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Pakistan Pounded Overnight: Not Making the Cut

Pakistan was down another -1.9% last night, putting the Karachi 100 index down an Eye opening -22% since the global crisis in everything basic foods related began. Unlike Bernanke's Fed, these countries in Emerging Markets consider food CORE .

In Malaysia, stocks got clocked again, closing down another -1.2% as political unrest associated with inflation are bringing PM Badawi to his knees with an emerging "no confidence vote" in his government. Inflation has far reaching consequences relating back to our Theme of Eye on Social Unrest.

"Emerging" does not stand for buy everything "Emerging Markets". Right now it stands for "Emerging" economic crisis brewing in Asia that I call Stagflation.

It is "Global This Time", indeed.
KM

China bounced overnight: Golf Clap...

Chinese stocks avoided their 11th consecutive day of losses overnight, closing +5.2% on the day.

Like a nice putt, we'll give this aberration in the data a golf clap. The "Trend" in the data is a crashing one. Inclusive of today's bounce, China is down -52% from the "its global this time" October 2007 highs.

My next support for the Shanghai Stock Exchange is 2696. Today the Index closed at 3085.

KM

(chart courtesy of stockcharts.com)

Volatility: Beware...

The VIX is looking to breakout big time here. While it is +6% on the day, if it can close above my 22.23 line, i think this is going at least +45% higher over the course of the summer.

No charts. No other points to be made here.

It is time to manage risk, not take it.
KM

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PNRA - Eating Wheaties!

Panera Bread raised its 2Q EPS guidance by $0.06-$0.08 to $0.48-$0.50 due primarily to better than expected company-owned same-store sales growth of 6.1%-6.4% (versus its initial guidance of +5%-6%). This good news release was partially offset by the fact that the company also stated that its 2H EPS results will be more negatively impacted than originally planned by rising gas prices (an incremental $0.02 to $0.03 negative hit). The 6%-plus same-store sales number, however, signals a huge uptick in top-line results from 1Q08 and FY07, up 3.3% and 1.8%, respectively. Our grass roots survey (posted on June 10) indicated that PNRA's new breakfast sandwiches were performing well, which could account for some of the same-store sales and margin upside (the new sandwich generates a higher penny profit than all of its other breakfast offerings).

Additionally, a big part of the bearish story about Panera has centered on the company's declining operating margins, which have been down every year since 2004, and yesterday's press release mentioned that management's renewed focus on driving higher gross profit per transaction started to yield better margins in the current quarter.

PNRA's stock price has recently reflected the change in wheat prices and yesterday's company announcement also removed some of the uncertainties around the company's exposure to this volatile commodity (up 20% from May). Management stated that it is has now locked in about 95% of its wheat requirements for 1H09 at $10/bushel (down more than 30% from the average $15 paid in 1H08). With wheat moving up so much in the last 3 weeks, this will be welcomed news to investors. Interestingly enough, the company wanted to lock in its 2H09 requirements as well, but suppliers are not offering commitments on basis for that time period.


From Iowa to China

The flooding in our nation's heartland is bad enough. But in taking a global view it is clear that we are not alone. The worst floods in 50 years in Guangdong, China are starting to take a toll on factories and finished goods inventory across all industries - including apparel and footwear. Not to diminish the pain being felt by US farmers, the floods in China have affected 5.8mm people (equal to twice the size of the entire state of Iowa). It's vital to step back and look at the progression of Mother Nature's wrath in China - debilitating snowstorms in February, Sichuan earthquake last month, and now the flooding. Three's a charm.

Capacity growth (measured by number of factories) was already slowing headed into the year. But now we're seeing an increasing number of factories close their doors. As I've been commenting on, migrant workers are not showing up to work at the seasonal peak when they are needed most. Add on the fact that we're seeing minimum wage increases better than 15% in certain provinces (18% in Shenzhen on July 1) as well as raw materials head higher, and the outcome is not good. Also keep in mind that in advance of the Olympics, the Chinese government instituted mandatory back pay for vacation days at bottom-tier factories producing lower-end product with questionable labor standards. Clearly, this serves as a financial 'incentive' for the factory to take up its mix and work standards (making China look better while in the Olympics fishbowl), or pay the penalty. Yes, another example of the sheer power of the Chinese government to push its own agenda at the expense of anything remotely resembling capitalism.

Bottom line, costs will continue to rise. Yes, they have already gone up, but they will accelerate in 2H and make their way into the US supply chain by 1H09. Short weak content and distribution (SKX, ADS, DKS). If you need exposure here, long brand strength (NKE and even UA), as well as turnarounds who can sidestep this impact (FL).

Adidas: Time To Dust Off The Short File

I'm getting more cautious on Adidas. Yes, it is a great global brand, and overall a reasonably well-run company. CEO Hainer reaffirmed guidance again today, the same guidance he said in the past that he would hit 'come hell or high water.' To his credit, it appears that he's hitting it. But I think they're pulling out all the stops this year, and with margins at peak, I wonder how much gas is left in the tank in '09. Here's what concerns me...

1) The German consumer confidence number came out today. Not good. -53% vs. expectations of -42%. While Germany is not its biggest European market despite its domicile, Europe overall accounts for 45% of sales and 75% of operating assets. Weaker German confidence, higher UK inflation (+3.3%) and a downturn in UK retail sales will not help this story - especially if the dollar strengthens.

2) The Euro Champs (going on right now) are boosting the athletic space. Then we deal with the hangover.

3) Same goes for the Olympics - for which Adidas is the sole apparel sponsor. 2Q and 3Q09 will be tough to anniversary.

4) US will not get any easier. The Reebok brand is seemingly going away. Retailers don't want it, consumers could care less, and market share for both Adidas and Reebok combined in the US is about in line with New Balance. That's sad. With Under Armour aggressively pushing into the footwear space, this should put pressure on the incumbents (especially Reebok). Let me know if you want any specific market share numbers.

5) Did I mention that cost pressures in the industry are exploding? Check out my early posts outlining the emerging secular margin challenges. Bottom line is that capacity growth in Asia is slowing, pricing is headed higher, and the supply chain is being stress-tested to a greater degree than we've seen in 10 years.

There's got to be some really powerful bull case out there to justify 9x EBITDA. I'm having a tough time finding it. This is officially a name where I need to dust off the short file.

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