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The Maestro

Due to a lack of connectivity this morning up here in Maine, I am writing the intro to this morning's note, and my new partner on the Macro Research front, Daryl Jones, has my back with the global macro recap. Daryl is also a hockey player, but he is what they call a “stay at home defenseman”, which in laymen’s terms means that he is not afraid of the rough stuff, so this is a great morning for him to be stepping up.

When my laptop bonked on me at 4:45am this morning, I was not enthused...After a strong cup of 'The Victorian by The Sea's" coffee however, I found my resolve in an inspiring talk that the renowned maestro of the Boston Philharmonic gave to us last night.

Ben Zander has been teaching music in New England for 43 years, and when it comes to understanding life, he gets it. Last night, Zander walked us through a simple yet profound mental model. He said "look, you have one of three choices when faced with challenges in your life... Resignation, Anger, or Possibility”.

I'd like to thank Zander for this clarity. From a market strategy perspective, this morning it is the most appropriate thought that I can pass along to you from Camden, Maine … Maybe you've resigned yourself to the bearishness of the moment, or maybe the market angers you throughout your day... The reality is that if you have chosen either of these two resolves, you are now transcending consensus.

I see this point in American financial history as the most exhilarating of opportunities. This is the time to be a capitalist. This is the time for new possibilities. This is the time, as Ben Zander would say, to "get up, and conduct!"

As an athlete or an investor, this is when we want to be on the ice, on the field, or in the market. The CNBC talking heads are highlighting that futures in the U.S. are limit down. This is on the back of most global markets being down between 7 – 10%. We won’t mince words, it is ugly out there.

All global asset classes are on sale this morning – commodities, currencies, bonds, and equities alike. Even purportedly positive news, like OPEC cutting production by 1.5mm barrels, is having no impact as crude oil is trading down over 5%.

The dramatic decline in oil from the “It’s global this time” peak has been vicious. As we highlighted in a note to clients last weekend, in the last major recession oil demand in the U.S. was down for five years and down 19% peak to trough. Let us repeat, recessions are not the times to bottom pick commodities.

On the Japanese front, the Finance Ministry reported overnight that country’s trade surplus for the first half of the fiscal year (April – September) had fallen almost 86% y-o-y. This is a country we have and continue to be negative on and this data point clearly only bolsters the case.

We have been following former Fed Chairman Alan Greenspan’s testimony in congress the last few days. And there is a one word summary. Embarrassing. Not embarrassing that Greenspan is completely unwilling to admit any fault, for as we’ve seen the Washington and Wall Street elite never hold themselves accountable, but embarrassing in that he wants us to believe him. Greenspan in his testimony stated: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

"Shocking"? Mr. "Maestro", are you kidding me?

That sounds like the real maestro, Ben Zander's, "Resignation" excuse to us...

Undoubtedly, that excuse will perpetuate "Anger" out there in the market today - it should.

The music has stopped. The leverage game has ended. If you saw this ending coming, congratulations. This is the time for the proactively prepared to seize the promise of new "Possibility" that the accountable forefathers of American Capitalism envisioned.

Good luck out there,

Keith and Daryl

COLM: Post Q Follow Up

As usual, a noisy quarter from COLM, but what was unusual is that the company beat – big (i.e. 20%). While my team nailed the trends in underlying business (and KM nailed the stock), I definitely ‘missed the beat’ in translating it to the model. I expected a ‘guide down that won’t matter’, which I think we got. But my math tells me that the consensus is likely to come out too low.

The biggest negative is that the Spring backlog is down 11% and management’s tone was very guarded. But as outlined in my earlier post, we’re seeing retail sales pick up in dollars, units, and average price. Maybe reorders are not coming in at a robust rate, but it is not because the market is flooded with product and is being heavily discounted. We’re seeing quite the opposite. Not bad given that Columbia is gaining share in 4Q.

Even with the stock presumably trading up meaningfully tomorrow, I think we have better margin visibility with COLM than others in the group. The SG&A evolution is key here, as the company is finally at a spending level that will help ignite some top line growth.

