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And I thought Vegas was a draining trip.  I'm writing this Macau update on the Friday flight back from Hong Kong.  Five days, 15 meetings, and only 20 hours of sleep later, I'm tired, but full of thoughts and observations from a very enlightening trip.

Near term, I'm more negative on Macau, especially on LVS, and to a lesser extent, WYNN.  Our estimates will be going lower on both companies.  Sands, in particular, may get drilled by SJM's Oceanus property opening right next door.

We're still working on the MPEL model - our numbers will be below the Street but nobody believes the Street numbers on this one anyway.  Sentiment is extremely negative on City of Dreams and MPEL which is understandable given the slow start.  The stock has been pummeled.  However, there are reasons to be optimistic as the launch of the VIP effort tonight, and the advertising in China, could drive revenues to leverage what appears to be a lower cost structure than most are projecting.

We will expound on the major takeaways in coming posts but here are our observations:




  • Macau not having a good June
  • June visitation may have been down 20%, similar to May
  • MGM and Grand Lisboa may have been the only major properties to have a decent June
  • Some of the junkets experienced very high hold % in June

Mass Market:

  • Cost of player acquisition and retention going up on the Mass side - margins going lower
  • More evidence of increased rebate activity: "Front end buy in" vs. "Rolling buy in" - 1% rebate on wagering above a certain level vs. 0.3%-0.4% on all dollars wagered - Mass margins could be under pressure
  • Growing belief that Beijing will "manage" Mass growth to coincide with GDP growth in China. Good for stability but the days of 15% growth are over. Over the long-term, predictable growth is probably worth a higher multiple

Visa Restrictions:

  • Beijing tightened up tour group restrictions in June after a few months of abuse - players were skirting visa restrictions through tour groups
  • At least one enlightened participant does not believe a new CE means that visa restrictions will be loosened, despite consensus opinion
  • New CE is not a "guy of change". He is already the 2nd most powerful government official in Macau and is probably not Beijing's first choice
  • Nobody knows what is going on with visa restrictions. Beijing probably cracked down on tour groups but some think that other restrictions may have been loosened. Any impact will be masked by Swine Flu concerns


  • Over the near term, there are more negative catalysts: lower margins due to market share competition, CoD taking share, and L'Arc and Oceanus (SJM) opening this year
  • Delays in Galaxy's Megaresort good for the market




  • I'm increasingly worried about Sands. SJM really going right after the property with Oceanus opening late this year
  • Oceanus will open near Sands, right next to the Immigration Center - covered moving walkways right from Ferry Terminal to Oceanus
  • Sands and Venetian continue to lose VIP share to Jack Lam's Mandarin Hotel operation
  • Venetian Mass business hanging in despite City of Dreams opening - that could change with the new CoD advertising program launched this week in southern China


  • IPO is most likely financing option
  • No asset sales are imminent
  • Government approval for condo sales will be a long way off - no source of cash for LVS


  • Singapore doesn't look like it will open in 2009, April 2010 more likely
  • Junket guys worried about Singapore regulations potentially limiting or prohibiting Junket activity - junket credit, private rooms, background checks - we believe this is potentially a big negative for the two Singapore concessionaires



  • Wynn Macau not having a good June, losing share to MGM and SJM
  • High VIP commissions elsewhere and Mass rebates/higher customer retention costs causing market share losses
  • Wynn Macau also lost a huge high end slot player to MGM and City of Dreams
  • Encore Macau won't open until the spring and the budget is likely to go up a little
  • Not impacted much by CoD yet, but CoD business beginning to ramp in both VIP and Mass
  • No real positive catalysts for WYNN in Macau



  • Mass volume in first two weeks was below expectations but hold % was reasonable
  • VIP volume was fine but hold was actually negative
  • Negative VIP hold % (-0.5% to -0.7%) due to 5-6 players, not widespread through the casino - not sustainable
  • Mass volume has picked up recently
  • Structurally, there does not appear to be any issues with CoD
  • The only legitimate criticism I heard was that the property is difficult to navigate
  • Margins will be much better than expected - probably due to correct staffing and lower wages - 75% of what they expected
  • Revenues ramping and won't be far off near-term expectations
  • The Hard Rock Casino is probably the most unique in Macau
  • Hard Rock doing 60% more per position than CoD casino
  • Rolling Chip (VIP) launch is Friday night
  • The go ahead for advertising in China was given on Wednesday - only 13% of customers are from mainland, needs to be 30%
  • Have not gotten the mid-Mass business yet - advertising in China will help
  • Signing 2,000 Mass customers into City Club database daily - faster pace than the Venetian after 3 weeks
  • Former Venetian marketing people running the database
  • Generally positive commentary from competition
  • Given the stock performance and the incredibly negative sentiment, MPEL is starting to look interesting on the long side



