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HedgeyeRetail Visual: Dollar Store Tailwinds Fading

Over the past 5 years, the Dollar Stores experienced a notable shift in both private label and consumables right when the consumer needed it which drove massive margin expansion. This happened alongside accelerated unit growth and a tailwind from food inflation. Now, private label and consumables penetration are hitting a ceiling and food prices are deflated relative to last year. With margins now at peak, we don’t need profitability to deteriorate but rather for these tailwinds to fade in order to build the short case.   

 

HedgeyeRetail Visual: Dollar Store Tailwinds Fading - dollar store margins

 

HedgeyeRetail Visual: Dollar Store Tailwinds Fading - Food Inflation


THE WEEK AHEAD

The Economic Data calendar for the week of the 16th of July through the 20th 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 - WeekAhead


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 13, 2012


As we look at today’s set up for the S&P 500, the range is 25 points or -0.43% downside to 1329 and 1.44% upside to 1354. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - one

 

THE HEDGEYE DAILY OUTLOOK - two

 

THE HEDGEYE DAILY OUTLOOK - three

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 07/12 NYSE -792
    • Down versus the prior day’s trading of 75
  • VOLUME: on 07/12 NYSE 763.79
    • Decrease versus prior day’s trading of -55bps
  • VIX:  as of 07/12 was at 18.33
    • Increase versus most recent day’s trading of 2.12%
    • Year-to-date decrease of -21.67%
  • SPX PUT/CALL RATIO: as of 07/12 closed at 1.31
    • Up from the day prior at 1.10 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Increase from prior day’s trading at 1.47%
  • YIELD CURVE: as of this morning 1.23
    • Down from prior day’s trading at 1.22 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI M/m, June, est. -0.5% (prior -1%)
  • 8:30am: PPI Ex Food/Energy M/m, June, est. 0.2% (prior 0.2%)
  • 9:55am: U. of Michigan Conf., July, est. 73.5 (prior 73.2)
  • 11am: Fed to purchase $1.5b-$2b coupon securities in 2/15/2036 to 5/15/2042 range
  • 1pm: Baker Hughes rig count
  • 1:20pm: Fed’s Lockhart speaks in Jackson, Mississippi 

GOVERNMENT:

    • Opening news conf. at Natl Governors Assn. meeting, 10am
    • House meets in pro forma session, Senate schedule TBA
    • N.Y. Fed releases documents on troubles detected with Libor
    • CFTC holds closed meeting on enforcement matters, 10am
    • SEC holds closed meeting on enforcement matters, 1pm
    • Acting Commerce Secretary Rebecca Blank speaks at opening of first U.S. Patent and Trademark Office satellite in Detroit
    • Wikimedia hosts 2012 Wikimania conference on government use of Wiki information networks, 9am
    • National Academy of Sciences holds conference call briefing to discuss report on three options for National Bio-, Agro- Defense Facility in Manhattan, Kansas, 1pm 

WHAT TO WATCH: 

  • JPMorgan releases earnings; 2-hr call with analysts 7:30am
  • Wells Fargo releases earnings
  • Google’s Page in much better health, Chairman Schmidt says
  • Lexmark cuts 2Q sales forecast, citing European demand
  • Berkshire Hathaway CEO Warren Buffett on BTV at 8am
  • China’s growth slows to 3-yr. low on trade, demand
  • New York Fed to release documents on Libor
  • P&G board members said to discuss replacing CEO McDonald
  • Bank of Korea trims 2012 growth forecast after cutting rates
  • Italy credit rating cut by Moody’s; contagion, funding risks
  • Italy readies $6.1b bond sale
  • Darden Restaurants to buy Yard House USA for $585m
  • Bernanke testifies, China housing, GOOG: Wk Ahead July 14-21
  • JPMorgan’s ‘London Whale,’ two supervisors leave bank: WSJ 

EARNINGS:

