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RL Online Promo Levels in Check?

This 70% off coupon for Ralph's summer merchandise raised a yellow flag with me. But turns out that this compares to a 65% discount at this time last year. 'Free Shipping' hurdles are 10% higher this year as well. Overall, not a bullish promotional level -- but in the same ballpark as last year. That's better than I can say for other brands who are seeing 2x the rate of markdown activity as last summer.

Eye on Protectionism...

Suffice to say, whether it is Olympic or Obama driven, the nationalistic juices are starting to flow again. It’s not just local this time either; it’s global. Germany announced today that they are drafting a law that would give the German government veto power over any proposed “foreign acquisitions” of their domestic assets.

The vote is scheduled for August the 20th, and this timing is being expedited I think in response to the Chinese bidding for Dresdner Bank. The 3rd largest German bank is in play and the Development Bank of China is currently bidding against Commerzbank AG for the prize. Commerzbank is Germany’s 2nd largest bank by assets.

This isn’t an Olympic swim meet. Protectionism is a negative “Trend” that is developing as world economic growth slows and governments lean to the left of the political spectrum.

KM

Huge Leap for Li Ning

Anyone watching the opening ceremony on Friday saw the final torchbearer being hoisted up 100 feet to capture the world’s attention for a full four minutes while he lit the torch in perhaps the most dramatic fashion in Olympic history.

The problem for Nike and Adidas is that the person was none other than Li Ning, the Chinese gymnast and national hero who won 6 gold medals at the 1984 games in LA, and subsequently started his own sneaker company. Li Ning is the 3rd largest brand in China behind Nike and Adidas. The identity of the final torchbearer was kept hush hush, but leaked out during the day on Friday which sent Li Ning’s stock up 3.4%. That probably pales in comparison to the percent change in blood pressure at the marketing teams for the bigger brands when they saw the ceremony.

You can’t buy this kind of brand exposure folks. I don’t think that the impact on Li Ning’s business in China is terribly relevant here. But now the free world knows about the company and the brand. I still think that an emerging theme will be Chinese brands exporting content to developed countries. This just gave Li Ning a nice jump start.

If you have not seen it that part of the ceremony, check it out on You Tube. The rest of the world did…

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Preparing For Tail Risk

“I’ll study and get ready, and then the chance will come.” –Abraham Lincoln

That’s always been a favorite of quote of mine. From playing on the ice of Northern Canadian outdoor rinks, to driving up highway 95 these days in the early mornings – preparation has always trumped all else.

I often wonder how Vladimir Putin thinks on this front. One of my investment themes in 2008 has been to have an “Eye On Putin Power” - his recent attacks on Georgia remind me that preparing for the geopolitical tail risk associated with his ambitions to revive Russia as a dominant world power is paramount. After seeing oil prices correct for a -22% down move, I hardly believe that we can chalk up the timing of his “being at war” to irony. To the prepared, timing is everything.

You’d be hard pressed to convince me that the Chinese weren’t as prepared for their masterful opening ceremonies as any nation has been in world history. At times, the Olympic “bird’s nest” was borderline intimidating. China is not America. Russia clearly is neither. Understanding where global equity markets are headed next will require a healthy level of preparation. Of that, I am certain.

China’s stock market got crushed by a wider margin than its basketball team did yesterday by Team USA. The Shanghai Composite Index closed down another -5.2% overnight and has lost -9.7% of its value in and out of its Olympic launch. Suffice to say, this has to be more alarming than the 2,008 synchronized Chinese men banging on electric war drums Friday night.

The other side of commodity inflation deflating (CRB Index down another -7% last week, Oil down -8%, and corn hitting 4 month lows), is that Asian economic growth is slowing to a halt. No, the word “halt” is not my exaggerating. After printing a horrible GDP growth number for Q2 last night at +2.1% (which is down from Q1’s +6.9%), the Government of Singapore guided the world to NEGATIVE EXPORT GROWTH expectations for the balance of 2008. No, this has not happened in Asia’s most relevant port country since 9/11. This is not good.

