Repetitive Consequences

“We hope that the weight of evidence in this book will give future policy makers and investors a bit more pause before next they declare, “This time is different.” It almost never is.”

-          Reinhart and Rogoff


We recently finished reading “This Time Is Different”, by Carmen Reinhart and Kenneth Rogoff, which provides “a quantitative history of financial crises in their various guises.”  We obviously found the book interesting on a number of levels. 


Firstly, both Keith and I worked at major private equity firms when the world was purportedly “awash” with liquidity.  Many of the world’s “great” financiers theorized that things were different that go around and were modeling company cash flows with no business cycles imbedded therein.   If we need any more evidence of this, it comes from Tishman Speyer Properties handing over Peter Cooper Village and Stuyvesant Town to their lenders this morning.  After closing the most expensive real estate purchase in history at the top of the real estate market, Tishman walked away today with its equity investment marked-to-market at zero.


Secondly, the book is an incredible resource for studying financial crises, particularly related to sovereign debt defaults.  Sovereign debt is a particular focus of our macro analysis this year given the massive amount of sovereign debt issuance piling up globally.  This is both an issue in the domestic United States, but around the globe as nations continue to issue debt to offset the budgetary issues related to the “Second Great Contraction”, as Reinhart and Rogoff refer to the global recession of 2008 / 2009.


The premise of the book is to look at historical financial crises and to attempt to quantify both what a crises is and what exogenous factors led to the crises.  If there is any lesson from the historical studies from the book, it is that crises are more normal than most market operators believe.  In fact, while we have been in a period of low sovereign debt defaults, over history this has not been the norm.  Typically a period of limited debt defaults is followed by a resurgence of default.   As Rogoff and Reinhart note in the preface to the book:


“If there is common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.  Infusions of cash can make a government look like it is providing greater growth to its economy than it is.”


Historical analysis is valuable because it can provide a range of outcomes for the future.   One of our Q1 Macro Themes is Chinese Ox in a Box, which refers to our belief that China will slow in Q1 of 2010.  Obviously, the most recent data from China already supports this thesis.  A key longer term question relates to the health of the Chinese banking system.  The bears are quite concerned, while the bulls continue to buy Chinese growth with little concern. 


The history of the Chinese banking system is less than stellar.  In fact, the last major crisis in Chinese banking occurred in the late 1990s.  As Reinhart and Rogoff write:


“China’s four large state owned banks, with 68% of banking system assets, were deemed insolvent.  Banking system nonperforming loans were estimated at 50%.” 


Another banking crisis of that magnitude may be solidly out on the TAIL in terms of probability, but we are pretty sure most China bulls aren’t even considering this in their scenario analysis for the Chinese stock market.  And certainly, this scenario is definitely not priced into Chinese stocks.  If Rogoff and Reinhart’s historical studies tell us anything, it is that history tends to repeat itself.  According to George Santayana:


“Those who cannot remember the past are condemned to repeat it.”






Daryl G. Jones
Managing Director


We now know that the improved trends in November were not a sign of a sustained recovery in casual dining demand.  Malcolm Knapp reported December same-store sales and traffic results of -4.9% and -5.4%, respectively.  Not only did trends fall off rather significantly on a 2-year average basis from November, but 2-year average same-store sales growth actually came in -7.2% with traffic down 8%, below December 2008 levels of -6.7% and -7.9%, respectively.


December was also the first month since April 2009 when comparable store sales growth came in better than traffic growth on a 1-year basis.  Malcolm attributed this 0.5% comparable sales outperformance to a lower level of discounting in December.  We know that weather was an issue in December, but decreased discounting may be largely responsible for the sequentially worse results during the month.  Brinker commented on its fiscal 2Q10 earnings call that it was phasing out its “3 Courses for $20 promotion,” which I said might be a little premature given the boost it has provided to traffic trends (EAT’s gap to Knapp widened to 1.7% on a 2-year average basis from 0.9% in the prior quarter).  Based on December trends, Brinker is not alone in its decision to decrease its reliance on discounting to drive guest counts, but the sequentially worse trends may signal that consumers have not recovered and are not yet willing to pay full price.  The industry has trained consumers to look for the best deals.

R3: Reversion to the Peak


January 25, 2009


Consensus margin assumptions for 2010 are lofty to say the least. The Street is looking for a return to peak by 2011. Here’s a scenario analysis that puts it in perspective.




We stated last week our increasing concern that Retail’s earnings revisions are slowing, while the consensus forward growth expectation has ramped to 25%, the market is placing a 19x P/E on such growth, and stocks are no longer going up on earnings beats. I’d be interested to have a discussion with anyone with an objective investment process that is not concerned by this.


