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Germany: 4 Bullish Charts

Position: Long Germany (EWG); Short Spain (EWP)


Below we refresh you with four bullish German charts, including unemployment that was released today at 7.8% in April, a sequential decline. In the face of European sovereign debt concerns, we continue to like Germany as a lower beta play on safety for an economy that should benefit from the government’s fiscal conservatism, an increase in exports alongside a weaker Euro, and an environment of low inflation. As one play on our Q2 2010 Theme Sovereign Debt Dichotomy, we’re long Germany (EWG) and short Spain (EWP). See the charts below. 


Matthew Hedrick



Germany: 4 Bullish Charts - c1


Germany: 4 Bullish Charts - c2


Germany: 4 Bullish Charts - c3


Germany: 4 Bullish Charts - c4


Until this week, the performance of the restaurant industry has been remarkably resilient.  Driven by the smaller cap names, the group has outperformed every month this year and did not come close to bottoming with the broad market in February.  Today the group is moving higher again with the broader market.  If the restaurant group was more high-profile like the Technology or Financial sectors, it would be considered a leadership group. 


Of course, it’s a leadership group because everyone needs to eat.  So with the Restaurant group rolling over this week, is it a leading or lagging indicator?  


The stocks have been outperforming in 1Q10 as…..


(1)    Top line trends continue to improve sequentially

(2)    Margins are expanding due to lower food costs

(3)    The Private Equity mania


The current pull back centers on….


(1)    Some high profile EPS misses

(2)    Food inflation is around the corner

(3)    Too far too fast….


With the rising tide having lifted all boats so far this year, I don’t expect this run up to continue for the balance of 2010.  I continue to believe there is some powerful momentum behind SBUX and would focus on EAT as we progress toward FY11.  MCD is taking share in the US but upside is limited as valuation is approaching a stressful level.  I see the BWLD business model as being broken and some restructuring is needed to fix the real estate issues.  PFCB has picked up some momentum in the Bistro’s traffic trends, but the risk parameters are on the rise with incremental pricing and lower discounting.




Howard Penney

Managing Director



Great quarter, guidance conservative but not exactly sandbagging.



“Lodging demand for our nine global brands accelerated as we moved through the first quarter, allowing us to beat expectations on robust top-line growth. We continued to hold the line on costs. Most encouraging for us was that occupancy gains were led by the luxury market. This benefits Starwood, thanks to our leading presence in the four and five star categories. With the depths of the downturn behind us, we have a long runway ahead as we move into the upcycle.”

- Frits van Paasschen, CEO


As we wrote about earlier this morning, HOT reported a very solid quarter and impressive guidance.  We saw that at least one sellside firm mentioned that people may be disappointed that the guidance implies 2H2010 moderation in RevPAR growth and "light" flowthrough.  While we are still going through the numbers, we are not at all surprised. 


First of all, Starwood got hit harder earlier on than its competitors given its outsized exposure to luxury, urban and international hotels.  All one needs to do is look at the occupancy declines they experience in 1H and especially 2Q09 to see this point. Those declines moderated materially as the year went on and were actually positive last quarter for W, Luxury/St. Regis, Le Meridian, and Westin brands.  Secondly, at current rates, currency will turn into a headwind for their owned portfolio in the 2H.  Thirdly, fx also impacts costs and given that the RevPAR gains are largely occupancy driven there is a lot of cost creep that should come back into the system.  Finally, since much of the upside was driven by late breaking transient demand, visibility remains lower than normal.


Given the momentum in this space, exaggerated expectations may finally kill these stocks.  We may have further thoughts post the call, but for now, please see our conference call notes.




