Politics vs. Pragmatism

“Europe’s problem is not its institutions, its Council, the Commission or Parliaments, the problem is  very often nationalism, populism, and narrow-minded parochial views of people who do not believe in the common project for Europe.” 

-Jose Manuel Barroso, 3/25/10


Late yesterday Jose Manuel Barroso (President of the European Commission) and Herman van Rompuy (President of the European Council) held a press conference in which they stated the willingness of Eurozone member states to take coordinated action with the IMF to “safeguard financial stability” for Greece, and the Eurozone members as a whole.


The “mixed formula” of financial support came without such details as:

  • When Greece, if needed, would receive loans or the value of said loans?
  • How much of the bilateral loan would come from the Europeans versus the IMF?
  • What budget deficit reduction requirements will be issued for other/all member states?

And to the first bullet point van Rompuy responded, “All this, we’ll work it out later.”  Is this policy?


While the Greek market shot up over 4% today and investors’ fears may be allayed for at least a day, Eurozone leaders have done little to address policy measures for the sovereign debt issues of its members.  And surely the debt obligations of the other PIIGS aren’t going away just because the fear of a Greek default becomes yesterday’s news…


To return to Barroso’s quote above, Eurozone skeptics exists. And one could argue that the decision by Eurozone leaders to support Greece in a coordinated fashion—rather than a unilateral IMF-led loan—is born out of the desire of the European community to further substantiate the existence of the Eurozone as an entity. While Barroso as President of the European Commission will put his best foot forward in confirming that the Eurozone has a sound governing body, the fact remains that the Eurozone is young, only 10-years old, and still working through honing policy to benefit the whole.


Clearly, finding consensus on policy from country members with vast histories, and divergent economies and cultures, will remain a challenge. Countries will differ on stance; having a unified currency will put additional challenges (handcuffs) on exercising monetary and fiscal policy measures with such issues like debt restructuring and default.


Equally, imbalances in terms of economic weight and political influence will continue to weigh on decision making. These points were put on center stage with German Chancellor Angela Merkel’s full support of a unilateral IMF-led bailout for Greece. The fiscally conservative Chancellor wasn’t questioning the validity of the Eurozone, but suggesting that Greece continue to work to clean up its own “house” (budget deficit) before monies were placed on the table so as to not reducing Greece’s incentive to issue austerity measures to shave its imbalances. 


Merkel approached the issue from a pragmatic level, conscious of her own political and fiscal constraints at home—confidence in her party’s management has waned in recent months and reaching into German coffers for Greek aid would put further strain on the German taxpayer.


While pundits could endlessly debate the benefit of a large economy like Germany to the Eurozone and vice-versa, we’ll spend our time understanding the dichotomy that exists within the Eurozone, and collectively throughout Europe, to drive our investment decisions.  Despite Greece getting a hall pass for now, in light of the increasing global sovereign debt issues, things continue to shake. 


The charts below show divergence between Germany and Spain based on the DAX vs. the IBEX.  While the IBEX is broken on its intermediate term TREND (3 months or more), the DAX continues to trade above its TREND line. For more on our fundamental stance on Germany, see our note from yesterday titled ‘Frau “Nein”’.


Matthew Hedrick



Politics vs. Pragmatism - DAX


Confidence: Is It Really "A New Season In America?"

What a week this has been. We kicked off the week by having the President of the United States proclaim that this is “A New Season In America”, and I am definitely not going to disagree with him on that. The question is, what’s new for American investors?


  1. Healthcare Reform = higher spending, higher state level deficits (don’t take my word for it – 14 states filed suits against the government for a reason)
  2. Municipal Bond Market “Bid Rigging” is being thrown onto the mat while the SEC’s Greenberg (Muni-unit) sues PA non-profit hospitals for fraud
  3. Insider Trading rings get plastered all over the tape, but at the same time Bernanke’s elixir of cheap money has the 2007 LBO rumor mill picking up speed


The Treasury Bond market is getting crushed; interest rates are breaking out to the upside; and I wonder what all the folks in China and Japan holding $1.6 Trillion in us promises can trust in all of the aforementioned spending and storytelling.


