The Economic Data calendar for the week of the 1st of November through the 5th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Conclusion: Even though inventory is at a 10-year high domestically, the U.S. dollar continues to drive the price of oil.
Position: We are long oil via the etf, USO.
Yesterday, we added a position in oil to the Hedgeye Virtual Portfolio via the etf, USO. One of the primary reasons we are upping our allocation to commodities is to protect ourselves against inflation. With the Fed continuing to signal that dollar debasement will continue via quantitative easing, those commodities that are priced in U.S. dollars really only have one direction to go . . . up.
In addition to the position in the USO, we also have positions in two oil producers, Suncor (SU) and Lukoil (LUKOY). Our Energy Sector Head Lou Gagliardi described these two stocks this way in a recent note:
Setting the impact of a weaker U.S. dollar to the side, the short term fundamentals for oil are not overly bullish, specifically as it relates to inventory. Crude oil inventories in the United States are now at 366.2 million barrels, which is up almost 8% y-o-y. In fact, days of supply is at almost 26.1 days, which is literally the highest level of days of supply on hand in the last decade.
Below we’ve charted oil versus the Canadian Dollar / U.S. Dollar exchange rate. The chart tells us a few things. First, as we note above, a weak dollar will lead to a higher price for oil. In addition, it will lead to an increase in those currencies that are supported by high oil prices, such as the Loonie and the Ruble. This of course also creates more risk as we noted in the Early Look today, which is that of interconnected global risk. So, while we can be long commodities due to dollar weakness and to protect against inflation, we also must be aware of the increase correlations that are occurring globally and the fundamental supply / demand backdrop.
Daryl G. Jones
The Green Lobby may impact the hospitality industry.
Roger Dow, President and CEO of the US Travel Association, believes an “overzealous” environmental policy could be the next obstacle for the travel industry. He said 72 government agencies have already cut their travel budgets because of environmental concerns. While this isn’t enough to move the needle, it could turn into a troublesome trend, particularly if environment groups begin to target private enterprises about fuel guzzling travel habits of their employees. Remember the teleconferencing scare a few years ago? Those concerns could be revisited. On the bigger picture, Dow does not believe the travel industry will rebound to 2007 levels until 2012-13.
R3: REQUIRED RETAIL READING
October 29, 2010
OUR TAKE ON OVERNIGHT NEWS
Coach Gets Aggressive on Chinese Retail - US fashion accessories brand Coach plans to open 25 stores in China during its current fiscal year ending June 2011 in an effort to step up its retail expansion in the world’s fastest growing luxury goods market. "China is our biggest opportunity as our brand takes hold and the market continues to develop rapidly," said Coach Chairman Lew Frankfort, adding that the company has started developing a multi-channel distribution model in the Chinese market, including a flagship store, retail outlets, and shop-in-shop. Coach, which owns 665 stores worldwide, currently operates 49 outlets in China. It has opened 15 stores in the Chinese market during the past fiscal year. A new has recently been opened in Dalian, Liaoning Province. <FashionNetAsia>
Hedgeye Retail’s Take: With sales in China just reaching ~$100mm last year accounting for less than 3% of total sales and Coach’s share at less than 5%, it’s a sizable opportunity indeed. The company is clearly going on offense in 2011 with 25 new stores representing ~60% square footage growth.
TSA Refinancing Debt - The Sports Authority Inc. is seeking a $350 million term loan to refinance debt, according to reports. Bank of America Corp. and JPMorgan Chase & Co. will arrange the seven-year debt. The Sports Authority plans to use the proceeds from the term loan to refinance an existing term loan and buy back a portion of its subordinated debt. The company took on that debt in 2006 to help pay for its approximately $1.36 billion leveraged buyout by Leonard Green. Separately, ratings agency Moody's Investors Service has raised its outlook on The Sports Authority Inc. to reflect the retailer's improved profitability, leading position in the market and strengthened liquidity. The firm said Friday it revised the company's outlook to "Stable" from "Negative," reaffirmed the company's "B3" corporate family and probability of default ratings and assigned a "B3" rating to the company's proposed $300 million senior unsecured term loan. Proceeds from the proposed term loan will be used to refinance the existing term loan and a portion of senior subordinated notes. <SportsOneSource>
Hedgeye Retail’s Take: The latest move from TSA suggests continued preparation for an eventual offering. Following Dick’s presentation last week at which the retailer mapped out the opportunity for store growth out west, perhaps TSA realized the need to accelerate plans of its own.
Maria Launching Lifestyle Line - After weeks of speculation, Carey confirmed on Thursday that she and her husband, Nick Cannon, are expecting their first child. But before her spring due date, Carey will hatch her first lifestyle collection featuring jewelry, footwear and fragrance on HSN on Nov. 29. The move makes Carey the newest addition to the celebrity designer circuit, but unlike many of her contemporaries, she isn’t taking the traditional retail route. Instead, she’s going straight to the consumer, and is sticking to a genre she is comfortable with — TV, as well as the Internet. <WWD>
Hedgeye Retail’s Take: She’s done fragrances, so why not jewelry? The noteworthy callout here is her decision to go direct only. Complete exposure to the fastest growing channel in retail is rare, but savvy move by Mimi.
