Retail: Exhausting Positive Momentum

As we do every morning here at Hedgeye, we gather in our locker room (some people call it a conference room) pre-game and both discuss and debate key issues in our respective industries and contextualize them vis/vis changes in the global inter-connected web that we call Macro. 

Yesterday, we published a note on earnings revisions in retail, and our view that such revisions are likely to go negative sooner than most people think (see those charts below). Consider the timeline...

  1. We had Holiday sales, which most would agree came in ahead of expectations. 
  2. But remember folks... this is a 100% 'top-line' news item.  What we did not hear is the level of promotional activity needed to ensure such sales. 
  3. We'll start to get a hint of that this coming Thursday. It won't be a disaster by any means. But we look at everything on the margin at Hedgeye, and in that vein, we'll get more commentary as to inventories and Gross Margins on that $400 cashmere sweater you got from your S/O.
  4. Then just a few days later, we have the ICR conference in SoCal. Yes, this is where most companies that matter in small/mid cap retail and restaurants converge in a flock of sidebar conversations with the sell-side, buy side, bankers, and yes even with each other. While major press releases on the quarter are not likely to flow, you can bet your bottom dollar that management teams will spill the beans on the 'tone of business' in their double-secret one on ones.  
  5. Again, I'm not saying that these will all be horrible conversations. But simply that the chance they are BETTER than what was already dished out over the prior 6-weeks is exceedingly low.
  6. Also, one key component to our 'Cannonball' theme, is that it will be nearly impossible for any of the companies present at the conference to accurately articulate how their competitors will react to a clear reversal of what has been a 3rd standard deviation positive influx of margin dollars in 2010. Remember folks, 95%+ of product in this industry is sold at the end of each season. The steepness of the curve to get all the 'stuff' sold in environments like this tends to change over VERY short durations.  Things might seem 'ok' to a retailer at ICR -- at least good enough to keep a smile on their face. But that's not to say that there can't be meaningful downward revisions as the year progresses.

Let's take this full circle as it relates to how this note started.

Just before Christmas (the 23rd, to be exact) Keith made a statement about Gold, which rings true for retail today. He had been a bull on gold, and kept being asked when he was going to buy it back. But the reality is that he was more inclined to short it. Please check out his note below. Also, his levels on the RTH suggests downside/upside of 5 to 1.

See you out in Cali.

Retail: Exhausting Positive Momentum - 1 4 11 Note RTH MVR

The Golden Haze: Gold Levels, Refreshed
12/23/2010 01:51 PM

While we don’t currently have a position in Gold (GLD), we’ve been very active in foreign currency as of late. We did make the call to sell our entire long Gold position in both the Hedgeye Portfolio and Asset Allocation models on December the 6th. I’ve been following up with notes on why (Early Look note from December 17th, “The Golden Haze”) since.

The question in my mind right now isn’t where do I buy gold back? It’s where do I short it?

Gold is competing against rising bond yields. Gold is also fighting the Fed’s policy to inflate. Gold is always a lot of different things to a lot of different people, but the most important thing about gold is its last price.

If gold closes below $1379/oz this week, this will be the 3rd consecutive week of gold closing down on a week-over-week basis. That would be bad for the immediate-term price momentum in gold but, by our risk management score card, its already broken from an immediate-term TRADE perspective anyway.

In the chart below we show the refreshed immediate-term TRADE line of resistance for gold up at $1399. There’s significant resistance between $1, so you can also use that as a range of resistance.

There’s an immediate-term TRADE line of support down at $1368, but it’s a weak one. The more important line to manage risk towards is the mean reversion move down to gold’s intermediate-term TREND line of $1313.

Last year I gave my Dad gold bullion coins for Christmas – this year I hope he doesn’t give them back!

Cheers,

KM

 

Keith R. McCullough
Chief Executive Officer

Retail: Exhausting Positive Momentum - Gold 1 4 11