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MACAU MARCH DETAIL

March was an odd month; a hot start, some head-fakes and misinformation, and ending in disappointment. VIP hold was lower than normal and the American companies continue to lose share.

 

 

VIP hold percentage was below normal which may have been partly responsible for the March misinformation in the press about revenues potentially being up 60% or more.  March's hold (quantified on just reported Junket RC) was 18 bps light of the TTM average,  20 bps below the average 3yr hold, and 55 bps below March 09 hold levels. Using a 3yr average hold would have resulted in 7% higher y-o-y growth. Alternatively, Junket RC increased 75% while VIP revenues only increased 47%.  Mass revenues grew 32% y-o-y, inline with a 6 month average 35%.

 

While some of this can be hold related, there is a clear trend of American companies continuing to lose share.  LVS lost 40bps of share from February and 680bps from March 2009.  Wynn lost 160bps and 280bps, respectively.  Despite the 42% increase for the market, LVS grew total revenues only 5% year over year while Wynn Macau increased only 17%.  Here is some detailed commentary.

 

 

Y-o-Y Table Revenue Observations:

 

LVS table revenues increased only 5% with all growth coming from a 16% increase in Mass revenues while VIP revenues were actually down 0.4%

  • Sands fell 3%, dragged down by a 6% decrease in VIP which was somewhat offset by a small 2% increase in Mass
    • The VIP decline was entire driven by weak hold coupled with a difficult hold comp.  Junket Rolling Chip (RC) was actually up a healthy 51%.  In March 2009, Sands benefited from very strong hold of roughly 4%, assuming 13% direct play.  If we assume 10% of total VIP play was direct in March '10, this implies hold of 2.6% 
  • Venetian was down 6%, driven by a 23% decline in VIP revenues which was only partly offset by 30% growth in Mass
    • Junket VIP RC only increased 60bps, so the decline in VIP revenues was hold related.  Assuming 19% direct play, we estimate that Venetian held at 2.6% compared to a hold of north of 4% last year assuming 17% direct VIP play.
  • Four Seasons was up 210% y-o-y entirely driven by 458% VIP growth with Mass declining 21% 
    • Junket VIP RC increased 189% to $727MM. 

Wynn Macau table revenues were up 17%, primarily driven by a 21% increase in VIP while Mass revenues were only up 4%

  • A massive 84% increase in Junket RC was dampened by what looks like very weak hold of roughly 2.3%
  • Wynn Macau was only able to grow Mass revenues in single digits in all three months of Q1 

Crown table revenues grew 133%, with the growth fueled by 653% growth in Mass and 101% growth in VIP

  • Altira was down 4%, with VIP down 4% while Mass increased 4%
    • VIP RC was down 1% and luck was bad - only 2.3%.  However, hold was also bad last year
  • CoD table revenue increased 2% sequentially, due to a 6% increase in VIP win which was partly offset by a 7% decrease in Mass
    • Mass was $33MM
    • Junket VIP RC increased 18.4% sequentially
    • If we assume 20% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $3.75BN.  However, hold in March was weak at only 2.4%.

SJM continued its hot streak, with table revenues up 67%

  • Mass was up 32% and VIP was up 90%
  • Junket RC volumes increased 122%
  • As we wrote about on several occasions, we believe SJM is being very aggressive on junket pricing

Galaxy table revenue was up 59%, mostly driven by a 67% increase in VIP win, while Mass increased 18%

  • Starworld's table revenue was up whopping 102%, driven mostly by 116% growth in VIP revenues, while Mass increased 14% y-o-y

MGM table revenue was up 17%

  • Mass revenue growth was 20%, while VIP grew 16%
  • VIP RC grew 33% y-o-y but hold comparisons were unfavorable. Assuming 15% direct VIP play, hold was 2.8% vs. 3.6% last year

 

Market Share:

 

LVS share dropped 40bps sequentially to 19.2%, with all the share loss coming from VIP. This is LVS's lowest share month since August 2007

