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R3: It’s Easy to Tell Who’s in Control

R3: REQUIRED RETAIL READING

January 28, 2009

 

Check out the differences between the income statement/balance sheet trade offs between UA, HBI and H&M.  Excellence, Mediocrity, and Cluelessness.

 

 

TODAY’S CALL OUT

 

One of the first things we do when a company reports earnings is triangulate the income statement and balance sheet vis/vis our SIGMA (Sales Inventory Gross Margin Analysis), which shows us the real health of the print relative to levers pulled on the balance sheet. If you follow our work, then you have, no doubt, seen these on many occasions.  

 

The normal cycle for anyone in retail is to move clockwise on the chart below; Quadrant 1) ‘business is great’, Q2) ‘yeah, our inventory is building, but we’re the best (and cockiest) at what we do and we’re not concerned about building inventory’, Q3) ‘of crud, we were wrong… too much inventory AND no room to hold margin’, Q4) ‘OK, we get it. We’ll clear inventory even if at the expense of margin to put us in the pole position again.’

 

Fewer than 15% of companies in a given quarter will sustain counter clockwise trajectory – which largely means that margins are getting better without a cleansing process first. I can also say that without the cleansing process, for margins to get better it usually means that the company is benefitting from an industry tailwind rather that the company proactively controlling its own destiny.

 

Ironic, then, that the first three SIGMA’s I looked at this morning (UA, HBI and H&M) entirely different movements. UA was clockwise = healthy. H&M was the opposite. And HBI was somewhere in between. I still firmly think these subtleties will set the stage for which names will be on each side of the ‘quality vs junk’ bifurcation in 2010.

 

R3: It’s Easy to Tell Who’s in Control - UA HBI H M SIGMA

 

 

LEVINE’S LOW DOWN 

  • Expect extra scrutiny when trying to promote a “Green” image, especially from bloggers. H&M is currently embroiled in a controversy after some fashion blogs discovered their 100% organic cotton line may not be exactly as advertised. After posting the concerns, the company responded by saying that in fact some of the cotton used in the garments was genetically modified. We expect retailers and manufacturers to remain under the microscope as many are claiming to be “sustainable”, while at the same time failing to verify such claims.
  • Add Hanesbrands to the list of companies looking to make an acquisition. Company management indicated that they are getting more serious about M&A, although debt pay down is still a priority. The company is focused on deals in the $100-$300 million range and they must be domestic given restrictions on the company’s debt. Management also noted that there are no negations currently underway, but that they are beginning to explore potential targets at this time.
  • According to a Neilsen survey, global consumers nearly doubled their time spent on social networking sites, to 5 hours and 35 minutes in the month of December. This compares to 3 hours and 3 minutes in December ’08. Interestingly, Australians spend the most amount of time on such sites, averaging 6 hours and 52 minutes while the average American is spending 6 hours and 9 minutes. Japan is at the bottom of the country list, with the average consumer spending 2 hours and 50 minutes tending to social media.

 

MORNING NEWS 

 

Li & Fung Signs Walmart Deal That May Generate $2 Billion Sales - Li & Fung Ltd. today entered an agreement to supply clothes and other consumer goods to Wal-Mart Stores Inc. that may generate an additional $2 billion of sales in the first year, President Bruce Rockowitz said. Walmart will have the option to acquire WSG Pte, the Li & Fung buying agency involved in the arrangement, after Jan. 1, 2016 according to a statement from Li & Fung, which didn’t set a price for the unit. Rockowitz declined to say if today’s deal would make Walmart the biggest client for the Hong Kong-based outsourcing specialist, overtaking Kohl’s Corp. Li & Fung, which makes more than 60 percent of revenue in the U.S., is accelerating efforts to buy smaller rivals and sign outsourcing agreements to meet a target of $20 billion in sales this year. The company, whose 35 percent gain in market value over the past six months makes it the third-best performer on the benchmark Hang Seng Index, has a $1 billion acquisition fund. Walmart isn’t obligated to any sourcing or shipping volume under the agreement, Li & Fung, the biggest supplier of goods to retailers including Target Corp., Inditex SA’s Zara and Marks & Spencer Plc, said in its statement. “We expect to do about $2 billion in the first year,” Rockowitz said in a phone interview today. Walmart, the world’s largest retailer, will become Li & Fung’s biggest client if it buys $2 billion worth of goods, Marsden said.  <bloomberg.com>

 

Macy’s Said to Be Cutting 1,500 Store-Level Jobs as of March 6 - Macy’s Inc., the second-biggest U.S. department-store chain, is eliminating 1,500 store-level positions effective March 6, two people familiar with the decision said yesterday. Macy’s, based in Cincinnati, is firing department managers and merchandising team managers, said the people, who declined to be identified because the cuts haven’t been made public. Some stores are losing operations managers, and the remainder will be shared across multiple stores, the people said. In addition, full-time stock positions were cut, they said.

