As we previewed yesterday, the Conference Board reported a disappointing consumer confidence number in September.  The Index now stands at 53.1, down from 54.5 in August.  The Present Situation Index decreased to 22.7 from 25.4. The Expectations Index declined to 73.3 from 73.8 last month.


The consensus forecast reading of 57 had suggested another significant sequential improvement.  The consensus optimism was based on higher stock prices, lower gas prices and fewer layoffs.  Our call was that “while energy prices are less of a concern for most consumers today, more of them are focused on other factors such as employment, housing and credit concerns.” 


More importantly, most consumer companies that have spoken publicly on the topic have stated that they do not believe that consumers are ready to buy into the economic recovery narrative. 


After falling to an all-time low in February, the overall index has been trending higher as more upbeat economic news helped improve the current situation, but we still have significant headwinds facing more and more consumers.  In some respects, Q4 '09 is shaping up to mirror Q4 '08, when looking at consumer centric issues.  I still believe that most consumers are focused on needs over wants, which remains in step with where we were a year ago. 


While more consumers are saving for future needs, a growing number of consumers are in precarious positions when it comes to personal finances.  As such, more and more are placing a priority on paying down debt and focused on decreasing overall spending. 


Howard W. Penney

Managing Director





Tax efficiency may not be Steve Wynn’s main incentive but it sure makes this IPO look attractive. If it weren’t for all those corporate/branding fees the IPO pricing, would be downright cheap.



From an investor’s perspective, we like the Wynn Macau IPO and would try and get as much stock as possible even at the high end of the stated range.


Not all EBITDA streams are created equal.  Buying into WYNN’s Macau operations at the same multiple at which WYNN is trading is a deal in our opinion.  The main reason?  Macau has a 5 year corporate income tax holiday on gaming profits, which is likely to get extended in perpetuity.  In the US, taxes are assessed at 35% of net income.  That’s a big difference. 


Presently the US only taxes repatriated income but over the long term, if one holds WYNN stock, the tax differential will come into play.  President Obama and many democrats controlling Congress would like to tax ALL income at the US rate regardless of where earned or whether repatriated or not.  That’s a subject for another post but it seems likely WYNN, LVS and many other US companies with significant international operations would domicile overseas in that case.


The following table attempts to equate taxable and non-taxable EBITDA streams to provide a better comparison.  At HK$10.08 per share, the high end of the range, we calculate an EV/EBITDA multiple of 14.6x (EBITDA includes a full year of Encore).  However, adjusting for the tax advantage, the multiple falls to 9.5x.  On top of a 9.5x tax equivalent multiple of current operations, Macau IPO investors would also receive a free option on a Cotai development, worth $1.2bn in our opinion.  Excluding this from the enterprise value yields an even lower multiple of 8x.  Think how cheap it would be if WYNN wasn't charging the new entity over $60 million in branding fees on top of the $46 million in coporate allocations, design, marketing, and employment fees!






We can argue about whether there is a better way to account for the tax efficiency (free cash flow – see below) but there is no doubt that, all things held equal, buying into a Wynn Macau IPO is more attractive at the same multiple than buying WYNN in the US.





On a free cash flow basis, we calculate a yield of 6.7%.  After adjusting the equity value for the Cotai option value, we estimate a “true” yield of 8.1% which is pretty attractive.


We’re hearing that they may close the books tonight with a 10/1 pricing.  The IPO is oversubscribed and Hong Kong tycoons and long only funds are in the driver's seat.  We think it will be a successful IPO and may even be worth a look when the stock commences trading.



DRI will report 1Q10 EPS after the market closes. Importantly, Darden is one of the first casual dining companies to report June, July and August numbers.  Consensus estimates for same-store sales: Blended (2.6%), Olive Garden (1.2%), Red Lobster (2.3%), LongHorn Steakhouse (6.5%), Capital Grill (16.4%) and Bahama Breeze (5.1%).


DRI did not provide same-store sales guidance for the first quarter, but said that comparable sales growth at Olive Garden, Red Lobster and LongHorn Steakhouse on a blended basis would be flat to down 2% for the full-year. 


Please see Sept 1 post titled “DRI – A Closer Look At the Numbers” for more details.







