For the first time in 30 years, wholesale inflation declined on a year-over-year basis

If you read Keith's note this morning, you know that lately we've come to realize that many people who read our work assume that because our model portfolio is tactical in nature, we are short term traders who operate purely in the moment. This perception is wrong: we execute tactically inside a defined strategic framework. 

Our work on India is a great example of this process: despite the fact that the Sensex is now up over 45% YTD, we are net positive in performance for our trades in Indian equities via IFN for 2009, despite having only taken short positions. Presumably those that accuse us of being short term thinkers consider each of those shorts a unique transaction, but for us it was a a single evolving investment thesis.

Since we opened for business over a year ago, we have had a strategic conviction that equity investors were overly focused on the opportunities for individual companies and industries in India while ignoring major structural issues that stand in the way of real progress on a long term basis. It is because of these macro headwinds that every single time we have taken a position in Indian equities it has been a short.  Some may see these transactions as individual trades, but for us they are all part of a longer term portfolio process. 

Inflation data released yesterday presents an interesting inflection point for our India thesis.  With WPI plunging, one might expect that Indian analysts would be uniformly bullish. After all this it leaves tremendous room for further loosening by the RBI.  Instead consensus among analysts and economists is an expectation that inflation will return rapidly, with a high single digit forecasts for Q1 next year.  This is not in itself a major negative for the Indian economy, but there are key pieces to the puzzle that have yet to be factored in:

  • CPI data is released on a long delay by the department of labor, but as the chart below illustrates, the April data continues to suggest that consumer prices have not declined appreciably despite the collapse in wholesale levels. This does not bode well for consumers when inflation returns.
  • The government plans to divest large positions in state controlled energy companies accompanied by a loosening bias for price caps in order to induce investors to step up. If energy commodity price inflation rears its ugly head in 2010, the dilemma facing investors will be whether rising fuel costs inhibit consumer spending growth or if government price caps destroy margins for refiners and utilities.
  • Even inside the WPI complex, the pricing of many individual components are continuing to increase, and food prices nationally continue to show double digit growth.

We continue to take a pessimistic view of long term opportunities for Indian equities and will opportunistically look for entry points defined by price action to short.  When we do, rest assured, in our minds it will be part of an investment strategy for Asian equities and not just a quick trade.

Andrew Barber




CCL put up a terrific quarter, all things considered, and issued lower guidance, but better than we thought.  Some of the cost savings generated in the quarter look like they are sustainable.  The cost savings, combined with Fx benefits are causing us to raise our 2010 estimate to $1.60.

However, our $1.60 is well below the Street at $2.07.  While most analysts project flat yields in 2010, we believe demand will not increase even close to the 9% necessary to offset the industry capacity increase.  Management hinted at this with their limited discussion of Q1 bookings. 

"We do expect to have yield declines in the first quarter of 2010. This results from year-over-year comparisons being very difficult since a good percentage of 2009 first quarter business was booked before the economy began entering into the recession in the third and fourth quarter's of last year."

Here are our takeaways:


  • Came in line with our revenues , but beat on the costs (that's where we thought they could probably be better than expected)
  • Beats came in two categories - commissions/ cost of distribution and rebates (cost of passenger tickets) and "other shipping costs" which we increased after the company guided to the swine flu impact. D&A was 7MM lower than our estimate and there was also 5MM of "other income" which we didn't include in our forecast
  • The $1.7BN of debt that CCL raised this quarter puts their balance sheet in good shape, as they will be able to finance their entire pipeline and still have plenty of availability on their Revolving Credit Facility


  • Net yield guidance for 2009 is unchanged, simply adjusted for the weaker dollar, which benefits revenues and hurt on the cost side (relative to guidance last quarter)
  • As expected, net cruise costs will decline less than previously forecasted given the run up in fuel costs and weaker dollar. However, excluding fuel, cost cuts were better than previously guided too (again no surprise here)
  • Fuel impact as we expected, and we think that CCL left themselves a little cushion for further increases as well. Their 3Q09 guidance for fuel costs is about $15 higher per metric ton than our assumption.
  • CCL gave some preliminary commentary on 1Q2010. The good news is that, as of the last few weeks at least, booking volumes are on pace with what they were one year ago for the comparable period on a supply adjusted basis. The bad news is that early indications point to negative yields for 1Q2010. The reality is that CCL won't know where pricing is shaking out for at least one more quarter. Our guess is that it will still be down unless demand miraculously comes in 9% higher. The math is simple; any shortfall is made up with price reductions.

