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2H Setup Still Looking Weak

More reasons to be short vs long coming out of June sales. 

 

Our major themes and ideas remain largely unchallenged by June SSS. 

1) Battle taking place for dominance in the mid-tier, with ensuing ripple effect through supply chain. Short M, JCP, KSS, JNY, HBI, CRI

2) Off-price retailers taking disproportionate share from the mid-tier -- which will be tough to recapture (psychologically and economically). Short JCP -- though the off price model is not being challenged today, but it will be in 3-6 mos -- a consideration for TJX and ROST.

3) May of last year was when the draw down in saving and increase in revolving credit first started to benefit personal consumption. This trend accelerated from July through September at which point it accounted for more than half of the increase in consumption. As such, come 2H personal consumption growth at the current rate is likely to become increasingly stressed.


Mid-Tier Remains in the Spotlight: of the 10 misses reported this morning, KSS (-4.2% vs +2.8E), GPS (0% vs. +0.4E) and M (+1.2% vs. +2.5E)  were noteworthy given the market share JCP has put up for grabs.

KSS: KSS highlighted Men’s as the outperforming category though its comp was flat in June- all other categories were negative. Interestingly, KSS only provided inventory unit growth which was +2% in June. In May however, unit inventories were down -5% with dollar inventories +7% on -2.6% revenue growth creating a ~-10% sales to inventory spread. With sales -2.6% again in June (and unchanged from May), the +2% unit inventories relative to -5% in May suggests a further deterioration in the spread. While KSS guided Q2 to the low end of its $0.96-$1.02 range (in line with consensus at $0.96), July comps need to come in +6.5% to hit the consensus -1.3% Q2 comp.

GPS: Although GPS’ June performance was just shy of expectations, there was a notable acceleration in the underlying 2 yr trend across all concepts domestically (int’l slowed). Regardless, it’s no surprise that GPS is comping years of a contracting business and will need to accelerate growth further to meet expectations with FY12 guidance sitting at $1.78-$1.83 relative to consensus of $1.94E.

M: While we don’t consider M (+1.2% vs. +2.5E) to be a mid-tier retailer, the month’s miss is notable in that M has been the only company to outright attribute some of its strength to share gains from JCP. Recall M guided June comps to be slightly below the +3.5% Q2 guidance suggesting the month’s performance was shy of internal expectations. M now needs to comp +6% in July to reach the +3.5% consensus (and guided) Q2 comp which implies a 150bps acceleration in the 2 yr trend relative to June- no easy task. A slowdown at M as well as light results out of GPS  & KSS suggests more share is being eaten up by the off pricers.

No Slowdown for Off Price Retail: ROST (+7% vs. +4.5E) and TJX (+7% vs. +3.3E) both posted strong June beats with 2 yr comps accelerating sequentially for both retailers. Both companies increased guidance for the quarter and highlighted inventories as a positive. ROST average in store inventories ended -5% in June with TJX describing them “in great shape and turning fast.” We expect JCP customers to continue to flock over to off price concepts and see little pricing risk in the subsector given excellent inventory positioning headed into 2H.

High End Rebounding: After a slowdown relative to mid and low end retail over the past 2 months, JWN (+8.1% vs. +4.2E) & SKS (+6% vs. +4.2E) posted strong June results. Outperformance drove a boost in the spread between high-end retail and the rest of the Monthly comp sample to 4 points vs. 1 point in April. Notably, JWN highlighted sales as consistent throughout the month with the final week the strongest suggesting high end strength headed into July.

LTD: LTD continues to outperform (+7% vs. +2.4E) posting the biggest beat in June (4.6 points) with Victoria’s Secret comps accelerating +11% at both Brick and Mortar and Direct. With sales growth improving sequentially (-0.3% vs. -6.3% in May) and inventories coming down (+10% per square foot vs. +11% in May), the sales to inventory spread jumped 7 points with LTD already highlighting merchandise margins as having been up significantly.

 

2H Setup Still Looking Weak - monthly SSS

 

2H Setup Still Looking Weak - high low chart

 

2H Setup Still Looking Weak - TGT grid

 


IGT: TRADE IDEA ALERT

Keith bought IGT in the Hedgeye Virtual Portfolio at $15.74.  According to his model, the TRADE support is at $14.82 and the TREND support is at $15.31.

