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The Street Out of Its Cotton Picking Mind?

Here's an interesting chart by my colleague Andrew Barber showing price/volume on NYMEX cotton contracts. Our key takeaway is how complacent this market has become. Volume = conviction, and the biggest volume days over the past 6 months were usually down price days. The market thinks that cotton prices are coming down. At 5-8% of the retail cost of the average apparel garment, the industry better hope that the market is right.

History Points To More Ugliness

Today's 4%+ comp numbers hide how bad things are in apparel land. While the numbers appear consistently bad with 6 out of 7 consecutive down months, they were down 13 months ending Nov 1991, and 16 months ending June '03.


Thank you Wal*Mart. You're the only thing that came remotely close to keeping the RTH's head above water today. The MVRX (a better gauge for the apparel retailers as it is equal-weighted) was down a whopping 3.49%. But with the help of a 5.8% ex-gas comp, WMT was ONLY down 80bps.

Were sales results bad? Yes and no. In aggregate they were actually pretty dang good - up about 4.5% with a 70bp acceleration in the 2-year run-rate. Yes, there was a lot of noise around weather, rebate checks and calendar. But overall, these numbers are not recession-like at face value.

But the bifurcation between sectors is very hairy. Discounters' comps are ramping meaningfully, which is largely due to food inflation, and to a lesser extent, the consumer trading down on discretionary items. But the department stores and apparel retailers were flat-out awful, with nearly every one missing plan.

Here's an interesting stat for you. Apparel comps are down 6 out of 7 months in a row at an average rate of 5.1%. Sounds big, huh? But we also saw negative comps for 16 months straight (March '02 'til June '03) at an average rate of 3.3%, and for the 13 month period ending November 1991 (avg 2.0%). I'd argue that the consumer is in worse shape today, and for the next 2 years, than in either of those periods.

I'm not holding my breath for this to reverse course anytime soon.

All Eyes on the Soy-mobile...

We are keeping our eye on Soy today as it trades up on a down day for rice, wheat and other softs in advance of tomorrow's quarterly report from the Department of Agriculture (particular our intern Karrin who runs her ancient Mercedes turbo diesel on soybean oil).

No real data in advance of the numbers although China's General Administration of Customs issued a trade surplus report today for the first half that showed the average import price for soy beans at an increase of 78.3% over the same period last year.

Andrew Barber
Director

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MACAU VISA RESTRICTIONS SPUR PROMOTIONS

Apparently, Venetian Maca is running a promotion that offers a room, breakfast, lunch and dinner, and a roundtrip ferry ticket from Hong Kong for the very low price of MOP1,488 ($185 to you and me). That rate is a 1/3rd reduction from the opening special last year of MOP1,008. Promotions like this may be more common as mass market visitation has likely taken a hit from the new visa restrictions.
  • Venetian Macau may be reacting to the new visa restrictions put in place last week. As we discussed in our 7/5/08 posting, the Chinese government instituted new restrictions limiting mass market visitation to Macau from once a month to once every two months. Unfortunately, the restrictions were not well communicated to the mainland so many potential customers have been turned away at the border gates. My guys on the ground there tell me that traffic has slowed noticeably at a number of casinos. Discussions with operating level casino workers confirm their observations. Junket commissions and now promotions may continue to eat away at margins as operators battle for market share. It might be time to reset expectations.

You Can't Eat Aluminum!

Aluminum hit an all time high on $3,380 a ton on the LME this morning. As usual, the full details of the supply disruption in China took some time to emerge -in this case it has been smelters in Shanxi reined in by an overstretched power grid.

There have been a series of smelters idled by lack of power recently (particularly in South Africa) but this work halt is particularly emblematic of the global inflation dilemma -reports in the Chinese press indicated that power had to be diverted for agricultural production. You can't eat aluminum.

Andrew Barber
Director

"Is Goldman In Charge?" - Episode 2: Hank Strikes Back!

Ron Paul: Who is charge of the U.S. dollar ?

Hank Paulson: We should give the government temporary emergency authority.... .

Do you recall in Star Wars Episode 2 When Senator Palpatine said the same thing to the Galactic Senate? Then he had sole authority, for which he subsequently used to take over the universe...

In Goldman do we trust? Ask the people living in the state of New Jersey what kind of a job the other recent ex-Goldman CEO, John Corzine, is doing...

Per the South Jersey News: "The Farleigh Dickinson University Public Mind poll found 40 percent approve of the governor's job performance, with 41 percent disapproving. That's down from a 44 percent approval in April and 48 percent in January."

*Full Disclosure: I am still short GS in my fund.
KM

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