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The Oil Market Has Gotten Ugly in a Hurry

Conclusion:  A myriad of bad news today has taken the price of oil out to the woodshed, though it still has not violated our key support lines.


Position:  Sold OIL yesterday.


While we didn’t have an expert network to advise us, we sold OIL in the Virtual Portfolio yesterday and it was obviously a fortuitous call given today’s action.   Front month oil futures for WTI are down almost 5% currently and trading was halted earlier due to the volatility in trading.  As Keith wrote yesterday when selling the position:


“I have no idea what centrally planned idea is coming down the pike next, so I'll sell here.”


Today, it seems, we know exactly what has come down the pike, which is that the CME, who owns the NYMEX, is increasing margin requirements by 25% at the close today.  Obviously, as we are seeing today, this is not good for the price of oil.  As investors, hedgers, and speculators are forced to either fund margin accounts, or reduce their positions, this obviously creates selling pressure.


To add to the adjustment of margin requirements, inventory levels released from the Department of Energy today were very bearish for the second week in a row. Specifically, crude inventories rose by 3.8 million barrels week-over-week, which is 2.2% above year ago levels. In addition, gasoline stocks were up 1.3 million barrels week-over-week.  This broad increase of inventory was underscored by clear demand destruction as consumption of motor dropped 1.3% last week, which is the lowest level since the week ended February 11th.   In the charts below, we show an increasing trend of oil inventory building in the United States.


The Oil Market Has Gotten Ugly in a Hurry - cushing


The Oil Market Has Gotten Ugly in a Hurry - oil


The Oil Market Has Gotten Ugly in a Hurry - gasoline


Additionally, while emerging market demand still seems solid, Chinese growth of oil imports did show more tepid year-over-year growth with the April import data.   Over the course of the past year, the average monthly year-over-year growth for Chinese oil imports is 10.7%.  In April, and admittedly this is only one month, imports were up only 1.7% year-over-year, which is a deceleration from the prior three months and certainly a cautious flag.


The other important factor to consider today is the relative strength of the U.S. dollar, especially versus the Euro.  Currently, the Euro is down roughly -1.5% in today’s trading versus the U.S. dollar and the U.S. dollar Index is up nearly a full percent.  The value of the U.S. dollar continues to be the key driver of the commodity complex, in particular oil.  In fact, as of last night’s close the correlation between the U.S. dollar and front month crude futures was -0.86 on a six-month basis.


In the chart below, we’ve highlighted our quantitative levels for oil.  The TREND line is $98.63, which is an important support level.  The next level is longer term TAIL line, which is $86.79.  Based on our quantitative models, a sustained violation of the TREND line, typically three days, would put the TAIL line in play, which is more than 12% downside from here.


Daryl G. Jones

Managing Director


The Oil Market Has Gotten Ugly in a Hurry - wti price

Retail Sentiment Check


Our Hedgeye Retail Sentiment Scorecard flagged some interesting changes on the margin. Those with a rapid rise in sentiment -- TGT, GIL, HBI, COH, KSS, FL, HD, LOW are paired against those with sequential erosion, like URBN – or no sentiment at all. Yes, that’s LIZ.



Today we are publishing our Hedgeye Sentiment Scoreboard in conjunction with the release of short interest data last night. Our Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. It’s probably no surprise that once sentiment reaches these extreme levels, it becomes a very asymmetrical setup wherein expectations become sky high or rock bottom and failure to meet those expectations is more probable than not. They’re not perfect, but they definitely give us a better sense to “fish where the fish are” across the retail landscape. Thanks to Josh Steiner and Allison Kaptur who created this system for the Financials group.


Here are some important notables:


TGT: The street continues to cling on to hope here. With a sentiment score of 90, TGT pierced the 9-barrier.

URBN: You can drive a truck through the bull vs bear case on this one. With a 10 point decline in sentiment over the past 2 weeks, the ‘expectations pendulum’ is starting to swing into favor for a potential bull case.

LIZ: This thing has a score of 5. No kidding. Hardly anyone comes close. Even after the company’s earnings release and analyst meeting – people still won’t give it a second look. Still one of our favorites.

GIL/HBI: As evidence that the market is looking right through raw materials as ‘yesterday’s news’ HBI and GIL are sitting there with sentiment scores of around 70.

COH: The only company to have a higher score than TGT with a 91 ranking.

KSS: Score of 89, and recently headed higher. Recent trend mirrors Macy’s, actually, but 20 points higher. KSS is a great retailer, but it is very close to a sentiment level that our model suggests is ‘extremely positive.’

FL: At its highest level in recent history – though still at just 67. If the story works like we think it will, then more people will climb aboard. This does, however, put pressure on Foot Locker next week to put up something better than the Street’s 5% comp expectation.

Home: While not a massive divergence, it’s interesting to see that HD and LOW have turned in sequentially higher sentiment scores, while BBBY, WSM and even BBY all turned down.


