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Known Unknowns

"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.”

-Donald Rumsfeld

 

A few nights ago, I participated in a panel on CNBC’s The Kudlow Report to discuss the outlook for the U.S. equity markets.  Interestingly, my co-panelists were an actor, Tommy Belesis, who was featured in Wall Street II and Lee Munson, who is not an actor, at least professionally, but is a veritable Jim Carey wannabe.  Larry asked all three of us about Egypt and both of my co-panelists suggested the spread of democracy would be a great thing for the markets.  Call me a nerdy hockey player from Yale, but my response was a bit more nuanced.

 

Stepping back for a second, I tend to agree that the proliferation of democracy is a positive force in this world.  (Hopefully that goes without saying.)  From a pure geo-political risk perspective, there are very few examples of modern democracies going to war.   Thus, the more democracies there are globally, the more likely it is that there will be less armed conflict between nation states.  This is a positive when considering a risk premium to apply to certain equity markets.

 

As it relates specifically to Egypt, the view I articulated the other night is that the outcome is very uncertain.  We don’t know that this is the onset of flourishing democracies in the Middle East.  Further, we don’t know what the unintended consequences of a regime change in Egypt will be.  As Former Secretary of Defense Rumsfeld notes above, the outcome of this historic last month of protests in the Middle East is, at best, a “known unknown.”

 

The benefit in having our headquarters at the Taft Mansion on Yale’s Campus is more than just easy access to Yale Hockey games at historic Ingalls Rink, but also easy access to Yale’s academic engine.  To the last point, we are hosting a call at 10 a.m. for institutional subscribers and prospects with Yale Professor Charles Hill.  The title of the call is “Analyzing the Geopolitical Chessboard: Is This Checkmate for American Influence in the Middle East?” If you’d like to join us for the call, please ping sales at .

 

Rather than acting, we decided to bring in an expert to discuss the situation in the Middle East and North Africa.  Professor Hill teaches the Grand Strategy class at Yale, and is the former Chief of Staff of the State Department, an advisor to former Secretary of State George Shultz, and former Secretary-General of the United Nations Boutros Boutros-Ghali.  Needless to say, Professor Hill forgets more foreign policy strategy in a day than most of us will ever know.

 

Currently, the primary issue as it relates to U.S. foreign policy in the Middle East is centered on the future of Egypt, which has been a long standing ally of the United States in the region.   After the 1973 Arab-Israeli War, Egyptian foreign policy shifted under Anwar Sadat, who opted to pursue a peace process with Israel, which he believed was in the best long term interest of Egypt.  As a result, the U.S. has been a major sponsor of both military and economic aid to Egypt.  In fact, Egypt is the second largest non-NATO recipient of military aid from the United States after Israel.

 

From an economic perspective, Egypt is the 27th largest economy in the world and, perhaps more importantly, controls the Suez Canal, which connects the Mediterranean and Red Seas.  The key benefit of the Suez Canal from a global economic perspective is that it allows water transportation from Asia to Europe without the need to circumvent Africa.  In aggregate, the Suez Canal carries almost 8% of the world’s sea trade.

 

Egypt’s strategic and economic importance can obviously not be understated in global affairs, and whilst it is difficult not to support popular protests against a non-Democratic regime, such as the one run by Hosni Mubarak in Egypt, as risk managers we also need to understand the alternatives.  If Mubarak was nothing else, he was a strong American ally in the region.

 

The debate over the future of Egypt currently centers on the role in which the Muslim Brotherhood will play.  The Muslim Brotherhood is the world’s largest and oldest Islamic political group, and was actually founded in Egypt in 1928.  Currently, the Brotherhood is banned in Egypt, but in the post-Mubarak era, the Brotherhood will have a role which could shift Egyptian foreign policy quite dramatically.  In fact, a leading member of the Muslim Brotherhood, Muhammad Ghannem, recently said to the Arab Press, “The people should be prepared for war against Israel.”

 

There are some that believe the Muslim Brotherhood is an effectual organization.  This was best articulated by Scott Atran, author of "Talking to the Enemy: Faith, Brotherhood and the (Un)making of Terrorists", in the New York Times yesterday when he wrote:

 

“Ever since its founding in 1928 as a rival to Western-inspired nationalist movements that had failed to free Egypt from foreign powers, the Muslim Brotherhood has tried to revive Islamic power. Yet in 83 years it has botched every opportunity.”

