PENN reports tomorrow. The only cracks we see are the possibility for slightly lower guidance and limited visibility on cash deployment. Street 2010 looks a little high but we’re not yet at that bridge.


Ignoring potential insurance proceeds, we see Q2 EPS and EBITDA close to PENN guidance and our estimate of $0.36 and $147 million, respectively.  The quarter should be a non-event.  For all of 2009, we are projecting $1.47 and $611 million, respectively, both in-line with the Street. 

Where we differ is 2010.  Our estimates of $1.48 and $645 million fall $0.08 and $26 million, respectively, short of the Street.  Numbers could go even lower, however, due to competitive conditions in many of PENN’s markets including Chicagoland, St. Louis, and Indiana (35% of property EBITDA in the aggregate).  Beyond 2010, most of PENN’s properties will face new market entrants.  We estimate over 80% of PENN’s EBITDA is generated in markets with increasing supply.  We’ll cross that bridge when we get to it.

The PENN positives are clear:  great management and a solid balance sheet and cash flow.  The negatives are the lack of growth and dwindling acquisition possibilities.  So what’s the right multiple?  The stock trades at about 7.5x 2010 EV/EBITDA and a 9% FCF yield.  Looks fair to us.



28 JULY 2009



Positive factors outweigh negative by 5 to 1. We would need to have seen the opposite to take this stock down.

UA’s revenue beat, EPS beat, guide-up and clean inventory position is going to frustrate plenty of folks today who are negative on the name – and trust me – there are plenty.  ALL of them will focus on the one negative…”how the heck could footwear be down 18%?”  Yes, that’s certainly a valid point. That number was below my estimate. But one that is being answered by the management change announced late last week and the hiring of Gene McCarthy as SVP footwear (the best footwear free agent out there). Find me any long term investor that owns the stock that now no longer thinks one that this is a remarkable opportunity for this company that that are proactively preparing to capture. Also, let me point out that 3 out of every 5 key bear case points thrown back at me over the past six months has been that core apparel ‘simply is not growing.’  Well, the +16% return to growth we saw this quarter in apparel is going to suck the wind out of that sail…

Anyway anyone wants to slice it…this is a very very positive result.



Some Notable Call Outs

- In a rare cross marketing effort between retailers, Foot Locker and Office Depot are collaborating on a back to school promotion. Presumably in an effort to leverage the traffic in two of the most important categories for the season, each is offering a discount for a cross purchase. It’s hard to think of many examples of retailers promoting each other, however with zero overlap between footwear and school supplies this appears to make some sense. Customers making a purchase at Footlocker will receive a coupon for $10 off a $30 purchase at Office Depot. For shoppers purchasing at Office Depot, they will receive a 20% off coupon for a purchase at Footlocker.

- DKS acquired six additional stores in Oregon, adding to the single store it is currently in that market. The former Joe’s Sports, Outdoor, & More locations are expected to open this fall. We mentioned a few weeks ago that DKS was poking around at the now-bankrupt Joe’s real estate, but this is the first indication that the company is taking multiple units in the pacific northwest. With 20 new store openings originally expected for 2009, we suspect the opportunistic entry is providing incremental growth opportunities beyond original expectations.

- In meetings with LIZ management yesterday, CEO Bill McComb suggested the likelihood that we see a significant pickup in markdowns over 2H, driven by the need to drive traffic (and not due to inventories which remain very clean).



- Pakistan is going to release a new textile policy to boost exports in the next three year - The policy will detail plans to hike exports to $25 billion in the three-year period, and would address issues regarding updating machinery, developing infrastructure and boosting human resources to enhance the industry's international competition. <>

- Thirteen Malaysian trade associations have raised concerns over the new foreign labour to the Minister of International Trade and Industry - Some of the issues which have been raised by these trade organisations include freeze on foreign labour intake and the proposed doubling up of levy on foreign workers to be borne by employers. Andrew Hong, CEO of Malaysian Textile Manufacturers Association said, "All associations based in Malaysia have joined their hands to raise their voice on a common issue of levy fee imposed on the companies ... they hope to get positive result from government to revert back to the old policy, but still are not sure about the results". <>

