TGT: 1st Mention of Synthetics; It's Not Just Cotton

Very realistic and sobering comment from Target on cost inputs. It's not just cotton when most other commodities have gone ballistic.  If only the rest of the industry was as good as Target... Unfortunately, the unknown here is not what input costs are doing to COGS -- but rather how competitors and supply chain partners react when those that are not prepared; a) have too much inventory, b) are clearing it irrationally, and c) push back on supply chain partners to make margins whole.


TGT Management

"Cotton is up about 80%, synthetic fibers up about 50. So some pretty hefty cost increases. I would say as that translates into the garment, there's a lot of things that we can do to help mitigate that, whether that's where it's produced or efficiencies within manufacturing and how we're cutting the fabric, using different fabrications, so we're going through the motions of making sure right now that we're designing the best apparel but at the same time with our eye on those cost increases and trying to mitigate that. And then I do think some of that will get passed on in higher retails where they're warranted. We don't want to get to the place where we change the garments so much just to hit a price that they're not appealing and so we'll design them appropriate for what the guest wants and make sure that we charge accordingly."

Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation

Conclusion:  We’ve been pretty vocal about our view of Housing Headwinds and the data is now suggesting that the headwinds may actually be worse than our street-low expectations.  While Billy Ackman’s best idea might be to buy U.S. homes, ours certainly isn’t.  Substantial downside remains in the housing sector.


We’ve had both massive pushback and substantial amount of compliments on Hedgeye’s Housing Headwinds call, which was orchestrated by our Financials Sector Head Josh Steiner and his team.  Steiner gave his presentation on June 25th.  In that time period, the SP500 is up 11.2%.  Conversely, we have in the table below highlighted the stocks that Steiner was bearish on:


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 1 


Alpha anyone?


Setting aside my doing a victory lap on Josh’s behalf, the bearish case on housing continues to play out and be validated.  Even if Billy Ackman’s best idea is to buy U.S. Housing, ours still isn’t (email if you are an institutional client that wants to see Steiner’s 101 page presentation on Housing that lays out the bear case). 


Some recent data highlights from Steiner and his team include:


Housing Takes A Dive, but the Worst is Yet to Come ...

Today's two negative housing data points on mortgage applications and housing starts add to yesterday's lackluster housing market index report. Next week we'll get new home sales, which we expect to be anemic as well. The week after that we'll get Case-Shiller, which should show the largest sequential decline we've seen this year. We expect these headwinds will keep a lid on near-term upside in housing-related names.


Bigger picture, we think the trends we're seeing in today's data are consistent with both our cumulative displacement theory under which we expect housing activity to remain heavily subdued for the next decade and our outlook for material further downside in home prices throughout the rest of this year and 2011.


Mortgage Demand Falls Sharply As Rates Rise

MBA Purchase Applications fell 5% versus last week. The MBA's data showed that mortgage rates backed up by 18 bps WoW (4.46% versus 4.28% the previous week).  The effect was more pronounced in the Refinance Index, which plummeted 16.5% WoW in response to the rate move. 


The real takeaway from this series is just how high the elasticity of demand is to even modestly higher interest rates. A backup in rates to 4.46% from 4.28% took refis down 16.5% and purchase activity down 5%. The point is that if we've already seen the lows in rates put in from QE2, then there's no reason to expect to see any improvement going forward.


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 2


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 3


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 4


Housing Starts Plunge to New Lows

Housing Starts fell -11.7% to 519k in October, the lowest level since April of 2009. The September Starts print saw a large downward revision, taking the level down to 588 from 610. Permits inched up slightly in October to 550k from the revised level of 547k.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 5


Starts and Permits are correlated with New Home Sales (better than .90 r-squared over the last ten years), suggesting that this month's New Home Sales number released a week from today will be worse than last month.  Perhaps counterintuitively, there is not a lag in this correlation - Starts and Permits in a given month best predict the New Home Sales number that same month.  This implies that all three series respond to varying degrees of confidence in the housing market.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 6


While it is widely believed that permits lead starts, in fact, the two series move simultaneously.  The chart below shows both series back to 1959.  Clearly, by any historical standard, the current activity level is very low. 


