Yet another new market may be emerging. The Brazil potential is huge, and real.



For investors willing to stomach some bumps in the road in 2010, gaming supply could be the best growth segment in all of leisure land.  Brazil is our latest focus, adding to a long list including Illinois, Ohio, Maryland, Kansas, Italy, Singapore, and even Spain.


Rumblings about Brazil legalizing gaming surfaced during G2E but the investment community seems to know very little.  We did some research and we are encouraged.


Casinos have been illegal in Brazil since the 1940's and gambling is punishable under the 1947 Criminal Convention Act.  Prior to President Lula da Silva shutting down the country’s gaming halls in 2004, there were roughly 60,000 gaming machines primarily concentrated in larger cities. 


The proposed legislation, Bill No. 270/03, would legalize licensed bingo and electronic gaming machines and allow for the emergence of gaming parlors with 20-40 devices in some of Brazil's larger cities and a maximum number of 75 devices per location in Sao Paulo.  All slot machines would be required to be connected to a central server, which would be overseen by the Ministry of Finance.  An earlier draft included ten casino resorts but the provision for full fledged casinos is not included in the current bill.  Other details of the proposed Bill 270/03 include:

  • Payout ratio equal to or greater than 80%
  • 17% tax on gaming revenues
  • Maximum of 3 bingo hall licenses per each license holder

In mid-September 2009, a draft version of Bill 270/03 passed in the Chamber of Deputies by a 40-to-7 vote.  The Bill is now awaiting debate and vote in the lower house of the Brazilian Congress.  While the Bill was given the green light to go to floor a few weeks ago, it appears that the debate has been delayed because of a provision dealing with the retirement age of public servants that was tacked onto Bill 270/03.  With the Christmas holidays approaching next week, it’s unlikely that anything gets passed this year, but the bill probably has a decent chance of passing as long as a vote takes place in advance of the October 2010 Presidential election.  Should the Bill pass in early 2010, we could see as many as 40,000-60,000 units shipping into that market. 


Similar to the gaming expansion in Italy, legalized slots in Brazil would be huge for WMS and BYI and additive to IGT.  As we wrote about in our 11/25/09 post, "ONE IN THE HAND IS WORTH TWO IN THE BUSH", analysts may be overestimating 2010 unit sales given the sharp drop off of new/expanded casinos.  However, looking past a potentially choppy 2010, we can see a pretty strong growth pipeline for the slot companies.


Yesterday, the Research Edge QUANT models flashed the S&P 500 breaking the TRADE line on big volume.  Also, Consumer Staples (XLP) and Materials (XLB) broke the TRADE line, joining Energy (XLE) and Financials (XLF).  The XLF is the only sector broken on both TRADE and TREND.  We continue to favor the low beta sectors of Healthcare (XLV), Utilities (XLU) and Technology (XLK).


The Dollar index is up five of the last six days and 2.2% over the same time period.   Until yesterday the S&P 500 was resisting the gravitational pull of everything priced in dollars going down as the dollar rallied.  Although the Dow finished lower by 1.3% yesterday, the index is now down for the fourth straight day. 


The fact remains that the FED is behind the curve and the strong dollar is communicating that message.  There were a number of headwinds at work today, highlighting the pickle the FED is in.  The economy has improved from a crisis levels, but how can the FED raise rates with the consumer struggling and there be no clear path to better times?


Yesterday Initial jobless claims rose to 480,000 for the week-ended December 12th, ahead of consensus expectations for a decline to 465,000. Continuing claims rose 5.2M following a big decline last week.  However, the four-week moving average fell to 468,000 from 473,000, its lowest level since September 2008.  While yesterday’s jobless claims number is a small step backward from the past three weeks, it’s a step backward nonetheless.


The Financials (XLF) continue to underperform and it feels like another bubble is bursting.  The XLF underperformed the S&P 500 by 70bps yesterday and nearly 1000bps over the past three months.  While Discover (DFS) led the group down, the banks and brokers were the real problem.  The bulk of the focus was Citi (C) and its inability to price a massive secondary offering.  The pricing of C was so bad that “Timmy” did not want to take a loss on “our” position.  


