The Economic Data calendar for the week of the 14th of February through the 18th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Conclusion: While we certainly don't intend to make light of a serious global issue (food inflation), we'll use today's media focus as a platform to cook up some emerging market “food for thought” for you to digest over the weekend.
It has taken riots in Egypt, Tunisia, India, Bolivia and other countries worldwide for consensus to notice the price action in many emerging markets equities and bonds since the announcement of Quantitative Guessing Part II. Since November 3rd, the MSCI Emerging Market Index, a collection of over 2,600 EM equities spanning 21 countries, has dropped (-3.8%) on the product of a very simple equation which we introduced back in early November:
QG2 = accelerating inflation globally = policy tightening globally = slower growth globally
Needless to say, we’ve been bearish on emerging market equities and bonds ever since.
Putting aside “smaller” countries like Egypt and Tunisia and focusing on the major “engines” of developing nation growth, emerging markets have largely fallen victim to the Starvation Trade since 11/3:
Meanwhile (since QG2’s official announcement):
For reference, the Starvation Trade is going long foodstuffs and agricultural commodities and shorting the large populations that need to tighten monetary policy in order to eat and maintain price stability in basic goods. As tactless as it may be to make light of something that’s actually not funny at all, we too have been guilty of gambling in The Ber-nank’s Casino. On January 14th, we offered up a few ideas in a collection of our best inflation plays in a note titled “Ten Ways to Play the Spike in Global Inflation” (email us if you need a copy):
Now that consensus’ best idea is the “short EVERYTHING emerging markets and get long the Dow,” we’ll use their sentiment and combine it with price action to form more actionable investment ideas. The “flows” don’t produce alpha; last week’s $7B outflow from emerging market equity funds was the largest since January 2008 – NOT a bullish data point for global growth right; we don’t buy the “US decoupling from the rest of the world” argument.
Given, we’ve assembled a collection of seven emerging markets we’ve done some work on recently that we think you need to consider as it relates to your exposure to growth and inflation trends – both domestically and globally. We’ll keep these updates short; email us if you’d like to see copies of the relevant reports and/or if you have any follow up questions:
China – The news flow regarding China eerily quiet of late; it seems perma-bulls only mention the world’s second-largest economy when they need to engage in storytelling around accelerating global growth. With the S&P at the top of a +96.5 rally from the March ’09 lows, it appears the bulls no longer need what they dubbed: “the engine of the world’s growth”. Chinese growth is slowing. How much Chinese growth overshoots the bottom of consensus estimates over the next two quarters remains to be seen.
India – India has been far and away our favorite short idea since early November. Nothing has changed but price (down -15.3% since we turned bearish on November 9th). Even to a value investor (which we are far from), India still looks iffy: SENSEX shares trade at 16.8x NTM P/E vs. 13.2x in China, 10.4x in Brazil, and 7.2x in Russia. Broken on all of our core durations (TRADE, TREND, and TAIL), we see more downside here.
Korea – Korea has certainly gotten the benefit of the US growth story. An inflated Q4 US GDP number has certainly given this export economy a nice boost until today’s (-1.6%) decline – yes, the GDP deflator is being understated and downward revisions to NTM S&P 500 earnings will create a massive divergence between the US government’s reported growth numbers and corporate profits in the coming quarters. If the commentary provided on CSCO’s earning call is any indicator, it’s decidedly bearish for Korea (and Japan) in the coming quarters. That’s on top of slowing growth and accelerating inflation at home on the peninsula. The market didn’t like the Bank of Korea’s decision to keep rates on hold today (down -1.6%).
Thailand – Thailand has been an interesting story in and of itself. While we recently covered our short position in the THD for a +5.28% realized return, we still remain bearish on the economy that is setup to slow from growth perspective and heat up from an inflation perspective. Serious compression (both margin and multiples) a’cometh for Thai equities. Mean reversion alone should keep this trade working over the intermediate term (up +36.5% in the past year).
Brazil – Today’s +1.8% move in the Bovespa reminds us all that there are pockets of value out there. The consumer and infrastructure stories in Brazil are the kind of long term bull theses that keep a smile on Mark Mobius’ face. Unfortunately, pockets of value can easily turn into Value Traps, as investors get sucked into buying good IDEAS not good INVESTMENTS. If you’re bullish on Brazil, patience will allow you to buy exposure at a discount to today’s price. The fight with inflation is far from over for the rookie president and central bank president duo. Growth will continue its deceleration in 1H11 as well.
