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QUICK THOUGHTS ON MAR 2Q09 RELEASE

Sloppy quarter and disappointing guidance.  Not good a good signal for the rest of the lodgers including HOT.

MAR reported EPS of $0.23 which was spot in line with our estimate. However, the numbers were sloppy this quarter with $57MM of exclusions; $33MM related to restructuring charges, and $24MM related to the revaluation of residual interests from prior note sales.  We're not sure that the write-downs in this quarter will be the last ones we see.  Guidance for the third quarter was disappointing and full year guidance was lowered with the primary culprits being worse international RevPAR and lower incentive fees.   Not a good start to the lodging earnings season.

2Q09 results:

  • NA comparable company operated RevPAR came in at -23.4%, in line with mgmt guidance of -20 to -25%
  • International comparable company operated RevPAR at -31.5% was materially worse than company guidance of -17 to 20%, partially impacted by swine flu
  • Base management and franchise fees came in a touch better than our expectations; however, incentive fees came in 8MM worse.
  • Owned, leased, corporate house and other revenues came in 10MM below our estimate, while margin was materially better than we expected, contributing to a higher net result.
  • Timeshare revenues came in 11MM better than our estimate but margins were materially worse due to the $12MM write down of residual interests
  • G&A was in line with our estimate if you exclude the systems write down and accounts receivable charge offs

3Q09 Guidance of $0.09 to $0.14 is below street expectations of $0.20 for the quarter and below our estimate of $0.15 cents.  RevPAR guidance was not "less bad" as we think many investors and sell side analysts were hoping for.  Incentive fee guidance couldn't be any worse.

 Full year 2009 guidance was lowered

  • NA comparable company operated RevPAR guidance reaffirmed -17 to -20%
  • International comparable company operated RevPAR guidance lowered by 400bps to -17 to -20%
  • Fee income was lowered to $1,030 to 1,060MM from prior guidance of $1,050 to $1,100MM, primarily driven by lower incentive fees
  • MAR lowered the high end of the range by $5MM for owned, leased, corporate housing and other revenues, net of direct expenses to $55 to $60MM
  • Lowered timeshare segment results by $5MM to $25MM
  • Increased full year G&A guidance by $5MM to $585 to $605MM
  • Lowered EPS guidance to $0.76 to $0.86 from $0.88 to $1.02
  • Lowered investment spending by $25MM to $325 to $375MM

THE MACAU METRO MONITOR

LAS VEGAS SEEKS TO AMEND MACAU LOANS reuters.com

Las Vegas Sands Corp released a statement Wednesday, announcing their intention to amend its Macau bank loans of about $3.4 billion.  An IPO of its Macau operations is still under consideration, but it will require the consent of lenders. 

A spokesman refused to elaborate on a timeframe for the lender discussions or disclose the degree to which banks are being asked to relax covenant restrictions.

 

MACAU CHIEF EXECUTIVE'S FAMILY FIRMS SELL STAKE IN AIR MACAU scmp.com

Two companies controlled by Chief Executive Edmund Ho Hau-wah have sold their combined 1.25% stake in Air Macau to a subsidiary of mainland flag carrier Air China.   The private sale comes just weeks after shareholders of the loss-making and technically insolvent Macau airline voted for a government-backed MOP 507.3 million rescue package. 

The selling of the stake will ease concerns over conflict of interest regarding the bailout plan and rescue the family from having to dedicate additional capital into the troubled airline.  Mr. Ho was a founding member of Air Macau in 1994. 

 

MACAO'S LONE TOP JOB CANDIDATE PROMISES TO LOOK INTO GAMING TAX ISSUES chinaview.cn

Chui Sai On, the sole candidate for the position of Chief Executive of Macau, stated on Wednesday that he will examine the issues of the SAR's gaming tax and declining gaming revenues.  In a meeting the members of the General Association of Administrators and Promoters for Macao Gaming Industry, Chui stopped short of disclosing any specific measures and instead promised to study the issues gaming tax and declining gaming revenues. 

Presently, Macau casinos pay almost 40% of total revenues to Macau's government.  This income provides over 70% of the SAR government's total revenues.  Other nations such as Singapore may join the Asian gaming market in the near future.  Macau clearly needs to ensure competitiveness in Asia and Chui has pledged to create a better environment for the gaming companies to operate in.