 

On the other side of the debate is Dr. George Friedman from STRATFOR who recently wrote:

 

“The demonstrations open the door for the Muslim Brotherhood, which is stronger than others may believe. They might keep the demonstrations going after Hosni leaves, and radicalize the streets to force regime change. It could also be the Muslim Brotherhood organizing quietly. Whoever it is, they are lying low, trying to make themselves look weaker than they are — while letting the liberals undermine the regime, generate anti-Mubarak feeling in the West, and pave the way for whatever it is they are planning.”

 

As for where Hedgeye stands, we covered our short Egypt position yesterday (via the etf EGPT) in our Virtual Portfolio.

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Known Unknowns - mass


CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt

 

 

CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt -  Chart of the Day


Men of Conformity

This note was originally published at 8am on February 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I would rather be a man of conviction than a man of conformity.”

-Martin Luther King, Jr.

 

When I read, I flag pages and write in them. It’s my way of taking some time to get lost in thought and scribble about what lessons history might provide me in preparation for today. Last night, as I was finishing "The Autobiography of Martin Luther King, Jr.", I found that timeless leadership quote.

 

It’s certainly not a quote for modern day American politicians. As King goes on to say on page 342, “… there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right.”

 

While I can’t imagine that Presidents George Bush or Barack Obama have a conscience that would lead them to believe that burning America’s currency at the stake is right, there are certainly many Men of Conformity who have been advising them by example of cowardice.

 

Whether you think Henry VIII clipping his citizenry’s coins caught up to him in the end, or whether you think that modern day American Presidents backing fiscal and monetary policies that debauch America’s dollars will equate to many globally interconnected consequences, no man, woman, or child will ultimately make the call on either. History will. And in this case, I’d rather be the man who sides with history’s lessons.

 

Before I dig in on the unintended consequences associated with a debasement of the world’s reserve currency, let’s look at what the US Dollar has done across multiple durations:

  1. Immediate-term TRADE (3 weeks or less): down, literally, almost every day since the President’s State of the Union Address and the Fed’s January FOMC statement.
  2. Intermediate-term TREND (3 months or more): up for 7 out of 8 weeks post US Midterm election promises, but down for 5 out of the last 6 weeks on the probability increasing that those promises are broken.
  3. Long-term TAIL (3 years or less): lower-highs and lower-lows -a national embarrassment.

Now if you can show me one man in an American position of fiscal or monetary policy setting power who shows any conviction in backing a strong US Dollar – just one man – I’ll readily accept this claim and consider why he has had no impact on the US Dollar where it matters – on the tape.

 

If you’ve studied economic history across long-dated cycles (yes, beyond The Ber-nank’s preferred point-in-time academic dogma of the great depression), you’ll already have learned that currency crashes and inflation are globally interconnected risks.

 

In fact, most modern day risk managers who have read Reinhart & Rogoff’s "This Time Is Different" have learned that there is a pattern that has repeated across 8 centuries of economic data. A simple way to consider this would be to re-read, rethink, and re-learn the lessons Reinhart & Rogoff outline in Part IV – Banking Crises, Inflation, and Currency Crashes where the sequence of chapters are as follows:

  1. Chapter 10 – Banking Crises (America has been there, done that)
  2. Chapter 11 – Default Through Debasement (America bailed some of these currencies (stock prices) out, but the national story is far from over)
  3. Chapter 12 -  Inflation and Modern Currency Crashes (America is in motion on this front – and in some cases, cheering it on)

So rather than reacting to the next country that erupts into social chaos against governments who are lying to them about real-world inflation, my advice would be for both the President of the United States and his Keynesian advisors to do the required historical reading. Remember gentlemen, conviction or not, a successful national currency landing will depend on whether your preparations meet this opportunity.

 

All is not yet lost. With some conviction and focus, America can arrest the social unrest associated with Global Inflation Accelerating – but this can no longer be willfully neglected. Again, for the 44 million Americans on food stamps, it’s time.

 

If you don’t think it’s time, take a gander at this morning’s Global Macro grind:

  1. The CRB Commodities Index (19 commodity basket) was up another +1.8% yesterday closing at its highest levels since October of 2008.
  2. Inflation, as measured by the CRB basket, is up +29% since Ben Bernanke opted for Quantitative Guessing II in Jackson Hole, WY.
  3. Dr. Copper is hitting a record high this morning at $4.48/lb (all-time records aren’t deflationary are they Mr. Ber-nank?)
  4. Oil prices are breaking out again to new intermediate-term highs with WTI Oil breaking out above our immediate term TRADE line of $90.21
  5. Food prices, measured by the UN’s basket, continue to hit all-time highs – from corn to rice, yes, this is a crisis for the world’s poor.
  6. South Korea’s inflation rate shot up to +4.1% in JAN versus 3.5% in DEC
  7. Indonesia’s inflation rate continues to rise with CPI for JAN 7.02% versus 6.96% for DEC
  8. Brazil’s CPI is now tracking up +11.5% y/y in JAN versus 11.3% in DEC
  9. Ivory Coast, which is seeing massive inflation in Cocoa prices, became the 1st country to default on their debt overnight ($2.3B in Eurobonds)