Macy’s is standardizing its individual store structure nationwide, which involves eliminating and adding positions, according to Jim Sluzewski, a spokesman. The net result in the number of jobs is not yet known, he said. The move is a continuation of the chain’s process of reducing the number of its regional divisions and adding more local managers to better tailor its merchandise to local markets, Sluzewski said by telephone yesterday when contacted for comment. Macy’s also has been reducing expenses and controlling inventories after sales slowed amid rising U.S. unemployment. It said earlier this month it was shuttering five stores.  <bloomberg.com>

 

Callaway Golf Appoints Board Member - Callaway Golf Company appointed Adebayo O. Ogunlesi to its board of directors. Ogunlesi, 56, is Chairman and Managing Partner of Global Infrastructure Management, LLC, which is a private equity firm with over $5 billion in assets which invests worldwide in infrastructure assets in the energy, transport, water and waste industry sectors. He will begin serving immediately and will stand for election for a full one-year term at the Company's 2010 Annual Meeting of Shareholders in May. Prior to founding Global Infrastructure Management, Ogunlesi spent 23 years at Credit Suisse where he held senior positions, including Executive Vice Chairman and Chief Client Officer and prior to that Global Head of Investment Banking. "Bayo's extensive knowledge and experience advising clients in corporate finance and general business matters will benefit the Board greatly," said Ronald S. Beard, Chairman and Lead Independent Director, Callaway Golf Company. "He is a welcome addition to the Board and we look forward to working with him." <sportsonesource.com>

 

Blue Nile’s founder and key alumni unveil their new private-sale site - After six months of development, two of the founding executives of online jeweler Blue Nile Inc. are formally taking the wraps off their newest venture: Zulily.com, a new private-sale web site aimed at young moms. Zulily.com launched today as a free members-only web site that will sell baby clothes, toddler’s apparel and similar products through limited-time sales, says CEO Darrell Cavens, who formerly was senior vice president of marketing and technology at Blue Nile. The site features merchandise discounted by up to 70% and sold during a three-day event, says Cavens. The first event features products from Origany Inc., a manufacturer of organic cotton and baby alpaca apparel for babies and toddlers, and HandySitt.com, a manufacturer of portable high chairs for children ages six months through five years. Subsequent events will feature merchandise from Lex Modern, a supplier of personalized art, ornaments and handprint kits, and Baby Nav, a distributor and retailer of baby and toddler apparel. “We will feature a great deal of diversity with the brands,” says Cavens. “What we will offer won’t just be what’s found in a typical big-box store.”  <internetretailer.com>

 

JJB Chairman Steps Down, Pinsent Will Join Board - JJB Sports Plc, an unprofitable U.K. sporting goods retailer, said Chairman David Jones resigned, announcing at the same time a 28 percent decline in full-year same-store sales because of a lack of stock. The retailer appointed Matthew Pinsent, the Olympic gold medal-winning rower, and Moss Bros Group Plc Chairman David Adams as non-executive directors. Jones will step down from Jan. 31, the end of the company’s fiscal year, for health reasons, while staying on as a non-executive director, JJB said in a statement today. Total group revenue for the financial year fell 51 percent. Jones said on Dec. 17 that new merchandise worth 75 million pounds ($122 million) would arrive toward the end of January and that would mark “the start of the recovery.”  <bloomberg.com>

 

Aliansce IPO Weakness Shows Bovespa Decline Damps Risk Appetite - Aliansce Shopping Centers SA is raising less money in its initial public offering than the company planned, adding to signs that the worst Brazil stock market drop in three months is damping demand for new shares. Aliansce and stakeholders may raise 673 million reais ($362 million), 20 percent less than the 845 million reais for the initial sale that the company estimated two weeks ago. The shopping mall owner’s initial offering is the first in Latin America’s biggest equity market this year. Metalfrio Solutions SA, the nation’s biggest maker of commercial refrigerators, canceled its planned share sale and M. Dias Branco SA, the biggest maker of cookies and pasta, postponed an offering in the past week as the Bovespa index fell 8 percent since Jan. 6, the worst slump since October.  <bloomberg.com>

 

Cheapest Route to Walmart From China May Skip Buffett’s Railway - Chinese toys and sneakers headed to Wal-Mart Stores Inc. and Target Corp. on the U.S. East Coast may bypass Warren Buffett’s $33.8 billion railway as the expansion of the Panama Canal slashes the cost of shipping them by sea.