Retail First Look: VFC – I Don’t Get It

RETAIL FIRST LOOK: VFC - I DON'T GET IT

16 JULY 2009

TODAY'S CALL OUT

VFC is quickly rising to the top of my 'how the heck can they make the quarter' list.  Levi's all-around weak results on Tuesday were rather telling (Levi has a bigger denim biz than VFC). Denim is not exactly knocking the cover off the ball right now. VFC's high margin The North Face business is slowing, company-wide retail is having a tough go at it this quarter, and Nautica is - well, Nautica. Make no mistake - this is a deal story. VFC needs an acquisition big time, and I don't like stories that hinge on buying assets. With ZQK shoring up its balance sheet it no longer needs to sell DC shoes (which VFC would like to own) so it comes as no surprise that VFC is throwing  its hat in the ring for Eddie Bauer. Not sure if I get that one. One might ask if an Eddie Bauer deal is meaningful enough to save 2H numbers. I think not.  Eddie Bauer has just shy of $1bn in revs, and barely $10mm in EBIT. This is a 'fix me' story. Even if VFC got it for free, it would hardly be accretive. If it only got the more profitable pieces, then it takes up the complexity of the transaction. The bottom line is that I am at $4.40 for this year, and am struggling to get there. We could conceivable see a $0.40 miss from the Street's $4.84. 

LIZ better aligning comp with shareholders? Ok, was I the only one was bowled over to see that Bill McComb's employment agreement was re-upped for 3-years just 6 months after being renewed in December? There's always a reason for such actions, and I can assure you that this one was not because 'the stock price has done so dang well that we gotta stay married.' I have a meeting with LIZ in a week's time - so this will be an important issue to delve into. But in reviewing both agreements with my colleague Michelle Leder, it appears that the only meaningful change (aside from duration) is higher severance in the event of a change in control trigger.  These things can always be interpreted many different ways, but the bottom line from my perspective is that he is getting paid more to the extent that this puppy gets flat-out sold.  I like that.

 

LEVINE'S LOW DOWN

Some Notable Call Outs

- WMT Goes Samurai?  Interesting speculation that Wal-Mart might reopen the Samurai Bond market for US investors. Really mixed signals there from our perspective. On one hand, it's good for the companies that can do it... i.e. those that have the trust of those that could buy the debt, and can presumably leave the cash outside of the US to fund growth instead of repatriating cash and getting dinged with tax penalty. But not a good signal when a major US stalwart like Wal*Mart finds Japanese soil a better source of funds than the Ozarks. Keith summed it up in fewer words... "Bad for patriots.  Good for capitalists. The US capital markets are no longer endowments."

- Looking below the surface of Wolverine's (WWW) inline 2Q results reveals some interesting and noteworthy trends. First, the company reported there was an acceleration in same store sales in the middle of the quarter in its owned retail stores and ecommerce business. This is consistent with weekly NPD data we watch carefully, but also a noteworthy improvement as we inch closer to the key back to school selling season. Second, the company offered some very detailed insight into trends in at-once and futures orders. The takeaway here is that the uncertainty in the US retail environment remains high. The shift from futures to at-once is substantial, with lead times shrinking by 5 weeks y/y for customers requesting delivery at-once and by 7 weeks for futures orders. Two-thirds of the orders in the quarter were categorized as "at-once" vs. 50% in 2Q08. The net trade off here is higher gross margins at the expense of generally higher inventory levels.

- At a conference yesterday, Gymboree management was asked a question about sourcing opportunities and the impact on product cost reductions. Management responded by saying there are still many opportunities out there and that they are testing Africa as a new sourcing alternative. This is the first mention I've seen of Africa for apparel product procurement, ever.

- While still a relatively small player in the denim market, Joe's Jeans had some interesting commentary on pricing in the premium denim category. The company recently introduced an opening price point product at $138, which was below the $145 to $179 range in the existing line. Management expected the lower price point to do well, especially in this environment. However, results have been below expectations leaving the belief that the fashion denim category purchase is driven more by emotion than by price. While we can't disagree with reality of this data, we can say that the market for premium denim is certainly smaller than it once was. There will always be a niche for premium goods, but the current environment will keep a cap on the market opportunities that were once thought to be endless.