  • Market share still growing, revenues stable
  • Margins lower due to customer acquisition and retention costs
  • L'Arc opening on 9/21/09 - apartment sales not going well (though not part of SJM's financial involvement in the project)
  • Oceanus - 280 mass market tables opening up by end of year - going directly after Sands business
  • Oceanus will be much more accessible to customers arriving at Ferry Terminal than Sands
  • Ponte 16 - doing very well. Casino was packed. Exclusively mass market for now



  • New games doing well in Australia
  • Similar games being introduced in Macau and competitor thinks they will do well



  • Being very aggressive, especially going after Wynn Macau's business
  • There seems to be more optimism surrounding the performance of this property
  • They seem to believe that $250 million in EBITDA is possible
  • Shun Tak's retail center will open in late 2009 and should be a catalyst for the property



  • Starworld lost share in June due to renovations and low hold % in June. However, property seems to be stable
  • Construction on Megaresort deliberately being slowed due to cost savings and market conditions
  • Construction costs may come in 10% below projections - running single shifts, no overtime pay
  • Will target Mass business from mainland China
  • Transportation infrastructure will be much improved by the time the property opens
  • No official opening date but 2011 looks likely



A while back I referred to Japan as a man treading water with a bowling ball in his hands. Since that time the situation has remained unchanged.

With production and exports at record lows and rising unemployment, the stimulus measures that the Aso administration is attempting to use to expand domestic demand look to us as insufficient to move the dial significantly.

Today's CPI figures showed a 1.08% Y/Y decline, with Tokyo specific slightly higher at -0.78%   and prices excluding Food and Energy  registering at -0.5% . With the threat of deflation weighing heavily on the minds of central bankers who have memories of the "lost decade" still fresh in their minds the only way forward will be to continue to pump money into the system -essentially throwing things at the wall until something sticks.

Another prolonged period of stagnation would be catastrophic for Japan as the pronounced demographic shift that is looming gets underway. Remember that as Japanese debt levels have been climbing towards 200% of GDP, the glass-half-full crowd has reminded everyone that all of that debt is held by domestic investors. As the aging Japanese population starts to drain savings and the tax base shrinks, there will be fewer consumers who will be keeping their money parked at banks that pay zero on deposits so that those banks can turn around and buy government bonds that pay barely more.

We remain negative on future prospects for the Japanese economy, but think that the equity markets there could still get a big boost from a weak yen.


Andrew Barber



The Wrong Headlines

Research Edge Position: Short Italy via the iShares etf EWI

The media has had a field-day with the marital status and personal relations of Italian Prime Minister Silvio Berlusconi over the last months. Apt for inappropriate comments, Berlusconi has recently been quoted saying that "he never paid a woman" and doesn't "understand what satisfaction there is if there isn't the joy of the chase." Suffice it to say that Berlusconi's private life has gotten more attention than the ailing Italian economy in recent weeks.

We're currently short the Italian equity market via EWI, a position we initiated on 6/19 based on overlapping quantitative and fundamental factors. In Europe we've maintained a bearish bias towards countries with financial leverage and over-extended balance sheets. Our short thesis holds acutely for Spain and Ireland who are suffering from the bursting of a decade-long housing property boom as well as Switzerland and the UK, which have high leverage to the financial industry.  At a point earlier this year we were short Switzerland via the etf EWL and the UK via EWU. As an aside, today Bank of England Governor Mervyn King said that banking problems may make the economy's escape from recession a "long, hard, slog."