  • All of the share loss was from VIP.  LVS's share of VIP revenues decreased to 16.4% from 17.2% in February'  However, LVS's share of Junket RC actually increased 20 bps to 13.5%
  • Mass share increased by 30 bps to 26.9%.
  • Sands lost 40bps, dropping to 6.4% sequentially.  This marks the properties' lowest share quarter since we've been tracking the data and likely its lowest share quarter since opening.  Sands lost share across both VIP and Mass.
  • Venetian lost 70bps to 10.2% sequentially.  Venetian's has only had one month (Sept 09) with worse share since opening.  
    • Venetian actually gained 70bps of market share in Mass sequentially to 17.1% but Mass gains were offset by a 140bps sequential drop in VIP share
  • FS share increased 70bps to 2.6%
  • After SJM, LVS commanded the second highest share of the Mass market with 26.6%, followed by Crown at 10%

 

WYNN's share fell to 12.9% from 14.5% in February

  • Wynn's loss was entirely driven by low VIP hold.  Wynn's share of the VIP revenues plunged from 16.5% in February to 14.1%.  Junket RC share only fell by 10 bps to 15.6% - still second only to SJM but Crown was a close 3rd.

Crown's market share fell by 70bps to 12.9% in February

  • All of the share loss came from Altira, whose share dropped to 5.3% from 6.1% in February. 
  • Altira's share drop was entirely due to a 1% decline in VIP share to 6.8% which was driven by the property's low hold
  • COD's share was flat at 7.5%.  Mass market share decreased by 1.2% to 7.6% and VIP share increased by 50bps to 7.5%

The American's loss was SJM's gain.  SJM's share climbed to 35.1% from 32.3% in February and 30.9% in January - its highest share month since Nov 2007

  • All the gains came from VIP share which increased 390bps to 32.6%
  • As we've been writing about, SJM has been aggressive on junket commissions to pursue market share at the expense of margins
  • More scrutiny on the American companies in regards to junket relationships may continue to erode their share of the VIP business
  • SJM Mass share declined by 1% to 41.6% sequentially

Aside from SJM, Galaxy was the only other concessionaire that gained share.  Galaxy's share increased to 11.9% from 11% last month

  • Starworld's market share was increased by 1.3% sequentially to 9.5%
  • Galaxy and it's flagship property gained share in both Mass and VIP in March

MGM's share decreased by 90bps to 8.1%

  • MGM's share loss can be attributed to a 1.2% sequential decrease in VIP share to 8.2%.  Mass share decreased 10 bps to 7.7%

Slot market commentary:

  • Slot win grew 32% y-o-y to $83MM
  • LVS's slot win grew across all 3 properties by 24% y-o-y to $27MM
  • Wynn slot revenues increased by 7% y-o-y to $16MM
  • Melco's slot win grew 109% y-o-y
  • MGM's slot win grew 48% y-o-y to $9MM
  • SJM's slot win grew 22% to $12MM
  • Galaxy was the only concessionaire that didn't see y-o-y grow in slot win.  Galaxy's slot was was down 20bps to $2MM

MACAU MARCH DETAIL - Macau Total Bac

 

MACAU MARCH DETAIL - MM REV

 

MACAU MARCH DETAIL - RC Turnover


CLAIMS WORSEN, REVERSING FIVE-WEEK TREND

Claims data this morning worsened. Claims climbed 18k week over week to 460k on a seasonally adjusted basis (after last week’s number was revised up 3k to 442k).  The 4-week rolling average rose 2,250 to 450,250.  Consensus had expected just 442k initial claims.  The chart below shows the rolling average trend line. 

 

CLAIMS WORSEN, REVERSING FIVE-WEEK TREND - claims rolling

 

After approaching our 3 standard deviation channel for the last three weeks, this week’s data moved away from its upper bound.   A Labor Department official noted that seasonal factors relating to Easter (which is hard to correct for, since it moves on the calendar) likely had an impact on this week’s numbers. Looking forward, we continue to expect claims to move lower in the coming months as we see the tailwind associated with Census hiring kicking in. 

