At the beginning of Q2 we introduced a Macro Theme titled “Inflation’s V-Bottom.” In the two charts below (US CPI and PPI) the V-Bottoms in year-over-year prices are outlined in red. For the month of May however we saw both the headline CPI and PPI rollover, sequentially (month-over-month), and we denote that with the little green arrows in the chart below as well.
While we don’t agree with the conflicted and compromised nature of these government calculations, we do agree that it’s important to consider these calculations relative to themselves (that is, until the government changes the calculation again!). For now, what we have learned from these compromised calculations is that there never was a “Great Depression” in consumer prices (the lowest reading was only -2.1% in July of 2009) and, at the same time, there never was a reported “Great Inflation” either (the cycle-high for inflation was just inside of +3%).
Whether the US reports it or not, over the long term, global inflation will remain a reality born out an interconnected world of Fiat Fools manipulating fiat currencies. Reinhart & Rogoff have shown this empirically in “This Time Is Different” (chart on page 181) through the breakout in the median-inflation-rate for all countries using a 5-year-moving-average for the period of 1500 (yes fifteen hundred) to 2006. The big breakout in secular global inflation really started when the US was endowed with the inalienable right to create moneys from the heavens (circa 1971).
Within the long term story of secular global inflation (which China implicitly signed off on this morning through a Yuan revaluation and Brazil did last week by giving 32 million government workers +18% wage hikes), I think the USA just proved that you’ll see headline CPI bounce, cyclically, between -3/+3 percent on its conflicted CPI calculation and producer prices (PPI) move in a range 2-3x that. All the while if he didn’t see it with $150/barrel oil, Bernanke will never see inflation. He’s a modern day Arthur Burns in that regard. It’s sad.
So what do you do with this? Other than never take the government’s word for it, I’m not entirely sure yet…
That said, on an immediate term basis (notwithstanding what’s going on with prices of things that trade in US Dollars around the rest of the world today), the sequential rollover in US headline CPI and PPI should insulate the messaging of the Fiat Fools coming out of this week’s FOMC meetings.
Bernanke’s decision to remain numb to all data that would respect a higher cost of capital than ZERO percent will likely remain Japanese in its monetary policy nature.
Keith R. McCullough
Chief Executive Officer
Position: Short France (EWQ)
We keep our eye closely on Sovereign CDS prices as a leading indicator of risk. The chart below shows that while risk has come in over recent days for many of the proverbial “PIIGS”, the levels are still elevated and we’ve yet to see confirmation of a meaningful down trend. Greece, however, continues to trend higher.
Even with European equity markets getting a boost today on the heels of China’s decision to allow the Yuan to appreciate, CDS reflects continued concerns surrounding sovereign debt risk throughout Europe’s debt-laden economies. A report by Standard & Poor’s today held steady its credit rating for six Spanish banks, yet excluded Banco Santander and BBVA “due to their multinational presence” and only included four of the 40 savings (cajas) banks throughout the country in its assessment.
While we hold that the transparency associated with the Bank of Spain’s pledge to publish the results of its bank “stress tests” is positive, we believe Spain’s sovereign debt concerns are far from out of the woods. Stay tuned.
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R3: REQUIRED RETAIL READING
June 21, 2010
A revaluation of the Yuan is sending ripples through the retail industry this morning. As a result, we revisit one of our Top 10 Predictable Unpredictable themes from back in January, “The Bombed Out Buck” and its impact on the supply chain.
TODAY’S CALL OUT
After a rally in the dollar through the 1H of 2010, a stronger Yuan serves as a reminder that the US dollar is in a longer-term decline. This trend whereby it ceases its reign as the world’s reserve currency begins to impact the sourcing economics of the apparel and footwear industry. The bottom-line here is that as China’s currency appreciates on both a cyclical and secular basis, it puts pressure on the COGS line for companies who overwhelmingly depend on Chinese labor.
What does this mean? The ante for sourcing intermediaries like Li& Fung goes higher as smaller brands must pay a premium to compete. Smaller brands that choose to go at it on their own need to build the sourcing expertise, which cost P&L dollars and working capital. This trend will also accelerate the consolidation trend in the apparel/footwear industry as marginal players start to fall off the map either by choice or necessity.
In an effort to differentiate the companies that have proactively prepared for this shift, we updated our file highlighting the companies with meaningful exposure to China from a COGS perspective as well as the revenues derived from China. The bigger companies and those that have a Macro process and have been proactively preparing to compete in the New Reality will be the share gainers.
