Bearish Buck Consensus?

We re-shorted the US Dollar via the UUP etf again yesterday. The most asked question in my inbox was “isn’t that consensus?”


I don’t mean to demean the question. At this stage of the Burning Buck game, it’s the only one to answer. At the same time, you have to ask yourself if asking about consensus, is consensus?


After making enough mistakes (with real ammo) trading markets, I have come to conclude that you can either be Bullish, Bearish, or Not Enough of one of those two things. When it comes to the Burning Buck, I shorted it’s strength yesterday because I don’t think the newly awakened US Dollar Bears are Bearish Enough.


To be truly Bearish Enough requires some reading beyond your latest tweet. You can listen to the Johnny-Come-Latelys on CNBC, who are now running segments with lead-ins like “When Nixon abandoned the Gold Standard in 1971” (sound familiar?) to truly appreciate that consensus still has no idea how to analyze this fundamentally.


Niall Ferguson at Harvard is who I would call Bearish Enough. He’s looking for a -20% drop in the price of the US Dollar (FROM HERE) in the next 6-12 months. That would put the US Dollar index at $60!


Required reading from Fergusson would be his book titled the Ascent of Money. This fantastic economic history read was all part of the studying we did to make this Burning Buck call 9 months ago, but that doesn’t matter anymore. What matters is the here and now. Now all that matters are my risk management levels. I have outlined them in the chart below. The US Dollar remains in what we call a Bearish Formation.


The Buck is Burning to lower-lows again today (down another -0.5% to $75.19). Alongside that, the SP500 is chasing to higher-highs.


Questions about consensus, can also be consensus…



Keith R. McCullough
Chief Executive Officer


Bearish Buck Consensus? - BUCK


SKX: Smoke vs. Sustainability

Casey Flavin, one of the analysts on our Retail Team, has done what I think is exceptional work on Skechers. He knows this thing cold. He visited the company a few weeks back, modeled it six ways til Sunday, and has been hitting me hard on the bull case. He thinks that the company will smoke estimates this quarter (released after the close tonight), and that the consensus is low next year by as much as a buck (yes folks, that’s 100%).  Check out his note to me below.  The irony is that I think that he’s spot-on, but I still can’t bring myself to hop on the bandwagon. They may do $2.00 next year, but there’s no reason why they can’t revert to a buck the year after.


I guess my problem rests in that the crux of the upside here is in the product cycle and the success of Shape-Ups, one of the better products that SKX has nailed in recent years. What’s bugging me, however, is that I am not convinced that SKX has the infrastructure to sustain the current throughput. Consider the following…


  1. SKX has already delayed the distribution center that was to be put in place last year. They claim that they’re fine with existing capacity, but the new DC was planned for a reason – to facilitate growth and efficiency.
  2. SXK’ revenue per employee is – by a long-shot – head and shoulder above the group average. How does that happen? I have NEVER seen an employee base that is above average productivity where the company is overly invested in capacity to facilitate growth.
  3. As it relates to product cycles, SKX is heavily susceptible with knock-offs on this one. Heck, being the king of the knock off, SKX should kow about this better than anyone. We’re already seeing similar product priced at a 60% discount at retailers like Payless.




SKX: Smoke vs. Sustainability - FootwearSG RevEmp 10 09



SKX: Smoke vs. Sustainability - SKX ShapeUp Comps



This time last year our call heading into Q3 was that margins would be cut in half due to a confluence of factors (see our 9/3/08 note “Misery Likes Company”) – as it turns out, SKX reported 4% operating margins in FY08 down from 8.1% in F07. So far in FY09 profitability has continued to slide. While many of the structural flaws of this story remain, several factors are starting to improve considerably such as Fx, product costs, and the company’s sales/inventory/margin triangulation, which has shifted from the worst place possible this time last year to one of the best in just three quarters. After visiting with management a few weeks ago, not only am I confident that the company is going to beat the quarter, but also that the incremental contribution from Shape-Ups will prove current Street estimates to be too low for next year.  



