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Obvious Conclusions

This note was originally published at 8am on March 23, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Once you understand the main conclusion, it seems it was always obvious.”

-Daniel Kahneman

 

Obviously, after the SP500 is down for 3 consecutive days, Asian stocks have their worst week of the year, and the Japanese Yen drops 9% in a straight line, Global Growth Slowing matters – right? Right. Right. Everyone nailed it, again.

 

The aforementioned quote comes from the end of Chapter 22 in “Thinking, Fast and Slow” titled Expert Intuition: When Can We Trust It? Obviously, after seeing Sell-Side and Washington consensus miss the Growth Slowdowns in Q1 of 2008, 2010, 2011, and now 2012, the conclusion is that you cannot trust our profession’s broken “economic” sources.

 

When evaluating expert intuitions you should always consider whether there was an adequate opportunity to learn the cues, even in a regular environment” (Kahneman, page 243). The globally interconnected cues associated with inflation slowing global growth have been as obvious as obvious gets.

 

Back to the Global Macro Grind

 

Let’s check in with the “experts” this morning:

 

1.  Credit Suisse – last week they said that “bond yields could rise further – this might help Equities” … so we’re still waiting to hear from them as to whether US bond yields falling this week might not help equities.

 

2.   Goldman Sachs – their currency strategist, Tom Stolper (who has been on the opposite side of just about every big currency call we’ve made for the last few years) says buy the Japanese Yen and sell the US Dollar. We’re still on the other side.

 

3.   Ben Bernanke – says “consumer spending has not recovered, it’s still quite weak relative to where it was before the crisis” and he is effectively daring consumers to draw down their savings even more to “fuel spending growth.”

 

You’ve just got to love how central planners think. Hey, why don’t we jam the entire world with Policies To Inflate, then chastise people for not having enough real (inflation adjusted) money left to buy things.  

 

Nice.

 

The good news is that some experts still have some credibility. Some of them actually still believe in gravity. German Finance Minister official, Ludger Schuknecht, said yesterday that Italy and Spain are “too big to be saved.”

 

Spain looks awful, fyi.

 

Away from the Obvious Conclusion that stocks can in fact go down after they go straight up, it’s a fairly quiet morning here in New Haven, CT. That’s interesting, given that yesterday was actually the 2nd biggest down day for the SP500 of 2012. It was only down -0.7%!

 

That’s not normal. Neither are the US stock market’s volumes – they are dead as the trust embedded in America’s craw.

 

Looking at the 3 biggest SP500 down days of 2012:

  1. March 6th= down -1.5%
  2. March 22nd= down -0.7%
  3. Feb 10th= down -0.6%

Since they seem to have a completely arbitrary “year-end target” for just about everything else, ask your local expert at an Old Wall Street shop how many days we’ll have this year where the market closes down by more than 1%. Here’s my expert forecast – more than one.

 

Remember, as Growth Slows, intermediate-term tops are processes, not points. Here are the last 3 times we’ve shorted what we call immediate-term TRADE overbought tops in the SP500:

  1. February 15th= covered Short SPY for a +0.94% gain
  2. February 22nd= covered Short SPY for a +0.21% gain
  3. Current short position = +0.52% in our favor (unrealized)

Obvious Conclusion: slim pickings for those of us who like to pick off price momentum chasing. That said, this was equally obvious in Feb-April of 2011. Then, tick-ah-tee-boom! The expert perma-bulls got run-over, again.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (USD/JPY), and the SP500 are now $1626-1666, $122.37-124.57, $79.33-80.45, $82.22-84.14, and 1375-1397, respectively.

 

Best of luck out there today and enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Obvious Conclusions - Chart of the Day

 

Obvious Conclusions - Virtual Portfolio


WEEKLY COMMODITY CHARTBOOK

Despite dollar strength over the past week, grain prices shot up on strong USDA weekly export sales data exceeding average levels for the seventh consecutive week. Coffee took back some of the declines it has been posting year-to-date and beef prices led to the downside.

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

SUPPLY & DEMAND:

 

BEEF: prices are down -2.4% y/y and -9% since March 1st

 

SUPPLY

Supplies of beef within the US remain tight following the effects of last year's drought.  

 

DEMAND

Consumer appetite for beef has been negatively impacted by the recent “pink slime” controversy.  The stronger dollar also has the potential to hurt foreign demand for U.S. beef. 