 

MORNING NEWS 

- US Commerce Secretary Gary Locke working with China to open up trade relationship - China must do more to open its domestic markets to U.S. goods, services and investment as the countries seek to combat the global economic crisis, U.S. Commerce Secretary Gary Locke said on Wednesday.  Locke, on his first official visit to China, said U.S.-China relations were the most important trade relationship in the world, and he outlined crucial issues to be jointly addressed. Chief among them are climate change; working to lower China's trade surplus and increase its domestic consumption; speeding up currency reform, and avoiding protectionist policies amid the financial crisis. In Washington, the International Trade Commission said Wednesday, it has initiated the first trade remedy investigation of textile products from China since quotas were lifted at the end of last year. The ITC said in a Federal Register notice it received a complaint on July 9 that "narrow woven ribbon with woven selvedge" from China and Taiwan was being dumped into the U.S. market or is being subsidized in ways that injure U.S. companies. The petition, filed by Berwick Offray LLC and subsidiary Lion Ribbon Co., referenced the lifting of the textile and apparel quotas as a key factor. A public hearing on the matter is scheduled for July 30, after which the ITC will issue its decision on whether there is sufficient injury to the U.S. industry for the case to proceed. A determination should be made by the end of next month, according to an ITC spokeswoman. <wwd.com/footwear-news>

- India's cotton exports expected to shrink from lighter Chinese demand - India's cotton exports are expected to shrink for this year due to decreasing Chinese demand and lower production combined with higher state purchase prices, according to the Cotton Association of India. Exports are likely to drop 59% to 3.5 million bales in 2008/09, with total output expected to fall 7.4% to 29.18 million bales. China, which is experiencing a slowdown in its textile industry affected by the global economic crisis, is the largest destination for Indian cotton, accounting for over 70% exports. <fashionnetasia.com>

- No sign of Vietnamese footwear recovery - There is no sign of recovery in Vietnam's footwear sector for the year despite recent uptake of textile and apparel exports in the last couple of months.  According to Vietnam Leather and Footwear Association,  footwear exports in the first five months of 2009 can reach US $2 billion compared to the target of $5 billion. The European Union accounted for a majority share of footwear exports from the country and the sector has also been able to increase exports to the US by 9%, when compared with the same period of 2008, the association said. <fashionnetasia.com>

- California lawmakers appeared close to a deal late Wednesday to resolve the state's budget crisis - Economists said the budget circus has created widespread uncertainty, which is a drag on the state economy, as the engines of economic growth - large employers and consumers - stall until they can be reasonably confident the government has its house in order.  Like other apparel designers struggling through the recession, Karyn Craven, founder of Burning Torch, a decade-old Los Angeles-based contemporary apparel brand, has narrowed her focus to survive. She downsized her staff and trimmed the company's offerings by about 30 percent, focusing on unique pieces using vintage or recycled materials. The state has been paying creditors with IOUs for only the second time since the Great Depression because Gov. Arnold Schwarzenegger and the legislature have been unable to agree on how to close a $26.3 billion budget deficit. <wwd.com/footwear-news>

- CIT Group's government funding looks bleak - CIT Group Inc. said late Wednesday it has been told there is "no appreciable likelihood" of government funding in the near term. <sportsonesource.com>

- Eddie Bauer may be headed to a liquidation sale - Reports state that Monarch Alternative Capital and Anchorage Advisors, the two lenders that control Eddie Bauer's $200 million in debt, may bring in Hilco Consumer Capital and Gordon Brothers to create a bid that would liquidate Eddie Bauer's stores. <sportsonesource.com>

- Toning footwear that promise to firm muscles are expected to become a $100 million category in 2009 - Yet, it's still a category in its infancy. Brands such as MBT, Ryn and FitFlop have earned a cult following, broadening their distribution significantly in the last year or two, and now mainstream brands such as Reebok and Skechers are getting in on the action. More major brands are sure to follow, said Matt Powell, a footwear analyst with SportsOneSource. "It's still emerging at this point, but it's starting to feel like its going to be a really big deal," he said. "People are starting to talk about it the way they talked about aerobics back in the mid-'80s." Mr. Powell estimates the category will reach $100 million in retail sales this year. And though that's a fraction of the roughly $1 billion walking category and $5 billion running category, he says toning footwear is the kind of thing that could "catch on like wildfire." "Pretty much everybody is aware of it, but some have chosen not to play yet," he added. "This could revive the walking category, which has been dormant for 10 years." <adage.com>