The deeper, wider canal will allow A.P. Moeller-Maersk A/S, China Ocean Shipping Group Co. and other lines to ship more cargo directly to New York and Boston instead of unloading it on the West Coast for trains and trucks to finish the journey east. That could save exporters 30 percent, the canal operator said. The $5.25 billion Panama Canal project, scheduled for completion during its centennial in 2014, may take business from ports including Los Angeles and Seattle, and railroads including Berkshire Hathaway Inc.’s Burlington Northern Santa Fe Corp. It costs as much as $1,000 more per cargo container to use trains than ships, said Lee Sokje, a shipbuilding analyst at Mirae Asset Securities Co. in Seoul.

“It is inevitable that railways, such as Burlington Northern, will lose some of their cargo once the Panama Canal is expanded,” said Jee Heon Seok, a shipping analyst for NH Investment & Securities Co. in Seoul. “Many more containers can be moved in a single voyage on a ship than going through the West Coast ports.”  <bloomberg.com>

 

Men's Specialty Stores See Positive Signs for 2010 - After business dried to a drip in the fall of 2008 and continued that way through most of last year, men’s specialty stores experienced a slight rebound in the fourth quarter, providing some hope for the future. Those that managed to survive did so by drastically reducing inventories — some as much as 30 percent — cutting expenses, seeking lower-priced merchandise options to appeal to price-conscious consumers and running more promotions. But according to stores shopping the New York market last week, a minor uptick in sales is still not enough to make them return to the old ways of doing business. Inventories may inch up a bit but will still be down from two years ago, sportswear will continue to gain at the expense of tailored clothing, whose sales have been lackluster at best, and incentives will still have to be offered to lure shoppers. Some of these strategies are counterintuitive for independents, many of whom have cut their teeth on clothing and have always managed to hold firm against promotional pricing. But 2010 is a new year and necessitates an entirely new way of doing business, retailers report, and they’re prepared to do whatever it takes to stay in business. <wwd.com>

 

Shipping: The Year Ahead - While brands and retailers see the pains of the recession easing this year, ocean carriers that get their goods to market are still girding for potentially massive upheaval. Carriers such as Maersk, APL Lines, Evergreen Line and Hanjin Shipping are facing myriad issues that are expected to linger throughout 2010 and beyond, including overcapacity of ships and containers, rising fuel prices and low freight rates. During the annual Textile & Apparel Importers Trade & Transportation Conference held in New York in November, executives from APL and Hanjin stressed their companies had taken all possible measures to reduce their losses. Ships have been scrapped, slowed down, idled for months and had their service patterns altered. Companies are also delaying the delivery of new ships. Still, they expected to see bankruptcy or consolidation among carriers as a result. “There are too many ships chasing too many containers,” said Robert Sappio, senior vice president of Pan American trade for APL Lines. The oversupply was exacerbated by the global recession and as a result ocean carriers failed to maintain freight rates at a level that would ensure survival. This has been particularly evident in crucial Trans-Pacific rates. <wwd.com>

 

Study finds barefoot runners have less foot stress than shod ones - Scientists have found that those who run barefoot, or in minimal footwear, tend to avoid "heel-striking," and instead land on the ball of the foot or the middle of the foot. In so doing, these runners use the architecture of the foot and leg and some clever Newtonian physics to avoid hurtful and potentially damaging impacts, equivalent to two to three times body weight, that shod heel-strikers repeatedly experience. "People who don't wear shoes when they run have an astonishingly different strike," says Daniel E. Lieberman, professor of human evolutionary biology at Harvard University and co-author of a paper appearing this week in the journal Nature. "By landing on the middle or front of the foot, barefoot runners have almost no impact collision, much less than most shod runners generate when they heel-strike. Most people today think barefoot running is dangerous and hurts, but actually you can run barefoot on the world's hardest surfaces without the slightest discomfort and pain. All you need is a few calluses to avoid roughing up the skin of the foot. Further, it might be less injurious than the way some people run in shoes." <physorg.com>

 

 

TODAY’S CALL OUT

 

One of the first things we do when a company reports earnings is triangulate the income statement and balance sheet vis/vis our SIGMA (Sales Inventory Gross Margin Analysis), which shows us the real health of the print relative to levers pulled on the balance sheet. If you follow our work, then you have, no doubt, seen these on many occasions.  