Because American-style bank "Stress Tests" have not been issued in Italy (or most of Europe), Italian balance sheets remain hazy. Although the Italian financials have proportionally lower foreign exposure than their competitors in France and Germany, meaning that they have not felt the fallout from global real estate and derivatives to the same extent, that domestic bias has historically helped to obscure issues for prolonged periods (a situation exemplified by the Parmalat case).  The continuing decay at Italian banks was underscored by the recent divesture by UniCredit SpA, Italy's biggest bank. Yesterday the bank announced plans to transfer some 640 Million Euros of property assets to a real-estate fund to boost capital and is planning to sell at least 1 Billion Euros of covered bonds. Given these lingering concerns, the fact that the composition of the Italian etf EWI includes a 40.10% weighting in the Financial sector raised a major red flag for us, making it easy to pull the trigger when the quantitative set up provided by price action became attractive.

We believe that as European economies work through depressed levels of production, struggle with rising unemployment and decreased appetite for exports from their main trading partner (Eurozone), governments that over-extend their balance sheets (budget balances) with debt, will see greater tightening of credit, which will push out growth for countries like Italy. This point is supplemented by data from FactSet that shows General Government Debt as a percent of 2008 GDP stands at 105.8% for Italy, compared to 65.9% for Germany and 68.1% for France.  

We continue to have our Eye on the credit markets. Today Italy sold 9.5 Billion Euros of government securities.  To date the Italian credit rating has not been downgraded, unlike its peers Spain, Ireland, and Portugal, yet the chart below of the German vs. Italian 10Y Treasuries clearly shows there is a risk premium in owning Italian debt. The 120 basis point premium over German and US bonds demanded by investors for the 2 and 10 year paper issued today does not bode well for future refinancing on public debt -which  currently stands at over 100% of GDP -a higher leverage ratio than Germany, France, Spain or the UK.    

From a fundamental basis, Berlusconi passed a 2 Billion Euro economic stimulus package in February to aid Europe's third largest economy, which is forecast to contract 5.3% this year by the OECD, a downward revision from a March estimate of -4.3%. Italian CPI came in at 0.8% in May (the lowest in 40 years), down from a target level of inflation of 3.5%, said EuroStat. The contraction will benefit consumers, but indicates the level of contraction the country is feeling. Compared to the Eurozone CPI average of 0.0%, it's a call-out that Italian inflation is running higher. Recently we've seen improved Italian business and consumer confidence reading in June, yet the surveys are forward looking and may be overly optimistic for the next 6 months. Q1 unemployment rose to 7.3% from 7% in the previous quarter, according to the Istat statistics office, with forecasts of 9% late this year and next. We expect sentiment to tick downwards as unemployment rises and predict very modest growth for Italy next year.

The Italia All-Share index is crawling around -1% YTD, similar performance to the S&P500 and German market (DAX). We're looking to increase our European exposure. Stay tuned.

Matthew Hedrick


The Wrong Headlines - it1

The Wrong Headlines - it2


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UA: Too Many Moving Parts To Count!

I've been a vocal bull on Under Armour. Finish Line management made what I would consider cautionary comments about UA footwear. Here at Research Edge, we don't hide from facts. We face the music. Ok, let's dance...


Here's what management said in response to a question about UA footwear...

  • o Initial running pretty good
  • o Has slowed down a bit
  • o Though running category overall is positive stand out
  • o Played down UA, looking forward
  • o Noted that expectations were just too high off the bat


My Take

Is this a disaster? No, but the tonal change toward the back half can't be ignored. My sense is that these guys were expecting the UA launch to allow them to perform well in a horrible retail environment. But that's just not the kind of roll-out  this was. It is slow, steady and more measured. It is not, and was not, geared to be a near-term sales pop for retail. There's simply not enough product out there to drive the retailers' comps.


Weekly NPD sales numbers look fine to me. Within the context of a growing running category, UA's share remains constant with where it has been since March (3% of the category). Are there incremental discounts in price in the final weeks of June? Yes. But ASP remains at $82, with Nike at $75 and the industry average closer to $50. This is normal activity as retailers clear the shelves for product coming in for July 1 (especially after 6 weeks of rain). 


Call me stubborn, but I still think that the big call here is taking this business from 1% of the market to 5%, and then 10% -- and most importantly, getting the management structure in place o achieve such growth. I'm really confident that UA is making that happen, as outlined in my recent research.


I must admit, I was initially surprised to see UA trade up on these comments.  Then it dawned on me... this is because of the Foot Locker announcement of its CEO change. After all, if you are the Chief Merchant of one of the largest retailers in the US that has sheer dominance over all of its customers, how comfortable would be if you took on the role at a smaller retailer where one vendor (Nike) accounts for over half of your sales. You're not gonna like that very much.  I'm not suggesting that we see Nike/Foot Locker channel war all over again (as we saw 6 years ago), but it is not impossible. Either way, the new guy is going to be looking to harvest relationships with brands that the Consumer genuinely wants to succeed. Enter Under Armour...


