The past two weeks of sports apparel sales were down. We’d been waiting for a third week to call it a trend. It didn’t happen. The sports apparel channel staged a meaningful rebound in the latest week.
Conclusion: The bevy of economic data out of Asia over the last 48 hours makes us question the legs behind the bullish rally in many Asian equity markets. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities.
Positions: Long Chinese Yuan (CYB); Short Japanese Equities (EWJ); Short Japanese yen (FXY); Short Indian Equities (INP); Short Emerging Market Equities (FFD)
There has been a slew of economic data coming out of Asia over the last 48 hours – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.
While we continue to be favorably disposed to Asian countries with strong growth profiles like China, Singapore, and Indonesia, we would be remiss to join in on the rally and decoupling talk now. We are likely buyers on pullbacks provided these markets hold important quant lines of support in the event of a dollar breakout. That, however, remains the biggest “if” in all of global macro investing right now.
For now, we are content to wait and watch.
The implied September baccarat volume looks pretty weak based on MGM’s pre-announced results.
We think September Strip Baccarat volume may fall 50-60% after posting 40% and 87% YoY increase in July and August, respectively. That would bring total baccarat volume growth for the quarter to 26-29%. Good, but not as good as everyone thought on Friday when the blockbuster August numbers were released by the Nevada Gaming Commission.
With its pre-announcement yesterday, MGM showed a baccarat volume decline at its wholly owned properties (so excluding Aria) of 6%. That is a very poor showing. It is our understanding that MGM’s baccarat market share was 35-40% and over 50% including Aria. Applying some simple math to MGM’s reported baccarat volume and the Nevada state figures leads us to the conclusion that September baccarat volume may be down 50-60%, even if MGM’s market share fell 10 percentage points. Of course, if they maintained share, then September Strip baccarat volume would have fallen even more.
We don’t want to marginalize the baccarat business. After all, this segment carried the Las Vegas Strip through the downturn and volumes continued to grow this year. However, relative to expectations, investors have to be disappointed with the full quarter volumes after Friday. We will need to reevaluate our model projections for WYNN and LVS again after raising our Las Vegas estimates following Friday’s Nevada release.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
R3: REQUIRED RETAIL READING
October 13, 2010
The JCP/Ackman chess match remains front and center today while Fila becomes the first brand to market with toning apparel just in time for the holidays.
- In the “really?” category, we note that teen pop star Justin Beiber inked a deal to release a collection of 6 nail polishes. Perhaps this is the product that Wal-Mart needs to get traffic moving in a positive direction. The line is set to launch at WMT in December, followed by a rollout into Target and Sears early next year.
- Coach tops the list of the second annual Digital IQ Index of luxury brands, skyrocketing from the middle of the pack last year to the top. The index measures the “digital competence” of luxury brands. Rounding out the top five in order are: Ralph Lauren, Louis Vuitton, Gucci, and Hugo Boss.
- According to the Gallup Well-Being Index, 6 in 10 Americans are either overweight or obese. Approximately 36% fall into the overweight category while 26.6% are obese. The good news here is that the obesity rate has been essentially unchanged for two quarters.
OUR TAKE ON OVERNIGHT NEWS
JCP Hires Goldman Sachs To Play Defense Against Bill Ackman - J.C. Penney Co. Inc. has taken a page from the Target Corp. playbook and hired Goldman Sachs to help play defense against activist investor William Ackman, sources said. Ackman plans to “engage in discussions” with Penney’s management and other stakeholders concerning the firm’s “business, assets, capitalization, financial condition, operations, governance, management, strategy and future plans.” Little is known of Ackman’s plans. <wwd.com/business-news>
Hedgeye Retail’s Take: Given that Target ended up holding its own against Ackman, the move to hire the same defensive player probably makes a ton of sense. In the meantime, this will unfortunately become a costly battle that shareholders are likely going to pay for.
Levi Strauss Sales, Expenses Grow - Net income at Levi Strauss & Co. dropped by 30.8% in the third quarter while sales improved as the company increased spending on new stores and advertising its Levi’s and Dockers brands. Total net revenue was up 6.6%, driven by the strong performance of the Levi’s brand in the Americas, the company’s acquisition of 73 outlet stores operated by a third party in 2009, and the expansion of the company’s retail store base, offset by wholesale declines in Europe and Japan. Although Europe did grow 6% cc, the 9% FX impact erased all growth. SG&A increased 15.5% primarily due to the spending on new stores and marketing. <wwd.com/business-news>
Hedgeye Retail’s Take: While the topline was supported by such investments, we note that expenses and not increasing costs were the key factor weighing on the bottom line. This is likely to change as cotton remains at elevated levels. Recall that Levi’s and Dockers are in the midst of rebranding efforts.
