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Fed Fighting: Bernanke Obfuscates

POSITION: Long US Dollar (UUP), Short short-term Bonds (SHY)

 

Here’s The Ber-nank’s key statement:

 

The Fed “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

 

Here’s reality in the most important part of the US equity market being infused with unprecedented Big Government Intervention: 

  1.        Financials (XLF) – November 1st-5th  = UP +7.1%
  2.        Financials (XLF) – November 5th-23rd = DOWN -7.5%
  3.        Financials (XLF) – November 30th-December 14th = UP +8.8 

All the while, commodity inflation is putting on massive moves to the upside and there are very few things trading with more volatility than the price of volatility itself.

 

On the score of “price stability”, Bernanke has effectively become the world’s running joke. He doesn’t get real-time markets or how he affects them. That’s scary.

 

We’re Fed Fighting (Long UUP, Short SHY) because we think that Big Government Intervention perpetuates market volatility and shortens economic cycles. Why? That’s simple – people don’t trust government’s long-term resolve in the face of short-term politicking.

 

While the aforementioned language is meant to obfuscate fact from storytelling, we don’t think that either the US Dollar or US Treasury market is suffering any fools right now. They get it. Pull up some 6-week charts.

 

On “subdued inflation trends”, we’ll refer Bernanke to the inflation that’s on your screen.

KM

 

Fed Fighting: Bernanke Obfuscates - 1


RETAIL SALES

Conclusion:  Retail sales came in strong today.  However, it is important to note that, on an absolute basis, the number is below where it was three years ago.

 

On the back of the strong retail sales numbers, I want to continue with my theme from Monday's Early Look titled, “The Pursuit of True Wisdom.”

 

As it related to the consumer spending it’s an appropriate time to reflect upon (1) What has transpired? (2) Where are we headed? and (3) What is left undone?

 

First some details.  Retail sales jumped 0.8% in November in total, on top of an upwardly revised 1.7% gain in October.  Clearly, the consumers have clearly picked up the pace of their spending (on the heels of increased optimism as the market heads higher); sales less autos growth was even steeper in November at 1.2%, up from 0.4% last month.  Is the potential for pent-up demand real?

 

Sales in November were strong (up for the 4th consecutive month) in nearly all categories outside of housing-related segments.  Top-line sales growth have risen at least 0.8% in each of the last four months and averaged 1%.

 

Growth in November was led by gas stations (+4%), department stores, apparel stores (+2.7%), sporting goods and hobby stores (+2.3%), and nonstore retailers (+2.1%).   On the declining side Motor Vehicle& Parts (-0.8%), furniture stores (-0.5%), electronics and appliance stores (-0.6%), and building supply (-0.01%).  Restaurants were another noteworthy laggard, up only 0.1%.

 

What has transpired?

  1. Income is improving
  2. The consumer has deleveraged but will continue to do so at a slower pace
  3. Debt payments have declined dramatically
  4. Stock market gains are also lifting the spending of higher-income households
  5. Pent-up demand is being released

 

Where are we headed?

  1. Year-over-year growth is likely to slow because comparisons get much more difficult.
  2. House prices are falling again, contributing to consumers' continuing need to rebuild their balance sheets
  3. Rental income is up, likely as a function of the soft housing market
  4. Consumers are doing little borrowing
  5. In this environment, spending will continue but it is unlikely recent growth is sustainable

 

What is left undone?

  1. Additional support will come next year in the form of reduced taxes and increased unemployment insurance benefits if the tax compromise passes
  2. Unemployment is high, and job gains have not been consistent enough or sufficient to put any downward pressure on the unemployment rate

The strong November growth, combined with upward revisions to the prior two months, shows sales growing at a 13% annualized pace over the last four months.  However, some perspective is in order. Even following this period of outsize growth, sales remain slightly below the November 2007 peak.  In essence, sales are at the same level they were three years ago.

 

While November 2009 was the first month of year-over-year sales growth following the recession, growth was only 1.8%; it grew to 5.5% in December and topped 8.5% and 8.7% in March and April, respectively.

 

Howard Penney

Managing Director

 

RETAIL SALES - retail sales nov



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China by the Numbers

Conclusion: The latest round of Chinese economic data suggests inflation remains a headwind and that a reining in of credit expansion and additional interest rate hikes are in China’s intermediate future. Further, the data is supportive of our assertion that QE2 will incrementally slow global growth.