- EU Trade Commissioner soon to determine whether to extend duties on mainland Chinese and Vietnamese footwear - The debate whether these measures should be continued or not bitterly divides European producers and importers. Any decision taken will inevitably offend a large number of interested parties in the EU. Hong Kong's business community will recall that duties worth 16.5% for footwear from mainland China  and 10% for footwear from Vietnam, entered into force in October 2006 and are set to expire on 3 January 2010, unless the ongoing review decides that measures should be continued. A majority of around 15 Member States are opposed to the continuation of measures including Austria, Belgium, Czech Republic, Cyprus, Denmark, Estonia, Finland, Germany, Ireland, Latvia, Luxembourg, Malta, the Netherlands, Sweden and the UK. In view of this opposition, it would be unlikely that Commissioner Ashton would make a decision without gathering majority support among the Member States. <>

- The SGB Retail Top 100 list has some big changes from prior years - The turmoil of the last year has certainly had its impact on the retailers in the market, but there were as many opportunities as challenges this year.  Dick’s Sporting Goods once again took the top spot for full-line sporting goods stores - though the gap with arch-nemesis The Sports Authority narrowed just a tad.  Dick’s Sporting Goods has tempered store opening plans for this year after growing square footage in the double-digits again in 2008, but The Sports Authority has taken a more aggressive approach to the new stores as well, adding a net increase of 29 stores, including 11 stores in one day in August last year.  The mall, for the most part, is a place that has been getting healthier after years of rapid expansion and the eventual bursting of the retail real estate bubble.  The main players are all limiting store growth, instead focusing on expense controls and the renegotiation of leases when available.  There are some estimates that as much as 40% of the mall athletic specialty stores could be renegotiated, remodeled, re-named or shuttered this year. Jimmy Jazz, the New York-based urban retailer, posted the highest growth percentage for 2008 as they continue their rapid expansion into Florida and the Southeast and Midwest regions.  Jazz shows no sign of slowing down in 2009 after just completing a deal through an affiliated business to take the Man Alive stores from The Finish Line - a transaction that could add another 75 doors to the retailer’s portfolio.  The rest of the top high fliers in revenue growth owed their growth to the red-hot Internet business or specialty retail as, Athleta, Lululemon, and rounded out the top five growth stories of the year. Still, the tough business environment - particularly at retail - took its toll as dozens of small specialty shops disappeared from the landscape.  The pain wasn’t reserved for the small guy though, as Sportsman’s Warehouse was forced to shutter or sell a large number of stores and Joe’s Sports & Outdoors made it through the year only to find its 31 stores liquidated by the time this list went to print.  Joe’s made it onto the SGB Top 100 list for one last time, if only to better express the opportunity that awaits other retailers in the Northwest. <>


- Slowdown in merger and acquisition activity in the retail, apparel, footwear and restaurants sector - Merger and acquisition activity in the retail, apparel, footwear and restaurants sector fell sharply during the first half of the year, putting 2009 on track to be the slowest M&A year of the 21st century so far. According to a quarterly report by Robert W. Baird & Co.’s investment banking department, the number of disclosed M&A deals in the U.S. for less than $1 billion, considered “middle market,” dropped 37.7% to 43 from 69 during the first six months of the year. The value of the middle-market deals within the retail, apparel, footwear and restaurants sector fell 17.7%.  If current trends hold, 2009 would set new lows for both deal volume and value. Deal value peaked in 1999 at $1.57 trillion, according to Baird, but came close to matching that level in 2007, when deal value hit $1.51 trillion. The greatest number of disclosed deals in the last 10 years was 6,040 in 2000. At its current pace, M&A activity in the retail-restaurant sector easily would fall below the slowest year of the decade, 2002, when a total of 108 disclosed deals came through with a value of $15.25 billion.<>