Sears Opens More In-Store Toy Shops - Sears is opening 79 additional Toy Shops within its stores, including in new markets Minneapolis, Philadelphia, San Diego and Washington, D.C. The expansion is based on a successful pilot launch last year. The year-round in-store Sears' Toy Shops will carry offerings from Fisher-Price, LeapFrog, Hasbro, Bakugan and VTech, as well as specialty items. The latest openings will bring the Toy Shop count to 99. The shops measure approximately 1,500 to 1,800 square feet. <licensemag.com>
Hedgeye Retail’s Take: Sears continues on its trend of creating a mall within a mall environment. However, toys appear to be heading for a competitive holiday following Toys R Us’ intention to open 600 pop up stores as well as Target and Wal-Mart’s intentions to be very sharp on pricing.
PERY Extends Nike License - Perry Ellis International has extended its license agreement with Nike, Inc. in which Perry Ellis will continue to design, produce, manufacture and distribute select apparel and swim equipment within North America under the Nike Swim brand through 2014. <sportsonesource.com/>
Hedgeye Retail’s Take: Status quo here with the swim license which means much more to PERY than it does to NKE.
Fila USA to Sell Women's Body Toning Workout Apparel - Fila USA announced the release of the Fila Body Toning System (BTS), a collection of body toning workout apparel for the women's fitness industry. The Body Toning System will first deliver to Dick's Sporting Goods stores and athletic specialty stores in early October. <sportsonesource.com>
Hedgeye Retail’s Take: While late to the toning shoe game, Fila becomes the first on shelves with a complimentary apparel product. With women now frequenting the athletic channel with increased frequency, retailers are likely to quickly adopt (or at least try) early toning apparel offerings in an effort to up-sell and retain new incremental female customers. Next in line is Reebok Easy Tone apparel in stores come November just in time for the holidays.
Fast-Fashion Flocks to India - Fast-fashion and contemporary brand retailers are flocking to India to tap into the nation’s rapidly growing economy and a market comprised of millions of young people. The latest is Forever 21, which opened its first store in India at the Ambience Mall here late last month, with a long line of customers waiting outside, impatient for the doors to be thrown open. Forever 21 joins the likes of Diesel, Zara, Ecko Unltd. and Italy’s OVS Industry. Other brands that made their entry into India earlier this year include Vero Moda and Seven For All Mankind. Over the last few years, Promod, Calvin Klein and S. Oliver have been establishing their stake in the metro cities. Meanwhile, well-entrenched brands like Van Heusen still see room for substantial expansion. What comes next? The entry of Gap is awaited, particularly in light of its plans to launch in China later this year. The frequency of purchase is highest among younger consumers. More than 81% of India’s population is under 45, and these consumers are the most fashion conscious. <wwd.com/retail-news>
Hedgeye Retail’s Take: Clearly an attractive market for retailers, but the key force tempering foreign direct investment continues to be Indian reform. Expect more aggressive entry by retailers as the government opens its gates further.
Russian Footwear Demand Recovers, 83% of Imported Shoes From China - Although footwear consumption in Russia is relatively smaller than those in European Union and the US, demand has been recovering, with China supplying 83% of imported shoes to the country. According to a recent survey conducted by Discovery Research Group, the average annual shoes consumption is 1.4 pairs for Russian, whereas 4.5 pairs for other European and 6.5 pairs for American. The imports in 2009 grew 22.3% to 222.1 million pairs from a year earlier. The average price for imported a pair of shoes was US$10. In terms of value, shoes consumption in the first quarter of 2010 increased 15% to 20%. Industry experts said that shoe demand in Russia is recovering, with prices also being on the rise. <fashionnetasia.com>
Hedgeye Retail’s Take: A population half the size of the U.S., but footwear consumption only ~20% of the American consumer suggests a capacity for increased demand. With the country’s GDP running +5% and an ASP of only $10 expect footwear demand trends to closely follow that of oil prices in the near-to-intermediate term.
TODAY’S S&P 500 SET-UP - October 13, 2010
As we look at today’s set up for the S&P 500, the range is 22 points or -1.26% downside to 1155 and 0.62% upside to 1177. Equity futures are trading above fair value in a continuation of yesterday's bounce which saw the S&P 500 close higher after recovering from an intraday low. Risk appetite was helped by the release of Fed minutes which reiterated the FOMC's resolve to take action if the economic recovery remained sluggish.
