WMT: Does Someone Think They Know Something?


Keith shorted WMT this morning in the Hedgeye Virtual Portfolio at $52.90, as he continues to trade around one of our core intermediate-term ideas. 


"l assume someone thinks they have inside information somewhere in this name this morning. US Consumption will remain lower as Oil climbs higher.” -KM


Our WMT view is based on our bullish view on inflation on top of the internal challenges that the company faces to drive its domestic same store sales back into positive territory.  


The situation surrounding Wal-Mart’s internal execution in areas such as apparel and overall category management is nothing new.  Too much selection? Not enough selection?  Brands? Basics?  Management is hyper focused on turning things around, yet numerous strategy changes over the past year have yielded little in the way of tangible results. We do not see a meaningful and credible plan at this current time that suggest domestic sales can outperform an increasingly challenging backdrop for the company’s core consumer.  In fact, the company entered 2011 with total inventories up 11% against a 2.5% increase in sales.  Clearly not the “clean” start that instills confidence in the wake of rising costs and substantial volatility at the gas pump. 


We remain concerned with the following near-term challenges:

  •  Management’s message now says the US goal of positive same store sales will “take time”.  The CEO acknowledged that issues facing sales (and their customers) were bigger than they “initially expected”.  Traffic is still a drag and likely to remain so given the law of large numbers that puts 1 in 3 Americans at a Wal-Mart each week.
  • Inventories are high no matter how you slice it heading into this year.  Total inventories up 11%, total sales up 2.4% at year end.  With a negative comp headwind, inventory pressure is likely to persist through the first half of the year leaving little chance for margin expansion.  From a timing perspective, this then rolls into the second half of the year which is the most uncertain time from an inflation and price elasticity standpoint.
  • The current four point plan aimed at fixing the US business is centered on price leadership, broad assortments, improved remodels, and focus on multi-channel.  None of this is revolutionary, but rather basic blocking and tackling.  Details surrounding these plans are also scant, at least as of 4Q reporting.  The first point of the plan is most telling however.  In order to maintain price leadership in a the wake of rising costs, we suspect WMT will be as aggressive as ever to protect its market share.  At best, this caps margin improvement in the near to intermediate term.
  • The company's $1bn cut in capex is a fcf positive for the year. But a company with this magnitude of challenges on the top line and margin equation banking on to cost cutting and financial engineering to drive cash flow is a concern for us.  



The Bloomberg Weekly Consumer Comfort Index has just hit the tape and reveals some interesting takeaways on the state of the consumer for the week ended March 20.


The Bloomberg Consumer Comfort Index is not a metric that I have written about at length in the past but the granular nature in which the findings of the survey is presented allows us to gain some valuable insights into sub-trends in the economy. 


Overall, the Index declined to -48.9 for the week ended 3/20 versus -48.5 for the week prior.  Hardly a momentous decline, but a decline nonetheless.  More narrowly, respondents’ view on the state of the economy went from -80.3 to -86 week-over-week.   Personal Finances and Buying Climate were two topics that drew sequential improvements in respondents’ perception of each subject; however, both have deteriorated significantly from five weeks ago.


Segmenting the data by age, as expected, 18-34 year-olds showed the worst week-over-week decline in sentiment on the state of the nation’s economy.   Additionally, it is worth noting that over the past five weeks, 18-34 year-olds’ sentiment has declined rapidly, from -35.7 for the week ended 2/13 to -57.3 for the week ended 3/20. 


Filtering the findings of the survey by income, the only brackets that saw a week-over-week improvement in the index were the $15k to $24.9k and the $40k to $49.9k groups.  All other groups saw a decline, with the $75k to $99k seeing the sharpest decline at -35.6 versus -27.6 for the week prior.


By region, the MidWest was the only area of the country that saw a sequential improvement in the CCI on a week-over-week basis.  The NorthEast saw the steepest decline from 3/13 to 3/20, coming in at -50.5 from -45.6.


The Polarization Index, which represents the difference between Democrats and Republicans, expanded to -7.9 from -3.9 for the week prior.  The larger the absolute figure, the greater the divergence in confidence.  For Republicans and Independents, the most recent week saw a sequential improvement in the CCI, while Democrats’ reading declined.


