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Surveying The World

“A man’s feet should be planted in his country, but his eyes should survey the world.”
-George Santayana

This country’s immediate threat of another natural disaster has passed, and those with their feet firmly planted in US denominated cash should be feeling proud to be home this morning. As the US Dollar Index charges higher again, everything commodity related continues to deflate. The USA comes out a winner, and the rest of the “emerging” economic world the loser.

An ‘Eye On Winners and Losers’ was a new Investment Theme we introduced over the weekend. We are no longer operating in a global economy where every asset class, across countries, moves up into the right of a price chart. As global growth slows, so will commodity inflation. Alongside that new reality, Asian currencies and stock markets alike will continue to fall.

This, of course, is not good for those enamored with the “Sovereign” Theme. Dick Fuld better sell to the Koreans before they go bankrupt again! Current account surpluses from the Middle East to South East Asia are all of a sudden contracting. Local currency deflation is something that Americans are all too familiar with. It equates to imported inflation. It doesn’t stop in “oil” or “BRIC” countries either. This morning, Romania reported a producer price inflation reading of +20.4% year over year. Eastern Europe will find itself on the ‘Losers’ side of this global scorecard when all is said and done.

In Asia, geopolitical and economic tensions continue to rise, in unison. Japan’s Prime Minister, Fokuda, unexpectedly resigned, after only being in office for 11 months. Japan’s Nikkei lost another -1.8% of its value as a result. I wrote another negative note on Japan on Friday afternoon. This situation in the world’s 2nd largest economy is plain ugly.

Forever and a day though, the “it’s global this time” crowd has told me that I shouldn’t be focused on Japan, because China is set to overtake it. Well, that may very well happen, but it won’t be this year, or next. And unless you are running a hedge fund that has a 3 year lock, instead of 3 month redemption features, you better be careful buying Japan “because it’s cheap”. Things that are hemorrhaging have a funny way of getting a lot cheaper. China’s stock market hit fresh new lows this morning, closing down another -0.87%, taking its cumulative losses since October to -62%.

Away from Japan, lately I have been focused on Thailand’s geopolitical risk factors. Overnight, Thailand’s PM declared a “state of emergency” in Bangkok, and Thai stocks dropped another -2.3%. The Thai Baht lost another -0.50%, and is part of the emerging ‘Losers’ asset class called Asian currencies. The South Korean Won continues to lead that list of losers, after losing another -1.6% of its value today. The Won has lost a startling -18% for the year to date!

The Australians are most closely affected by Asia losing, so they promptly cut interest rates today. Aussi central banking chief, Glenn Stevens, is a ‘Winner’. He was 1st to recognize global inflation, raising rates to 7.25%. Now he is 1st to call out global stagflation, by cutting rates for the 1st time in 7 years. When Steven’s makes a “macro call”, pay attention.

Americans are winning again. The score for the US Dollar since July 14th has been an expeditious +8.8% gain. Domestically, the hurricane has passed, and God willing, this is finally a big win for Main Street America too. Unfortunately, the proverbial storms have broken the levees across the oceans. With their feet firmly planted on the streets of New York to Chicago, US traders will be back at their posts, covering shorts this morning. It’s a new month, and they need to chase performance. I hope some have the sobriety to be surveying the world all the while.

Welcome back,
KM



GES: Timing is Everything

I think we are 2-3 quarters away from the realization that GES is overearning. I struggle with whether or not Wednesday’s 2Q EPS will be the event. While I think that certain facts are increasingly ominous, I don’t think Wed will be the event where the fundamental story buckles.

As I’ve stated in the past, I think that GES is a solid brand, and unlike others in the space, it definitely has a reason to exist – but simply not at an 18% operating margin. My view is that the company has underinvested its FX and sourcing benefits over the past 4 years, and as such its top line growth trajectory, margin rate, or both, will take a hit as FX reverses course and cost of goods races higher.

Here’s one of the more frightening call-outs for me…
1) Growth in almost every Guess? business has decelerated over the past 2 quarters, with the one accelerating business being US retail.
2) Take a gander at this quote from the 1Q conf call. “Our U.S. retail business continued to benefit from tourists coming to the country with strong currencies 80% of our U.S. stores are located along the coast and in key tourist cities.” My Partner Todd Jordan (Gaming/Lodging/Leisure) has been calling this out for his companies, such as Starwood. Not an accident that the past 2 quarters have been among the most favorable yy comparisons as it relates to FX.
3) Assuming the dollar stays where it is today, we are nine weeks away from parity vis/vis year-ago levels.


So 48% of GES sales are in the US – a large portion of which is tied to travel markets. Those markets are unlikely to sustain the growth levels we’ve seen over the past few years. At the same time, international sales will be translated back to US$ at a less favorable rate. I can’t imagine that US consumers step up their int’l travel activity and buy more Guess? apparel.

I think it all comes down to timing.
On one hand, company guidance for Wednesday looks reasonable. Margin expectations call for no sequential change from the rate we’ve seen over 2 quarters. I can live with that (for another quarter), especially with inventories ending last quarter in check. Sales growth guidance of 15-20% calls for an 8-10% slow down from the company’s recent run rate. Again, this is probably doable.

But on the flip side, this is what the ‘expectations game’ looks like every quarter. This company has only missed one quarter out of the last 20, 100% of the sell-side ratings are ‘Buy,’ and though still high at 12% of the float, short interest has been ticking lower.

I don’t love the fact that margin compares start getting a bit easier starting in 3Q, but we’re still talking about lapping positive numbers from a year ago. If the macro environment plays out like I think it will, then we could see 2+ years of down margins, and that 20%+ consensus CAGR through 2011 will look like a pipe dream.
GES EBIT Margins vs FX

Seasons Change, Expectations Don’t

As everybody sits down on Tuesday morning ready to crank after a summer-ending long weekend, I think it is an opportune time to gauge how realistic earnings expectations are heading into 4Q and 2009. I did this about a month ago and was startled to see how lofty expectations were headed into 2H and holiday given rising input costs, slowing consumer demand, etc… Well now those factors have intensified, and we have the added (MASSIVE) factor that is the strengthening US dollar. I don’t know if the consensus is looking…but we are 9 weeks away from the first time in almost 4 years where the yy delta in the $/Euro is negative for US multinationals.

I’ve been reminded a couple of times in my career that nothing is impossible. But missing expectations over the next 12 months is as close to a mathematical certainty as I’ve ever seen in this group.

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Eye On Putin Power: Tiger Hunting?

After suiting up in camouflage and shooting a 5 year old tiger today, Putin said, "the Ussuri tiger is a unique animal -- it's the biggest cat on the planet,"...

In thinking about the USA being the proverbial tiger, this is ominous...
KM
(see CNN.com article for more)
  • http://www.cnn.com/2008/WORLD/europe/09/01/putin.tiger.shoot.ap/index.html
AP Photo

Eye on Winners vs. Losers...

Below we have attached a chart that overlays nationwide UK Housing Prices with the British Pound. As the US Dollar strengthens and starts winning again, losers emerge, globally.

The UK home owner is one of those losers. Together, nominal prices and local currency are in a downward spiral. This is ugly.
KM

US Bank Failure Chart (1934-2008), Updated...

A picture tells a thousand words. Here it is, inclusive of the blowups of Integrity Bank, The Columbian Bank & Trust, and First Priority Bank. The names vs. reality of these said businesses are too ironic. “Integrity, Trust, and Priority” – right, right…
KM

Chart by Andrew Barber, Director
Research Edge LLC

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