Mexico – Much like Korea, Mexico is getting the benefit of the doubt from the US growth story (in addition to positive exposure to crude oil prices). Even if US growth was, in fact, robust in 4Q10, that’s in the rear view. Of the leading indicators we track, none are signaling an acceleration of growth for this US’s 70% household consumption-based economy. WTI’s lackluster performance over the past few weeks of heightened geopolitical risk is an explicitly negative US demand signal.
We need to see much better employment data than the last two payrolls misses to get us constructive on US growth. And one can make a very compelling argument that the COGS inflation being felt by companies like KO, PEP, SYY, CSCO, NKE, F, and GT is definitely NOT bullish for CFO’s increasing their labor expense in 2011. Add in the impact of rising interest rates on the bottom line and companies will be forced to take up price on a weak US consumer. Margin compression will come from slower traffic or sitting on rising input costs. Either way, Mexico loses from a lack of pricing power here (80% of its exports go to the US).
Argentina – Alongside Zimbabwe, Argentina wrote the book on modern-day emerging market inflation. Just over 20 years later, President Fernandez and company have taken the liberty to sue private economists who report inflation – many of which are 250% of the government’s official reading of +10.9% YoY. No country in the world has a more suspect CPI calculation – not even the US. The Merval Index is up +7.7% since QG2 was announced on the strength of the parabolic moves in soybeans, corn and wheat prices (Argentina’s main exports). Apparently Argentineans themselves don’t have to eat. Social stability or stock market performance – something’s going to give here.
Don’t be swindled by the statements of our Fed Chairman Ben Bernanke:
"Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies..."
- The Ber-Nank, Feb. 3, 2011
From our purview, the slope of demand growth in emerging markets is falling like a “BRIC”.
Keep your head on a swivel and have a great weekend.
Recent Hedgeye Macro research notes on CHINA (email us for copies):
Recent Hedgeye Macro research notes on INDIA (email us for copies):
Recent Hedgeye Macro research notes on KOREA (email us for copies):
Recent Hedgeye Macro research notes on THAILAND (email us for copies):
Recent Hedgeye Macro research notes on BRAZIL (email us for copies):
Recent Hedgeye Macro research notes on MEXICO (email us for copies):
Recent Hedgeye Macro research notes on ARGENTINA (email us for copies):
Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)
We’re seeing a meaningful inflection in the CHF-EUR, down -5.0% year-to-date, an added benefit for a country whose exports represent 55% of GDP. With an expedient gain of +19.3% in the CHF versus the EUR in 2010 -- and considering that the Eurozone is Switzerland’s main export partner -- the weakening in the currency comes as a great relief to exporters, but also the Swiss National Bank (SNB) that attempted to weaken the CHF last year, but ran into snags with 1.) the inability to cut below its main benchmark interest rate of 0.25%, and 2.) sovereign debt fears in the Eurozone that buoyed safe haven currency plays like the CHF.
Although the inverse correlation between the CHF-EUR and Swiss Market Index (equity) is not extremely high (-0.34) since 12/31/09, the trend line suggests a positive bias in the equity market to a weaker CHF.
[Of the major currencies versus the EUR, only South Africa’s Rand is down more than the CHF year-to-date, at -10.2%.]
Yesterday, Swiss CPI declined sequentially to +0.3% in January Y/Y versus +0.5% in December, bucking the trend of rising inflation we’re seeing across Europe. From a comps perspective, CPI should remain benign in 1H2011.
4Q10 GDP has yet to be released, however average Bloomberg forecasts suggest +2.6% Q/Q, a sequential slowing from +3.1% in Q3. We’re cautious on the country’s growth profile given that its main trading partners in Europe are working through austerity programs that are cutting spending, increasing taxes, and dampening confidence, whereas an important export market like Germany is showing fundamental signs of rolling over. Comps get increasingly more difficult beginning in Q1, and Bloomberg consensus forecasts +1.7% annual GDP growth in 2011.
We’re not currently invested in Switzerland and remain cautious on Europe’s underlying debt and deficit imbalances. This week showed a reversal in European equity market performance, with the PIIGS underperforming their European peers after an exuberant start to the new year, whereas the credit markets continue to reflect a heavy risk premium to own Europe's periphery.
The European Summit on March 24-25 remains a main catalyst that we're managing risk around in Europe. Stay tuned.