 

CLAIMS WORSEN, REVERSING FIVE-WEEK TREND - claims raw

 

As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 

 

CLAIMS WORSEN, REVERSING FIVE-WEEK TREND - census chart

 

Joshua Steiner, CFA

Managing Director


Claims worsen, reversing five-week trend

Claims data this morning worsened. Claims climbed 18k week over week to 460k on a seasonally adjusted basis (after last week’s number was revised up 3k to 442k).  The 4-week rolling average rose 2,250 to 450,250.  Consensus had expected just 442k initial claims.  The chart below shows the rolling average trend line. 

 

Claims worsen, reversing five-week trend - claims rolling

 

After approaching our 3 standard deviation channel for the last three weeks, this week’s data moved away from its upper bound.   A Labor Department official noted that seasonal factors relating to Easter (which is hard to correct for, since it moves on the calendar) likely had an impact on this week’s numbers. Looking forward, we continue to expect claims to move lower in the coming months as we see the tailwind associated with Census hiring kicking in. 

 

Claims worsen, reversing five-week trend - claims raw

 

As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 

 

Claims worsen, reversing five-week trend - census chart


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RT – HEDGEYE THOUGHTS

A strong quarter for Ruby Tuesday, trends may slow from here.

 

3Q SSS came in at -0.7%, slightly better than the preannounced range of -0.8% to -1%.  RT has outperformed Knapp now for 4 quarters, partly attributable to easier comps.  This was the first quarter RT outperformed Knapp on a two-year basis in over two years.  The two-year “Gap-to-Knapp” was 1%.  RT raised FY SSS guidance to -1% to -2% from -1% to -3% and raised FY EPS to $0.60-$0.65 from $0.50 to $0.60 (street was already at $0.63).

 

RT – HEDGEYE THOUGHTS - RT gap to knapp 1yr

 

RT – HEDGEYE THOUGHTS - RT gap to knapp 2yr

 

 

It was good quarter for RT, but it looks like this could be the last quarter of accelerating trends.  RT is partially benefiting from better overall industry trends and renewed focus on profitability.  In addition, it appears that RT is taking some market share from its larger rivals Chili’s and Applebee’s.

 

RT – HEDGEYE THOUGHTS - RTebit margin

 

At 15x NTM EPS and 7.6x EV/EBITDA, RT has made a full recovery and the associated benefits to the company are now in the past.  Presently it seems that Q4 will likely be the first quarter in five where EBIT margins could be down year-over-year. With Brinker setting the stage to be more competitive the big market share gains for RT could be a thing of the past.

 

The industry outperformance yesterday has put the group in a precarious position. 

 

 

RT Earnings Call 3QFY10 - SUMMARY

 

3Q was the best sales quarters in three years.

  • Despite weather
  • Lapping difficult comps
  • Closed underperforming stores
  • SSS were down 0.7% in the quarter
  • Bad weather impacted that by 1.5% to 2%
  • SSS were slightly positive in January and February even with the weather impact which was significant in February
  • Sales outperformed Knapp on a 1 and 2 year basis

 

 

Focus on brand strategies has paid dividends despite lapping last year’s 3Q which was 4 points better than 2QFY10.

  • Getting people in to see the new RT and they are coming back
  • Introduced mid-year menu update in November:
  • Variety with a focus on quality and differentiation
  • Consumer’s responded well

 

Primary corporate goals were:

  • Increase SSS
  • Max cash flow reduce debt
  • Strengthen brand by providing guest with providing value
  • Long term strategies are helping create additional value

 

Price increase was 1-2%

  • Want to increase average check from $13.50 to $14.50
  • By managing promotions RT achieved good sales and good profits
  • Traded some check for profitability this past quarter

 

 

 

