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Bearish: SP500 Levels, Refreshed

POSITION: Short SPY

 

I’m not short everything in global macro, but I am short the SPY. The short position is -2.73% against me. Don’t I feel like a genius.

 

Selloffs in the US stock market in December have been few and far in between. While it’s incredible, it doesn’t mean it’s not a historical fact. The SP500 hasn’t had 2 consecutive down days yet for the entire month. Today’s intraday selloff has been like every other selloff in December – fleeting.

 

Having just snapped my Achilles tendon, I can assure you that when the music stops, it can stop abruptly. For now, this is a stock market that the Big Broker artist formerly known as Chuck Prince would have loved. When the music is playing that is…

 

My immediate term TRADE lines of support and resistance are now 1254 (which has held today) and 1265, respectively.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish: SP500 Levels, Refreshed - 1


R3: WMT, JCP, WRC, M&A

R3: REQUIRED RETAIL READING

December 30, 2010

 

 

 

RESEARCH ANECDOTES

  • JCPenney is pioneering the mobile movement in retail having launched a full online store within Facebook – i.e. browse and buy. In addition to keeping product in front of its younger demographic driven by news feeds, information acquired from the site provides the company with unmatched customer data that can be analyzed. While JCP is the first major retailer to execute this technology, expect others to soon follow suit.
  • In the latest effort to cut the use of plastic shopping bags, Italy has announced they are officially banning the use of polyethylene bags starting Saturday January 1st.  According to the Italian environmentalist lobby, Italians use 330 bags per person on an annual basis. Replacing the bags with ones that are biodegradable will double the cost of providing bags for retailers – yet another input cost on the rise.
  • In addition to announcing the launch of its new 3D DS handheld game device in February, Nintendo is also barring kids under 6 from using it at the event for risk of "harming the growth of children's eyes." This falls into the category of flat out scary - a kids product that's dangerous for kids. Expect to see many, many more headlines on this. It also begs the question of just how safe 3D TVs are…

OUR TAKE ON OVERNIGHT NEWS

 

Wal-Mart Tests New Smaller Concepts - Wal-Mart is getting flexible and it’s hoping that approach will help it crack New York City at last. The world’s largest retailer tried unsuccessfully in 2005 to open a store in New York — it searched for a site for a SuperCenter, but finding the necessary 185,000 square feet of space was, and still remains, difficult. Now, five years later, the Bentonville, Ark.-based company is adopting a new strategy armed with an arsenal of store formats, including some never-before-seen concepts and a rejigged SuperCenter — its size reduced to as little as 80,000 square feet and categories not crucial to urban areas, such as lawn and garden centers, eliminated. The redefined approach stems partly from necessity — the suburbs have become saturated and Wal-Mart needs to enter more urban markets if it is to grow in the U.S. “We’re addressing size and being more flexible in our approach,” said Steven Restivo, Wal-Mart Stores Inc.’s director of community relations for the Northeast. “The way we’re bridging the gap between larger traditional stores and smaller, more efficient formats is our site-to-store multichannel experience option.” The retailer’s latest format is a 3,500-square-foot store called Wal-Mart on Campus, which will open at the University of Arkansas next month, replacing a university-run pharmacy. “It’s probably the smallest-format store,” Restivo said. “It’s a [pharmacy] and campus merchandising store with licensed apparel.” Wal-Mart on Campus was developed at the university’s behest as a one-off to meet the university’s needs. While there are no similar stores in the works, lessons might be gleaned from the project and its size could be appealing in urban areas. <WWD>

Hedgeye Retail’s Take: Cutting the stores footprint down to 80k sq. ft. in urban markets not only makes sense (e.g. shedding the garden center), but it’s also a necessity as the retailer has come to find out. While a 3,500 sq. ft. Wal-Mart is tough to envision, we’d expect the retailer to keep to the big box, but just small enough to start penetrating inner cities.  

 

Storms Impact Estimated at $1Bn - The titanic Sunday snowstorm that paralyzed much of the Eastern seaboard might have cost retailers $1 billion in the two days after Christmas. That’s the preliminary estimate from ShopperTrak RCT Corp., the Chicago-based firm that provides research and analysis on retail sales and traffic, based on what it termed a “conservative” appraisal of the impact of the Dec. 26 storm on business Sunday and Monday. The company estimated the storm took an 11.2 percent bite out of the traffic anticipated for Dec. 26. While year-on-year traffic fell 6.1 percent in the Northeast, the average increase in traffic in the Midwest, South and West was 38.6 percent. The impact on business on Monday was more severe, reducing total traffic 13.9 percent, with a 42.9 percent drop in the Northeast, more than offsetting increases averaging 13 percent in the other three regions. Preliminary estimates of GAFO — general merchandise, apparel and accessories, furniture and other categories — sales for the two-day stretch were $10 billion. Although much of the lost business could be reclaimed as consumers resume their normal routines, any irretrievable volume could cut into December sales and retailers’ ability to minimize inventories, putting a damper on fourth-quarter and year-end earnings. Nonetheless, ShopperTrak reaffirmed its estimate for a 4 percent rise in sales and a 1.8 percent increase in traffic for the two-month holiday period. <WWD>

Hedgeye Retail’s Take: Notable traffic declines for sure, but what's being overlooked in all of this is the 4-weeks leading up to the storm that were unseasonably cold boosting sales across much of the Midwest and East Coast in the process.

