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It's Officially Unofficial Earnings Season

We’re officially in the “unofficial” earnings season for retailers with both Sales Day and the annual ICR Exchange set to take place over the next several days. History paints an interesting picture (and precedent) of pre-announcements over this two week period. As such, we’ve updated our matrix of companies with a history of pre-announcing at or around the annual pilgrimage to ICR. Those with positive releases are highlighted in green while those with less positive news are highlighted in red. This year should be no different than in years past, where we are likely to see 10-15 companies update guidance in the coming days. If history tells us anything, PVH seems as sure as any to report “unofficial” results early next week.

 

It's Officially Unofficial Earnings Season - icr pre announcements

 

Eric Levine

Director


Staring at The Sun

This note was originally published at 8am on January 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum

 

As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.

 

Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.

 

No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.

 

As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.

 

In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.

 

Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.

 

As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.

 

Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.

 

While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.

 

On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.

 

In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.

 

In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.

 

My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Staring at The Sun - sun


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

 

 


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SBUX FUTURE - BRIGHT BUT NO GREEN MOUNTAIN

SBUX’s battle with Kraft to gain control of its distribution is an important milestone for the company as it can gain control of a very important sales channel for the company, which will provide new avenues for growth. 

 

In my view, the recent article on Bloomberg regarding Starbucks, Kraft and the single serve segment misses the most important point.  The article rightly points out that the terms of the current deal with Kraft prohibit Starbucks from putting its coffee in the Keurig Home Brewer.  However, I believe Starbucks’ strategy is not focused on that area.  Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine. 

 

The best analogy I can use to describe what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.  By the end of FY2011, I believe we will be hearing that Starbucks is testing a Starbucks branded single serve coffee with new technology that is far superior that what is currently available.  The machine will likely be manufactured by a third party and sold in Starbucks stores, supermarkets and club stores.  For example, the company is working closely with Nuova Simonelli on a number of different types of machines.

 

I see Starbucks as posing a threat to Keurig’s 71% market share, not a benefit.  There is no doubt that growth of the single serve segment has cut into Starbucks’ grocery sales, but buying Green Mountain or aligning themselves to the Keurig brewer is not going to happen.  Starbucks has already made the mistake once of leaving control of the brand in the hands of Kraft, there are not going to make that same mistake with Keurig or Green Mountain. 

 

The recent success of VIA is a great example of Starbucks controlling and putting its marketing muscle behind it’s the instant single-serve product.  The introduction of VIA was about entering the “instant” coffee market and not the “single serve” segment.

 

In the short-term, the diatribes between Kraft and Starbucks will continue to fly around and the rumors about Green Mountain will continue.  Once Starbucks does get control of its distribution system, the opportunities for Starbucks will be made clearer.  At that time it will also make more sense as to why Starbucks should buy Peet’s Coffee & Tea. 

 

Howard Penney

Managing Director


Gold: Bearish Is As Bearish Does

POSITION: Short GLD

 

Lower-highs and breaking down through Hedgeye’s immediate-term TRADE line of support ($1398). That’s bearish.

 

We get the bullish position in gold (we sold our long position on December 6th, 2010). We get the bearish position on Fiat Fools (we coined the term in 2010). We also get that gold can go down when global bond yields are going up. Gold, like any other asset class, has to compete with yield (we shorted GLD on December 29, 2010).

 

If you’re in the ‘I love Heli-Bens’ camp and you don’t see inflation, you’ll only perpetuate my bearish case for gold. That’s because when I am talking about competing with yields, I’m talking about real-interest rates (adjusted for inflation). If your inflation assumption is lower than mine, you should be more short of gold than I am.

 

I don’t plan on being short gold in perpetuity. But I am going to try my best to stay short it until we anniversary January 21, 1980. If you have a 23 year old gold trader on your desk who didn’t see that historical time stamp, send him my twitter link.

 

There’s no support for the gold price down to the intermediate-term TREND line at $1352/oz.

 

There’s always risk to be managed somewhere,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gold: Bearish Is As Bearish Does - 1


Bearish: SP500 Levels, Refreshed

POSITION: Short SPY

 

Before this morning’s market open we outlined daily probability (on our Macro Morning Call and in Early Look levels) of 4:1 risk (downside) versus reward (upside) in the SP500. As of 11AM EST, alongside lower prices, that’s gap is starting to narrow.

 

What’s bearish about today versus yesterday is that we just saw an Outside Reversal in the SP500 (higher opening highs, above the cycle high, reversing below the prior closing high of 1271). While these aren’t always bearish signals, they certainly aren’t bullish ones.

 

We’ll see where we close today because that’s the price that matters most, but a close below 1260 (our immediate-term TRADE line of support) would be bearish and a close above it would be bullish.

 

Don’t forget the Fed’s Minutes are due out intraday – we think they’ll be hawkish, on the margin. Maybe that’s why commodities are getting clocked.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish: SP500 Levels, Refreshed - 1


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