- UK bears at credit ratings agency claim recent positive trends are unsustainable and downturn may last through 2011 - A leading UK credit ratings agency has dismissed recent signs of life on the high street as unsustainable, predicting that the downturn may continue through to 2011. Fitch played down recent positive trading figures from a number of firms including fashion chain Next, which said that fine weather in the first half of its trading year had added between 2% and 3% to sales. But the ratings agency said the upturn was temporary as a later Easter, better weather and many early sales conspired to give trading an artificial boost. Fitch added that retailers may have tied themselves in knots with the early sales, which left margins squeezed and firms backed into a corner to keep promotions or suffer shoppers looking elsewhere after becoming accustomed to price cuts. <>

- August is set to be a “weak” month for UK retail sales, according to figures compiled by the CBI - UK Retail sales fell for the third consecutive month in the year to July, with little respite forecast by retailers for August, according to the CBI’s Distributive Trades Survey. 32% of retailer respondents said that year-on-year sales volumes increased during the year to July, while 47% said that they were down.  27% of retailers forecast that sales would be below seasonal norms in August. The three month moving average of sales volumes was negative at a balance of -16% and is expected to drop further in August to -21%. <>

- Fast Swimsuit ban will take place in 2010 - The Fédération Internationale de Natation (FINA) has agreed to ban the record-breaking swimsuit technology that led to 108 world records last year and almost 30 already this year, according to reports from several sources including the Associated Press. The new rule will not take effect until 2010, as the 13th FINA World Championship is currently underway in Rome.  The ruling means that all use of non-textile fabrics will be barred by Jan. 1, 2010.  The argument for the ruling is that the non-textile suits, made from polyurethane, provide more speed and buoyancy to the swimmers, according to several published reports.  Yet swimsuit makers may argue that advances in sport technology can only benefit the sport and to deny access to these technologies would be putting the sport back decades to before it existed. <>

- Speedo expressed frustration over new swimsuit ban - Speedo blasted the Fédération Internationale de Natation (FINA) move to ban swimsuit technology that led to numerous world records over the last year. Among other points, Speedo said, "Any move which seems to take the sport back two decades – such as a possible return to the traditional female swimsuit and male jammer - is a retrograde step that could be detrimental to the future of swimming." <>

- Nike's management gets lower compensation - Lower earnings last year translated into smaller paychecks for Nike Inc.’s chief executive officer and the president of the Nike brand. Mark Parker, president and ceo of Nike, saw his total compensation decline 17% to $7.3 million from $8.8 million the year before. Although his base pay rose 6.3% to $1.5 million and his stock and option awards gained 4.4% to a total of $4.8 million, these couldn’t make up for a nearly two-thirds reduction in his nonequity incentive plan compensation, to $900,000 from nearly $2.7 million. Parker’s long-term incentive compensation, one of two components of the nonequity package, rose to $900,000 from $750,000 in fiscal 2008, but annual incentive compensation, tied to company performance, shrank to zero from $1.9 million. For Parker and his fellow top executives to qualify for the annual payout, Nike would have had to have posted yearend earnings before income taxes of $2.47 billion. However, Nike’s pretax profits fell to $1.96 billion, shutting out Parker and the other principals. <>

- LVMH accidently preannounces, posts Q2 flat sales and modest sales growth in 2H while also experiencing heavy destocking by distributors - LVMH reported a 23% decline in first-half profits, despite a modest sales gain, as its wines, spirits, watches and jewelry businesses were hurt by heavy destocking by distributors. But the French luxury group said it still expects to gain market share in 2009 because of product launches, expansion in new markets and cost containments. A spokesman for LVMH said the company had to publish the earnings earlier than scheduled after they were mistakenly released. Sales in the period rose 0.2% helped by strong global demand for Louis Vuitton bags and a good performance by the Sephora beauty chain. In the second quarter, sales were flat but fashion and leather goods sales grew 8%. Louis Vuitton bags and luggage had a “particularly exceptional” first half of the year, said LVMH, as the unit reported double-digit growth and strengthened its position across all regions. The brand also received a boost from Japanese shoppers, who took advantage of the strengthening yen by making purchases abroad. <>

