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STRAIGHT SHOOTING IN JOLIET

PENN management throws a wet blanket on 2011 regional growth expectations.

 

 

At the grand re-opening of Hollywood Casino Joliet, Penn National's president and COO, Tim Wilmott, said PENN is not expecting a better 2011 for the casino business.  He stressed that unemployment and plummeting housing values will continue to depress spending.  We've consistently shown these two variables are the most critical in assessing regional gaming revenues.  As we mentioned in our note, "REGIONAL GAMING HEAD FAKE?" (12/23/10), we haven't seen clear evidence of a recovery in the regional gaming market, despite the October head fake.


Natural Gas Seasonality, Or Lack Thereof

Conclusion: There is a noted lack of seasonality in natural gas prices this year, which we view as a bearish leading indicator.

 

There is no shortage of prognosticators on commodity prices who are bearish on the price of natural gas heading into 2011. As I sat in my hotel room in California yesterday watching CNBC, two things were obvious after listening to much of the commentary. The consensus is to be long U.S. equities and short U.S. natural gas. Since we are currently short the SP500, we disagree with the former, but on the latter we’ve been consistently bearish on natural gas prices for most of 2010. Currently, seasonal prices moves, or lack thereof, seem to be supporting this view.

 

Since 2000, natural gas prices (based on the Energy Information Administration’s wellhead price) have shown a consistent seasonal pattern. In 9 of the last 10 years, from 2000 - 2009, natural gas prices have increased from October to December. On average the price increase from the full month average in October to the full month average in December has been 15.5%. Clearly, we’ve seen meaningful seasonal moves as the weather starts to get cold heading into December.

 

While the EIA hasn’t reported their wellhead prices for October or December yet, if we look at their reported front month contract prices, it becomes clear that this normal seasonality is not occurring this year. On October 1st the front month contract for natural gas, according to the EIA, was priced at $4.04 per Mcf and as of yesterday the front month contract was priced at $4.06 per Mcf according the EIA. Seasonality? Not so much.

 

This lack of seasonality is likely a signal that the market remains in imbalance and will remain so heading into the winter. Some of the recent data points, which we’ve previously highlighted, support this. Specifically:

 

Supply - Currently, natural gas in storage is 8.5% above the 5-year average with 3,368 Bcf in storage. This is obviously a bearish amount of natural gas in storage, though it is down about 1.6% on a year-over-year basis, but remains well above historical norms.

 

Production – Our energy Sector Head Lou Gagliardi has written about this point extensively, but the growth of production in the United States continues to be one of the most overriding bearish factors for natural gas price. With seemingly little concern for the growth of supply, major E&P companies continue to invest in the natural gas industry in the United States, especially in the various shale plays. In fact production growth is so high that the Department of Energy is predicting that storage by March 2011 will be 10% above 2010 levels.

 

Demand – We’ve been quite vocal as to our expectation of slowing economic growth in the United States in 1H 2011 due to tough comps, consumer headwinds, and a lack of future government stimulus. If we are correct in our assessment, it is likely that demand for natural gas could be flat or fall in 2011 versus 2010. In 2009, demand for natural gas was down more than 2% from 2008 levels. Moreover, natural gas is not exactly a growth industry as overall consumption has only grown 9.1% over the 40-year period from 1969 through 2009. The Department of Energy is currently expecting demand to be flat in 2011.

 

It seems that many investors still are not bearish enough on natural gas. While there are many arguments as to why demand should increase overtime, we currently are in a supply glut driven by production. In the chart below, we show monthly production numbers in the U.S. going back to 1994. This chart quite clearly shows that we are in a new paradigm as it relates to the production of natural gas, primarily due to technology advances via horizontal drilling and massive discoveries in the shale areas.

 

The reality is, natural gas can go a lot lower. It is a localized commodity that is not driven by the same global demand (emerging markets) and price (U.S. dollar weakness) as oil. In fact, from 1994 to 1996 natural gas varied between $1.50 per Mcf and $3.00 per Mcf and spent most of that period below $2.00 per Mcf. This lack of seasonal price moves is an important data point as we consider the next move in price.