Financials

Earnings

  • $0.28 vs. $0.09 last year
    • Last year included impairment charges of $0.17 vs.  closure and impairment charges of $0.02 this year
  • Restaurant margins were 19.5% for the quarter versus 18.8% last year
  • Food costs flat at 28.5%
  • Continue to experience favorable commodity costs
  • Labor costs declined to 32.7% from 33% as a percentage of sales
    • Store closings, initiatives outweighed higher payroll taxes

Other

  • Depreciation was down 50 bps as a percentage of sales because of closures last year and assets becoming fully depreciated since the prior year
  • Higher G&A, up 70 bps, was due to bonus accrual and other minor factors

 

Interest expense declined

  • Lower interest rate
  • Lower spread to LIBOR
  • Less outstanding

Tax rate was 20.1% versus 5.3% last year

 

Balance Sheet

  • Book debt was $322 million, down $43 million in the quarter
  • YTD paid down 171 million of debt so far and $200m paid off in the last twelve months
  • Book debt to capital was 38% at end of quarter.  Book debt to EBITDA was 2.2x

 

Guidance on new stores openings

  • No company operated restaurants in 4Q. Closing one
  • Franchisees opening between 1 and 4, up to two of which are international
  • For the full year, intend on opening none and closing 14, franchisees are anticipating opening five to eight, including three to five international

 

Company operated SSS will be down 1-2% for the year - down 1.9% YTD.   4Q comparison represents the most difficult comparison of the year

 

ROP down slightly because of compelling value strategy

D&A will be 63-65m

SG&A down 12% yoy

Increase in marketing expense from last year’s low level

  • Newspaper
  • Internet

Bonuses are expense expected to be up

Interest expense - $16-$17m

EPS diluted - $0.60-$0.65c

CAPEX - $18-$20m

Pay down $20-$25m of additional debt this year, bringing down the total debt for the fiscal year to $190-$195m.

 

Excess liquidity of 175m after draw down of revolver to pay off 70m loan with an interest rate of 6.44%

 

 

Sales:

Marketing strategy

  • Print
  • Internet
  • Media

 

The strategy has been effective, used in a way that supports high quality position.

  • Consumers cited the food over the promotion when asked about the advertising

 

New Dinner entrees, new brunch entrees, being introduced

  • Brunch is developing well

 

Liquor sales

  • $5 all day premium cocktail program
  • After 9pm, anyone getting a $3 drink gets a free mini

 

Offering or testing new products throughout this quarter

  • Increases guest frequency
  • More variety maintains traffic

 

Goal is to increase check from the $12 area where it is up to $13.50 to $14.50

 

Compelling value

  • Strengthening brand by increasing frequency, trial, average check
  • Improving guest experience
  • Surveys are doing well, intent to revisit/recommend all well over 90%
  • 70% of customers rate the experience as a 5 out of 5
    • Large sample size – 250k people

 

New management structure

  • Assistant managers are now either guest service specialists or culinary specialists
  • In March, all bartenders received second round of training to help increase bar sales
  • Guest satisfaction in the bar is a new survey
  • Scores are higher than overall which is encouraging

 

Turnover levels are in-line with objectives

 

 

Questions and Answers:

 

Q:

How are you thinking about reinvesting versus returning cash to shareholders?

A:

Just got off the defensive and are now on the offensive. First objective is to invest in the business but no great demands right now.  In 12 months, give or take, we’ll have the extra cash and make that decision closer to the time

 

Q:

What’s driving the guest satisfaction? Something relative to what your competitors are doing? The bar? Freshness?

A:

First quarter we’ve tracked bar guest satisfaction…encouraged with the scores.  Should be higher than the dining room – higher server to guest ratio.  Teams positioned as a premium bar product. Great food products at the bar.  Entertainment also, with the big screens etc. Innovation.

 

Q:

Considering how fast margins have turned, guidance implies that margins have to come back down. Is it initiatives that are going to drive that back down?

A:

Whether it’s food costs, lobster, or extra labor on Saturday nights, during promotions, we will incur more costs.  We continue to invest in the brand.