In the chart below, Darius Dale accurately pinpoints that American Consumer Confidence nudged up from the preliminary University of Michigan reading from earlier this month. That said, confidence in this country continues to make a long term series of lower-highs.


Maybe Americans aren’t as naïve as their politicians deem them to be. Maybe they don’t buy into the CNBC mania of evaluating a America’s health on the tick of the stock market.


‘Tis a new season indeed.


Our immediate term support and resistance lines for the SP500 are now 1157 and 1175, respectively. We have been making sales in the Virtual Portfolio all morning into this hopeful stock market strength. Hope is not an investment process that we adhere to.



Keith R. McCullough
Chief Executive Officer


Confidence: Is It Really "A New Season In America?" - CConf1

R3: FINL: Ahead of The Pack



March 26, 2010


After highlighting 15% comp growth thus far in March, FINL added fuel to the fire that is beginning to roar in the athletic footwear industry.





In looking at FINL’s results after the market close yesterday, one could argue the industry indeed saved the best for last. Just take a look at the industry SIGMA chart below, FINL is in a league of its own. Top-line growth of 8% was good, but relative to +1%, +11%, and +13% for FL, DKS, and HIBB respectively it wasn’t the driver of relative outperformance in the chart below – a 20% reduction in inventory was. Now to be fair a significant portion of this is due to the removal of its perennially money-losing Man Alive business in Q2 of last year. With that drag offloaded, the company is poised to exceed recent peak high margins of 8.3% after posting 6.2% in 2009. The other notable highlight in last night’s release is the March comps – up 15.5% quarter to date! That’s compared to a down 1.2% over the same period.  Interestingly, 1Q09 comps were down 3.9% which implies that the comparisons ahead are actually getting easier for the balance of the quarter. As the comp chart reflects below, FINL’s +10% comp was the strongest in the industry with HIBB a close second. Interestingly FINL’s March comp preview suggests HIBB’s guidance of -2%-+2% comps in Q1 could be on the conservative side.


The bottom-line here is that the latest industry data point is in and it’s very positive. We expect performance across the industry to only accelerate into the 1H.


R3: FINL: Ahead of The Pack - SG SIGMA 3 10


R3: FINL: Ahead of The Pack - SGComp Table 3 10


R3: FINL: Ahead of The Pack - SG CompChart 3 10





  • Lululemon noted that its exceptional sales growth in the quarter has left the company chasing inventory, a process that is expected to continue through the Summer. As a result, there are key out of stocks in core items and sizes online and in stores. Additionally, the company eliminated its annual warehouse sale in Canada this January because there was no inventory to support the event.


  • Best Buy pointed out that its online sales grow by 20% in 2009 to $2 billion in sales. Interestingly, 40% of sales for the ecommerce channel were picked up in store by customers. Due to investments in technology and customer service, the company was simultaneously able to reduce customer complaints by 19% vs. the prior year. A key component of the improved service has been the company’s Twitter efforts, which allow consumers to Tweet questions to Best Buy employees and receive solutions in near real-time.


  • Fred’s management noted that is now seeing relative stability from a competitive standpoint in the marketplace, from dollar stores, Wal-Mart, and traditional grocers. However, management went on to note that they believe there is reason to believe there may be an intensification on the promotional front coming soon, and as such they will alter their plans accordingly. In other words, the environment will dictate how promotional they will become to remain competitive.





UK High Street Forecasts Damp Easter - The crucial Easter trading weekend is in danger of turning into a washout, according to high street retailers that have been disappointed with the slow start to March. <>


China Cotton Imports Surge - As the export market of Chinese textiles has been recovering, China imported 221,000 tons of cotton in February, surged by 137.6% compared to the same period a year ago, according to the National Development and Reform Commission. In January this year, the country's cotton imports surged 286% year on year to 301,359 tons. China's yarn output rose 10.1% year on year to 1.63 million tons in February, while its exports of garments and textile products soared 89.3% from a year ago to US$12.64 billion in the month. <>