 

US beef export sales totaled 13,159 metric tons last week, moving up from -9,660MT the week prior. 

 

 

CORN: prices are down 14% y/y

 

SUPPLY

Planting season is underway and, according to a USDA report released on March 30th, grain farmers intend to plant the largest acreage of corn since 1937.  The Prospective Plantings Report by the National Agriculatural Statistics Service indicated that the nation’s growers intend to plant nearly 95.9 million acres of corn, up more than 4% or 4 million acres, from 2011.

 

The warm weather has enticed some to plant corn early.  According to the USDA’s Risk Management Agency, Indiana and Ohio farmers with individual crop insurance plans have no replant coverage on corn planted before April 6, or soybeans planted before April 21. 

 

DEMAND

Corn exports jumped 23% this week versus the week prior, according to the USDA’s latest U.S. Export Sales report.  Corn exports totaled 793,100 MT, which was 7% above the trailing four-week average.

  

 

CHICKEN

 

SUPPLY

The egg set data, released every Wednesday by the USDA, is not signaling any recovery in chicken supplies any time soon.  Year-over-year, the trailing six week egg set count is declining ~5.5% and wing prices, in turn, are trending near-vertical at almost +120% y/y.

 

WEEKLY COMMODITY CHARTBOOK - egg sets bwld

 

 

THIS WEEK’S COMPANY COMMENTARY

 

On Beef… TSN COO James Lochner weighs in on the impact of “pink slime” controversy:

"In the short run, the negative publicity, I do believe had an impact negatively on ground beef demand, which will recover I think quite quickly. This was a very fast-moving thing. When you look at it, it was really a two-week event. So what will happen is, they'll be less lean beef, ground beef material available supply and the markets will adjust. Again in the spread businesses, it did have a negative short-term impact on the revenues, so the cattle cost probably will reflect that going forward. And we'll actually probably see a somewhere around a 2% to 3% reduction in the available beef supply. So it's not a positive thing. It's a very unfortunate thing because it was a very safe, very wholesome, very nutritious product that will now be not available in to the consuming public."

 

 

CONSUMER CALLOUT

 

Inflation

 

Gas prices have risen steeply year-to-date.  Our view is that the impact of this has been somewhat muted by the more favorable weather conditions that most geographies have enjoyed this past three months. 

Food prices are also squeezing consumers globally. 

 

WEEKLY COMMODITY CHARTBOOK - gas prices

 

 

COMPANY COMMENTARY ON GAS PRICES

 

WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.

 

BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.

 

CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.

 

DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.

 

 

CORRELATION

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

CHARTS

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soyebans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 9th of April through the 13th 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.

 

THE WEEK AHEAD - all


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Weekly European Monitor: How about that Spanish Auction?!

No Positions in Europe

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 is down -1.6% week-to-date vs -0.9% last week. Bottom performers: Italy -4.4%; Austria -4.0%; Greece -3.7%; Czech Republic -3.5%; Spain -3.2%; Portugal -3.2%. Top performers:  Russia (MICEX) +2.1%; Ukraine +1.1%; Denmark+90bps.  
  • FX:  The EUR/USD is down -2.13% week-to-date.  WTD Divergences: RUB/EUR +1.78%, TRY/EUR +1.47%, GBP/EUR +1.00%, ISK/EUR +0.93%; HUF/EUR -0.51%
  • Fixed Income:  Greek 10YR bond yields again led the upward charge, gaining +109bps week-to-date to 22.13% (after a +100 bps move last week). In close step was Portugal, gaining +83bps to 12.23%, followed by Spain’s +37bps to 5.80%. Critically, both Spain and Italy continue to see rising yields in recent weeks, bucking an early March hold in and around 5.00% level.  The German 10YR contracted -7bps to 1.75%, and remains the “risk-free” stand-out in the politically compromised Eurozone. We’ve long wondered why the lack of sovereign buying from the ECB’s SMP program in the last two months (including zero buying in the last three straight weeks) didn’t equate to rising yields. This week we clearly witnessed a reversal in this trend across the Eurozone’s weaker members.

