FL: Quick Call Outs From Conf Call


As follow up to our overview this morning on FL and the space in aggregate, here are some notables that mgmt threw out on the conf call, fyi… They support the case for this name (and space) turning on the margin into 2010) as the rest of retail rolls.


Balance of commentary out of FL positive - a few notables:

  • Inventory levels are in good shape - as evidenced by sales/inventory ratio and significantly lower markdowns in 3Q
    • Don’t expect the need to increase promotional cadence in Q4
  • Comps expected to improve sequentially, but still negative (reported -8.2% comp in Q3, a -3% comp keeps the 2-yr trend flat)
    • US Sales soft in October - trend continues for November
  • Comps at down HSD in 3Q
  • Plan to close more stores than originally expected - 160 net closings in FY09 (60 more than origianlly targeted)
    • Implies 120 store closings in the 4Q - 3.3% of total 3600 store base!
  • Despite double digit comp store declines in Athletic footwear and apparel, running turned positive in October
  • Comp store sales trend in Europe improved versus the spring season - October was strong with comps up HSD
  • October sales trends better with meaningful gains in Italy, France, Germany and the UK
  • ASPs in the US increased low single digits - reflecting a stabilization of prices and lower markdown rates
  • Hicks sees apparel as a significant sales and profit opportunity

US STRATEGY – Managing Risk

Today we have included three new charts to help manage risk around the S&P 500, USD Index and the VIX. 


The S&P 500 declined 0.9% yesterday, with the index seeing its biggest one-day pullbacks since October 30th. The RECOVERY trade faced headwinds from the bounce in the dollar.  The Dollar Index rose 0.11% yesterday and is now up two out of the last three days.   


On the macro front, the economic calendar offered some support to the market.  Initial jobless claims were unchanged at 505,000 in the week-ended November 14th, and the four-week moving average fell to 514,000 from 521,000, the lowest level since last November. In addition, continuing claims fell for a ninth straight week. The Philly Fed Index was another bright spot, rising to a better-than-expected 16.7 in November from 11.5 in October, with new orders increasing to 14.8 from 6.2 and shipments jumping to 15.7 from 3.3.  Leading indicators only rose 0.3% in October vs. consensus expectations for a 0.4% gain; the index is still up for a seventh straight month.


Over the past two days the news flow on the consumer related trends continue to show some deterioration from the recent trends.  This week mortgage applications declined 2.5% last week to the lowest level in 12 years.  It was reported yesterday that mortgage delinquencies rose to a seasonally adjusted rate of 9.6% at the end of the 3Q09. 


Yesterday, the VIX rose 4.6%, but has declined 6.6% over the past week. 


While every sector declined yesterday, the three best relative performers were Consumer Staples (XLP), Healthcare (XLV) and Consumer Discretionary (XLY).   While the XLY was one of the better relative performers, it was a busy day on the earnings calendar with HOTT, DKS, LTD and ROST all reporting in line numbers.   Although, all four stocks declined yesterday on guidance that was disappointing!


The worst performing sectors were Energy (XLE), Financials (XLF) and Materials (XLB). With the dollar up it was a tough day for the sectors with leverage to the global RECOVERY theme.   Within the XLB, the steel stocks were the notable decliners. 


From a risk management standpoint, the ranges for the S&P 500, USD Index and the VIX are seen in the charts below.  The range for the S&P 500 is 33 points or 2% upside and 1% downside. 


Howard Penney

Managing Director


US STRATEGY – Managing Risk - sp1


US STRATEGY – Managing Risk - usd2


US STRATEGY – Managing Risk - vix3




 November 20, 2009





When all is said and done, those with apparel exposure printed the best numbers. Consistent with our recent incremental thoughts on the space, we think that the setup for athletic footwear remains solid headed into ’10. If FL is not on your list of long candidates, it should be. NKE starting to look better too.