  • Lots of businesses are done cutting costs and shifted to try and grow revenue by hitting the road to drum up business
  • Hopeful but cautious on the back half the year
  • Refuse to give back the savings that they have achieved
  • Plan to continue deleveraging the balance sheet
  • Strong transient demand and in the quarter for the quarter group bookings drove the upside in the quarter
  • ADR did improve month on month throughout the quarter and are approaching turning positive in many markets
  • Leisure and transient demand offset lower group bookings - Paris was up 43% for example
  • New bookings are up 30% in 2010, and cancellations are below historical levels
  • Lead volumes were also up, especially for small group meetings
  • Group business on the books for 2010 is approaching flat to 2009
  • Expect positive RevPAR for their hotels in every region
  • NYC alone has almost as many rooms as all of India (ah this reminds me of Jason Ader's India Hospitality road show years ago)
  • Pheonician - occupancies were up 30% in the quarter.  Restarted ballroom properties
  • W's were their best performing brands. NYC close to peak occupancy
  • Sold $20MM in residences at Bal Harbour
  • Some deals put on hold are coming back to life (luxury development)
  • Given the recovery going on, they want to postpone their asset sale program, since assets are trading well below replacement costs (although replacement costs don't capture depreciation)
  • Asia was up 20% in April. Japan and Thailand are the only 2 laggards. There was significant late breaking business.  ADR's are now up 2% in April.  Expect Asia to contribute over 20% of their fees
  • North America had the biggest upside surprise in the quarter.  Occupancy in NYC was 75% in 1Q and rate was down 7%. In April they are seeing the first positive ADR change in NA. 
  • Continental Europe recovery is also underway.  First quarter is a loss season so its hard to extract trends.  Late breaking corporate business is the driver of recovery here.  Don't expect the Iceland incident to impact 2Q
  • ME & Africa: Wil derive 13% of their fees from this region.  Didn't see growth here because of weakness in the UAE (-12%)
  • Latin America: South America was very strong (Brazil up 30%) but Mexico was very weak but is slowly recovering.  In Q2 Mexico will lap H1N1 - so far in April Mexico is up 7%.
  • Vacation ownership:  Price reductions help close rates.  On track to generate record cash levels through timeshare- more then enough to fund Bal Harbour
  • Exchange rates remain a tailwind in 2Q- adding 200bps. 
  • Expect to have their first quarter of margin improvement in Q2.  However, occupancy driven recovery doesn't help margins, and fx doesn't either (well not by much at least)
  • Fees and other income included a non-recurring $7MM last year
  • Still have little visibility issues as the booking window is very short 



  • Sheraton... is the pruning done? 
    • They are 4/5 done with the pruning. Now they are going back and promoting the brand. Launching the "Rediscover Sheraton" campaign
  • Comps get harder in the back half so they would need to see absolute increase from here to see back half growth
  • Look at the 2004 recovery it also started off very strong and moderated
  • Impact of cancellation fees in 1Q09 and FY2009
    • It's a single digit number not very meaningful
  • They basically want peak multiples on peak EBITDA for asset sales - lol.  no wonder there is a wide bid/ask spread
  • Their NOL expires at the end of next year.  Plan to use as much as they can before it expires.  That will influence their sale strategy.  There are ways to extend it though
  • One of the reasons that group bookings are looking better is because more people are showing up to group events
  • Timeshare securitization in the $100MM range for the back half

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He Who Sees No V's

Ben Bernanke pandered to the political wind yesterday. Shocker.


What might also shock some life into the ‘I love Janet Yellen’ because she’s perma-dovish crowd is this thing we Real-Time Risk Managers call marked-to-market prices. We acknowledge that there are better functions on Bloomberg’s terminal to calculate what is embedded in TIPs (expectations), but the actual price chart of TIP, on its own price merits, is decisively bullish.


While we are aware that inflation expectations dampened on sequentially decelerating February inflation reports, we have seen nothing but the opposite occur (hence the V-Bottom in this chart) ever since. Today, of course, is April and with the insulation of an expectation for a continued European sovereign debt collapse, we see nothing in the immediate term that changes our view of Inflation’s V-Bottom (if you’d like a copy of our Q2 Macro Themes slides that outlines how a sovereign debt default cycle will lead to sustained inflation, please email us at ).