 

The normal cycle for anyone in retail is to move clockwise on the chart below; Quadrant 1) ‘business is great’, Q2) ‘yeah, our inventory is building, but we’re the best (and cockiest) at what we do and we’re not concerned about building inventory’, Q3) ‘of crud, we were wrong… too much inventory AND no room to hold margin’, Q4) ‘OK, we get it. We’ll clear inventory even if at the expense of margin to put us in the pole position again.’

 

Fewer than 15% of companies in a given quarter will sustain counter clockwise trajectory – which largely means that margins are getting better without a cleansing process first. I can also say that without the cleansing process, for margins to get better it usually means that the company is benefitting from an industry tailwind rather that the company proactively controlling its own destiny.

 

Ironic, then, that the first three SIGMA’s I looked at this morning (UA, HBI and H&M) entirely different movements. UA was clockwise = healthy. H&M was the opposite. And HBI was somewhere in between. I still firmly think these subtleties will set the stage for which names will be on each side of the ‘quality vs junk’ bifurcation in 2010.

 

R3: It’s Easy to Tell Who’s in Control - UA HBI H M SIGMA

 

 

LEVINE’S LOW DOWN 

  • Expect extra scrutiny when trying to promote a “Green” image, especially from bloggers. H&M is currently embroiled in a controversy after some fashion blogs discovered their 100% organic cotton line may not be exactly as advertised. After posting the concerns, the company responded by saying that in fact some of the cotton used in the garments was genetically modified. We expect retailers and manufacturers to remain under the microscope as many are claiming to be “sustainable”, while at the same time failing to verify such claims.
  • Add Hanesbrands to the list of companies looking to make an acquisition. Company management indicated that they are getting more serious about M&A, although debt pay down is still a priority. The company is focused on deals in the $100-$300 million range and they must be domestic given restrictions on the company’s debt. Management also noted that there are no negations currently underway, but that they are beginning to explore potential targets at this time.
  • According to a Neilsen survey, global consumers nearly doubled their time spent on social networking sites, to 5 hours and 35 minutes in the month of December. This compares to 3 hours and 3 minutes in December ’08. Interestingly, Australians spend the most amount of time on such sites, averaging 6 hours and 52 minutes while the average American is spending 6 hours and 9 minutes. Japan is at the bottom of the country list, with the average consumer spending 2 hours and 50 minutes tending to social media.

 

MORNING NEWS 

 

Li & Fung Signs Walmart Deal That May Generate $2 Billion Sales - Li & Fung Ltd. today entered an agreement to supply clothes and other consumer goods to Wal-Mart Stores Inc. that may generate an additional $2 billion of sales in the first year, President Bruce Rockowitz said. Walmart will have the option to acquire WSG Pte, the Li & Fung buying agency involved in the arrangement, after Jan. 1, 2016 according to a statement from Li & Fung, which didn’t set a price for the unit. Rockowitz declined to say if today’s deal would make Walmart the biggest client for the Hong Kong-based outsourcing specialist, overtaking Kohl’s Corp. Li & Fung, which makes more than 60 percent of revenue in the U.S., is accelerating efforts to buy smaller rivals and sign outsourcing agreements to meet a target of $20 billion in sales this year. The company, whose 35 percent gain in market value over the past six months makes it the third-best performer on the benchmark Hang Seng Index, has a $1 billion acquisition fund. Walmart isn’t obligated to any sourcing or shipping volume under the agreement, Li & Fung, the biggest supplier of goods to retailers including Target Corp., Inditex SA’s Zara and Marks & Spencer Plc, said in its statement. “We expect to do about $2 billion in the first year,” Rockowitz said in a phone interview today. Walmart, the world’s largest retailer, will become Li & Fung’s biggest client if it buys $2 billion worth of goods, Marsden said.  <bloomberg.com>

 

Macy’s Said to Be Cutting 1,500 Store-Level Jobs as of March 6 - Macy’s Inc., the second-biggest U.S. department-store chain, is eliminating 1,500 store-level positions effective March 6, two people familiar with the decision said yesterday. Macy’s, based in Cincinnati, is firing department managers and merchandising team managers, said the people, who declined to be identified because the cuts haven’t been made public. Some stores are losing operations managers, and the remainder will be shared across multiple stores, the people said. In addition, full-time stock positions were cut, they said.