- The recession’s reach seems to be forcing the City That Never Sleeps to dress more relaxed - The one-two combo of a decline in black-tie parties and benefits and the upswing in at-home entertaining is changing the way women dress up at night. That’s not necessarily such a bad thing, according to some fashion insiders — many of whom now have no qualms about wearing daytime pieces at night. Dresses with detachable accessories also fit the bill for post-work festivities. All in all, many Americans seem to be warming up to a more low-key lifestyle. <>

- Ebay takes advantage of vacant retail space through pop-up store whose lifespan is short - Ebay on Monday began filling with products a 5,000-square-foot three-dimensional equivalent of its online self at 3 West 57th Street. EBay, with platforms for trading goods and services auction-style, payments and communications, wanted people to see what just a fraction of its inventory would look like in a store — even if only for five days. “They’ve taken this fabulous retail space among all these great neighbors and decided to create the brick-and-mortar experience of what eBay is,” a spokeswoman said. “There will be ‘wow’ items, including lots of clothing, shoes and accessories.” The company said its holiday preview event would showcase a diverse selection of new and used merchandise from Louis Vuitton, Apple and Barneys New York, which, coincidentally, happen to operate stores within blocks of the eBay pop-up. Ebay is leasing space in a neighborhood with a high pedigree. Bergdorf Goodman is just east of the space, which previously housed auction house Phillips, de Pury & Luxembourg. The location, said the spokeswoman, “is at the physical and metaphorical intersection of shopping, pop culture, high style and creativity.” <>

- Lacoste Footwear president resigns - Gary Malamet has resigned from his position as president of Lacoste Footwear, a wholly owned subsidiary of Pentland USA Inc., based in New Hyde Park, N.Y. Malamet, who joined the company in January 2007, was responsible for overseeing operations in the U.S. and Canada. A replacement has not yet been announced.  <>

- VF Corp. named David Conn president of VF Retail Licensed Brands - Conn is the former EVP of Iconix Brand Group and also served in senior marketing roles at Columbia House and Candie’s Inc. In his newly created role, Conn will seek out new retailers for the company’s licensed business. “Partnering with leading retailers is one of the cornerstones of VF’s growth strategy,” Mike Gannaway, VP of VF Direct/Customer Teams, said in a statement. “Beyond our core national brand strategy, we see additional opportunities for growth with key partners through the introduction of new brands under a licensed business model. David brings a unique set of skills, capabilities and brand licensing experience to VF that will prove effective in leading our efforts in this new endeavor.” <>

- LaCrosse Footwear posted a massive beat at $0.26 when the street was at -$0.01 - This is the first company we have seen that has beaten on a revenue basis.  Although BOOT beat big time on EPS, here are some reservations about the implications of the Q2 09’s results and the company’s future looking forward: 1) Sales were only a beat because of increased military orders which boosted work/occupational sales up 26% while their non military leveraged outdoor category revenue was down 22%, 2) inventories were completely out of control being up 35% while sales were only up 7.5%, 3) BOOT’s cap ex is on the rise which is completely opposite to the entire footwear and apparel industry. 

- Rocky Brands misses earnings on lower sales - Cautious inventory commitments and decreased consumer spending contributed to sales and earnings losses at Rocky Brands Inc. in the second quarter. For the three months ended June 30, Rocky Brands reported a net loss of $1.4 million, or 25 cents a share, versus earnings of $700,000, or 13 cents, during the year-ago period. Sales at the Nelsonville, Ohio-based company dropped 15 percent to $51.2 million, compared with $60.5 million last year. Sales in wholesale were down 11 percent to $37.9 million, while retail sales decreased 24 percent to $12.3 million for the quarter. “Sales were down as retailers remained cautious with inventory commitments as the result of decreases in consumer spending and store traffic,” Mike Brooks, chairman and CEO of Rocky Brands, said in a statement. <>