- CNBC highlights Under Armour's Recharge suit - The Recharge is a compression suit that the company has designed for athletes to wear for 24 hours after their big workouts. Under Armour says it helps reduce swelling and soreness time and re-energizes the body for the next workout. "Right now we're seeing this on athletes across all major sports leagues -- NHL, NFL and MLB -- so it's starting at the top level," said David Ayers, Under Armour's director of product creation. "But this is a science that can benefit all athletes, from guys and girls just getting off the couch for the first time and are just going out for a run and feeling aches and pains the next day. It's as much for them as it is for the world class athlete." Under Armour worked with the University of Connecticut to test athletes and to support the claims for this product. For optimal results, the company recommends athletes put it on within two hours of finishing a workout and wear it for 24 hours. Both the top ($99.99) and the leggings ($89.99) are being sold separately and could be seen as steeply priced in this economy. Ayers says the cost is all relative. <cnbc.com>

- Footwear CPI prices increased 1.6%year over year in June - Footwear prices increased 0.2% in June and advanced 1.6% from a year earlier, the Labor Department said Wednesday in its Consumer Price Index. Women's footwear prices declined 0.3% in June, and dropped 0.9% in 12-month comparisons. The cost of men's footwear declined 0.5% in June, while rising 2.1% year-over-year. Boys' and girls' footwear prices rose 1% in June, and spiked 6.4% compared with a year earlier. Retail apparel prices, which include footwear, rose a seasonally adjusted 0.7% in June while advancing 1.5% compared with a year earlier. Apparel prices declined 0.2% in March, April and May. Prices for all goods and services advanced 0.7% in June, but declined 1.4% year-to-year. The monthly increase was driven by a significant jump in gas prices. <wwd.com/footwear-news>

- LLBean and Sears top the list of online website availability and quality connection in June - Web shoppers could access a top 50 retailer web site with a high broadband connection an average of 98.90% of the time in June. That availability compares with an average of 91.88% for a low broadband connection and 74.49% for dial-up, says Gomez Inc. The web retailer with the best high broadband availability rate in June was LLBean.com at 99.76%, followed by Sears.com at 99.64%, Newegg.com at 99.62% and ColdwaterCreek.com at 99.59%. Sears.com also had the most consistent low broadband and dial-up availability in June at 98.61% and 98.04%, respectively. <internetretailer.com>

- Bill Gates ups his stake in JJB sporting goods company - Billionaire Bill Gates has taken a stake in embattled sports retailer JJB. The Microsoft tycoon made the acquisition through the Bill & Melinda Gates Foundation, the philanthropic organisation created to "help all people lead healthy, productive lives". On Tuesday the foundation, which is also supported by legendary investor Warren Buffett, increased its holding from 7,072,405 shares to 7,872,405 taking the stake to 3.14%. <retail-week.com>

- Wal-Mart to close deal on acquisition of Russian retail real estate company - According to unofficial reports of retail market insiders, Wal-Mart Stores Inc. has initiated negotiations to acquire 100% stake in the Russian retail real estate company OOO Torgovy Dom Kopeyka which owns 49 properties in Russia. One of the top managers of Finansovaya korporatsiya URALSIB OAO said that Wal-Mart made a preliminary written offer in June. According to this manager, Kopeika has not accepted the offer formally yet, but it is planning to do it in August 2009. Nikolay Tsvetkov may keep a minority stake in the company. It is estimated that Kopeyka may be worth between $280 million and $630 million. Esmerk reported that Corporate Relations Director of Wal-Mart in Russia and Eastern Europe, Konstantin Dubinin, has not commented on this information.

- Wal-Mart going green and leading the way - Wal-Mart is expected to introduce an index that would determine the social and environmental impact of all the products it sells today during a Web cast of its Sustainability Milestone Meeting. The index could help buyers decide what items to put in stores; consumers referring to the index could see how brands compare in the sustainability department. The move has lots of implications, including potentially higher costs for manufacturers. There could also be more competition among brands for shelf space as manufacturers vie for higher rankings. The initial setup for new methods of manufacturing might be a cost added for Wal-Mart's producers, but long-term, it certainly will be a benefit. <wwd.com/retail-news>

- UK lingerie supplier files for bankrupcty - Lingerie supply giant Intimas has collapsed into administration after it was hit by the weak sterling and tough trading. <drapersonline.com>

- Ossie Clark label closing - The iconic Ossie Clark label, which relaunched last year, is shutting down. "Due to market conditions, developing the business has been challenging and the decision has been made to cease trading,'' a company spokesman said Wednesday. Brothers Marc and Julian Worth, clothing business veterans, hoped to turn Ossie Clark into a global designer brand. They had an exclusive licensing deal with Alfred Radley, a manufacturer who purchased Clark's business in 1968. Marc Worth never disclosed how much he paid for the license, although he told WWD in 2007 he planned to invest "a seven-figure sum'' in the overall project. <wwd.com/business-news>