Macy’s is standardizing its individual store structure nationwide, which involves eliminating and adding positions, according to Jim Sluzewski, a spokesman. The net result in the number of jobs is not yet known, he said. The move is a continuation of the chain’s process of reducing the number of its regional divisions and adding more local managers to better tailor its merchandise to local markets, Sluzewski said by telephone yesterday when contacted for comment. Macy’s also has been reducing expenses and controlling inventories after sales slowed amid rising U.S. unemployment. It said earlier this month it was shuttering five stores.  <bloomberg.com>

 

Callaway Golf Appoints Board Member - Callaway Golf Company appointed Adebayo O. Ogunlesi to its board of directors. Ogunlesi, 56, is Chairman and Managing Partner of Global Infrastructure Management, LLC, which is a private equity firm with over $5 billion in assets which invests worldwide in infrastructure assets in the energy, transport, water and waste industry sectors. He will begin serving immediately and will stand for election for a full one-year term at the Company's 2010 Annual Meeting of Shareholders in May. Prior to founding Global Infrastructure Management, Ogunlesi spent 23 years at Credit Suisse where he held senior positions, including Executive Vice Chairman and Chief Client Officer and prior to that Global Head of Investment Banking. "Bayo's extensive knowledge and experience advising clients in corporate finance and general business matters will benefit the Board greatly," said Ronald S. Beard, Chairman and Lead Independent Director, Callaway Golf Company. "He is a welcome addition to the Board and we look forward to working with him." <sportsonesource.com>

 

Blue Nile’s founder and key alumni unveil their new private-sale site - After six months of development, two of the founding executives of online jeweler Blue Nile Inc. are formally taking the wraps off their newest venture: Zulily.com, a new private-sale web site aimed at young moms. Zulily.com launched today as a free members-only web site that will sell baby clothes, toddler’s apparel and similar products through limited-time sales, says CEO Darrell Cavens, who formerly was senior vice president of marketing and technology at Blue Nile. The site features merchandise discounted by up to 70% and sold during a three-day event, says Cavens. The first event features products from Origany Inc., a manufacturer of organic cotton and baby alpaca apparel for babies and toddlers, and HandySitt.com, a manufacturer of portable high chairs for children ages six months through five years. Subsequent events will feature merchandise from Lex Modern, a supplier of personalized art, ornaments and handprint kits, and Baby Nav, a distributor and retailer of baby and toddler apparel. “We will feature a great deal of diversity with the brands,” says Cavens. “What we will offer won’t just be what’s found in a typical big-box store.”  <internetretailer.com>

 

JJB Chairman Steps Down, Pinsent Will Join Board - JJB Sports Plc, an unprofitable U.K. sporting goods retailer, said Chairman David Jones resigned, announcing at the same time a 28 percent decline in full-year same-store sales because of a lack of stock. The retailer appointed Matthew Pinsent, the Olympic gold medal-winning rower, and Moss Bros Group Plc Chairman David Adams as non-executive directors. Jones will step down from Jan. 31, the end of the company’s fiscal year, for health reasons, while staying on as a non-executive director, JJB said in a statement today. Total group revenue for the financial year fell 51 percent. Jones said on Dec. 17 that new merchandise worth 75 million pounds ($122 million) would arrive toward the end of January and that would mark “the start of the recovery.”  <bloomberg.com>

 

Aliansce IPO Weakness Shows Bovespa Decline Damps Risk Appetite - Aliansce Shopping Centers SA is raising less money in its initial public offering than the company planned, adding to signs that the worst Brazil stock market drop in three months is damping demand for new shares. Aliansce and stakeholders may raise 673 million reais ($362 million), 20 percent less than the 845 million reais for the initial sale that the company estimated two weeks ago. The shopping mall owner’s initial offering is the first in Latin America’s biggest equity market this year. Metalfrio Solutions SA, the nation’s biggest maker of commercial refrigerators, canceled its planned share sale and M. Dias Branco SA, the biggest maker of cookies and pasta, postponed an offering in the past week as the Bovespa index fell 8 percent since Jan. 6, the worst slump since October.  <bloomberg.com>

 

Cheapest Route to Walmart From China May Skip Buffett’s Railway - Chinese toys and sneakers headed to Wal-Mart Stores Inc. and Target Corp. on the U.S. East Coast may bypass Warren Buffett’s $33.8 billion railway as the expansion of the Panama Canal slashes the cost of shipping them by sea.