Thematic Callouts:

  • DKS & HIBB reported better than expected results while FL missed the quarter (it’s also the only one of the 3 that doesn’t provide guidance)
  • The SIGMA for all three reflected both an improved sales/inventory ratio and margins across the board
  • Comps improved on a 1Yr & 2Yr basis for all three
    • Both apparel and hard goods posted positive comps in Q3 (DKS & HIBB)
    • Footwear comped positively for DKS, but negative for HIBB (non-cleated business)


  • Outlook disparity b/w DKS and HIBB Q4 guidance and an implied trends at FL (flat on 2Yr) clearly stands out implying a 7% sequential deceleration.
    • DKS attributed the conservatism not to current deterioration of trends, but rather the shift of cold weather product demand into the 3Q, uncertainty about consumer spending in light of healthcare bill, unemployment, etc. as well as the anniversary of record guns&ammo demand.
  • Store growth: HIBB easing (expect 22 net new stores in F09 vs. 30-32 noted last qtr) while DKS is stepping on the accelerator commenting that if properties become available as was the case with Joes that fit the DKS footprint (35-55k), they will move to acquire add’l locations.




  • Every category (including footwear) comped positively for the 3Q
  • Mgmt noted that footwear has been a good business, but that they are bit different from ‘mall-based retailers’ in that they focus on the core athlete (football, baseball player) implying that similar to HIBB it was the cleated footwear business that outperformed within footwear.
  • Noted there were no real highs or lows to note.



  • While revs were modestly better than expected, footwear was highlighted as the most challenging category in the quarter and continues to be.
  • On the other hand apparel, accessories and hard goods and cleated footwear was all positive in the 3Q – trend expected to cont. in 4Q.



  • Only commentary of consequence is that the Int’l business is outperforming domestic sales.




MISS: Reported EPS of $0.04 (Clean $0.10 ex impairment charges) vs. $0.13E


Revs (-7%) up on a 1 & 2Yr basis as well as comp.

                Store consolidation continues -14 net

(-14 net store reduction on base of 3600 –declining avg. sq. ft. trend continues (-3%-4%)).

Fx (0.3%) impact

Comps -8.2% (vs. -5.8%E)


GM: 0bps

SG&A: +60bps

OM: -60bps


S: -7%

Inv: -3%


Int’l outperformed domestic US business with improved trends in Eur through 3Q and positive performance in APac.



BEAT: Reported (clean) EPS of $0.30 vs. $0.24E


Revs (+4%) up on a 1 & 2Yr basis as well as comp.

                Opened 5 net new stores, but dialing back plans for net adds in FY09 to 22 from 30-32

Comps -0.2% (vs. -0.8%E)


GM: +70bps

SG&A: -10bps

D&A: -10bps

OM: +90bps


S: +4%

Inv: +5%




EPS $0.95-$1.02 (vs. $0.92E) and guidance of $0.85-$0.95



Implied EPS $0.24-$0.31 (vs. $0.27E)

Comps -2%-2%


  • Authorized a new stock repurchase authorization of $250mm replacing the existing plan set to expire in Jan ’10.


FL call @ 9am

HIBB call @ 10am


RETAIL FIRST LOOK: KEY SPORTING GOODS THEMES - Footwear and Apparel in the Sports Retailer Channel















