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King Dollar: An Update From The Bernank

POSITION: Long US Dollar (UUP)

 

After hearing today’s US Federal reserve proclamations of forecasting faith, we have no change to our view that Ben Bernanke will remain in a box for the foreseeable future.

 

Being in a box (for those of you central planning fans who have never tried it at home) means that you can’t cut or raise interest rates. In The Bernank’s case, we continue to believe that he cannot yet fear-monger for a QE3.

 

Ironically, but not surprisingly, the reason for this is King Dollar itself. As you can see in the charts below, as is the case with making most Big Macro calls, it’s the slope of the lines that matters. Less Big Government Intervention (money printing) = Stronger US Dollar.

 

Stronger Dollar = Stronger US Consumption.

 

Stronger Consumption in Q3/Q4 means Bernanke can’t cut (US Consumption = 71% of US GDP).

 

Pictures tell a 1,000 words. Keynesian Politicians, take notes.

 

Cheers,

KM

 

Keith R. McCullough
Chief Executive Officer

 

King Dollar: An Update From The Bernank - 1

 

King Dollar: An Update From The Bernank - 2

 

King Dollar: An Update From The Bernank - 3


Slowing Apparel Retail Sales

 

So much for record Thanksgiving sales reports. U.S. Retail sales came in up only +0.2% vs. 0.6%E and ex-Auto +0.2% vs. +0.5%E on a sequential basis in November and up +6.8% yy. The continued sequential deceleration since July is consistent with what we heard out of retailers regarding November sales and the takeaway is the same as well – the U.S. consumer is weaker than many headlines suggest.

 

Among the key callouts from today’s retail sales report is the sharp deceleration in apparel to +3.7% down from +5.3% for the second consecutive month. Yes, that category alone it accounts for only 7% of PCE, but general merchandise stores (e.g. department and warehouse stores) had a similar deceleration. Combined the two represent over 25% of total PCE – that’s noteworthy.

 

Below is a table of the key categories that constitute ~70% of the retail sales number. Here are a few additional callouts:

  • Top-line yy trajectory is decelerating sequentially in all core categories with the exception of auto and electronic/appliance stores.
  • Food and Gas stores (~1/3 of total sales) were down -0.2% and -0.1% each sequentially underperforming all other categories
  • Electronics/appliance stores were the best performing for the second consecutive month.
  • Department stores declined -3% from -0.5% sequentially reflecting an even sharper deceleration than SSS trends suggest (+0.5% in November from +2%). At roughly 10x the size of the SSS sample set, this too is worth noting.

So what does it mean for Q4? The reality is that consumers are now lapping tougher retail sales compares through the 1H of ’12 with fewer levers to pull in order to sustain 7%+ growth rates. We continue to expect the greatest pressure on the consumer will be realized in the mid-tier department stores into the 1H of F12.

 

Slowing Apparel Retail Sales - Retail sales chart

 

Slowing Apparel Retail Sales - Retail sales table

 

Casey Flavin

Director


Shorting the Aussie Dollar: Trade Update

Conclusion: While some factors remain supportive, our interpretation of and outlook for key fundamentals are indicating further downside in the AUD/USD exchange rate over the intermediate term.

 

Position: Short the Australian dollar (FXA); Long the U.S. dollar (UUP).

 

This morning in our Virtual Portfolio Keith re-shorted our favorite way to play our compendium of active Global Macro themes within the Asian FX landscape – the Aussie dollar. We’ve been making this call since 2Q throughout a collection of research notes (hyperlinked below) and the AUD has generally underperformed other Asia-Pacific currencies vs. King Dollar throughout various durations within the last six months. To recap, our bearish thesis is fivefold:

  1. Slower Growth domestically and in key export markets (Asia accounts for ~70% of Australian exports) will weigh on expectations for tighter monetary policy and potentially degrade fiscal metrics. Domestic manufacturing, services, and labor market activity all remain extremely subdued;
  2. A Deflating of the Inflation in Australia’s reported inflation and inflation expectations (both market-based and central bank targets) will lead the RBA to incrementally ease monetary policy and erode Australia’s real yield advantage relative to the U.S.;
  3. A Deflating of the Inflation across Australia’s key exports (commodities account for ~60%) will reduce Australia’s terms of trade and coincide with a pullback in international demand for Australian exports and, hence, the Aussie dollar;
  4. Domestic Housing Headwinds (all-time low mortgage demand perpetuating falling prices) will act as a long-term drag on economic activity and consumer confidence; and
  5. A potential Correlation Crash and Liquidity Risk are two key quantitative and behavior factors that could weigh on the Aussie dollar in the event of a USD-breakout. The AUD/USD rate continues to trade with a positive correlation to the S&P 500 with an r² north of 0.90 on both our immediate-term TRADE and long-term TAIL durations. Additionally, the AUD is the best-performing currency vs. the USD since the Mar ’09 bottom (nearly +60%) and mean reversion remains a risk if underperforming FX investors turn to the Aussie dollar as a potential source of liquidity (see: chart of gold).