Oh, and by the way, the Nike acquisition rumour is back. I'd place a higher probability of Abercrombie buying Procter & Gamble.


UA: Too Many Moving Parts To Count! - Running Market Share


UA: Too Many Moving Parts To Count! - Running Shoe ASP


UA: Too Many Moving Parts To Count! - UA stacked volume


UA: Too Many Moving Parts To Count! - UA volume

Retail First Look: 6/26/09


While the Street was predisposed yesterday with the hangover of the Fed announcement, and in digesting results from Nike and Bed, Bath & Beyond, some important datapoints around 1Q Chinese Leather imports/exports went unnoticed. Yeah...I know, I know... We're already looking at the close of 2Q, and China makes up its numbers anyway. So these are stale and fabricated...why should we focus on them?  Aside from the case I could make that the US makes up its numbers as well on trade categories (and other areas), this data from China is at least consistently fabricated. In other words, it tends to directionally track economic reality for users of leather.   Two callouts...

  1. The growth spread in leather shoe imports/exports troughed. Exports were down 24% in units, and 11% in dollars. The gap here is second only to 'footwear components' in the major categories, in which exports were down 42% in units and only -1.5% in dollars.  At the same time, leather shoe imports were UP 5.3% in dollars. While I'd argue that there will be a secular shift in imports of leather footwear into China by European producers as the Chinese consumer continues to emerge from the Iron Rice Bowl and takes down savings rates and spend on higher-end goods, this quarter's uptick is notable.
  2. Is it any mistake that this is the exact quarter where exports for China in aggregate were down 23%? Nope. Is it any surprise that just weeks after quarter-end China loosened taxes (VAT) on footwear to stimulate exports? Nope. Similarly, should it come as a surprise that three weeks later China did the same for leather goods? Nope.  Since then we've seen around 1,500 factories re-open in the Pearl River Delta in China (off a base of 6k).

Mark my words everyone... These numbers will prove to be a trough. The balance of power from a margin perspective is shifting back to the US brands that have been hurt over the past 2 years. People are underestimating the impact in 2010 for key companies.

Retail First Look: 6/26/09 - image1


Some Notable Call Outs

  • We're not ones to perpetuate rumors or to recycle published news stories, but this quote is notable from UK's The Independent. Tadashi Yanai, CEO of Japanese company Fast Retailing (parent of Uniqlo) said that he wants Fast Retailing to become the world's biggest clothing manufacturer and retailer, with annual sales of ¥5 trillion (over £30bn) within the next decade. He also said that, "to achieve our target, the Asian market is the most important and we have already begun to expand there. In Europe and the US it is not realistic to establish hundreds or thousands of new stores solely via our own efforts, so we want to buy a big chain business." He went on to confirm that Gap is "within the scope" of the domestic companies he has his eye on.
  • We're still questioning the logic of the DBRN/TWB merger announced yesterday. The conference call did little to articulate the real opportunities the combined entity will ultimately benefit from. We do not count elimination of "public company costs" or the assistance that DBRN will provide in alleviating Tween's limited access to capital as blockbuster reasons to justify the deal. Regardless of the strategic rationale, this deal is the largest we have seen so far in what is likely to remain a robust m&a cycle.
  • In a growing trend that may ultimately benefit retailers like CHRS and CTR, other specialty and department store retailers are cutting their exposure to the plus size business. The economy along with the higher cost, slower turning nature of plus sizes has led to the elimination of the category in stores. Most retailers are maintaining online offerings however. Historically, the plus size business has been seen as an untapped growth opportunity but it has not been successfully capitalized on in recent years.