- Yolanda Cellucci's 41 yr old bridal shop shuts down - After dressing tens of thousands of brides in the last 41 years, Yolanda Cellucci will close her one-stop bridal and ready-to-wear boutique, salon, spa and cafe in Waltham, Mass., next month. <wwd.com/retail-news>

- New board of advisors for men's footwear company Vael - Bourgeoning men's footwear and accessories company Vael unveiled a new creative board of advisors Thursday to assist the growing brand. The Santa Barbara, Calif.-based brand, which launched its collection of shoes and bags for fall '08 and has been tapped to create a special-edition shoe for the Project trade show in September, has recruited a group of advisors with longtime connections to the streetwear market, including the founders of Stussy and Mossimo. "We have put together an advisory board of iconoclasts who represent the best and most creative minds in the fashion industry," said Vael founder and Creative Director M. Coleman Horn, in a statement. "These are pioneers in the fashion industry ... and Vael is fortunate to have their support and expertise as a driving force behind our success as a new brand." <wwd.com/footwear-news>

- U.S. Army secures footwear licensing deal - A line of U.S. Army-trademarked footwear and bags from the Philip Simon Group will be shown in August at MAGIC. The deal was brokered by The Beanstalk Group, which represents the U.S. Army. The multiyear deal will see the development of fashion and athletic footwear and bags featuring vintage Army aesthetics and street-chic styles. "We want to create a footwear line that expresses and conveys the ideals of the U.S. Army, but in a fashionable way," says Philip Chemla, president of PSFG. "This line will embody the idealistic aspects that define the U.S. Army and translate them into functional and fashionable shoes and bags. The patriotic homage combined with bright accent colors and cool styles will appeal to consumers across the board." <licensemag.com>

 

INSIDER TRADING ACTIVITY:

LIZ: Andrew Warren, CFO, sold 2,837shs ($7k) less than 10% of common holdings.

LIZ: Nicholas Rubino, SVP & Chief Legal Officer, sold 434shs ($1,100) less than 5% of common holdings.

ARO: John Howard, Director, sold 2,093shs ($75k) less than 5% of common holdings as a charitable contribution.

 

MACRO SECTOR VIEW AND TRADING CALL OUTS

Retail First Look: VFC – I Don’t Get It - SV 7 16 09

 

 


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Don't Hold Back

"Don't let the fear of striking out hold you back."
-Babe Ruth
 
After yesterday's move in the market, it's only fitting that today's Early Look is U.S. focused.  We are swinging away everyday at Research Edge without fear.  
 
Largely on the back of "better than bad" economic news, the S&P 500 increased the most in two months since crushing the 200-day monkey average (875) short seller like a bug.  The move higher was convincing with volume up 31% day/day and breadth was very positive (86% advancers/12% decliners).
 
The good news does not end there.  Last night China reported that GDP grew 7.9% (better than consensus) and now trends in Japan are "less bad" as The Bank of Japan raised its economic assessment for a third month.  
 
While the VIX remains broken across all 3 durations, yesterday it was up alongside the S&P 500; this has only happened 13 times since 1990.  My guess is the VIX was reflecting the fact that there are still lingering reminders that things are not perfect in this world.  
 
Apparently, the CIT Group Inc. is probably not going to receive a federal bailout.  Finally, the government is doing the right thing.  While I have a good friend that works at CIT, the federal government SHOULD NOT bail out CIT.  I have no desire to spend my money bailing out another CEO, who may have taken on risk at a time when he should not have.  Let the chips fall where they may!
 
Yesterday's rally was all about REFLATING assets or as we call it "BURNING THE BUCK" - the dollar index got smoked yesterday, down 1.0%.  Not surprising, the consumer names underperformed as they should; the trends impacting the consumer remain weak.  It's being reported today that the US issues with housing are not getting much better.  The number of U.S. households on the verge of foreclosure soared by 15% in 1H09, and foreclosure filings rose more than 33% in June year-over-year and were up nearly 5% from May.  
 
For the next two weeks it's all about earnings and so far the earnings season has started out relatively strong.  Of the 6% of the S&P 500 that has reported earnings so far, 71% have reported a positive earnings surprise relative to analysts' expectations.  
 
Although, as we learned from YUM Brands a positive surprise does not always lead to positive commentary about the balance of 2009, which is another small reminder that consumers around the world are feeling a pinch - still.
 