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POSITION: No position in SPY
No matter where you go, here we are again – testing higher-highs for both the intermediate-term cycle and the YTD. With the prior closing high of 1324 established on Tuesday, February 8th, it looks like The Mu-barak wants to be the latest huckleberry for the bulls.
I’ve been talking about the probability if seeing either my 2.5 or 3.0 standard deviation lines of 1330 and 1340 (or both) tested to the upside in the immediate-term. That’s why I’m not short the SPY and have been leaning long with 2 of the 9 S&P Sector ETFs (XLV and XLU) all week.
That doesn’t mean I won’t start selling longs on the way up to my immediate-term TRADE lines of resistance (1331) and then start re-populating my short exposures however. The inverse relationship between the VIX and the SPY remains a very dominant one and we are approaching a big level of support for the VIX that held in both mid-April 2010 (before the 15% correction we called for in our May Showers call) and mid-January 2011.
My immediate-term TRADE line of downside support at 1315 has held like a champ all week. If they break that, there’s no support down to my intermediate-term TREND line of 1233. And I don’t think many people are positioned for that kind of drawdown in price.
Trade this market tight – the rest of the ride won’t be for the faint of heart,
Keith R. McCullough
Chief Executive Officer
Keith shorted JNY again in the Hedgeye portfolio today. I had three people ping me this morning on the rationale. Each of them had a similar message; “Don’t you think that the cat’s outta the bag?” Simply put, the answer is “No.”
JNY’s Guidance looks like the start of a game of Chinese water torture. Check this out…
“Our goal and the corresponding plans that we have put in place are focused on our achieving gross margins approximating last year. If the business climate deteriorates, we believe that full-year gross margins could decline by 50 to 100 basis points. Comparisons in the first half of the year are more difficult than the back half of the year. We faced near ideal conditions in the first half of 2010 and posted near record gross margin percentages. In 2011, we are facing distinctly different conditions regarding rising product costs and continued uncertain consumer spending as unemployment stays high and the cost of consumer staples continue to rise. Keeping all this in mind, we expect first-quarter gross margins will be down by approximately 200 to 250 basis points and second-quarter margins down about 150 basis points. As we get to the back half, it's much tougher to forecast, but as price increases have a more significant impact and we benefit from tighter controls of inventory, third-quarter margins could be flat to up slightly and fourth-quarter could be up sharply.”
So our interpretation of that is “Margins should be flat, with a hockey stick trajectory leading to a strong finish to the year. But if things erode further, margins could be down by 50-100bps off a record 2010.”
So did they say that “if the unknown occurs in 2H, it will cost us 50-100bps in margin.”
Why not 200bps? Why not 500?
The Street is at $1.37 for the year. We’re having a tough time getting over $1.10.
Brian P. McGough
R3: REQUIRED RETAIL READING
February 11, 2010
OUR TAKE ON OVERNIGHT NEWS
Puma and Undefeated to Release Clyde Collection - This spring, Puma’s Clyde is going Undefeated. German athletic brand Puma is expected to announce Friday that it has partnered with seminal Los Angeles sneaker shop Undefeated for a collection of the brand’s iconic Clyde basketball style. The first shoes in the collaboration, unisex styles retailing for $110, were designed by Undefeated cofounder Eddie Cruz and will deliver to Undefeated and other top-tier sneaker shops on April 10. A second delivery of $65 styles to the same channel will drop on June 10. Further releases are planned throughout 2011 and beyond. <WWD>
Hedgeye Retail’s Take: While collaborations are nothing new in the world of sneakerheads, the focus on basketball from Puma is certainly noteworthy. While not a strongpoint of Puma’s heritage, we suspect the overall hoops resurgence is influencing this grassroots effort.
American Eagle Speculation about Retail Takeover - American Eagle Outfitters Inc. surged the most in almost two years in New York trading on speculation the Pittsburgh-based teen-clothing retailer may be a takeover target. The shares rose $1.34, or 9.1 percent, to $16.03 at 4:01 p.m. in New York Stock Exchange composite trading for the largest gain since April 2009. “It’s the takeover rumors starting up again,” said Brian Sozzi an analyst for Wall Street Strategies Inc. in New York. A deal would make sense for private equity because American Eagle has “a good brand and generates lots of cash,” he said. The clothier, led by Chief Executive Officer James O’Donnell, faces increasing competition from teen retailers like Abercrombie & Fitch Co. and Aeropostale Inc., both of which reported gains in same-store sales last month. <Bloomberg>
Hedgeye Retail’s Take: If every “good brand with lots of cash” was for sale, then we’d be certainly be more bullish on retail. We point out that at various times over the past four years, AEO has been rumored to be for sale.