The Materials (XLB) was the worst performer yesterday, with much of the damage stemming from a spike in the dollar.  The Chinese appear to be flexing their muscles as it relates to a new potash contract.  It’s now widely expected that the new contract price will be lower than the current global spot price. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 12 points or 0.5% upside and 0.5% downside.  At the time of writing the major market futures are trading higher.


In early trading crude oil rose in New York and is poised for its biggest weekly gain since October on optimism demand will increase amid improved prospects for a global economic recovery.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.66) and Sell Trade (74.30).


Gold is trading 0.2% higher at $1,101.41 an ounce in Singapore after yesterday it dropped the most in almost two weeks.  Spot gold fell below $1,100 yesterday for the first time since Nov. 10.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,097) and Sell Trade ($1,151). 


Copper fell 2.4% yesterday, the most since Oct. 30th.  Although copper is still up 1.1% this week after better-than expected U.S. housing data. China’s imports recovered from a nine-month low amid a drop in domestic inventories. The Research Edge Quant models have the following levels for COPPER – buy Trade (3.13) and Sell Trade (3.26).



Howard Penney

Managing Director














R3: ANF/Not My Bag, Baby


December 18, 2009





Last I checked, in order to ‘sell stuff’, you have to ‘own stuff’.



Anyone that knows me knows that my style does not lend itself to walking into a mall, observing a trend, and making a call based on that trend. While some might consider such mall-checking an investment process, I consider relying on it too heavily a recipe for failure. Note: another one of my favorites is “my wife thinks that the fit is wrong on those shoes, and therefore the stock must be a short.”  In the wise words of Austin Powers, ‘that sort of thing ain’t my bag, baby.”  (my tween boys are currently obsessed with watching the trilogy).


We won’t ignore such anecdotes, but will use them as a small part of a multi-factor process to drill down the direction of cash flows and returns.


Yesterday afternoon our Retail team hit a local mall in Milford, CT, which is a ‘B’ mall with a whole lot of average Joes and Janes. Here are some bullets from our walk. Take from them what you want, and leave the rest. But there’s one that I need to call-out, because it was one of the most bizarre things I’ve seen at retail in a while. That’s Abercrombie.  The picture below says it all. There were literally half a dozen full-wall clearance setups in the mid-back of the store with nothing on them. No, they were not in the midst of a floor reset, and they did not just come off a period where a strong consumer and/or product cycle created a meaningful supply/demand imbalance -- which are often the reason for empty shelves. This is all about just not having any product.  Also, for what it’s worth, (and I realize that this is completely irrelevant) I had 2 salespeople approach me when I was there, and they actually attempted a conversation.  Every other time I’ve gone in there I was either flat-out ignored by employees, or sneered at in a way that says “hey geeky old guy, what makes you think you have the right to shop in this den of coolness.” The first thought that went through my mind was that either I am cooler, or maybe that exclusive ideology has been restricted. Trust me, I get less cool by the day…


R3: ANF/Not My Bag, Baby - 1


Why do I bring this up? Abercrombie has been one of the names we have debated a lot internally (such debate often leads to our best ideas). Keith has liked it from a quant/factor perspective, I have liked it from a directional financial perspective, but Levine has put the kabash on it due to concerns about how the company is managing the brand, controlling inventory and driving sales.


While I cannot base any conclusion on one store in the middle of a Thursday afternoon, I do have a better anecdotal glimpse as to what he’s talking about now.

Score 1 for the process.


Here are some other notables from our tour.

  • DKS
  • Pre-packaged racks shipped ready-for-display (entire displays made from cardboard, selling socks)
  • Thin inventory on select shelves (notably North Face and outwerwear)
  • Easytones (Reebok’s ‘fitness shoe’) very light on inventory; front-and-center display
    • FINL – UA apparel 40% of mix; no UA footwear, though
    • FINL, Lady FL showcasing Shape-Ups in Lease Line displays
    • FL – UA running shoe commentary from clerk: “UA moving units, but we can’t get enough sizes to put in the front of the store” (shoe was towards the back on the bottom of the shelf)
    • BBY Mobile had some prime real-estate w/ regards to foot traffic (near food court); counted at least another 5 wireless outlets in the mall
    • GPS didn’t have any employees in the front half of the store (and it wasn’t busy)
    • AEO had the longest line and most shoppers per sq. foot (buy one top get one 50% off sale seemed to be working)
    • Growth concepts not too far from parent co. (Pink next door to Victoria’s Secret; Aeire 20 yards away from AEO)
    • Charlotte Russe, DKS, ANF empty racks (see picture)
    • ARO had heavy discounting (50-70% off); women’s inventory looked thin, with some empty hanging racks; offset was cardboard boxes filled with merchandise sitting under tables
    • UGG knock-offs prevalent across retailers (AEO, ARO, DKS, Hollister)
    • GH Bass (EARTH) Wellness shoe spotted in Champs