EU Footwear Body Sues Over Duty Extension - The Federation of European Sporting Goods Industry (FESI) expressed in a statement the European Commission's decision to extend duties on imported Chinese and Vietnamese leather footwear was based on a misguided investigation and analysis. Leading sports footwear labels including Adidas, Puma, Nike, Lacoste and Asics are members of FESI, claiming that the extended duties has cost the industry almost 1 bn euros since 2006. "We have taken this case to court not only because we firmly believe that these duties are unjustified but also because it is clear to us that the European Commission is ignoring the basic economic realities of the footwear business," FESI president Horst Widmann said in a statement. The legal action has been filed with the EU's General Court, the bloc's court of first instance. The European Commission is the executive arm of the European Union. <>


Thailand: Apparel makers shift to service-oriented model - To fend off competition from Asian countries, Thai apparel manufacturers are shifting their focus towards service to lure global buyers to set up their regional headquarters in the country. "Thai manufacturers should explore investment opportunities both in Asia and outside the region, offering competitive costs and other facilities to pave the way for the establishment of Bangkok offices that focus only on trading," said Dej Pathanasethpong, president of the Thai Garment Manufacturers Association. "Malaysia and Singapore have moved ahead of Thailand by focusing on a service-provider strategy for the past 15 years. If Thailand does nothing, we will step backward and those two countries will seize lucrative market when the Asean Economic Community is completely formed by 2015," said Dej. He also warned that Thailand would face serious labour shortages in the next five years, as the region gears up to become a single market by 2015. The government should plan to develop more technicians, experts and designers. Dej said manufacturers should gear operations to cater to growth in major manufacturing and consumer nations like China, India and Japan. <>


WWW Calls Up Some Designs From the Past - Wolverine World Wide is looking to the past for design inspiration with the launch of 1883. Targeting a male audience, collection is named for the year the company launched. The series of work, casual and outdoor styles is based on the brand’s heritage looks updated with a modern twist. Included in the offering are speed-laced hikers and classic 6-inch work boots. Retailing from $135 to $235, the line is aimed at specialty stores. Delivery is slated for August.. Hush Puppies, also under the Wolverine World Wide umbrella, is in a retro mood too with the debut of Nineteen Fifty-Eight, a collection of men’s and women’s looks based on styles from the brand’s launch in 1958. The collection, based on patterns in the Hush Puppies design vault, include suede oxfords for men such as the Yesteryear, inspired by the label’s legendary Wayne style; and the Attic for women, a peep-toe wedge. Set to retail for $90 to $100 for women’s and $110 to $120 for men’s, Nineteen Fifty-Eight is aimed at independents and premium apparel and department stores. Delivery is slated for June/July. <>


Sportswear Company Ventures into Footwear - Men’s ready-to-wear line Copy, a sportswear collection with a street vibe, is venturing into footwear for fall with a collection of athletic-inspired looks. Part vintage, part futuristic, the line includes the Studio, a low-top design; and the Elevate, a high-top sneaker. Color and material are a big part of the story, with suedes and patents in black and white playing against a palette of purple, slate blue and yellow. The line will be distributed in department and specialty stores including American Rag and Urban Outfitters. Delivery is set for July, priced at $75 to $150 retail. <>


Weyco Brand Nunn Bush Pushes Rugged Trend - Nunn Bush, part of Weyco Group, is heading for the great outdoors with its All-Terrain Comfort collection for men. The series of rugged-inspired casuals are engineered for light hiking and trail walking and include slip-ons, lace-ups and boots built on a flexible strobel construction and feature gel in the heels for enhanced cushioning. For protection against the elements, the shoes have a Scotchgard finish. The collection is targeted to outdoor specialty and comfort stores, at $80 to $90 retail. Delivery is set for August. <>


Women's Footwear Trend: Fringe Embellishments - Women’s brands have turned to fringe embellishments on boots, moccasins and sandals for fall ’10. An added fringe benefit: Several brands have opted to offer the look under the $100 mark. <>