The stock had a nice day yesterday, and rightly so.  Today we've had a couple of upgrades which have pushed the valuation to 17x our 2010 number.  CCL is not overly expensive but the valuation a little worrisome for a company facing uncertain demand, big capacity increases, and declining ROIC.

Retail First Look: 6/19/09


Liz came out yesterday morning and 'updated guidance' (ie guided down) the morning after announcing a convertible offering. Combine that with short interest as a % of float going from 20% to 4% year-to date, and arbs looking to short the stock and play this deal. What do you get? A 25% hit on the day. Ouch! Welcome to the reality of sub-$5 stocks.

 My thoughts? Let's think about sentiment for a minute. Sales have been awful out there for the past 3-weeks. This is across concepts and price points. Is LIZ doing poorly? You betcha. But no worse on a relative basis than they had been.

 Given that Liz' credibility is already in the gutter, there's no way the company could risk doing a deal and then coming out a few weeks later and missing by a dime. They HAD to preannounce.

 What are people ignoring? Over the course of the past several months LIZ has taken several steps to repair its balance sheet, push out maturities and mitigate bankruptcy risk. It has done just that. I firmly believe (via basic math) that this company will not breach nevermind file. On top of that, costs are coming down further, capex will be cut again, and there's the call option on selling additional assets.

In the spirit of this being a binary outcome, either the top line stabilizes, margins pop, people eye $0.80 in EPS and actually start to view this as a company with a shot at being a viable ongoing concern. If it fails, then LIZ fires McComb, and breaks up the pieces. The core Liz brand used to be $1.4bn. Now its just under $1bn. Lets say the real number is $600mm. What do you think Wal*Mart could do with this as a house brand? 1x sales on that brand plus the value of Lucky, Juicy, Kate Spade, and monetization of other assets gets a high single digit stock after netting out debt.

Does the stock look like death here? Yes. Technically it is broken. But I still really like the risk/reward.



  • Pockets of improving trends within home related categories continue to surface. On Pier One's 1Q conference call, the CEO highlighted outdoor furniture as one of the company's best performing categories. He also noted that strength has continued into the Summer and outdoor accessories are also performing well. Whether this is a benefit of "cocooning" or just an overall improving trend off of a low base, we take this as a positive sign for the sector.
  • Not surprisingly there has been a large amount of talk about the poor weather during the month of June. Rainfall amounts are breaking records across much of the country and the month still has just under two weeks to go. Given the overall weakness in the economic backdrop, it has been some time since the good old weather excuse has been used. We don't like to hear such excuses, but this time it's probably warranted.
  • The NRF urged Congress Thursday to resist political pressures from the textile industry to tighten tariff enforcement for apparel imports amidst an influx of counterfeit goods. Last we checked, the number of US textile mills has fallen by over 80% over the past 10 years. The NRF is holding the cards here, and will win the political card game.
  • In addition to announcing the acquisition of Universal Safety Response, Smith & Wesson silenced recent calls that demand for handguns and rifles has weakened by issuing updated Q4 results - revenues +20% were double consensus expectations. More details will be provided when SWHC reports earnings Monday.


Zach's overview of items you're unlikely to find in the general press. 