The deeper, wider canal will allow A.P. Moeller-Maersk A/S, China Ocean Shipping Group Co. and other lines to ship more cargo directly to New York and Boston instead of unloading it on the West Coast for trains and trucks to finish the journey east. That could save exporters 30 percent, the canal operator said. The $5.25 billion Panama Canal project, scheduled for completion during its centennial in 2014, may take business from ports including Los Angeles and Seattle, and railroads including Berkshire Hathaway Inc.’s Burlington Northern Santa Fe Corp. It costs as much as $1,000 more per cargo container to use trains than ships, said Lee Sokje, a shipbuilding analyst at Mirae Asset Securities Co. in Seoul.

“It is inevitable that railways, such as Burlington Northern, will lose some of their cargo once the Panama Canal is expanded,” said Jee Heon Seok, a shipping analyst for NH Investment & Securities Co. in Seoul. “Many more containers can be moved in a single voyage on a ship than going through the West Coast ports.”  <bloomberg.com>

 

Men's Specialty Stores See Positive Signs for 2010 - After business dried to a drip in the fall of 2008 and continued that way through most of last year, men’s specialty stores experienced a slight rebound in the fourth quarter, providing some hope for the future. Those that managed to survive did so by drastically reducing inventories — some as much as 30 percent — cutting expenses, seeking lower-priced merchandise options to appeal to price-conscious consumers and running more promotions. But according to stores shopping the New York market last week, a minor uptick in sales is still not enough to make them return to the old ways of doing business. Inventories may inch up a bit but will still be down from two years ago, sportswear will continue to gain at the expense of tailored clothing, whose sales have been lackluster at best, and incentives will still have to be offered to lure shoppers. Some of these strategies are counterintuitive for independents, many of whom have cut their teeth on clothing and have always managed to hold firm against promotional pricing. But 2010 is a new year and necessitates an entirely new way of doing business, retailers report, and they’re prepared to do whatever it takes to stay in business. <wwd.com>

 

Shipping: The Year Ahead - While brands and retailers see the pains of the recession easing this year, ocean carriers that get their goods to market are still girding for potentially massive upheaval. Carriers such as Maersk, APL Lines, Evergreen Line and Hanjin Shipping are facing myriad issues that are expected to linger throughout 2010 and beyond, including overcapacity of ships and containers, rising fuel prices and low freight rates. During the annual Textile & Apparel Importers Trade & Transportation Conference held in New York in November, executives from APL and Hanjin stressed their companies had taken all possible measures to reduce their losses. Ships have been scrapped, slowed down, idled for months and had their service patterns altered. Companies are also delaying the delivery of new ships. Still, they expected to see bankruptcy or consolidation among carriers as a result. “There are too many ships chasing too many containers,” said Robert Sappio, senior vice president of Pan American trade for APL Lines. The oversupply was exacerbated by the global recession and as a result ocean carriers failed to maintain freight rates at a level that would ensure survival. This has been particularly evident in crucial Trans-Pacific rates. <wwd.com>

 

Study finds barefoot runners have less foot stress than shod ones - Scientists have found that those who run barefoot, or in minimal footwear, tend to avoid "heel-striking," and instead land on the ball of the foot or the middle of the foot. In so doing, these runners use the architecture of the foot and leg and some clever Newtonian physics to avoid hurtful and potentially damaging impacts, equivalent to two to three times body weight, that shod heel-strikers repeatedly experience. "People who don't wear shoes when they run have an astonishingly different strike," says Daniel E. Lieberman, professor of human evolutionary biology at Harvard University and co-author of a paper appearing this week in the journal Nature. "By landing on the middle or front of the foot, barefoot runners have almost no impact collision, much less than most shod runners generate when they heel-strike. Most people today think barefoot running is dangerous and hurts, but actually you can run barefoot on the world's hardest surfaces without the slightest discomfort and pain. All you need is a few calluses to avoid roughing up the skin of the foot. Further, it might be less injurious than the way some people run in shoes." <physorg.com>


UNEMPLOYMENT CLAIMS DATA SOFTENS - STAY TUNED

Initial claims fell 8k to 470k last week, down from 478k the prior week (revised down 4k). On a rolling 4-week basis, average initial claims rose 9k to 457k from 448k and are up 15k in the last two weeks. While the rolling number remains within the channel of improvement shown in the following chart, it is moving to the upper band of that channel quickly. Given the historical tendency for this seasonally adjusted data to trend up in mid-to-late January we will give it the benefit of the doubt for now that the longer-term trend lower remains in place, but we think the next month's worth of data will be very important. it's definitely time to pay attention.