We have laid out our 3Q themes, and most of them seem to be playing out as expected early in the quarter.  Yesterday, the "BUCK WAS BURING," REFLATING parts of the market.  REFALTION coupled with a powerful short covering rally (inspired by INTC) led the market to the higher end of our other theme "RANGE ROVER" - a call that the S&P 500 will trade in a tight trading range of 9% in the intermediate term.  
 
The futures are slightly lower right now; the economic reality is that the world is healing but the wound is still open and CIT is reminding us there is still trouble in corporate America.
 
Function in Disaster; finish in style   
 
Howard Penney
 

LONG ETFS

USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. With the USD breaking down, oil should get a bid.  

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.

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
 

SHORT ETFS
 
XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials. We want to short this ETF ahead of GE reporting on Friday.

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.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

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.


McGough's CIT take

As a follow up to our First Look callout on the CIT situation we'd like to point out some additional facts.

- CIT is one of the largest (and oldest) "factors" to the apparel trade, but it's not the only one. Wells Fargo, GE Capital, and Bank of America are also some of the larger players in the space. A quick Google search also lists numerous smaller and regional players which routinely service manufacturers. If CIT were to cease purchasing receivables then you don't have to be a rocket scientist to figure out that there'd be a temporary setback to the small and middle market manufacturers that require receivables based financing. After all, CIT's $6bn in its trade finance asset portfolio represents about 6-8% of total industry receivables. However, it is likely that alternate sources of funding would be found as market share would accrue to the other large players in the space.

- Looking below the surface, it's important to note that CIT is predominately a lender to the middle market and small businesses. The issue of potential failure here is really confined to the trade originated by smaller businesses that, in aggregate, could have a broader impact on the overall environment. Clearly any failure or disruption in the availability of credit is relevant, but the impact on the larger publicly traded manufacturers and retailers (indirect impact from potential product shipment disruption) is not likely to be noteworthy.

- The real risk in this situation lies in the cost of capital. As Keith and our Macro team have repeatedly pointed out, the risk in the current market lies with companies that are saddled with financial obligations in a rising cost of capital environment. This holds true for the mom and pop, local, or regional player that is most dependent on factoring to boost the cash flow cycle. Even if vendors are to find new sources of financing it is likely to be at an increased cost, resulting in further pressure on sales and margins. The flip side of this equation is that the larger players with clean balance sheets are likely to gain share at the expense of their smaller competitors. With our day to day focus centered on the public markets, we tend to forget that there is still a substantial amount of small business activity centered in the retail and apparel trade. Of the approximately $200 billion in US apparel retail sales, the top 20 national brands account for only 30% of the total volume. We also estimate that about 60% of apparel in the US is sold through a publicly traded entity.

- With the decks already stacked against the smaller player whose financing options may already be limited, the CIT situation may force the hand of owners to seek partners or outright sales of their businesses in an effort to stay afloat. We've been talking about consolidation moving up the spectrum to larger scale deals, but a sustained dislocation in financing could lead to a change in activity as it relates to size. At the end of the day, this is yet another driver of consolidation albeit in a less efficient manner than the likes of a Linens or Circuit City.

 McGough's CIT take - a1

Brian McGough
President and Director of Research

 


COTAI COMMISSION CAPS

The two Cotai powers colluding to control runaway commission expenses sounds good on the surface.  Cotai versus the peninsula is a battle that started with the opening of City of Dreams on June 1st.  It does make sense for Venetian and CoD to continue to work together and commissions are an obvious place to start.  After looking at the June data and July so far, Cotai is clearly winning the battle.

One issue with self-regulating commission rates is that the other players probably won't follow the cut.  Is Jack Lam going to reduce his commission at the Mandarin from a very lucrative 1.40-1.45%?  I doubt it.  Given the competitiveness in the VIP segment, pricing is a key variable.  Junkets can easily bring their customers to the higher commission casinos.  The second problem is the lack of transparency in junket commission rates.  It's good PR to announce a commission reduction, but will CoD know that Venetian is cheating and vice versa?  Will Venetian know if CoD is making other concessions to the junkets that don't show up in the official junket rate?

Even a government enacted commission cap would be difficult to enforce.  The operators have been expecting government action since late last year and still nothing has been enacted.  We are skeptical of any government action until at least late 2009 when the new Chief Executive takes over.

We continue to believe there is upside in both MPEL and LVS for different reasons, none of which involve commission caps.  For MPEL, the incremental news flow should be positive as CoD continues to ramp.  For LVS, Macau margins could look much better than expected as drastic headcount reductions and numerous one-time expenses will improve "ongoing" margins.


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