  • The disparity between VAT rates North and South of the border will result in substantial job losses in the retail sector, electronics group, Currys warned today. Currys, which has outlets in both parts of Ireland, called on the Government here to cut VAT, allowing businesses to compete more effectively.
  • MPs voted yesterday evening to increase VAT rate from the current 18 percent to 20 percent, writes Äripäev. The third reading that is expected also to approve the raise in the excise duties of fuel and alcohol and cut sickness benefits will take place today.
  • The U.S. International Trade Commission voted on Thursday to move forward with the first general Chinese safeguard case decided under the Obama administration, which could have implications for other industries like textiles. The question is, will Obama send a message about the administration's willingness to be tough on China and decide to impose quotas ? Pasted from <>
  • U.S. textile executives who at one time supported the controversial Central American Free Trade Agreement told a House panel Thursday that four years of massive amounts of fraud and inadequate Customs enforcement in the region are crippling their businesses. Textile executives are calling on Congress and the Obama administration to overhaul the textile enforcement division of U.S. Customs & Border Protection and crack down on what they claim are soaring levels of fraud in Central America and other trade preference areas. Pasted from <>
  • Diadora SpA said Wednesday it had reached an agreement for Geox SpA's founder and Chairman Mario Moretti Polegato to buy all Diadora's assets through his investment arm, Lir. Pasted from <>
  • Nike Inc. appointed John Lechleiter, Ph.D. to its board of directors. Lechleiter, 55, is chairman, president, and CEO of Eli Lilly and Company.
  • In Eddie Bauer's Chapter 11 filings the company asked the court for permission to sell the company to private equity firm CCMP Capital Advisors and continue retail and catalog operations, including honoring its gift cards. CCMP Capital has agreed to: Keep the majority of the stores open and retain the majority of the employees; support company motions to maintain critical vendor relationships and payments; and support company motions to honor gift cards and the company's loyalty reward program. Pasted from <>
  • E-commerce and the Internet give Under Armour Inc. the best and most effective means to reach its core audience-gifted teenage athletes, vice president of e-commerce Mark Kuhns told attendees Wednesday during his featured speaker address at the Internet Retailer Conference & Exhibition in Boston. Under Armour is connecting to its core customer through the online world of, You Tube and other social networks. Pasted from <>
  • China's textile machinery market overview: China's textile machinery manufacturing industrial output value increase 4.9% in 2008, profit margin remains low for the Chinese textile machinery manufacturing industry (a profit margin of only 5.6 % was far below the average profit margin of China's manufacturing sector in average), knitting equipment made up the largest market share with 34% of China's textile machinery market. Pasted from <,+10:00+AM>
  • UK retail rents are expected to drop 11% by the end of next year, as retailers are demanding better deals from landlords who are desperate to stop shops becoming empty in the economic downturn. This will be the first drop in prime rents since the recession in the early 1990s. Pasted from <>
  • U.K. Retail Sales Unexpectedly Dropped in May for First Time in 3 Months U.K. retail sales unexpectedly dropped in May for the first time in three months and Bank of England Governor Mervyn King said the economic recovery may be sluggish as banks ration credit. Pasted from <>
  • Japanese Department stores' May sales slid 12.3% for its 15th straight month of decline with apparel sales down 15.1% (men's wear down 16.9%, women's wear declined 15%), citing the ongoing recession, rising unemployment, and swine flu fears as drivers for the loss. To combat the current climate, some Japanese department store operators are offering summer discounts earlier than usual.Pasted from <>



DECK: Constance Rishwain, President Simple & Ugg, sold 1,000 shs.