We remain long of TIP in the Virtual Portfolio and outline the intermediate term TREND line of support for TIP below at $103.96.



Keith R. McCullough
Chief Executive Officer


He Who Sees No V's - TIP

R3: Athletic Divergence


April 29, 2010





For the first time this year, we're seeing a meaningful divergence between sales trends in the athletic space and the rest of retail – with athletic underperforming. Perhaps chalk it up to a disproportionate increase in more fashion-forward apparel given 23 months of suppressed demand -- yes, athletic is ‘lower beta’ as it relates to being impacted by changes in consumer spending, and therefore did not decline as much last year.  But regardless, a fact is a fact. The numbers for the past week were mixed, but we always look at the trailing 3-week trend – as it’s proven to be the most consistent tell tale sign of what’s really happening out there.


We wouldn’t be surprised to see the group take a breather as long as a chart like this exists. We’re ok with that. In fact, we think that the most power trend in retail over the next 2-years has already begun, which will be a resurgence in the athletic space as a whole. This is largely Nike driven – with a helping hand from Under Armour and Foot Locker. It will help everybody from Dick’s to Finish Line and will even be a backstop to bring a dog like Sports Authority public again. See our Nike Black Book for full details on why we think this theme is so powerful.


So why are sales weak today? The fact is that the product in the market right now is a function of the prior R&D cycle – think 9-12 months ago. By summer, there will be a meaningful turn in top line. In fact we’re already started to see it in order levels and manufacturing activity.


If this group takes it on the chin over such near-term concerns, as well as some wind coming out of the sail after Nike’s analyst meeting, there’s going to be some great entry points around a powerful multi-year call.


R3: Athletic Divergence - Sports Apparel and Footwear Chart


R3: Athletic Divergence - Table





- Carter’s indicated that sales to off-price retailers, including ROST and TJX are down dramatically this year in large part to growing demand and better inventory management for the company’s brands. Upon further clarification, management noted that sales to the off-pricers are down 70-80% year over year. Clearly this speaks the big year over year shift in availability of branded goods for the off-price channel.


- JNY management noted that while inflation in cost of goods is likely to remain minimal in the back of the year, it may become a bigger issue in 2011. In an effort to combat cost pressures, the company expects to take price in areas where “value” supports it, focus on product differentiation and fashion which can command higher price points, and shift the assortment towards higher margin items. Cotton and leather were both mentioned as areas to watch over the next 12-18 months.


- In an effort to emphasize and highlight that change is potentially on the way for Sam’s Club (yes, we’ve heard this many times before), CEO Brian Cornell expressed in detail the number of new executives the WMT division has hired over the past year. These hires include a new CFO, new chief merchant, the former President/COO of Michael’s Stores, and the former CEO of the military’s worldwide retail operation.


- With Skechers nearing the anniversary of its Shape-Ups sales ramp, it’s time for the next growth category – apparel. Through various licensing deals, management spoke of aspirations to have consumers dressed head-to-toe in Skechers on Wednesday’s earnings call. Following the launch of kids apparel in Q1, it sounds like there is more in works for the whole family.





 R3: Athletic Divergence - Calendar






China Commodity Demand on the Rise - The country posted its first trade deficit in six years in March mainly because of the surge in imports of raw materials. Exports dropped due to Chinese factories were slow to reopen after the Lunar New Year holiday. Exports surpassed $112 billion in March, up 24% year on year, while imports increased by 66%.  <fashionnetasia.com>


Weyco Acquires Umi Brand - The Grafton, Wis.-based children’s brand Umi has been acquired by Weyco Group Inc., which markets footwear under the Florsheim, Nunn Bush and Stacy Adams brands, among others. Weyco will also acquire Umi’s U.K. operations. The head of Umi will join Milwaukee, Wis.-based Weyco, where he will continue to helm the Umi brand. Umi’s existing design and development teams will also remain under the transition. A new Umi sales team is expected to be announced shortly by Weyco. All fall ’10 orders will be processed and shipped from Weyco’s Glendale, Wis., warehouse. <wwd.com/footwear-news>