SKX: Smoke vs. Sustainability - SKX S 8 09



Let’s start with the quarter – anecdotally, two competitors have indicated strong 3Q results so far with DSW’s preannouncement last week (comps up 6%-8%) and SCVL’s commentary of 11% comps in August. With only 20-25% of revenues derived from owned retail this is positive albeit modestly for SKX’s top-line. Additionally, we are seeing improved trends in domestic wholesale. Based on our analysis of industry trend data, I expect Shape-Ups to contribute an incremental $10-$12mm, or ~5% in Q3 wholesale sales helping to offset low double-digit declines in backlog exiting the 2Q. All things considered we’re shaking out at a 7-8% yy decline in revenues on a consolidated basis.


The upside lies with gross margins. Based on our sourcing calculation (similar to PSS with 95%+ sourced from China), we expect a ~100bps improvement from lower product costs and another ~50bps from Fx and higher margin Shape-Ups combined. Despite a clean inventory position, we’re accounting for 50bps degradation from promotional activity and 100bps of net expansion in Q3. As for operating expenses, mid-single digit G&A savings will be offset by slightly higher Selling costs related to Shape-Up spend resulting in modest operating margin contraction of 25bps – a significant improvement to the 800bps+ seen over each of the last three quarters.


Consider the facts regarding Shape Ups:


Shape-Ups were first tested domestically in Dec/Jan in select owned stores and then in larger quantities in March-May before officially launching this past summer. By the end of Q3, Shape-Ups were in just over 10% of SKX’s 12,000-15,000 domestic doors and were already sold out in several distribution channels. The shoe recently entered Europe, which is 5-6 months behind the US, and testing has been met with even greater fanfare. Even at this early stage of demand for the product, domestic and international order interest is on pace for over 1mm pair/qtr combined (primarily domestic).



SKX: Smoke vs. Sustainability - SKX Shape Ups byMo 10 09



SKX’s most successful product to date was the Energy shoe from 1, which generated ~$200mm in revenues at its peak at an ASP of $20-$22/pair at wholesale. Five-years later, the company has a larger store base, more distribution channels, and a product with a ~$50/pair price tag at wholesale. As the company broadens distribution domestically into the athletic channel (~5% of distribution currently), within existing doors and internationally, demand for 8-10mm+ units/qtr is certainly feasible. The question then becomes one of allocation. Assuming a fulfillment rate of 20%-25%, we are modeling a sell-through of ~2.3mm pair, or $130mm in revenues from Shape-Ups next year.


While Shape-Ups are a nice incremental boost, the direction of the core business is key to top-line trajectory. After mid-teen declines in core domestic wholesale revenues and low double-digit declines in core international wholesale revenues in FY09, we are modeling core revenues down 2% and 4% in domestic and international revenues respectively in FY10. Offset by 4% growth in same store sales in retail and $130mm in Shape-Up related revenues, we expect sales growth of 7%-8% next year. In addition, we’re modeling 250bps of gross margin expansion due to lower product costs (100bps+), higher margin Shape-Up sales (100bps+), and a greater percentage of owned retail sales. Given the expectation of selling expense to outpace sales growth and leveraging of G&A, we expect the company to return to 5% operating margins and generate earnings 40% higher than consensus estimates in F10.


Let’s not forget about the ongoing DC transition plan that has been years in the making. The latest expectation is for a 3Q of F10 or 1Q of F11 start date. While said to be immediately accretive to earnings, the company will have to spend another $35-$40mm of capital in the 2H (assuming 3Q start) towards the installation of equipment, software, & programming, which will impact FCF. The current facility holds roughly 13-14mm pair of shoes and turns roughly 1mm pair/week so there should be no issue handling the incremental stress of a successful new line (I would be happy to provide interested subscribers with further details).


Casey Flavin



SKX: Smoke vs. Sustainability - SKX Dist 9 09



SKX: Smoke vs. Sustainability - Skechers 9 09 trends byCat





Penn missed the quarter and lowered guidance, but the market doesn't seem to care. Taking into account the lobbying costs, the miss, and the guide-down isn't enough to spook investors. All eyes are on the Fontainebleau deal update, particularly now that PENN isn't planning on going it alone and that prudence hasn't gone out the window



“The challenging economic environment, which has resulted in lower consumer spending at gaming facilities, continued to impact operating results for both the overall industry and Penn National in the third quarter, particularly during the month of August. Penn National’s reported third quarter results were below guidance..."