And again, for those fans of the Fiat Fools who say this has nothing to do with a humble looking bald man with a beard, that’s just a charlatan’s way of ignoring the math. Here are the refreshed inverse correlations between the US Dollar Index and major global food prices:

  1. Cocoa = -0.91
  2. Wheat = -0.90
  3. Rice = -0.88

Notwithstanding that US farmers are planning to plant the fewest acres of rice since 1989 (they make more money planting things like corn), and the global supply shortages we are seeing associated with flooding and/or countries engaging in revolutions, the simple reality here is that mostly every major food staple in the world is keying off of what the US Dollar does every day – and yes, Mssrs Obama and Bernanke, that Burning Buck stops with you.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1276 and 1297, respectively. I remain long of inflation and bought my Sugar (SGG) back in the Hedgeye Portfolio yesterday. Being long inflation also means being short bonds and emerging markets.

 

Being long inflation is an explicit conviction that the Ben Ber-nank will remain a Man of Washington Conformity.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Men of Conformity - obama


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 4, 2011

 

Equity futures are trading near fair value following Thursday's late rally which erased earlier losses and ahead of today's January jobs report.

 

Also, focus will fall on the EU leader's summit in Brussels which will address the thorny issue of whether to strengthen the Financial Stability Mechanism. According to the latest press releases, Germany and France remain split on the issue of bond buybacks and on how best to co-ordinate a response to the crisis.   

 

As we look at today’s set up for the S&P 500, the range is 20 points or -0.93% downside to 1295 and +0.60% upside to 1315.

 

 MACRO DATA POINTS:

  • 8:30 a.m.: Non-Farm payrolls, Jan., est. 146k, prior 103k
  • 8:30 a.m.: Private payrolls, Jan., est. 145k, prior 113k
  • 8:30 a.m.: Manuf. payrolls, Jan., est. 10k, prior 10k
  • 8:30 a.m.: Unemployment rate, Jan., est. 9.5%, prior 9.4%
  • 10 a.m.: Fed’s Patrick Parkinson testifies to Congress on CRE
  • 1 p.m.: Baker Hughes rig count, Feb. 4  

TODAY’S WHAT TO WATCH:

  • Egyptians poured into Cairo’s Tahrir Square before Friday prayers, raising the prospect of more violence. Mubarak tells ABC News late yesterday he fears “there will be chaos” if he abruptly quits, warns the Muslim Brotherhood will come to power. 
  • FDA staff report due before Feb. 8 advisory panel on data gathered on drugs given marketing clearance before 2009 under accelerated approval program: Includes LLY’s Erbitux for colorectal cancer, GSK’s Bexxar for non-Hodgkin’s lymphoma and Arranon for T-cell leukemia and lymphoma, GENZ’s Clolar for pediatric leukemia
  • UBS says employees will find out about their bonuses on Feb. 16, rather than planned Feb. 9, receive them in early March, because of regulatory reviews 
  • Daimler Says Its View on EADS Stake Is Unchanged: WSJ
  • EADS Golden Share Considered as Daimler Seeks Exit: Tribune
  • China’s AVIC May Seek U.S. Defense Contracts: WSJ
  • U.S. Companies Increase Contract Hiring: Detroit Free Press
  • Consumers Turn to Plasma TVs as Prices Fall: L.A. Times
  • U.S. Aviation Bill Won’t Give Carriers Equipment: WSJ
  • Rosneft May Buy Out Russian Holders of TNK-BP: Vedomosti
  • Ralphs Grocery Faces Fine for Overcharging: L.A. Times

PERFORMANCE:

 

Only the XLP remains broken on TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

  • One day: Dow +0.17%, S&P +0.24%, Nasdaq +0.16%, Russell 2000 +0.31%
  • Month-to-date: Dow +1.43%, S&P +1.63%, Nasdaq +1.99%, Russell +2.22%
  • Quarter/Year-to-date: Dow +4.19%, S&P +3.93%, Nasdaq +3.81%, Russell +1.91%
  • Sector Performance - (All 9 sectors  traded higher): - Consumer Disc +1.17%,Materials +0.42%, Consumer Spls +0.52%, Utilities +0.41%, Healthcare +0.13%, Tech +16%, Financials +0.03%, Energy +0.05%, Industrials +0.04%  