We took the analysis a step further to see what margin expectations are really embedded in this group. In doing so, it’s pretty clear that the market assumes margins to revert to the mean for Retail in 2010, and to revert to historical peak in 2011. There are some quality companies that have been proactively investing in their models and will get there. But we think we’ll see a big diversion between the quality and junk this year.


At a minimum, here’s a matrix that allows you to make your own top line and margin assumptions which gives the resulting P/E based on current market prices.


R3: Reversion to the Peak - Table Valuation


R3: Reversion to the Peak - Industry Operating Margin Chart




  • After two and half years, import volumes at major retail ports increased by 1.7% in December.  Global Port Tracker, which monitors cargo volumes also estimates that year over year import growth will continue for at least the next 6 months.  December marked the first month in the last 28 that showed a positive increase.
  • Add Movie Gallery to the list of shrinking strip mall tenants.  There is speculation that the 2,700 unit movie rental chain is considering closing an additional 1,000 stores as part of a restructuring effort.  The chain, which had 4,600 stores at its peak in June 2007, may also be considering a Chapter 11 filing.
  • While the overall success of the Vancouver Winter Olympics my already be in doubt, there is one item that appears to be a big hit.  The officially-licensed $10 red and white mittens worn by torchbearers during the run up to the games are now the must-have item of the event. The mittens have sold almost 2 million pairs in advance of the opening ceremony or about 1 pair for each 34 Canadians.  For each sale, $4 of proceeds is donated to support the Canadian Olympic efforts.




Walmart to Cut 11,200 Sam’s Club Jobs, Outsource Demonstrations  -  Wal-Mart Stores Inc.’s Sam’s Club chain, the second-largest U.S. warehouse club, will cut about 11,200 jobs in the next month after hiring an outside company to take over in-store product demonstrations. About 10,000 demonstration employees, most part-time, will lose their jobs in the U.S. as marketing firm Shopper Events LLC takes over sampling, Sam’s Club Chief Executive Officer Brian Cornell said in an interview yesterday. The company also is cutting about 1,200 membership recruiting jobs. The hiring of Shopper Events, which already works for Walmart’s namesake stores, is part of an effort to improve demonstrations and lure customers from rival clubs, Cornell, 50, said. Sam’s, which trails Costco Wholesale Corp. in sales, will use savings from labor costs to improve the sampling of food, beverages, health items and electronics, the CEO said. “This was not a cost-cutting move,” he said. “We view it as an investment in building membership loyalty and attracting new members and ultimately fueling growth for Sam’s Club.”  <>


Chad Kessler Said Out at A&F - Abercrombie & Fitch Co., reeling from poor results, has dismissed its top ranking women’s merchant, Chad F. Kessler, according to sources. The company did not respond to requests for comment on Sunday. Kessler held the title of executive vice president of female merchandising and reported directly to Michael Jeffries, chairman and chief executive officer. He has been a key player at the specialty chain for a number of years, successfully rising up the ranks. Abercrombie has lately been outperformed by such youth specialty rivals as Aéropostale Inc., The Buckle Inc. and Hot Topic Inc. But the company, which operates Abercrombie & Fitch, abercrombie, Hollister and Gilly Hicks stores, is fighting back and trying to reconnect with consumers, including recently launching mobile commerce, advancing social networking initiatives and lowering prices. Kessler, who is in his mid-30s, has been executive vice president since November 2008. Before that he was senior vice president of female merchandising, prior to which he served as senior vice president and general merchandise manager of the Hollister division. <>


New Look to consider IPO at board meeting - New Look’s board will consider this week whether to go ahead with a Stock Exchange listing. Although the retail sector has been de-rated by the City in recent weeks an IPO is an option for New Look, people familiar with the situation told the Financial Times.

The retailer, which will also look at alternatives including a sale to another private equity firm, delivered strong Christmas sales and former Tesco director John Gildersleeve became its chairman this month.

Last year, New Look drafted in JP Morgan Cazenove, Deutsche Bank and Credit Suisse to advise on an IPO. The retailer could be valued at as much as £1.8bn. New Look said that a float is one option, but no decision has yet been made. <>


Salter Resigns as CEO of Hilco Consumer Capital - Jamie Salter has resigned as chief executive officer of Hilco Consumer Capital and Eric Kaup, general counsel at parent company Hilco Trading LLC, has been named interim ceo of the private equity firm. Kaup will continue as general counsel and executive vice president of Chicago-based Hilco Trading. Salter, who was said to have resigned over financial issues, cofounded Toronto-based Hilco Consumer Capital in 2006 with Hilco Trading. The firm invests in consumer product brands, and its investments include Polaroid, Sharper Image, Bombay Co., Ellen Tracy, Linens ‘N’ Things, Tommy Armour Golf and Halston. The company is also the exclusive adviser on licensing matters to the House of Marley. <>