    • JPMorgan Chase (JPM) 7am, $0.76
    • Webster Financial (WBS) 8am, $0.44
    • Wells Fargo (WFC) 8am, $0.81 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Carbon Surge Stokes Suspicion EU Ideas Leaked: Energy Markets
  • U.S. Tightens Iran Noose With Sanctions on Tankers, Front Firms
  • Copper Traders Most Bearish in Six Weeks on Demand: Commodities
  • Asian Corn Demand Seen Gaining as Drought Shrivels U.S. Crop
  • Oil Rises on China Stimulus Optimism, Tightening Iran Sanctions
  • Corn Rallies in Best Weekly Run Since November on U.S. Drought
  • Copper Advances as China Slowdown May Signal Additional Easing
  • India to Review Sugar Exports After Sales Reach 2 Million Tons
  • Gold Advances in New York on Speculation Over Stimulus by China
  • Cocoa Advances After Falling 5.1% on Lower European Processing
  • Malaysia Weather Dept. Sees 58% Chance of El Nino From August
  • Bipartisan Attacks Stymie Bill to Overhaul U.S. Agriculture
  • Malaysian Cocoa Maker Guan Chong Said to Consider Bids for Stake
  • U.K. Seen Doubling Power Price to Guarantee New Reactor: Energy
  • Rubber Gains, Paring Weekly Loss, as Rains Cut Thai Supplies
  • Palm Oil Rebounds as Some Investors Cover Bets on Further Losses
  • India to Sell Wheat From Reserve as Prices Surge on U.S. Drought

 THE HEDGEYE DAILY OUTLOOK - four

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - five

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - six

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - seven

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - eight

 

 

 

The Hedgeye Macro Team


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 80.32%
  • SHORT SIGNALS 78.48%

THE M3: S'PORE GDP; PACKAGE DATA; GOKNOGWEI; MGM

The Macau Metro Monitor, July 13, 2012

 

 

SINGAPORE GDP UNEXPECTEDLY CONTRACTS IN 2Q WSJ

According to advance estimates released by the Ministry of Trade and Industry, Singapore 2Q GDP unexpectedly contracted mainly due to a sequential contraction in the manufacturing sector.  2Q GDP fell 1.1% QoQ on a seasonally adjusted and annualized basis, missing estimates of 0.8% growth.  On a YoY basis, 2Q GDP grew 1.9%, missing consensus of +2.4%.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MAY 2012 DSEC

Visitor arrivals in package tours increased by 11.7% YoY to 669,460 in May 2012.  Visitors from Mainland China (465,923) went up by 4.9%, with 166,292 coming from Guangdong Province; Taiwan (52,839), Hong Kong (33,485), and the Republic of Korea (24,941) increased by 63.2%, 28.0% and 18.5% respectively.

 

There were 24,117 guest rooms available at the 97 hotels and guest-houses at end-May 2012, an increase of 2,599 rooms (+12.1%) YoY, with those of the 5-star hotels accounting for 61.1% of the total.  The average length of stay decreased by 0.11 night to 1.4 nights.

 

GOKNOGWEI IN TALKS TO JOIN OKADA FOR VEGAS STYLE, $2BN CASINO BY BAY Philippine Daily Inquirer

Filipino billionaire, John Gokongwei Jr., is reportedly in talks to join Kazuo Okada in the development of his Manila Bay Casino project.  According to sources, Gokongwei’s property arm, Robinson Land Corp., has offered to run the gaming and retail operations of Okada’s Tiger Resorts project, worth $2 billion, in Entertainment City, a 100-hectare property on the edge of Manila Bay.  Gokongwei, who owns a shopping mall chain, hotel resorts and the country’s biggest budget airline, Cebu Pacific, would be joined in the project by another Filipino billionaire, Andrew Tan, whose property group would handle the land development side of Okada’s casino project.

 

MGM CHINA LOOKING FOR HK$12 BILLION LOAN Reuters

MGM China Holdings is seeking a HK$12-billion (US$1.55 billion) refinancing loan.



Crumble Cake Europe

“I get no respect. The way my luck is running, if I was a politician I would be honest.”

-Rodney Dangerfield

 

I’ve been handed the Early Look pen this morning and thought starting with Dangerfield’s humor was in order.  After all, I cover Europe for the macro team and there’s nothing funny about what’s going on in the region.  Frankly stated, we don’t see a “bazooka” in Europe over the intermediate term as Eurocrats remain politically divided and in a slow and reactive mode to address sovereign and banking imbalances, slapping band-aids on peripheral woes at every corner, but failing to craft a real “path” forward.