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

  • Takashimaya Co., Japan's third largest department store chain, announced a steep drop both in sales and profits for the third straight quarter. Net profit dropped a whopping 93 percent to 316 million yen, or $3.2 million at exchange rates for the period. The retailer said Friday it has not seen any sort of recovery for apparel and high-priced luxury goods in recessionary Japan. To that end, sales slid 13.3%, operating profit dropped 72%. Japanese department stores are struggling to spur revenue as falling wages and a worsening job outlook deter consumer spending. Takashimaya began its summer sale this month, 10 days earlier than the usual July start.  <http://www.bloomberg.com/apps/news?pid=20601205&sid=awIFL54qzpFg>, <http://www.wwd.com/business-news/takashimaya-q1-net-profit-drops-93-percent-2191705?navSection=retail-news>
  • Subhiksha Trading Services Ltd., the Indian retailer that closed stores after it ran out of cash, is confident its debt recast will be completed "well before" the end of next month after negotiations with stakeholders. The debt restructuring of the company, key to the survival of the retail chain, has to be completed by July 31, or six months since the beginning of the process. Subhiksha, which owes 13 banks about 8 billion rupees ($165 million), said 12 of the banks and the company's three largest stockholders are working to restructure the debt and infuse funds needed for the company to reopen its stores, Subramanian said.  Subhiksha on Jan. 30 said its business was at a "near standstill" and it needs 3 billion rupees to resume operations. The retailer, founded in 1997, ran out of cash in October after relying on a "high level" of debt, according to the company. <http://www.bloomberg.com/apps/news?pid=20601205&sid=a6T5uKNOZJQY>
  • Online e-tailer eLuxury appears to be reincarnating as a social media site devoted to the world of luxury. Today, the e-tailer shuts its doors and on Monday, the new concept makes its debut.  Starting Monday, the site will pose one question a day, subjects will include fashion, art, food and wine, design, culture, travel, beauty, music and entertainment, the company said. "ELuxury will learn from its audience, getting smarter each day, and will use this intelligence to present increasingly targeted and relevant content," said a statement. <http://www.wwd.com/business-news/takashimaya-q1-net-profit-drops-93-percent-2191705?navSection=retail-news>
  • Textile group Devanlay SA, the manufacturer and distributor of sports brand Lacoste, has appointed José Luis Duran, former chief executive officer of French food retailer Carrefour, president of its management committee. Duran will be named ceo of the company in September and is expected to take the helm of Swiss-based Maus Frères SA, Devanlay's holding company, in 2010, succeeding Guy Latourrette.  <http://www.wwd.com/business-news/duran-to-head-devanlay-manufacturer-of-lacoste-2191204?navSection=business-news>
  • McKay Belk, president and chief merchandising officer of the Belk Inc. department store chain, is going on sabbatical for ministry-related work. Belk's sabbatical from the department store chain, which was founded by his grandfather William Henry Belk in 1888, begins Aug. 3. Belk said after his 12-month sabbatical he will become vice chairman, and will continue to provide the company advice on merchandising strategy and vendor relations. He will also continue as a member of the Belk board. But Belk also said he may not decide to come back. <http://www.wwd.com/business-news/takashimaya-q1-net-profit-drops-93-percent-2191705?navSection=retail-news>
  • John Jansen has been appointed to the new position of GM for Keen Europe. He will run the division from the company's new European headquarters in Rotterdam, the Netherlands. Jansen will focus on building the brand's business in Europe, but also will be part of Keen's global management team. He will work across the company to create a growth strategy for Keen in Europe. Jansen was previously VP of commerce for O'Neill in Europe and also has worked for Nike and Converse. <http://www.wwd.com/footwear-news/brooke-burke-to-appear-in-skechers-ad-2191329?navSection=footwear-news>
  • Dakine launched an interactive mobile-specific website, an abbreviated version of Dakine's website that is compatible with most media rich-enabled cell phones. When connected to a high-speed wireless or 3G network users can access streaming music and video clips. Additionally, worldwide surf reports provided by Surfline.com are available along with Snow reports provided by OnTheSnow.com. <http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=8&id=28495>