A summary of the key takeaways from the Bloomberg Weekly Consumer Comfort Index is as follows:

  • 18-34 year olds have become far less optimistic, relative to other age groups, of late.  Joblessness continues to be an issue for this age cohort and compounding stress factors such as high personal debt levels and the general societal malaise in the United States today further drag on sentiment among young adults.
  • Overall, political sentiment has declined for GOP, Democrat, and Independent voters over the last five weeks.  Heightened concerns about government balance sheets, foreign policy, and a dearth of leaders stepping up to the plate for the GOP presidential nominations may be contributing to this trend.
  • Lastly, if you are single or divorced, you registered as being more positive for the week ended 3/20 than you did the week prior.  The married among us, however, saw their sentiment decline week-over-week!

Howard Penney

Managing Director


CONSUMER UPDATE - weekly cons comf

Range Rover: SP500 Levels, Refreshed



I should have covered my SP500 short position on yesterday’s test of the 1 range. Should-haves are a poor hockey player’s excuse for staring down at the puck. I should not have had my head down when in Big Alberta’s trolley tracks…


With month and quarter end coming up (next week), there’s no reason why the bulls won’t do their best to defend the bottom end of this market’s newly established trading range. For both our TRADE and TREND durations, I see those ranges as follows: 

  1. Immediate-term TRADE = 1
  2. Intermediate-term TREND = 1 

One of the key reasons for the sustainability of this one-week rally from immediate-term TRADE oversold lows is that the VIX has backed off its long-term TAIL line of 22.03. The inverse relationship between the VIX and SP500 remains critical to respect. Currently, intermediate-term TREND support for the VIX holding around the 18 level keeps the intermediate-term TREND of lower-highs for the SP500 intact.


On a breakout above 1308, I’ll wait and watch to short the SP500 again at 1315-ish. Otherwise, I’m waiting for another Short Covering Opportunity at 1281. Manage your risk around the ranges.



Keith R. McCullough
Chief Executive Officer


Range Rover: SP500 Levels, Refreshed - 1

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Notable news items/price action from the past twenty-four hours.

  • SBUX gained almost 5% on accelerating volume yesterday as investors reacted favorably to the AGM, which was held yesterday in Seattle.  Critical takeaways from the AGM include the company’s intent to expand the CPG business and growing its K-cup business, which management believes could ultimately become a $1 billion business. 
  • SBUX card mobile has become a hit already.  More than 3 million people, so far, have paid for their purchases using Starbucks Card Mobile (either the Starbucks Card Mobile iPhone or Blackberry applications).
  • SBUX said that it would expand on its previously announced relationship with Courtesy Products, the nation’s leading provider of in-room coffee service to hotels, via a new brewing system that would be priced lower than the Keurig machine.  Details of the deal are still being worked out, according to The Wall Street Journal.
  • WEN is trading well recently, gaining 3.2% on accelerating volume yesterday.  The next catalyst for the stock is the sale of Arby’s.
  • KKD is outsourcing its domestic supply chain distribution channels to Sysco Corp. KKD declined on accelerating volume yesterday.
  • SONC is facing stiff competition in its Texas market as In-N-Out and CKE Restaurants (via Carl’s Jr) expand into Texas.
  • MRT declined on accelerating volume yesterday.
  • Consumers may be more resistant to price increases than management teams are aware of.  A man in Texas fired a gun at a KFC/Taco Bell drive-thru employee after discovering the price of a burrito had risen to $1.49 from 99 cents.
  • Subway is the most loved fast food chain in the US according to Amplicate, an online opinion-collating resource.  The top 20 rankings, per the Amplicate survey, can be found here.



Howard Penney

Managing Director

CHART OF THE DAY: Short Covering in Consensus Short Ideas



CHART OF THE DAY: Short Covering in Consensus Short Ideas -  chart

Instinctive Effort

“It is no other than the instinctive effort of every people towards liberty.”



It’s both sad and exciting to watch Portuguese politicians fall on their swords of Keynesian storytelling this morning. And oh the irony of Portugal’s PM bearing the name of the great Greek philosopher. Socrates’ decision certainly adds to the philosophical field of ethics. For the first time, he’s actually doing what he said he’d do – resigning.