"We recognize that the issues in Las Vegas are extremely challenging, and are focused on attempting to develop a creative and strategic solution that would include bringing in an equity partner."



  • Continue to feel challenged with the softening of the consumer - increased saving levels and deleveraging
  • Visitation continues to be flat, but spend per visitor and time on device continues to be down year-over-year and quarter-over-quarter
  • Being appropriately aggressive at reducing costs to adjust to this new environment
  • More of the same of what they saw in 2Q.  August was the weakest month of 3Q, due to lower spend per visit



  • Are they satisfied with the performance of Lawrenceburg (post expansion) thus far?
    • No they are not. Gaming revenues only grew 12%, turnstile count grew over 20% though.  Not getting growth in the VIP segment that they hoped for.  They are working on improving the non-gaming amenities, like adding more meeting space and replacing a "tired" restaurant with a new dining option. Hopefully those additional amenities will be ready in 6 to 9 months
  • Any change in the consumer in October, trend-wise?
    • No change to what they saw in 3Q
  • Fontainebleau, how are they thinking about the capex there, how much would they spend?
    • Very complicated bankruptcy, are carefully evaluating the opportunity.  Ultimately, the courts will decide what the best course is.  They think that there will be a fast resolution since the building needs to be secured and maintained. Those things are a cash drain now but the alternative is a rapidly depreciating asset

    • Value of the building (sunk cost) is almost nothing, given the cost left to complete it. They will not pay a lot for the current site

    • Would only approach this project with a strategic partner that can bring more to the table than just money

    • Capital markets have gotten better, but not good enough for a greenfield project in Vegas.  Maximum available financing for this project would $500 - $600MM

    • If they do the project they would put it in a separate entity

    • Need a positive outlook on future of Vegas to do this project, and think that "in time Vegas will be fine"
  • 4Q09 lobbing spend in Ohio?
    • Can't disclose for obvious reasons. They will disclose what they spend in 4Q09 on Nov 4th.
    • Obviously there is a decent # in their guidance for the lobbying effort, but we don't think that the entire lowering of guidance can be attributed to lobbying (I assume they knew they would be spending money on this last time they gave guidance, or not?)
  • $764.4MM of cash (roughly $60MM was restricted) at 3Q09, 1.695BN of bank debt, total debt of $2.282BN
  • Ohio outcomes?
    • Not sure when and if slots at racetracks will get on the ballot for a referendum vote
  • Not sure why the state of Indiana would give Indiana Downs table games, and if they did, it would negatively impact Lawrenceburg
  • Acqueduct?
    • Not sure on the timing, originally decision was supposed to be made by Labor Day
    • They have the most aggressive proposal in terms of up-front payment to the state and think they can open the quickest
  • They don't think that Maine is getting another casino, if they did it'll be in the western part of the state and should not impact them
  • Hurdle rate at Fontainebleau? Structure of a partner?
    • "We wouldn't go there if we didn't think the investment makes senses"
    • Partner would likely be 50/50
    • Would take them 6 months or so to redesign / finish the design of the property and lock down pricing to build out the property
    • Would "take our good old time" in deciding how to proceed
  • Change in 4Q09 guidance?
    • Fundamentals - trends in September/ October
    • Ohio referendum costs
  • Capex was $88.5MM
    • $63MM of project capex ($58 for Lawrenceburg & Empress)
    • $49MM project capex for 4Q09, $26MM for maintenance
  • Texas and bid for Lonestar?
    • Think that at some point TX will allow for expansion, who knows when... (big shot at PNK given their concentration there... you can write off Lake Charles then...and the Baton Rouge issue)
    • Lonestar's purchase can't really be justified on its standalone economics - it's really a bet on eventual gaming legalization
  • What happens if they win all of their bids in various jurisdictions? Which balls would they drop?
    • There are some obvious winners on their list
    • Las Vegas is the only "risk to capital project", "no downside" in the other projects
    • Partnerships are some of their answer in terms of being able to compete in so many jurisdictions
    • Very focused on where cost of capital is
    • Some opportunities are so good that they would issue equity but they are very far away from that scenario
    • They would definitely build both Ohio free standing casinos if they win on Nov 3rd
    • Would definitely expand in PA if they pass table games, unless its the House version that passes
    • Maryland will open and they are optimistic on Kansas
    • Wouldn't do a project that wasn't cash flow positive out of the box
    • Expect to earn a mid-high teens returns on their project and their thinking hasn't changed
  • Still two other pieces challenging VLT legislation in Ohio that would need to be resolved. However, there are legislative ways to get around the referendum. There is no indication that that is the way that they are headed
  • Timeline in Ohio?
    • Earliest that something can open is late 2012 (for the free standing casinos)... a la - PA
    • For the slots at racetracks, timing is less clear
  • Last year's corporate expense also included lobbying efforts
  • They feel good about their efforts in Jefferson county, WV regarding the benefit of table games .  Campaign is Dec 5th. Spend is modest
  • Bullwackers?
    • So insignificant that they don't think that it's worth committing capital suicide (a la ASCA?) to grow there
  • How much of their cost saves are sustainable in a recovery?
    • Think that 2/3rds is sustainable even when volumes come back
    • Most of it is labor - salary and staffing (not volume dependent)
  • Thoughts / interest in Las Vegas locals market
    • Will probably continue to be tough as construction jobs grind to a halt when City Center is completed, so employment market should continue to be tough
    • Too much capacity for the next few years
    • Longer term, as the Strip recovers, they think that things will get a lot better
    • No imminent opportunities there for PENN
  • Again... not seeing any improvement in consumer trends
  • Tables in WV & PA can be easily accommodated in the existing space 
    • Shell in WV is already built out so they would just need to fit out the interior
    • Can accommodate about 35 tables in PA but can expand if the legislation is favorable, hope to know late this year/early next year. The lower the tax the higher their investment

