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Retail First Look: 6/29/09

TODAY'S CALL OUT

  1. The first is that the infamous 'Nike making a run at Under Armour' rumor reared its ugly head again on Friday. UA traded +4% in a down tape. To reiterate what I said on Friday, ...this is beyond ridiculous. Aside from the fact that the 'would be' buyer and seller simply do not like one another, the biggest reason such a deal will not happen is that Nike thinks that it can beat Under Armour organically. Whether it can or not is absolutely, completely, 100% irrelevant. They won't buy another brand  to touch a consumer they think that they can win over with their own. Case in point... remember Callaway golf? Think back to around 2003. The Street was bugging Nike to buy ELY - then worth about $1.5bn. "After all, Nike, you have Tiger Woods...Imagine what you could do with Callaway?"  Nike's thought back then, as well as today sounds something like this... "Why do such a deal today for $1.5bn, when we can invest $200mm in our own brand, beat them organically, and have no integration risk?"  Guess what? It worked. Nike's share is ahead of ELY in most categories.  Importantly, Nike does not think that it needs UA to win. If such a deal happened, it would make me seriously question this change in Nike's strategy.  I'm not going to have to answer that question. As I noted on Friday - I'd place better odds of Abercrombie making a run at P&G.
  2. Now that June books are nearly closed, the apparel/footwear retail industry is calling it official. Weather was a disaster in June. I don't think anyone doubts that one bit. In fact, the last time I recall the weather card being this strong and as widely accepted even by people (like me) who hate when a management team uses the 'W' word was 3-years ago during the snow-less winter. That's when people granted Quiksilver (75% of Rosignol's biz in Europe, here 70% of ski runs did not even open for the year) , Amer Sports, and Columbia free passes (or, at least, heavily discounted passes) for lost sales. One thing that makes me antsy now, however,is that the MVR is up 2.7% month-to-date vs. a flat performance for the S&P. Translation = either a) the market is absolutely looking through weather, or b) it is stupid and does not realize the risk to sales numbers next week. Take your pick. Either way, the bottom line is that this synchs with our view that we need high quality earnings beats to take components of this group higher.

 

LEVINE'S LOW DOWN

Some Notable Call Outs

  • Despite a challenging economy and weak mall traffic, Finish Line's best selling item in the entire store is the Nike Air Max 2009, which retails for $160. While not enough to move the needle on tough compares, this is a reminder that unique product will continue to sell well despite the overall economic backdrop.
  • Finish Line was able to reduce overall occupancy costs by 5% in its recent quarter, reflecting the willingness of landlords to negotiate rather than lose tenants altogether. This is yet another example of retailers regaining the upper hand in negotiations as rent and lease terms remain the lynchpin for future profitability coming off of a 3 year period of unprecedented rent escalations.
  • In a sign that the Buckle anticipates substantial future growth, it signed a deal late Friday to build a new 240k/sq foot distribution center in its home state of Nebraska. The company's strong and stand out sale performance is clearly helping management's decision in laying out future growth plans.
  • A quick visit to the American Apparel sample sale on Orchard St. in Manhattan over the weekend suggested two things. First, consumers remain crazy about deals and are willing to wait in long, annoying lines for the opportunity to seek out values not otherwise found in "traditional" retail establishments. Secondly, companies with high inventory levels and creative merchandising will continue to seek out alternative forms of distribution, as evidenced by American Apparel's short-term lease of an empty store front. The challenging economic environment continues to afford those with creativity a unique opportunity to secure real estate at low prices in an effort to clear goods.

 

