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I'm not a doctor, nor do I play one on TV, but this swine flu has got me worried.  Remember the Avian Flu?  At the very least, the disease runs a fairly isolated course and the hysteria has already peaked.  At worst, the world has a big problem.  The degree and duration of the uncertainty will ultimately decide what impact this outbreak could have on leisure stocks; it is too early to tell whether a negative trade and/or trend will result.


Even under the optimistic scenario, leisure stocks are likely going lower for more than just today.  The Health Commissioner for the EU urged Europeans to forgo travel to the US and Mexico.  Travel will take a big hit.  For traders, it's difficult to make the case that anything leisure related should be owned at this point, especially given the huge two month run we've had in the space.


The following sectors within Leisure could be affected:

  • Cruise lines: The thought of being stuck on a ship in close proximity with thousands of other people is likely to strike fear into would-be cruisers. Considering the history of contagious pathogens such as the Norwalk Virus, E. Coli, and Entamoeba Histolytica infiltrating cruise ships, this sector could be the hardest hit.


  • Major market gaming: Las Vegas/Macau = lots of people who don't have to be there. One breakout at a hotel casino and that's all she wrote.


  • Lodging: Hotels rely on travel. We all know airplanes are flying Petri dishes. At least some travel is necessary (business, family, etc.), but much is leisure related. Even at today's depressed occupancies, there are still too many people at one location for comfort in a flu outbreak.


  • Regional gaming - Few people fly to regional gaming destinations but there is still a large, concentrated number of people in a casino at any given time.

US Market Performance: Week Ended 4/24/09


Index Performance:

Week Ended 4/24/09: DJ (0.7%), SP500 (0.4%), Nasdaq +1.3%, Russell2000 (0.1%)

April and Q209 To-Date: DJ +6.1%, SP500 +8.6%, Nasdaq +10.8%, Russell2000 +13.2%

2009 Year-To-Date: DJ (8.0%), SP500 (4.1%), Nasdaq +7.4%, Russell2000 (4.2%)


 Keith R. McCullough

Chief Executive Officer

GIL: 内衣

I think a blurb out of Taipei flew beneath many radars today.  Unless this is a misprint, Gildan plans for 45% of its sales to come from Asia within three years due to strength in China. They've made it no secret that Asia is an opportunity for them, but this is well above above what they've noted before. I don't get it... Really, I don't. Here's why...


1) First off, let's hope for GIL's sake that the Asian demand accounting for nearly half of its business is not due to the denominator - its US screenprinting business -- shrinking. 


2) Is it an accident that the company is stepping this up at a time when Broder - 30% of sales - could potentially go bankrupt? This would actually be good risk management on GIL's part. But Broder is an efficient and profitable core customer. Asia is an undesirable substitute.


3) Shifting focus on Asia at the same time that the much-touted branded mass-market strategy is proving marginal at best? Again, this makes me come back to the original thesis that the company used sourcing savings over the course of five years to cut price and drive its core business (which gave GIL undeserved cult-stock status). Once it maxed out share, it also ran out of sourcing opportunity. Now it is growing into less profitable business where competition is fierce, the balance of power shifts out of its hands, and it has to spend more for increasingly volatile returns.


4) Gildan does not have a brand. It is currently the low-cost producer of a commodity product. That's not a bad thing by any means as long as management recognizes it, and respects it for what it is. Virtually all of its sourcing operations are in Latin America - which works as it relates to product going to the US and Europe. But the only way to win in Asia will be on price, and it will take state-of-the-art local manufacturing (and allies on the ground to set up shop) to establish such capacity. Does GIL buy someone? Maybe. Either way, I smell a capital outlay to compete for business that the Chinese have owned for the better part of 20 years.

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Squeezy Is Stress Testing The Shorts: SP500 Levels, Refreshed...



Let me guess, no matter what this Fed white paper says, Meredith and some of those super duper smart "hedgies" who are feeding her are giving a read through that's negative. I sincerely hope they aren't - that would be professionally embarrassing. On the margin (which is all that matters), this preliminary look-see is positive.


Did people legitimately think that Heli-Ben and Timmy were going to create a test that makes more people fail than pass? Wow, I must be living in the land of common sense nod. The only stress test that I see people failing out there today is the one that's front center and marked-to-market on my screen - the short seller's appetite to hold his/her positions is much less formidable than Squeezy's!


Market prices don't lie; people do. I'm sticking with the buying range that I established earlier this week (shaded green waters in this chart). Next line of SP500 resistance is at a higher high than the prior closing one. I have the dotted red line in this chart up at 875.


From consumer confidence, to earnings reports and housing data, this week's fundamentals support today's price action.


We are not "overbought" yet...


Keith R. McCullough
Chief Executive Officer


Squeezy Is Stress Testing The Shorts: SP500 Levels, Refreshed...  - sharky

HOUSING – Which way is up?

As I see it, the news on housing can only get worse from here due to two factors.  First, consumers stop buying new homes and second, the supply of foreclosed homes is so massive that there is an acceleration in the decline of home prices.


We learned today that the sales of new homes are showing indications that the housing decline may be near a bottom.  As reported by the Commerce Department new home sales fell 0.6% last month to a seasonally adjusted annual rate of 356,000. Importantly, February was revised up from the originally reported 337,000 to 358,000.  So the last three months were revised higher and the new data point was better than expectations.  Great!