Retail First Look: 6/19/09 - FL trading outliers

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Thinking Time

"Tactics without strategy is the noise before defeat."
-Sun Tzu
Some people call me a strategist. Some people call me a "trader". Some people call me Mucker. Some people call me names. It is what it is, and I love every bit of it.
I love having people tell me what I can't do in this life. I love people who tell me "you can't make market calls." I love the friction in this game. I love the grind.
Our investment process is repeatable and applicable across durations. You tell me your game, and I'll be in my crouch at the face-off circle waiting to dance with you on the risks embedded in your strategy. This game is about being right, not being rigid.
Our daily note isn't about "trading" - it's an accountability mechanism. There is responsibility in recommendation. We don't want to hide. We want to test this industry's appetite for the ultimate transparency challenge. Who can get their feet on the floor and make the call, every day?
For those of you who are new to reading our morning missive, every 3 months the Research Edge Macro team boils down our intermediate term TREND (3-months or more) fundamental views into 3 Investment Themes. We do a conference call, and Andrew Barber's slides are really pretty. The idea is to proactively prepare for big macro moves, rather than spending our time reacting to consensus.
For Q109, our Themes were:
1.       REFLATION
2.       MEGA Squeeze (in US Consumer Discretionary)
3.       Socialism vs. Capitalism (long China)
For Q209, our Themes were:
1.       Breaking The Buck
2.       Cost of Capital Rising
3.       Autocorrelation's Apathy
For Q309, as I think about our most relevant Investment Themes, I've decided to take advantage of the weak British Pound and fly to Scotland on Sunday night. I'll be spending the entire week away from my family, my screens, and my phone, thinking.
I left Wall Street at the end of October of 2007, spent 6 months in my boxers, reading and writing - then I started this firm. Since then, there have been some major macro "calls" that needed to be made, and by God's good graces we've done our part. Now that we have seen the crash and the squeeze, I think the big moves are behind us. For now, I think markets will settle in and trade in a predictable range (SP500 904 to 958). I think that now is the right time to take another step back before I attempt to look forward.
Some of you just read that and said, thank God - get this guy off his soapbox, and on a plane. I know my team is fired up to have me out of the office! Now they can take their shots. We'll have 5 of our finest write their own Early Looks next week, and I'm already smiling as I think about what they might inspire. Nothing in our every day communication with you will change - I am only as good as my teammates. They run this firm.
What you'll see is a lot of what you don't get to see in what makes this firm real. I have been blessed with the pleasure and privilege of teammates who wake up every morning with one unified goal - being right.
Somewhere along the lines of industries maturing and reaching their saturation point of size and scope, they begin to  creatively self-destruct. Amidst all of the TRENDs and TRADEs in this global marketplace, that's what you're really seeing now. You are seeing the US Financial Services industry's Berlin Walls come crashing down. You are seeing new ideas crawl out from underneath their dust. From Beijing to Boston, it's fascinating to watch. Out with the Allen Stanford's of this business, and in with The New Reality: Transparency. Accountability. Trust.
While politicians politic and economists parrot all that's in our rear-view, you can finally hear the voices. Those are the voices that have never left this great country. Those are the capitalists who are allowed to see and hear.
On behalf of the 32 employees at Research Edge who you, our subscribers, have empowered and employed, I'd like to thank you.
Thanking you for your time to let us all think,


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - 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 resourcerich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  Bearish TRADE and bullish TREND.

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

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.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  



XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.  TRADE and TREND lines are positive.

SHY- iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic. 

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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. 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.



Everyone is waiting to see how Melco Crown's $2.1bn property, City of Dreams, is doing.  The preliminary revenue figures will be an important indication.  After the first two weeks of June, the marketshares are as follows, according to industry "insiders": SJM Holdings had around 31 % of the market; Las Vegas Sands had 27 %; Wynn Resorts had 14.5 %; Galaxy Entertainment had 13.3 %; Melco Crown had 9.9 %; and MGM Grand Paradise had 4.1 %. 

Melco Crown had around an 11% share last month.  The other big movers were LVS (up from 21% last month) and MGM (down from 8% last month).  Considering that the property has only been open for two weeks, it is worth considering the impact of luck and the volatility that may be factored into revenue figures over such a short period. 



Destination-Macau strikes a more negative note than the SCMP on the second week of revenue figures for CoD.  They suggest a total for June of MOP 100 and state that it would be a "disastrous" first month for the project if that was the case. 

Criticisms of the property cited in the article include design, details of finishing, poor service, and a lack of effective marketing.  The most likely reason, suggests,, is that the property is opening "at a difficult time and in a difficult market".  Also, the author sees brand loyalty as a new but pertinent factor in Macau gaming and sees it as being increasingly difficult to break as the market matures.  In addition, the market is simply not growing.  The swine flu and central government restrictions have exacerbated what is usually a weak month anyway.



The number of additional visitors attracted to the Venetian by the recent Indian Film Academy awards turned out to be nowhere near the tens of thousands that had been conjectured by the organizers. Although overall retail sales were apparently up by about 15 per cent, retailers in Grand Canal Shoppes said it had made no difference to their business. Moreover, F&B managers were dismayed to discover that even the in-house official invitees took most of their meals in Venetian function rooms.