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 268 (+465)  
  • VOLUME: NYSE 999.87 (+7.11%)
  • VIX:  16.69 -3.53% YTD PERFORMANCE: -5.97%
  • SPX PUT/CALL RATIO: 1.67 from 2.35 (-29.12%)

CREDIT/ECONOMIC MARKET LOOK:

 

Treasuries were weaker for a fourth straight session.

  • TED SPREAD: 17.26 0.406 (2.409%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%      
  • YIELD CURVE: 2.87 from 2.85

COMMODITY/GROWTH EXPECTATION:

  • CRB: 341.00 -0.81%  
  • Oil: 90.54 -0.35% - trading +0.22% in the AM
  • COPPER: 454.45 +0.01% - trading +0.17% in the AM
  • GOLD: 1,354.22 +1.82% - trading -0.41% in the AM

OTHER COMMODITY NEWS:

  • World food prices rose to a record in January on higher dairy, sugar and cereal costs and probably will remain elevated, the United Nations said.  An index of 55 food commodities climbed 3.4% from December to 231 points, the seventh straight increase.
  • London is set to overtake New York as the biggest center of crude and oil product futures trade this year, signaling a shift in power as the British capital benefits from soaring demand in Asia and mounting concerns over the usefulness of key U.S. contracts. 
  • Newmont Mining Corp., the largest U.S. gold producer, agreed to buy Fronteer Gold Inc. for C$2.3 billion ($2.3 billion) to gain exploration and development projects in Nevada.  Newmont is paying a 41 percent premium based on Fronteer’s average share price over the 20 days prior to the deal, according to Bloomberg data.
  • Argentine corn farmers will harvest 19.5 million metric tons of corn this season as a drought in the world's second-largest exporter trims output to below estimates, the Buenos Aires Cereals Exchange said. Corn gained in Chicago. 
  • U.S. wheat futures fell on Thursday, retreating from 2-1/2 year highs amid profit-taking, disappointing exports and a stronger dollar, but worries that extremely cold weather in the U.S. Plains might hurt the winter wheat crop underpinned prices. 
  • A drought may slow economic growth in Kenya for the first time in three years as farmers in the world’s biggest black-tea exporting nation scale back production and millions face food shortages. 

CURRENCIES:

  • EURO: 1.3649 -1.01% - trading -0.15% in the AM
  • DOLLAR: 77.748 +0.76% - trading +0.06% in the AM

EUROPEAN MARKETS:

  • FTSE 100: +0.40%; DAX: +0.27%; CAC 40: +0.33%; IBEX: +0.17 (as of 6:30 ET)
  • European markets trade higher helped by a late rally on Wall Street and firmer markets in Asia.
  • Corporate results were mixed and there is limited European economic data scheduled.
  • The focus is on the European leader’s summit where German and French leaders will present their proposals for EuroZone economic reform and there are hopes that discussion may lead to a stronger bailout fund.
  • Advancing sectors lead decliners 14-4 led by insurers and construction both up +1.4%; food & beverage (0.8%) and personal & household (0.3%) lead laggards.
  • Spain 4Q GDP probably advanced 0.2% from the 3Q and 0.6% Y/Y, the Madrid-based Bank of Spain said today in its monthly bulletin.  Banks higher on the news
  • UK SMMT January new car registrations (11.5%) y/y
  • UK Jan house prices up 0.8% M/M but down (2.4%) y/y vs consensus (3.0%) - Halifax

ASIAN MARKETS:

  • Nikkei +1.1%; Hang Seng (closed); Shanghai Composite (closed)
  • Asian markets that were open rose solidly today, though trade was thin since so many markets around the region are closed.
  • Japan rose, as the announcement that Sumitomo Metal and Nippon Steel plan to merge had investors gambling a round of industry reorganization is pending. The stocks soared 16% and 9%, respectively, leading the steel sector to a significant gain.
  • Indian stocks fall after PM Manmohan Singh says inflation poses “serious threat” to growth.
  • Australia rallied 0.87%. QBE Insurance Group jumped 7% after agreeing to buy Balboa Insurance from Bank of America. Miners rose on higher commodities prices.
  • Indonesia rose 0.44% despite a 25-basis point interest rate increase.   Indonesia’s central bank unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high.
  • Thailand up 0.43% - PTT Exploration & Production jumped 6% after Australia said the company would not lose its oil licenses there.
  • Hong Kong and South Korea are closed until 7-Feb, Taiwan is closed until 8-Feb, and China is closed until 9-Feb for Lunar New Year.