  • William Sonoma management indicated that early sales of the holiday assortment are selling better than expected at this point in the season. There is a sense that their customers are decorating again and continue to entertain at home. As a result, there may be some inventory shortages resulting from continued demand improvement across the business. As a result, management is now expecting to pull some early spring product into late December to meet demand as well as offer newness into the assortment.
  • Despite substantial inventory management improvements over the past two years, ROST management still believes it can reduce inventories further in 2010 by mid to high single digits. Embedded in this assumption is the company’s ability to buy and process units closer to need. However, with inventory tight across the entire supply chain we wonder how much more opportunity there really is to buy closer to need.
  • As retailers continue to create a web of confusion surrounding November sales performance, add PVH to the list of those that are still seeing positive momentum. After reporting a better than expected 6% same store sales increase in the quarter, management noted that the same trend has continued through the third week of November. Sales momentum is being driven primarily by higher AUR’s and conversion, with traffic that is essentially flat.
  • In effort to support the success of its first holiday season in southern California, Dicks Sporting Goods is investing heavily in promotions and marketing in 4Q in that region. The cost of these efforts is expected to be $14 million or $0.07 per share, split 60/40 between marketing and promotions. Management was quick to point out that region has not necessarily gotten worse but that the company is taking the opportunity to invest in the region to further build its brand presence.
  • Management of GameStop attributes the company’s ability to sell 2.5 million units of Modern Warfare 2 in the first 72 hours to the company’s ability to offer trade credit through its used game program. There continues to be an increasing amount of new launch titles being purchased with credit, reflecting both the company’s market share in the used game industry as well as the consumers’ appetite for value.
  • After chasing inventory in the denim category in September and October, Gap is just now back in stock, by size, fit, and wash for the Thanksgiving weekend. This is the first time since the denim re-launch in August that inventory has been well positioned. On a go forward basis, management is focused on making more frequent month by month introductions in the category to continuously reinforce the company’s commitment to innovation in the category.
  • Given Steinmart’s demographic focus on a lower income consumer, management noted that sales conditions continue to be challenging. The company’s customers are reliant on incentives (i.e coupons) to come into the stores to shop. Additionally, the lack of clearance inventory in the mix did have a negative impact on sales, further indicating that their customer remains very focused on value and price.
  • If your already annoyed by Gap’s recent return to TV advertising (maybe a little too much cheer?), there is good news ahead. The second through the fifth weeks of the campaign will feature different twists to the initial programming we have seen over the past seven days. Along with a new campaign, the company will continue to test the balance between rebranding and the use of promotion.





Retail Groups Express Concerns Over Senate Health Care Bill - Retail groups voiced strong opposition to employer mandates in an $849 billion bill unveiled by Senate Democrats Wednesday night that would overhaul the health care system and assess fees on employers to help pay for workers eligible for government health insurance subsidies. The National Retail Federation and the Retail Industry Leader Association were critical of the bill’s employer requirements, while Wal-Mart Stores Inc., which supports a mandate for businesses to pay for employee health care, remained neutral on the Senate bill. The AFL-CIO, on the other hand, lent overall support for the bill, but expressed concern over several issues, including employer mandates that the union said fall short in providing more coverage to workers. <>


GAO Report Finds Credit Card Swiping Fees on the Rise - The National Retail Federation welcomed a report issued today by the General Accountability Office on the $48 billion in “swipe” fees that credit card companies collect from merchants and their customers each year. “This report shines a spotlight on credit card fees and their cost to consumers,” NRF Senior Vice President and General Counsel Mallory Duncan said. “In the past two weeks we’ve seen the Federal Reserve Bank of Kansas City hold a major conference on credit cards, a study from the Hispanic Institute on how card companies take from the poor and give to the rich, and now this document. Clearly, there is a growing focus on this issue and it’s time for action. With this information in hand, we hope Congress will move quickly to pass legislation to bring these fees and practices under control.” <>


China Will Face Its Own Bubble to Face as Consumer Demand Falters - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Chinese growth is likely to be hurt by an absence of consumer demand from trading partners such as the U.S. “The Chinese, I suspect, will have a bubble of their own to confront,” Gross said in a Bloomberg Television interview yesterday from Pimco’s headquarters in Newport Beach, California. “It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China.”  “With unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,” Gross, co-founder and co-chief investment officer of Pimco, said on Bloomberg Television.  <>


Bank of Japan Keeps Rate at 0.1% as Kan Urges Deflation Fight - The Bank of Japan kept interest rates near zero and raised its economic assessment even as government pressure for it to fight deflation intensified. Governor Masaaki Shirakawa and his colleagues held the overnight lending rate at 0.1 percent, the central bank said in a statement today in Tokyo. The release came hours after Deputy Prime Minister Naoto Kan warned about the danger that falling prices pose to Japan’s recovery from its worst postwar slump. <>