The companies that look best in this regard are Nike, Adidas, Timberland, Coach, Columbia, and Ralph Lauren. On the flip side, Brown Shoe, Payless, K Swiss, Lululemon, and many small footwear and apparel brands are at a meaningful disadvantage.
We don’t think that this analysis gives us much of a feel as to who the near-term longs and shorts might be, but for those that can invest with a duration of a year or more, this is an incredibly relevant issue to consider.
LEVINE’S LOW DOWN
- Bad news for men’s fashion out of Milan’s Spring ’11 fashion shows. Word has it that “jeggings” (jeans crossed with leggings) are being shown for men! While European trends sometimes take their time to make it stateside, we hope this is one trend that dies out before hitting the mall.
- According to online coupon aggregator Retailmenot, Victoria’s Secret, Kohl’s, and JC Penney were the most searched coupons for the month of May. Overall coupon traffic for the month grew 42% y/y.
- With Gulf oil tragedy persisting, it’s no secret that the region’s seafood industry is in danger. In Louisiana, shrimp fishing is down to just 30% of normal production levels. As a result, shrimp pricing is on the rise. Estimates suggest Gulf shrimp prices have already risen by 40% while imports are up about 13%.
World Cup Impact To US Geographies, Demographics - Consumer enthusiasm for the 2010 FIFA World Cup has been a boon for soccer retailers in the past few weeks, but analysts said the overall impact will depend on the outcome of the tournament. Storeowners polled last week said they are seeing a noticeable uptick in sales, particularly at stores in areas with a large Hispanic population. The Hispanic population drives the soccer market in Los Angeles because it’s a major sport embedded into the culture. In Boston, athletic footwear is also seeing a lift from the World Cup as a result of the local culture. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Measuring enthusiasm and the pulse of retailers selling World Cup gear during the event is pretty likely to come out with a positive read. The real question is how long the excitement lasts over the next four years until the next cup.
Republic Sold - Change Capital Partners LLP, the London-based private equity firm, has sold the multi-brand denim and sportswear retailer Republic to TPG Capital, formerly known as Texas Pacific Group, for an estimated 300 million pounds, or $447 million at current exchange. In a joint statement, the companies said that Republic’s management, including co-founder and chief executive Tim Whitworth, would remain in place. Republic operates 105 stores throughout the U.K. and sells brands including G-Star, Diesel and Firetrap.Change purchased a controlling stake in Republic in 2005 and has since doubled the firm's turnover to 200 million pounds, or $298 million, and trebled earnings before interest, taxes, depreciation, and amortization. <wwd.com/business-news>
Hedgeye Retail’s Take: Another premium denim manufacturing changes hands, making this apparel sub-sector one of the most frequently traded. This time around the assets are retail specific and European.
CHRS Appoints New President to Fashion Bug Unit - MaryEllen MacDowell, most recently president of Charming Shoppes Inc.’s Lane Bryant Outlet division, has been appointed president of the company’s Fashion Bug unit. She succeeds Jay Levitt, who has left the firm after two years in the post. Additionally, Laura Johnson, previously president and chief executive officer of Zac Posen/House of Z LLC, has joined Fashion Bug as executive vice president, merchandising and product development, reporting to MacDowell. <wwd.com/retail-news>
Hedgeye Retail’s Take: More management changes for the plus-size retailer which is still struggling to re-energize the topline. On paper anyway, the current team seems to be the first step towards revitalizing the specialty retailer.
Under Armour Partners with IMG Soccer Academy - IMG Academies announced a deal for Under Armour to become the official apparel and shoe provider to the IMG Soccer Academy. <sportsonesource.com>
Hedgeye Retail’s Take: Add this to the already long list of grassroots efforts to get young athletes wearing the UA brand. Also a cost effective way to build longer-term brand equity without breaking the bank via a major endorsement.
1000 Chinese Tanneries to Shut Down in Next 5 Years - Energy saving and emission reduction are the top concerns for China's leather industry as the drafted plan of the government's twelfth five-year plan will be announced next year. According to the secretary general of China Leather Industry Association Su Chaoying, during the twelfth five-year plan around 1,000 tanneries will be forced to shut down in order to achieve a reduction of 10% of COD and ammonia nitrogen compounds emissions. By the end of this year the Ministry of Environment Protection will reveal the list of tanneries which comply with the environmental protection standards, while the preparatory for survey conducted by the tanning self-regulation group is under way. <fashionnetasia.com>
Hedgeye Retail’s Take: Can’t be good for leather prices if capacity is shuttered. Though a longer term process, it’s worth keeping an eye on footwear and accessories margins as China clamps down on environmental hazards.