Disney Store Taps Whitestone as VP, Marketing - Damon Whitestone was recently promoted to vice president of marketing at Disney Store North America, where he will lead global marketing initiatives, as well as the North American marketing strategy through in-store brand positioning, franchise and synergy development. Whitestone joined Disney more than 12 years ago and had most recently served as the company's head of marketing for Walt Disney Records. In that former role, he created artist development and marketing plans for Disney artists from Miley Cyrus and Hilary Duff to the Jonas Brothers, as well as also working with film properties, including Enchanted, The Princess and the Frog and Cars. <>


Designer Allie Yoko Launches Athletic Apparel Company: White Iguana Apparel - The mission statement of the company is to develop athletic apparel that provides superior comfort by utilizing sustainable organic bamboo and environmentally friendly business practices. White Iguana Apparel is designing and selling their own line consisting of mens leggings, womens leggings, hoodies, mens athletic shirts, and womens athletic shirts. Products are different from others because they claim to protect sensitive skin from the uncomfortable and chemically treated athletic apparel sold by other brands. To combat the trend of exporting jobs overseas, their athletic apparel is 100% made in the USA. <>


Finish Line Announces Nationwide Shoe Drive to Benefit Haitian Relief Efforts - Soles4Souls ( and Finish Line ( have joined forces to bring shoes to victims of the devastating earthquake in Haiti. Finish Line will help collect footwear to support Soles4Souls’ commitment to donate more than 1 million pairs of shoes to affected areas. Beginning January 22, customers at Finish Line will have the opportunity to drop off a gently worn pair of shoes. All donations will directly support relief efforts.  The retailer will also offer a $5 discount on a new pair of footwear with the donation of a gently worn pair, subject to certain terms and conditions. <>


Luxury Retailing: The Year Ahead - After a year of speculation about sell-offs and bankruptcies, the clouds in the luxury sector started to lift last November. Stores such as Bergdorf Goodman, Barneys New York and Saks Fifth Avenue have seen a slight uptick in sales, thanks to tourism, some pent-up domestic demand and the stock market holding steady. This year, the latest forecasts are for no major Chapter 11s to materialize, although it's anybody's guess whether deals will be struck. According to financial sources, they're more likely to be of a strategic character, rather than driven by private equity or real estate concerns. Luxury firms are all still managing under the duress of the tough economy, with significantly lower inventories, less dramatic markdowns, cash building up, reduced expenses and realistic expectations. They're also focusing more on accessories, cosmetics, shoes and contemporary sportswear, which continue to be among the busiest departments. Outlets are also perceived as an opportunity, with Saks Fifth Avenue, Neiman Marcus and Bloomingdale's among the retailers putting greater emphasis on the sector.  <>


FCC Launches Consumer Task Force - This week the Federal Communications Commission also said it will work to tighten restrictions on "robocalls" by telemarketers. The FCC has launched a consumer task force to investigate ways to safeguard consumer rights in the context of proliferating telecommunications networks and technologies. Armed with a Government Accountability Office report urging the FCC to tighten its consumer protection rules, FCC chairman Julius Genachowski said Joel Gurin, currently chief of the commission's Consumer and Governmental Affairs Bureau, will head the cross-agency Consumer Task Force. The new FCC unit will include every Commission bureau chief, the chief of the office of engineering and technology, the general counsel, and the managing director.  <>


Jury still out on whether barefoot running trend is beneficial - Running barefoot is as old as humanity. We ran barefoot for thousands of years before shoes were invented. But barefoot running has become more popular lately, due mainly to Christopher McDougall's best-selling book "Born to Run," which describes the barefoot-running Tarahumara tribe of Mexico and its mystical ultra-marathoning lifestyle. Though there weren't throngs of barefoot runners at last week's P.F. Chang's Rock 'n' Roll Arizona Marathon and  1/2 Marathon, more people are interested in barefoot coaching seminars and "barefoot"-like footwear. The trend can also be tied to a backlash against running-shoe companies that pile on ever-increasing and costly amounts of padding and gel while pulling favorite models off the market to encourage stockpiling. <>

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Challenging Gartman

“The President’s very frontal attack on the bankers is a front attack upon capitalism.”
-Dennis Gartman
In his Friday morning missive, that’s what Dennis Gartman wrote about capitalism. This is a view that got forwarded around this weekend. It’s a fear-mongering and politically partisan view that attempts to hold Americans hostage to the Perceived Wisdoms embedded in a failed financial system.
So, Mr. Gartman, let’s see how hard core a capitalist you really are. I am now challenging you to a debate:
TOPIC: What is American Capitalism in 2010?
WHEN: Any time