 

 

With good earnings visibility over the next few quarters and an aggressive stock buyback, we believe there is limited downside to the stock.  Positive catalysts include a potential FQ3 earnings beat and strong international sales which would lead credence to the company's aggressive international market share goals.  We remain positive on the slot sector as we think the industry is in the early innings of a 3-5 year bull cycle. 

 

IGT: TRADE IDEA ALERT - igt

 



JOBS: Built Ford Tough

Weekly jobless claims fell to a 6 week low, dropping 14,000 to a seasonally adjusted 374,000. It signals layoffs are easing and that’s welcome news. But an interesting bit of data shows that the better-than-expected data is courtesy of American automaker Ford (F).

 

 

JOBS: Built Ford Tough - F joblessclaims

 

 

In the 27th week of the year, Ford normally idles 13 of their production plants in the US for two weeks, allowing their employees to collect unemployment insurance. This causes a temporary but larger jump in the amount of claims traditionally. This year, Ford decided to only idle plants for a single week, allowing for a quicker recovery in the numbers.

 

On a non-seasonally adjusted basis, claims fell 3000. NSA rolling claims are improving at a rate of around 7% year over year, which is a further decline in the rate of year over year improvement. While it may appear that Ford’s need to continue cranking out cars and trucks is a positive for the US economy, the YoY change is a worrisome sign of things to come.

 

 

JOBS: Built Ford Tough - JOBLESS claims2


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July ECB Presser YouTubed

--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-ways include that President Mario Draghi gave little color on the size, shape, or scope of a European banking authority (as discussed at last week’s EU Summit), including if the ECB would be a backstop for the future facility.  He continued to highlight that the pass-through effects of the LTROs have not been fully realized and gave no further detail on future measures such as another LTRO or the re-engagement of the SMP down the road. Speaking less to the duty of individual governments to stay the course of fiscal consolidation, Draghi’s comments suggested that there’s still a long road to sorting out a banking supervisory mechanism in this highly “fragmented” environment for banks and sovereigns, as lending from either the EFSF and future ESM could have different consequences for the banks and sovereigns. Draghi did not rule out future interest rate cutting, and noted that economic growth remains weak, with “heightened uncertainty weighing on confidence and sentiment.”  In our assessment, today’s 25bps cut leaves the door open for future cuts into year-end.

 

At the Governing Council of the ECB meeting today the ECB cut the interest rate on the main refinancing operations by 25bps to 0.75%; cut the interest rates on the marginal lending facility by 25bps to 1.50%; and cut the deposit facility 25bps to 0.00%.

 

You can find Mario Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here. We have no major changes in language versus June's script to highlight. 

 

 

Highlights from the Q&A:

 

-We see a divergence in bank lending across Europe, and heightened risks in Spain and Italy. What can be done to mitigate these risks?   MD: The idea that the ECB could channel funds via a bank lending channel to a specific category of firms or households is as wrong as those that say the ECB shouldn’t buy government bonds. Both ideas are very hard to implement. What the ECB has done is broadened collateral standards to be more inclusive of all banks.

 

-What if Italy needs aid? Is the structure of EFSF/ESM large enough?   MD: No answer.

 

-Will all banks be included in a pan-European banking supervisory?   MD: It’s too early to answer these questions. A few general messages: (1.) The EU council has made important steps towards a financial market union. Leaders committed substantial political capital towards a union. (2.) Whatever the proposal will be, the ECB should be placed in a task to carry it out in an independent way without risk of its reputation. (3.) Any new task should be separated from monetary policy tasks. (4.) The ECB should remain independent to carry out this work. (5.) We will work with national supervisors (National Central Banks). ( 6.) New tasks will be given a higher level of democratic accountability.

 

-Is the ESM big enough, large enough in scope?  MD: How big is enough? We know what we have. We have to make it work. I think that the ESM and EFSF with their new modalities are adequate to cope with the risks/contingencies that we can envisage now.

 

-Should the ECB back the ESM and give it a banking license?   MD: We believe the institution should hold up to its mandate. As we speak the details of this issue are still being discussed. [ = non answer]

 

-Was the decision to cut 25bps unanimous?   MD: Unanimous.