However, for Macau as a whole, Indian visitors are up nearly 30% y-o-y for the first half of '09.  If the TV reruns help to bolster this growth, then the ROI from the Venetian for the rest of Macau will look a lot better.



Macau reported its first confirmed case of the swine flu yesterday, with a Filipino man who arrived at the airport from Manila.  Health officials are confident that the man's positive test is not an issue for the community as he was stopped and tested in the airport.

Lei Chin-ion, director of the Health Bureau, said Macau had mounted a strong defence against the spread of the A (H1N1) virus from other regions.

But he said he could not rule out the possibility of people carrying the virus but not showing symptoms having entered the city.  Mr Lei also said that it is unnecessary to shut down casinos that have good hygiene standards, even if they had been visited by people confirmed as carrying the H1N1 virus.

An Indian man who had stayed at the Venetian casino resort last week for a film festival returned to Honk Kong on Sunday and tested positive for swine flu on Tuesday.  The authorities have asked casinos and hotel to ban people with a fever and carry out regular cleaning and disinfections.



The Portuguese national airline, TAP, says it is planning to sell its entire (15%) stake in Air Macau.  The Portuguese may end up being diluted out of the business by Air China, the dominant shareholder that is about to inject nearly half a billion patacas into Air Macau to keep it going.

It will be interesting to see if other significant shareholders, like EVA Airways from Taiwan and Stanley Ho's STDM, will match Air China's move or will step aside and allow the Chinese company to take it all. 

Also, Viva Macau is planning to fly to Mumbai later this year. Once the International Indian Film academy awards are broadcast there, demand from India is expected to grow further from the 30% y-o-y jump in visitation seen in 1H'09.



The Cirque of the Sun opened the Zaia show in the new $150m theatre at the Venetian.  The attendance numbers have been disappointing.  This article applauds the organizations humility in vowing not to begin another permanent show on Cotai.  The company has realized that Chinese customers are different to those where most of Cirque's permanent shows are based, in Las Vegas.  As Cirque adopts the style of the shows, and the number of them they perform, to suit the Chinese audience, the attendance should pick up.  They have learned from the mistaken "build it and they will come" approach that they assumed initially.



The Mandarin Oriental is set to become the "Grand Lapa" on August 1. Lapa is Portuguese for "cave" and has been used in naming some famous neighborhoods throughout cities in the former colonial empire, such as Lisbon, Rio de Janeiro, and Sao Paolo.

The hotel is now owned by Stanley Ho's STDM and Pansy Ho's Shun Tak.  Most of its customers come through junket operator Jimei.  Mandarin Oriental Hotel Group will continue to manage the hotel for the next two years.


I feel a little uneasy about regional gaming revenue trends.  It's not so much that May was disappointing.  It was with same store revenue falling 4%, but the comp was the most difficult of the year after February.  On the other hand, June is a much easier comp.  June of 2008 was down 7% versus May 2008 down only 2%.  I don't want to get bogged down on monthly revenues but it feels like the January positive pivot has stalled out. 

Beyond the June easier compare, the catalysts look negative:

  • With the lapping of the IL smoking ban and the removal of the MO loss limit, shouldn't numbers be better? May in Missouri was very disappointing. Same store revenues fell despite the loss limit removal and the faster than expected ramp up at Lumiere Place.
  • Gas - 50 straight daily increases? This has to have an impact. As we wrote about in our 06/29/08 note, "GAS PRICES AND THE ECONOMY DO MATTER", gas prices are a statistically significant variable. Every 1% increase in gas prices causes a 0.15% decline in gaming revenues. Gas prices on average were down an average of 39% YoY year to date through the end of April. Unfortunately, gas prices have increased 30% over the last 50 days. The precipitous drop in gas prices in the first third of the year may have masked more serious issues in gaming spend. More on this in an upcoming note.
  • Sequential comps - We'll look at 2 year comps when June comes out. May started out strong and trailed off in the second half of the month.
  • Government transfer season is over - Tax refunds and other transfer payments have already made their way into consumers' pockets. We'll see how sustainably stimulating that stimulus will be.

REGIONALS: DISCERNING A TREND - regionals delta chart

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