 

Q:

How have franchisees done in managing costs?

A:

We run better costs than they do

 

Q:

New company restaurant growth?

A:

Way down the list of priorities.  No meaningful emphasis on that.  As far as franchising partners where it makes sense, you’ll see some of that but probably in line with the couple per year we’ve seen recently.

 

Q:

Is there a need for TV advertising to help franchisees?

A:

This year we’ll invest in overmanaging them so they can adopt what we’re doing in the company stores.  We have them lag typically, when adopting new programs, to make sure they’re good.

 

Q:

Food cost experience year-over-year? What kind of deflation in your basket?

A:

Flat on the basket. Our investment has been adding lobster to it.  Not seeing decreases.  Chicken could be up slightly but it’s a pretty benign market.

 

Q:

Traffic and check flipped this quarter. You’ve been very traffic focused, can you talk about that?

A:

Tougher quarter with weather. Still beat Knapp Track, still one of the best performers out there.  On a two year basis, we continue to improve by 2 points on the second quarter. What we’re spending to drive traffic, and the return we’re getting, is satisfactory.

 

Q:

What’s the targeted impact on guest experience with new management structure?

A:

Focusing on better food, better service. More focused assistant managers. We’ve gotten as much quality as possible out of the old structure. Now changing to a Capital Grille type structure and that will help us improve quality of food and service.

We’ll also have two managers in the building rather than one.  Offset the cost by focusing managers hours only when guests are in the building.

 

Q:

On the increase in marking dollars in 4Q, is that going to be split between OpEx and SG&A?

A:

All in SG&A line

 

Q:

Increasing trial and frequency…is frequency up or is the increase just trial?

A:

Frequency has to be up some, we are creating trial too but don’t know the exact numbers. 2.9 visits from those that came in during the 90 days.

 

 

Howard Penney

Managing Director


R3: BBBY: Consistency Repeats Itself

R3: REQUIRED RETAIL READING

April 8, 2010

 

 

TODAY’S CALL OUT

 

It is said that history repeats itself.  It can also be said that consistency repeats itself.  BBBY continues to be the poster child for this theme as evidenced by 4Q results. Yet again, the ‘BBBY is too expensive’ case proves thin.  Even with lofty expectations and “whispers” that to some seemed like a stretch, expectations were handily exceeded.  There is very little to criticize or critique here.  The results speak for themselves. 

 

Earnings of $0.86 per share were $0.13 ahead of the Street.  Same store sales were up 11.5%, representing the second quarter in row of sequential acceleration on a one and two year basis.  Gross margins expanded by 180 bps, benefitting from a continued decrease in couponing, reduced markdowns, and solid inventory management.  Recall that we have been bullish on the multi-year opportunity that still lies ahead for BBBY, which in part results from dramatically reducing couponing in the wake of capacity reductions in the home furnishings sector.  SG&A as a percentage of sales improved by 270 bps, also reflecting lower coupon circulation, lower ad expenses, and leverage on payroll and central costs.  The balance sheet remains solid, with inventories up 7.1% against a 16.7% increase in total sales. Additionally, the company ended the year with $1.7 billion in cash and no debt.  Square footage growth for 2010 is as expected, with 60 stores in the pipeline representing 5% growth.   All in, this quarter was very consistent with the prior two quarters- with a slight sales acceleration. 

 

For anyone that has been following our positive stance on BBBY for a while, we recognize these posts may seem repetitive.  For now and for at least the next few quarters we remain confident that this type of performance will continue.  Tight inventories, reduced couponing, expense control,  coupled with same store sales and store growth, make this one of the most consistent stories in retail.  And this holds true even after the earnings upside we saw over the back half of 2009. 

 

We believe the biggest mistake coming out of the this quarter would again be to “take the trade”.  Earnings guidance calls for 10-15% growth in 2010. We’re looking for 25% and that may be conservative.  Yes, expectations continue to rise, but it’s important to put 4Q results in perspective.    This is just the third quarter in a row (after 10) in which gross margins have improved.  Sales are accelerating, as they should when a macro recovery is underway and the company’s biggest direct competitor is now gone for just over a year.  And, some day management may actually put the cash balance to work.

