This note was originally published at 8am on April 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“They would be our shepherds, and we are to be their flock.”
After watching Maria Bartiromo interview Chicago Federal Reserve Bank President Charles Evans yesterday into the market close and then watching The Bernank shepherd the financial media into taking his word for it on The Inflation last night, I thought about becoming a sheep.
Or should I rethink my being in this interconnected Global Macro game of risk as a lemming? Perhaps a monkey? Or a donkey? Ah, so many attractive career options are available if I were to accept the wishes of the overlords of the Keynesian Kingdom and become a member of The Fiat Flock…
Born in France in 1801, then orphaned at the age of 9, Bastiat penned the aforementioned quote when he wrote “The Law” in 1850. Not surprisingly, his work wasn’t well regarded by the French Socialists of his time. Neither was it promoted by Charles de Gaulle in the 1950s when his debt-financed-deficit-spending and devaluation programs destroyed both the franc and French credibility in global markets…
During days when the General-in-Chief of the US Federal Reserve (Bernanke) is more left leaning and socialist than the ex-Finance Minister of France turned head of the European Central Bank (Trichet), I think it’s worth taking a moment this morning to consider America’s constitutional definition of liberty as an alternative to this wanna be Centrally Planned world.
The Bastiat Questions (“The Law”, page 46):
“The pretensions of organizers suggest another question, which I have often asked them, and to which I am not aware that I have ever received an answer: Since the natural tendencies of mankind are so bad that it is not safe to allow liberty, how comes it to pass that the tendencies of the organizers are always good? Do they consider that they are composed of different materials from the rest of mankind?”
The Implied Answer (“The Law”, page 46):
“They have, therefore, received from heaven, intelligence and virtues that place them beyond and above mankind: let them show their title to this superiority. They would be our shepherds, and we are to be their flock.”
So how do you feel about that? How do you feel about American central planners debauching the longstanding entitlement we’ve had to the definition of a “free market” system? What’s so free about a market whose every breath of weaning volume depends on The Bernank’s heavy hand?
It’s sad to watch.
Back to this morning’s Global Macro Grind…
The Top 3 headlines this morning are:
Great news for UConn and National Semi – but what’s up with The Bernank? What exactly does monitoring inflation “extremely closely” mean? Were our shepherds monitoring The Inflation somewhat closely before food prices hit all-time highs?
I don’t know how else to say it, so I’ll say it like the Chinese just did this morning by addressing The Inflation head on and raising China’s benchmark interest rate. If we’re not going to address reality about oil at $108/barrel, a new leader in the global financial system will. Don’t think for a New York minute that China didn’t do this in Bernanke’s face this morning for a reason.
China waited on Ben Bernanke’s speech to The Fiat Flock in Georgia last night. This what he said:
“So long as inflation expectations remain stable and well anchored… the increase in inflation will be transitory”
No, dear hard working red-white-and-blue-collared Americans, I couldn’t make that quote up if I tried. Yes, Bernanke makes up his own “forecasts” about matters like growth and inflation all of the time – and, yes, his forecasting track record speaks for itself. It’s terrible.
As we like to say at Hedgeye, Mr. Bernanke, ever is a long time…
There has never been a Federal Reserve Chairman who has overseen more Americans on food stamps (44 million people and counting). There has never been a Federal Reserve Chairman who has overseen 3-week explosions of price volatility (VIX) on the order of +40-60%, and then draw downs to higher-lows that are the most expedited in market history (7 days in March = VIX down -41.6%).
We are not your Fiat Flock. We do not trust your “forecasts.” And we want our markets back.
My immediate-term support and resistance lines for WTI Crude Oil are $105.91 and $108.92, respectively. My immediate-term support and resistance lines for the SP500 are now 1318 and 1341, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - April 8, 2011
Both China and Europe raise interest rates this week; Chinese and European stocks both rallied on the decision. China, which is the country we like most on the long side right now was up for the 3three consecutive following the rate hike to +7.9% YTD. As we look at today’s set up for the S&P 500, the range is 31 points or -1.61% downside to 1312 and 0.71% upside to 1343.
SECTOR AND GLOBAL PERFORMANCE
We are on DAY 5 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries fell, sending 10-year yield to 3.57%, as traders added to bets on inflation, Fed Bank of Richmond President Jeffrey Lacker said may raise interest rates this year.