MORNING NEWS 

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

  • California Senator Dianne Feinstein (Democrat) introduced legislation on 21 May that would provide duty-free treatment through 31 December 2019 to apparel imports from least-developed countries that do not receive benefits under other U.S. preferential duty programmes, namely Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Laos, Maldives, Nepal, Samoa, Solomon Islands, Timor-Leste, Tuvalu, Vanuatu and Yemen. Sri Lanka would also be eligible to receive duty-free treatment under this legislation even though that country is not an LDC. To qualify for duty-free treatment, apparel would have to comply with certain requirements that are similar, and in some aspects identical, to those set forth under the African Growth and Opportunity Act, which is a programme that provides duty-free access to apparel from sub-Saharan African countries. In practical terms, the single most important benefit provided under this legislation is clearly the extension of duty-free treatment to imports of apparel wholly assembled in Bangladesh, Cambodia or Sri Lanka from foreign fabrics made from foreign yarns. This could present both an opportunity and a challenge to Hong Kong and mainland Chinese exporters. On the one hand, the enactment of this legislation would most likely stimulate demand in beneficiary countries for mainland Chinese textile inputs for apparel production, particularly fabrics. At the same time, these three countries, especially Bangladesh and Cambodia, would probably increase their apparel exports to the United States to the detriment of Hong Kong and mainland Chinese suppliers.  <http://www.hktdc.com/info/vp/a/gmt/en/1/4/1/1X05WMLL/Garments---Textiles/Duty-Free-Treatment-for-Least-Developed-Country-Imports-under-Consideration--China%E2%80%99s-Competitiveness-May-Be-Affected-in-Certain-Products.htm>
  • China is Russia's biggest trade partner. China's consumer goods such as textile and garments, with their cheep prices, are sustaining the daily needs of Russian people, who are less than prosperous. The announcement by Russia on June 18th of destroying imported Chinese goods on its 22 counters has put the long-standing problem of "gray custom clearance" on the table, again. "Gray custom clearance" refers to the practice by some government-connected "clearance" companies in Russia pushing imported goods into the Russian market at a tax rate far lower than the official level. These companies often undertake the whole process of the freight after they depart from Chinese ports, and deal with all procedures within the Russian territory. Last October, nearly $1 billion worth of goods were banned due to "gray custom clearance," and up to 400 Chinese enterprises were afflicted. This time, after the confiscation of goods in these 22 counters, another 7000 or so counters are also challenged, where $5 billion worth of Chinese commodities are facing the danger of being destroyed. <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=APPSEAR.story&STORY=/www/story/06-27-2009/0005051340&EDATE=SAT+Jun+27+2009,+10:00+AM>
  • Japan's retail sales dropped for a ninth month in May as a worsening job market forced households to cut back. Sales slid 2.8% which was worse than the -2.6% consensus estimate. Falling wages and an unemployment rate at a five-year high are forcing households in the world's second-largest economy to reduce spending. The jobless rate rose to 5% in April, the highest since 2003, and about two work seekers are competing for a single spot, the most severe job shortage on record. Wages have slid for 11 months, the worst losing streak in six years. <http://www.bloomberg.com/apps/news?pid=20601205&sid=asXZTnfBpEZ4>
  • Angela Merkel, the German chancellor, has categorically ruled out an increase in value added tax in spite of rocketing public deficits, should she return to power for a second term after this year's general election. Speaking ahead of a conference of her Christian Democratic Union in Berlin on Monday that will endorse the party's manifesto, Ms Merkel sought to silence political allies and economists who last week called for tax increases to plug the hole blown in the public coffers by the economic crisis. "Every discussion about VAT damages economic activity," she told the mass-market weekly Bild am Sonntag. "With me, there will be no increase in value added tax under the next government." <http://www.ft.com/cms/s/0/1e742196-6408-11de-a4feabdc0.html?nclick_check=1>
  • Canada signed a free trade agreement Sunday with Jordan, its first with an Arab nation. The deal gives Jordan preferential trade conditions, including full exemption from customs duties for Jordanian goods. In return, the Mideast country will lower customs duties on Canadian products over a four-year transitional period. Agriculture, forestry, manufacturing and agri-food are expected to be the beneficiaries from immediate duty free access. The agreement is expected to be ratified by both parliaments later this year. Bilateral trade was estimated to be about $80 million in 2008, according to the Canadian Embassy in Amman, Jordan. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • David Webb Inc. has filed for Chapter 11 bankruptcy court protection in Manhattan, the second New York-based jeweler to do so in the same week. In business since 1948, the family-owned Webb operates a jewelry store at 789 Madison Avenue in Manhattan and has more than 30 employees. Webb listed assets of between $10 million and $50 million and liabilities of between $1 million and $10 million. Webb said in court papers filed last Tuesday that it has inventory valued at $7 million and accounts receivable of $165,000, among other assets. It owes FCC, which does business as First Capital, a secured creditor, $2.9 million. It is also a party to a lawsuit involving its landlord, Lawrence and Melvin Friedland, bankruptcy documents said. The company Web site lists Nina Silberstein as chairman, Stan Silberstein as president and Sharon Silberstein as vice president and creative director. