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Pricing Trends Lagging Inputs

I'm keenly aware that it seems like every other theme I post is related to the impending margin pressure in 2009 as the apparel/footwear supply chains get stress-tested to a greater degree than anytime since perhaps the Asian currency crisis (and I'd argue that this time will be worse). But this trend should rob the industry of at least 3 points in margin, and spark the greatest consolidation wave the group has seen since the 1990s. Worthy of a few extra posts, don't you think?

With that, I've got to highlight Friday's import statistical release from OTEXA (the government office of textiles and apparel) which shows that apparel import prices into the US for the month of May posted a 0.9% year/year increase. That might not seem so bad, but given the preceding three months were down an average of -1.8% -- this unfavorable 270bp delta is not looking good for go-forward margins.

I'm not against cost increases - as long as the consumer is funding these costs. But unfortunately the CPI for apparel is down about 1.5%. This is spot on with levels have been year-to-date. So costs are going up, but revenues are not. What does all this add up to? Margin compression.

The chart below shows the consumer price less the consumer price (a positive value means that consumer prices are going up at a faster rate than cost inflation). Unfortunately, the trends in this spread are making lower highs and lower lows. I think we'll see that trend through 2009. That's a loooong time to wait.

More quantifiable analysis to come on this.

This still makes me very wary about GIL, WRC, GES, VFC and PVH. RL and LIZ are the way to go here given company-specific growth and ROIC levers that can weather the storm.



Ron Paul, The Catholic Church Wants To Know Too: "Who's In Charge?"

According to the BBC News, the Catholic Church ended up losing $14.3M in 2007. "That was despite receiving a single anonomous donation of $14.3."

Interestingly, per the article (link below), almost 1/4 of the Catholic Church's offerings annually come from Americans.

The US Peso's decline is proving to have far reaching effects within the contruct of the many geopolitical factors contributing to economies and organizations.

KM

http://news.bbc.co.uk/2/hi/business/7501486.stm

(Picture: http://romancatholicblog.typepad.com/roman_catholic_blog/images/2007/08/30/casting_out_the_money_changers.jpg)

Chart of the Week: The Bull Market Emerging In The VIX

You can overlay your own economic cycle and/or risk management factors. This is as relevant a long term chart as any I have on my screens.
KM

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Eye on Putin Power, II...

MOSCOW

Eye on Putin Power...

By the time you're done your morning coffee today, you'll likely conclude that the geopolitical risk factors affecting markets have been stepped up a notch. The Israeli/Iran threat is the obvious one, but how many people are watching this Russian/Chinese alliance?

Putin's Russia joined arms with China vetoing a UN Security Council proposition to impose sanctions on Zimbabwe's Mugabe.

The US and the UK are lashing out against this move this weekend, and they should.

The higher energy prices go, the more amplified Putin's geopolitical power becomes.

Don't think for one minute that the Russians have enjoyed being subservient to US rhetoric for the past 20 years. That was approximately the length of the bull market in US stocks too. When everyone is making money, a lot of risks can get swept under the rug - when people stop making money is when you realize they are still there.

It is global this time, indeed.
KM
(picture: www.globalsecurity.org/wmd/library/news/russia)

Indy Mac: 2nd largest US Bank Failure Ever

Below is a picture of what it looks like when the US government seizes control over a bank, and you want in. Indy Mac's 33 branches will be shuttered this weekend.

Like most levered business models, Indy Mac's didn't end well. An old fashioned run on the bank is now a real time reality.

This is going to cost the FDIC $8 billion in bailout capital, which represents approximately 15% of the Federal Deposit Insurance Agency's "insurance" buffer.

KM
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Picture: Annie Wells / Los Angeles Times

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