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 7


Housing Market Index Essentially Flat

The National Association of Homebuilders (NAHB) released their monthly Housing Market Index yesterday.  The composite index rose one point to 16, but this was after a downward revision of the prior week. Excluding that revision the series was flat sequentially. Confidence remains extremely low is the bottom line.  The chart below shows the relationship between homebuilder confidence as measured by the HMI and single-family starts.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 8


Daryl G. Jones
Managing Director


Josh Steiner, CFA

Managing Director


Allison Kaptur


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TODAY’S S&P 500 SET-UP - November 17, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.11% downside to 1177 and 0.99% upside to 1190.  Equity futures are trading higher tracking a rebound in European equities. The developments on the Irish debt situation are being closely watched, with a joint European-IMF team expected to visit Ireland to prepare for a bailout.


In important economic data today: October CPI, October Housing Starts and October Building Permits.

  • Bob Evans Farms (BOBE) boosted year oper. income forecast to $108m-$112m (ex $13.9m charge) from $105m-$110m
  • Comerica (CMA) boosted dividend to 10c-shr from 5c-shr, said it will buy back up to 12.6m shrs
  • CVR Energy (CVI) said shareholders including affiliates of Goldman, Kelso will sell 15m shares in secondary offering
  • Giant Interactive (GA) reported 3Q rev. $50.6m vs est. $50.9m
  • Human Genome Sciences (HGSI), along with GlaxoSmithKline, won FDA advisory panel backing to sell Benlysta lupus drug
  • Woodward Governor (WGOV) forecast 2011 sales $1.55b-$1.65b, vs est. $1.53b


  • One day: Dow (1.59%), S&P (1.62%), Nasdaq (1.75%), Russell 2000 (2.03%)
  • Month-to-date: Dow (0.85%), S&P (0.42%)%, Nasdaq (1.50%), Russell (2.03%)
  • Quarter-to-date: Dow +2.18%, S&P +3.25%, Nasdaq +4.27%, Russell +4.31%;
  • Year-to-date: Dow +5.71%, S&P +5.67%, Nasdaq +8.84%, Russell +12.78%
  • Sector Performance: Materials (2.16%), Energy (1.87%), Tech (1.81%), Financials (1.67%), Industrials (1.61%), Consumer Disc (1.36%), Healthcare (1.45%), Utilities (1.16%), Consumer Spls (1.11%).
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Urban Outfitters +11.73%, Mattel +3.27% and Honeywell +1.79%/First Solar -6.42%, Jacobs Engn -5.04% and Kimco Realty -5.03%.


  • ADVANCE/DECLINE LINE: -2249 (-2604)  
  • VOLUME: NYSE - 1354.34 (+53.99%)
  • VIX: - 22.58 +11.78% - YTD PERFORMANCE - (+4.15%)
  • SPX PUT/CALL RATIO: 1.80 from 1.46 +23.24%  


  • TED SPREAD: 15.35 -0.304 (-1.943%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.34 from 2.39


  • CRB: 296.22 -3.20%
  • Oil: 82.34 -2.97% - BULLISH
  • COPPER: 373.10 -4.93% - BULLISH
  • GOLD: 1,337.35 -2.51% - BULLISH


  • EURO: 1.3486 -0.94% - BEARISH
  • DOLLAR: 79.210 +0.88%  - BULLISH



European markets:

  • FTSE 100: (0.13%); DAX +0.37%; CAC 40 +0.47%
  • Shares are trading slightly positive following a weak open and a poor show yesterday and as the market waits for a resolution to Ireland’s debt situation.
  • Further support comes from GlaxoSmithKline after it found support for its key lupus drug.
  • Technology, banks and Insurance sectors are among the gainers today, while Telcos, Retail sectors are weak.
  • UK Sept ILO unemployment +7.7% vs consensus +7.7% and prior +7.7%
  • UK Oct claimant count (3.7K) vs cons. (5.0K)
  • BoE minutes: 7 MPC members voted for unchanged policy In Nov
  • Posen voted for £50B more QE, Sentance voted for 25bps rate hike