 

M&A Expectations Heading into 2011 - U.S. consumers put the brakes on dealmaking in 2010. They may be the accelerator next year. Chief executives maintained record levels of cash this year as the recession-weary consumer fueled doubts about an economic recovery. While mergers and acquisitions topped $2 trillion in 2010 -- the first increase in three years -- the amount failed to approach 2007’s $4 trillion peak in global takeovers. Shoppers may help bring 2011 closer to that total. Holiday sales jumped 5.5 percent in the U.S., the best performance in five years, on purchases of clothing and jewelry, according to MasterCard Advisors’ SpendingPulse. As spending rises, companies are more optimistic and willing to take on risk, according to Joseph Gromek, chief executive officer of New York-based Warnaco Group Inc., owner of the Calvin Klein and Speedo brands.  “There will be a very aggressive approach,” Gromek said. “The companies that have strong balance sheets with lots of cash on hand will try to be as opportunistic as possible.” The 1,000 biggest companies worldwide, excluding financial- services industries, have amassed more than $3 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg. Most companies and their boards stayed conservative this year, waiting to see how the economy rebounded before pursuing deals, he said. Warnaco invested in its operations and foreign distribution in 2010, and may now look at acquisitions, Gromek said. “Interest rates are very favorable,” he said. <Bloomberg>

Hedgeye Retail’s Take: Our sense is that the commentary from executive teams coming out of ICR next month will be similar with organic growth prospects continuing to look challenged.

 

L.A. Retail Recovery Slow But Improving - The gulf separating the haves and have-nots among specialty retail districts here is widening. Prime stretches of marquee venues — Rodeo Drive, Robertson Boulevard, Melrose Place and Melrose Avenue — are starting to get traction, but second- and third-tier retail enclaves have it tougher. In the top areas, vacancies are diminishing, rents are bottoming out and newcomers are taking root. The total number of available retail spaces can be counted on fewer than two hands on the key blocks of Robertson Boulevard and Rodeo Drive. There’s a flurry of launch and leasing activity, particularly on Rodeo, with Lanvin, Tom Ford, G-Star, Stephen Webster, Richard Mille, Agent Provocateur and Solange Azagury-Partridge opening this year or in 2011. “The confidence is definitely coming back” in the top tier of the market, said Stuart Millar, executive vice president of G-Star North America, which plans to open a 5,000-square-foot flagship on Rodeo Drive in the first quarter of 2011. “There is another six- to 12-month window where you can be pretty aggressive with getting the right deal from the landlord.” Patrick Ortiz, a vice president of NAI Capital who handles the leasing and sale of properties in West Los Angeles, estimated vacancies were as high as 50 percent on certain blocks off the main drags. “The shift is from the landlord as the monster to tenants as the monster,” he said. “Tenants are able to make deals they have not been able to make in 50 years.” <WWD>

Hedgeye Retail’s Take: There has been a notable shift in the past year as it relates to retailers’ appetite for resuming store growth particularly of late. While demand is starting to return (at a price), we expect the environment for negotiating leases will remain favorable for retailers for a few more quarters before the environment begins to normalize.

 

Customs Intercepts Knock-off NHL Goods - U.S. Immigration & Customs Enforcement said Wednesday it had seized $100,000 worth of counterfeit sportswear, apparel and other merchandise in Pittsburgh as part of a monthlong joint enforcement effort with Customs & Border Protection and the U.S. Postal Inspection Service. ICE said agents seized fake National Hockey League and National Football League jerseys, hats and T-shirts, along with counterfeit Ugg boots and other brand name shoes, handbags and apparel. In all, 792 items were confiscated during the enforcement effort. ICE and CBP are both part of the Department of Homeland Security. The initiative was aimed at netting fake NHL Winter Classic merchandise. Pittsburgh is scheduled to host the NHL Winter Classic, an annual event in which regular season hockey games are held outside, on New Year’s Day. <WWD>

Hedgeye Retail’s Take: A small-scale bust, but important win for Customs nonetheless as it begins to make good on efforts to step up enforcement against counterfeiting. Several small wins can add up and more importantly send an even stronger message to the culprits who’ve made 'easy money' in the past. 

 

 

Apple Sued Over Sharing Personal Data - Apple is the target of a class action lawsuit over the way its apps share personal information with outside parties, according to a Bloomberg report. The lawsuit comes a week after a Wall Street Journal article about user information being shared by some popular mobile apps "widely and regularly." The lawsuit names applications such as Pandora, Paper Toss, the Weather Channel and Dictionary.com, according to Bloomberg. The Wall Street Journal article claims that in both the Android and iPhone versions of the Pandora app "sent age, gender, location and phone identifiers to various ad networks." <BrandWeek>

Hedgeye Retail’s Take: This is exactly why behavioral marketing is slow to materialize.