Japanese May Department Store Sales Less Bad - Japanese department stores' May sales slid 2.1% , representing an improvement on previous months' performance. The stores registered their 27th straight month of declining sales but the drop was smaller than that of previous periods. The association said that warm weather and some holidays boosted sales of spring and summer clothing early in the month. Two stores closed their doors in the month of May, bringing the total number of department stores in the country to 265. <wwd.com/business-news>
Hedgeye Retail’s Take: Wow, there are more Macy’s in the US than there are department stores in the entire country of Japan.
Reef Expanding Products, Redifining the Brand - Reef is returning to its roots and expanding into the closed-toe business. President Jim Gerson, who has been at the VF Corp.-owned brand for a year, said his priority has been to reposition Reef as a more authentic surf player. “We spent a lot of time focusing on the brand DNA,” said Gerson. “We revamped ourselves as the exotic beach and surf brand, and we now run everything through that filter.” That includes bringing back the Reef girl ads, featuring exotic women shot from behind in remote tropical locales, and debuting shop-in-shops and fresh product. The new five-style closed-toe men’s collection, dubbed Coastal Cruisers, has canvas uppers built on the brand’s pebbled texture footbed and will retail from $43 to $55. The outsole of the shoes has a wave texture, emphasizing the brand’s connection to the beach. Gerson said he knows the category will take time to grow, but his hopes are that closed-toe footwear could make up as much as 15 percent to 20 percent of sales within five years. <wwd.com/footwear-news>
Hedgeye Retail’s Take: It was only a matter of time before VF got traction on turning Reef into a lifestyle brand. With sales so dependent on flip-flops, a year-round product offering (i.e closed toe) is the first logical move. Longe-term we wonder how Reef is ultimately positioned vs. Vans.
Tiffany to Launch Leather Collection - Luxury retailer Tiffany not only plans to open 16 new stores within the year, but also will launch a leather goods collection to expand their merchandise offerings. The collection will be developed by designers Richard Lambertson and John Truex and will feature wallets, key holders, business card holders, and luggage tags to sell for US$100 or US$120. Tiffany’s CEO Jim Fernandez anticipates the leather goods collection will boost sales by 6-7%. <fashionnetasia.com>
Hedgeye Retail’s Take: Nothing new here, except the leather-goods launch is finally drawing closer. Recall that TIF purchased Lambertson Truex out of bankruptcy in an effort to grow it’s non-jewerly presence.
Big Weekend for Golf Retailers - With the U.S. Open and Father's Day, Golf retailers scrambled to make the most of the holiday. Golf retailers offered video cameras, free lessons and contests ahead of Father’s Day and the U.S. Open to spur demand as the highest sustained unemployment since 1982 deters shoppers. Golfsmith International Holdings Inc. ran another promotion to give cash back to some shoppers depending on who wins the U.S. Open this weekend. Callaway Golf Co. is giving Kodak PlaySport cameras to customers who buy new drivers. The tournament and Father’s Day usually make June the biggest sales month for golf companies, topping the Christmas season. <bloomberg.com/news>
Hedgeye Retail’s Take: The real question is whether Dad was actually playing golf or shopping for golf?
Nike's Ambush Marketing Paying off at World Cup - With its highly-popular "Write the Future" ad campaign, Nike is said to be gaining greater awareness around the World Cup than the event's official sponsor, Adidas. Two separate surveys show Nike is emerging as the most recognized company of the World Cup. <sportsonesource.com/news>
Hedgeye Retail’s Take: Official sponsorships may be on the demise, as this is not a new trend. Unfortunately for the sporting events themselves, this may ultimately have an impact on funding and overall success. Clearly the better ROI for a brand is to avoid the “official” sponsorship, while thinking creatively to drive awareness.
Nike's Pop-Up Stadium to Open in Selfridges - Next week, Nike will open a pop-up stadium in London's Selfridges, filled with 62 plasma screens and surround sound so that shoppers can watch World Cup matches in the store. The Nike Stadium will be on the lower ground floor in the Selfridges Ultralounge, an arts and exhibition space. Adjacent rooms will host table football and video games and an exhibition of iconic Nike football kits. The pop up coincides with the launch of a Nike concession in the department store, stocking many sportswear pieces unavailable elsewhere in London. <licensemag.com>
Hedgeye Retail’s Take: No wonder Selfridge’s is the department store of the year! Sounds like it could be even more exciting if Team England makes it into the elimination round. Certainly the mood for shopping would not be overshadowed by depression.