THE HEDGEYE DAILY OUTLOOK - 2 4 2011 7 05 10 AM

 

Howard Penney

Managing Director


LVS 4Q CONF CALL NOTES

Big benefit from high hold, particularly at MBS, drives a small beat over consensus.  Despite higher whisper numbers, 2011 estimates continue to look reasonable. We will have a detailed analysis later but here are our conf call notes.


 

"We are pleased to report record financial results for the fourth quarter of 2010. We set quarterly records for net revenue, adjusted property EBITDA, and adjusted property EBITDA margin during the quarter. Strong revenue growth and margin expansion in Macau, together with outstanding results at Marina Bay Sands in Singapore and improving results in Las Vegas and Bethlehem, contributed to an industry-leading financial performance."

- Sheldon G. Adelson, chairman and CEO

 

 

CONF CALL NOTES

  • Confident that their EBITDA growth will continue into 2011 - as validated by their January results
  • 806MM shares is their fully diluted share count in the quarter
  • Singapore - 1Q2011 - most of the remaining elements of the property will be launched: Lion King, Museum, and Water Show on the Bay
    • Mice business continues to grow
    • Visitor arrivals to Singapore have increased over 20%
    • LVS now owns the 2 top MICE hotels in Asia
    • The Singapore market is still growing, and the subway stop at their property opening in 2012 will help them
    • They are in the process of adding 300 more slot units
    • Think that CNY will be a big growth catalyst for them
  • Macau
    • EBITDA should be the true metric on which performance is judged, not GGR. Their market share of EBITDA was more than 2x that of SJM.
    • "Remember you can't put GGR in the bank"
  • Sands Bethlehem: 300 room hotel will open in May
  • Development pipeline:
    • Visited with government and tourism officials all over the world at their request to discuss the development of a MBS-like resort
    • Talking to Korea, Taiwan and Japan
    • Also to Florida and Texas

Q&A

  • Margin pressure in Macau due to wage pressures and competitive pressures?
    • Wage pressures are under control for now
  • Lot 3- will they get an extension?
    • Feel confident that they will get an extension if they want it. But they can monetize.
  • Still waiting to hear from the government on the FS condos.  Feels very confident that they will get something approved in the quarter.  Just received some pages commenting on issues at FS condos
  • FS Plaza had a hold issue - only 1.55%.  That was reversed over the last few weeks. They have made more than $20MM of EBITDA in just Jan 2011. The limited # of junket reps there make it more volatile - they are looking to bring in more junkets to make it less so.
  • Seasonality in MBS - saw some softness in November and saw strength during Christmas and New Year's.  CNY should be great ... they are still learning.
  • EBITDA is over $110MM in January at MBS. Wouldn't let one month's drop in RC determine what the future of Singapore will be.
  • In Vegas, experienced over 90,000 room nights during January and lowered their comps considerably to get a better customer in. Rates are somewhat under pressure but are seeing some improvement in January.  There is a lot more competition now at the high end.  Have high expectations on their Intercontinental alliance.  They have cut out almost all of their comps except to their best customers - which is resulting in a substantial increase in cash income
  •  Labor expectation for Sites 5 & 6.  Expect to get 3,000 workers from Galaxy's site at the end of February. Still plan on opening a portion of Ph1 - 1000 rooms, one of the mass casinos and a VIP casino. Have 3,500 employees now.
    • May 2012 is the scheduled completion of PH1 of Sites 5 & 6. What happens afterwards depends on the labor situation.
  • Singapore ramp of non-gaming amenities - running in the mid-to- high 80's for occupancy - close to their 90% target. Their MICE business in the first quarter of 11' is good.  The rate is good. Think that they are at 80-85% of their potential in their life cycle for non-gaming revenues.  Have about 40 more retail stores to open. Probably 55-60% of the way there for retail EBITDA - which will get a nice boost when the subway opens.  Sales are $982/psft now. Mid 80's EBITDA run rate on the Mall - think that eventually they can do $170MM of EBITDA there in a few years
  • Concentrating on improving the junket business.  Think that there is huge upside there for them.  
  • 16-24% is the range of their direct business at their properties in Macau. At Venetian its 18.6%. 
  • They are in the process of looking for a CEO of MBS and they will take their time. Looking for a broad based business person.
  • Any commentary of 2012 business in Vegas?
    • Have 781,000 rooms nights - and the forecasted ADR is closer to $200 vs. this year's $180
  • Singapore - slot win per unit per day is great- what is their capacity to add more aside from the 300 they are adding?
    • Not sure - the market is very deep for Mass and Slot drop/ handle - thinks $1-1.5BN
    • Will add 300 games by end of Q1
  • Mark Juliano is moving over to the casino side in Singapore this weekend. Also hired a SVP marketing executive formerly from Starwood.
  • Dividends?
    • Haven't really spoken about it
    • But are talking about paying down $2BN of debt in Macau
    • Aren't paying down debt in Singapore yet
  • Has no reason to think that they won't earn $3BN of EBITDA this year including a $1BN in Singapore
  • CNY should be huge all across their regions this year
  • Demand in Las Vegas for CNY is huge- they are completely sold out
  • They are talking about getting grants and incentives in Europe as well. Will take an approach of bidding out construction going forward.
  • Their 270 moving day average is 2.93% in Singapore... so according to Sheldon you don't need to adjust the hold % for the high hold this quarter
  • In another location where Intercontinental is partnered - they brought in 44% of hotel revenue
  • Relationship with their junket reps is improving - they will have 40 private gaming rooms that are junket operated in the VIP casino at sites 5 & 6