  • Discover Financial indicated that sales volume in its credit card business has trended positively since mid-October, including the most recent week. While comparisons mimic those in retail, the consistency of the positive trend is encouraging.
  • Pier One indicated that its sales of seasonal merchandise have been encouraging and selling through at full price. In fact, the company has not broken price on the seasonal product yet, even with less than one week to go. Given clean inventories and better than planned full price sell-throughs, management now anticipates January sales could be negatively impacted given lack of clearance inventory and difficult compares with last year’s highly promotional post-Christmas sales.
  • When asked about Tiger Woods’ situation and it’s impact on Nike Golf, Nike’s CEO responded with, ”The only thing I'll say right now about Tiger is that we all know that he's chosen to step away from the game, and out of respect for his time and space he needs, that he's asked for, we'll respect that and we'll continue to support Tiger and his family as we, of course, look forward to his return.”




Chanel Workers Demonstrate - About 200 Chanel employees demonstrated Thursday over salary conditions outside the company’s Neuilly-sur-Seine, France-based headquarters. At issue was the 1 percent pay raise to be given to staff earning less than 3,000 euros, or $4,301 at average exchange, per month. They are demanding a 2.5 percent salary hike instead. Chanel executives are surprised by the demand because the proposed 1 percent salary increase allows its employees to preserve their spending power and even raise it in the difficult economy, according to a spokeswoman. She added only one of the four unions at Chanel called for the employees to demonstrate and also that all of the workers’ benefits have been renewed, and some of them increased. <>


Sally Beauty Holdings Buys Sinelco Group - Sally Beauty Holdings Inc. said Thursday it has acquired Belgian beauty distributor Sinelco Group NV in a cash deal worth 25.5 million euros, or about $37.1 million at current exchange. The wholesaler supplies sundries, accessories, basic salon goods and electrical products to 1,500 customers in 35 countries, Sally Beauty said. Chad Selvidge, vice president of the Denton, Tex.-based firm, said Sally Beauty expects the acquisition to accelerate its growth abroad. “The addition of Sinelco, which sources many of its products in Asia, will provide us with the opportunity to sell to distributors of professional products in many countries in which we lack a physical presence,” Selvidge said.  <>


L&T to Launch First Outlet - Lord & Taylor is entering the outlet business, a move that reflects mounting interest in the sector among consumers, retailers and developers. Lord & Taylor executives said Thursday the department store chain will open its first outlet, a 15,000-square-foot unit, in mid-February at the Jersey Gardens outlet center in Elizabeth, N.J., located about 18 miles west of Manhattan. The unit, which will be in New Jersey’s largest outlet mall, is considered a test that could lead to additional locations, officials said. The outlet sector, along with the Internet, is one of the few bright spots in the depressed retail landscape. It is attracting more and more consumers in what many retailers call a “secular” shift to trading down amid economic upheaval. Lower occupancy costs also make outlets desirable expansion strategies for retailers and brands. Macy’s might be the next department store player to enter the outlet arena. Officials have acknowledged that the company is exploring the possibility, but have yet to announce a site. <>


Delta Apparel to Acquire Art Gun Technologies - Delta Apparel, Inc. (NYSE Amex: DLA) has signed a letter of intent and expects to acquire substantially all of the net assets of Art Gun Technologies, LLC by December 31, 2009. Through its innovative technology or "virtual art studio", Art Gun provides shoppers the ability to design apparel products by choosing different styles, colors and graphics to create their one-of-a-kind customized garment. Art Gun's unique software application can be fully integrated into any company's e-commerce platform, allowing Art Gun to manage the entire process from web design and integration to digitally printing and shipping the garment. <>