Weekly European Monitor: How about that Spanish Auction?! - 111. yields

 

 

Call Outs:


LTRO - Some of Europe’s biggest banks are preparing to return a chunk of 3yr LTRO money: senior bankers said UniCredit, BNP Paribas, SocGen, and La Caixa in Spain are preparing to pay back up to a third of the money they borrowed – estimated at €80-€100B in total – within the next 12 months.

 

Spain - The government said total borrowing needs will reach 79.8% of GDP for 2012, 30% below what was needed in 2011.

  • PM Rajoy said: “The worst we could do now is nothing…It will be intense and difficult, but we’re laying down the grounds for Spain’s future recovery.”
  • Finance Minister Luis de Guindos said:  "From a budget perspective, the government is facing a lose-lose situation. If you don't make enough adjustments, markets will penalize you. But if you go too far, markets could also penalize you."

Italy - PM Monti reached an agreement with Italy’s main political parties on his proposal to ease firing rules and speed its passage through parliament.

 

Italy - BlackRock is buying Italian stocks amid optimism that PM Monti will succeed in cutting debt and boosting economic growth.

 

Swiss Franc - Broke through 1.20/euro for first time since the central bank set that rate limit but the SNB said it’s ready to buy unlimited quantities to prevent it from dropping below. 

 

Hungary - Hungarian President Schmitt Resigns. Reason – Plagiarism.

 

Czech Republic - PM Petr Necas warned snap elections may be held quickly if the smallest member of the three-party ruling coalition makes good on its threat to quit amid preparations to cut the budget deficit.

 

 

In Review:


This week showed once again how much headline risk is governing European markets, especially on the equity side. Wednesday’s €2.6B Spanish bond auction, which came in at the lower range and saw yields on the 2015 maturity security jump to 2.89% vs 2.44% on March 15th and the 2016 maturity jump to 4.319% vs 3.376% on March 1st, rattled markets. The DAX closed down -2.8% on the day (Wednesday), CAC -2.7%, and FTSE -2.4%.

 

But the sovereign and banking risks in Spain aren’t new!  We’ve signaled our bearish positioning on the PIIGS in recent months and continue to believe that the region is far from “out, and in the clear”. Not only has the fundamental data come in largely worse for the month of March (PMIs and confidence readings in particular--see below), but we continue to think the combined ESM and EFSF (€800B) is undercapitalized to deal with a sovereign default from the likes of a Spain or Italy.

 

Related, but getting less press, the German parliament (Bundestag) has agreed (across party lines) on a new decision-making process that requires all 620 members of the Bundestag to vote on nearly every detail of the euro rescue fundversus the previous quorum from a 41-member budgetary committee (with knowledgeable experts from all parties). Therefore, if the EFSF wants to make important decisions, in the future the entire Bundestag will have to regularly convene, in compliance with all legislative deadlines and regulations, with at least 311 parliamentarians present in order for a decision to be valid.

 

Can you say roadblock!

 

 

CDS Risk Monitor:

 

Week to date Spain saw the largest CDS gains, at +38bps to 475bps, followed by Italy (+27bps) to 424bps and Portugal (+23bps) to 1,097bps. The move in Portugal comes after two weeks of material declines, -143bps and -94bps, respectively. 

 

Weekly European Monitor: How about that Spanish Auction?! - 111. cds   a

 

Weekly European Monitor: How about that Spanish Auction?! - 111. cds   b

 


Data Dump:


Weekly European Monitor: How about that Spanish Auction?! - 111. PMIs


Eurozone Unemployment Rate 10.8% FEB vs 10.7% JAN

Eurozone Retail Sales  -2.1% FEB Y/Y (exp. -1.1%) vs -1.1% JAN

Eurozone PPI 3.6% FEB Y/Y (exp. 3.5%) vs 3.8% JAN   [0.6% FEB M/M (exp. 0.5%) vs 0.8% JAN]

 

UK New Car Registration 1.8% MAR Y/Y vs -2.5% FEB

UK Industrial Production -2.3% FEB  Y/Y (exp. -2.1%) vs -4.0%

UK PMI Construction 56.7 MAR (exp. 53.4) vs 54.3 FEB

UK Manufacturing Production -1.0% FEB M/M (exp. 0.1%) vs -0.3% JAN   [-1.4% FEB Y/Y (exp. 0.1%) vs -0.1%]

UK Halifax House Prices -0.6% MAR Y/Y (exp. -1.7%) vs -1.9% FEB

 

