Lock The Barn Doors! The Karachi Crunch Continues

After getting hammered for a 6 day -18% down move, Pakistan's government decided to play their Keynesian cards again and stop trading!

No, this is not the Jim Cramer "stop trading" call... this is an old fashioned socialist government intervention. This is the 2nd time in 2008 that Pakistan has opted to plug trading curbs into their free falling stock market. Free market capitalism allows people to fail. They don't get it.
  • Next support for the Karachi 100 Index is 9,013.
chart courtesy of

European Money Supply Still Way Too Inflationary

Below, Andrew Barber, and I have attached a 10 year chart of European M3 Growth (money supply). The impetus for this note is that the Europeans reported a big +9.3% year over year growth in this critical inflation metric this morning. Yes, the growth rate has come down from it’s all time highs, but the point it is that its running way too high versus current stagnant regional economic growth.

The Euro itself, was introduced to the world markets as a currency in 1999, so this chart maps a critical duration that needs to be understood within the "its global this time" macro narrative.

Europe has never endured an protracted period of economic stagflation with all of the countries in Europe tied to the same currency horse.

Is there tail risk on this horse? You bet!


Finally A Positive for the (E) in my 'RIPTE' model!

This is a one week data point, so let's not get all excited about it yet. That said, I am data dependent and this week's jobless claims # in the US finally brought the 4 wk moving average down, albeit by a hair.

Claims dropped by 10,000 this week to 425,000. This moves the 4 week moving average down by 6,000 to 440,000.

Both the "Trade" and "Trend" in unemployment stats remains negative. If I see 3 consecutive weeks of amelioration, that would move the short term "Trade" to the positive side of my models ledger. I still think US unemployment rates will see 6-7% levels by year end.

As the facts change, I do. Life's easier that way.

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RL: Control Freak

Jamming product in the channel to drive revenue and save a floundering P&L does not work (just ask J Crew). Fortunately, RL is in far better control of its destiny.

Ralph Lauren remains near the top of my favorites list, and its promotional activity remains very much in check – especially to other parts of US retail (note recent J Crew results).

RL’s on-line promotional activity with ‘End of Summer 2’ and ‘Back to School’ remains about 5% above last year’s level, but that’s actually better than its ‘End of Summer 1’ sale, which was about 10% above last year.

Not a huge factor in the grand scheme of this story, but my view is that RL will print $4.50 this year vs. consensus at $4.13. These clearance checks along with my own sources give me more comfort that inventories are not getting out of control.
Note better yy delta between Summer 1 and Summer 2.

ZQK: Worst Trade of The Decade?

This Quiksilver ski asset sale might go down as one of the worst consumer M&A deal this decade – despite seemingly timing the FX trade perfectly. Now what are we left with? Check out the timeline…

3Q05: Buys Rossi for $501mm at face value, including deferred purchase obligations. Seemingly rich at 11x EBITDA.

Subsequent 18 months, needs to infuse about $250mm in working capital. Takes EBITDA multiple to 16-17x.

3Q05-3Q08: Absorbs over $100mm in operating losses. Implied multiple goes to 30x+.

3Q07: Sells Cleveland Golf for $133mm.

3Q08: Sells Rossignol and other ski assets for €100mm, or $147mm – subject to working capital adjustments. This is key, because ZQK got disproportionately stuck with the working capital adjustment on the front end, and will likely not see an offsetting benefit on the back end.

When all is said and done, we’re looking at about $850mm in, and around $275mm out -- $133mm of which has already been realized.

The big question now is what we’re left with. The answer? One of the best names in teen apparel, sans the seasonality and low-return characteristics of ski equipment. Even the sucker trade outlined above still leaves enough cash flow to take down debt to total cap by 10+ points. I think there’s more low-hanging fruit here to take up margins than any other company in the space.

I think that $1.50 in EPS and $425mm in EBITDA in 2 years is completely doable. That’s 4.2x EBITDA based on today’s price and post transaction debt.

The ONLY thing preventing me from going all-in at this point is that even after the Rossi sale, 50% of sales come from outside the US. The good news is that I think that ZQK is one of the companies that has been treating FX benefits appropriately – by reinvesting them back into the model. The bad news is that I think they’ve been reinvested largely into the Rossignol model – and now that’s gone.

This name is near the top of my queue again for the deep dive. Stay tuned…
Where'd the FX benefit go?


While Accor has done a nice job with its cost cutting, it is not immune to the global slowdown. Kudos to management, however, for a realistic outlook on the significant hurdles facing the hotel industry. Most relevant in my view is the duration of the slowdown. Management of this global hotel company warned that 2009 and 2010 “could be more difficult”. The sell side needs to pay attention. Hope for a 2009 recovery is fading fast. Models need to be adjusted. Estimates need to come down, again. Valuations on current estimates are meaningless.

I’ve written extensively on the issues facing lodging investors. Some of these include:

• The underestimated margin impact from slowing RevPAR
• Inflated RevPAR in gateway US cities from a weak dollar and strong global economies – both trends are reversing
• Slowdown in travel and tourism globally
• Aggressive analysts’ estimates that assume 2009 recovery

Maybe the Accor commentary will open some eyes in the sell side community. Probably not. I guess we’ll have to wait for Q3 earnings reports to see estimate reductions.

Sofitel London St. James

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