R3: FINL: Ahead of The Pack - Shoe Trend Image



WTO Examining India's Export Subsidy Qualification - An evaluation by the World Trade Organization, following a request by the U.S., has determined that some Indian textile and apparel products may no longer qualify for export subsidies because they meet competitiveness criteria. While most government export subsidies are prohibited under WTO rules, there are exceptions that allow the world’s poorest nations and some developing countries, including India, to use such financial supports if they meet certain conditions. But the same criteria stipulate that developing nations such as India can no longer benefit from the exemption from the subsidy prohibition if they have reached export competitiveness in a product. This would occur if exports of a product have reached a 3.25% share of world trade for two consecutive years and would subsequently require India to gradually phase out any export subsidies on such products over a period of eight years. Products found to have met the threshold include woven cotton fabrics, woven fabric of synthetic yarn, men’s and boys’ knitted or crocheted shirts, women’s and girls’ blouses and shirts, T-shirts and vests, and women’s and girls suits, ensembles, jackets, blazers, dresses, skirts, panties, slips, petticoats, briefs, nightdresses and bathrobes. <>


Avon Acquires Liz Earle Beauty Co. - Avon Products Inc. has acquired Liz Earle Beauty Co., which manufactures the Liz Earle Naturally Active Skincare brand. The acquisition moves the Avon company into more channels, including television shopping and a limited network of retail stores. The purchase of Liz Earle might not have a large financial impact for the $10 billion direct-selling giant, but it has significant implications. Avon is opening its mind to other avenues, including new geographies and pricing. The company named acquisitions as its first priority over the existing share repurchasing program. The last brand Avon acquired was Discovery Toys in 1997, which it later sold. <>


SHOO Stock Split - Steven Madden Ltd. said Thursday its board has declared a three-for-two stock split, in the form of a dividend. The split will give all shareholders as of April 20 one additional share of Steven Madden common stock for every two shares held. The additional shares are expected to be distributed by April 30. As a result, the firm will have 27.5 million shares outstanding, versus 18.3 million before the split. The firm last purchased 2.6 mm shares of its stock, or nearly 13% of shares outstanding at the time, for $44.2 million, or $17 each, in March 2008. <>


Hat World Rebranding - Hat World, Inc., a subsidiary of Genesco Inc., plans a re-branding campaign designed to leverage its LIDS retail brand across the three major divisions of its business. The move includes renaming its Sports Fan-Attic and Impact Sports businesses. <>


Sports Logo Apparel Market - Adult Americans spent more than $8 bn on sports logo apparel in 2009, according to a new study being released by the National Sporting Goods Association (NSGA). “Sports Logo Apparel Market 2010,” based on a consumer study of 20,000 U.S. households, counts Americans 16 years of age and older as adults. Men were bigger spenders than women. Of the $8.02 bn spent, males accounted for 60.9% of all purchases. Females accounted for the balance, 39.1%.

“Sports logo apparel has been an important part of the product mix for full-line and specialty sports retailers for more than two decades,” NSGA Vice President of Information and Research Thomas B. Doyle said. Regionally, for the 14 sports activities, sports fans in the South accounted for the highest percentage of dollar purchases, 34.9%. <>


Saks High-Yield Bonds Soar as Consumers Revive Spending on Luxury Products - Saks Inc. and Neiman Marcus Group Inc.’s high-yield, high-risk debt is soaring as demand for luxury goods in the U.S. returns following the worst economic recession since the 1930s. <>


Zale U.S. Jewelry Chain's List of Bidders Said to Include TPG, Sun Capital - TPG, the private-equity firm run by David Bonderman and James Coulter, and Sun Capital Partners Inc. are among a smaller pool of bidders for a stake in Zale Corp., three people familiar with the negotiations said. <>


Petco boosts average order values with segmented e-mail campaigns - After switching to an e-mail marketing program that supports segmented newsletters based on customers’ interests, the multichannel pet supplies retailer boosted online average order values by 30%, e-mail marketing manager Margaux Abaya says. <>


Company Reported in Last 24 Hours: LULU, GIII, APP, WTSLA, FINL, BKRS 


R3: FINL: Ahead of The Pack - 1


R3: FINL: Ahead of The Pack - 2


R3: FINL: Ahead of The Pack - 3


Daily Trading Ranges

20 Proprietary Risk Ranges

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


Unemployment has been a major focal point for QSR.  The price of gasoline, another significant variable in driving consumer discretionary spending, is providing an additional headwind in the Golden State.