Innerwear Consolidation - The Komar Co. said Thursday it is acquiring the Carole Hochman Design Group, bolstering its position as the biggest privately owned innerwear firm in the U.S. Financial terms were not disclosed. The deal is expected to close within two weeks. Komar is a $500 million sleepwear, daywear and underwear firm with licensed brands such as Donna Karan, DKNY, Ellen Tracy, Eileen West, Liz Claiborne and Kensie, a young contemporary brand. It also produces the Very Vera Vera Wang sleepwear collection, which is a Kohl’s Corp. license. The family-owned Hochman company, marking its 80th year in business, generates between $150 million and $200 million annually. It produces and distributes sleepwear and intimates licensees, including Oscar de la Renta, Lauren Ralph Lauren, Betsey Johnson Intimates, Lilly Pulitzer and two new lines, Nicole Miller sleepwear and Tommy Bahama sleepwear, loungewear and boxers for men. <WWD>
Hedgeye Retail’s Take: Consolidation is to be expected in the declining hosiery market and with this stable of brands, Komar is upgrading the quality of its brands and ultimately its distribution channels to the end consumer in the process.
U.K. Retailer Jack Willis Comes to Beantown - The British men’s and women’s wear retailer — which has zoomed to almost 40 stores in the U.K. and yearly sales of 90 million pounds, or $143 million at current exchange, on the back of its cult status among 18- to 21-year-olds eager to snap up its English preppy styles — is making its boldest move yet in that former colony called the United States with the opening of a 4,600-square-foot store in a former town house at 179 Newbury Street in Boston. It’s the latest expansion move by a company that grew up in the Internet era and aggressively promotes e-commerce and social networking. “This has always been a multichannel business,” cofounder Peter Williams told WWD in an exclusive interview. “The Web has always been at the heart of this business, which is built around the lifestyle of our core customer.” About 25 percent of sales are online, while 75 percent are from the retail stores. <WWD>
Hedgeye Retail’s Take: Having 25% of sales from online is virtually unheard of for a brand of this size – perhaps neighboring competitors can learn a thing or two from their English competition.
Small Business Sees Outsized Benefits from Social Media - According to the American Express OPEN fall 2010 “Small Business Monitor,” small-business owners have dramatically upped their usage of social media for marketing in the past year. While just one in 10 business owners reported using social networking for marketing last year, 39% indicated they did in September 2010. The impetus is driving sales by connecting with consumers. Facebook was the clear leader among small-business owners, with 27% using the site to attract new customers, vs. 9% using LinkedIn, 8% using Twitter and 5% maintaining a blog. American Express found that among businesses that use social media marketing, 39% said it increased the exposure of their business. But the second most common response, selected by 17%, was that social media tools had not helped them. <emarketer>
Hedgeye Retail’s Take: The current day version of putting rubber to the road and handing out fliers to drive business, it’s no surprise to see small business owners learning how to navigate the social media network at breakneck speed.
Mexican Counterfeits on the Decline - Mexico’s textile industry is confident a ballooning contraband trade can fall sharply in three years as the government strengthens customs inspections and increases raids against so-called “phantom firms” that smuggle billions of fake and subvalued Asian garments into the country. On the back of fresh strategies to combat the activity, the trade could fall to accounting for three out of 10 garments sold in Mexico, down from six out of 10 now, Garcia predicted. One of those strategies shifted into higher gear earlier this month when Mexico unveiled plans to join the international Anti-Counterfeiting Trade Agreement, which 37 countries are hoping to enforce this year. Gilda Gonzalez, deputy director general at the Mexican Institute of Intellectual Property (PGR), told WWD that Mexico hopes to join the agreement in the first quarter of 2011, pending negotiations and the Mexican Senate’s approval. If Mexico joins the accord, fake clothing imports should fall drastically, Gonzalez predicted, as customs will be empowered to seize “suspect” containers at port or after they have entered the country. Under current legislation, brand owners must go to customs to report an illicit container or file a claim for the authorities to chase an illegal importer once the goods have reached Mexico. Mexico’s domestic textile and apparel sales (as measured by production value) totaled $5.8 billion last year but about 60 percent of the goods were contraband merchandise, arriving mostly from China but increasingly from Bangladesh, Vietnam and Malaysia, according to Canaintex. Of that 60 percent, 67 percent is apparel while the rest are textile products such as fabrics and yarns. The bulk of the goods come in illegally but can also — in the case of counterfeit brands — be made in Mexico. <WWD>
Hedgeye Retail’s Take: This legislation is a must in the eyes of apparel brands who are faced with expensing their own counter contraband efforts with no guarantee of results making it a futile effort for most, but impossible for small-to-mid sized brands. The proposed legislation rightfully empowers customs officials to proactively patrol the border for counterfeits, an effort we expect Mexico join.