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Retail Upgrade/Downgrade Day


SEPTEMBER 29, 2009





There’s a flurry of upgrades/downgrades this morning in retail. These are notable to me…


  • How can we not highlight Goldman upgrading Ralph Lauren at $74? I definitely think that RL has among the best stability and highest unrealized earnings power in the group – so I am not arguing with this call.  But the September 2007 upgrade to ‘Buy’ with the stock in the mid $90s still haunts me. Admittedly, I was one of the analysts that liked it then too. But I need to keep this call in check to make sure it’s not becoming consensus.
  • WRC initiated Buy at BofA/Merrill. I think the analyst there does good work, so it was a head-turner for me. There are secular margin headwinds here, license loss risk, and downright poor quality of management. Sell sentiment is quite high (80% of ratings are Buy), short interest is re-testing lows, and management is selling. Haven’t we seen this story before?
  • Under Armour (UA) target increased to $24 from $19 at Weisel; rating remains market weight on valuation and execution risk. Yet again, I maintain that staying on the sidelines because of valuation and widely hated near-term factors is a dangerous game.  UA remains of our favorite longs.




Some Notable Call Outs


  • Despite an optimal calendar setup, Halloween spending is expected to be down 15% this year due to less participation and less overall spending on this highly discretionary event.  The number of consumers planning to celebrate Halloween is estimated to drop from 64.5% last year to 62.1%, according to BIGresearch.  Of those participating, 88% plan to spend less than last year.


  • WAG reported better than expected Q4 results, driven largely by cost savings generated by the “Rewiring for Growth” initiative and better gross margin. Sales, which were already released on a monthly basis as incurred, were generally below expectations for the quarter. In addition, while largely expected, management announced specific store growth plans for fiscal ’10 (+4.5%-5%) and fiscal ’11 (+2.5%-3%). The company continues to pare back growth as it looks to become more profitable and is no longer growing for the sake of growth.


  • In the near term, flu season trends will remain top of mind. Although is still too early to tell, the drugstore sector will likely be one of the biggest beneficiaries in terms of foot traffic if the flu season continues to build at what is now historic rates. However, given the uncertainty with predicting exactly how the virus may or may not spread, it is unlikely we will hear WAG management banking on such a trend.


  • In the wake of last week’s announcement, we think Aeropostale’s naming of co-CEOs to succeed Julian Geiger is definitely unusual . In essence, the company is pitting the current Chief Merchant against the Chief Operating Officer to be the new CEO. That might not be the tag line, but have you EVER seen a ‘co-CEO’ model work long term? When you ultimately have to sacrifice one half of the brain for the other (ops or merchandise) only flawless execution can make the story end well.  


  • Spain's textile companies asked the government to save the industry by introducing an aid package. Key Spanish manufacturers like Dogi, Fuentecapala, and Caramelo are on the verge of bankruptcy due to the economic recession. The textile aid package will need to include measures to boost credit and financing lines to struggling producers. Our sense is that they have all the leverage they need – especially with yesterday’s decision by the government to take up VAT taxes to help the economy.


  • Italian and Spanish footwear manufacturers are preparing to fight for the extension of the anti-dumping laws that have been in effect since 2006.  The decision to maintain or end the 16.5% tariff on Chinese footwear and 10% tax on Vietnamese shoes is due October 22 and will take place January 2010.  Nike and Adidas will be on the other side of this battle, fighting to end the tariffs.




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outsided movements relative to the market, peers, and volume trends...


1)      OXM: 4x outperformance on the day with 20% volume acceleration.

2)      WSM: price improving on a sequential basis looking at 1 day, 1 week and 3 week trend – all on accelerating volume.

3)      LIZ: High volume on big underperformance. This was on GS downgrade. I’m comfortable taking the other side of this on a 6-9 month duration.