Permira Buys Back Valentino Debt - Private equity group Permira gave Valentino Fashion Group a vote of confidence Thursday when it agreed to re-purchase a chunk of the company’s debt from Citigroup. According to industry sources here, Permira and the Marzotto family, which together own VFG, have agreed to pay Citigroup 250 million euros, or $362.5 million at current exchange, for an original debt load worth 730 million euros, or $1.06 billion. The purchase will reduce VFG’s outstanding debts by one-third. “The papers are signed, and they are expected to complete the transaction by the end of the year,” said a source close to the deal. A Permira spokeswoman declined to comment. <>


Italy's Coin Takes Control of Upim Chain - Italian midmarket retailer Gruppo Coin SpA has taken control of mass market store chain Upim Srl, creating a giant retail group that will count 900 stores. Through a capital increase, Venice-based Coin will give a 7.5 percent stake in the new group to Upim investors, which include the Borletti family, one of the owners of high-end department store chain La Rinascente, equity fund Investitori Associati, Deutsche Bank Real Estate Opportunities Group and real estate group Pirelli RE. As part of the agreement, before the deal can be completed, investors must reduce Upim’s debt by 52.5 million euros, or $76.3 million at current exchange. Coin, which is controlled by PAI Partners, declined to provide the total debt figure.  <>


Urban Outfitters Announces Retirement of John E. Kyees and Appointment of Eric Artz as Chief Financial Officer - Urban Outfitters, Inc. (Nasdaq:URBN), a leading lifestyle specialty retail company operating under the Anthropologie, Free People, Leifsdottir, Terrain and Urban Outfitters brands, today announced that John E. Kyees, Chief Financial Officer, will retire and be succeeded by Eric Artz on February 1, 2010. Mr. Kyees, 63, who most recently helped URBN successfully navigate the most challenging retail environment in decades, has been with the Company since 2003.  <>


Building a Global Brand: Tory Burch Launches Overseas Expansion - With the opening here of her first overseas flagship, the designer has taken the initial step in a major international push. The eventual goal is to have overseas markets represent about 60 percent of the business. The two-story, 2,551-square-foot store in Ginza here is the first of about 30 planned for Japan alone over the next few years, including a flagship in Tokyo’s Aoyama neighborhood. The Japanese stores are being opened in partnership with Look Inc. <>


American Apparel Launches Nail Polish Line - Long favored by the types of young ladies who would likely also paint their nails all manner of eye-popping shades, American Apparel is taking the leap into beauty with its first line of nail polish in 18 vivid colors, for $6 a pop. True to form, the shades are an extension of the brand's already-vivid array of versatile cotton separates (hot purple leggings, aqua tank tops, and the like), and they come armed with quirky names like "Downtown LA" (a brick red), "Office" (a minty green), "Coney Island" (a bubble-gum pink), and even "Hassid" (a dark black). Also like the clothing, the polish is all made in the USA and, as American Apparel's creative director told WWD, "the palette is inteded for year-round use." (Read: Don't expect the brand to launch any new powder-pink options come spring.) <>


Moosejaw Raises Additional Equity - Moosejaw has landed an undisclosed amount of equity capital from Glencoe Capital's Michigan Opportunities Fund. Glencoe is the second firm to invest in Moosejaw following Parallel Investment Partners in February of 2007. Moosejaw will use the money to "enter promising new retail environments for outdoor active apparel and equipment. "We are extremely pleased to find a Michigan-based company that offers sterling opportunities for revenue growth and the promise of expansion in the state," said Evans. "Moosejaw presents a compelling story in the specialty outdoor active apparel and equipment marketplace, with national reach and highly loyal customers."  <>


Layaway shopping online is new trend - Before every department store issued its own credit card and before everyone’s wallet carried plastic, there was another way to get something you couldn’t quite afford at the moment: layaway. As quaint as the sweet-smiling elevator lady who took you up to housewares in the giant department store, layaway is enjoying a practical, albeit limited, comeback during a credit-stressed economy. The newest innovation offers layaway shopping online. And one major retailer is offering layaway just for the holiday season. “In an economy like this one, people don’t want to rely on credit,” said Ellen Davis, a spokeswoman for the National Retail Federation. Layaway, which involves making incremental payments on merchandise held at the store, offers other benefits during the holiday season, she said. <>


