Creditor. China remains The Client. The US Dollar is going to be the intermediate term loser born out of this economic crisis. That's the marked-to-market price America has to pay for the malfeasance of those who are, unfortunately, part of the American Financial System team.


In a perverse way, and in the immediate term, Breaking The Buck remains bullish for anything that Main Street Americans would like to see REFLATE. From their 401ks to their homes, that's really all that matters.


Let's start hoping that this country's handshake starts to matter again, and soon...


Keith R. McCullough
Chief Executive Officer

Chart Of The Week: Shaking Hands With The Client - chine

Learning What Not To Do

"I think that only daring speculation can lead us further and not accumulation of facts."
-Albert Einstein
That Einstein quote can really make you think. It will resonate with most people who like to compete in this world - in order to really win, you have to really let your competition fail. The last 18 months of daring speculation has provided some of the greatest investment price points that this world will ever see.
Having worked with plenty a Portfolio Manager in the hedge fund industry and watching them when they didn't think I was looking, I was blessed with the good graces of observation. Each investor has something about them that's unique. For me, it was always about finding that something that could be additive to my investment process. These lessons included learning What Not To Do.
Probably the most critical of those lessons was not asking everyone in the room what I should do next. There's a question that some of the winners over at Goldman's J. Aron & Company used to pose: "can you make money in a dark room?"... I am meeting with a former leader of that old Wall Street guard for lunch today, and I can't wait. 'Do what you do' is an investment process that he'll most certainly get.
At +24.6% since the SP500's March 9th closing low, and AFTER the biggest 4-week move in the US stock market since 1933, you may or may not be shocked that the #1 question in my inbox this weekend was 'why don't you buy more'?
You see, it confuses some people that I have sold down my position in US Equities to 7% currently from the 27% I was carrying in early March (my max exposure to an asset class, other than cash, is 33%). Hyman Minsky used to call this problem that creeps into the investor crowd "the sin of extrapolation" - people have a natural tendency to think that the immediate term future performance of markets will be like the recent past.
Some people call it mean reversion. Some people call it being "contrarian". Some people call it being plain cheap. Buying low and selling high is not a new concept. Having the ability to be fully invested AFTER markets move to where you proactively predicted them to go is an exercise for those far braver than me.
While I have a 7% position in our Asset Allocation Model to US Equities, I have a 21% allocation to Commodities. But most people don't want to talk to me about commodities - why? Because my buying gold for instance late last week (when it dropped below $900/oz) isn't where that day's return was being generated - there is no momentum there - just value... or is there a store of value in gold?
I wrote a note on February 22nd titled "The Safety Trade Peaking", and with gold prices at $995/oz, I shorted the gold etf (GLD) and had a healthy amount of inbound emails telling me that I didn't understand. Having owned gold since 2005, I thought I did - so I locked myself in my room (kept the lights on) and shorted it anyway. Now I'm sitting here buying it -10% lower and no one cares? Thank God for "daring speculation"...
So where am I going with this? Away from +25% higher than where we were here in the US stock market 4-weeks ago, or say +40% higher from where oil prices were 7-weeks ago (we're long oil), we are right where we have always been - sitting here staring at a live quote... today's quote... and no matter where you want the storytelling in your head to go this morning, there those prices are - so let's deal with them.
On an immediate term basis (today), the SP500 has +1% reward (849) and -2% risk (824). There is no doubt that the US futures are indicated up again. There is no doubt that as long as the SP500 can hold and close above 824, that US Equities are breaking out now on both of my durations (TREND and TRADE).
Have the fundamentals here in the USA improved over the course of the last 3-weeks? Rather than ask the latest Depressionista who is trying to sell you his book, ask Dr. Copper or Mr. Steep (as in the US yield curve). Real-time prices don't lie; people do.
Copper just charged above the $2/lb line this morning. The spread between 10 and 2-year US Treasury yields has expanded to +195 basis points wide. The TED Spread (3mth Treasuries - 3mth LIBOR) continues to narrow and is now only 95 basis points wide versus the freakout in measurable counterparty risk that we saw in October/November of almost 500 basis points.
Chinese stocks are +33% for the YTD, and Russian stocks are +23% YTD after moving up another +4.3% when I woke up this morning. The US Dollar is down again, taking its devaluation to down -6% since that March 9th low in the US stock market. Dollar DOWN = Stocks UP. All inclusive of THE most dominant macro factor at work in the US (Dollar vs. Equities inverse correlation), none of this is new this morning - it's just more of the same...
As those who missed all of this dare to speculate at or above 849 in the SP500, make some more sales. As volume dries up at those prices, let them fall (like they did Friday morning), and buy things back. There are no rules against managing risk out there in this market. While we have learned a lot of the What Not To Do's in the last 18 months of trading, what has become crystal clear is that we should keeping doing what it is that we do - managing risk.
Best of luck out there this week,


TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLB - SPDR Materials -We bought Materials down 2% on the open Friday (4/03). It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis.  Domestically, materials equities should also benefit as the stimulus plan begins to move into action.

RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle via a quicker decline in asset prices. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.  

USO - Oil Fund-We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.  