Japan’s Department Store Sales Fall 10.5 Percent - The Japan Department Store Association said sales for the month of October dropped to 513.55 billion yen, or $5.71 billion at average exchange, a decline of 10.5 percent compared to the same month last year. This is the 20th consecutive month of decline and biggest monthly drop yet. Sales of clothing fell 13.6 percent overall, with women's apparel dropping 13.5 percent. The largest drop in a single category was 17.2 percent, in furniture. The only area that posted an increase was consumer electronics, up 11.3 percent. <>


INDEX IQ introduces M&A ETF - This week has already seen a number of unique ETFs come into the market place. The IQ ARB Merger Arbitrage ETF (NYSEArca: MNA), linked to the IQ ARB Merger Arbitrage Index, is another one. MNA is the first ETF to invest (long and/or short) in global companies that are potential takeover candidates. The new ETF seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. This differentiated approach is based on a passive strategy of owning certain announced takeover targets, with the goal of generating returns that are representative of global merger arbitrage activity. The index also includes short exposure to global securities as a partial equity market hedge.  <>


Adidas Targets Mountaineers as $59 Billion Outdoor Market Booms - Adidas AG, the world’s second- largest sporting-goods maker, will start selling a new range of 400-euro ($595) mountaineering jackets next year as it aims to capture a larger share of the growing outdoor-pursuits market. The Herzogenaurach, Germany-based company wants to become a leading brand for so-called performance-sports gear by 2015, Rolf Reinschmidt, head of the global outdoor division, said by phone. Adidas is “among the top 10 labels” in the market, he said, declining to be more specific or provide figures. Sales of outdoor gear will rise about 0.7 percent in Europe this year, outperforming the declining sporting-goods market, according to industry body European Outdoor Group. The fragmented nature of the market makes it attractive for Adidas. VF Corp., owner of The North Face brand, leads the $59 billion industry with outdoor-sports sales of $2.74 billion, the association says. <>


Malaysia Economic Contraction Eases as Asia Recovers - Malaysia’s economy shrank the least in three quarters as government stimulus boosted consumption and the global recession eased, strengthening an Asian recovery. Gross domestic product contracted 1.2 percent in the third quarter from a year earlier, after declining 3.9 percent in the previous three months, the central bank said in Kuala Lumpur today. That was better than the median forecast of a 2 percent drop in a Bloomberg News survey of 19 economists.  <>


Tommy Hilfiger Set for Major Global Expansion - Tommy Hilfiger has some big expansion plans in the works — now he just has to make sure he controls the growth. Hilfiger plans to open 100 stores in the months remaining in the current fiscal year ending March 31, adding to the tally of 950 stores he currently operates worldwide. They will be split between Europe, North America and emerging markets. In an exclusive interview, Hilfiger pointed to Central and South America, where the brand has been present for the past 20 years and where it has 130 stores, as hot properties. “We see the region as a big emerging growth market,” he said. “Brazil is untapped. We’ve seeded Argentina, Peru, Colombia, Venezuela and Mexico — and now we’re poised for growth there. The brand is primed for those areas, too, with cotton and bright colors.” <>


Casual Male to Open Superstores in 2010 - Casual Male Retail Group Inc. will unveil a new superstore concept in the spring. In reporting third-quarter earnings on Thursday, where the company posted a net loss of $1.4 million, or 3 cents a diluted share, the Canton, Mass.-based big and tall men’s wear retailer revealed plans to open three Destination XL stores in 2010. The concept will bring together the merchandise offered by all of the company’s existing divisions: the moderately priced Casual Male, the more-upscale Rochester Big & Tall, the B&T Factory Outlet as well as the catalogues Shoes XL and Living XL. The latter offers products in many categories that address the needs of the larger-size customer such as seat belt expanders, heavy-capacity chairs and step stools.  <>


Tesco unveils broadband ambitions - Tesco is to take on broadband telecoms players such as BT, TalkTalk and Virgin media as it targets extra profits of £200m annually. The giant grocer has struck a five-year deal with Cable & Wireless to offer combined broadband and home phone packages. Tesco will also double its number of in-store phone shops to 200 by the end of next year and ultimately to have 500. Tesco is targeting eventual sales of £2bn a year and profits of £200m from broadband and landline services, which are a step on from the established Tesco mobile business. <>