- Christian Lacroix SNC received a serious bid from Italy’s Borletti Group - The administrator of Christian Lacroix SNC said Monday it has received a “serious” bid from Italy’s Borletti Group, the owner of department stores La Rinascente and Printemps, in association with the designer. Monday was the deadline to lodge offers for the couture house, which has been in administration after filing for protection against creditors in May. A commercial court is due to rule in September on the offers, including Borletti’s. A bid from French turnaround firm Bernard Krief Consultants, which last week said it was planning to make an offer for the fashion house, has been deemed unsatisfactory, said a spokeswoman for administrator Regis Valliot. <>

- Cartier `Not Sure Worst Is Over' for Jewelry Market as Slowdown Persists - Cartier, the biggest brand owned by Cie. Financiere Richemont SA, is prepared for a prolonged slowdown in the jewelry market and lower sales this year, with more workers set to work part-time hours if needed, according to U.K. Managing Director Arnaud Bamberger. <>

- Wal-Mart selling exclusive Foreigners Comeback CD - Can Walmart work its magic for yet another '70s rock act? The retail giant's exclusive September 29 release of Foreigner's Can't Slow Down will be its first major exclusive since AC/DC's Black Ice in October. The album (Foreigner's first since 1995's Mr. Moonlight) has much in common with Journey's 2008 Walmart-only release, Revelation. Like its predecessor, Can't Slow Down will be a three-disc set that features a CD of new material, a concert DVD and a best-of collection. But whereas Revelation included a CD of rerecorded Journey favorites, Foreigner remixed the band's original master recordings to make its hits sound more contemporary. Perhaps most noticeable to longtime fans of both bands, each release features a replacement lead singer -- in Foreigner's case, Kelly Hansen, who takes the place of original frontman Lou Gramm. Despite the absence of original Journey lead singer Steve Perry, Revelation sold 633,000 copies in the United States, according to Nielsen SoundScan. In its debut week that ended June 8, 2008, it sold nearly 105,000 copies, good enough to reach No. 5 on the Billboard 200 album chart. Black Ice sold 2.1 million U.S. copies, including 784,000 in its debut week that ended October 26, 2008. <>

- Coldwater Creek names a creative director for stores and its retail site - The retailer has named Jerome Jessup to the newly created position of executive president and creative director, with responsibility for brand management, creative services and visual merchandising. <>

- Zale hires a new marketing leader who will oversee its web site - Zale Corp., a chain and online jewelry retailer, has hired Richard A. Lennox as executive vice president and chief marketing officer. His duties will include overseeing Zale’s e-commerce operation. <>

- Footwear and apparel from Nice Skate Shoes, or NSS, will launch at Kmart and Sears stores soon - The young men and boys apparel line ($9.99 to $26.99) features street-and skater-themed T-shirts, hoodies, denim, belts, chains and other novelties. NSS shoes ($17.99 to $44.99) are offered in sizes from toddler to adult for men, women and kids. To kick off the apparel launch, Kmart and Sears have created the nationwide rideNSStour, where the best skating talent will compete at 25 skate parks in California, Kentucky, Ohio, Pennsylvania, Maryland, New York, New Jersey and Indiana. <>

- KB Toys intellectual property sale set - Streambank has set an Aug. 6 auction date for the intellectual property sale of KB Toys, which filed for Chapter 11 this past December. No stalking horse bidder has been confirmed. <>

- Bebe enters into licensing agreement with Titan industries for footwear - Mall-based women's apparel retailer Bebe Stores Inc said it entered into a five-year licensing agreement with Titan Industries Inc to design, manufacture and distribute non-casual footwear for women. The Brisbane, California-based retailer said the new bebe shoe collection will be sold in bebe stores in the United States and Canada as well as select specialty and department stores worldwide from early spring 2010. The shoes will be priced in a range from $89 to $169 at retail stores, the company said in a statement. Titan was created in 1998 for the sole purpose of licensing shoes under the bebe brand, Titan's Chief Executive Joe Ouaknine said. Bebe's shares closed at $6.63 Monday on Nasdaq. Pasted from <>

- The spring ’10 Polo Ralph Lauren Layette collection offers plenty of options for pint-size preppies - With patent leather loafers, nautical-inspired slip-ons, casual sneakers and gingham-print espadrilles, some of spring’s most classic styles have been shrunk down for the cradle crowd. Produced under license by Boca Raton, Fla.-based BBC International, the collection retails from $20 to $50. <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): UA, AZO

