With all eyes focused on any signs of slackening demand from China, today's production and export order data from Taiwan was a disappointment. Orders declined by 20.9% year-over year, a sequential improvement from last month, while output registered at -18.31% y/y. Economists had predicted levels over 1% higher.

On a deeper dive basis, the export order data shows that "the Client's" appetite for high margin consumer electronics is demonstrating resilience, with order for electronic products in general  improving sequentially to -11.33%  while information and communication products have improved to -11.9% Y/Y (an increase of over 30% on a 3 year basis).  This demand acceleration has been felt by producers across the tech spectrum, with multiple firms guiding estimates higher for the second half based on rising sales to People's Republic.

Our Technology team posted on this data earlier today, in which they noted that order trends are starting to exhibit familiar expansion patterns on a longer term basis.

Although today's improving data disappointed many, we still see confirmation that consumer demand is strengthening in China -perhaps not enough to offset Taiwan's lost business in Europe and North America completely, but more than enough to support our strategic stance on "the client" himself.

Andrew Barber



Confidence “Shoots”

Western European indices bounced back mildly today after a substantial sell-off on Monday following the World Bank's downward revision on global growth.  The report reduced the Eurozone's economic outlook for this year to -4.7% from a March prediction of -2.7%.

Mixed signs of economic stability throughout Europe continue, yet recent sentiment data from Germany and France yield an improved picture for forward-looking conditions.  German consumer confidence rose in July for a second month according to a Gfk survey released today. The index rose to 2.9 from a revised 2.6 in June; the uptick comes on the heels of yesterday's report from the IFO that showed German business and investor sentiment improved for a third straight month in June. Business confidence also rose in neighboring France for the third straight month in June, according to the Paris-based statistics office Insee. Yet in contrast to the bullish survey a separate report indicated that French household spending unexpectedly fell 0.2% in May on a monthly basis or -1.6% from the previous year.

As Eurozone's two largest economies, the health of Germany and France will greatly drive the improvement throughout the continent as European countries are highly dependent on the EU as a trading partner.  The Eurozone Purchasing Managers Index out today shows signs of stabilization, yet the numbers are still at a low level (a reading below 50 indicates contraction).  Services PMI declined to 44.5 in June from 44.8 in May, short of economists' expectations of 45.8 and Manufacturing (PMI) rose to 42.4 from 40.7 in May, its highest level since September 2008.

We continue to view Europe's health on an individual country level. CPI for France stood at -0.3% in May on an annual basis, while Germany's came in at the Eurozone average of 0.0%, according to Eurostat. These levels should benefit consumers and increase sentiment, however today's French Services PMI would suggest the opposite as the reading fell to 47.5 from 48.3 in May. We'll be monitoring German unemployment, which actually came in 10 bps to 8.2% on the last reading, to rise sequentially, which we believe should dampen sentiment. We expect modest but improving negative GDP growth in 2H '09 for France and Germany and modest positive growth in 1H '10.

Matthew Hedrick

URBN: Comes Clean on SEC Request

URBN: SEC asks for more details

SEC comment letters are something of a black hole. The SEC never discloses them until at least 45 days after the investigation is closed, which could take months or even years. But some companies -- perhaps out of caution -- choose to come clean about the letters and that's exactly what URBN did late Friday.


In this case, the SEC was asking the company for additional disclosure about the bonuses paid to top executives last year. While URBN initially tried to skate by with generic statements about performance objectives, the SEC asked for solid numbers. It's easiest to illustrate this with an example, so here's how the company disclosed this before the SEC started asking questions:


"The second measure is based on whether the Company's net sales for specified stores meet or exceed a dollar amount specified in each named executive officer's performance objectives"


And here's how they disclosed it on Friday:


"The second measure is based on whether the Company's net sales for specified stores meet or exceed the specified dollar of approximately $1.8 billion (the "Sales Plan Target") and whether the Company's profit for specified stores meets or exceeds the specified dollar amount of approximately $318.5 million (the "Profit Plan Target")."


See the difference? The first disclosure essentially tells you nothing, while the revised one provides some key benchmarks to help build a better model.


Michelle Leder

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NKE: Duration, Duration, Duration

It's been a while since I've seen such a gaping hole in buy-side sentiment on Nike heading into a quarter. We all know the consensus sell-side call "taking up numbers because FX is turning positive on the margin, and SG&A cuts will pad any profit erosion from the weak business climate."  But as much as this is the uniform sell-sider view, the buy-side is in to separate ballparks. I think it's all about duration.


The bottom line is that this stock is locked into a trading range for the next 12-18 months at which point the market can start to see, and subsequently discount, Nike's next growth acceleration.  Until then, there will be fits and starts in the business - i.e. sales, inventories, and futures moving a few points here or there. If you want to play those fits and starts, by my guest. In fact, I'll help you do so as the market embraces and discounts information that is out of synch with economic reality. In the high $50s this thing had too much optimism in it - especially with no major swing coming our way as it relate to futures. But with a $54 stock, I'm squarely in the 'do nothing' camp into the print.