 

Guatemala Labor Practices in Question - Guatemala’s textiles and apparel industry has rejected U.S. and local trade union claims of significant labor law violations under the Central American Free Trade Agreement, branding them as “unsubstantiated.” The U.S. launched an inquiry against Guatemala last summer for “apparent violations of obligations on labor rights,” adding that it hopes to see the government take “specific and effective action — including, if appropriate, legislative reforms — to improve the systemic failures in enforcement of Guatemalan labor law.” Based on a 2008 AFL-CIO union investigation, the Obama administration claimed Guatemala is failing to enforce laws to enable workers to unionize, organize and bargain collectively and promote acceptable working conditions. The U.S. also expressed “serious” concern about labor-related violence, which has seen several nontextile union leaders killed in recent years and which is “apparently deteriorating.” The case saw both countries engage in labor consultations. If Guatemala fails to address the problem, it could be forced to pay $15 million into an annual fund to improve labor standards. Guatemala is forecast to export $1.5 billion worth of textiles and apparel this year, solidifying its status as the biggest U.S. supplier under the CAFTA bloc comprising Dominican Republic, Honduras, Nicaragua, El Salvador and Costa Rica. While some observers say working conditions have improved since Guatemala joined CAFTA, Lacs said “sweatshop” conditions remain, with many people logging 10- or 11-hour days with no overtime, especially in the subcontracted firms. <WWD>

Hedgeye Retail’s Take: For many reasons, the least of which is the global perception of dealing with a neighboring trading partner in violation of labor laws, the U.S. would do well to work with the Guatemalan government to improve the standards of its largest apparel supplier in Central America.

 

Chinese Cotton Imports up in November - China imported 126,000 tons of cotton in November, up 31% compared to October or a year-on-year increase of 11.8%, according to statistics released by the General Administration of Customs. In the first eleven months of this year, China imported 2.38 million tons of cotton, up 81.4% compared with the same period of last year. In November, cotton's import price was US$2,356 per ton, 10.6% or US$225 more than in October. Uzbekistan overtook the US as the largest cotton export origin to China. The government announced in September that it will lift China's cotton import quota from previously planned 894,000 tons to 2.7 million tons to curb the price fluctuation. <FashionNetAsia>

Hedgeye Retail’s Take: Continued demand growth by the global markets largest buyer. The supply side of this equation continues to be a critical factor in moderating prices near-term.

 

 


CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS

Initial Claims Plunge 34k Breaking the 400k Line

Reported initial claims dropped sharply by 34k to 388k in the week ended December 25th. On a four-week rolling basis, they fell 12.5k to 414k. By any measure this is a positive print and should further perpetuate the Santa Claus rally in Financials. As we've written before, we expect initial claims will continue to have a tailwind through mid-January, consistent with the last two years. In other words, in spite of the seasonal adjustment factors, claims have a tailwind that starts at the beginning of December and runs through mid January. The charts below demonstrate.

 

We would 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. With claims in the 388k range as of this most recent print, that would suggest we could start to make some forward progress if claims remain in this range or move lower. 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. So, while we're heading in the right direction it will likely be a very long time before the headline unemployment rate improves.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 1

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2

 

Yield Curve Widens 23 bps in 4Q10 Relative to 3Q10

We chart the 2-10 spread as a proxy for industry NIM. The spread in 4Q is tracking 23 bps wider than 3Q. The current level of 272 bps is flat with the 272 bps at the end of last week.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 3

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 4

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 5

 

Joshua Steiner, CFA

 

Allison Kaptur


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.62%

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS

Initial Claims Plunge 34k Breaking the 400k Line

Reported initial claims dropped sharply by 34k to 388k in the week ended December 25th. On a four-week rolling basis, they fell 12.5k to 414k. By any measure this is a positive print and should further perpetuate the Santa Claus rally in Financials. As we've written before, we expect initial claims will continue to have a tailwind through mid-January, consistent with the last two years. In other words, in spite of the seasonal adjustment factors, claims have a tailwind that starts at the beginning of December and runs through mid January. The charts below demonstrate.

 

We would 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. With claims in the 388k range as of this most recent print, that would suggest we could start to make some forward progress if claims remain in this range or move lower. 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. So, while we're heading in the right direction it will likely be a very long time before the headline unemployment rate improves.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - rolling claims

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - raw claims

 

 

Yield Curve Widens 23 bps in 4Q10 Relative to 3Q10

We chart the 2-10 spread as a proxy for industry NIM. The spread in 4Q is tracking 23 bps wider than 3Q. The current level of 272 bps is flat with the 272 bps at the end of last week.

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2 10 actual

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - 2 10 chg

 

 

Financial Subsector Performance

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

 

CLAIMS AND SPREADS ADD SHORT TERM FUEL TO THE BULL CASE IN FINANCIALS - subsector perf table

 

Joshua Steiner, CFA

 

Allison Kaptur




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