 

Joshua Steiner, CFA

Financials

 

UNEMPLOYMENT CLAIMS DATA SOFTENS - STAY TUNED - 1.28.10


THE M3: LVS TO RESTART COTAI

The Macau Metro Monitor. January 28th, 2010

 

LVS TO RESTART COTAI IN FEBRAURY macaubusiness.com

LVS announced that it will start construction on sites 5 & 6 right after Chinese New Year, on Feb 14th. According to Tribuna de Macau, Steve Jacobs, LVS's Macau president, said they are now looking to recruit around 10,000 workers to get lots 5 and 6 going again after over a one year halt. The project will be built in three phases with Phase I expected to open June 2011 with  three luxury hotels with around 3,700 rooms and casino facilities with 670 gaming tables and 2,200 slot machines.


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ANOTHER SO/SO SUPPLIER EARNINGS RELEASE

BYI met consensus EPS but top line was soft.  We thought they would’ve done better.   BYI did maintain previous guidance, albeit a very wide range, but seemed more cautious on the current Q.

 

 

IGT and WMS beat but the quarters were of low quality.  Both provided somewhat disappointing guidance – IGT didn’t raise despite the beat and WMS provided FQ3 (March) guidance below Street consensus.  BYI was a little different because the company only met consensus but missed our expectations.   However, their quarter was also low quality.  Revenues missed but an very high gross margin on product sales and a low tax rate allowed them to make the EPS number. 

 

BYI reiterated its FY2010 EPS guidance range of $2.30-2.55, although given our view on new/expanded casino openings over the next two quarters, we’re guessing the Street may have to come down off of its $2.44 estimate.  The Street’s $0.65 estimate for the March quarter may be even more at risk – BYI hinted as much during their call.

 

BYI is down 7% since IGT reported last Thursday night so some of the disappointment may be in the stock already.  Even though the important part of the long-term thesis remains new markets and normalizing replacement demand – both very much intact – we’d prefer to see more conservative near-term estimates for BYI and the rest of the sector.

 

So what did we learn from the release?

 

Game sales

  • Similar to WMS (but not IGT) replacements orders were better than expected while new and expansion units were disappointing (we will have another note out shortly elaborating on this issue)
  • Calendar Q4 slot orders for the industry may have been a “catch up” quarter given it’s the last quarter of the fiscal year for most operators and orders from the rest of 2009 were paltry
  • Unlike IGT and WMS, BYI’s international shipments where surprisingly good.  We suspect that a couple hundred shipments to Mexico helped
  • ASP’s were disappointing, but this could be because the units shipped to Mexico are at a lower ASP
  • Margins were very impressive due to reductions in material costs and mix shift towards more video shipments which have slightly higher margins than mechanical reel machines. Conversions kits, while down sequentially where also likely a higher % of the "other mix"

 

Game Operations

  • Placements were below expectations although we agree with management that the timing of new game introductions hurt them this quarter
  • Win-per-unit was also disappointing.  We thought that blaming it on the weather was kind of weak… Robert you’re better than that

 

Other

  • No real revelations on systems
  • SG&A was a little higher than our estimate, but the Dec Q did include $3MM of G2E related expenses
  •  R&D expenses, similar to IGT and WMS, were below expectations
  • BYI’s tax rate was lower, although that’s mostly due to the strong performance of lower tax international jurisdictions(which represented a higher share of profits) as well as higher shipments to Nevada, which also has a lower tax rate.  If international shipments stay strong the lower tax rate could continue in 2H FY2010

When One Door Closes

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”   
-Alexander Graham Bell
 
I expected much more from yesterday.  It’s not that I like to revel in the agony of others, I just like good theatre. Yesterday the “Super Bowl of Politics” was one of those days where you knew what was going to happen and it happened as planned, but I was hoping for some fireworks.  
 
With the market up 62% from the March 2009 low, the door on the financial crisis is closed.  Yet politicians and policy makers are looking at the closed door.  
 