Although I bought the S&P 500 via SPY’s on Friday morning (see timing of note on our Portal), this should be understood for what it is – a “Trade”. July was one of the worst months for US hedge funds on record. Energy and fertilizer stocks can indeed go down at the same time that fund of funds demand weekly performance. Plenty of PM’s are getting bounced around the Olympic rings here and, as a result, the deflating inflation “Trade” still has legs. I am moving my immediate term topside target in the S&P 500 to 1303 this morning (I was at 1299 prior).

I wrote a note this weekend on TED spreads remaining ominously wide (3 month LIBOR versus 3 month Treasuries). That negative “Trend” has not changed this morning; neither has Putin’s rhetoric. Russian tanks are moving deeper into Georgian territory; war planes have not calmed their attacks.

The US Dollar’s +3.4% melt-up from last week may have a lot more to do with what’s going to happen to the geo-political landscape next. Global Peace has been as positive a global “Trend” as any in the past few decades. It has undoubtedly contributed to falling risk premiums, globally, and unprecedented cross border trade. I pray that this doesn’t change, but I am preparing for the tail risks nevertheless.

Good luck out there this week,
KM



EBO > EAO

My partner Keith McCullough recently coined the phrase “earnings before Obama” or EBO. With a supportive congress, President Obama is likely to follow through on Candidate Obama’s populist rhetoric. I see four areas where Obama’s policies could drive EAO below EBO.

• Taxes – Corporate income taxes may or may not rise but personal income and capital gains taxes are certainly headed higher. “Hidden” taxes and fees on corporations would likely increase.

• Interest rates – In another post today I addressed the likely EPS hit from bank line refinancing. This was before even considering macro level interest rates which are likely to rise under an Obama administration advised by Paul Volcker. Attacking inflation could certainly benefit the long term economy but near term profits would suffer.

• Regulation – We’ve had a de-regulating trend in this country for nearly 30 years. Obama would likely reverse that positive trend and with it force up compliance costs.

• Labor – This is a biggie for my companies. Obama favors the “Employee Free Choice Act” which I’ve discussed in previous posts. Despite opposition from liberal stalwart George McGovern in Friday’s WSJ, this democratic congress favors the union initiative to oust the secret ballot in union elections. An open petition or “card check” will certainly result in more union victories. Higher wage costs, reduced labor flexibility, and lower productivity should follow.

I do not write a political blog and Research Edge is not a political firm. Like most firms we have diverse individual views but we do share at least one important value: objectivity. So while I’m not expressing a political opinion on whether an Obama presidency is good for America, I am trying to make an economic call that Obama will not be good for consumer stocks.



Chinese Wage Inflation De-bunked...

Inflation needs to be understood on two fronts, not just the commodity front. On the wage front we have a dynamic situation whereby inflation in Asia and Eastern Europe is running well ahead of that being realized in the West.

What China and Russia will have to deal with in the coming months is not unlike the ominous combo that Nixon faced here in the 1970’s – wage and price spirals occurring in tandem. Both countries look to be sustainably pushing towards wage inflation of +20% year over year growth.

When I posted the chart of Chinese wage inflation earlier in the week, I had questions in reply asking what the numbers might look like if I looked at urban workers versus those driving the numbers in rural China. Edge always lies in the question, and I think that is the one to ask. According to the Xinhua article on July 28th out of Beijing that was pulling numbers from the latest issued by the China National Bureau of Statistics, “urban workers' per capita salary averaged 12,964 Yuan (1,878 U.S. dollars) in the first half of this year, up 18 percent year-on-year.”

So, yes, the wage inflation number appears lower on the urban side of the ledger, however it’s still running at a considerably higher rate than reported Chinese CPI which is running around 8% for the same time period.

On Tuesday, we’ll have our eyes on the latest Chinese inflation report for July. It is global this time, indeed.
KM
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