  • French Consumer Confidence Increases to 15-Month High as Recession Eases - French consumer confidence rose in June for a fourth consecutive month to the highest since March last year in a further sign the recession may be easing. <http://www.bloomberg.com/news/industries/consumer.html>
  • U.K. retailer Woolworths was relaunched today as an online business, woolworths.co.uk, by its new owner Shop Direct. The Web site focuses on the same Woolworths' offers as the store chain-toys and outdoor, children's clothing under the Ladybird brand, video games, DVDs, CDs and books and party goods, plus its famous "pick 'n' mix" sweets. Household goods have been dropped from the offer. <http://www.licensemag.com/licensemag/Retail/Woolworths-Back-in-Business-with-Shop-Direct/ArticleStandard/Article/detail/606498?contextCategoryId=33594>
  • Recap of PVH's annual meeting - PVH is freezing development of Calvin Klein full-price retail stores as the company continues to downsize its outlet retail operation. Although Calvin Klein is a highly profitable growth engine, PVH's  outlet retail business has been a drag on financial performance. Calvin Klein retail stores have been hurt by the recession and won't expand until they begin to meet performance goals. PVH will continue to shut outlet stores, with 150 closures expected over the next three years in addition to the 100 Geoffrey Beene stores already shut. <http://www.wwd.com/business-news/duran-to-head-devanlay-manufacturer-of-lacoste-2191204?navSection=business-news>
  • Quiksilver Inc. and its subsidiary Quiksilver Americas Inc., entered into a commitment letter with Bank of America, N.A. ('Bank'), Banc of America Securities LLC, General Electric Capital Corporation ('GECC'), and GE Capital Markets Inc., pursuant to which the Bank and GECC committed, subject to certain conditions, to provide a senior secured asset-based revolving credit facility to Quiksilver Americas and certain of its domestic subsidiaries in the aggregate principal amount of $200 million. On June 24, 2009, the same parties entered into an amendment of the Revolving Credit Commitment Letter to extend the date by which all specified conditions must be satisfied, from June 26, 2009 to July 31, 2009. <www.sec.gov>
  • Dickies aims to give its clothing a higher purpose in a new ad campaign. The manufacturer of work, school and outdoor apparel unveiled its new brand campaign today "Wear with Purpose", which focuses on the real stories of several American workers. The campaign was developed in-house at Williamson-Dickie, and begins this month, via print, online and national broadcast, as well as point-of-sale at retailers.  Williams-Dickie Manufacturing Company spent $5.3 million on media, per The Nielsen Company. Dickies' new tagline replaces "Legend in Work," but keeps with the brand's focus on the practical use of its clothing. According to Uchtman, this emphasis on hard work has broad appeal to a diverse base of consumers. <http://www.brandweek.com/bw/content_display/news-and-features/retail-restaurants/e3iabcb04149132c4bd59cfefeb2231eee6>
  • Brown Shoe Co. Inc., the operator of retail footwear sites Shoes.com and FamousFootwear.com, relies on its own usability lab and outside site performance testing to see how its web pages are viewed by shoppers through multiple web browsers. Although Brown doesn't try to optimize its web sites for any single web browser, it monitors the breakdown of browser use by its site visitors and constantly tests how its pages are viewed through each of these browsers, says vice president of e-commerce Pete Hogan. <http://www.internetretailer.com/dailyNews.asp?id=30923>
  • The Timberland Company has launched its latest green product innovation, the Earthkeepers 2.0 boot, which is touted as the first footwear the company has designed to be disassembled and recycled, rather than discarded, at the end of its life. The 2.0 collection is made of 80% recyclable or reusable materials that represent a 15% reduction in greenhouse gas emissions and a 15% increase in the use of recycled or renewable content, compared to the traditional Earthkeepers boot. Timberland said it will be the first footwear company to commercialize this process and plans to incorporate it into its fall 2009 collections. <http://www.environmentalleader.com/2009/06/24/timberland-designs-first-recyclable-footwear/>
  • Skechers USA announced Thursday that celebrity host and season-seven winner of "Dancing with the Stars" Brooke Burke will model in the next "Nothing Compares to Family" ad campaign. Burke will appear in the campaign with her fiancé, David Charvet, of "Baywatch" fame, and son Shaya, 1, and daughters Rain, 2, Sierra, 7, and Neriah, 9. The model first appeared in a Skechers ad in 1995. <http://www.wwd.com/footwear-news/brooke-burke-to-appear-in-skechers-ad-2191329?navSection=footwear-news>