Retail Upgrade/Downgrade Day - 1





-UK Insurance industry VAT liability set to increase - The insurance industry could incur increased VAT liabilities and associated costs under new rules, according to consultant Moore Stephens. The company warned that under changes to the VAT international services rules, which take effect on 1 January 2010, they could incur increased costs on certain services bought in from any country outside the UK. It also warned that, under the changes, many more non-VAT-registered businesses could find themselves caught in the VAT net. <>


-Japan's July apparel imports rise in volume but fall in value - According to the Japan Textiles Importers Association, July apparel imports fell by 11.4% from the year before to 164.4 billion yen. Meanwhile, the import volume increased by 3.6% to 303.77 million units. Although the import volume increased for the second straight month, the value posted a double-digit decrease for the first time in two months. The figures indicate that the Japanese market is heading toward lower priced goods. <>


-Punjab expects 10% increase in VAT collections - Notwithstanding the current slowdown, Punjab is hopeful of registering an increase of 10-15% in VAT(Value Added Tax) collection in the financial year 2009-10 over the last financial year. However, the VAT collection in the first five months of the current fiscal year is not very encouraging as the state registered an increase of only 7 per cent over the corresponding period last year. According to the data, in the first five months of the current fiscal year(April-August 2009), the state managed to collect Rs 3,310 crore as VAT as compared to Rs 3,100 crore it collected during the corresponding period (April-August 2008) last year. That amounted to a growth of 7 per cent over the corresponding period of the last year. <>


-Pakistan government imposes no duty on imported textile machinery and equipment - Pakistan's textile sector welcomes the government's decision to impose zero-duty on imported textile machinery and equipment which is a part of the new textile policy. Zubair Motiwala, advisor to Sindh Chief Minister said: "The implementation of the Textile Policy in full spirit will help the textile industry to get back on its feet and the country will be able to compete with its rivals in international textile market". He added: "Due to extreme pressure on textile exporters and high overheads, Pakistan was unable to compete even against Bangladesh, which exported clothing and apparel worth $11 billion." <>


-Even the most coveted retail spots in the world are not immune to a drop in rent prices - According to New York-based Cushman & Wakefield’s “Main Streets Across the World” report, 54% of the 274 streets monitored by the real estate firm have seen prime rents take a dip, while 18% have seen premier asking rents rise. Of the 10 most expensive shopping streets in the world most have seen rents fall or stay flat. The biggest rent drops globally occurred for Colaba Causeway in Mumbai, India, which saw a nearly 64% drop this year; and Sao Conrado Fashion Mall in Rio de Janeiro, which fell 53%. The Calea Victoriei shopping area in Bucharest, Romania, dropped 48% , the report showed. But a few premier retail areas did see increases, included Alameda Lorena in Sao Paulo, where rents vaulted 111%; and Munich, Germany’s Kaufingerstrasse, which reported a 7% boost in rents. <>


-Zumiez preannounced better than expected earnings, margins, and revenue - Zumiez Inc. said that based on better than planned quarter-to-date sales and product margins, it is increasing its expected sales and earnings guidance for the quarter ending October 31.. September month-to-date comparable store sales increased 0.8% while quarter-to-date comparable store sales declined 7.7% for the four and eight week periods ended September 26. <>


-Carrefour under pressure - Carrefour SA and LVMH Moët Hennessy Louis Vuitton SA on Monday declined to comment on reports the French retail giant could be under pressure from its biggest investors to sell operations in the fast-growing Chinese and Latin American markets. Investment firm Colony Capital LLC and billionaire Bernard Arnault, chairman and chief executive officer of LVMH, hold a 13.5 percent stake in Carrefour. <>


-Apparel giant VF Corp. has tapped Susan Kellogg as president of its contemporary brands coalition - Kellogg was most recently chief executive officer of Elie Tahari Inc. and is a 25-year industry veteran. She joined Tahari in January 2008 and resigned from her position in March. At Tahari she was charged with helping the company’s domestic and global growth, overseeing the company’s wholesale, retail and global sales in women’s and men’s apparel and accessories. Prior to Tahari Kellogg held positions with Liz Claiborne and Macy’s West. At VF, she succeeds Mike Egeck, who the company said left in June for personal reasons. Egeck spent six years with VF before leaving to take over as ceo of Seven For All Mankind in August 2006. VF acquired Seven for an estimated $775 million in July 2007, naming Egeck head of the newly formed contemporary brands coalition in the process. <>


-Cabela’s Inc. hired Scott Frnka as vice president of merchandising – General Outdoors. Frnka, most recently vice president of Academy Sports and Outdoors’ Field and Stream Division, brings more than 15 years of retail merchandising experience to the multi-channel retailer of hunting, fishing and outdoor gear. <>