Puma City in New York is the Ultimate World Cup Spot - The Puma City installation, which will dominate Manhattan’s South Street Seaport until July 11, is prime World Cup territory. Insider took a walkthrough of the space on opening day of the tournament, when it was thronged with the football faithful. There are human foosball and soccer clinics on the fenced-in pitch, ping-pong tables, a beer garden run in collaboration with Red Bar and, of course, plenty of retail space. The footwear and apparel sold at Puma City crosses from soccer performance to lifestyle, with some Puma City exclusives. During the day, it’s a retail space that shows Puma’s World Cup-themed artwork and photos, but when the sun goes down, it converts into a bar/lounge, with chalkboard walls, bar games, “DJ Hero” and flatscreen TVs. “It’s soccer by day, party by night,” McCrae said with a smile. <wwd.com/footwear-news>
Hedgeye Retail’s Take: More World Cup excitement, but this time in NYC style. Sounds a little more dynamic than Nike’s London effort, but to be fair this is really a glorified bar.
Viral Marketing Top 10 Sites - Viral marketing is nothing new, but Nike raised the bar recently with its World Cup film “Write the Future,” starring a dozen marquee soccer players (plus Roger Federer, Kobe Bryant and, er, Homer Simpson). The day it hit, the ad logged 7.8 million views, a new digital record. Below are most trafficked online video sites, where you can find the Nike flick and other hot clips. 1) You Tube 101.3 mm, 2) Facebook 26.2 mm, 3) Yahoo 24.2 mm, 4) Google 18.9 mm, 5) Hulu 15.5 mm, 6) MSN/Windows Live/Bing 14.4 mm, 7) CNN Digital Network 12.4 mm, 8) Fox Interactive Media 11.5 mm, 9) The CollegeHumor Network 8.2 mm, 10) MLB.com 7.8 mm. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Expect to see more and more viral campaigns now that the reach has far surpassed traditional TV viewership.
Average Value of a Facebook Fan - Many social media marketers are eager to tie a hard number to the value of their efforts. To that end, firms have attempted to analyze the worth of fans and followers on social networking sites like Facebook. Digital consulting firm Syncapse and research company Hotspex have come up with an empirical formula that puts an average value of $136.38 on the Facebook fans of the site’s 20 biggest corporate brands. Most of that value comes from how much the fans will spend on the brand’s products, with additional dollars coming from customer loyalty, recommendations and earned media. <emarketer.com>
Hedgeye Retail’s Take: Interesting, but this still seems like a very loose estimate. Given the limited history with converting a “Facebook Fan” into a full on consumer of a particular brand, we suspect it will take more time to truly understand the monetary value of an individual social networker.
Conclusion: The potential revaluation of the Yuan is positive for Chinese equities, but likely negative longer term for Treasuries. It will also benefit the currencies of those nations that supply basic materials to China – Australia, New Zealand, Canada, and Brazil.
The global macro news of the day is, of course, the statement by the People’s Bank of China that they are going to end the two year peg of the Chinese Yuan against the U.S. dollar. The timing is apropos as the G20 Summit is occurring this coming weekend in Ontario, and increased pressure on the Chinese to let their currency more freely float was very likely. At the least, the Chinese have bought themselves time in that debate, though it does seem likely that this is the first step in a more freely floating currency.
Per the release from the People’s Bank of China:
“The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.”
While this announcement is certainly bullish for the Yuan, it must be taken with a grain of salt as it doesn’t dictate a revaluation of the Yuan or even a change in the daily trading range, but emphasizes flexibility. So, in effective, it was the bare minimum in terms of policy to support a Yuan revaluation. Clearly, though, with increasing signs of inflation within China, this is a way to dampen housing and consumer price increases that threaten the Chinese economy.
So far the reaction from the U.S. government has been muted at best. Treasury Secretary Timmy Geithner released a statement yesterday in which he stated:
“This is an important step, but the test will be how far and how fast they let the currency appreciate. Vigorous implementation would make a positive contribution to strong and balanced global growth.”
Translation: Timmy likes this, but he wants to see more action. While obviously Timmy’s statement may be politically convenient within the confines of the domestic U.S., Chirping Our Creditor has implications in its own right, specifically as it relates to the appetite of the Chinese to continue to fund U.S. deficits. Moreover, a revaluation of the Yuan will fundamentally lead to lower demand for U.S. Treasuries over the long run.