Retail Sentiment Check - Discount Stores Sentiment Chart 5 11


Retail Sentiment Check - Apparel Retail Sentiment Chart 5 11


Retail Sentiment Check - Apparel Brands Low Mid Tier  Sentiment Scores 5 11


Retail Sentiment Check - Apparel Brands Upper Tier  Sentiment Scores 5 11


Retail Sentiment Check - Department Stores Sentiment Chart 5 11

Retail Sentiment Check - Footwear Sentiment Scores 5 11


Retail Sentiment Check - Sporting Goods Sentiment Scores 5 11


Retail Sentiment Check - Other Sentiment Scores 5 11



Draghi in Driver’s Seat as Next ECB President

Positions in Europe: Long Germany (EWG); Sold the British Pound (FXB) yesterday


Today German Chancellor Angela Merkel expressed her support for Mario Draghi as the next president of the ECB – pushing Draghi from frontrunner to near foregone conclusion to take over from Jean-Claude Trichet in October.


We’ve spent time this year discussing the seat change of the ECB Presidency. After our initial favor for former Bundesbank President Axel Weber was dashed when he withdrew his candidacy in early February, Draghi rose to the rung of “best of the rest” in our book.  Today’s backing by Merkel completes the four biggest Eurozone countries (France, Italy, and Spain) to endorse Draghi.  A formal push of endorsement from the union may come as soon as May 16th when the Eurozone finance ministers meet in Brussels. In any case, the region will push to name Trichet’s successor many months before October to ease the impact of the transition.


While Draghi brings impressive international credentials, including as Executive Director of the World Bank, chairman on the Financial Stability Board, and as current Governor of the Bank of Italy, we continue to have our reservations. As we’ve highlighted before, his hang-ups include:

  • From a PR perspective (whether you want to believe it or not) Draghi as an Italian citizen is symbolic of southern Europe’s governmental fiscal irresponsibility. Italy has the 4th highest public debt across the globe, at 118% of GDP (behind Japan, Greece, and Iceland) as persistent sovereign debt contagion threats, primarily from the periphery, continue to dampen growth prospects and incite volatility in the EUR.
  • Draghi has the backing of Italian Prime Minister Silvio Berlusconi – his praise and approval is tainted by concurrent trials addressing his numerous political and sexual scandals.  
  • Draghi worked a 3-year stint as a vice chairman of Goldman Sachs in which his duties included arranging currency swaps that helped Greece hide the extent of its budget deficit.  This reflects poorly against a European populous that blames investment bankers for the region’s credit crisis and resists country bailouts.

Monitoring the market implications of sovereign debt contagion in Europe, uneven fundamentals across the region and movements in the EUR versus major currency remains a daily process. On the long side we continue to like Germany (via the etf EWG), and expect underperformance from the region’s peripheral countries.


We’re seeing significant weakness in the EUR-USD intraday (blowing through our immediate term TRADE line of support of $1.44) as tens of thousands protest austerity measures in Greece and S&P said Portuguese banks might possibly require more significant government support. Stay tuned.


Matthew Hedrick


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 80.46%
  • SHORT SIGNALS 78.35%


If you were short WEN going into yesterday’s earnings release purely based on the company missing the quarter, it proved to be a mistake.  For the most part, the market is shrugging off declining numbers due to commodity inflation.  What can’t be ignored is the trend in top line sales.  For now, WEN is given a pass on current sales trends because its core momentum should appear in 2H11. 


I’m not so sure that is the case with JACK.  Yes, management’s number one priority this year is to drive sales and traffic at Jack in the Box through investments to enhance food, service and facilities.  The current investments are depressing margins, so without a corresponding lift in sales the stock will be in the penalty box.  In 2Q11, same-store sales comparisons are easy; comps declined -8.6% in 2Q10.  However, the competition is strong, and gaining incremental share will be difficult for JACK.


For 2Q11, guidance is for same-store sales for Jack in the Box company restaurants to range from flat to down 2% and system-wide same-store sales for Qdoba to increase 3% to 5%.  Management guidance reflects sales trends early in the quarter, which has included some unfavorable weather in many markets, particularly Texas which represents 27% of Jack in the Box company restaurants.   









“In 1Q11 operating margin decreased 170 basis points to 12.6% of sales, driven by commodity inflation of approximately 2.3% compared to 7% deflation in last year's first quarter. Rising beef costs were the biggest contributor, up 10.6% versus our expectations of 9% inflation and compared to 19% deflation in last year's first quarter. We also saw significant increases for cheese, pork, dairy and shortening.”


“In November, we were forecasting commodity costs for the full year to increase by 1% to 2%. Based on the increases we've seen in most commodities since that time, we are now expecting full year commodity inflation to be 3% to 4%.”


