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They are getting "fired up" in Jackson Hole

At least that's what Tom Keen just said on Bloomberg (he is their Editor at large) - "there is a fervor out here - people are fired up".

That's all good and great for them. For we free market capitalists, the thought of government getting "fired up" to re-regulate financial markets is one of the scariest thoughts in my head.

Find me the 'Cowboy Bar'. This is going to be painful to watch tomorrow.
KM

LVS: TIDBITS FROM MACAU

• Macau Financing: This situation may not be as dire as the market perceives. Less demand certainly contributed to the scaled down financing effort from $7bn to $5.25bn to below $5bn. However, it may not be the type of demand problem people think. Apparently, there is interest from the banks in providing funds to LVS but the company may be scaling back its development on lots 7 and 8. Given the uncertain demand picture in Macau, less capex is probably a good idea.

• Four Seasons: Yes the property opened in August but no, it is not fully open. As far as my guys can see, only 50 rooms are open and the website is still not taking reservations until September 15th.



US Dollar Getting Hit Hard Today

Since the US Dollar put on such a big move in such a compressed period of time (+8% in a month), it has the potential to correct expeditiously. Today the US$ Index is down 94 basis points at 76.22, which is the biggest down move we have seen in weeks. Immediate term support was at 76.57, so that line is broken. Next stop is 75.70, then we have the more meaningful support line at 74.17. If Bernanke panders to the easy money crowd tomorrow in Jackson Hole, this move down in the US$ and coincident re-flation of crude oil, gold, etc. will continue.
KM
  • US$ Support is way down at the $74.17 level

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30 Year Mortgage Rates 1982-2008

Below, my colleague, Andrew Barber, put together a chart that overlays the long term chart of fixed mortgage rates with its spread to 10 year Treasury yields.

This morning the 30 year fixed mortgage rate hit a new short term high of 6.37%. As access to capital continues to tighten, these rates can go a lot higher. Historical context makes this point crystal clear.

Don’t forget that over 70% of new home loans in this country are either bought or guaranteed by US government sponsored issuers.
KM

Positive on FL, Negative on SKX

I continue to gain confidence that we’re going to see a reversal in margin trajectories between Foot Locker and Skechers. Though clients know my thinking as to why, there have been 2 nuggets in as many days that strengthened my view that SKX margins are heading lower by at least 3pts, and FL is going up by about the same.
1) FL: Industry sales trends continue to look good in aggregate. But when peeling back the onion and seeing which channels look good and which look bad, it is clear to me that the strength is in the athletic specialty channel, and weakness is confined to channels that are overweight low-profile (i.e. National Chains).

FL reports EPS after the close tonight. The company has missed each of the past six quarters. Not a great track record, by any means. But expectations look like they’re in check, and I think that inventories are under control. I still like the margin leverage on this name as traffic picks up and the major brands (esp. Nike and Under Armour) get into the ring and duke it out with running and basketball offerings over the next 12 months. There’s enough juice here to sidestep industry margin/sourcing pressure for at least a few margin points.

2) SKX: This Skechers situation is fascinating. After upping the bid and getting shut out twice, Skechers management is still trying to get sucked into this black hole by publicly pursuing HLYS. I won’t elaborate again on my thoughts (check out my 8/13 post “Deal or No Deal, The Damage is Done”) other than to reiterate that this is the last straw for a company that is over-earning in the wrong part of its cycle.
Share gain is coming from the right place for FL, not for SKX.

DKS: ‘Easy Comps’ Are Meaningless

I have had a dozen people ping me this morning asking ‘so, are you still the perma-bear on Dick’s?’ The short answer is ‘No!’ I am not a perma-bear/bull on anything. Yes, I have been very negative on the Dick’s story for the better part of a year – and have had very good reason. I don’t think that Wall Street appreciates the impact that the confluence of aggressive lease acquisitions and several material changes in the sporting goods retail space will have on DKS organic cash flow trajectory. I step back every day and retest my thesis, search for facts that could prove me wrong, and see how all this synch’s with market expectations. So far I have come up dry, and this quarter did nothing to change that. As I posted on 7/28, “Prepare to Whack-A-Mole” on a sandbagged 2Q. We’re still a buck or two away from the point where Keith’s models suggest playing that game. But stay tuned…

First off, let’s face some facts, this was a lousy quarter. Square footage up mid-teens, but comps down 3.7%, new store productivity eroding, and total sales netting out to a +7% rate. Gross margin rate down, SG&A deleverage, EBIT margins off a full point, and earnings down 6%. Yuck!

Yes, there are one-off things you can point to like cycling the impact of Heelys, and weakness in golf (temporary?), both of which hurt sales. But let’s not forget that in 2H DKS cycles Nike’s ACG launch, as well as exclusives from Adidas – and I’m pretty confident that these guys won’t be anywhere near as generous with terms as they were last year. Also, Under Armour is getting tighter with the mall retailers at the same time it is doing more business with Sports Authority.

TSA, in turn, is opening stores left and right (11 on 8/16 alone – and will add 37 this year) and is growing its footprint. Dick’s is expanding its reach as well into markets like Texas and Arizona. Is it a coincidence that the competitive landscape is getting tighter at the same time comps are weak and new store productivity turns down? No way folks… Moving into more expensive markets, with a less efficient infrastructure, and a lesser-known brand is rarely a good near-term event. Check out my 5/22 DKS post “Drink Facts, Not Kool-Aid” as to why I think that the lease structure for DKS is misaligned with economic reality.

I still think that the right margin rate for this company is about 4%, a far cry from the 6% it is likely to report this year. My biggest worry is that the company will pull another dilutive deal out of its hat and mask the true erosion in organic cash flow and returns.
This chart is a bit messy. It is going to get messier as footprints increasingly overlap.

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