 

Eric Levine

Director

 

R3: BBBY: Consistency Repeats Itself - BBBY

 

 

LEVINE’S LOW DOWN 

 

  • Despite a meaningful pick up in same store sales trends at Family Dollar in the month of March, management noted that they still see a pronounced payroll cycle. In fact, there has been no meaningful change over the past couple of quarters in the low income consumer’s behavior relative to the payroll cycle. While they did not elaborate any further, perhaps this status quo behavior suggests that the recent acceleration in sales is less related to the low income and more attributable to a higher income customer.

 

  • According to luxury website innovator, James Gardner of createthe Group, consumers are more likely to buy when consumers recommend outfits or products to other consumers, rather than brands themselves doing the merchandising. In fact, the conversion rate on the area of Juicy Couture’s site where consumers put together their own looks and then post them to other consumers is 162% higher than the traditional ecommerce offering. With that said, expect to see more “user generated” merchandising make its way across the internet. Recall that this is consistent with recent surveys that suggest consumers trust peers more than they trust brands.

 

  • Rumor has it that Japanese fast-fashion chain UNIQLO is headed to midtown Manhattan to fill one of the most expensive retail locations in New York. The space which was formerly the home of Brooks Brothers on Fifth Ave. occupies 70,000 square feet and supposedly commands an annual rent of $30 million! This would mark the chain’s second stateside location, with the other located in Soho. For anyone who hasn’t seen the concept first-hand we highly recommend a store visit. Clever merchandising, deep value pricing, and an extremely colorful in-store environment makes for long lines almost every day of the week.

 

 

HEDGEYE CALENDAR

 

R3: BBBY: Consistency Repeats Itself - Calendar

 

 

MORNING NEWS 

 

Consumer Credit Declines in February - Consumer credit in the U.S. declined in February more than anticipated, indicating Americans are reluctant to take on more debt without further improvement in the labor market. Borrowing fell $11.5 bn, the most in three months, after a revised $10.6 bn January gain that was twice as much as initially estimated, the Federal Reserve said today in Washington. The drop was the 12th in 13 months and shows consumer purchases, which account for about 70% of the economy, will be limited until households become more optimistic about the recovery. Confidence to finance spending may be restored if employment keeps rising after a March payroll gain that was the biggest in three years. <bloomberg.com/news>

 

CEOs A Little Less Confident on the Future - While declining to 62 from 64 in the final quarter of 2009 after gains in each of the four quarters last year, the measure is still in positive territory. According to the board, a reading of more than 50 reflects more positive than negative responses. “Ceo’s continue to rate current economic and industry conditions favorably, but expectations are that the pace of growth will not pick up in the months ahead,” said Lynn Franco, director of The Conference Board Consumer Research Center. “Hiring plans are improved from last year, but less than a third expect employment levels to increase this year.” In the most recent survey, 71 percent of ceo’s assessed current economic conditions as having improved when compared with six months ago, down from 75 percent last quarter. <wwd.com/business-news>

 

Protesters Paralyze Bangkok, Shut Down Malls - Major malls in downtown Bangkok are losing millions of dollars daily after being forced to close since Saturday by thousands of antigovernment protesters who have paralyzed the district. The losses will mount if the demonstrators keep retailers shut during the 10-day Thai New Year celebration, Songkran, which begins Friday. “We make a lot of money during Songkran. That’s huge for us,” said a spokesman for Siam Paragon Development Corp., which operates Bangkok’s luxury Siam Paragon mall. <wwd.com/business-news>

 