Coward or capitalist? Conflicted or compromised? We will have to see. Bring any one of your Fast Money friends from the manic media network (CNBC). I will come alone. No phones. No crack-berries. No notes.
You called President Obama “young and misguided.” Well, Paul Volcker is far from young and my macro views from “The Top, To The Bottom, and Back Again” have been hardly misguided. So now you can be held accountable by some real players in this game. Let’s get it on, real-time. You know where to find me.
Back to my daily risk management call…
On Friday’s market selloff, instead of whining about our politics, we started buying. We dropped our allocation to cash from 52% to 46% and took our invested position in US Equities up to 12% (from 6%) in our Asset Allocation Model. We bought back the 3% position we sold higher in US Healthcare (XLV), and bought a 3% position in the SP500 (SPY) for the first time in 2010.
We remain bullish on the US Dollar’s intermediate term TREND (we are long UUP), and bearish on everything commodities (including gold) for the same duration. Despite Mr. Gartman insisting that those “predisposed to exiting dollar positions to do precisely that”, the buck continued higher last week, closing up +1.3% week-over-week at $78.16. The US Dollar Index has closed up for 5 out of the last 7 weeks.
Zero is our current asset allocation to Commodities because we are bullish on a Buck Breakout and bearish on the demand implications of the Chinese Ox being in a Box. Zero is also the rate of return being issued to the conservative citizens of America who have been keeping cash in their hard earned savings accounts rather than issuing it to asset managers like Gartman who can’t seem to earn anything unless commodities inflate.
If creating a high-low American society of preferred lending terms is your version of “capitalism” Mr. Gartman, please state so plainly. Otherwise, we will find someone else who will call zero percent return for what it is – the sad truth.
This morning, the spread between the short-end (2-year US Treasury yields) and the long end (10-year yields) remains unsustainably wide. Carry traders on prop desks at Investment Banking Inc. don’t call it this, but we do – this is called the Piggy Banker Spread, and it is currently +281 basis points wide. That’s only 0.005% away from its widest spread ever. Yes, Mr. Gartman, ever is a very long time.
Chinese stocks closed down another -1.1% overnight, taking the Shanghai Composite down to -5.6% for 2010 to-date. China doesn’t issue their domestic savers a rate of return of zero, nor do they intend on allocating incremental capital to countries like the US or Japan who intend on issuing that conflicted and compromised rate to foreign investors as their “full service” domestic bankers chow down.
China is moving down her own economic path, at her own pace. China is now the world’s creditor nation. America is the debtor. If the old boy networks of Dennis Gartman think that what the Chinese have been watching ensue in America for the last 3 years is called “capitalism”, I’m thinking that they’d just as soon let us keep it.
My immediate term TRADE lines of support and resistance for the SP500 are now 1080 and 1126, respectively.
Best of luck out there today,

XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
SHY – SPDR S&P 500
— On 1/22/10 we bought our first piece of exposure to the broad US stock market index as it tests our intermediate term TREND line of support.
EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil
— As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
EWJ - iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY - iShares 1-3 Year Treasury BondsIf 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.


McCarran Airport traffic declined 2.1% in Dec. However, an easy hold % and table drop comparison with last year coupled with recent strength in the high end from Asia may have resulted in Strip revenue growth.



McCarran Airport in Las Vegas released the number of enplaned/deplaned passengers at 3.1 million for the month of December, down 2.1% y-o-y.  On the surface, that would seem to be enough to push gaming revenue growth into negative territory following November’s surprise increase.  However, in December of 2008, table game hold percentage was only 10.1% versus a more normalized hold of 12%.  Moreover, baccarat drop, which can be extremely volatile month to month, was also abnormally low last year.


In addition to the easy comparisons in hold percentage and table drop there are two additional factors leading to a conclusion that Strip gaming revenue growth could be positive again in December.  As we’ve written about, there has been an acceleration in high end Asian play recently due the strong economic conditions, particularly in China.  Macau is experiencing the same trend.  Also, CityCenter opened in mid-December which probably spurred above normal high end visitation.  


Assuming normal hold percentage, we project Strip gaming revenues to once again climb 8% - November also posted +8% - over the same month last year.  Hold percentage is always the wild card, of course, and the assumption of normal hold is the largest y-o-y contributor to our positive revenue projection.  If we assume consistent low hold with last year, our model projects slightly negative Strip revenue growth.


Here our are projections:






The Macau Metro Monitor. January 25th, 2010



MGM Grand Macau is looking to strengthen its brand by appealing more to Chinese tastes. President Grant Bowie said: “We need to make it a China brand…that’s my role.” The company plans to re-launch the Macau brand shortly with a new marketing campaign geared towards upper middle class Chinese. Some of the changes will include a more traditional buffet and improving taxi access to the property.


With a potentially lucrative HK IPO in the works, sources said MGM is taking steps to exit Atlantic City, where it owns 50% of Borgata and a 72-acre parcel near the resort in Renaissance Pointe. It's unclear whether BYD will be interested in acquiring MGM's stake, but they do have the right of first refusal

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