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Now that a Chicago bankruptcy court has signed a final order approving the sale of the assets of bankrupt Hartmarx Corp. to London-based Emerisque Brands and its investment partner SKNL North America, the question among retailers, bankers and even politicians - including its best-known customer, President Obama - remains whether the new owners can make Hartmarx and its brands viable in the long term and fulfill their promise to maintain jobs in the U.S. A. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Sport Chalet, Inc. reported fourth quarter sales declined 12.7% as same-store sales tumbled 17.7% and the net loss in the period of $11.1 million, or 79 cents a share, compared to a loss of $2.8 million, or 20 cents, a year ago. Results came in just ahead of a forecast given in early May.  The Los Angeles-based sporting goods chain noted that same store sales were hurt by macro economic conditions and a warm January in the company's markets as compared to January of the prior fiscal year, which impacted the demand for winter related merchandise. <http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=4&id=28506>
  • Escada said its 200 million euro, or $280 million, bond exchange program would begin today, and that almost all the preconditions for the realization of its financial restructuring plan have been met. The struggling German fashion house is offering bond holders a cash incentive if they accept the offer during the early-bird period, which ends July 14. The overall exchange period runs through Wednesday. The bond restructuring is a central pillar of Escada's rescue plan, which also calls for a capital increase of at least 29 million euros, or about $40.7 million at current exchange. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Foot Locker Inc. is looking to pick up market share in the $8.4 billion skate market with the debut of CCS-branded brick-and-mortar stores. The company bowed CCS's first retail shop on the Third Street Promenade in Santa Monica, Calif., on April 30, and the second opened at the Garden State Plaza mall here on June 10. Foot Locker acquired CCS, an online skate retailer, for $102 million from Delia's Inc. last September. The CCS shops, which mimic the Website, feature skate shoes, apparel, accessories and hardgoods for the 12-to-18 year-old customer. CCS devotes plenty of shelf space to apparel, with labels such as Volcom, Fallen, Element and its own CCS brand. Although Foot Locker has experimented with skate-oriented displays in its Champs locations and about 600 Foot Locker stores, CCS marks the company's first push into full-line dedicated skate stores. But Foot Locker is hardly entering into unfamiliar territory: The company has retained all 32 of CCS' original merchants since its acquisition, including its managing director, Susan Van Arsdale. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • Insider caught up with the "Gossip Girl" star and face of K-Swiss' "Classic Remastered" ad campaign at the after-party celebrating the shoe launch at New York's Bloomingdale's. Is there a place for K-Swiss in the wardrobe of Chuck Bass, his ultra-dandified "Gossip Girl" alter ego? "Absolutely," he said, without hesitating. "I see him wearing them on the basketball court." Nearby, DJ Josh Madden (who also runs DCMA Collective with his brothers Joel and Benji of Good Charlotte) gave Insider some advice for keeping a party moving. "If you want to be a good DJ, all you have to do is worry about making the ladies dance," he said. Also feeling the beat was David Nichols, EVP of K-Swiss, who hinted that news would be forthcoming about the new California Youth action-sports label, which is a major facet of the Westlake, Calif.-based company's turnaround plan. <http://www.wwd.com/footwear-news/insider-ed-westwick-admires-k-swiss-ll-cool-j-dishes-on-collab-2197052>
  • Juicy Couture launched an intimate apparel store Friday in Las Vegas' Forum Shops at Caesars Palace, the first of what is expected to be a handful of single-category concepts for the Liz Claiborne Inc.-owned brand. The 2,200-square-foot boutique, called Love G&P, is on the former site of Juicy Couture's multicategory location that bowed in 2004. "Intimates is a natural extension to the brand and showcasing it in a close but separate environment felt like a strategic next step," said Beth Cohn, vice president of retail for Juicy Couture. "This will be the true destination for this category." The chain introduced intimate apparel a year ago with nighties, robes, pajama bottoms, sleep tops and underwear ranging from about $15 to $150, with graphics and prints that speak to the brand. Outside of Juicy Couture's stores, the line is carried in 200 specialty and department store doors, including Bloomingdale's, Nordstrom, Saks Fifth Avenue and Lord & Taylor. Bestsellers include a $60 stripe nightie called Crochet & Charms, Beach and Dog Boxers for $42, a long brushed jersey pant for $65, and a Love, Peace & Juicy pointelle nightie for $58. <http://www.wwd.com/markets-news/juicy-couture-gets-intimate-in-las-vegas-2196749?navSection=retail-news>