Talbots Seals the Deal, Finally - After six deadline extensions, The Talbots Inc. finally completed its warrant exchange offer with BPW Acquisition Corp., allowing the retailer to acquire the special purpose acquisition company on Wednesday. Talbots said that in addition to closing the BPW deal, it repurchased about 29.9 mm of shares held by former majority stockholder Aeon Inc., which constituted a 54% stake in the specialty retail firm. <wwd.com/business-news>

 

M&S Fourth-Quarter Sales Growth Quickens More than Anticipated on Fashion - Marks & Spencer Group Plc, the U.K.’s biggest clothing retailer, said sales growth accelerated more than anticipated in the fourth quarter as shoppers bought new fashion ranges. <bloomberg.com/news>

 

Fast Retailing Raises Profit Forecast by 5.2% on HeatTech Underwear Sales - Fast Retailing Co., Japan’s largest clothing retailer, raised its full-year profit forecast 5.2 percent and said it may list shares overseas, where it expects operating profit to more than quadruple this fiscal year. <bloomberg.com/news>

 

H&M Starts the Year Strong - Hennes & Mauritz AB, the world’s third-largest fashion retailer, saw net profit jump 45.2% in the first quarter as new store openings in South Korea and Israel and an early Easter boosted sales in its stores despite lingering economic doldrums. Same-store sales rose by 2% in the quarter. H&M said total sales rose 21% in March versus the same month a year earlier, while same-store sales were up 9% following a dip in February. The March increase was partly due to calendar effects, which contributed 2% points, and by a positive effect from Easter falling one week earlier than it did in 2009, it said. <wwd.com/business-news>

 

R3: BBBY: Consistency Repeats Itself - H M

 

Nike Tiger Commercial - Nike Inc. plans to air a new television commercial featuring Tiger Woods and a voice recording of the golfer's late father. It's the first ads featuring the golfer since revelations about his extramarital affairs. Check out the video: www.youtube.com/nikegolf. <http://www.sportsonesource.com/>

 

Sports Direct Makes Offer for Faith - Sports Direct is among five bidders to have made offers to invest in footwear specialist Faith, it is understood.  <http://www.drapersonline.com/>

 

Sales for Shoes.com Slump in 2009 - Sales were down across all major channels, including Shoes.com, for Brown Shoe Co. last year. Shoes.com recorded a decrease in web sales of 8.2% to $68.1 million from $74.2 million in 2008, while total and specialty retail sales also fell. <http://www.internetretailer.com/>

 

ColdwaterCreek.com Garners the Fastest March Response Time - ColdwaterCreek.com gave shoppers the fastest high broadband access time among large web retailers last month, says Gomez, the web performance division of Compuware. <http://www.internetretailer.com/>

 

Bluefly Gets Inside Customers’ Closets With its New Social Media Strategy - The off-price fashion apparel retailer launched this week BlueflyClosetConfessions.com as a social media site where consumers can upload photos and videos displaying favorite items from their own closets. <http://www.internetretailer.com/>

 

Web Retail Sales Grew 18.4% in March, MasterCard says - It was the eight consecutive month of double-digit growth in e-retail sales, says the monthly MasterCard Advisors SpendingPulse report. <http://www.internetretailer.com/>

 

Claire's Becomes Twilight Destination - Fashion accessories and jewelry chain, Claire's, has become a destination retailer for Twilight Saga merchandise across 831 branches in the U.K. and Europe throughout 2010. The first products hit Claire's stores on March 22 with the DVD release of The Twilight Saga: New Moon. The retail program will be supported by dedicated Twilight Saga areas in-store and a window presence. <licensemag.com>

 


Meany Manipulators

“Only free men can negotiate; prisoners enter into contracts.”

-Nelson Mandela

 

Nelson Mandela, the first South-African president to be elected in a fully representative democratic election in that country, knows a thing or two about negotiating.   He also knows a thing or two about being in prison, as he spent 27 years of his life in a South African penitentiary.  Upon release, he returned to the leadership of the African National Congress and led the multi-party negotiation that led to the first multi-racial elections in South Africa.  This Nobel Prize winner is one of the icons of our times.