 

Daryl G. Jones

Managing Director

 

Natural Gas Seasonality, Or Lack Thereof - monthly natty


R3: BBBY, FINL, CROX, LL Bean

R3: REQUIRED RETAIL READING

December 23, 2010

 

 

 

RESEARCH ANECDOTES

  • Like many retailers, online sales growth is a key initiative to drive top-line growth over the near-to-intermediate term at Finish Line. What sets this goal apart from peers is that management is looking to grow online sales as a percent of the total to the mid-teens – well beyond the 10% hurdle most retailers are citing.   
  • Among the key drivers of steadily improving apparel comps throughout the quarter, Finish Line highlighted “powerful” sales of The North Face gear for both men’s and women’s – consistent with what we’ve seen in weekly athletic sales data.
  • While gross margins contracted modestly during Bed Bath’s 3Q, the company noted that coupon redemptions were actually down year-over-year providing a positive offset – further evidence of improving consumer confidence.

OUR TAKE ON OVERNIGHT NEWS

 

Men's Outperforming This Holiday - Driven by pent-up demand, or just boredom with dated wardrobes, men’s wear has emerged as the star performer for many retailers this holiday season. This reverses a downtrend that has plagued men’s sales for nearly the entire year and offers the industry hope the momentum will carry through to 2011. Surprisingly, tailored clothing has been the sleeper hit of the season with the more-fitted silhouette leading to increased business for many stores. The luxury end of the market is also experiencing an uptick, stores report. In a recent survey, Mastercard’s SpendingPulse found that, through mid-month, men’s wear sales were leading the apparel category. While the apparel business in general has been strong this season through Dec. 11, men’s was up 8.4 percent, nearly double that of women’s, which is running ahead 4.4 percent. <WWD>

Hedgeye Retail’s Take: Consistent with what we heard on December retail sales calls, the outperformance in men’s apparel sales appears to be shaping into a 2-year trend that has occured since the turn of the century.

 

L.L. Bean's Robust Holiday Sales - L.L. Bean told USA Today that it has broken a number of records already this year, including the biggest sales day in its history on Dec. 19 and the biggest day for website traffic on Dec. 13.  The newspaper has been following Bean as part of its "Cautious Optimism" series this holiday season. Steve Fuller, chief marketing officer, told USA Today that consumers are less price driven this year and looking more for qualities such as "warm" or "dry." "Customers are still making highly considered purchases, but product quality and performance are taking much larger roles in the decision making," he said. CEO Chris McCormick, added that L.L. Bean has already sold out of almost anything made of flannel, as well as some slippers and boots. He believes "next year will be an even better Christmas than this year," says. <SportsOneSource>

Hedgeye Retail’s Take: Further indication that the trend in authentic “Americana” remains robust and has been for the better part of 2010. Sounds like the 2011 Christmas is going to look an awful lot like 1986.

 

California Rain Impacts Retail - Torrential rains in Southern California put a crimp in retailing, as power failures shut some stores and kept holiday shoppers under wraps. The deluge was expected to ease by today. Select stores at the Third Street Promenade and the revamped Santa Monica Place shopping center, including Bloomingdale’s, lost power Tuesday. In general, outdoor shopping centers and districts suffered as shoppers fled the downpours, although indoor shopping malls and online retail were said to have gained customers. Gov. Arnold Schwarzenegger has declared a state of emergency in six counties because of the downpours. The hardest-hit areas received rainfall of more than 20 inches. The rain caused mud slides and darkened neighborhoods. Flooding forced evacuations, and road closures were prevalent. <WWD>

Hedgeye Retail’s Take: Given the fragility of sales in the southwest of late, torrential rains are the last thing retailers need. On the other hand, favorable weather has lead to outperformance in the Northeast over recent weeks – a gap that apparently will be widening near-term.