  • The legal headaches continue to pile up for Forever 21, with a new copyright and trade dress infringement suit filed against it by Express last week. In a complaint filed in U.S. District Court for the Central District of California, Express claims Forever 21 copied four of its copyrighted plaid patterns for men's shorts that were introduced in its stores in December 2007. Additionally, Express is claiming trade dress infringement for a zippered jacket the specialty retailer introduced last December. Forever 21 has been sued over 50 times in the past seven years for alleged intellectual property violations by competing retailers and designer labels. It has settled almost all of those cases out of court, but last month a case brought against it by California-based Trovata went to jury trial, ending in a hung jury. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Children's Place Retail Stores Inc. has agreed to pay $12 million to settle a class action lawsuit that alleged its officers misrepresented facts about operations that caused the company's stock to artificially increase. The company said that it denied all the suit's allegations and decided to eliminate further litigation and related expenses. Children's Place said the settlement's cost would be covered by insurance. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Amazon Cuts Ties With North Carolina Affiliates Over State Sales-Tax Plan Amazon.com Inc., the largest Internet retailer, cut ties with business affiliates in North Carolina after the state drafted legislation that would force the company to collect sales tax. <http://www.bloomberg.com/news/industries/consumer.html>
  • Urban Outfitters last week joined a very small club: Retailers who sell via smartphone, such as the iPhone. Urban's new site, m.urbanoutfitters.com, is designed to be easy to use on a mobile device. Now Urban customers can shop, see their wish lists, read the blog, check order status, find a store and sign up for text alerts from their mobile phones. The mobile store also links to Urban Outfitter's pages on Facebook, MySpace, Twitter, YouTube and Flickr. While any cell phone with Internet access can visit any Web store, unless the site has been optimized for the small screen, the experience is cumbersome and typically the checkout process doesn't work. As BlackBerrys, iPhones and Palms become ubiquitous, it makes sense to create stores for them, said retailers, to capture business from potential customers who are surfing the Web while waiting for appointments, commuting, on a lunch break or any place without full computer access. When Yoox quietly put up a test site in April, it received 710 orders in one month. Polo Ralph Lauren, Sears, SVC and Amazon also offer mobile shopping. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Shoebuy.com steps up its traffic -eBay, however, isn't so lucky - Consumers love their stilettos and sneakers, at least if recent traffic data from Nielsen Online is any indication. Shoe e-retailer Shoebuy.com posted a whopping 43% rise in traffic in May compared to a year earlier. <http://www.internetretailer.com/>
  • Amid the flailing economy, footwear brands are finding opportunity in the bridal category. Several women's brands, from Payless ShoeSource to Mary Norton, have launched new bridal collections this year and are looking to make wedding shoes permanent additions to their lines. While Payless has long included dyeable dress shoes in its business, the retailer is now pushing bridal more heavily with Unforgettable Moments by Lela Rose, a capsule collection of kitten, slingback and T-strap heels priced between $25 and $45. It debuted in February at 2,600 Payless stores. Payless debuted an Unforgettable Moments Website in April to build the line independent from the other Payless collections. Cole Haan, meanwhile, launched a bridal collection this spring, following the debut of its DressAir line, which uses Nike Air technology to create comfortable dress shoes. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • Retailers across the country said that unusual weather patterns during June made a tough month even tougher. According to information from the weather-tracking firm Planalytics, the Northeast has had one of the wettest, coolest Junes in history, while areas of the South have experienced extreme heat. The Midwest has seen rain and flash flooding in some areas. Laura Bryan, who owns Wish, a women's high-end shoe store in St. Louis, said alternating bouts of rain and extreme heat have kept shoppers out of stores. But, some say indoor shopping malls may benefit from the weather. "People tend to want to get away from the rain and the heat, and they can't go to the beach if it's rainy, so they hang out in the mall," Garcia said. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • The mood at this week's Bread & Butter show is dark - at least as far as sneakers are concerned. Athletic companies showing at the event in Berlin put black front and center for both men and women, playing with texture, embellishment and colorful accents for contrast. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • With retailers working harder than ever to excite the customer, many are seeking new brands to create a point of difference. But where can they go to find fresh resources? In this economy, footwear retailers everywhere are scrambling to gain an edge on the competition. Many are turning to new designers and brands to bring excitement to their shelves. But it isn't always easy to find them. To track down new talent, store owners say they are looking beyond the trade show circuit and getting creative. Bloomingdale's began holding designer open calls in February. Some of these will be among the 17 new shoe brands the department store is adding to its roster for fall '09. The Internet also has become an increasingly important tool for hunting for up-and-coming designers and brands.  <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>