 

It is no secret that his negotiations coincided with his release from prison.  Prisoners have effectively entered into a penal contract with the state (even if unjustly), so they have no bargaining position.  Even on the highest level of political and international relations, negotiations require thought, preparation, and tactics.  And, as Mr. Mandela says, “only free men can negotiate.”

 

The Art of Negotiation was a book published by Gordon Wade Rule in 1962.  The book provides a detailed plan for conducting a negotiation.  A couple of points he highlights as keys to success in any negotiations:

  • Realistically evaluate your bargaining position both with respect to individual points and overall possibilities of success;
  • Determine clearly your authority – if any – to settle each point within the maximums and minimums; and
  • Consider how and where you would like to see the negotiation get underway and proceed.

Today, and likely through the duration of the week, we will see whether Timmy Geithner understands The Art of Negotiation.  Timmy is in China today to meet with Chinese Vice Premier Wang Qishan.  The primary topic of these discussions will be Chinese exchange rate policy.  Interestingly, this visit will occur a week before Timmy’s boss, President Obama, will meet with Chinese President Hu Jintao.

 

In Washington, the political heat is being turned up on China.   U.S. lawmakers are currently moving forward with legislation that would require the U.S. to impose tariffs on countries with “misaligned currencies”.  As the ever chatty Professional Politician Senator Charles Schumer said yesterday:

 

“China will not act on their own because they want to maximize their wealth . . . every Treasury Secretary says “Let me talk to them, I can get them to change” and the change almost never occurs and when it does, it’s small, grudging and temporary.”

 

In contrast, Timmy actually delayed the release of the Treasury Department report on global currency policies that would likely name China a currency manipulator.  With this rhetoric from Congress it seems that the United States is undermining a number of core tenets from the Art of Negotiation.  Thus the talks today for Timmy, and next week for his boss, appear to have some challenges.

 

The most important challenge is, of course, determining whether the United States has any bargaining position at all.  In the Chart of the Day below, we have highlighted the growth of Chinese ownership of U.S. government debt.  Currently, U.S. debt in the hands of foreign governments is 25% of all U.S. government debt and more than 25% of that is owned by the People’s Republic of China.  China is the United States’ single largest foreign creditor.

 

One thing that United States officials need to consider is the appetite of the Chinese to continue to fund U.S. public debt in an environment where their currency is not pegged.  Since it is likely that the Yuan would appreciate under free market conditions, perhaps meaningfully, the value of the Chinese holdings of U.S. government debt could depreciate meaningfully and sour Chinese interest in further U.S. treasury purchases. 

 

According to a recent report by the Congressional Budget Office, the United States will be running close to a trillion dollar budget deficit annually for the next ten plus years.  If these projections are even in the ball park of reality, the United States needs good relations with its creditors. Calling your banker names, like Meany Manipulator, even if accurate, is not conducive to maintaining amiable relations.

 

For the first time in a long time (maybe ever), Keith applauded Timmy’s decision yesterday to delay the release of the currency  report ahead of his meetings with Chinese officials.  More specifically, the Treasury department cited upcoming meetings between between Chinese President Hu Jintao and President Obama on the sidelines of the Nuclear Security Summit on April 12-13, the second round of the U.S.-China Strategic and Economic Dialogue in late May, and the G-20 summit in Toronto in late June.  These will be critical global macro events to keep your Hedgeyes on.

 

Even as Professional Politicians like Senator Schumer continue to turn up the rhetoric on the Meany Manipulators, it does seem that Timmy and crew are taking a more balanced and thoughtful approach, though perhaps they have no choice.  After all, if someone lends you money, copious amounts at that, are you really any different from a “prisoner that has entered into a contract”?

 

Interestingly, Gordon Wade Rule dedicated his seminal book, The Art of Negotiation, to his country. His country and political leaders could use some art in their negotiation right about now.

 

Keep it real,

 

Daryl G. Jones

Managing Director

 

Meany Manipulators - Chinese Holding of UST


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