 

-With your decision to cut the deposit rate to 0%, what’s your response that banks are still not using the money to pump it into the economy?   MD: We still need time to see the impact of two LTROs.

 

-Will we see additional LTROs or temporary measures?   MD: We never pre-commit.

 

-How much coordination today, with Bank of China and BOE?   MD: No coordination beyond normal exchange between central banks.

 

-There has been talk that ECB staff feels overworked given the environment over the last two years. Is this an operational risk and are there plans to hire more staff?  MD: We’ve taken some measures to alleviate this stress and we may increase resources. 

 

Matthew Hedrick

Senior Analyst


INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER

Claims Strength Attributable to Ford Not Idling Plants - A Healthy Sign

This morning's jobless claims number was better than expected primarily because of a decision by Ford to idle 13 plants for just one week this summer instead of two. Factory workers are allowed to collect unemployment insurance during these idling periods. As the chart below shows, weeks 27 and 28 normally reflect large increases in NSA claims while the plants are closed. This reverses in weeks 29 and 30 as the plant resume production. The average WoW rise in NSA claims in the comparable week over the last five years has been 42k compared to the decline in NSA claims of 3k in this morning's print. 

 

Initial jobless claims fell 12k last week to 374k. Incorporating the 2k upward revision to the prior week's data, claims fell 14k. Rolling claims fell 1.5k WoW to 386k. On a non-seasonally adjusted basis, claims fell 3k. NSA rolling claims are improving at a rate of ~7% YoY, which is a further decline in the rate of YoY improvement - a worrisome sign. 

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Auto3

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Raw

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Rolling

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - NSA

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - NSA rolling

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - S P

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Fed

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - YoY NSA

 

The 2-10 Spread

The 2-10 spread widened 1 bp WoW to 132 bps, while the ten-year treasury yield rose 1 bp to 163 bps. 

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - 2 10

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Subsector Monitor

 

INITIAL CLAIMS: FORD DRIVES CLAIMS LOWER - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 5, 2012

 

As we look at today’s set up for the S&P 500, the range is 15 points or -0.66% downside to 1365 and 0.44% upside to 1380.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels

 

THE HEDGEYE DAILY OUTLOOK - sector table

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 7/3 NYSE: +1773
    • Versus prior  trading day +1255
  • VOLUME: on 7/3 NYSE 466.46
    • Versus prior trading day 736.11
  • VIX:  on 7/5 closed at 16.66
    • Change versus most recent trading -0.8%
    • Year-to-date change of -28.8%
  • SPX PUT/CALL RATIO: as of 7/3 closed at 1.40
    • Versus prior trading day 1.68                     

 

CREDIT/ECONOMIC MARKET LOOK:

 

TREASURIES – if you asked the bond market for US Growth’s slope for the last 5 yrs, she’d have given you all you need to know over the intermediate-term TREND. Breaking down to 1.59% this morning, the 10yr is already down -5bps this wk and the Yield Spread (10s minus 2s) is hitting a new low of +129bps wide. Very bearish for the financials (and US growth assumptions).

 

  • TED SPREAD: as of this morning: 37.85
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year yield: as of this morning 1.62
    • Versus prior trading day 1.63
  • YIELD CURVE: as of this morning 1.33
    • Versus prior trading day 1.33

 

MACRO DATA POINTS

  • 7am: MBA Mortgage Applications, June 29 (prior -7.1%)
  • 7am: Bank of England announces interest rates
  • 7:30am: Challenger Job Cuts Y/y, June (prior 66.7%)
  • 7:45am: ECB announces interest rates
  • 8am: RBC Consumer Outlook Index, July (prior 46.1)
  • 8:15am: ADP Employment Change, June, est. 100k (prior 133k)
  • 8:30am: Initial Jobless Claims, June 30, est. 385k (prior 386k)
  • 9:45am: Bloomberg Consumer Comfort, July 1 (prior -36.1)
  • 10am: ISM Non-Manf. Composite, June, est. 53 (prior 53.7)
  • 10am: Freddie Mac mortgage rates
  • 11am: Fed to purchase $4.5b-$5.5b notes in 8/15/2020 to 5/15/2022 range
  • 11am: U.S. Treasury to announce 3-, 10-, 30-yr auction sizes
  • 11am: DoE Inventories
  • TBA: ICSC Chain Store Sales Y/y, June (prior 1.7%)

