The UK Finally Prints A Downtick In Inflation

Producer Prices in the UK for the month of August came in well below expectations. In fact, this was the largest sequential (month over month) drop in prices in 22 years (see charts below).

Dropping -0.6% sequentially is better than bad, but it's important to keep in mind where these prices are falling from! The charts below show 1 "Trend" line inflation. Output prices are still close to +10% year over year.

Europe is starving for relief in headline economic reports however. This should feed them, for a day.


Sunday newspapers are the coupon source for more than half of American households, according to Scarborough Research. Many companies have responded to sluggish consumer spending by boosting the volume of "coupon drops" in Sunday newspapers around the country. During the first six months of this year, manufacturers delivered more than $173 billion in consumer incentives through 129 billion coupons in Sunday newspapers nationwide. Retailers' participation in freestanding insert promotions increased 31.3% YoY.

A McDonald’s “Flavor Saver” coupon Book was in this weekend’s NY Times -8 individual coupons in English and Spanish. The NYT Sunday circulation is 1.6 million. The coupons are for:

$2 off: Southern Chicken Sandwich extra value meal ($1 off in Manhattan)
$3.49: 20 pc Chicken McNuggets ($3.99 in Manhattan)
$2 off: Angus Third Pounder Extra Value Meal ($1 off in Manhattan)
Two Coupons: Buy any Bagel or McGriddles sandwich get a second free
$1 off Southern Style Chicken Biscuit
Two Coupons: Buy any Large Sandwich (Quarter Pounder with Cheese, Big Mac) and get a second free

Couponing is never good for profitability, but it’s clearly a sign of the times.

Don't Forget

It’s ‘Macro Time’, and now we have ourselves what I like to call ‘some pin action’ out there! Right on time, as earnings season melted away, volume and volatility have melted up. Feet on the floor – it’s time to find the new order of free market winners and losers on Wall Street!

Hank Paulson isn’t much of a free market type anymore – but hey, no one ever accused politicians of being free market capitalists. The current Republican Administration is drawing on the “wisdom” of a man who oversaw the creation of massive leverage and liquidity risks while he was getting paid as an investment banking CEO at Goldman Sachs. I have to give credit where it’s due, this man is getting good at painting both sides of the political fence. But at the end of the day, don’t forget that he’s all for privatizing profits, and socializing losses!

Founder and retired CEO of Vanguard, Jack Bogle, was suggesting something along those lines last week in an interview, so I can’t take credit for my negative view on ole Hank all on my own. What I can do, however, is thank Paulson for the “Trade”. With the S&P 500 at 1219 at 10:57AM on Friday, I wrote a note to our clients (time stamped on our Portal for transparency/accountability purposes), to get long the US market for a “Trade” at oversold capitulation lows.

Why is it that people capitulate? Rather than pontificate on as much, it is best to go back to the bookshelf where Richard Peterson has done some of the best work on the neuro-chemical realities associated with the brain’s decision making process. In his 2007 book titled “Inside The Investor’s Brain”, Peterson wrote a great chapter called “Framing Your Options” that debunks why humans consistently revert to panic selling.

Peterson explains that “when strong emotions take hold, they overwhelm the pre-frontal cortex and drive thinking… strong fear, and the physiological effects of stress hormones, will predispose one to catastrophic thoughts of further declines.” This is exactly what happened on both July 15th, and September 5th of 2008, when the S&P 500 registered intraday panic lows of 1201 and 1218, respectively.

Fortuitously, I am in print with “buy” notes on both of the aforementioned days. Call me lucky, or call me right – I am indifferent. In this business, unfortunately, you don’t get paid unless you remind people of facts. There is no NFL Sunday Instant Replay – or should I say there wasn’t. That’s why we have created the “Hedgeye Portfolio” – accountability is what investors want, and I am all in for that. As proud as I come across to you when we are winning, is as harsh as I will be on myself when I am wrong. That’s not my politics. That’s just how I have always played games where I have a passion. Every day, we wipe the slate clean.

Hank Paulson is telling the world he is stop-gapping the bleeding in US Housing, and starting anew. The problem, of course, is that his solution is an immediate term “Trade” to “stabilize financial markets”. The intermediate “Trends” in US Personal Savings, Leverage, and Housing will be revealed in the next 6-9 months, and the likelihood of his sticking around to see it through is a big question in my mind. With McCain overtaking Obama in the Gallup polls this weekend, odds go up that Paulson keeps his job. That scares me.

