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The Specter of Arlen: Is Cloture on Employees Free Choice in Play?

"If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner."
- Henry Louis Mencken


"I'm a Republican and I'm going to run in the Republican primary and on the Republican ticket."
- Senator Arlen Specter, Newsweek, April 4th, 2009


In a major about face from his stance less than one month ago, Senator Arlen Specter, Republican from Pennsylvania, announced that he is switching parties earlier today.  The literal implications of this are that, assuming Al Franken from Minnesota gets confirmed, the Democrats will have 60 seats in the Senate, which is a filibuster-proof majority.


In the statement announcing his decision, Specter said the following:


"Since then, I have traveled the state, talked to Republican leaders and office-holders and my supporters and I have carefully examined public opinion. It has become clear to me that the stimulus vote caused a schism which makes our differences irreconcilable."


After voting in favor of Obama's stimulus package, one of three Republicans that did so, and then travelling his state and talking to members of his own party, it became clear to Specter that his nomination for the Republican party in Pennsylvania  2010 would be at risk.  Coincident to this, Pat Toomey, head of the anti-tax Club for Growth, stepped down from that post in mid-April with the intention of running in the 2010 primary.  In 2004, Specter barely beat Toomey in the primary by 17,000 votes out of a million cast.  Undeniably, that margin would have shrunk or gone away with Specter's support of the Obama stimulus package and polls showed Toomey ahead by double digits versus Specter, which made Specter's decision that much easier.


Specter now has to appeal to a different constituency in the Pennsylvania primary.  He can do this in both promises, as to Mencken's quote above, or in actions.  Quite frankly, if I were a Democrat in Pennsylvania I would want to see some actions from Specter in the next 18 months to prove his party allegiance before I would cast my vote for him in the primary.  Even in the most recent congress, he voted over 61% of the time with his Republican colleagues.  That number will shrink, likely below 50%.


That said, in his statement today, Specter did hedge himself in order to assert his independence when he stated:


"My change in party affiliation does not mean that I will be a party-line voter any more for the Democrats that I have been for the Republicans. Unlike Senator Jeffords' switch, which changed party control, I will not be an automatic 60th vote for cloture. For example, my position on Employees Free Choice (card check) will not change."


Given that Specter had previously voted for cloture in 2007 on Employee Free Choice, before he spoke out against it (if you will), I would consider this issue very much in play, among many issues, despite his referencing it in the quote above.


Now my Dad was a former labor leader in Canada, so I do not have a bias either for or against unionization, but it is reasonable to assume that the passage of this act will increase unionization as union representatives will no longer be selected solely by a secret ballot based NLRB election.  Under the Employee Free Choice Act, the NLRB would be required to certify a bargaining representative if the majority of employees sign cards, which obviously introduces the factor of peer pressure in determining representation as union members collect these signatures from their colleagues.  As was stated in Supreme Court decision NLRB versus Gissel Packing: "A secret ballot election is the most satisfactory - indeed the preferred - method of ascertaining whether a union has majority support." Indeed.


Unionization obviously has differing impacts on different segments of the economy, but for those businesses that are dependent on labor, the rise in labor cost could be dramatic.  According to estimates by the Economic Policy Institute, if 5 million service workers join unions they would "get an average raise of 22%", which would add up to "$34 billion in total new wages". While this is obviously a positive outcome for the service worker, assuming they're able to keep their jobs, the impact on the margins of their employers can only be negative.


Make no mistake about it, the balance of power in the United States has officially swung to the left and as a result we should analyze both risk and reward accordingly with this new geo-political input.


Daryl G. Jones
Managing Director

EYE on Confidence – Armageddon no more!

In today's, Early Look I proactively prepared for what was beginning to look like another day of "fear" in the markets.   The data we collected seemed to point to a better than average possibility that consumer confidence would come in very strong relative to "Armageddon" expectations. 


To summarize - April was a good month; the Obama's had a successful trip to Europe, the Dow Jones has moved closer to 8K, and there has been a clear sign of stabilization in the housing market in February and March, and it's the spring time!


The cutoff date for April's preliminary results was April 21st, so the fear consumers may be feeling now from the Swine flu will impact May's sentiment reading.   Clearly, if the swine flu remains an "above the fold" story it will slow the rate of change in confidence we may see in May. 