 

NOTABLE RESEARCH:

JCP: Morgan Stanley upgrades to Overweight from Equal-weight, price target is $35.

 

MACRO SECTOR VIEW AND TRADING CALL OUTS

Retail First Look: 6/29/09 - sector view


Ambition's Ladder

"Tis a common proof... That lowliness is young ambitions ladder."
-William Shakespeare
 
Don't worry - I didn't spend the last week reading Shakespeare. I did, however, brush up on my late 19th century global central banking history, and that's actually where I came across that quote. The quote was in reference to an unproven country that decided to take their economic destiny into their own hands - the United States of America.
 
While many a British short seller of America's 20th century has rendered himself a secure job as a Scottish golf caddy, I left Edinburgh yesterday wondering what an American short seller of China's 21st century might end up doing... super size them fries for me there laddy!
 
On this continent, US investors should continue to open their minds to The New Reality of global macro winds that continue to blow onto her shores. They're real, and oh' are they a changin'.
 
While the easiest thing for an American investor to do is assume that he is smarter than everyone else and that the Chinese are making up their numbers, it's also proving to be the dumbest thing to do.
 
Whether you're having a pint in the highlands of the United Kingdom or sippin' on some Sapporo in Japan, if you have a television today you're going to see Madoff as frequently as you see Michael. They are both performers. They are both American. If your investment thesis is that the rest of the world lies, please take a look at the man in the mirror and re-adjust that set.
 
This morning I am waking up to a Chinese stock market that is hitting another fresh year-to-date high. In addition to effectively signaling that Q2 GDP will be reported at a higher growth rate than the +6.1% that was reported in Q1, Chinese central bank chief, Zhou, said China's reserve policy is aimed at "liquidity, safety and returns." I like that.
 
All the while, the American manic media is anchoring on Zhou's comment that China will not make any "sudden" changes to their currency policy. This has investors who completely missed the mother of all REFLATION trades perplexed. Hate to break it to you CNBC, Zhou's comments aren't perplexing - buying REFLATION stocks high at the lows of a Broken Buck in mid-June is!
 
When it comes to managing his largest position, no rational risk manager would ever signal to the world that he is going to start behaving like a crackberry addict. Do US centric investors think we are going to get a memo one day from the Chinese that 'today is the day we are blowing out of Treasuries'? C'mon. Let's be serious here.
 
Inclusive of locking in another higher-high last night, the Shanghai Stock Exchange is seriously in the green for 2009. At a closing price of 2,975 I'll proactively predict that you're going to see a cover story on Barron's sometime soon about a "China bubble". Right now, most people who missed the crash are bubble pros don't forget. That's what the "I'm smarter than you" does.
 
What is it that you do? I think that's the question that people managing countries, currencies, and companies will have to answer in the 21st century. As the Chinese sign a hugely relevant deal with Hong Kong this morning to settle international trade in Chinese Yuan, I think they are telling us what it is that they do. They are taking their destiny  into their own hands.
 