 

Position: Long Chinese Yuan (CYB); Long the U.S. Dollar (UUP); Short U.S. Equities (SPY)

 

Chinese November inflation data came in hot [again] over the weekend. CPI accelerated to a 28-month high of +5.1% YoY and PPI also quickened substantially to +6% YoY – a +100bps sequential uptick. In line with our call since late-August, we’re seeing more confirmation of accelerating inflation globally as a result of the Fed’s weak-dollar policy (QE2) – a term we aptly named Quantitative Guessing.

 

China by the Numbers - 1

 

While economists continue to spend hours debating whether China’s “artificial devaluing” of the yuan is perpetuating inflation within its borders, the real truth that matters to market practitioners is that inflation is accelerating globally, across a spectrum of currency policies. Don’t take our word for it, however; pull up a chart of Brazilian or U.K. CPI, global bond yields, or the CRB Index, which just hit a new YTD high yesterday.

 

Turning back to China specifically, we are inclined to suspect further tightening may be on the horizon. China has been varied in its efforts to combat inflation and speculation YTD, including raising bank reserve requirements (as recently as 12/10) , restricting home loans, forcing banks to hold more FX, price controls, supply rationing and raising interest rates (10/19). Despite these measures, we feel China may be running out of room for further “cuteness” and that additional interest rate hikes are on the way in 1H11.

 

Looking at real 1-year deposit rates, we see that inflation is consuming Chinese savings at an accelerating rate. In November, Chinese savers effectively paid a 2.6% tax on their 1Y savings deposits - even with October’s 25bps rate hike factored in.

 

China by the Numbers - 2

 

Considering that inflation has been, on the margin, eroding China’s high household and corporate savings (a combined 42.2% of GDP), it’s no surprise to see that China continues to struggle to rein in property prices as those savers turn to real estate investment on the margin. National Property Prices (70 cities) continued to grow in November, climbing +0.3% MoM.  Although, on a YoY basis, growth in Chinese Property Prices continued to slow sequentially (+7.7% YoY in November vs. +8.6% in October).

 

China by the Numbers - 3

 

While the pace of YoY growth has been slowing lately, the persistent MoM gains of late continue to defy China’s efforts to dampen speculation in its real estate market. Further resiliency of property prices will likely necessitate incremental rate hikes or the implementation of the oft bandied about national property tax trial.

 

Further compounding China’s inflation woes is the rate at which new loans are accelerating, gaining 564B yuan in November vs. advancing 587.7B yuan in October. While the second-derivative slowdown is welcomed by Chinese officials, the rate of growth in November far exceeds the average monthly growth needed throughout November and December to achieve China’s official loan growth target of +7.5 trillion yuan ($1.1 trillion) for full-year 2010 (+308.9B yuan). As a result, new loans must not exceed 53.8B yuan in December in order for the target to be met – a low not seen since October ’06!

 

China by the Numbers - 4

 

All in all, we feel the confluence of inflation eroding savings (which causes Chinese savers to speculate with their assets on the margin) and robust loan demand will continue to put upward pressure on Chinese inflation data, absent any meaningful policy changes. The global commodity reflation brought on by Quantitative Guessing further supports our conclusion that further rate hikes may be on the horizon in China.

 

It’s important to keep in mind that China is not alone in its bout with inflation. As Bernanke and the Fed continue to pursue a weak-dollar policy via QG, there’s no reason to expect commodity prices to come down meaningfully in the near term, which will put upward pressure on both core and headline CPI readings globally (COGS inflation will likely get passed through to consumers).

 

An interesting anecdote there is that Kunming, the capital of China’s Yunan province, recently ordered five retailers including Wal-Mart to report and justify price increases two days before the changes.  Should price controls accelerate on the margin, look for retailers exposed to China to suffer margin compression in 1H11 as topline growth potentially slows (vis-à-vis slowing GDP growth).

 

In turn, elevated inflation readings will continue to lead to further tightening globally, which will weigh on global growth in 2011. Keep the equation below in mind as you ponder the real effects of QE2 vs. what the Fed would have you believe:

 

QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

 

Darius Dale

Analyst


Berlusconi Wins, Berlusconi Wins

Round-up of today’s data: Berlusconi wins Confidence Vote; Bullish German ZEW survey; UK CPI accelerates; Spain’s Pain continues; Portugal bows to the client (China)

 

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)

 

Viva Berlusconi!?