Here are some key things do consider.


Fact 1: Nike's current restructuring is definitely the right thing to do. Look back in time... Growth here is anything but slow and steady. This company grows in bursts, then resets the organization. That's what great companies do. They hurry up and evolve. The chart below says it all.


NKE: Duration, Duration, Duration - 6 23 2009 7 01 06 AM


Fact 2. We're only halfway through the current reset. Earnings at this company will not grow at a sustainable rate for another 12-18 months. Will FX help on the margin? Yes. In fact, the quarter Nike is about to report will mark the trough quarter, as evidenced by the following chart (FX weighted by Nike sales by country). 


NKE: Duration, Duration, Duration - NKEFX 6 09


Also, one can argue that the 5% headcount cut will help by around $0.20 per share - or 5%. But do you think that will REALLY flow both FX and SG&A saves through to EPS??? 


Anyone that thinks the answer is 'Yes' is living in a parallel dimension. In fact, if Nike did flow it through, then I'd start to question top line growth assumptions as the next leg of the story starts to rip. EVERY TIME Nike has gone on one of those blistering share-gaining runs of double digit top line growth, it has come after a prolonged period of investment. You can either bank on seeing the cost cut benefits today on the P&L, or the top line growth later. We'd need to have seen a major change in Nike's DNA to ignore the growth. Trust me...that has not happened.


Ok McGough... If that's the case, can we at least bank Nike delivering a knock-out punch to struggling competitors?  Unfortunately, the answer is 'No.'  I can't give a great answer as to why, other than to say that in all my years dealing with Nike, one of my few frustrations has been that the company does not take advantage of competitors being on the ropes as often as it should. It is a fierce competitor, but for some reason is content to leave a competitor on life support instead of pulling the plug. Translation = if you are going to take my comments and look for someone that will feel the pain as a result of Nike's investment rate, you're gonna have a tough time.

EYE ON HOUSING – A mixed blessing

Expectations were high for today's number from the National Association of Realtors. 

Existing U.S. home sales rose in May, up 2.4% to a seasonally adjusted annual rate of 4.77 million units during the month from a downwardly revised 4.66 million units in April.  Total sales were still down from a year earlier however, when the annual pace reached 4.95 million units.  Using a three month moving average, which incorporates seasonally good and bad months, we are settling in at a run rate of slightly more than 4.6 million homes.  The national median home price fell in May, though, to $173,000, down 16% year-over-year. 

While the printed number was below expectations, the decline in the month-supply is a net positive surprise.  The month's supply declined to 9.6 months from 10.2 months in April.  Given all of the foreclosure news, this supply number is most likely understated.

The national average for a 30-year, conventional, fixed-rate mortgage edged up to 4.86% in May from a record low 4.81% in April.  Last week, it was reported that the 30-year fixed rate is at 5.38%.  The increase in rates may discourage some new buyers in the coming months while motivating others to jump in and buy now before rates move even higher. 

The incremental news on the consumer continues to suggest that momentum is slowing in a number of key areas.  Along with the air coming out of the reflation trade, the Consumer Discretionary (XLY) is the third worst performing sector over the past week, declining 5.5% versus the S&P 500's decline of 2.9%.  We remain short Consumer Discretionary (XLY).  

Howard Penney

Managing Director

EYE ON HOUSING – A mixed blessing - hpch



Icelandic investment group and insurer Sjova-Almennar Tryggingar have cancelled plans to purchase the sixty-eight unit Tower Four of One Central Residences for HK$782.74 million or HK$4,410 per square foot and walked away from a 30% deposit.  

The insurer had been looking for a new buyer in the second half of last year before it completed the deal, as Iceland was among the countries worst hit by the global credit crunch.  The balance was due before the delivery of the units at the end of this year.

According to a managing director at Jones Lang LaSalle in Macau, many buyers had shown interest in the project and were willing to take it over at HK$3,800 to HK$4,000 per square foot. Owners needed to spend about HK$700 to HK$800 per square foot to furnish the units, as they would be bare upon delivery, he added.

Units at One Central Residences, launched for sale in the second half of 2006, fetched more than HK$8,000 per square foot when the market peaked in 2007. But selling prices have dropped to between HK$4,800 and HK$5,000 per square foot in the secondary market.  

"Taking up the properties by cancelling the sale-and-purchase agreement will provide an opportunity for the group to realise an attractive return and ... to benefit from the positive outlook of the property market," Shun Tak said in a statement. He expected Macau's property market to catch up with the Hong Kong and Zhuhai markets soon.  If this were true it would certainly benefit the likes of LVS which has a bunch of apartments to unload at Four Seasons.



Macau had a positive budget balance of around 10.451 million patacas at the end of May, according to The Macau Daily Times. This figure represents a decline of 35% over the same period of last year.   There were some positive signs, however; public revenue for the YTD rose 0.8% year-over-year.

The gambling sector is reported to have contributed 15.32 billion patacas through the direct taxation of 35%.  Total current expenditure reached 10.89 billion patacas for the first five months of the year, up by 111% over the same period of last year.

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