China is The Client. China wants "liquidity, safety, and returns." China wants the world to buy into one of the 33 IPO's they have on tap ($10B in issuance).
 
China doesn't want Bernie Madoff. China doesn't want Alan Stanford. China doesn't want any more US Treasuries (April Treasury data shows that the Chinese actually had a net outflow of US Treasuries to the tune of $4.4B. Outflows mean they are a net seller).
 
I know, I know... a billion dollars isn't what it used to be in this country. But then again, the Dollar isn't going to be the world's dollar like it used to be either. As we think about this "150 years" that will grip post weekend at Bernie's headlines this morning. I think we need to keep thinking about what them British caddies are still whining about missing 100 years back. The lowliness in which some currently regard this young Chinese economic power is their ambition's ladder.
 
I continue to think that the bubble and crash callers will be frustrated by a US market that, while still trading -61.8% lower than the Chinese stock market YTD, will continue to trade in a proactively predictable range. This morning I have downside support for the SP500 at 910, and upside resistance at 930.
 
Best of luck out there this week,
KM
 

LONG ETFS

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 resource rich 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.  

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.
 

SHORT ETFS

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

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.


EYE ON COMMODITY PRICES

Food costs continue to be extremely favorable for restaurant companies with only chicken prices currently up on a YOY basis.

Sales trends continue to be weak but the 20%-plus YOY declines in most restaurant commodity prices should continue to soften the impact on margins in Q2. Chicken prices are only up about 2% YOY and year-to-date so the only negative standout is the increasing gas prices, which though still extremely favorable on a YOY basis, are now up nearly 70% year-to-date. Gas prices tend to increase the most in the summer driving months so we will have to watch how these increasing prices impact consumers' discretionary spending and eating out habits in the coming months. Current prices at the pump still look good, however, relative to the $4-plus per gallon we experienced last June and July.

Lower dairy prices will continue to help restaurant margins in the near-term with milk and cheese prices down 51% and 42%, respectively. That being said, these favorable prices may reverse rather significantly in 2010 because according to a Bloomberg article, milk prices could rise by at least 25% by the second half of 2010. Dairy farmer profits are currently under pressure because it now costs $17 to produce $10 of milk. In an effort to improve profitability, the article states that the National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in the coming months. "The cuts will lead to the first two-year drop in output in four decades and higher prices in 2010 for butter, cheese, milk and the non-fat dry powder that's a benchmark for global exports, according to U.S. Department of Agriculture forecasts....U.S. dairies are trimming the herd. The kill in the week ended June 6 rose to 60,800 head, 35 percent higher than a year earlier, according to USDA data. This year's cull is up 13 percent from 2008."

 

EYE ON COMMODITY PRICES - commpx

 


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THE MACAU METRO MONITOR

MACAU GRANTED JURISDICTION OVER UNIV. OF MACAU NEW CAMPUS ON HENGQIN ISLAND macaunews.com.mo

Macau was granted authorization to rent a plot of land on Hengqin island for the development of the new University of Macau campus.  The bill proposing the arrangement was passed by the eleventh National People's Congress (NPC) Standing Committee of China.  Presently under the jurisdiction of Zhuhai, the land will be rented to Macau until 2049. 

The central government has approved a pilot joint development project to make Hengqin Island "a new platform to promote industry upgrade in the west bank of the Pearl River under the 'one country, two systems' policy."

LOCALLY INFECTED H1 N1 CASE WITH UNKNOWN SOURCE FOUND macaudailytimesnews.com

The second locally infected H1 N1 case with an unknown source of infection was reported yesterday.  The Influenza Emergency Coordination Center also announced one additional imported case of Influenza A (H1 N1), bringing the total number of local and imported H1N1 cases to 18 in Macau as of yesterday.

Health Bureau director Lei Chin lon said that tourists from different countries coming in and Macau were contributing to the problem.  "Macau is at risk of a H1 N1 influenza outbreak", he said.


OCEANUS TO SINK SANDS MACAU

There is quite a bit of new supply entering the Macau market in 2009.  Besides MPEL's City of Dreams (CoD) which opened June 1st, US investors do not seem very focused on the supply picture.  That's typical, since the remaining new builds for 2009 are owned by non-US listed companies.