Walking Co Exits Chapter 11 - The Walking Company Holdings Inc. has emerged from Chapter 11. The firm, as previously reported, said it exited bankruptcy with 207 of 210 former locations in tact. It also plans to pay off all debts and credit obligations. <wwd.com/footwear-news>


Kobe Bryant Tops NBA's Most Popular Jerseys - The Los Angeles Lakers' Kobe Bryant once again topped the NBA's list of most popular jerseys, where he has reigned as No. 1 since the start of the 2008-09 season. The list is based on sales at the NBA Store in New York City and on NBAStore.com since the start of the 2009-10 NBA season through April 2010. <sportsonesource.com>


US CEOs of Multinationals Concerned Over Earnings Estimates Due to Euro Weakness - United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated. The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009. Terex Corp., DuPont Co., McDonald’s Corp. and Johnson & Johnson also said in the past two weeks that the euro’s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy. <bloomberg.com/news>


Unilever Sees a Tough Environment Ahead - Unilever reported its first-quarter profits increased 31% on sales that grew 6.7%. “We showed strong momentum across all geographies with continued strengthening of our competitive position in line with our strategy,” stated Paul Polman, chief executive officer of the Anglo-Dutch consumer goods giant. “We will face a tougher environment as the year progresses, and thus it is more important than ever to stay focused on the consumer. Commodity costs will increase in the second half, economies remain sluggish and competitive intensity will remain high." <wwd.com/business-news>


Hugo Boss Posts Earnings and Sales Decline in Q1 - Despite decreases in both earnings and sales in the first quarter, the Hugo Boss Group reasserted it will “return to growth” in 2010. Net income declined 11% in the three months ended March 31 while group sales slipped 8%. Boss said lower pre-order volumes from the recession year 2009 continued to impact its wholesale business, but noted sales from directly operated stores surged 25% to reach 83 million euros, or $115 million. For 2010 as a whole, Boss is forecasting single-digit sales growth, with adjusted EBITDA expected to increase somewhat more strongly than sales.<wwd.com/business-news>


Levi's to Launch Chinese Brand at Lower Price Tag - Levi's has announced plans to launch a new global brand in China and other selected Asian markets this autumn, marking the first time the brand is to be launched in markets outside America. The company has not revealed the name of the brand, but said the prices of the new products may be lower than its existing products. The new products are designed for the Chinese market, but the company will also develop the new brand into one of its major brands, targeting well-educated young people ages 18 to 28. Levi's plans to open about 20 new stores under the new brand and will increase the number to 1,000 by 2015. <licensemag.com>


Sears's Lands' End Styles - Since introducing Lands’ End Canvas, the company’s younger, more stylish collection in November, Lands’ End has quietly been testing a few other initiatives that were detailed at its fall preview. First, the Heritage Collection, a range of perennial Lands’ End classics such as the Squall jacket and the Drifter sweater, was introduced in the catalogue and online three months ago. Updating and expanding on the company’s roots appear to be priorities for Coe, who oversaw an overhaul of the classic down outerwear, redesigned for fall with an eye toward more modern fits, a broad range of colors and three groups: everyday, luxury and chevron. <wwd.com/retail-news>


Hiking Shoes/Boots Declined 16% in 2009 - Sales of hiking shoes/boots declined 16% to $873 million in 2009, according to NSGA’s soon-to-be-released “Sporting Goods Market in 2010.” The study found that despite a 4% decline in unit sales, the overall athletic and sports footwear market reached $17.1 billion in 2009, down just 1% in dollar terms from 2008. <sportsonesource.com>


This past week initial jobless claims fell 11k to 448k from 459k (revised up 3k), which brought the rolling four-week average higher by 1.5k to 462k. As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date. The following charts demonstrate this. We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.


As a reminder around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 1 day away. 




The following chart shows the raw claims data.




The following chart shows the census hiring timeline.




Joshua Steiner, CFA


Allison Kaptur

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