Investment Rodeos

"It's the broncs and the blood, it's the steers and the mud, and they call the thing rodeo." -Garth Brooks

It's rodeo season in Western Canada, and I've flown back to my hometown of Bassano, Alberta to participate in the local amateur rodeo. No, I won't be riding bulls, or wrestling steers, but rather I'll be participating in the Wild Cow Milking competition. Wild Cow Milking is one of the more gentlemanly sports in rodeo. As such, it involves a team of three cowboys and a wild cow. The team that fills a bottle with the cow's milk the quickest, and runs the bottle across the finish line first, wins.

So, what exactly does either a rodeo, or wild cow milking have to do with global macro investment risk management landscape? There are two basic parallels. First, in a Wild Cow Milking competition the team with the most coordinated effort usually wins. By comparison, in the investment world, usually the team that is most effective at analyzing and tying together both the macro information and company specific data points, wins.

Second, just like the current investment landscape, rodeos are chaotic. In Alberta, when things get a little nuts, we say they are getting "western". To say that things are little western in the investment rodeo these days is an understatement. To emphasize this, let's look at some of the global asset class moves in the year-to-date via their representative ETFs: Russia +60% (via RSX), SP500 +2.0% (via SPY), Natural Gas -37.2% (via UNG), and high yield bonds up +6.9% (via JNK).

Our investment process, which combines both bottoms up and top down research, has uncovered a number of relevant and incremental data points this week that support our conservative, though slightly long-biased model portfolio positioning. Some of the key callouts from the Research Edge Team this week to our clients are as follows:

1. In healthcare, Tom Tobin and his team have been analyzing the negative impact on President Obama's approval rating as a function of aggressively taking up the gauntlet of healthcare reform. The reality is, as President Obama continues with the healthcare push, his approval rating will continue to weaken. Tobin likes hospital stocks on the short side to play this theme, along with his expectation that their bad debt will ramp with heightening unemployment.

2. Our restaurant analyst, Howard Penney, in his weekly conversations with his restaurant companies, has noted that none of his companies are providing a view that business is getting better, which obviously has implications for the broader consumer discretionary landscape. As a result, we are short the consumer discretionary etf, XLY, in our model portfolio.

3. In technology land, Rebecca Runkle provided an update on Oracle earnings this week, which suggests that software spending is and may continue to be better than expected. She has also been uncovering increased activity in the PC supply chain due to the pending Microsoft upgrade cycle, which may be an investable theme heading into the back half of the year.

4. From the Gaming, Lodging and Leisure team, they are expecting a slowdown in regional gaming markets this quarter. According to Todd Jordan (who is currently in Macau): "Every 1% y-o-y change in gas prices results in an inverse 0.15% change in same store gaming revenues, holding all other factors constant. In thinking about organic growth in regional revenues, it is necessary to focus on the trend in gas prices." Our Macro Team is bullish on oil, and Todd has his sector, and our portfolio, positioned accordingly.

5. Brian McGough, and his retail, footwear and apparel team, have zigged while the rest of the Street has zagged. While people are getting caught up in the noise around near-term earnings revisions and 2H numbers being a 'slam dunk' (this call mattered in March, not now after a 40% run), his team has shifted gears to focus on quantifying the impact of changes in international trade policies around apparel, as well as the cadence of cash flow in 2H and its impact of the M&A cycle. Ultimately, the team's call is that there will be a massive bifurcation between winners and losers starting in 1Q10 based on decisions today that are misunderstood by the market.

6. In our Macro group, our research this week was focused on the continued evidence of loose monetary policies globally, as indicated by ECB, Fed, and Chinese banking action this week. The implication of these historically loose global monetary policies is that the reflation trade should continue, with a risk of morphing into inflation in the back half of the year. To position for this, we are long energy companies (XLE), long energy producing nations (EWC, EWZ), and long inflation protected treasuries (TIPS).

The manifestation of these recent data points, and the work we have been doing all year, is our model portfolio structure. Our current positioning in our model portfolio supports the interpretation that things are still a little "western" out there. We currently have 20 longs and 9 shorts, for a long / short ratio of just over 2:1. In our asset allocation model, we still only have a medium allocation to equities and commodities, with cash as our largest weighting.

Ultimately, investing is a much more civilized sport than rodeo. The board room of the typical investment firm is typically classy in décor (although I hear Julian Robertson does have a stuffed tiger in his!), while a rodeo arena is littered with bruised cowboys, crushed beer cans, and empty Copenhagen tins. Also, most money managers don't routinely break bones while competing, even if they do have bruised egos at times.

But the parallels remain and the point is, if you want to win the global macro investment rodeo this year, you need to operate like cowboy. So put on those chaps, give yourself a slap, and ride the bull . . . and at the end of this year if you've stayed on for 8 seconds you'll probably "hear the roar of the Sunday crowd", and get paid for your performance.

Have a great weekend,

Daryl G. Jones
Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.