07/27/2009 10:49 AM

BUYING UA $24.22

Company reports tomorrow and if this stock gets squeezed I don't want to miss it. Intermediate term TREND line support = $21.98. KM


07/27/2009 10:31 AM


Lampert keeps selling, but we need to trade around this position - short green days; cover red ones. KM







“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
-John Maynard Keynes
I always find it fascinating to listen to grey beard Washington/Wall Street rear-view looking economists talk about their long standing experiences analyzing markets. All the while, one of their idols of government intervention, John Maynard Keynes, was only in his 30’s when he originated some of his most influential writings… Such is history. She usually writes herself after we are all dead.
Yesterday, the Chinese were in Washington to visit with Go Go Geithner and Dora The World Peace Explorer. The Chinese smiled and shook hands. They told Geithner that “we are concerned about the security of our financial assets.” And Timmy said, no worries…
With the US Dollar testing her year-to-date lows this morning, at +89% and +43%, respectively, stock markets from Shanghai to Hong Kong are making new YTD highs. Watch what the Chinese do, not what they say. They are buying what they need; not what American politicians want them to need (US Treasuries).
What Go Go and Goldman really want are not dissimilar from what I want – they want to get paid. The only difference being that I don’t get to use America’s balance sheet as my leverage and her currency as my hall pass. As we debauch America’s currency, Debtors, Bankers, and Politicians get paid. Her creditors (China and the US Consumer), pay the bill.
There has been only ONE other time since Nixon abandoned the Gold standard (1971) that the US Dollar Index has sustainably broken below the $78 line. That was one of the major leading indicators to my calling the crash in 2008. After all of yesterday’s useless political China rhetoric, the US Dollar is trading down again at $78.45.
As long as we are all cool with this, we should have no worries. In the immediate term, this is REFLATIONARY and everyone who owns something denominated in US Dollars wins. In the intermediate term (from now until Q4), we will have a REFLATION ROTATION where year-over-year deflation will morph into reported inflation. In the long run, as Mr. Keynes appropriately acknowledged, “we are all dead.”
Most people who have studied economic history will recall that John Maynard Keynes was a self-made millionaire. He originally made his money as a currency trader. Remember that back then (circa 1913 when America created US Federal Reserve) that the most important objective of the day was for central bankers was to preserve the integrity of their country’s currency. So Keynes simply traded around their groupthink.
Keynes ended up becoming a prolific author, but I would argue that his conclusions were born out of trading markets with live ammo. What we see in today’s America are a bunch of professors, lawyers, and politicians running America’s central bank and Treasury having never traded or managed real risk in their life.
This, in the long run, is a major problem for this country, and many others modeling their economic policies after the fully politicized Greenspan model that we have taught them to use. In the end, countries/economies that socialize individual risk taking and capitalize individual resumes of perceived wisdom will not be those that the Chinese trust.
For now, all we can do in America is hope. And while our President says there is an “Audacity of Hope”, allow me to submit the less eloquent conclusion of a global macro trader – hope is not an investment process.
Provided that we wake up every morning to Go Go and Dora, understanding that this is nothing but an exercise in adult story-telling, we can all manage the risk associated with being invested in markets just fine. As long as you understand the game, just trade the one that’s in front of you.
This morning’s leading indicators are the same ones you were looking at yesterday. While America Burns The Buck, copper, oil, and gold prices continue to march higher. The uncompromised end of the US Treasury yield curve continues to make higher-highs and higher-lows. The yield curve (the spread between Bernanke’s politicized end of the curve and the marked-to-market end at 10 years) continues to trade as steep as it has EVER has.
In the immediate term, this is all great. Its great for banker bonuses. It’s great for Bernanke’s job security. It’s great for just about everyone in de Club, other than the commoner like me and you.
We simpletons need to understand that this is all very subtle and “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

My immediate term upside resistance level for the SP500 is now 991, and I have downside support at 956.
Best of luck out there today,


XLK – SPDR Technology Tech got smushed for the 2nd day in a row on 7/27. Buying red.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

EWA – iShares AustraliaEWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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.