There is, of course, no ethics in assuming that you can plunder your people with deficits and debts without the rest of the world eventually noticing. That’s why Portuguese bonds continue to crash this morning (2-year Pig Paper yields hitting new highs of 6.83%). That’s how the broken handshakes are going to be priced in this brave new transparent world of Fiat Fool Finance – with a trashing of promissory notes that were based on lies.


Instinctively, whether you are watching American Idol or a piggy politician, you know when someone doesn’t pass the smell test. While fibbing is part of any political process, flat out lying is punished with much more asymmetric outcomes. There is an Instinctive Effort of every person in this world to find the truth.


The truth about sovereign debt is that more of it is not good. At least not when your country has crossed what we have called The Rubicon of deficit and debt ratios (as a percentage of GDP). As a reminder, those 2 critical risk management levels are as follows:

  1. Deficit/GDP greater than 9%
  2. Debt/GDP greater than 90%

If you are reading this note in America this morning, this should remind you that we will not be immune to crossing the proverbial Rubicon of Fiat Fool Finance.


Timing unknown. Fundamentals known.


As the Japanese press toward 210% Debt/GDP, if you didn’t know the Japanese Bureaucrats have already handcuffed their citizenry’s long-term liberty with these liabilities, now you know…


Socrates (the 399 BC one) was penning his thoughts about ethics 3 centuries before Julius Caesar finally crossed The Rubicon. For Caesar, that meant passing the point of no return. That was the beginning of the end for the professional politicians of the Roman Empire. On that historical score, today is a very good day for Portugal’s version of Socrates. The People refuse to be plundered.


As Bastiat predicted in 1850, in plundering The People, “in this you will not succeed… so long as the legal plunder is the basis of legislation within” (“The Law”, page 15). And behold that Instinctive Effort of The People of Portugal this morning – they refuse to let Big Government Interventionists plug them with austerity measures any longer. They’d rather see the aristocracy, who gets paid by the bond market, fail.


Back to the grind…


Not surprisingly, the immediate-term reaction in both US and European stock market futures to this “news” is that if the market isn’t going down immediately on this, well we better suit up in our BTD Gear and chase these suckers higher…


To a degree, this illustrates the continued short-term performance pressures building within the temples of the hedge fund community. For 2011 YTD, how else would you explain a stock market like Greece’s being the world’s best performer?


Drum-roll… it’s called short covering in consensus short ideas…


Been there, done that – and I’m actually still trying to do it every day. How does a “fundamental” long/short Risk Manager make money shorting Fiat Fool countries who think “This Time Is Different” (Reinhart & Rogoff, 2009) when anyone who hasn’t been living under a rock for the last 18 months knows how this movie will ultimately end? Evidently, you wait, patiently, on price.


As a refresher, there is this thing in risk management called mean-reversion. Those who subscribe to it know that what crashes, eventually bounces – and what bubbles, eventually pops…


For the year ended 2010, the 3 worst performing stock markets in the world were:

  1. Greece = DOWN -35.6%
  2. Spain = DOWN -17.4%%
  3. China = DOWN -14.3%

In 2011, for the YTD, the tables have turned:

  1. Greece = UP +13.9%
  2. Spain = UP +8.0%
  3. China = UP +4.9%

So, I guess it’s a good thing we’re long China after being bearish on Chinese stocks for the last year…


Ultimately, whatever crack-pot “strategist” tells you this all means Greece, Spain, and Portugal are all systems go now probably missed proactively making the call 2 years ago that these stock and bond markets would selectively self-destruct on multiple durations.


Net net net, our long-term call on this gigantic Keynesian experiment going very bad remains as follows:


1.   Crossing The Rubicon of deficits and debt ratios will ultimately result in governments and their promissory notes self destructing

2.   Debauching the value of fiat moneys will result in both Price Volatility and The Inflation

3.   Fiat Fools and their policies to inflate will ultimately go away


They won’t go away forever. That’s Wall Street. You always bring in a new cattle class to bank and broker commissions. But Roman history and 1970s Style Stagflation fans alike remember Caesar as well as they remember Nixon – with an Instinctively Effortless smell.


My immediate-term support and resistance lines for WTI Crude Oil are $101.78 and $106.98, respectively. My immediate-term support and resistance lines for the SP500 are 1280 and 1309, respectively. Manage your risk around these ranges.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Instinctive Effort - Chart of the Day


Instinctive Effort - Virtual Portfolio

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 80.43%
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