As JACK CEO Linda Lang and other QSR executives have stated time and again, unemployment is proving to be a major headwind for top line growth.  California’s unemployment rate for January is projected by the Bureau of Labor Statistics to be 12.5%, the highest of any of the states and well above the national average. 


Yesterday, I listened to CKR’s fiscal 4Q10 earnings conference call and while there were no major incremental data points to speak of, it was interesting to hear management mention the higher gas prices in California at the moment.  As the chart below shows, Californians are paying more at the pump than any other Americans.  People in California, particularly Southern California, are also highly dependent on the automobile.






As if the unemployment outlook wasn’t dire enough, the chart below clearly shows that Californians are paying even more of a premium over the national average than they were twelve months ago.  Gas price inflation of 32% in February, although less than the national average, certainly moved the needle.  Prices staying constant, the outlook suggests that robust year-over-year growth in prices at the pump will continue to impact the Californian wallet.  Although the rate of inflation will continue to lag some areas of the country (assuming current prices going forward), year-over-year growth in prices will range approximately between 34% and 18%.  Indeed, as the chart below indicates, national gasoline price inflation is currently very high.  This is impacting consumer discretionary spending, and all restaurants, across the board.


It is important to consider that the five most populous counties in California (Los Angeles County, Orange County, San Diego County, Riverside County, and San Bernardino County) account for 60% of the state population and are all in Southern California.  Gas prices in Southern California are even more elevated than the state average; the most recent weekly data shows that the price per gallon in Los Angeles is 317.5 cents versus 313.9 cents in San Francisco. 






Turning to stocks that this analysis is relevant to, many restaurants’ top lines are heavily levered to California.  PEET, RUBO, BJRI, JACK, CPKI and CAKE are just a few of the restaurant stocks with high levels of exposure to the Californian market.  The table below illustrates this.





Howard Penney

Managing Director


“I am turned into a sort of machine for observing facts and grinding out conclusions.”

– Charles Darwin


Recently, we had a vigorous debate with one of the smartest investors we know.


The essence of the debate was, in effect, what is the value of macro for a bottom up stock picker?  It is obviously a good question and one we need to justify in order to earn our keep.  Our view is simply this: an idea can be incredible, but if Mr. Macro Market is going against you, it doesn’t matter that you’ve counted the number of shopping bags in shoppers hands coming out of a mall (or whatever your edge may be), the stock will go against you.  In our opinion, risk management requires macro.


The point is simply this: we don’t get paid to be bottom up stock pickers, top down macro dudes, to be on the buy side, or to be on the sell side.  We get paid to be on the right side.


I’m sure many of our subscribers believe that we are only on the Macro side.  Trust me, we do it all.  In fact, we have one of the most seasoned research teams in the business.  Today, I wanted to highlight some of their top stock ideas, which are as follows:

  • Darden (DRI) – Our restaurant guru Howard Penney likes Darden because the company is well positioned in an improving sales environment.  Specifically, he  believes the potential higher returns on capital in the next couple of years will drive stock performance and that people are missing that more capital is going towards remodels, which will accelerate these returns;
  • United Health Care (UNH) – Healthcare sector head Tom Tobin likes this name because he thinks the business model is positioned perfectly in this environment of improving employment (we highlight this employment point in the Chart of the Day below as well).  Enrollment growth should pick up and the mix will shift to younger enrollees, who comprised more of the unemployed, which helps on costs;
  • WMS Industries (WMS) – Todd Jordan believes the long term outlook for the slot guys is bordering on incredible.  Replacements will trough this year, and new markets will contribute meaningfully in 2011 and beyond.  The normalization of replacements alone will boost EPS growth for WMS by 50%;
  • CIT Group (CIT) – Financials guru Josh Steiner, who has plenty of experience with live investing ammo in his career, likes CIT due to its severe discount to historical book value ranges.  CIT is currently trading at less than its book value and when accounting for book value accretion over the next two years, is trading at a ~74% discount.  Historically, CIT has traded at ~60 – 200% of tangible book, which suggests meaningful upside from current levels; an
  • Foot Locker (FL) – This remains Brian McGough and his team’s top ideas.  They believe FL new management, in combination with a sea change in this industry, will take EBIT margins from 3% to 7% over the next two years, which will lead to meaningful EPS growth.  Furthermore, their research (with NKE and FINL among others) suggest that the overall environment for footwear is improving.