It’s been a long time since I said this, but I kinda like this story. I think that COLM maintains its trajectory in the quadrant chart below for at least a couple quarters. See my two earlier posts for more color on my thinking on this name.


St. Louis is probably one of the most dynamic gaming markets in riverboat land. PNK’s Lumiere Place opened last year and another PNK property will open in South St. Louis County next year. A statewide referendum on the ballot in November could eliminate the loss limit in exchange for a 1% higher gaming tax rate.
  • We’ve done some revealing work on local housing prices as the most important driver of gaming revenues over the past 15 years (see “IT’S THE HOUSING STUPID, 7/17/08). We all know what is happening with housing nationally but it is instructive to view the variable on a localized level. As shown below, St. Louis homes did not experience the explosive pricing growth as other parts of the country. Gaming revenue growth was also more moderate. For this reason, I expect declines to be on the reasonable side as well which makes St. Louis one of the more attractive gaming markets. This is all relative of course.
  • The other attractive feature of the market is of course, the potential for the loss limit elimination. PNK and ASCA are the clear winners should the referendum pass. Polls indicate that a slight majority favor passage. Missouri remains the only state with loss limits in place, effectively repelling significant high end business. ASCA could experience a 10-15% net increase in EBITDA over time from the loss limit removal.
  • PNK appears on track to open in South County late next year which will negatively impact same store revenue. Ameristar and Argosy (PENN) look to be pretty insulated from the new competition. Harrah’s Maryland Heights will feel some impact but the major market share losers will be PNK’s own Lumiere Place and President, and the privately owned Casino Queen.
  • Given the horrendous results following smoking bans in Illinois, Atlantic City, and Colorado, everyone seems to be focused on this issue. We are fairly optimistic we won’t see a smoking ban any time soon in Missouri. A smoking ban proposal was last rejected in 2006.
  • ASCA generated 27% of its EBITDA in St. Louis and should be the prime “beneficiary” of less bad results in this market and the potential loss limit removal.
It's the housing, stupid!
On a relative basis, STL exposure is probably a good thing

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Smith Travel released their forecasts for the hotel industry today. For 2009, they are projecting a RevPAR decline of 2.5% but an ADR INCREASE of 1%. It looks like the fudge variable in that regression model of theirs may have been fudged a bit too much. It’s not simply a matter of hotel companies getting better at holding rate. At some level of demand, the yield and profit models will dictate lower ADRs. We believe that level will be reached next year. HOT’s guidance of down 5% RevPAR may even turn out to be aggressive.


We have been keeping our eye on bullish supply data points for South American Arabica recently. The demand side of the coffee equation is less clear, clouded by the impact of the economic slump on consumers as well as Asian capacity for Cheaper Robusta.

Global Coffee Prices spun into a nose dive in the late 80’s after the collapse of the International Coffee Agreement. As major US household brands like Sara Lee and Kraft shifted rapidly to lower quality Robusta and other cheaper grades, South East Asian growers began to ramp up production dramatically. Nowhere was this more pronounced than in Vietnam, which is among the largest global suppliers after less than a decade of rapidly increasing export levels.

Prices for Vietnamese exporters have fallen dramatically over the past month, with the Vietnam Coffee and Cocoa association reporting average levels of $1,700 USD per metric ton vs. $2,500 in February. Anecdotal reports suggest that there has been a pronounced decrease in buyers from Western Europe and the US combined with a sudden collapse of credit facilities for local brokers and traders. Meanwhile news reports from Indonesia, the second largest Asian producer, suggest that there has been a drop in demand felt there as well (a recent uptick in exports of Robusta is largely due to settlement of forward contracts dating back to early in the season).

The presence of low cost providers like Vietnam and Indonesia complicates the global coffee picture. Although they are primarily producing the less desired Robusta variety they have tremendous capacity and miniscule labor costs.

Andrew Barber


The VIX swung sharply higher today as options buyers rushed into the market at any cost. If you read our work you know that we look for spiking VIX levels as a signal of capitulation selling, but today’s spike feels more like a fund(s) being forced to cover short volatility positions as it does a true indication of sentiment.

Andrew Barber

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