Germany Factory Orders -6.1% FEB Y/Y (exp. -5.5%) vs -6% JAN  

Germany Industrial Production -1.0% FEB Y/Y (exp. 0.5%) vs 1.5%

 

Italy Unemployment Rate 9.3% FEB Prelim vs 9.1% JAN

Italy 2011 Deficit to GDP = 3.8%

 

Belgium Unemployment Rate 7.2% FEB vs 7.2% JAN

Ireland Unemployment Rate 14.3% MAR vs 14.4% FEB

Denmark Retail Sales -0.5% FEB Y/Y vs -3.3% JAN

Norway Credit Indicator Growth 7% FEB Y/Y vs 6.9% JAN

 

Switzerland Retail Sales 0.8% FEB Y/Y vs 4.7% JAN

Switzerland CPI -1.0% MAR Y/Y (exp. -1.1%) vs -0.9% FEB

 

Russia Q4 GDP 4.8% Y/Y vs 5.0% in Q3

 

Turkey Consumer Prices 10.43% MAR Y/Y vs 10.43% FEB

Turkey Producer Prices 8.22% MAR Y/Y vs 9.15% FEB

 

Romania Retail Sales 3% FEB Y/Y vs 9.9% JAN

Romania Producer Prices 5.9% FEB Y/Y vs 6.0% JAN

 


Interest Rate Decisions:


(4/4) ECB Interest Rate UNCH at 1.00% (in-line)

(4/4) Poland Base Rate UNCH at 4.50% (in-line)

(4/5) BOE Interest Rate UNCH at 0.50% (in-line)

(4/5) BOE Asset Purchases UNCH at 325B Pounds (in-line)

 

 

The European Week Ahead:


Monday: Mar. Germany Wholesale Prices (Apr 9-12); Mar. UK Lloyds Employment Confidence, RICS House Price Balance; Mar. Greece CPI; Feb. Greece Industrial Production

 

Tuesday: Apr. Eurozone Sentix Investor Confidence; Feb. Germany Exports, Imports, Current Account, and Trade Balance; Feb. UK House Prices; Mar. France BoF Business Sentiment; Feb. France Industrial Production, Manufacturing Production; 1Q Spain Business Confidence; Feb. Spain House Transactions

 

Wednesday: Feb. Spain Industrial Output

 

Thursday: Apr. ECB Publishes Monthly Report; Feb. Eurozone Industrial Production; Feb. UK Total Trade Balance, Trade Balance in Goods; Mar. France CPI; Feb. France Current Account; Jan. Greece Unemployment Rate

 

Friday: Mar. Germany CPI – Final; Mar. UK PPI Input and Output; Mar. Italy CPI - Final; Feb. Italy Industrial Production; Mar. Spain CPI - Final

 

 

Extended Calendar Call-Outs:


22 April:  French Elections (Round 1) begins, to conclude in May.

 

29 April, 6, or 13 May:  Potential Greek Presidential Elections.

 

30 June:  Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio.

 

1 July:  ESM to come into force.

 

 

Matthew Hedrick

Senior Analyst


Retail: SSS Not Good Enough

 

March sales were good, but not good enough. The beat-to-miss ratio was 12 companies coming in ahead of expectations and 7 misses. Given the Easter shift and the best March weather on record, we were expecting better on the event – so too was the market based on how these names are trading. The bigger callout of the day are the revisions. With 4 upward revisions compared to zero negative adjustments, April sales day is setting up for some surprises. Companies will be reporting the final month of the quarter in what will be a zero gravity environment at best against 2011 Easter compares.

 

Here are some additional callouts on this morning’s event:

 

