Here's a nugget that gets me even more beared-up about footwear margins in 1H09. Chinese export data released last night shows that almost half of the shoemakers in China's Pearl River Delta closed shop in the first half. I repeat - they lost 2,331 producers out of about 4,750 (49%).

Government officials suggested a trend whereby the big got bigger, the smaller have sought out niche markets, and the middle ranks have been going away. Yes, capacity is consolidating, and we'll see more. Bad, obviously, for most companies doing business with them.

Another telling statistic is that 1.35bn pairs were shipped in the first 5 months of the year - a decline of 15.5%. That said, export dollars actually rose 9.4%. This is especially significant in that the dollar value of shoes sourced in the Guangdong province account for about $10bn US. Even if I assume that only a third of these are destined for the US athletic market, it still represents about 2/3 of the market.

Ok, so let's get this straight. Half of the capacity in the most important region for global footwear production has gone bust, and there was a subsequent 2,600bp gap in unit production vs. price (in US$). This brings me back to one of the themes in the footwear space that I've outlined quite a bit (see all of my earlier industry postings) - investors are not cautious enough on margins in this space.

Exhibit courtesy of Hong Kong Trader


Judging by the new room promotion at The Venetian, demand for Las Vegas has cooled considerably. The Venetian is offering a room rate based on the forecasted temperature. I guess a Las Vegas hotel makes more money with that promo than say one in Thunder Bay, Ontario. However, a $100 room at one of the nicest hotels in Las Vegas is a hot deal for customers but chilling for investors. For patrons looking for a step up in quality, the Four Seasons is offering a free room with a 2 night stay. Hopefully, the Four Seasons Hotel Macao, Cotai Strip will do a little better when it opens on October 1st.

I've written extensively on the coming margin compression from room rate pressure so I won't rehash much here. See Mean Margin Reversion... posted on 6/22/08 and More Margin Context... also posted on 6/22. Suffice it to say that most of the big expansion in property level margins over the past 15 years was driven by room rate increases. The Las Vegas model aims to hold occupancies to drive casino visits. Not good for room rates and margins in this environment.

Goldman (GS): Short Against Lehman Long...

The levered long momentum investing community marked Goldman Sachs at and all time high of $247.92/share on the last day of their month on October 31, 2007. There is no irony in that date or pricing. What a difference 9 months makes.

While the stock is down -29% from that high, it continues to make lower highs on rallies, and lower lows on selloffs. If in fact the rumor mongers are right, and someone is looking to "take under" Lehman (LEH), Goldman would be on the short list of companies with the theoretical liquidity and currency to do so. If Goldman bids for Lehman, I want to be short GS.

I do not want to be naked long any brokerage stock. Long LEH, short GS (using a $176.86 stop loss).


(chart courtesy of

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Buying Lehman (LEH), for a Trade...

Enough is enough, and the stock finally broke down through my target price today, trading down another -9% on a "rumor" of a "take under".

"Take Under"? C'mon guys... almost 15% of the float is held short at this point, and you're out there creating rumors like this on the last day of your month and quarter?

Do you really think this is going to happen tomorrow? I don't...

Strategists all over the US have been trying to catch a falling knife buying the brokers all year long. Consider this my 1st buy ticket, and foray into the abyss. Pray for me.

*Full Disclosure: I now own LEH in my fund, for a Trade at $20.33.


The opening of The Encore at Wynn Las Vegas may be pushed into 2009. I don't normally sweat delays but the week encompassing New Year's Eve is the most important week of the year. Management must balance a rush opening in December against a smoother opening of the entire facility sometime in 2009. My guess is that WYNN will avoid the never effective piecemeal opening most recently tried by Las Vegas Sands and the Palazzo. In any event, the impact of any delay on the construction budget is the bigger concern. The project budget currently stands at $2.2bn. Recent casino ROIs have shown escalating denominators with no change to the numerators. Analysts: no more backing into EBITDA with your magical 15% ROIs.

Management has yet to respond to our inquiry. Stay tuned.

Korean Correlations ...

Ironically enough, at -19%, the South Korean stock market is down as much as the Dow Jones is since its October 11, 2007 "its global this time" high. According to new sober estimates from the Korean Economic Research Institute, stagflation looks like a similar domestic reality.

According to the Korean Herald this morning, "The private think tank said in a report that annualized growth in gross domestic product would plummet to 3.3 percent in the second half, from 5.2 percent in the first half of the year."

Meanwhile US stock market centric economists, strategists, and portfolio managers alike are finally agreeing to agree that inflation is a reality. What no one seems to have any confidence in is the growth side of the "stagflation" equation.

This report out of the Korean Economic Research Institute should be commended for it's proactive assessment of likely risks.

Global Stagflation is here.

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