Volatility (VIX) up another +10%: Thanks Hank...

I've been hammering on why I think the VIX is in a bull market. We have "hammerin' Hank" Paulson's confusion to thank for this. This may be one of the worst performances in the history of the US Treasury.

At 28, the VIX is stair stepping towards my target range of 31-32. If the US stock market continues to crash the boards, that target will look very conservative.

Hedge Funds are blowing up. You will see that news hit the tape, after the fact, not before.



The Great Capacity Squeeze

In my post yesterday, I noted that there was noise out of China that the government might ease the tax burden of Chinese exporters who have been crushed by rising wage costs, raw materials, RMB, etc... Based on another set of reports, it looks like that will happen as speculated. I learned some new facts in my research.

What did I already know? That 2,331, or 49% of the footwear factories in the Dongguan province closed over the past year. What I did not know is that there were another 7,500 in other industries that closed as well, making the tally about 16% of total plant count. My estimate is that about 4,000 were apparel. In addition, what spurred the government's action is its estimate that there will be another 10,000 factories close down over the next six months - even with their stimulus.

As noted yesterday, the magnitude of tax relief equates to about $0.45 on a $100 (retail) garment. When I account for the fact that just shy of 40% of our apparel is sourced in China, then we're talking about $0.18 in total benefit - or less than 0.2%. There's no way in my opinion that this comes close to offsetting pricing pressure we're going to see in '09 after another 3-4000 apparel plants close shop. This balance of power pendulum still has plenty room to swing. And it ain't in our favor. 2009 margins are going down.

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.

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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


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.

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