U.K. Consumer confidence falls for second month - Consumer confidence dropped in December for the second month running and consumers are wary about prospects in the new year according to a study. Although levels of confidence are much higher than a year ago, Gfk NOP’s Consumer Confidence Index - which is compiled on behalf of the European Commission - fell by two points to -19 in December. Consumers’ expectations for the next six months fell nine points and confidence in the outlook for personal finances over the next year declined by two points. However, the measurement of the climate for major purchases improved by three points. Gfk NOP social research managing director Nick Moon said: “After a dramatic increase in the index from August to October the index has now fallen back for two months in a row, and another month of falls could see all of the gains since August disappear. <>

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The Good, The Bad, and The Ugly



Last night at 11:50pm, CityCenter got its gaming license and opened its doors to the public.  We have mixed opinions on the property as shown below, but the major concern continues to be whether this property has enough of a differentiated appeal to drive visitation beyond the room/casino supply it is adding.  We remain skeptical.



The Good:

  • Different, modern feel for those who, well, like the new and modern feel
  • Lots of exciting new dining options
  • Several new clubs and bars
  • Great artwork and like Wynn/Encore there are lots of nuances to the property that will likely take many stays to discover
  • Central location on the Strip


The Bad:

  • The modern feel may not appeal to many gamblers 
  • Despite the “natural light”, on overcast days or in the mornings, the casino feels very dark with its “earthy” colors
  • There are already lots of overpriced dining options in Vegas, many of which are now offering discounted pre-fix that the budget-strapped consumer or the “trade-up” customer can afford
  • While the central location is nice, you still have to walk several blocks off Las Vegas Boulevard to get to Aria. So it may not get the same foot traffic as many center-strip properties get with easier egress


The Ugly

  • The rooms are very small... or as one person euphemistically put it “urban chic”.  Unfortunately, this isn’t New York and the finicky Vegas “higher end” guest that typically stays at Wynn/Encore, Venetian/Palazzo, or Bellagio is used to more space.  The tower suite was, at most, 300 square feet.  There’s only one chair next to the bed and, directly beside that, a desk with a flat screen mounted over it.  I think that this property will have a real challenge charging rates at a premium to Wynn and some of the other premium properties.
  • The Elvis show was a total flop.  Hopefully they can improve it over time, The experience felt like attending a bad Elvis musical.  Many people we spoke to felt the same.







The 480k print this morning marks a small step back from the 457k and 462k levels two and three weeks ago, respectively, but the volatility of weekly initial claims numbers makes it necessary to focus on rolling claims. We use a four week rolling average to smooth out that volatility.


The rolling average claims improved further this week to 468k from 473k last week - an improvement of 5.2k, and in-line with the slope of 5.3k/week since March (8.3 months of data). We are keeping a close eye on this metric as rolling claims are the leading indicator for ongoing recovery in the economy and, by extension, the loan books for consumer lenders.




For those wondering how to interpret a possible inflection in rolling claims in coming weeks, should there be one, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 490-495k as a rolling upper limit based on the downward channel that's been in place since March.


Ok, so Vietnam is not on your list of countries that you watch on a daily basis – we do.  The big news today is not the Citi (C) debacle but what is happening in Asia—there were big breakdowns in the TRADE lines in the equity markets of Vietnam, China and Hong Kong.


Last night Vietnam was down 1.6% and is now down 30.5% over the past month.  That is a stock market CRASH!  Also last night, Hong Kong broke its TREND line of 21,557, declining 1.2%. The next question is, why?   We see the reason being China. Not only did the Shanghai A-Shares get smoked last night trading down 2.3%, but also broke its TRADE line, an important momentum line that has not been violated in quite some time. 


We continue to make the call that China is going to slow down from an economic data point perspective in 1Q10.  It should also be on your radar screen that we’ve seen a big divergence in the property stocks in China, which have underperformed the local index by nearly 1000 bps.  Our take-away from this is that the property bubble appears to be popping in China, just like the financial “bubble” is popping here in the US.  The XLF has underperformed the S&P 500 by 990 bps over the past three months.


We continue to harp on the fact that China is going to restrict loan growth in the property sector because of “bubble” fears. 


With the Japanese market declining for the past three months, there is not much in Asia that looks positive right now.   



Keith R. McCullough
Chief Executive Officer




Daily Trading Ranges

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