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.


XLF – SPDR Financials – Shorted Financials on a bounce on 7/27 with the yield curve as good as it gets.

XLI – SPDR Industrials – We don’t want to be long financial leverage, which is baked into Industrials.

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
– As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

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.

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David Chow Kam-fai has missed a deadline to pay US$200 million to buy out a group of shareholders in Macau Legend Development, Mr. Chow’s company which owns the Landmark hotel and gaming hall and the Fisherman’s Wharf entertainment resort.  The buyout had been offered by Mr. Chow as a means to ending the business relationship between him and the shareholders after the shareholders’ investment in Fisherman’s Wharf (at 10x EBIT) fell flat; Fisherman’s Wharf failed to make financial targets after intense competition from other resorts including the Venetian.

The businessman and former lawmaker has pledged to spend HK$3 billion on a revamp of Fisherman’s Wharf.  Shareholders have been selling large tranches of their stakes but remain in the consortium.


The rate of unemployment in Macau rose by 0.1% to 3.6% in the second quarter compared to the first three months of the year, according to official statistics.  According to the Census and Statistics Bureau, the rate of unemployment between April and June also rose 0.8% compared to 2Q08. 


We all know same-store sales growth was weak for casual dining operators in 2008, but continued unit growth, albeit at a decelerated rate of growth, helped to support overall revenue growth.  As shown by the chart below, new unit growth has turned negative for the bar and grill segment in 2009 so achieving revenue growth will be increasingly more difficult this year as demand remains weak.  And, this chart only accounts for Ruby Tuesday, O’Charley’s, Applebee’s and Chili’s.  The total reduction in supply would look much greater if we could account for all of the mom and pop and privately-owned restaurant closures, including Bennigan’s.

Although the cut back in development could put increased pressure on revenues in the near-term, this rationalization of units will benefit all of the relevant players once consumer demand returns.  It is a well known fact that there was too much casual dining supply, particularly in the bar and grill segment, as same-store sales turned negative in early 2006, prior to the economic slowdown.  The economic slowdown only magnified the problem, convincing restaurant operators to curb their growth targets.   

As excess supply is removed, unit economics should improve across the board as there will be fewer seats to fill.  Restaurant operators cannot cut costs forever so as I said last week sustainable operating margin growth relies on business picking up, the timing of which is still unknown.  As almost all of the restaurant companies’ management teams have said (I am paraphrasing), “due to the economic slowdown, we have made changes that make us better positioned to outperform once sales return,” this is definitely true for the bar and grill segment as a whole.

RESTAURANT INDUSTRY - Supply Trends - bar and grill supply



June trade data released today for Hong Kong saw the deficit expand to 16.5 HK Billion, with total exports increasing to  211 HK Billion a year-over-year decrease on 5.41%  -a big sequential improvement over May.  Shipments to the mainland increased by 10.18% (NSA) over last June and accounted for 52.5% of the total, continuing the trend that has held since February when the impact of Beijing’s stimulus was first felt and exports to “The Client” rose to more than 50%.


For us, this data is an excellent rear view mirror confirming the impact of Beijing’s plan, but is less valuable as an indication of future demand. Although the Export orders in neighboring markets like Taiwan suggest consumer spending in China is showing no signs of slowing anytime soon, Baltic Shipping indices (admittedly a volatile and imperfect measure) have pulled back in recent weeks as anecdotal evidence that stockpiles for base metals and other industrial commodities have built to surplus levels that may at least warrant a breather for heavy imports in August.


We view the Shanghai Composite’s current level as unsustainable as more easy credit finds its way into the hands of more first time equity investors and prices reach irrational highs. We also believe that the internal demand spurred by the stimulus will plateau for a period in the near term unless the nature of that demand shows signs of broadening more rapidly than it has thus far. Neither of these opinions makes us bearish on a long duration basis necessarily, we simply manage risk in real time and focus on the math first, the narrative second.

Andrew Barber


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