EWC - iShares Canada-We bought Canada on Friday (3/20) into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.   

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold. 

GLD - SPDR Gold-We bought more gold yesterday (4/02). We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.3523. The USD is up versus the Yen at 101.3530 and down versus the Pound at $1.4918 as of 6am today.

EWL - iShares Switzerland - We shorted Switzerland for a TRADE on an up move Wednesday (3/25) and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials. Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".
DIA -Diamonds Trust-We shorted the DJIA on Friday (3/13) and Tuesday (3/24).

EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD.  Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

XLP - SPDR Consumer Staples- Consumer Staples was down Friday (4/03) on an up tape. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.

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March Baccarat revenue fell less than 9% versus last year.  Once again the decline was driven by the Rolling Chip (RC) segment where revenues dropped 12%.  The higher margin Mass Market (MM) segment actually increased 1%.  Good luck prevented a bigger decline in RC revenues.  However, even after normalizing hold % between the two periods, total March revenues in Macau would still have only dropped 13%, an improvement from the 17-19% drop in January and February.


The Mass Market performance was encouraging.  Despite the much talked about visa restrictions, MM revenue grew versus last year.  RC faces difficult comparisons through August as the segment was flooded with junket credit last year.


THE MARCH MACAU DETAIL - macau march mm rev


In terms of market share, both LVS and MGM gained a decent amount of market share as can be seen below.  However, both were attributable to good luck on the RC tables.  Volume, on the other hand, remained consistent with the prior months.  Crown and Wynn Macau did gain a little RC volume share from February, mainly at the expense of SJM.  In the MM segment, Wynn Macau and MGM both experienced a slight sequential increase in revenue share, mostly coming from LVS and Galaxy.


THE MARCH MACAU DETAIL - macau march baccarat


THE MARCH MACAU DETAIL - macau march rc turnover


THE MARCH MACAU DETAIL - macau march mm


We continue to be positive on the Macau market and the March results support our thesis.  Despite the visa restrictions, MM continues to be resilient.  If they haven't already, visa restrictions may be eased later this year when the new Chief Executive takes over.  The RC segment faces difficult comparisons only through August when we expect revenues to flatten.  With growth stemming from the higher margin MM and potential junket commission caps in place, market EBITDA growth could be positive later in the year.



Trivia question:  What regional gaming stock has not had a monster run?  ASCA, ISLE, PNK, PENN, BYD?  All of these are up huge, +81% on average since the March 9th low while Great Canadian is up only 23%.  Hey, Great Canadian Gaming is a regional too.  Where's the love?  Sure they're Canadian.  Some of my best friends are Canadian.  Don't hold that against them.





GC is a valuation story with catalysts.  It's not without hair, but the overhangs appear to be behind the company with the exception of the economy.  Historically, GC has traded at a higher multiple than its regional counterparts south of the border and rightfully so.  GC has a better business model as Capex is generally reimbursed by the Canadian provinces.  Right now, GC trades at 4x 2010 EBITDA versus the US regional operators at about 6x.  That disparity shouldn't exist.




So is this a value trap?  I don't think so.  There are some real catalysts:


  • The Winter Olympics will be held in Vancouver in February, 2010. GC generates 80% of its EBITDA in Vancouver.


  • In advance of the Olympics, The Canada Rail Line, opening later in 2009, will include a stop right in front of River Rock, GC's largest property. River Rock is only 8 miles from the airport on the Canada Line and will be the only gaming facility with a stop. The incremental traffic flow from the Olympics should be huge, albeit temporary. However, the rail stop is permanent.


  • Cash flows should stabilize as comparisons ease from lapping the smoking ban in April of 2008, and the opening of two competing properties, Starlight and Burnaby (opened 12/07 and 12/08, respectively). There won't be any new supply for years.


  • GC's largest competitor in Vancouver is Gateway Casinos which is a high probability bankruptcy candidate. This can only help GC's competitive positioning.



The consumer economy is difficult and GC is facing more competition.  However, the consensus numbers actually look reasonable.  If GC can hit those numbers the stock can only go higher given the low valuation.  Here are some of the negatives:


  • - Small cap: Equity cap only $240MM
  • - Canadian stock
  • - Investors don't trust Ross McLeod - the Chairman & CEO and also the largest shareholder (25% of the float) - although he does have great governmental relations
  • - Company has a history of low ROI investments since the money is "free". However the new COO & CFO seem to be more disciplined
  • - Stock is illiquid



We may be early on this one.  It wouldn't be the first time.  However, considering the low relative and absolute valuation, and the recent surge in the US regional gaming stocks, the timing might be right as we get closer to the aforementioned catalysts.

US Market Performance: Week Ended 4/3/09...


Index Performance:

Week Ended 4/3/09: DJ +3.1%, SP500 +3.3%, Nasdaq +5.0%, Russell2000 +6.3%

April 09' to-date: DJ +5.4%, SP500 +5.6%, Nasdaq +6.1%, Russell2000 +7.9%

2009 YTD: DJ (8.7%), SP500 (6.7%), Nasdaq +2.8%, Russell2000 (8.7%)

Keith R. McCullough