Act I - Tim Geithner continued to use his fear-factor strategy to defend his actions and employed the age old theory of “If the facts don't fit the theory, change the facts.”  The real tell on how he fared during the day was when the camera focused on him during the State of the Union - he looked beaten.    The Treasury secretary did what he needed to do to ensure job security once he leaves Washington.   
 
Caroline Baum of Bloomberg news made a great point that firing Geithner might be good for both President Obama and  the Treasury secretary, stating, “Obama would be seen as an ally of the people and Geithner would be free to claim his just reward:  that plum offer from Goldman Sachs.  The circle would be squared.  Obama would have his man on the inside.”
 
Act II - We then moved to the "exceptionally low" for an "extended period" stage.  I’m YOUTUBING myself on this one.  I have written many times that the Fed was going to change the language in its policy statement in January.  The Fed did not, and I was wrong.  
 
Can you learn from your mistakes?  Yes, you can. Ben Bernanke is just another Washington insider that is fighting for his job; of course he is not going to change the language in the policy statement if his job is on the line.
 
It gets better.  Two days before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet, it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition, the recession is over as the U.S. economy will have posted two straight quarters of GDP growth.  
 
Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government. Knowing this, do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the Fed is trying to tell us something.  
 
What are the markets doing with this information?  As of 5 am, stocks around the world are rallying and the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day.  Another door has opened, but Ben is looking at the closed one!
 
Act III - The State of the Union was a non-event, too.  I love America and last night was a very important part of our Democracy.  I wanted to listen to the President, who is known for being a great orator, deliver a great speech.  The likelihood of the speech including something shocking was low, but that’s ok.  More importantly, I could care less if the RIGHT or LEFT approves of what he was saying - we know what each stands for.  
 
Is it just me or was it nauseating to see Nancy Pelosi and Joe Biden shaking their heads and jumping up and down every five minutes. Personally, I think his speech would have been far more effective if all of the partisan politicians would just shut up and let the President speak.  Now that would be good theatre!
 
Yesterday, the Financials (XLF) was the best performing sector by a moon shot, outperforming the S&P 500 by 190 bps.  The outperformance was even more telling knowing that the President has the bankers in his sights and said so last night.
 
I’m going to give the President the benefit of the doubt that he is looking through the door that has opened for him.  We will know for sure if and when he begins cleaning house and gets rid of some of the dead wood lying around.
 
Function in disaster; finish in style
 
Howard Penney
Managing Director
 

LONG ETFS

XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
 
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.

 
SHORT ETFS

GLD – SPDR Gold Shares
We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

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.


US STRATEGY – THE FED IS TELLING US SOMETHING

Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  Knowing this do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the FED is trying to tell us something. 

 

A day before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition the recession is over as the US economy will have posted two straight quarters of GDP growth. 

 

What are the markets doing with this information?  As of 5am, stocks around the world are rallying the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day. 

 

Yesterday, the S&P 500 US equities finished higher on accelerating volume.  Early in the day a negative tone was set by tightening concerns that drove a fourth consecutive downturn in China stocks.  Last night China was up slightly, while the rest of Asia rebounded nicely.

 

On the MACRO front yesterday, new home sales fell 7.6% month-over-month to a seasonally adjusted annualized pace of 342,000, compared with consensus estimate of 366,000.  The median home price in December declined by 3.6% year-over-year, while the months' supply of new homes for sale rose to 8.1 from 7.6, but remained below the 12.4 months seen in early 2009. 

 

Yesterday, news flow also helped fuel a continued bounce in the dollar, which was up 0.31% yesterday and 1.04% year-to-date.  The VIX has seen a three day correction declining 5.74% yesterday, following a nearly 3.38% decline Tuesday.   

 

After being the worst performing sector on Tuesday, the Financials (XLF) outperformed the S&P 500 by 190bps on Wednesday.  Yesterday’s outperformance was driven by the BKX, which was up 2.9%.  Within the banking sector the regional names were the best performers. 

 

The RECOVERY trade got hammered again for the second day in a row.  Yesterday the Materials sector was the worst performing sector, declining 0.98%.  No surprise that the tightening concerns out of China, sovereign credit concerns and the accompanying bounce in the dollar are putting pressure on the RECOVERY trade. 

 

The CRB declined 1.8% yesterday and now declined 5 out of the last 6 days.  Since the beginning of last week the CRB has declined 5%.

 

Howard Penney

Managing Director

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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