 

CFO Hammer Resigns From Crocs - Crocs Inc. Wednesday said the company's chief financial officer, Russell C. Hammer, has resigned effective Dec. 31 in order to join an unnamed Chicago-based public company as its financial chief. The shoe maker said a search for Hammer's successor is underway. A company spokeswoman wasn't immediately available to comment further on the departure. Hammer served as CFO of Crocs since the beginning of 2008. He was responsible for the company's national and global financial operations. Prior to joining Crocs, he worked for Motorola Inc. for more than 30 years, serving in several senior-level executive positions, including as CFO and vice president of that company's $5 billion connected home solutions business. <DJNewswire>

Hedgeye Retail’s Take: After navigating the company and its financing from the brink of collapse, we’re not entirely surprised in the move given Russ never relocated his family, but commuted to Colorado for the past 2+ years. Optically, however, the company’s inability to retain top-talent is a bit disconcerting.

 

Christmas Shopping Survey - The International Council of Shopping Centers and Goldman Sachs announced that their joint holiday consumer tracking survey indicates roughly 15 percent of shoppers ages 16 and older - a total of 23 million consumers - plan to shop on the day before Christmas. "With many last-minute shoppers still needing to finish their gift lists, brick-and-mortar retailers will be buzzing with activity on Christmas Eve," Michael Kercheval, president of the shopping centers group, said in a news release. According to the survey, more men (17%) plan to shop that day than women (13%). By age, people 18 to 34 years old are more likely to be shopping (21%) than those 55 and over (8%). By region, 19% of those living in the Midwest said they were planning on doing last-minute holiday shopping on Christmas Eve, while those in the West (16%), Northeast (13%) and South (13%) were relatively less likely to shop that day. <SportsOneSource>

Hedgeye Retail’s Take: Interestingly, but at the same time predicable, the regions that have struggled the most of late are also the ones that plan to shop at the last minute more – perhaps in hopes of capturing extra savings associated with last minute deals.

 

 


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Initial Jobless Claims Hold Flat Excluding Revisions

No Change in Initial Claims


Initial claims were flat at 423k WoW, as the 3k headline decline was offset by the 3k upward revision to last week’s print.  Rolling claims rose for the first week in six to 426k, 2.5k higher than the previous week.  We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate.

 

Initial Jobless Claims Hold Flat Excluding Revisions - rolling claims

 

Initial Jobless Claims Hold Flat Excluding Revisions - raw claims

 

Yield Curve Comes In Slightly


We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 4Q is tracking 20 bps wider than 3Q.  The current level of 272 bps is down from 287 bps last week.

 

Initial Jobless Claims Hold Flat Excluding Revisions - spread

 

Initial Jobless Claims Hold Flat Excluding Revisions - spreads QoQ

 

Financial Subsector Performance


The table below shows the stock performance of each Financial subsector over four durations. 

 

Initial Jobless Claims Hold Flat Excluding Revisions - performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 


INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS

No Change in Initial Claims

Initial claims were flat at 423k WoW, as the 3k headline decline was offset by the 3k upward revision to last week’s print.  Rolling claims rose for the first week in six to 426k, 2.5k higher than the previous week.  We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate.

 

 INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS - rolling claims

 

INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS - raw claims

 

Yield Curve Comes In Slightly

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 4Q is tracking 20 bps wider than 3Q.  The current level of 272 bps is down from 287 bps last week.

 

INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS - spread

 

INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS HOLD FLAT EXCLUDING REVISIONS - performance

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 23, 2010


As we look at today’s set up for the S&P 500, the range is 11 points or -1.01% downside to 1245 and 0.01% upside to 1259.  Equity futures remain near flat to fair value on a slow news day, ahead of several economic reports, including Weekly Jobless Claims and December final Michigan Consumer Sentiment.

 

Oil futures have climbed to a near two year high as cold weather across the US and Europe lifts demand.

 

After the close, Bed Bath and Beyond reported consensus beating quarterly earnings and provided an upbeat outlook.

