- 1) Brands are flocking to China. Unfortunately, many of these brands have no reason to exist in the first place. Brown Shoe (BWS) attacking the Chinese middle-tier footwear opportunity? C’mon…first get the opportunity right in the US. ANY preexisting brand that cannot work in a developed market certainly can’t hack it in China.
- 2) I like the Lotto deal. It is a premium Italian brand that clearly has a place on the feet of Chinese consumers. Without knowing financial terms, I’ll say at least that the strategic move was a sound one for Li Ning.
- 3) There is definitely too much product being shipped in for the Olympics. Period. And it will take a lot to convince me otherwise. Think about it. Are the big brands growing aggressively in China to sell product around a 2-week sporting event? No. They want to be front and center in the eyes of consumers attending the event. Unfortunately, this means building a massive number of stores filled with a whole lot of product. China is a black hole where even the best brands have no clue how much product is in the market. There will be excess inventory in the wake of August.
- 4) On a less doomsday-ish note, any inventory glut will pass. This is not like Atlanta, which took years to recover from the overbuilding around the 1996 Summer Games. I can’t imagine that any PM owning this stock would look at ‘post-Olympic market stress’ and subsequently deem the market broken. But still, an important growth driver will be frozen for a few quarters.
- 5) I think we’re going to see a content transition in China. Yes this is purely my opinion, and I cannot quantify it. But Chinese consumers want US brands such as Nike, and European brands like Adidas to show the world that they’ve arrived – even if it means spending a week’s worth of income on a pair of kicks. But we’re seeing local brands gain some steam, like Warrior and Feiyue – not to mention Li Ning. Not only will these brands accelerate in China, but my bet is that they’ll become more prominent in Western markets.
- 6) If Nike and Adidas are smart, they’re looking at deploying cash to add Chinese brands to their portfolios before they are playing defense and spending more marketing dollars to combat them. If I’m a Chinese brand with any history of relevance whatsoever, I’m scrounging every last Yuan I can find to build my brand image. I’ll get it back many times over when I’m acquired.
This week the Constitutional Court rejected the proposed ban of Erdogan and his political party. Instead, they fined him for “anti-secular” behavior, and the stocks in Istanbul celebrated big time.
On Friday, the Turkish stock market flashed a very positive divergence versus weakness across equities, globally. Turkey’s ISE National 100 Index closed up +1.9% on the day, taking its ramp up 10,000 feet from the thralls of potential political disaster on July 1st where the market was trading at 33,208,-29% lower!
I’ve attached the roller coaster 3 year chart of Turkey as it tells many stories within the “it’s global this time” stock market narrative. On October 15, 2007, at the peak of global equity euphoria the ISE Index closed at a nosebleed height of 58,231.The levered long community saw no tail risk to Ataturk’s long standing secular Republic coming under geo-political fire – why would they? Did they even know what it meant?
Obviously, there were winners and losers coming out of those October 2007 highs. Turkish stocks ended up losing -43% of their value from that peak to the July 2008 trough. Ouch.
I model all country level stock index performance daily (globally) as it often issues me clues as to where tail risk lies. I am in the camp that the global economy is an increasingly interconnected and complex system of factors that need to be respected before they are fully understood.
Understanding Turkey’s domestic arm wrestle between their dominant Islamic faith and secular aspirations to be accepted into the European Union is a fascinating one as it pertains to global geo-political tail risk. It may not be a widely known statistic on Wall Street that there are approximately 1 billion Muslims in a world of 6 billion people. But that certainly doesn’t mean that the reality of these numbers cease to exist.
It is global this time, indeed. America’s grip on “leading” the world is loosening, and we need to pay attention to all of the critical factors underlying where the world is headed next. Turkish politics have the Europeans on their toes – the “Caliph” of Istanbul’s return would wake American’s up in a hurry too.
- The ISE National 110 Index
1. CityCenter is further along in terms of construction
2. Dubai World is a 50% partner and probably doesn’t want its billions in capital sitting in a dormant project
3. CityCenter has contracts for what it expects to be $2.7bn in residential sales within CityCenter. Millions of dollars of deposits have been received and would have to be refunded. Echelon does not contain a residential component.
This is a smart move by BYD and helps the supply situation a bit. However, let’s not get too excited about MGM following a similar path.
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- Does this change my mind on the 1-2 year call? No. In fact, with the sales in department stores having stabilized relative to this time last year (See my 7/30 post), my sense is that LIZ is using on-line clearance channels to a greater extent than funding markdowns on the product to retailers.
- Nonetheless, anything that is 80% off in retail is nothing short of pathetic. Mizrahi has his job cut out for him. The good news is that the brand has sunken so low that if he hits a fashion trend – even if by accident – then it’s a big potential margin event.
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