January Schmanuary

January sales results provided a surprisingly solid end to the retail fiscal year, with about two-thirds of today’s sales reports surpassing (tempered) expectations.  With January sales volumes amongst the lowest of the year, the relevance of such results can be debated.  However, the reality of the sequential uptick has two important takeaways.  First, most retailers end the year with clean inventories and less clearance on a year over year basis.  This sets up well for the Spring transition.  This is also the reason why we saw some companies raise their EPS guidance, even in some cases with lower than planned sales results (JCP, KSS).  Second, the weather was barely mentioned as an excuse.  Only a handful of retailers including Costco, BJ’s, JCP, and HOTT cited the impact of stormy weather on the month and actually quantified it.  Despite this, COST and BJ still exceeded expectations.  Others with winter apparel and footwear exposure likely benefited, leaving little reason to mention record snowfalls and deep freezes as an excuse.


We do not expect this strength to continue, especially as first quarter compares are challenging and prices at retail are beginning to creep higher.  With that said, the facts are the facts and the two-year same store sales run-rate for the broad index reached its highest level since 2007.  Time to focus on 2011 with full attention and unfortunately less clarity than we’ve seen surrounding the retail environment in well over a year. 

 

January Schmanuary - TotalSSS

 

Callouts from today’s reports:

  • While e-commerce sales remained robust for most, sales were actually down 6% at hottopic.com and only up 2.6% for jcpenney.com.  Sites with strong growth included Kohl’s (+60%) and Macy’s (+27.2%).
  • ROST continues to take advantage of the environment to secure closeouts at favorable (current) prices ahead of cost increases.  The company ended January with pack-away up 900 bps y/y  to 47%.  Inventories did increase slightly since December as well going from up 19% in total to up 25%.
  • Consumer electronics remained weak for the month as measured by performance at COST and TGT.  COST noted that TV unit sales were flat while overall dollars were down in the mid single digit range.  Target noted that overall hardlines declined by mid single digits, driven by weakness in electronics, music, movies, and books.
  • Comparisons are still overrated- for Nordstrom.  The company reported its 17th consecutive month of traffic increases.
  • Men’s apparel was cited as a leading category for the month by: JWN, KSS, and TGT.
  • COST noted that while inflation is tracking about 1% for food and sundries, the levels of increases have subsided a bit relative to recent months.  Meat and deli showed the highest levels of inflation, up mid single digits.
  • KSS noted that clearance levels were down 9% year over year.  Clearly a help to margins and a potential headwind for sales.
  • Aeropostale noted that average unit retail decreased in the low double-digits, primarily due to increased promotional activity vs. last year.
  • American Eagle noted that less promotional activity and a higher mix of accessory sales resulted in a flat average unit retail price for the month.
  • Big Lots noted that the later timing of income tax refunds and the reduced availability of income tax refund anticipation loans, impacted a portion of their customer base and certain discretionary categories, particularly furniture.  
  • Next month’s sales day will be even less hectic, with all three teen retailers (ARO, AEO, & ANF) ceasing to report monthly sales. Let the speculating begin!          

Eric Levine

Director


Early Look

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