Italian Prime Minister Silvio Berlusconi won a no-confidence vote today, capturing the upper house easily, but winning by a slim majority of 314 votes to 311 in the lower house. As we noted in our post yesterday titled “Silvio’s Black Eye”, despite the victory, Berlusconi’s slim majority should only prolong Italy’s Crisis in Confidence and increase the risk that Italy struggles to finance and meet its debt obligations next year.

 

Position: Short Italy via the etf EWI. Current public debt projections mark Italy’s debt at ~120% of GDP. Next year, Italy is rolling up against a substantial €350 Billion in government debt maturities (principal + interest) and we’re of the opinion that the market will increasingly punish its fiscal imbalances alongside continued political uncertainty with Berlusconi at the helm. YTD we’ve seen a steady rise in the country’s risk premium via credit spreads and yields, and a more parabolic move alongside Ireland’s funding assistance over recent weeks.

 

Berlusconi Wins, Berlusconi Wins - me1

 

 

Bullish German Sentiment

 

The German ZEW economic sentiment survey showed confirmation of a positive outlook for the next 6 months in Germany, rising to 4.3 in December from 1.8 in November, with improvement over the last two months. The current situation index also gained, registering 82.6 in December versus 81.5 in the previous month.

 

Berlusconi Wins, Berlusconi Wins - meee2

 

Position: Long Germany via EWG. We continue to like Germany’s fundamentals that present a strong dichotomy from most of its European peers. Germany’s strong exporting and industrial complex continues to get orders, especially from China. Unemployment has trended lower this year, currently at 7.5%, and the DAX has powered forward at 17.8% YTD.

 

 

UK’s Inflationary Dilemma

 

UK headline CPI registered 3.3% in November versus the previous year, an acceleration from October’s rate of 3.2%.  With inflationary signals from November PPI (input and output) published in the last days, it came as no great surprise that headline CPI also rose. We think the UK’s inflationary issues are well documented; however the BOE still seems quite divided to make any policy changes. The dilemma remains that an additional bond purchasing program would encourage inflation, while increasing the main interest rate could threaten growth. The Bank’s consensus may well remain to do nothing for the next months.

 

Berlusconi Wins, Berlusconi Wins - me3

 

 

Spain’s Pain

 

Today we saw a similar trend in Spain’s bond auctions, namely the increased yield premium to entice investors, a trend also seen across auctions from Europe’s fiscally weaker countries.  Spain issued nearly €2 Billion of 12M bonds at 3.449% versus 2.363% on November 16th.  €523 Million of 18M bonds were also sold at 3.721% versus 2.664% in November.   We’ll have our eyes on Spain’s auction this Thursday with maturities in 2020 and 2025 to be issued.

 

 

Portugal at China’s Hand

 

Portuguese Finance Minister Fernando Teixeira dos Santos completed a two-day visit to Beijing  to meet with Chinese Finance Minister Xie Xuren, Chinese central bank Governor Zhou Xiaochuan, and officials of China’s state administration of external reserves to strengthen relations as Portugal hopes to get additional financial support from China.

 

Teixeira dos Santos said, “We took a big leap forward in terms of strengthening our relations at all levels, commercial and investment, and also in the area of financing,” however did not specify the amount of Portuguese treasury securities that Chinese institutions have already bought or will buy.

 

Take-away: Going to the Client (China) is an interesting move as Portugal attempts to get the media’s spotlight off its sovereign debt issues. Notwithstanding, we do not believe Portugal can escape the market forces that punish countries with excessive debt leverage and political instability.

 

Matthew Hedrick

Analyst


R3: COST, DDS, OSTK, Groupon

R3: REQUIRED RETAIL READING

December 14, 2010

 

  

 

RESEARCH ANECDOTES 

  • While China remains a key growth market for many western brands,  there are some that actually have a disproportionate amount of doors already open.  It turns out that Versace just celebrated the opening of its third jewelry boutique in Beijing, which keeps the luxury brand on track for having 67 stores in China by year end.  Interestingly, this compares to just 10 locations in the U.S.  Sounds like Versace is taking its cues from Yum Brands!
  • While Groupon continues to be the talk of the town stateside, it’s actually growing at a furious pace outside of the U.S.  In just this year alone, the company’s footprint has expanded into 35 countries from just one.  Approximately 52% of Groupon’s website visitors are coming from Europe, 33% from North America, 12% Latin America, 2% in Asia, and .2% from the Middle East/Africa. 
  • According to new data from Comscore, holiday spending online between November 1st and December 10th  has increased by 12%.  Trends over the last week were up 11%.  Free shipping continues to be a key driver of e-commerce and holiday growth, with a full 50% of transactions over the past three weeks including a free shipping component.

