Quote Of The Week: Bill Ackman

“While PSIV and Target stock have declined materially, we still believe our fundamental investment case for Target stock will ultimately be realized, although not within the original timeframe we had initially estimated,”
-Bill Ackman

Indeed Bill, indeed… timing and sizing in this business are everything.

As the winners and losers on Wall Street continue to reveal themselves, the New Reality will perpetuate investor demand for transparency, accountability, and trust.

The Liquidity Crisis of October/November of 2008 was marked to market by a SP500 closing price on November 20th of 752. While that freak-out low is now -15.4% lower than Friday’s close, this doesn’t mean that those land locked in their own Illiquidity Crisis (private equity, concentrated activists, etc…) wont continue to fear monger investors, blaming their timing and sizing mistakes on the narrative fallacy of a “Depression” and the like…

If there are two factors we want you to own in your portfolios, they are: Liquidity and Duration. Don’t be locked into illiquid investments, and don’t let your money manager be held hostage to the duration that other investors force upon them.

Keith R. McCullough
CEO / Chief Investment Officer

Chart Of The Week: When The Nasty, Is Good...

Despite it not being mainstream economic thought yet, I continue to anchor on the US Dollar being the lead indicator for the US stock market. In the immediate term, what is bad for the US$ is going to be good for the stock market.

This week was the 1st week of 2009 where the US Dollar declined on a week over week basis. Importantly, the buck didn’t stop going up until we received these two nasty economic reports show in the chart below (jobless claims, and the unemployment report). I’ve been saying this for the last few weeks, and I’ll say it again, and again, the worse the economic data gets, the better it is for the stock market – nasty news (including socializing Wall Street’s losses) breaks the buck’s upward momentum. Deflating the Dollar, re-flates the stock market.

The SP500 was +5.2% this week, and the US Dollar was down -0.66%. If they break the buck by another 300-600 basis points, you better not be bearish like this market’s consensus is. This Thursday-Friday move was a powerful preview of what can happen when everyone expects the nasty.

Keith R. McCullough
CEO / Chief Investment Officer

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US Market Performance: Week Ended 2/6/09

Index Performance:

Week Ended 2/6/09:
DJ +3.5%, SP500 +5.2%, Nasdaq +7.8%, Russell2000 +6.1%

2009 Year-To-Date:
DJ (5.6%), SP500 (3.8%), Nasdaq +0.9%, Russell2000 (5.8%)

Keith R. McCullough
CEO / Chief Investment Officer

GIL: Follow the 'Leader'?

I don’t believe in GIL’s strategy or sustainability of returns, but the Q looks OK to me, and the CEO is buying again after selling 250% higher. This guy can trade his stock. Follow the ‘leader’?

This quarter should be abysmal, with a 3,000bp sequential slowdown in sales, and a 1,000bp erosion in margins. Yes, you read that right, I did not err with too many zeros. It would take a lot for me to ever turn fundamentally positive on the trajectory of this company’s margins long-term, as it is growing into slower growth businesses where it is a price taker with increased capital requirements to sustain growth and profitability. That’s not a disaster scenario as long as management realizes it. This team does not.

But few things are linear in this business. After missing and/or guiding down for the past six quarters, 1Q09 should mark the bottom for GIL. Note that the CEO sold 3.6mm shares of stock about this time last year – just before the business completely fell apart and over $4bn in equity value went away. Well…at least he avoided losing $130mm in his own capital.

Here are a few considerations on the quarter.
1) Revenue:
a. Negatives: 1) Pricing down 7-9% at a minimum, and GIL does not benefit from price increases granted by WMT to the extent as Hanesbrands and Fruit due to meaningfully less exposure. 2) FX has been a 1.5% tailwind over the past year. At current FX cross rates, this reverts to a -1.5% headwind. 3) Prewett acquisition has helped revs for the past 11 months. GIL shows 1 quarter of that in this quarter, which helps by 4% in total, but then we’re back to relying on organic growth – where GIL has struggled.

b. Positives: 1) 1Q is the least significant revenue quarter. 2) There’s a 5-10% volume opportunity this year from Europe, with a call option on Japan and Mexico. 3) The US mass retail underwear program started in 3Q, which still leaves some yy growth for 2 more quarters.

2) Margins: a) GIL comps in 1Q against a 600bp margin boost due to mix last year. b) Inventories were +32% at the end of 4Q relative to 27% growth in sales. That’s not great, but does not make me too queasy. c) The biggest negative is also emerging into a positive. Cotton will be a crushing blow to GIL this quarter. Every penny in cotton prices equals about $0.035 in EPS. With cotton having been cut by $0.30 to about $0.50 over the past nine months, we’re approaching the inflection point where the 9-12-month gap from purchase to booking as COGS on the P&L shows up in earnings.

3) Capex/Working Cap: Capital expenditures should be up by about $15mm off a base of ~$100mm in ’09 to expand the DR facility and Rio Nance One. This should add an incremental 7-8mm dozens of annual capacity (8%). Keep in mind that there should also be $70mm of additional working capital to support growth in 2010 and the cash payment resulting from the CRA audit (~$17mm).


While we don’t have the Aristocrat Leisure Q4 figures (the Aussie’s don’t report quarters), all the other major players have reported. The chart below provides market share trends for the gaming suppliers. After 2 quarters of market share losses, WMS regained some of its lost share, coming in close to 20%, in-line with BYI’s share. BYI appeared to lose about 4 percentage points. BYI typically outperforms in the replacement market but Q4 contained a higher percentage of slots into new and expanded casinos. IGT lost a few percentage points but at 38%, its share remains well above the Q1 2008 low of 30%.


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