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Sports Apparel Continues to Rip

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Sports Apparel Continues to Rip - 33


Penn missed the quarter and lowered guidance.



Penn missed the quarter reporting $144MM of EBITDA and adjusted EPS of $0.33 vs guidance of $162MM of EBITDA and EPS of $0.35 and consensus estimates of $160MM and $0.34, respectively.  Penn's new 4Q09 guidance for EBITDA is 10% below consensus and 13.5% lower than their previous guidance.


PENN 3Q09 QUICK REVIEW - penn guidance q4



“The challenging economic environment, which has resulted in lower consumer spending at gaming facilities, continued to impact operating results for both the overall industry and Penn National in the third quarter, particularly during the month of August. Penn National’s reported third quarter results were below guidance as, in addition to the challenging economy, we incurred charges for several items that were excluded from the guidance provided at the time we reported second quarter results, including lobbying costs and an $800,000 charge for design and development costs related to the proposed addition of a hotel -- which has since been cancelled -- which impacted results at Black Gold Casino at Zia Park.” 


Compared to Penn's original guidance for $162MM of EBITDA, $12.3MM of the miss was related to Ohio lobbying expense and write-offs of construction in progress at Zia Park and Penn Kansas, attributabing $5.5MM of the miss to weaker fundamentals.  According to our numbers, property EBITDA fell 3% short of our $177MM estimate.  Please see the breakout in the table below:




As we noted in our preview yesterday, we don't think that the Penn story hinges on this quarter, but rather on PENN's deployment of their dry powder and the duration and subsquent recovery from this downturn.  Penn provided an update on its greenfield and acquisition opportunities in its release:

  • Fontainebleau speculation was confirmed:
    • "We have expended significant effort with outside legal, construction and financial consultants to analyze the potential opportunity for the bankrupt Fontainebleau project in Las Vegas. We recognize that the issues in Las Vegas are extremely challenging, and are focused on attempting to develop a creative and strategic solution that would include bringing in an equity partner. While we have received numerous inquiries from potential investors, we are primarily interested in partnering with entities that can bring strategic value in addition to economic contributions. We are currently in discussions with a partner that we believe meets this criteria, and have advanced a proposal to the debtors and several key creditor constituencies to provide a ‘debtor in possession’ loan and serve as the stalking horse in an auction of the project. Because the numerous creditors have not unanimously endorsed our proposal, it is uncertain whether our proposal will be accepted or whether we will be the successful bidder at an auction. We will provide additional disclosure on this matter if and when definitive agreements are in place."
  • Maryland: Penn's proposal for a $97.5MM casino with 1,500 slots in Cecil County is expected to be voted on today. If selected Penn will close its land purchase and commence construction shortly thereafter with a planned opening in late 2010
  • Kansas: Penn's 50/50 JV with Speedway International is awaiting approval from the Kansas Lottery Gaming Review Board which is expected later this year
  • Ohio: The Supreme Court of Ohio ruled that in installation of VLT's at racetracks is subject to voter referendum, which Penn is waiting on. Issue 3, a proposal to amend the state Constitution to allow for four casino's in Ohio's largest four cities, is being going to a vote in November. Penn has proposed constructing and operating two facilities in Toledo and Columbus
  • New York: No timing update on an award for Acqueduct



US Strategy – Owning up to higher interest rates

On Tuesday, the S&P 500 closed at 1,091, down 0.6%.  While yesterday was a down day on accelerating volume, the S&P 500 held support and remains positive on both TRADE and TREND. 


Yesterday’s weakness was consumer related.  On the MACRO front housing starts rose 0.5% month-to-month in September to a 590,000 unit annualized pace, while consensus expectations were for a 610,000 rate.  Importantly, building permits, a leading indicator for construction activity, fell 1.2% month-to-month to a 573,000 annualized rate vs. consensus expectations of 595,000. Coming into the day we were short the XHB, as housing-related stocks came under pressure, with the XHB (2.3%).  We covered our short on the XHB, but remain cautious on housing in general. 


As an industry, the homebuilders are in the business of building new homes, which helps to support the nation’s economy.  Unfortunately, the bottom line is that we don’t need any more new homes.  Using data from the Mortgage Bankers Association, there are more than 7 million homes that are in some state of distress.  Given the pace of new homes being built, the current inventory of unsold homes and the potential number of homes that are in distress is likely to increase. Put simply: the housing overhang is here to stay. 


The earnings onslaught continued this morning and last night with Morgan Stanley, Boeing, Freeport McMoran and Yahoo.  From the Research Edge perspective, the Yahoo earnings report (stock currently up 5% pre-market) was another feather in Rebecca Runkle’s cap as earnings were better than expected at $0.13 versus $0.07 for the quarter.  Another notable call out is Freeport McMoran, which is the world’s largest copper miner and reported earnings of $2.07 versus $1.31 in the year ago quarter.  This earnings report is important in that it is a leading indicator of our reported inflation increasing in Q4, as compares for many commodities year-over-year are setting up to be very easy, which will spike reported inflation.


Other portfolio activity included buying Utilities (XLU), the Canadian dollar (FXC) and Adobe (ADBE).  We also shorted the US Dollar (UUP).  


On the positive side 80% of the S&P 500 is beating analyst expectations, with another fairly upbeat showing yesterday from AAPL, CAT, TXN, and UNH. 


The momentum behind the “currency creditability crisis” waned as the UUP was up 0.4%.  The VIX declined 2.7%. 


Yesterday, only two sectors (XLP and XLK) outperformed the S&P 500 and every sector was down on the day.  The three best performing sectors were Consumer Staples (XLP), Technology (XLK) and Energy (XLE), while Utilities (XLU), Consumer Discretionary (XLY) and Materials (XLB) were the bottom three. 


Yesterday, the Materials (XLB) was the worst performing sector.  There were a number of factors behind the underperformance of the Materials sector yesterday, though much of the focus appeared to be on the dollar rally.  Gold stocks were among the worst performers and DuPont weighed on the diversified chemicals stocks. 


Today, the set up for the S&P 500 is: TRADE (1,083) and TREND is positive (1,003).   Day 8 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.         


The Research Edge Quant models have 1.5% upside and 1% downside in the S&P 500.  At the time of writing the major market futures in the U.S. are lower.


The Research Edge MACRO team.




US Strategy – Owning up to higher interest rates - S P500


US Strategy – Owning up to higher interest rates - s pperf

US Strategy – Owning up to higher interest rates - s plevels


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