Piazza Sempione Plots U.S. Expansion - The financial bubble may have burst, but for Piazza Sempione, the U.S. is still a ballooning market. The fashion firm is pushing ahead with a bullish retail program with the opening of three freestanding stores in The Shop at the Bravern mall in Bellevue, Wash.; in Chevy Chase, Md., outside Washington, and in The Plaza at King of Prussia, Pa. Between 1,200 and 2,300 square feet in size, each unit is expected to generate annual sales of $2.8 million. Earlier this year, Piazza Sempione spent $1.5 million to open a store in Chicago and is seeking the right location in New York. Piazza Sempione has 13 stand-alone stores and 600 doors worldwide.  <>


Limited closing Canadian apparel chain - Limited Brands Inc. got out of the U.S. tween girl market 10 years ago and now will do the same in Canada. The Columbus-based retailer said Thursday it is closing the 42-unit La Senza Girl chain north of the border. The apparel chain aimed at 7-to-14-year-old girls, akin to the former Limited Too chain, was part of the 2007 purchase of Canada lingerie chain La Senza Corp. for $609 million. Limited bought the more than 600-unit business for its international foothold in lingerie though, not its modest girl apparel business. “Frankly, since the time of the acquisition, we had thought it probably would not be a go-forward business for us,” Martyn Redgrave, chief administrative officer, said during a call for stock analysts. <


Reshaping manufacturing costs in a post crisis world: Asia's not so cheap any more - A decade or more ago Asia was by far the low-cost producer. Recent reports – including the analysis by Alix Partners – show that Asia’s production costs are 15% or 20% higher than they were just four years ago. A US Bureau of Labor Statistics (BLS) report from March reaches the same conclusion.  Compensation costs in East Asia – a region that includes China but excludes Japan – rose from 32% of U.S. wages in 2002 to 43% in 2007. Since wages are advancing at a rate of 8% to 9% a year, and many types of taxes are escalating, too, East Asia’s overall costs have no doubt escalated even more in the two years since the BLS figures were reported.    <>


Private equity firms table first-round Matalan bids - Five private equity groups are understood to have tabled bids for value fashion group Matalan, which may be sold for as much as £1.5bn. BC Partners, Blackstone, TPG and Warburg Pincus have all tabled indicative offers, the Financial Times reported, The fifth is Advent, which already owns value variety store chain Poundland and whose bid would be led by former Boots chief executive Richard Baker. If Matalan attracts the mooted £1.5bn price tag it would be valued at more than 10 times EBITDA of £145m in the year to February 28. The hefty price being demanded is understood to have dissuaded some potential bidders from submitting offers. <>


Burkle’s Yucaipa to Buy Piece of Barneys Debt - Ron Burkle’s evolution from food to fashion may be ready to take another step. Sources said Thursday that Burkle’s Yucaipa Cos. investment vehicle, which previously has taken stakes in Sean John and Scoop, is in the final stages of purchasing some of Barneys New York’s debt from Citibank. “We know Yucaipa bought some of it,” said one financial source. “It has more to do with Citibank,” which is struggling and anxious to shore up its finances. “But it also shows a recovery in pricing of Barneys’ debt,” said another source familiar with the deal. It is believed the amount of debt Yucaipa will own will be less than that of Perry Capital. That hedge fund is headed by Richard Perry, husband of designer Lisa Perry. <>


General Growth, CIT Make Progress in Ch. 11 - General Growth Properties and CIT Group hope to exit Chapter 11 proceedings next month. General Growth said on Thursday it has reached an agreement with lenders to extend the due dates on its mortgages by almost five years, with interest continuing at the “current nondefault rate.” The mall operator said the average interest rate for the 70 loans covered by the agreements is 5.35 percent. If approved by the bankruptcy court, none of the 70 loans would mature before Jan. 1, 2014.  <>