Lindsay Lohan Looses Shelf Space - While Lindsay Lohan’s legal woes are taking center stage once again, the actress’ apparel and accessories brand, 6126, has quietly receded from the shelves of department and specialty stores, according to checks by WWD. Initially a leggings brand, 6126 made a splashy debut in 2008 and 2009 at upscale stores such as Nordstrom, Macy’s, Bloomingdale’s, Neiman Marcus and Limited Brands Inc.’s Henri Bendel, but representatives from those stores said this week they no longer carry the line. <WWD>
Hedgeye Retail’s Take: With Lohan in the headlines for all the wrong reasons, this hardly comes as a surprise. Let this serve as a reminder that celebrity licensed product lines are not without risks. Lohan’s latest theft snafu may actually land her in jail for a prolonged period of time. Jumpsuit endorsement perhaps?
Stride Rite Lands Marvel License - Stride Rite has added another big license to its stable. The brand, a division of Topeka, Kan.-based Collective Brands Inc., has signed a multi-year licensing agreement with Marvel Entertainment to create a collection of children's shoes inspired by Marvel's cast of iconic superhero characters, including Spider-Man, Iron Man and Captain America. The collection, available in toddler and youth sizes, will include athletic styles, sport shoes and casual sandals. <WWD>
Hedgeye Retail’s Take: Good timing with many of the Marvel characters making splashes on the big screen. We wonder if Captain America shoes will be ready for the July release.
Retailers Switch to iPads from Conventional Kiosks - City Sports and Things Remembered have unveiled a new system from mobile retail software provider Global Bay Mobile Technologies that turns off-the-shelf iPads into kiosks to enhance the in-store experience for shoppers. The iPads are securely mounted to kiosk-like stands throughout the stores. The bottom button on the iPad, which takes users to the iPad home screen, is covered so shoppers can only use the app running on the screen, called iPad Kiosk. The app, linked to a retailer’s information systems via Wi-Fi, can be customized to present any information a retailer selects. <InternetRetailer>
Hedgeye Retail’s Take: With no moving parts and a relatively low cost, the growth of the Ipad in an enterprise setting is likely to continue. Check out Square (https://squareup.com/) which actually turns your Ipad into a cash register.
Asia Fuels Sales Growth at Prada - Prada Group closed the year with a bang, with sales exceeding 2 billion euros, lifted by gains across all geographical markets. In the fiscal year ended Jan. 31, the Italian luxury house reported revenues of 2.04 billion euros, or $2.69 billion, up 31 percent compared with the year before. In particular, sales in Asia rose 48 percent. At the end of last month, Prada said that it planned to go ahead with an initial public offering on the Hong Kong Stock Exchange. “These results confirm that the retail network expansion is a winning strategy and exceeding the threshold of 2 billion [euros in] revenues is a target which now allows us to set further challenging goals,” said Patrizio Bertelli, chief executive officer of the company. <WWD>
Hedgeye Retail’s Take: With less than 18 stores domestically and the company’s plans for an IPO forthcoming, expect to see considerable store expansion domestically this year.
E-Commerce up in 2010 - Total U.S. e-commerce spending reached $227.6 billion in 2010, up 9% versus the previous year, according to the comScore 2010 U.S. Digital Year in Review report released this week. Travel e-commerce spending grew 6% to $85.2 billion, while retail (non-travel) e-commerce spending jumped 10% to $142.5 billion for the year. The annual report recaps key trends in the U.S. digital media landscape, including e-commerce, social networking, online video, search, online advertising and mobile, with an emphasis on how digital marketers can capitalize on these trends in 2011. “2010 was a very positive year for the digital media industry, highlighted by a strong rebound in e-commerce spending , significant innovation and increased demand for online advertising, and an explosion in digital content consumption across multiple platforms,” said comScore chairman Gian Fulgoni. <SportsOneSource>
Hedgeye Retail’s Take: e-commerce outperformance is not new news, but the category is likely to be off to a solid start again early here in 2011 with consumers intermittently housebound in January. At this point, the callout is those companies not participating – HIBB is one of the few retailers that comes to mind that still lack a platform.
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