“Specific to our major commodity purchases, produce is having the biggest single impact on our expectations. Beef accounts for more than 20% of spending. For the full year, we are now anticipating beef costs to be up nearly 9% versus our previous expectations of 6% to 7% inflation. We expect beef costs to be up approximately 10% in the second quarter compared to a decrease of 9% in the second quarter 2010.”


“We expect 50s to average in the $0.85 per pound range in Q2 versus $0.78 last year. Cheese also accounts for about 6% of our spend and is now expected to be up 13% for the year versus our forecast of 7% to 8% inflation due to higher butter prices, which are up 43% year-over-year and stronger cheddar prices overseas. Dairy costs, which are over 3% of our spend, are also being impacted by the higher butter prices and are now forecasted to be up 5% for the full year.”


“Overall commodity costs are now expected to increase 3% to 4% for the full year. Restaurant operating margin for the full year is expected to range from 13% to 14%, depending on same-store sales and commodity inflation. And while the closure of the 40 restaurants last year will have a positive impact on margins, we expect this to be more than offset by commodity inflation, improvements to our core products and guest service initiatives.”


"When looking at the guidance and how that relates to pricing, guidance implies a significant improvement in that year-over-year company restaurant margin trend from down 170 in first quarter to get to the - in the next three quarters in order to get to the midpoint of the margin guidance."



Howard Penney

Managing Director

M/GIL: Two Ways To Beat


Macy’s quarter was impressive in so many ways. But we wonder if doubling its dividend will be its ‘Jump the Shark’ moment given imminent industry margin pressures. GIL beat, and showed us how a big slowdown in the core can be masked by an acquisition.



Two events this morning that are notable.


1)      Macy’s blowing out the quarter. This has been a consensus long, but even the numbers put up today beat the high end of expectations. Take note of the SIGMA, specifically. The company ended its FY11 with the triangulation between sales, inventories and margins headed in a downward slope, and directed clearly towards the lower left quadrant – which is like death from a profitability standpoint. But instead, it acted like a well-run, mature business by matching sales and inventories very tightly, keeping gross margins in check and leveraging a lsd growth rate in SG&A. Financial management has always been strong at Macy’s. But this one really stands out.

So here’s the question. Due to its success, Macy’s doubled its dividend. Are we going to look back at this day in another six months (and thereafter) and view this as the watershed moment when a management team from a major company was so confident in the path that lies ahead that it committed to permanently deploy capital in a way that it COULD, rather than when it SHOULD?


M/GIL: Two Ways To Beat - M S 5 11


2)      Gildan printed $0.53 vs the Street at $0.49. Netting out a $0.05 tax benefit, and adding back about a $0.03 disposal charge for a corporate jet, they came in at $0.51.  The company guided up for the year due to amongst other things its recent acquisition of Gold Toe and lower tax rate, both of which are nice.  But three things on a collective basis were quite frightening: 1) socks were down 24% due to lower retailer replenishment – showing how volatile that category can be, 2) the screenprinting business softened in April. Broder indicated it on its call, and Gildan confirmed it today, 3) though GIL seems to have a better handle on cotton procurement, gross margin risk is still clearly present. GIL in aggregate had 29% inventory growth for the quarter, showing the worst spread relative to sales we’ve seen in years. And this comes in conjunction with distributor inventories up 52% and in a category where GIL has 63% market share.


When the Gold Toe acquisition was announced, we raised questions about the base business, and whether this deal was made to mask a slowdown in its core. We now think the answer is ‘Yes.’  It’s still a good deal, but the timing still smells punk to us. Management is still aggressively looking for more deals. The big question from here is if the market will pay for these new brands to come in and, in part, cannibalize and upgrade existing product.  We’re not sure. The beauty of this model in the past has been one of executing a commodity business. They’ve done it masterfully, but are now headed into uncharted waters. We’re taking up our risk premium in this model.


M/GIL: Two Ways To Beat - GIL S 5 11





Should be another monthly record



Table revenues for the first 10 days of May are in and they look good - maybe not to those expecting Chinese New Year’s (CNY) type numbers.  Daily table revenues averaged HK$899 million during the Holiday, the second best week only to the HK$998 million generated during CNY in early February but only slightly higher than that during the October Holidays.


It is very difficult to accurately project out full month revenues at this stage considering we only have 10 days and it was a holiday, and Galaxy Macau is opening mid-month which will likely stimulate incremental visitation.  However, we will take a shot.  Taking into account the number of weekend days remaining, a significant post holiday slowdown, and the opening of Galaxy, we think an estimate of HK$22-24 billion, up 33-45% is reasonable.


We have heard anecdotally that MPEL and Galaxy held below normal on VIP while Wynn and LVS were above.  The only major market share shifts from recent trends was from MPEL to SJM.  MPEL appears to be coming back to Earth following a big jump in market share to 17.2% in April, way back down to 12.7% here in May.  Here are the details.



Daily Trading Ranges

20 Proprietary Risk Ranges

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.