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Asia Is Slowing? Really? Thanks

This morning, the head of the Asian Development Bank officially cut his estimates for Asian GDP growth in 2008. While our inflation call has morphed into consensus, our "global stagflation" call has not. This revised estimate is another nice admission however, taking consensus closer to reality.

A few weeks back, Goldman also downgraded their Asian Equity market view on select countries. After Vietnam lost 2/3 of its value, and China was down 50% from its October 2007 peak, we gave that a golf clap. That call, like many sell side strategy calls, was a revisionist and reactive one.

Since Q4 of last year I have been calling for Asian growth to be adversely affected by inflationary pressures and social unrest, in addition to the 2nd derivative effects of a US economic growth slowdown.

Asia's aggregate GDP growth for 2007 ended up close to +9% year over year. Look for the revisionist historians to pop into your inbox day by day now, reflected on that being the top in this global economic cycle's growth.

It is global this time, indeed.

Marking Your Home To Market, Part Deux

This entire notion of Wall Street "marking to model" really stung the likes of the currently employed Dick Fuld and the legion of CEO's at legacy investment banks who have been fired. Now we're moving this trend to Main Street, and we are focused on marking American Net Wealth to market.

The two factors in the model that remain most relevant are A) your portfolios and B) your homes.

If you have more than one of A) and/or B) and its levered, that's probably not good, particularly if either are still "marked to model."

This morning US New Home Sales for the month of May came in lower again month over month at 512,000 versus 525,000 in April. I expect these numbers to decline throughout the summer months and not trough until Americans mark their homes to prices that a realistic market will bear.


(picture: http://a.abcnews.com/images/US/rt_foreclosure_071101_ms.jpg)

Too Bearish?

My call yesterday was that around the 1311 line in the S&P 500, investors were getting "too bearish". From S&P my call was that investors were "not bearish enough". As the facts and prices change, I do.

This morning I am getting confirmation in as much via the weekly II survey which showed "Bears" shooting up to a new intermediate high reading of 39%, and "Bulls" breaking down to a new intermediate low of 34%. When this spread is negative (more Bears than Bulls) you are best served to NOT be running net short.

I've been covering and buying stocks for the last 36 hours. For a "Trade", luck is on my side so far...

(picture: http://www.courantnie.com/images/bull+bear.jpg)

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More Capacity Constraints

Lesotho noted this week that the country needs to diversify away from any dependence on apparel exports. Is it me? Or is it a sad statement about an industry when a third-world country with half the GDP of Fond du Lac, WI heads for the hills?

Bunny Ears

Here's a story out of Bangkok that I simply could not resist commenting on. Lumyook - the Thai importer of Playboy merchandise and owner of Chic Club retail stores - announced plans to add male underwear to its arsenal starting in 4Q of this year. While not exactly the same demographic (18-40 year old metrosexuals) as a brand like Calvin Klein it does speak to the different level of competition and low barriers to entry for basic apparel categories when leaving US borders. Notable in that International accounts for better than 75% of Warnaco's growth.

Even more noteworthy, I think, is that Lumyook will reduce imports to 50% of consumption next year, versus 70% today. Assuming that Lumyook is not grossly out of line with the rest of Thailand (which it is not) this means more local capacity will be dedicated towards local consumption. That takes the bid higher for the US brands looking to diversify from China by sourcing in Thailand.

SONC - A capital offense in the restaurant industry!

Sonic reported EPS today that leave more questions than answers!

Sonics management noted that part of the declining performance at partner drive-ins was due to the consumer rejecting the aggressive price increases taken last year. On top of that, management reduced labor in the stores as they were trying to manage margins. Trying to manage to Wall Street's expectations is extremely difficult, and sometimes, decisions are made that can have severe repercussions on the business model.
  • Here are two things we know from the quarter SONC just reported. (1) It can't raise prices, so with inflation rampant, margins are coming down. (2) SONC needs to add labor to the stores to improve service levels, putting further pressure on margins. Things continue to deteriorate for SONC. - Here is a quick look at the guidance time line: after its 2Q, the company forecasted 15%-17% FY08 EPS growth (but still 18% long-term growth). On May 9, when the company preannounced its 3Q results, management lowered its FY08 EPS expectations to 9%-12% growth. Today the company is looking for 4-6% growth. The science of guidance!
  • SONC also slightly lowered its development schedule from 2Q when they were saying they would open 180-200 drive-ins system-wide in FY08. The company is now expecting to open 175-185. To help improve the trend in same-store sales, the company increased the number of franchise retrofits it expects to complete by fiscal year end to more than 700 (versus its prior expectation of 600-700). A phrase used often at Research Edge is when a company pulls the goalie to make the quarter. In short, this means that the company cuts SG&A so it can make the number. For SONC, the company has been pulling the goalies for years and there is nothing left. In 2001, SONC's SG&A as percentage of sales was just over 9%, today it's hovering around 7%. SONC is the model of efficiency when you compare its level of SG&A spending relative to sales to that of its competition. Given what we have learned about management's quest to maintain margins in the current quarter by cutting labor at the expense of customer service, I'm thinking that maybe the company has gone too far.

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