On a supportive note, Australia’s solid fiscal positioning (debt/GDP < 30%; deficit/GDP < 5%), a continued drive towards achieving a balanced budget over the medium term, and the sovereign’s AAA status will continue to keep a bid for the Aussie dollar – especially in an environment of elevated sovereign debt risk. That said, however, we expect the marginal buyer/seller of Aussie dollars to continue demanding lower price points for the currency as our interpretation of and outlook for key fundamentals are indicating further downside in the AUD/USD exchange rate over the intermediate term.

 

Related research notes covering each of the five aforementioned factors in greater detail:

Darius Dale

Senior Analyst

 

Shorting the Aussie Dollar: Trade Update - 1


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KONA: TRADE UPDATE

According to Keith’s quantitative models, KONA is breaking down.

 

From a fundamental perspective, we have lost confidence in the company’s ability hit the numbers and the recent departure of the CFO, Mark Robinow, does not reassure us.  There have been a string of departures from the executive suite. Confusion surrounding the overall direction of the company is evident in the two latest announcements.

  1. Upon the departure of the CFO, the company announced a share repurchase program of up to $5 million of the company’s outstanding common stock.
  2. In early December, the company announced the appointment of Marci Rude as VP of Development.

While the company is currently generating cash (and has $5 million in cash on hand), it only spent $1.9 million in capital spending over the past twelve months.  This is down considerably from the $12 million invested in new stores in 2009 and $17 million in 2008.  If the company bringing Mr. Rude on board in a development role is an indication that capital spending it about to ramp up again, we would question the prudence of the Board in authorizing a $5 million share repurchase program.

 

The new CEO, Michael A Nahkunst, said “The company is initiating this repurchase program in the best interests of its stockholders, as we believe our common stock represents an attractive value.” We would contend that buying back stock does not necessarily create shareholder value but rather, in this case, the announcement was merely a defensive move given the departure of the CFO.  The disruption in the senior management team over the past six months will create a disruption in the financial performance of the company. 

 

As the chart below illustrates, the share price has broken the TAIL line at $5.41.  From both a quantitative and a fundamental perspective, our view on KONA is negative.

 

KONA: TRADE UPDATE - KONA LEVELS

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

                 


DNKN: TRADE UPDATE

Dunkin’ Brands was shorted moments ago in the Hedgeye Virtual Portfolio as the stock is approaching the immediate term trade level of resistance.  Our fundamental view on the stock remains bearish despite positive sell-side research emerging yesterday along with an investor presentation from the company.

 

Dunkin’ is trading up today on Jeffries’ initiation with a Buy rating and a price target of $30.  The company also released an investor presentation which, in our view, provided no evidence that our fundamental thesis is flawed.  The presentation focuses largely on the same themes: lack of penetration outside the Northeast, comparable restaurant sales growth, and product innovation.  Where the disclosure is still lacking is in unit growth: what is the backlog and what is the company’s confidence level that 500 stores will be opening annually by 2013 in order to double the store base over the next twenty years?  As we wrote on 11/29, “WHAT DOES DNKN RUN ON?”, the investor relations section of the Dunkin’ Brands website provides scant evidence of the backlog that we believe will be required to ramp up unit growth sufficiently.  While comps are important for the company, the franchised business model will depend more on unit growth than comps to reach its EPS growth goal.

 

Per Keith’s quantitative model, DNKN is approaching immediate term TRADE level resistance.  Positive research reports and company presentations that are, in our view, focusing on the less relevant metrics while ignoring the crucial one are not going to provide sustainable support for this name.  Given the rich valuation the stock is trading at versus more attractive growth stories like YUM, we are remaining negative from a fundamental perspective.

 

DNKN: TRADE UPDATE - dnkn levels

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Process: SP500 Levels, Refreshed

POSITION: Long Healthcare (XLV), Long Consumer Discretionary (XLY)

 

Our call yesterday was to buy the SP500 if it held our immediate-term TRADE support (1232). Our call was also to sell it if it failed at our immediate-term TRADE line of resistance (1249). We did both.

 

Don’t fight us – it’s just the process of managing the risk implied in our range (I explained that in more detail in this morning’s Early Look).

 

While the long-term TAIL (1270) of resistance for the SP500 insulates managing the broader 1 range of risk, our process attempts to get in there and make a call on the shorter-term durations. I realize that’s not for everyone. But it’s what we do well. So we’ll do more of it.

 

As a reminder, across all 3 of our risk management durations, here are the key lines we’re focused on: 

  1. TAIL = 1270
  2. TRADE resistance = 1249
  3. TRADE support = 1232 

Manage your gross and net exposures around these ranges instead of being forced to chase beta.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process: SP500 Levels, Refreshed - SPX


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