 

Unfortunately, now the stakes are much higher as Italy is Too Big to Bail.  For reference, Italy’s total sovereign debt alone is €1.9 Trillion with €372 Billion in debt coming due in the next 12 months versus the combined EFSF and ESM bailout facilities worth around €700-800 Billion. To boot, markets continued to shake this week on statements from Italian PM and technocrat-in-Chief Mario Monti that Italy may want to tap the Eurozone bailout mechanism to help lower its borrowing costs (the 10YR is currently at 5.99%); that he has no plans to seek another term when elections are called next spring; and on Moody’s downgrade of the Italian sovereign yesterday to Baa2 from A3.  And if the political state wasn’t fractured enough, rumors also flew of a Berlusconi comeback. Can you say Bunga Bunga increased risk premium Party!

 

Interestingly enough, much hangs on the Eurozone’s ability to craft a fiscal union (compact) alongside its monetary union. It is firmer ground on this step that we think is critical before real action can be delivered on such proposed plans as:  a banking authority; pan-European deposit insurance; European Redemption Fund; European Financial Transaction Tax; and Eurobonds.

 

That said, we see the passage of a fiscal compact many months to years out, if ever, as countries will be slow to give up their sovereignty to Brussels/Frankfurt. Further, we’d expect the aforementioned facilities to receive approval after much foot-dragging and politicking as the ECB is likely to be wary of extending its balance sheet as a backstop for the programs while strong fiscal nations like Germany will likely balk at signing off on lower creditworthiness in exchange for the region’s risk (Eurobonds).

 

However, as these programs stew, the most pressing issue right now is that the European Stability Mechanism (ESM), originally targeted to be operational by July 1 with firepower of €600 Billion, is in limbo given that Germany’s Constitutional Court passed on making a decision on it this week; already German Finance Minister Wolfgang Schaeuble warned that a ruling (in conjunction with the fiscal compact) could be pushed to this Fall!

 

We mention this indecision on the ESM and fiscal compact from the Germans for a number of reasons:

  1. A lack of decision on Germany’s commitment will broadly breed further indecision across capital markets until the court makes a decision.
  2. Spain’s €100 Billion bailout is dependent on the loans from the EFSF and ESM, and further clarity on the firepower of both facilities is essential because A.) they were not originally crafted with a specific mandate for bank bailouts; and B.) lending first through the sovereign (at least as they were originally intended), before sovereigns can then loan to banks, will simply pile on more sovereign debt and perpetuate the cycle of more sovereign and banking imbalances across the weaker states.
  3. We believe Germany is still carrying the biggest policy stick in Europe (despite a stronger “socialist” French-Italian handshake developing) and how Merkel and her courts rule will have great impact on how Germany may or may not choose to underpin a future fiscal union.

 

In the Balance

 

If the political landscape and potential direction of the Eurozone sounds convoluted, it is! We return to our fundamental  view that neither bailouts nor encouraging more borrowing through cheaper money is the solution to Europe's problem of over-indebtedness. That said, we fully realize that when assessing Europe one must recognize that what Eurocrats “should” do (from an economic policy perspective) may be very different from what they “will” do.   

 

Given the runway on a ruling from the German Court and the fact that there are no planned Summits (i.e. catalysts) around which markets could rally over the intermediate term, we expect Crumble Cake Europe to continue to trade on headline risk, and the EUR/USD cross to remain a relative loser until more decisive action is taken from Eurocrats. As we show in the chart below, the cross broke our intermediate term TREND Line of $1.22 this week and is nearing 2010 lows, back when Greece received its first bailout in May. 

 

Should Europe play out as we expect – continued slower growth beyond consensus and Eurocrats socializing weaker members and changing the goalposts along the way– we fear that the next two years across the Eurozone could look a lot like the last two years – short of a default from Italy or more expedient action on such measures as Eurobonds.

 

I suppose I misspoke at the beginning of this missive when I said there was nothing humorous in Europe. Yesterday, Italy's national statistics office threatened to stop issuing data on the economy, saying that it has been crippled by government spending cuts aimed at reducing national debt.

 

Whether or not Italy has an agency to report its economic data reminds me of the old philosophical question: “If a tree falls in a forest and no one is around to hear it, does it make a sound?”  Unfortunately for the Eurozone, the whole is only as strong as its weakest parts and everyone is forced to listen!

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.76-103.01, $82.81-84.06, $1.20-1.23, and 1, respectively.

 

Have a great weekend!

 

Matthew Hedrick

Senior Analyst

 

Crumble Cake Europe - el   EUR

 

Crumble Cake Europe - vp 7 13


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