Asian markets:

  • Nikkei +0.15%; Hang Seng (2.0%); Shanghai Composite (1.97%)
  • Asian markets apart from Japan followed the US and Europe down today.
  • Resource shares fell on lower commodity prices.
  • Japan fell at the start of the day, but a weaker yen encouraged dip buying and allowed the market to finish barely up. Megabanks outperformed the market.
  • South Korea darted in and out of positive territory but ended down on the day.  Shipbuilders gained after falling yesterday.
  • Resource shares led Australia lower by (1.62%).  Qantas fell 2% as another airplane turned around in midflight, this time after a problem with its electrical system.
  • Blue chips extended China’s recent decline on a report that Premier Wen Jiabao said the government is preparing steps to fight inflation.
  • Hong Kong fell again on fears of higher interest rates in China.
  • Singapore and Indonesia were closed for Hari Raya Haji and Idul Adha, respecitvely.
  • Japan September revised composite index of coincident economic indicators (1.2 points) m/m to 102.1 vs preliminary (1.3 points) m/m.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













TGT: Bullish Quote of the Day

Target's 3Q press release includes the bullish quote of the day:


"Based on our merchandising and marketing plans, combined with the expected impact of REDcard rewards and our newly completed remodel program, we expect Target’s fourth quarter comparable-store performance will be the best of any quarter in the last three years.”


So what does that mean exactly? Expect same store sales to exceed the prior three year peak comparable store sales performance of 2.8% achieved in 1Q10. While a low to mid single digit comp was once commonplace for TGT, this confidence has been elusive for at least three years. Interestingly, both WMT and TGT expect to see a sequential acceleration (with confidence from both) in sales during the most promotional, competitive, and IMPORTANT quarter of the year.


More details to come from the 10:30AM conference call, but it's safe to say that this commentary may have taken some of the suspense out of CFO Doug Scovanner's quarterly guidance ritual. 


Eric Levine



The Macau Metro Monitor, November 17th, 2010



CEO Chui said yesterday that the government  will monitor more closely its auditing of the casinos, enhance gaming-related laws and regulations, and restrict the opening of new casinos through measures like a cap on tables.  IM thinks the a tighter supply policy is good news for SJM and MGM Cotai ambitions.  The bigger news is the Great Handout:

  • 5,000 patacas for every elderly person;
  • 4,000 patacas for permanent residents;
  • 2,400 patacas for non-permanent;
  • 1,500 patacas for students with Macau identity cards;
  • 6,000 patacas for every central provident fund account;
  • 25% tax reduction;
  • Medical voucher worth 500 patacas for all permanent residents;
  • Rent subsidies for low income families awaiting public housing; and
  • Pay rise for civil servants.

IM thinks the new cash handout  is a positive step towards a looser policy on labor imports and steady growth prospects for Macau.  While noting that the cash handout is lower than the one instituted from the March policy address, Chui said the new scheme "is no longer part of a temporary policy. We want to provide long-term protection."  The cash handout will be launched in early 2011, instead of the usual Summer distribution.


Chui repeated his previous commitment to build 19,000 public flats by 2012 and the creation of a task force to establish the ceiling income to buy affordable housing.  He said the Government will try to maintain a stable and healthy real estate market by curbing real estate speculation.   "Up to 72% of Macau residents own properties; we want to prevent a real estate bubble," he said.


VIP promoter, Asia Entertainment & Resources Ltd, has completed its acquisition of KGP, King's Gaming Promotion.  KGP had operated one room with five tables at the Venetian Macao, gneerating US$129MM per month under a fixed 1.25% commission rate.


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