  • High Low End Bifurcation Remains Intact: Though the spread between the high and low end department stores compressed slightly in March, it remains ~5pts wide. JWN (+8.6% vs +5.7E) & M (+7.3% vs +4.7E) posted strong beats with SKS (+6.3% vs. +6.4E) coming in-line to slightly below consensus. On the low end, BONT (-0.1% vs. +1.7%) missed while KSS (+3.6% vs. +2.4E) and SSI (+4.7% vs. +3.3E) beat estimates for the month. 
  • KSS: After coming in light in February (-0.8% vs. -0.1E), KSS  beat expectations this morning driven primarily by kids (13% of sales) which came in +mid teens and accounted for 2pts of the 3.6% comp. While March sales came in better, the shortfall in February requires April comps to be +0.8% or greater in order to meet guidance of +1% for 1Q12 vs. +0.7E suggesting a +7.6pt sequential acceleration in the underlying 2yr trend. With the Easter shift now a stiff headwind, we see continued risk in Q1 EPS.
  • Off-Price Remains Robust: TJX and ROST both reported March comps +10% beating expectations by 5.1 and 5.4pts respectively, increasing the spread between the off-price space and the rest of retail to 4.6 pts, up 50bps sequentially (see chart below). ROST inventories were down -4% on +15% sales growth droving the sales/inv. spread up +6pts sequentially to +19%. Based on our industry SIGMA analysis (see below), while the sales to inventory spread improved on the margin in 4Q11 at the expense of additional EBIT margin, the spread remains down -7% on +16% inventory growth. As inventories build throughout the industry, we think TJX and ROST will continue to be positioned for more favorable buy-ins over the intermediate term TREND.
  • Earnings Updates: For much of retail, March marked the second month of 1Q12 with April accounting for the remaining ~32% of the quarter. Surprisingly, with 12 beats & 7 misses by an average spread of 3.5 and (-1.7) points respectively, all of this morning’s updates to guidance were to the upside. Major increases to EPS guidance for the first quarter came out of TGT, ROST & TJX. For the second time in a row, TGT comp’d positively in all of its major categories in over a year with Food & Apparel accelerating sequentially (19% & 19% of sales respectively).

 

Below are the changes to first quarter guidance out of TGT, ROST & TJX:

  • TGT:  Increased EPS to $0.96-$1.02 vs. $0.98E (up from $0.88-$0.98)
  • ROST: Increased EPS to $0.89-$0.91 vs. $0.88E (up from $0.82-$0.86)
  • TJX: Increased EPS to $0.51-$0.52 vs. $0.48E (up from $0.45-$0.47) 
  • M: increased comp guidance for the combined March-April period to +4.3%-4.5% vs the prior +3%-3.5%. The increase implies that April is expected to come in around +1%-1.2%. Based on April coming in-line with expectations, M’s first quarter comp would come in near +4.5% vs. +3.9E. This is a positive read through into PVH with Macy’s its largest customer accounting for 9.4% of sales in 2011. PVH remains one of our favorite large cap longs in 2012 behind our Top 3 – see our recent note "PVH: Levers and Drivers". 
  • GPS: March Comps were +8% vs. +4.4%E on the heels of an upside surprise in February after months of posting misses and “less bad” numbers. These results suggest new product out of GPS’s international creative facility in NYC is gaining traction. While the underlying 2-year trend slowed across all of GPS’ domestic segments, this was the first month where every concept comp’d positively since March 2010 and will get investors thinking about $2+ in earnings power. While the near-term setup here is bullish, our TAIL call remains bearish based on an increasingly stressed share repo model and underinvested infrastructure. 
  • COST: missed expectations for the first time in 2 years +6% vs. +6.4E. Gas benefited comps by 1 point in the US while FX headwinds resulted in a 50bps detriment to growth. Though Electronics remained down MSD, all of Costco’s major categories were up with softlines (10% of sales) the outperformer up LDD. 
  • Category Performance: Consistent with the timing shift of Easter (April 8th this yr vs. April 24th ly) children’s and footwear were common categories highlighted as outperformers during the month. TGT cited particular strength in both boy’s and girl’s with toys also strong. ROST mentioned juniors and children’s shoes as the strongest merchandise categories. Footwear was +18% at BKE and mentioned positively at ZUMZ who also highlighted Juniors as an area of strength in March, though boys comp’d down. On the high end, JWN also saw strength in children’s. Additionally, consistent with what we’ve been seeing, designer handbags were of the strongest categories at both JWN & SKS.

 

Longs: URBN, LIZ, RL, NKE, PVH

Shorts: KSS, HBI, HIBB, VRA

 

Casey Flavin

Director

 

Matthew Darula

Analyst

 

Retail: SSS Not Good Enough - blended SSS high low spread chart

 

Retail: SSS Not Good Enough - total SSS

 

Retail: SSS Not Good Enough - industry SIGMA

 

Retail: SSS Not Good Enough - TGT Monthly Grid



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