Helping to boost Keith McCullough's "big call" on jobs was the employment outlook, which improved on a  4-week moving average basis so far every week in April. According to the Conference Board, the percentage of consumers anticipating fewer jobs in the months ahead decreased to 33.6% from  41.6%, while those expecting more jobs increased to 13.9% from 7.3%.


Howard Penney
Managing Director


EYE on Confidence – Armageddon no more! - cc

UA: Get Used to Revenue Beats


For a name with so much emotion surrounding it (mostly negative), the results were here were pretty dang predictable in the context of our call. Revenue beat, the footwear launche(s) are moving according to plan, and apparel revenue is actually picking up slightly on the margin. Yes, gross margins are in tank - as we expect given the high fixed costs that need to be amortized in the face of a new product launch like running footwear - but this is more than made up for by SG&A, which is down meaningfully vs. last year. To top it all off, with sales +27% we're looking at inventories -2%, which leaves us with the biggest positive spread in these metrics we've seen out of UA in 3 years. Capex coming down by 20% this year is gravy.


What does all this mean? This is an incredibly solid brand that the consumer genuinely wants to succeed - something this space has not seen in a while. It went through a year and a half where sales slowed, margins rolled over, SG&A costs rose, inventories built, and capex headed up. Yes, this was a rapidly growing free cash flow monster that pulled a 180 and financially morphed into something ugly and confusing in 2008 for those not willing to look through all the noise. Now we've got this company coming out the other end with accelerating sales, margins and cash flow - which I don't think is a one quarter event.


I still think that the addition of $300-$400mm in footwear revenue over 3-4 years plus another $100-$200mm internationally (as it branches away from dependence on US football and into running, basketball and training) should keep UA in the upper echelon of growth in the world is US consumer companies.  Off a base of $750mm in revs? Not bad at all. And yes, this can happen even in a prolonged US/global recession.


UA: Get Used to Revenue Beats - UA SIGMA

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


To repeat what I said last month:  As we have been saying every month since early January when we made our call on housing bottoming, the S&P/Case-Shiller index is a lagging indicator and housing prices will bottom in 2Q09.  To be clear, I said that housing would bottom in terms of sequential price declines and inventory growth in Q2 of 2009.  We are getting closer by the day!

Guess what today is? Today is that day!

According to the S&P/Case-Shiller index, home prices in 20 U.S. cities fell 18.6% in February from 19% in January – the first sequential improvement since January 2007.  We are well into the 2Q09 and the housing market is less bad.


Arresting the slide in residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near.  Increased confidence in the real estate asset class will allow the assets to obtain higher prices, and that is what happening to market at the time of writing.


Howard W. Penney
Managing Director

Higher Lows: Don't Doubt The Calendar...

Every time this market sells off, it's to a higher low.


The Depressionistas continue to fight the facts - on both scores of housing (Case Shiller) and consumer confidence, the numbers are what they are this morning - better...


What's next?


The macro calendar is always tough to fight and the news cycle is too... in the next 48 hours both will change (sorry Swine Stressionistas):


1. Obama's 1st "100 Days" is tomorrow, and his 8PM prime time TV speech may not appear on Fox, but it won't be a bearish catalyst either.


2. Month end for April = Thursday. It's been another fantastic month to be long stocks here in the USA, and that is what it is...


Now that we've made higher lows, will we make higher highs and close above 869 on the SPX next? I'm definitely on the long side of that TRADE.


CKR – Uninspiring

I understand the motivation for not wanting to discount. It hurts margins and could put the company’s brand positioning at risk, particularly once the economic environment improves. Holding the line on value in the near-term, however, is going to continue to put pressure on Carl’s Jr’s sales performance relative to its competitors. As I have said before (please refer to my March 26 post titled “Is Market Share Shifting?” and April 24th “fighting Back”), I think that given the current casual dining discounts, the big market share shifts to QSR from casual dining are likely over. With casual dining restaurants offering more competitive value options, it will become increasingly more difficult for QSR players to win market share with premium-priced menu items.


I think this is made clear by Carl's Jr's declining traffic trends. On a two-year basis trends did improve, but the chain continues to lose market share.


The issues at Carl's Jr. have been magnified by today's more challenging environment, especially in California. Looking at the concept's same-store transaction growth trends, 2-year average trends have been negative for some time now, highlighting the fact that trying to sell higher-priced menu items in a difficult economy is not the only problem facing Carl's Jr.

CKR – Uninspiring  - hardeesp3