-Aeropostale names co-CEOs to succeed Julian Geiger - The multichannel apparel retailer has appointed Mindy Meads, a former executive of Victoria’s Secret and Sears, and former Brooks Brothers executive Thomas Johnson as co-CEOs to succeed Julian Geiger. <>


-Hanesbrand's Bali Company Introduces Its New Natural Uplift Bra - Bali Company has introduced its new Natural Uplift bra that features advanced lift for the bust without adding size. The patent-pending lift innovation delivers just the right amount of lift and side support for beautiful shape and comfort, with full coverage to prevent spillover. The Bali 'Natural Uplift' bra, which will be available in department stores in September, helps women Live Beautifully(R) by providing a solid foundation to uplift women from the inside out. <>


-Nike announced a change in reporting which gives more disclosure on China's success - Nike Inc. said in a SEC filing released yesterday that NIKE brand's sales in its Greater China segment – including China, Taiwan and Hong Kong – rose 29% in its fiscal year ended May 31, to $1.74 billion from $1.35 billion a year ago. In constant currencies, sales climbed 21%. In the filing, Nike Inc. broke out its past year's results under a new regional structure of the way it reports the performance of the brand. <>


-Fossil’s vintage roots are coming through this spring in classic men’s looks with a modern point of view - Clean-cut dress oxfords, traditional maritime looks and chic driving mocs are detailed in washed and burnished leathers for an added level of comfort. Even sneakers are done simply in suede and canvas lace-up and slip-on styles. The collection retails from $20 for a beach flip-flop to $158 for an oxford, available at select Dillard’s and Macy’s stores, as well as online retailers and <>


-Adidas became the official matchball and referee kit supplier to the European Rugby Cup (ERC) - Under the sponsorship deal with the ERC, adidas will provide the official match ball for both the Heineken Cup and newly titled Amlin Challenge Cup. <>


-Max Azria receives $403mm asset-based credit facility - Max Azria's private 20-year-old BCBG Max Azria Group of Vernon, CA just received a $403 million asset-based credit facility.  Azria can extend the amount to $450 million under certain conditions. GE Capital, Corporate, Corporate Retail Finance of Norwalk CT acted as co-collateral agent in the deal. BCBG  has more than 13,500 retail and wholesale points of sale worldwide. <>




Gaming revenue is apparently at 9.6 billion MOP through 9/27.  At that pace, gaming revenue would grow 40% year over year off of the 7.1bn MOP recorded last year.  That could disappoint some that are expecting 60% growth but let's face it:  40% is very strong and October could be even stronger.


As we stated in our 9/22 note last week, most of the gain is coming from the VIP segment and higher hold, particularly at SJM on both counts.  The VIP centric properties clearly grew market share, as can be seen in the table below, while LVS and MGM lost share.  A note of caution:  VIP is very volatile and sensitive to the China stimulus and liquidity drivers.  A bubble could be forming in this roller coaster business so attention should be payed more to the Mass trends.  The good news is that the Mass outlook looks favorable.


MACAU: SEP SHOULD BE UP AROUND 40% - macau market share2

Cat Food

“Wake up and smell the cat food in your bank account.”
-They Might Be Giants
At 82 years old, this isn’t Paul Volcker’s first rodeo. Tonight, you can see him interviewed by Charlie Rose on PBS. If you care to see whose US Government views are most closely aligned with ours, these are the ones to hear out. I don’t hear them often.
I’ve called it Squirrel Hunting. Volcker calls it “Herding Cats.” If you have tried either (or observed some squirrely neighbor doing the same), you get the point. With a preview of tonight’s interview in hand, here are Volcker’s 3 main points:
1.      China is the Creditor; America The Debtor - “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do,” Volcker said.

2.      The Balance of Power in Global Financial Leadership is shifting – “symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, intellectual and otherwise,” Volcker said.

3.      Credible American Economic Leadership requires competence, not politicization – “I would like to think that given the history of the past, given the strength, actual and potential of the American economy, we can still provide a kind of indispensable element of leadership here,” …“But it’s not going to be dictatorial, I’ll tell you that. It is very hard to herd these cats together.”