 

GOVERNMENT

  • President Obama begins 2-day bus trip through Penn., Ohio
  • House, Senate in recess

 

WHAT TO WATCH

  • Volkswagen to buy remaining stake in Porsche for $5.6b
  • Retailers issue monthly sales reports
  • Bank of England, European Central Bank announce rates
  • Euro fell yday as German svcs dropped bef. ECB; copper slid
  • Canada Competition Bureau approves Maple’s TMX purchase
  • Japan regulator OKs merger of nation’s 2 biggest bourses
  • Exxon Mobil said to explore sale of German Esso gas stations
  • ‘Spider-Man’ generated $35m in ticket sales in opening day
  • Service Industries in U.S. Probably Expanded at Slower Pace
  • China Seen Entering Deflation, Credit Suisse Says
  • France Sells EU7.8b at Bond Auction, Yields Rise

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Milk Rallying as New Zealand-to-U.S. Weather Sours: Commodities
  • Copper Gains as Chinese, European Central Banks Reduce Rates
  • Brent Oil Rallies to 1-Month High as Statoil Set to Halt Output
  • Paris Wheat Jumps as Dry Weather Cuts Supply From U.S. to Russia
  • Food Prices Seen Climbing This Month by FAO After June Decline
  • Biggest Wheat Sale From India Since 2004 Seen Halting Rally
  • Gold Futures Drop in New York After ECB Cuts Interest Rates
  • Putin Gains From Iran Pain as Russian Oil Surges: Energy Markets
  • Baltic Exchange Seeks to Double Asian Membership as Trade Shifts
  • Japan Reduces Spot LNG Purchases as Prices Soar to Near a Record
  • Palm Oil Climbs as Much as 0.9% to a One-Month High
  • Ukraine Lowers Corn Crop Forecast 8% as Fields Scorched by Heat
  • Commodities Seen Advancing as Much as 10%: Technical Analysis
  • Oil Drops in New York on Europe, U.S. Data
  • Repsol Junk Prospect Risks Alaska to Angola Expansion: Energy
  • Ghana Expects to Invest $20 Billion in Oil With Tullow, Anadarko
  • Rubber Declines From Five-Week High as Oil’s Drop Reduces Appea

 

THE HEDGEYE DAILY OUTLOOK - commodity

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - currency

 

 

EUROPEAN MARKETS

 

SPAIN – the IBEX rallied from its crashing lows to -20% here from its YTD high; failing here would be a very bearish signal; the intermediate-term TREND line for the IBEX = 7141, so watch that and Germany’s (6567 DAX) closely today/tomorrow.

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS


CHINA – Shanghai Comp down another -1.2% overnight, so it looks like American and European central planners are going to need a bigger bailout. Don’t forget China’s GDP slowdown report for July is on the 17th. By that time Global Growth and company earnings slowing will be what drives this market’s decision (volume should be real then too)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Dubai’s Stocks Complete Biggest Weekly Gain Since March on Emaar
  • GCC Bank Yields Drop as Capital Can Withstand Risks: Arab Credit
  • REITs at Records on Payouts Set to Beat Stocks: Islamic Finance
  • Dubai Duty Free Gets $1.75 Billion in 6-Year Syndicated Loan
  • Qatar National Bank Is Set for Highest Close Since May on Profit
  • Emaar Posts Biggest Weekly Gain in Five Months: Dubai Mover
  • Qatar Said to Start Investor Meetings July 9 for Sukuk Sale
  • Iran Oil Tankers Signal China in Sign Storage May Be Concluding
  • No Apology Needed as Contraction Boosts Bonds: Turkey Credit
  • Egypt Pound Set for First Weekly Gain in Five; Dollar Bonds Gain
  • Brent Oil Exceeding $100 a Barrel ‘Sustainable,’ Mirae Says
  • Wall Street Bank Investors in Dark on Liability of Libor Probes

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team


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