  • Amylin Pharmaceuticals (AMLN) and Lilly submitted sNDA to FDA for expanded use of Byetta injection
  • Bed Bath & Beyond (BBBY) sees full year EPS $2.86-$2.90 vs est. $2.81, announces $2b buyback
  • Crocs (CROX) said CFO Russell C. Hammer resigned, effective Dec. 31
  • Micron Technology (MU) reported 1Q rev. $2.25b vs est. $2.37b
  • Watson Pharmaceuticals (WPI) said its oral contraceptive won FDA approval
  • Wintrust Financial (WTFC) sees $11.4m charge related to repurchase of 250k shares issued under TARP

PERFORMANCE

  • One day: Dow +0.23%, S&P +0.34%, Nasdaq +0.15%, Russell 2000 +0.01%
  • Month-to-date: Dow +5.03%, S&P +6.63%, Nasdaq +6.93%, Russell +8.75%;
  • Quarter-to-date: Dow +7.15%, S&P +10.31%, Nasdaq +12.79%, Russell +16.93%
  • Year-to-date: Dow +10.85%, S&P +12.89%, Nasdaq +17.73%, Russell +26.42%
  • Sector Performance: Financials +1.1%, Utilities +0.5%, Energy +0.4%, Consumer Spls +0.4%, Industrials +0.3%, Health-care +0.2%, Consumer Disc +0.1%, Materials 0.00%, Tech (0.04%).             

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 678 (-478)  
  • VOLUME: NYSE 784.28 (-3.24%)
  • VIX:  15.45 -6.31% YTD PERFORMANCE: -28.74%
  • SPX PUT/CALL RATIO: 2.75 from 1.54 (+78.64%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.30
  • 3-MONTH T-BILL YIELD: 0.14%  
  • YIELD CURVE: 2.71 from 2.72

COMMODITY/GROWTH EXPECTATION:

  • CRB: 328.11 +0.40%
  • Oil: 90.48 +0.73%
  • COPPER: 427.50 -0.02%
  • GOLD: 1,387.33 +0.05%

CURRENCIES:

  • EURO: 1.3087 -0.25%
  • DOLLAR: 80.727 +0.01%

OVERSEAS MARKETS:

EUROPEAN MARKETS:

  • European markets saw session highs early, the FTSE100 flirted with the 6000 level, and subsequently drifted lower in light trading.
  • Comments from a Chinese Foreign Ministry spokesman that China was willing to help EuroZone countries recover from the financial crisis helped sentiment as did Greece passing its 2011 austerity budget last night.
  • Advancing sectors lead decliners 12-6 with autos and media the leading gainers whilst basic resources and construction lead fallers.
  • This is the last trading day for much of Europe ahead of the Christmas holiday with only France, Belgium, Ireland, Netherlands, Portugal and the UK open tomorrow.
  • France Nov consumer spending +2.8% m/m vs consensus +0.8%
  • France Nov PPI +0.4% m/m vs consensus +0.2%
  • UK Nov mortgage approvals for home purchase 29,991 vs prior 30,689, net mortgage lending +£1.46B vs +£1.72B, lowest since Mar and Aug 2009 respectively

ASIAN MARKTES:

  • Asian markets were mixed today; with more falling the later they were open.
  • Volumes remained low.
  • Bank stocks rose in Australia. Miners went up after the country’s Policy Transition Group made what were interpreted as favorable recommendations on the imposition of a mining tax.
  • New Zealand’s gain was limited when Q3 GDP declined (0.2%) vs consensus (0.1%). Shoe retailer Pumpkin Patch lost 1%.
  • South Korea ended flat despite tensions on the peninsula when President Lee Myung Bak promised troops the country would launch a “merciless counterattack” if North Korea attacks again.
  • Rises in retailers and property were outweighed by falls in financials, and Hong Kong reversed slim gains to finish at a loss.
  • China fell again on an end-of-year cash crunch in the financial system. Oil refiners fell on fears yesterday’s fuel price increases will raise their operating costs: Sinopec Shandong Taishan Petroleum lost 3%.
  • Japan was closed for the Emperor’s Birthday.

 

THE HEDGEYE DAILY OUTLOOK - EQUITIES


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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