CREDIT/ECONOMIC MARKET LOOK:
“Not realizing that giving someone no map is much, much better than giving him a wrong map.”
I’m almost a third of the way through reviewing Pablo Triana’s “Lecturing Birds On Flying.” Published in 2009, this is a thinkers book. It made it to the top of my reading pile as I’m keen on reading anything that offers an alternative solution to the academic dogma that’s plaguing the American Economic System.
The aforementioned quote came from Nassim Taleb’s 7-page foreword. If you think what I write is aggressive, you need to read this book. Taleb’s foreword was easily the most aggressive I’ve ever read. His advice: “You need to shame members, humiliate them. Make fun of these charlatans.”
I don’t like charlatans. I don’t like cowards. And I certainly don’t like taking people’s word for things unless I have a basis to trust their work. I’d be a hypocrite not to criticize myself inasmuch as I will Ben Bernanke or Pablo Triana. My goal in life isn’t to defend my answers. It’s to find the right ones.
Given that I’m still waiting on my entry point to re-short this SP500, this morning I am going to lecture myself on shorting. In Chapter 2, “The Financial Economics Fiefdom”, Triana sufficiently proves that some of the said economic savants who are lecturing our B-school students need a wake-up call of real-life experience. So, I’ll offer my own. If you want to hit competing strategies in the mouth, you have to be accountable to what’s coming out of your own.
To be clear, no one said being transparent and accountable in this business is easy. That said, unlike Taleb and Triana, I actually show the score associated with my implementation of risk management solutions each and every day. We need more practitioners to get in the game on this front. God knows we aren’t going to boil the ocean of academic dogma on our own.
So, back to lecturing myself on shorting, let’s start with some very basic modern day risk management questions. If you want to lecture people on managing “Black Swan” or “tail risk”, shouldn’t you know how to profitably short a country, currency, or commodity? How about shorting stocks, governments, or the professional politicians that back them?
I’ll humbly submit that if you could, you would. So let’s strap the accountability pants on and take a walk down that path. Other than an internet connection and an online brokerage account (or a hedge fund), what else do you need to get started?
Ok. Ok. Now you’re either laughing or calling me names like the guys on the Princeton hockey team used to do. Either way, my teammates and I don’t really care what you call me. The Hedgeye Portfolio has an 83.6% winning percentage on the short side since inception (2008). Who Dat Hedgeye?
In all seriousness, in these globally interconnected times of government sponsored volatility, I don’t think you should be buying, selling, shorting, or covering anything unless you have a top-down global macro process combined with bottom-up research and risk management tools.
Ok. Now that I’ve laced up my skates with some Money, Macro, and Mucker, I’m ready to play God (Chapter 1 of Lecturing Birds On Flying is called “Playing God”). In terms of some pre-game prep, here are some highlights from Triana’s first chapter that any student of this game can appreciate:
1. Citing Emanuel Derman (former Goldman exec and currently professor at Columbia who has his PhD in physics), Triana makes an invaluable point about discipline and hard work: “It’s not that physics is better, but rather that finance is harder. In physics you are playing against God and He doesn’t change His laws very often. In finance, you are playing against God’s creatures, agents who value assets based on their ephemeral opinions.”
2. Again, borrowing another great quote from Derman, Triana hammers home a critical point about the behavioral side of this game that you need to internalize before you get out there on the proverbial ice: “When you take on other people, you are pretending you can comprehend other pretenders, a much more difficult task.”
3. Finally, on page 22, Pablo brings some Harvard heat by using a solid quote about economic forecasting from John Kenneth Galbraith: “The only function of economic forecasting is to make astrology respectable.”
Now playing against the said gods of Perceived Wisdom is tough. My mother-in-law was the first to remind me and my newly found feathered-gray hockey hairs about that. But God Himself is tough. And if you want to play this game for real, you better be tough too - especially when both critics and consensus tell you that you can’t do something that they can’t do.
After all, I believe it was Galbraith who also said that, “we have two classes of forecasters: those who don’t know – and those who don’t know what they don’t know.” Keep being your own harshest critic out there and you’ll be just fine. Read, write, and spend as much time with the people you love as you can. Short selling and managing risk is all about doing. As the game changes you need to change alongside it.
I’ve been waiting and watching for my re-entry point on the short side of the SP500 since early September. My immediate term support and resistance levels for the SP500 are now 1155 and 1177, respectively. I answer to no man on when to pull the trigger. I’m accountable to the score. I have my own map.
Keith R. McCullough
Chief Executive Officer
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