The longer term impact of this change in policy will likely be a decreased demand for U.S. dollars. In order to maintain the fixed exchange rate with the U.S. dollar, the Chinese government had to get long of the U.S. dollar. Their method for doing this was to purchase U.S. Treasury bonds in large sums. With the decision to let the Yuan float, the need to purchase U.S. dollars decreases and with it, on the margin, Chinese demand for Treasuries, which will be negative for the price of Treasuries (and positive for yields). The chart below outlines this point as it shows that Chinese purchased more than $450 billion in U.S. Treasuries over the last two years, while the currencies were pegged, which was almost the same as the prior eight years combined.
So far this morning, the movement in the Yuan has been a bit sleepy. With no specific policy action, the Yuan is still confined to its 0.5% daily trading range. That said, even as this announcement is somewhat rhetorical in the short term, the long term implications are positive:
1) It is indicative of the Chinese showing a willingness to play by the rules of free and open markets, which will increase confidence in investing in China
2) The potential of trade wars will be somewhat alleviated on the margin as the argument that China has a structural competitive advantage due to an undervalued currency is less compelling
3) A stronger Yuan will combat internal inflation within China, which offsets a key potential risk for the global economy – an overheating of the Chinese economy followed by a dramatic decline (think POPPING of a bubble)
As it relates to global trade, a more highly valued Chinese currency will increase China’s purchasing power for commodities, which are priced in U.S. dollars. Therefore as the Yuan appreciates, it will have positive fundamental impacts for those countries that sell commodities into China. Think Australia, New Zealand, Canada, and Brazil. Not surprisingly, the currencies of these nations are acting accordingly and are up between 0.75% and 1.00% across the board today (with Brazil up a little less).
While the movement in the Yuan today may be a bit of yawn, the longer term implications of a meaningful revaluation will have a real investable impact on various asset classes globally. And positioning for this revaluation will be critical.
Daryl G. Jones
The Macau Metro Monitor, June 21st, 2010
NO LAST MINUTE SITE SWAP FOR WYNN'S COTAI PROJECT Asian Gaming Intelligence
Steve Wynn has played down any rumors on swapping his Cotai site. According to AGI, there was speculation that Wynn may bid for Macao Studio City if the government made the MSC site available. But Wynn said to AGI, "It seems to me if there was a good chance of switching [sites for a Cotai development], they [the government] might have said to me 'Steve if you hold off something might happen' [on plans for Cotai]. I didn't get any of that [feedback]. My site's nearly twice the size of Macao Studio City's. I'm 51 [acres] I'm told theirs is 32. It [the MSC site] is big enough, but I would expect that they [the government] would have told me something like that."
MACAU GAMING GROWTH WILL EXCEED 30%, ADELSON SAYS Bloomberg, WSJ
In its annual meeting, Adelson told reporters he expects +30% growth in second half of 2010. The projected growth follows a YTD increase of more than 60%, he added. Adelson was confident that the foreign labor quota issue would be worked out. He also took a shot at SJM, claiming the government "shouldn't allow any more casinos to be opened where the casino is greater than 10% of the [resort's] space" because such properties aren't contributing to the diversification of Macau's economy.
Sands CEO Jacobs reiterated that the Cotai project will be complete by 3Q 2011, and the Four Seasons apartment sale is forthcoming.
SINGAPORE SAYS YUAN MOVE WON'T AFFECT CURRENCY REGIME Bloomberg
The Monetary Authority of Singapore wrote in a email that China's decision to unpeg the yuan to the dollar won’t affect Singapore’s exchange rate policy. “The policy of a modest and gradual appreciation of the island’s currency announced on April 14 remains unchanged and is appropriate against underlying economic conditions,” it said.
BUDGET SURPLUS DOUBLED macaubusiness.com
Macau registered a budget surplus of MOP21.28 billion in the first five months of 2010, with direct taxes from gaming increasing 57% YoY. Direct taxes from gaming totaled MOP24.01 billion.
CONSUMER PRICE INDEX FOR MAY 2010 DSEC
CPI for May 2010 increased by 2.76% YoY. Recreation & Culture rose by 0.96%, attributable to higher charges for outbound package tours.
NEW RECLAIMED AREAS IN MACAU WITH 3.5 SQ KM TO BE READY IN 5 YEARS Macau News
The Macau government will reclaim 3.5 sq km of land in the next five years to provide new areas for the territory expansion, said Secretary for Transport and Public Works Lau Si Io last week. But according to Lao Long, urban development chief of the Lands, Public Works and Transport Bureau (DSSOPT), there would be no development by the gaming sector on the newly reclaimed land.
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