Leading Chinese Footwear City Sees Increase in Exports - China’s leading shoe exporting city Wenzhou shipped 394 million pairs of shoes worth US$1.9 billion in the first seven months of this year, up 33.2% year-on-year, according to the city's customs. The EU and Eastern Europe remain the biggest overseas market although exports to the US have seen rapid growth. In the first seven months of this year, Wenzhou exported 131 million pairs of shoes to the EU, up 20.5% year-on-year, accounting for 33.2% of Wenzhou's total export of shoes during the period. That compared to exports of 42 million pairs of shoes to the US, up 85.3%, 22 million pairs to Russia, up 41.7%, and 30 million pairs to Croatia, up 96.2%. Jin Jianfeng, Deputy Chief of the Light Industry and Textiles Section at the Wenzhou Entry-Exit Inspection and Quarantine Bureau, said Wenzhou's competitive edge lies in its ability to deploy an accurate and timely grasp of information on the consumer market through direct contact with end-users. It's also developed a well-co-ordinated industry chain and a regional advantage through its product mix, he said. But real leather shoes, which are relatively expensive, are getting a cold response from foreign buyers, despite some recovery in demand there, said Jin. The share of high-end shoes in the total value of Wenzhou's total shoes export has steadily dropped to 17%, a drop of 1.7 percentage points from the same period last year. <FashtionNetAsia>
Hedgeye Retail’s Take: Despite continued growth of footwear exports from coastal Chinese cities, U.S. domestic brands continue to shift stitching operations in-land due to increasing labor costs as well as to neighboring countries such as Vietnam and Indonesia.
Vietnam Continues to See Manufacturing Demand - Vietnam’s textile and garment sector’s export value is expected to earn US$9.16 billion during the first ten months as the industry is likely to surpass its target benchmark of $10.5billion for the year, according to the Vietnam Textile and Apparel Association. The sector’s good performance is attributed to a rise in orders from Vietnam’s traditional giant importers including the US, the EU bloc, Japan and Russia. According to the Association, Vietnam’s textile and garment shipments to the US made up 55% of the industry’s export value in October. <FashtionNetAsia>
Hedgeye Retail’s Take: This is fat-tailed trend with years of runway.
Top Holiday Toys - "This year, the toy industry has combined innovation and creativity to respond to the ever-changing demands of children," says Gary Grant, chairman of the TRA's Dream Toys selection panel. "The technological advancements used in many of the toys we reviewed this year were simply amazing, and demonstrate how forward thinking manufacturers are." <LicenseMag.com>
Hedgeye Retail’s Take: With retailers forcing us to consider holiday shopping for our kids with holiday music playing before we even get to celebrate Halloween, here’s a list of toys to consider from across the pond.
This note was originally published October 29, 2010 at 08:03am ET
“Nobody ever drowned in his own sweat.”
I’ve seen a lot of sweaty hockey players in my day. The stench of a few hockey bags in the back of a mini-van has definitely made a few hockey Moms nauseous, but I think Ann Landers has the greater risk management point right.
The Hedgeye Question of The Day: Can markets drown in the sweat of their own expectations? If you are really levered up long here. And I mean right here, right now… you better be sweating. Here’s why:
As global macro risk managers, measuring TIME (duration of catalysts) and SPACE (price) is obviously critical. At the same time we need to comply with the rules of Wall Street Storytelling and come up with something that the theoretical people out there can surmise as plausible.
How about this 3-factor model?
‘Whoa, whoa, big bone head hockey fellah – that doesn’t fit the narrative fallacy of our outstanding September/October performance run. Reign that sweaty hockey talk in before we cut your trading commissions. Oh right, you don’t have trading commissions – we’ll plug Nomura then.’
I didn’t sweat consensus coming off of the April highs and I’m certainly not going to now. There are plenty of clean cut contrarian signals in the marketplace today that reconcile another mean reversion move in correlations to the downside (VIX, CDS Spreads, Sentiment, Inside Selling, Volume Studies, etc…). But let’s not focus on those market-practitioner-points for now. Let’s get back to where the theoreticians need some convincing.
Sweating yet? Don’t worry – it won’t kill you. Heli-Ben has bags full of “cash on the sidelines” – load up the mini-vans and plug your nose.
My immediate term TRADE lines of support and resistance for the SP500 are now 1169 and 1192, respectively.
Have a great weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - October 29, 2010
As we look at today’s set up for the S&P 500, the range is 23 points or -1.25% downside to 1169 and 0.69% upside to 1192. Equity futures are trading below fair value after a mixed finish on Thursday as the build up to next week's pivotal FOMC meeting continues to sap momentum.
Today politized 3Q GDP is posted with Bloomberg forecasting a +2.0% rise q/q vs prior +1.7%. Chicago PMI and Michigan Consumer Sentiment are also due for release.
CREDIT/ECONOMIC MARKET LOOK:
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