The most impactful property post-CoD will be SJM's Oceanus.  SJM is already knocking the cover off the ball in terms of recent market share gains.  Add to the SJM portfolio an attractive Mass Market casino, strategically located next to the Macau Ferry Terminal.  Unfortunately for LVS's Sands Macau, Oceanus is situated between Sands and the Terminal.  It is our understanding that SJM will provide covered and air conditioned moving walkways from the Ferry to Oceanus.  Location was a huge competitive advantage for Sands and it soon will be transferred to Oceanus.

Here are some details on Oceanus: 

  • Obscures Sands from the Ferry Terminal
  • 280 Mass tables vs 350 at Sands
  • Almost purely a Mass property
  • Billed as a regional locals property targeting ferry customers from Hong Kong and Guandong Province
  • Property to open in late 2009

Based mostly on the impact from Oceanus, we are now projecting a 20% decrease in 2010 EBITDA at Sands to $169 million.  We believe the Street is projecting well north of $200 million.  Sands is vulnerable because of its location and focus on the Mass market.  We calculate that over two-thirds of its EBITDA is derived from Mass play.  The Mass market has been stable and is likely to grow in the mid single-digits as Beijing keeps a tight grip on visitation.  However, Oceanus is not the only new supply.  L'Arc and City of Dreams (another large Mass property) will contribute to an approximate 25% increase in Mass supply from 12/09-05/09 and a 20% increase for all of 2010 as seen in the following chart.  Not good for the other LVS Mass Market property, Venetian Macau, either.

OCEANUS TO SINK SANDS MACAU - macau mass market table growth 

LVS faces many near-term hurdles including covenants in both credit facilities, a slow start at Sands Bethlehem, and the Las Vegas doldrums which are not over.  Add Oceanus to the list and don't underestimate the potential negative impact to Sands.


CKR - A FOCUS ON SOCAL MEDIA

Until this week, it seemed fairly safe to suppose that an impenetrable divide existed between the world of SEC filings and the technophiles who have already downloaded MashDeck. And then we read the exhibit to this 8K, which included one of the first references we've seen in SEC filings to the popular social media site Mashable. (And because the web is a giant echo chamber, Mashable has its own account of the story).

It was filed by CKE Restaurants, Inc. (CKR) - the company behind Hardee's and Carl's Jr. restaurants - you know, the fast-food joints where you get those late-night Western Bacon Thickburgers and Jumbo Chili Dogs when nothing else will do.

Here's what we found, which comes shortly after CEO Andrew Puzder explained that while "It has never been my goal to get excited over reporting flat earnings or margins," the fact that the company's operating income and margins remained steady in spite of the poor economy and competitive industry practices was "a testament to our management team and the strength of our brands." Then Puzder said:

We just launched a very innovative partnership with YouTube whereby we are utilizing some of their most popular video stars to produce short videos promoting our burgers. With a combined following of 3.2 million subscribers, these video bloggers ("vloggers") are helping us target our customer demographic where they already are. In addition, the media cost is much lower than with traditional advertising. According to www.mashable.com, the world's largest blog focused exclusively on Web 2.0 and Social Media news, our sponsored video content appears to have ‘turned out to be a big hit.' In fact, just one of the Carl's Jr. vloggers created a video that's already received over 2.4 million views across the web. All of the Carl's Jr. vloggers' videos, combined, have been viewed more than 5.7 million times.

But it's not just Carl's Jr. We also noticed that the annual report that Bob Evans Farms, Inc. (BOBE) filed earlier this week. In it, the company touts its use of "BE-Mail", Facebook, Twitter, and a revamped web site. Be sure to check out the unlikely pairing of its list of corporate Twitter users with the down-home images of rolling hills. Then again, a quick scan of some of Bob Evans tweeters shows that they're not exactly regulars.

Of course, the real question is whether this embrace of social media technology by decidedly non-tech companies is worth the money and the effort. We've eaten at Bob Evans before and it's hard to imagine much overlap between those folks and people who crashed Twitter yesterday looking for news and sharing memories about Michael Jackson.

Michelle Leder

 


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