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
ASIA PACIFIC MARKTES:
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Overall, there’s probably not many analysts/PMs out there who are short/underweight Retail that are not scratching their heads wondering what they’re missing, and why today’s sales are so strong. If they’re not asking that, then they’re being intellectually dishonest.
We’ve spent the past few hours debating, crunching, and thinking about what all this means. And at the end of the day, we’re sticking to our guns that retail will roll meaningfully in 2H (actually, with margin pressure becoming apparent in June).
Yes, there was definitely an overwhelmingly high number of beats relative to expectations. But there’s a lot of factors at play…
1) Sample size: Let’s not forget that over the past year, the number of companies represented in the sample went from 33 to 23 – and because one of those companies is Wal-Mart, we’ve seen $260bn in revenue go silent. Look at it this way, we have a $14 trillion economy with a 73% consumption rate – so about $10.2 trillion in PCE. Wal-Mart’s US sales account for about 2.6% of that. Better yet, WMT accounts for 7.1% of all dollars deployed at retail in the US.
2) Target didn’t exactly knock the cover off the ball. It beat expectations by 90bps, but still printed a (-5.5%) comp, as strength in consumables and Home was offset by weakness in/mix shift away from apparel and footwear.
3) COST continues to confirm our view on inflation with both fresh foods and food and sundries still up in the LSD range while meat and produce increased reflecting MSD inflation. In addition, gas contributed +3% and +7.5% to SSS for both COST and BJ respectively. Our view is that while this won’t be the first or second crack in the retail industry’s margin equation, it will add to the pain as the retailers choose to capture consumables inflation costs at the expense of discretionary product margins. (i.e can’t take up price on milk, eggs, and chicken – so look to extract margin in categories like underwear, shirts, toys, etc…).
4) There’s no doubt that higher-end products and brands are outperforming. Not a shocker. JCP -0.3, Macy’s +0.9%, Nordstrom +5.1%, and Saks +11.1%. This is definitely a positive for Ralph, and to a lesser extent Guess and PVH.
5) Mesh that with another major undisputable fact…after drawing working capital down to the lowest level in the history of modern day retail, we need to start to see inventory flow into – and then out of – the system in order to allow any of these companies to grow sales. I don’t think anyone would dispute that Gross Margin variability is headed higher – but companies won’t talk about that when their most important month of the quarter is left to go. While this will be more of an issue in 2H, it is likely to be a factor this quarter as well.
So now what?
We’ve got another month of meaningful acceleration in sales. Who’s going to short retail after we saw a seemingly inexplainably strong March, and should see a better than 1,000bp ramp in April? Well… I might. But then in May we get the deceleration and it is on product that has a higher cost embedded in the margin. Then a month later the consumer runs out of QE2 support. Our financials analyst, Josh Steiner, noted this morning to clients how history shows that the end of any period of quantitative easing has put the brakes on improvement to the employment picture for an average of 5-6 months. We have no reason to think it will be different this time around.
That means that we either need wage improvement to drive income, which we’re not going to bank on.
That leaves us with two remaining levers to boost personal consumption – taxes and savings rate. Taxes are sitting at about 9.5% now, one of the lowest levels on record. Yes, that sounds so low, and most people reading this wish they could have this rate. But math is math. Even if you argue that the government understates the tax numbers (why not? They have no problem misrepresent other numbers – like the CPI ) at least give them the benefit of the doubt that they consistently misrepresent it. The latest trajectory is near trough, and it’s probably not going any lower.
If there’s one area where we think we could be wrong, it’s with the personal savings rate. It’s crept up to 5.6% from close to zero over the past few years, and this is a direct trade-off with consumption. Could the consumer draw down savings in 2H and be sitting there with no savings, but still be spending? Yes. We’re Americans. That’s what we do. But the savings rate came down over time as interest rates came down, which has obvious implications for purchasing power. With rates today sitting near zero, it scares me to think of what the consumer environment will be later this year if we’re right with our thesis, and the consumer draws down savings back towards zero while interest rates have nowhere to go but up.
I work in an office of hockey heads. But I think the scenario I just described is like ‘pulling the goalie.’
For all these reasons, I’m a seller into strength over the next two months. Favorites include LIZ, PSS, FL, ROST, RL. Least Favorites: WMT, TGT, CRI, JNY, JCP.
Additional SSS Callouts:
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