OUR TAKE ON OVERNIGHT NEWS

 

Supreme Court Backs Ruling on Costco Copyright Case- Discounters, beware. The Supreme Court’s narrow decision on Monday to let stand an appeals court ruling that found Costco Wholesale Corp. liable for copyright infringement when it sold Omega watches at heavily discounted prices without the Swiss company’s authorization has broad implications in the fashion world. The court’s ruling could have a significant impact on discount retailers and off-price merchants that often purchase imported goods from middlemen and distributors at lower prices, rather than buying direct from a manufacturer or its authorized U.S. distributor. These retailers then sell the products in the U.S. below the brand’s official price, legal experts said. Experts said the Supreme Court’s ruling now will make it harder for retailers to engage in this technique. It also will hit online auction sites such as eBay, they said, because gray market goods are often sold on the site and it could be held liable But while the high court’s decision was a blow to retailers, it was a victory of sorts for brands. The decision upholds a company’s right under U.S. copyright laws to regulate the distribution, price and resale of products that are made overseas and reimported to the U.S.  <WWD>

Hedgeye Retail’s Take: No question that this deals a blow to those procuring goods from a third party and selling them below manufacturer’s suggested retail prices.  While this likely means less “deals” for the consumer at off-pricers, discounters, and private sale operators, it also suggests that when the consumer actually sees a deal it will have been “approved” by the brand itself.  Additionally, the middle man loses out on alternative distribution as they will now be under even greater scrutiny. 

 

Neiman's Shuffles Buying Staff - Neiman Marcus, in a sweeping realignment of the responsibilities of its top merchants, has put senior vice president and general merchandise manager Jonathan Joselove in charge of designer sportswear, couture, handbags, women’s shoes and accessories. Ann Stordahl, executive vice president and general merchandise manager, will oversee precious jewelry, designer jewelry and beauty. For many years, Stordahl handled all women’s apparel, including designer sportswear and couture, intimate apparel, coats and furs, while Joselove oversaw beauty, coats, handbags, ladies shoes and accessories. In addition, Lisa Kazor, senior vice president and gmm, will be responsible for designer II, which is Neiman’s designation for bridge sportswear; St. John; contemporary sportswear; dress collections; furs; coats; intimate apparel, and children’s. Previously, she had the gift galleries, precious jewelry, designer jewelry, intimate apparel and children’s. Russ Patrick, senior vice president and gmm, will be responsible for men’s, gift galleries and the Cusp division, which operates freestanding stores and shops inside Neiman’s stores, both of which sell contemporary sportswear and accessories. Patrick previously oversaw men’s and Cusp. Neiman’s is examining Cusp to see whether it becomes a rollout strategy or not. <WWD>

Hedgeye Retail’s Take: Management changes as a precursor for an IPO?  With minimal growth prospects, something will have to be different if one of the most expensive takeouts in retail history is going present well on the road.

 

Dillard's to Launch Cremieux Women's Line - Poised, stylish and approachable, Alexandra Dillard looks to be just the type of customer who will take to Cremieux’s new women’s collection. As brand manager, Dillard, whose father, Alex, is president of the company, is championing this collection, which she described as having “a modern fit and is a little more dressy than casual,” and should compete with labels such as Michael Kors and Kenneth Cole. While the exclusive Daniel Cremieux label has been a men’s wear top performer in the Dillard’s stable for 10 years, this spring will mark the debut of the women’s Cremieux line.  Going forward, the men’s line is being marketed as Cremieux to keep everything in sync. To get shoppers excited about next month’s launch, there will be outdoor advertising, colorful in-store signage, online ads, catalogue placement and e-mail blasts. The fact that many Dillard’s shoppers are familiar with the name, which is also used for home items, should help generate interest, she said. “We are trying to trade off the base of Cremieux customers who are familiar with the label, know that it offers fashion and comfort and that it is exclusive with Dillard’s,” said Dillard, adding that luggage will be introduced this spring. <WWD>

Hedgeye Retail’s Take: Often off the radar screen of many investors, Dillard’s appears to be working harder to differentiate its merchandise.  Even more interesting is that the company made a recent appearance at an investor conference after staying away from face-time with potential investors for several years.