More importantly, at the current sales pace, it would take 10.7 months to work through existing inventory versus 11.2 last month and 13 in January.


As said yesterday, one nagging concern is the end of the foreclosure moratorium and the implications for the supply of unsold home within the financial system.  Not to be trite, but what you can see is probably not there.  Yes, foreclosures are on the rise, but the supply of foreclosed homes is probably not as bad as the depressionistas want you to believe.  If they can't see it how do they know what the number is?


The most important factor in all of this is the consumer and is he/she willing and able to buy a home today?  The data suggest yes!


On the issue of affordability we looked at median home prices, mortgage rates, monthly mortgage payment, and median family income.  Given the dramatic decline in both home prices and mortgage rates, affordability is literally at a ~40 year high (most affordable) on this basis. 


Obviously, there other variables to incorporate, but the NAR tracks this data back to 1960 using the same methodology, and February, the most recent data point, showed home prices on this basis (price, mortgage rates, and payments as a percentage of median income) to be literally the most affordable since 1971. The reading in February was 173.8, which was based on a median priced home of $164,600, mortgage rate of 5.12%, monthly payment of $717, median family income of $59.7K, and payment as a percent of income of 14.4%. Critically, as the chart below shows, the affordability of homes for first time buyers also reflects this price trend, with more young people positioned to buy as liquidity returns to the system.


Market prices don't lie, people do. Mr. Market is telling us that we are right and the US Housing bottom will be in the rear view soon.


Howard Penney
Managing Director


HOUSING – Which way is up? - housing1

Long EWG? Germany's Lifeblood "Das Auto"

We recently received a follow-up question from a client who was "surprised by the long Germany call"  when, to his point, so many German jobs are tied to the ailing automotive industry. The client brings up a good point which was not included in our post on 4/21 "EWG: Why We Bought Germany Today." Below you'll find our response to the question, which argues that although the German automotive industry has taken a huge blow in this global recession, the strength of German unions and the subsidy measures granted by the government to prop up the industry have helped to maintain jobs and offset double-digit sales declines as the industry rides off decreased global demand.  


As a point of reference in case you didn't read the original post, part of our reasoning in taking a long Germany position is to hedge against our short exposure to Switzerland via the etf EWL.

---------Thanks for your response. I'm not an automotive analyst, but I have spent a fair amount of time looking at Germany. As you're well aware the automotive industry lies close to the German soul and therefore everything is being done to save it; concurrently GM's Adam Opel in Germany is looking for a buyer. The government has yet to step in, hoping to find a private buyer, yet you can bet that both acting Chancellor Merkel and her incumbent Frank-Walter Steinmeier will be making this a central issue to resolve as election day nears in September.


Firstly, it's important to keep in mind the historical and cultural framework of the German workforce to get at an understanding of the auto industry. German schooling (much like other European countries, but arguably more so)  is very rigid from an early age, tracking children to particular schools (university track, technical, vocational). This leads to the cultural mentality that each individual is suited for one particular industry/profession, which leads both employees and employers to value job security above all else. German business/organizations are very hierarchical and the lack of entrepreneurship compared to the US is strong.


In short, German automotive jobs are relatively resilient (see chart below) for German trade and labor unions play a large part to insure job security.  As an example, the government recently extended subsidies so that companies can keep workers on payrolls for as long as 18 months-it used to be 6-even if layoffs might be easily justified. For cyclical industries like autos, this could mean the difference in riding out the global recession that has destroyed demand.   The government has also created a short work program from more than 670,000 workers and in March the number of applicants was up 55 times.


To use Daimler as an example of labor's pull...although the company threatened a first round of job cuts at its annual meeting last week, management can't carry it out before the end of 2011. In short, it's hard to fire people. 


While EWG, the ETF we purchased, has a sector exposure to industrials of only about 15%, your point about the overall exposure of the German economy to the Automotive Industry is well taken.  (My sources show 1 in 8 Germans are tied to the auto industry).


Yet, Germany is working to help incentivize the auto industry in particular (so much so other industries are crying foul). Germany has issued an auto rebate program (Abfrakpraemie) by which individuals can trade in their old cars (9 years+) and receive 2500 Euros towards a new car that meets certain emission standards. The program has been a huge success and has helped to drive sales.  The government said it expected 2 million purchasers to apply for subsidies, costing it 5 Bill Euros this year.  While German auto sales were down globally on the whole in the first two months/1Q of 2009, both Daimler and BMW announced that the drop in sales in March relative to the same month last year was less than the year-on-year drop measured in previous months. Further, most major German automakers reported that  sales rose considerably in China. 


Additionally, Daimler received a 2 Billion euro investment from Abu Dhabi's sovereign wealth fund in return for 9.1% of its stock.  Perhaps investment from abroad could pick up in the near term at the right price. Therefore I'm of the opinion that despite the country's leverage to Autos, it is relatively stable, despite the global recession's impact on the automobile industry.


Matthew Hedrick


Long EWG? Germany's Lifeblood "Das Auto" - auto1


Long EWG? Germany's Lifeblood "Das Auto" - auto2

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