When Paulson gets on TV again today and tells you his government bailout plans are the right ones, don’t forget that this is the same man who told you that the “worst of the credit crisis is behind us” five months ago. Don’t forget that he did not proactively prepare his former investment banking firm for this global financial tsunami. Don’t forget to keep this market’s up move from Friday’s lows a “Trade”.

I have an upside target for the S&P 500 of 1277.56, and that’s where I’ll start selling again.

Good luck out there this week,

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These guys have really upped the ante from a marketing standpoint. Much more targeted than I've seen from Hanes this decade. For those bears who think that Gildan is going to take over HBI at Wal*Mart, think again.
Big consumer-direct email campaign for new product at sharp price points (perhaps too sharp?).
Big consumer-direct email campaign with TV backup and internet viral marketing.

Clarification on COH from Tourist Post

Only $20mm/yr (<1% of sales) comes from the NYC flagship. The 12% previously noted is for TIF . The point about 18% of COH stores in travel markets is correct. Apologies for any misunderstanding.

Notable Cotton Development

Here’s a great cotton overview by Andrew Barber. It smells bad from an apparel standpoint (the trend, not the analysis!). India, which accounts for 15-20% of global cotton production, also has the lowest yield of any cotton-producing country. With 60% of the population (more than 2x the entire US population) tied directly to agriculture, and with social unrest building meaningfully in 2008 to a point that almost cost Singh the election, he needs to appease the masses. As such, he backstopped the cotton farmers with a 48% price increase vs last – despite the fact that India’s prices are already 15% above the global market price. The massive Indian textile industry is bracing itself as it has already felt the pushback from China and other major partners before this increase. I still think that the worst has yet to come from input cost pressure in this industry – nevermind the strengthening dollar. I sound like a broken record, I know, but next year’s estimates are still too high. I continue to like RL, FL, LIZ, TBL, KSWS, PSS and ZQK. I don’t like GES, WRC, SKX, GIL, DKS, PVH, and VFC.

Brian McGough

Last week the Indian Government increased price guarantees for cotton farmers by up to 48% over last season, creating a back-stop price of 3,000 INR per bale of long staple and 2,500 INR of medium Staple via the federally controlled Cotton Corp. of India. Cotton prices have already been under pressure as total hectares planted for this season declined 2% from last year as farmers shifted to food staples such as rice to capture skyrocketing prices. Critics are charging that this increase will raise domestic prices for cotton above the current global average.

A question of Yield: Manmohan Singh’s populist socialist government is obliged to provide this level of price protection to the nation’s 4.5 Million cotton farmers to maintain political support among the rural poor. For India’s farmers, every rupee counts: although improved technology (most notably the introduction of Monsanto Bt seeds) and irrigation have helped increase crop yields from 300kg per hectare five years ago to 560kg last year, Indian yields still lag every other major global producer significantly. Put plainly, Indian farmers realize smaller returns for their labor than their competitors abroad. In a socialist nation were 60% of the population is employed in agriculture that creates pressure for the government to intervene, particularly an administration that has barely survived a recent parliamentary vote.

Exports: India is the second largest producer of Cotton on earth but, thanks to its huge textile industry they remain a less significant player in the global export market than smaller producers such as the US and Brazil. Not surprisingly the biggest buyer for Indian Cotton exports is China, and rising prices and lower yields have already been felt by buyers there.

Textiles: The price increase raised howls of protest from textile industry groups. P.D. Patodia, chairman of the Confederation of Indian Textile Industry, was quoted in the Indian media on Thursday saying “It has come as a rude shock to the industry in the throes of a crisis; domestic prices are already 15% higher than international prices. This would trigger another price spiral which the industry will not be able to afford."

The textile industry argument is, basically, that the slowing trajectory of textile sales growth for Indian mills has been more than offset by increasing Chinese demand for raw cotton and that increasing the domestic price of fiber now will put Indian textile and apparel manufacturers at a grave disadvantage with competitors for their two key markets, the US –which has already provided preferential status to Central American producers, and Europe.

Andrew Barber

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