 

Denim Makers Seeking Next-Generation Fabric -Sustainability was front and center at the two-day Denim by Première Vision salon held at La Halle Freyssinet. Volatile cotton prices were among the factors helping to raise the profile of sustainable alternatives such as recycled denim and cellulose-based fibers. “It’s definitely the season to add Tencel and Modal, which previously have been regarded as premium fabrics,” said Gayle Johnston, head of women’s wear fabric trends and sourcing at Marks & Spencer, which has a major sustainable program under way. Denim guru Adriano Goldschmied said a “widening of vision” will be necessary for the denim industry. “[In the future], jeans could be made out of milk, a tree or bamboo,” Goldschmied said. “Cotton can be a component of that…but there are amazing things that are giving a new look to denim.” He cited as examples Cupro, MicroModal, Tencel, viscose and rayon. <WWD>

Hedgeye Retail’s Take: Between the growing shift toward green/sustainable practices by industry pioneers and the rising cost of cotton, customers will come to expect an introduction of several new alternative materials in the coming year.

  

Avril Lavigne Sings New Fashion Tune - Avril Lavigne is getting ready for her solo act in fashion. Two years after launching her juniors line Abbey Dawn exclusively at Kohl’s, the entertainer is branching out on her own to sell her rock-inspired tops for men and women directly to customers on the Web and in boutiques worldwide. Working with San Diego-based manufacturer Blank Generation, Lavigne is launching Abbey Dawn’s e-commerce site on Friday, a month before she begins wholesaling to shops such as Trash and Vaudeville in New York and the 14-store Blue Banana chain in the U.K. By introducing monthly mini collections of new product throughout next year, Lavigne is ramping up for the spring 2012 debut of a full-fledged juniors fashion line with sportswear, denim, swimsuits, dresses, loungewear, activewear, shoes and handbags. “[Kohl’s] was a great way to start my line and a great home for it for two-and-a-half years,” said Lavigne, 26, curled up on a purple velvet couch before practice with her band in a San Fernando Valley recording studio. “The thing with me is…I really want my clothes to be available internationally.” <WWD>

Hedgeye Retail’s Take: A bold move by the young entrepreneur to drop the department retailer in order to pursue global reach – the reality is however, no time is like the present to take a shot on her apparel line with music still Lavigne’s primary revenue generator.

 

Overstock.com to Open Tech Center in 2011 – Overstock.com Inc. says it will open a software development center in early 2011 in Provo, UT. The company says it expects to hire 150 software developers to staff it. “We are expanding our tech presence in Utah and actively recruiting. We have more innovation in the pipelines than we have developers,” says Overstock.com president Jonathan Johnson. The company is offering individuals who refer qualified software developers $5,000 if Overstock hires the workers and they stay at Overstock for at least 90 days. The company says it expects to hire 100 developers within a year. The e-retailer employs more than 1,500 people in Utah through a call center and three other facilities.<InternetRetailer>

Hedgeye Retail’s Take: One of the more aggressive internal growth plans we’ve heard about over the past year, OSTK is clearly geared to ramp SG&A investment in ’11. After missing expectations in 4 of the last 5 quarters, a focus on organic growth is not the quickest path to reaccelerate top-line growth, but arguably the most sustainable.

 

Sen. Schumer Calls for Online Restocking Fee Investigation - A U.S. senator has called on the Federal Trade Commission to pressure retailers to disclose fees charged consumers for returning products bought online. Charles Schumer, a Democrat from New York, sent a letter to the FTC asking the agency to investigate what are commonly called restocking fees for returned goods. “I urge you to investigate whether the failure to disclose restocking fees online could constitute a deceptive trade practice, and to take swift action to crack down on it,” the letter states. “Consumers deserve to know if these charges will apply prior to a purchase.” <InternetRetailer>

Hedgeye Retail’s Take: With e-commerce accounting for a larger portion of holiday spend, this issue is sure to come into greater focus following the holidays when recipients realize the fees associated with returns. As a case in point, <$1,000 computers can generate more than $200 in return/restocking related fees alone, a material portion of ticket product value.

 

 


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