If you are an institution and interested in any of our sector or stock specific analysis, please email our head of sales Jen Kane at .


As much as Keith sometimes suggests otherwise, we didn’t invent hard work at our firm.  We just happen to practice it. 


Darwin’s quote above is an apt one.  In order to “grind out” the right conclusions, we have to observe a lot of facts.  Luckily, to generate differentiated investment performance, it doesn’t require a 5-year scientific voyage on the H.M.S. Beagle like Darwin, but it does, however, require getting up early, observing a lot of data, and a willingness to evolve.


Below in the Chart of the Day, we have highlighted the relationship between employment and housing.  As the chart emphasizes, keeping an Eye on employment, will be key to determining the direction of the housing market over the coming quarters.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Evolution - z.Relief on the Way



Wynn Macau (1128.HK) released its annual audited results on March 24th.  There were no surprises but a few interesting tidbits.


While there were no surprises in Wynn Macau's annual filing, there were a few interesting tidbits and details. Below is what we thought was incremental. 

  • Cash split between the various "WYNN" entities:
    • Wynn Las Vegas: $66.4MM
    • Wynn Macau: $674MM
    • Wynn Resorts: $1,251.4MM (wasn't explicit in the 10K filing since the cash was still at the Cayman subsidiary at Dec 31, 2010.  The cash has since been moved to Wynn Resorts)
  • Table mix at Feb 10th 2010: VIP: 196 and Mass: 198.  Wynn increased their VIP table count by 53 and decreased the number of Mass tables by 30 since 2008.  Once Encore opens in April, Wynn will have 233 VIP tables, 222 Mass tables, and 1,200 slots.
  • Mentioned the Cotai site but no real update on timing and scope.  Only detail was that they have submitted an application on a 52 acre site under their wholly owned sub “Palo Real Estate Company.”
  • Junket structure detail: all junkets are on a revenue share agreement and additionally receive a monthly allowance based on % of turnover which they can use towards rooms, food and beverage and other discretionary expenses for their clients.  
  • Credit exposure: Wynn typically advances commissions at the beginning of each month to provide junkets with working capital.  At December 31st, Wynn’s aggregate exposure to their junkets, comprised of the difference between the advances and commissions payable, was HK$127.7MM ($16.5MM USD).
  • Wynn’s adjusted EBITDA was $418MM after royalty fees and corporate expenses paid to the Wynn Resorts, but before any preopening or share based compensation.  Wynn Resorts reported Wynn’s Macau’s EBITDA as $502MM.
  • Junket commissions: Wynn’s all in commission rate was 1.25% or a revenue share percentage of 43.1% in 2009 compared to a commission rate of 1.2% or 40% in 2008. The all in commission rate is calculated as the sum of reported commissions and discounts recorded as a reduction to revenues, junket commissions recorded as an operating expense, and the promotional allowance for non gaming revenues over VIP turnover.  Revenue share % is calculated as the commission rate divided by  the hold percentage. 
    • As we've written on several occasions, we are concerned that junket commissions may be headed higher. Commission caps only regulate fixed commissions but not revenue share agreements.  We've heard that SJM is being aggressive on this front, albiet using a different franchise model, to go after market share and that MPEL is increasing commissions as it struggles to grow its VIP business at CoD.


  •  Cash Flow: Wynn generated $583MM of cash from operations (HK$4,517.2MM). Wynn had a large working capital benefit that helped 2009 cash flow.

Below is a summary of Wynn's Macau's valuation and our updated estimates.