Call it irony or not, Paul Volcker’s views as Chair of the President’s Economic Recovery Board have been largely muted. President Obama’s Administration is much more comfortable with the Hope Model of prancing around his compromised  and conflicted Chief Squirrel, Tim Geithner. Larry Summers then backs Timmy’s views, sometimes, by alluding to what he and his yes Lady, Christina Romer (Chair of the Council of Economic Advisors), call “blue chip estimates.”
“Blue Chip”, you know, as in Wall Street forecasts! After what we have gone through in the last 18 months, the US Government’s full faith and credit in these estimates is that smell of cat food in your bank account.
With all due respect to their theoretical wherewithal, I was raised by a firefighter, and you don’t bring a college professor into the world’s most interconnected risk management fire. When this thing is a blazing, check the theories and cats at the door. When it’s time to go through that burning door, I want someone who has been in a fire before. If America has that someone, it’s Paul Volcker.
Volcker gets it. China gets it. The Germans are getting it. So how in the world are we going to herd these American cats and squirrels? Sadly, unless we start evolving the thought process, I don’t think I have an answer to that question that is any more theoretical than what Romer espoused at Berkeley.
Back to the fire…
Yesterday, we scored one for America’s team, putting a ball in the end zone against the Crash Callers. The Citigroup watch-out below for 1000 on the SP500 was a “call” that was to be capitalized on, offensively.
Yesterday’s meltup in the SP500 was a nifty +1.8% daily move, wiping out almost all of last week’s losses, taking the short squeeze of a generation back up to a +57.1% gain from the March 9th closing lows.
Yesterday’s rally was not supported by accelerating volume studies however, and that makes this morning all the more interesting – as all fires are. So let’s strap on the cat herding gear and our masks and get into it. Here are some critical US market factors to consider before the door opens:
1.      SP500: Immediate term TRADE support = 1045

2.      SP500: Immediate term TRADE resistance = 1077

3.      Risk/Reward (daily) for the SP500 is balanced; stay hedged

4.      Top to Bottom probability studies (weekly) for the SP500 is 33 points; that’s tight and trade-able

5.      VIX (Volatility): downside support 22.63; upside resistance at the intermediate term TREND line is 26.31

6.      Breadth: for the 11th consecutive day, 9 out of 9 sector views in our SP500 model remain bullish TRADE and TREND, but at a price

7.      Yield Curve: 10-year yields minus 2-years continue to compress this morning at +232 bps wide (narrowest in 6 months)

8.      US Treasuries: the Fed continues to keep money on the short end free (0.10% for 3-month UST; we are Japanese)

9.      US Dollar: up small this morning to $77.11 and +1.7% from last Wednesday’s low; TRADE line resistance = $77.39

On the global macro country heat map, here are some critical factors to consider:
1.      Japanese equities have broken their immediate term TRADE line and are now threatening a TREND line breakdown

2.      Chinese equities closed down another -0.33% overnight, making it 3-days in a row, ahead of the 60 year Revolution party at week’s end

3.      Hong Kong closed up a strong +2.1% leading the rest of the Asian equity market higher overnight (Taiwan +2%, Australia +1.5%, Indonesia +1.9%)

4.      Russia cut interest rates for the 7th time since April, taking them down from 10.5% to 10%; Russian equities moved higher on that to +99.8% YTD

5.      Romania cut interest rates from 8.5% to 8%, but their yields remains the highest in the European Union next to Hungary at 7.5%

6.      Brazil is backing off their stimulus plan, and the Bovespa continues to hang out near the YTD high of +64%


Meanwhile in Commodities, we continue to see a worrisome breakdown in both copper and oil prices. West Texas Crude Oil is broken from both an intermediate term TREND perspective and an immediate term TRADE perspective, whereas Dr. Copper is holding his TREND line support of $2.58/lb after breaking his TRADE line of $2.85/lb. The only commodity exposure we have in the Asset Allocation model remains gold, which continues to hold what we call a Bullish Formation.
What does all of this mean? I can tell you what it doesn’t mean. There is no herding cats or hope in this global risk management process. And while hope is not an investment process, that’s all I have left for our President to hear when Sir Paul Volcker is aired with Charlie Rose tonight.
Best of luck out there today,




EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats over the weekend. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


LQD – iShares Corporate Bonds
Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


DIA  – Diamonds Trust In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

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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