Ralph Lauren's Grand Entrance in Connecticut - After an absence of more than a decade, Ralph Lauren is returning to Greenwich — and making quite an entrance. Today, Lauren is opening a nearly 19,000-square-foot store on Greenwich Avenue with all the ingredients increasingly emblematic of the designer’s retail network. The store is housed inside a newly built structure with an imposing Beaux-Arts limestone facade, large arched windows and balconies; the residential-like interior has several smaller rooms and a grand staircase, and there is a noticeable spotlight on women’s apparel and accessories.  <>


VF Outdoor Launching Two New Value Backpack Brands - VF Outdoor, Inc., a subsidiary of VF Corporation is introducing the launch of two new backpack brands, Wolf Creek™ and L8R™ to service the sporting goods, mid-tier, mass and club channels in Fall 2010.  VF Outdoor says the the Wolf Creek and L8R brands were created to "offer consumer-valued feature sets at compelling prices." “Wolf Creek and L8R will enable retailers to capture healthy margins and sales volume, ensured by the power of the VF Outdoor supply chain,” said Steve Rendle, President of VF Outdoor Americas. “This meets a need for junior lifestyle and young men’s consumers in sporting goods, mid-tier, mass and club channels in a way that complements the overall VF Corporation brand portfolio.” <>


Timberland Names VP, North America Wholesale Sales - The Timberland Co. promoted Mike Noonan to VP of North America wholesale sales. In this role, he will lead the sales operations for Timberland's wholesale customers throughout North America. Departments reporting to Noonan will include field sales - headed by National Sales Manager Tom Lucas - sales operations and customer/consumer service.   In his new role, Noonan reports to VP and GM Mark Bryden. <>


Wal-Mart enters the mobile app realm with product recommendations - Wal-Mart Stores Inc. already operates a successful m-commerce site (1.58 million unique monthly visitors in August, according to The Nielsen Co.) and conducts text messaging with customers. Now it has added the third leg of the mobile commerce stool by launching a mobile app. The new app, designed for the iPhone and iPod Touch and available for free at Apple Inc.’s App Store, focuses on electronics product recommendations. It also includes a store locator and a social media tool to ask friends for help. Wal-Mart says this is only the first version of the app and that future versions will include additional functions.  <>





TJX: Ernie Herrman, SEVP, sold 20,000 shares after exercising options to buy 20,000 shares for a net gain of $350k.


LOW: Michael Mabry, EVP,  sold 35,000 shares for a gain of $756k.


BBY: Bradbury Anderson, Vice Chairman, sold 31,000 shares after exercising options to buy 31,000 shares for a net gain of $341k.


BGFV: Richard Johnson, EVP, sold 15,000 shares for a gain of $255k.


NFLX: Reed Hastings, CEO, sold 10,000 shares after exercising options to buy 4,500 shares for a net gain of $590k.



  •  John McCarvel, EVP of Ops, sold 14,000 shares for a gain of $80k.
  • Russell Hammer, SVP/CFO, sold 7,000 shares for a gain of $40k.
  • Erick Rebich, VP of Gen. Counsel, sold 7,000 shares for a gain of $40k.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Fantasy Forecaster

“We have two classes of forecasters: Those who don’t know – and those who don’t know what they don’t know.”
-John Kenneth Galbraith
I was flying back to New York from Seattle last night, and for the life of me could not shake this ‘dude’ they have on Fast Money who keeps pronouncing China, “Chi-nar-r.” We’re not asking much from these Fantasy Forecasters, but for the love of God, CNBC, get us someone who at least knows what they don’t know about basic spelling and pronunciation. The Chinese are watching.
Rebecca Runkle’s vision of Mobility is a wonderful thing but it can really infuse some distractions to my research while I am on the road. After getting what I needed from CNBC’s broadcast (closing prices for factors in my macro model), I promptly moved back to the country music channel.
Some people call me a forecaster. Some people call me names. Most people are starting to call me their Risk Manager. After spending a lot of time on the road in the last few weeks with Global Macro investors from Calgary, Alberta to Kansas City, Missouri, that’s where people say my team adds the most value.
Howard Marks has been adding value for Oaktree Capital Management investors for a long time. He founded the firm in 1995 and runs $60B in a way that a lot of people respect. They should. He is no Fantasy Forecaster – this man is a world class risk manager. In his recent letter to investors, Marks outlined some thoughts on risk management. Here were two that found their way into my notebook:
1.      “Ignoring bubbles is a special case of ignoring risk in general.”

2.      “I say we never know where we are going, but we sure as heck ought to know where we are.”

No matter where we go this morning, there those real-time, marked-to-market, prices are. Ultimately, this is a very simple way to start knowing what you may not know. Never forget that market prices don’t lie; people do. Price action is a leading indicator for something. Our daily task, as risk managers, is finding a way to understand what it is about those prices that we don’t know.
After being on the road meeting with a lot of people who are in the know, I thought I’d start to share my list of what seems to strike investors as something they didn’t know:
1.      Japan’s stock market is breaking down at the same time as her sovereign default swaps have doubled since August

2.      Japan’s stock market is down -5.4% for the month of November vs. China’s being up +10.5%

3.      Japan’s debt/GDP has gone from 50% in 1988 to 196% today, and government debt could top 240% within the next 3 years

That’s just Japan. And I have to keep this morning missive under 1000 words, so I better jump to another country. What is it about America that Washington doesn’t want anyone to know?
1.      Ben Bernanke’s new nickname is “He Who Sees No Bubbles” (see Daryl Jones, note titled “Geronimo” from Tuesday November 17th)

2.      America’s debt/GDP is tracking the exact same path as Japan’s, from 50%, to 80%, to … ?

3.      America’s debt, all in, per the Federal Reserve, is $53T (includes government, corporate, and consumer debt) actually close to 380% versus GDP

Wait. We know this – or do we? Do we know that levering ourselves up with debt is bad? Do we know what one TRILLION dollars is? How about $53 Trillion, and counting? Do we know what we don’t know?
Do American politicians know what off-balance sheet debt obligations are? If I throw those into the mix (Medicare, Social Security – you know… that other stuff), I can get to $56 TRILLION. That’s not a Fantasy Forecast either. That’s a number that “we sure as heck ought to know” we are running up here!
What does Timmy Geithner know? He claims to know that he “brought America back from the brink.” But the minute that Texas Congressman, Kevin Brady, insinuated that Timmy may not know what he doesn’t know… well… you saw that Squirrel Hunter get all fired up Rouge didn’t you. I have never seen a squirrel turn red before. Heck, I guess that’s just one more thing I didn’t know.
What most Americans know is that they are getting the bill. The Piggy Banker Yield Curve gets the Bankers, Debtors, and Politicians paid. Geithner’s job was to ensure the top 3 banking firms in America got their $30B in 2009 bonuses. Enough with your having brought us back from the brink already, ‘dude’.
Back to Bernanke. Depending on what slope you want to look at, the ‘He Who Sees No Bubbles’ yield curve is 2-4x its historical slope. If you didn’t know, that’s steep. There is a bubble forming in US Treasuries.
This morning you are seeing massive politicization on the short end of that yield curve. The 2-year US Treasury rate is plummeting to new lows (0.69%, levels not seen since the crash). The Yield Spread (10-year yields minus 2-year) is +265 basis points wide (11bps from its widest spread EVER), and the Term Structure (30-year yields minus 3-month) is +401 basis points wide (the historical median is 129bps!).
By any historical measure – government debt, yields, spreads – America has never looked more like Japan did in 1989. Rather than hiring a student of the Great Depressionista “brink” school to run this country’s debt levels up and into monstrous bubble proportions, maybe we should get someone who knows something about Japan to explain this to our President.
President Obama,
If one of your aides passed you the Early Look, I am satisfied – because now you know.
Ignoring America and Japan’s debt bubbles is, as Howard Marks can teach you, a special case of your in-house Fantasy Forecasters “ignoring risk in general.”
My immediate term TRADE support and resistance levels for the SP500 are now 1082 and 1115, respectively.
Enjoy the weekend with your families and best of luck out there today,




EWA – iShares Australia We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS
The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16 and 11/16.

SHY – iShares 1-3 Year Treasury Bonds
 If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


The Macau Metro Monitor. November 20th, 2009.



A press release from Asia Properties Inc., a Nevada-registered company listed on the Over-The-Counter exchange in the US, has revealed that an agreement has been reached for them to buy a majority share in the “casino VIP club” from Sing Hou.  DM had thought that these VIP rooms were operated by one of Macau six concessionaires and that gaming promoters, licensed by the DICJ, were remunerated by the concessionaires for bringing in customers. 


There is obviously a host of regulatory questions surrounding the ownership of a VIP room in Macau by a listed company that is not licensed as a gaming operator in either Nevada or Macau.  While some VIP rooms in Macau operate “cages” within their rooms, so the concessionaire does not know who it is that is playing, regulators have not yet acted.  DM wonders if a US-listed VIP room operator might be treated differently. 





After a slow second quarter, the real estate market seems to be back on track with sale and purchase results from the third quarter this year rising considerably.  According to information released by the Statistics and Census Service, 5,345 building units were purchased and sold at MOP8.98 billion in the third quarter – up by 44% and 96.3% sequentially quarter-over-quarter.  The majority, 3,681, were residential units amounting to MOP7.66 billion – up by 61.7% and 103.5% quarter-over-quarter. 


JACK’s 4Q09 6% same-store sales decline at its Jack in the Box concept came in significantly worse than my estimate, street expectations and management’s guidance of -2.5% to -4.5%.  Making matters worse, trends have deteriorated further with management forecasting a 10% same-store sales decline in fiscal 1Q10 based on trends in the first seven weeks of the quarter.  We have a seen significant slowdown in QSR trends, particularly at the concepts that have relatively more premium product offerings and relatively more geographic exposure to California.  To that end, maybe I should not be surprised by these results, but JACK’s underperformance did shock me because trends fell off so dramatically from the prior quarter, with comparable sales declining 500 bps on a 1-year basis and 270 bps on a 2-year average basis.  A -10% number in Q1 would imply another 245 bp sequential decline in 2-year average trends.


Like last quarter, management attributed the sales weakness to rising unemployment (12%-plus level in California) and increased industry discounting with the biggest fall off in trends continuing to stem from lower breakfast, side item, beverage and mid-tier priced sales.  Specifically, management thinks its sales suffered from its strategic decision to go off air with its new product news as the company allocated more advertising dollars to its value offerings, which according to management, were just not compelling enough.  In response to a question, management stated that BKC’s $1 double cheeseburger, which was launched nationally in October, could also be impacting JACK’s sales trends in the current quarter.


Going forward, management thinks it is extremely important to balance its advertising budget behind both its premium and value messages.  In this environment, it is somewhat surprising to think that more advertising behind premium offerings would help, which is concerning because even the significantly lower same-store sales guidance for full-year 2010 of -3% to -7% assumes a sequential improvement in 2-year average trends throughout the year from current Q1 trends. 


If the economic environment does not improve in the near-term, I have a hard time believing that premium offerings will drive traffic higher.  According to management, being more promotional and offering an increased number of value items are not helping either.  JACK was only on air with its value promotions and traffic has not improved in Q1.  And, management said that significant check erosion was responsible for the sequentially worse trends quarter to date.  This leaves the company in a difficult position.  Increasing value at the expense of average check only makes sense if it is getting more people in the restaurant.


JACK’s full-year 2010 guidance of 15%-16% restaurant level margins implies that margins will be flat to down 100 bps YOY despite the expected 3%-7% decline in same-store sales at Jack in the Box.  As I pointed out last week in reference to CKR, these operators cannot continue to hold margins (even considering current refranchising initiatives) with demand decreasing so significantly.  Keep in mind that food cost favorability will moderate and go away.  For reference, commodity costs were down about 5.5% in 4Q09 with beef and cheese down 17% and 31%, respectively.  This level of YOY commodity favorability drove food and packaging costs as a percentage of sales down 320 bps YOY in 4Q09 and helped to push restaurant level margins 220 bps higher on a YOY basis despite the 6% decline in comparable sales.  This favorable offset to declining sales will not last.



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