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RL: Imagine If The Numbers Were Bad?

If you have the luxury of being at a shop where you can actually invest in a company instead of renting a stock, how could you NOT look at RL here?
To call a -2% EPS decline a victory is hardly appropriate, but I’ll give RL props for managing through this sucker. When business gets bad, a company can proactively drive its model, or simply sit back and hope. Hope is neither and investment nor management process. Ralph and team ‘get it’ in this regard. Yes, a 13.5% retail comps stinks. But with horrific results from Tiffany, Burberry, Nordstrom, Saks, Guess?, Coach and just about everyone else tied to the high end consumer, I don’t think that the sales numbers came as a big surprise.

Now let’s talk guidance…

RL beat the quarter by $0.19 but took down the year (ending March) by $0.15. Yes, this means that 4Q needs to be down by 65%. I rarely follow any management team's guidance (except on basic items like tax rate and capex), but I’ll always plug assumptions into my model necessary to hit the guidance that the company gives the Street. I absolutely, positively cannot get anywhere near RL’s 4Q guidance. They’re suggesting a range of $0.28-$0.43. The lowest number I can get to is $0.52 – yes that’s 50% above guidance. And yes, I am assuming comps -20%, retail margins -500bps and wholesale growth declining by 15% sequentially with margins off 400bps.

If numbers come in as bad as the company guided, then 'The Question' will not be about comps and margins, it will be about brand relevancy. I firmly believe that question will not need to be asked.

I think RL puts up a number close to $4.10 this year, pushes through $4.50 in FY10 (Mar), and has near $6ps in economic-rebound earnings power. I know people will think I am nuts for attempting to talk about anything ‘post recession,’ but the reality is that key global growth drivers are coming board over 2 years in some form regardless of what the economy says. Even looking at next year, however, RL is at 8.5x earnings and 4x EBITDA! For those who have the luxury of being at a shop where you can actually invest in a company instead of renting a stock, how could you NOT look at RL here?


Break the Buck

This could possibly be the most unpatriotic post I have ever written. The dollar is critical to many investment themes within the current RE Macro models, and it’s currently flashing bright red to us. The lynchpin to market sentiment is the financials. As I said last week (see Hedgeye’s Early Look: Rust – 1/23/09), the debate over the status of some financial service firms reminds me of last year’s debate over whether GM was bankrupt or not! Of course, it was bankrupt, and yes, the government is running our largest financial institutions.

In the short run, the ever bigger US Government socialist stimulus plans and government bailout expeditions are going to be good for the stock market. As the government transfers “risk” from the balance sheets of our defunct financial institutions to its own balance sheet, it will be good for whatever financials remain and therefore, good for market psychology. But everything has its price!

Unfortunately, the deterioration in America’s balance sheet has severe implications on how the world views the US dollar. The more we show the world that we are willing to socialize our financial system, the less the US Dollar will be worth. There is a price to pay for the lack of accountability in the US financial system and that will result in a devalued US dollar. Year-to-date the U.S. dollar index (UUP) is up 5% and the S&P 500 has declined nearly -8%. The bulk of the decline in the S&P 500 has been driven buy the -29% decline in the XLF – Financials.

Over the years, mismanaged countries have had to de-value their currency in order to pay for the sins of the past. While there is a psychological impact associated with devaluation as a cheaper US dollar could be perceived as a sign of weakness, a devaluation of the US dollar would boost aggregate demand in the economy. This would help in the effort to fight rising unemployment. In addition, a decline in the value o f the dollar would help increase the value of assets in the US. In the end, an efficient way to clean up the toxic assets inherent in the US financial system is to create a cheaper dollar.

Keith continues to emphasize the fact that stocks cannot go up if the dollar is rising. The market knows that the quickest way to fix America’s problems is to print more of our currency so if the dollar goes down, stocks will rally. At the time of writing this missive the S&P is down -0.7% and the US$ is up +0.75%. This is The New Reality.


BREAK THE BUCK

This could possibly be the most unpatriotic post I have ever written. The dollar is critical to many investment themes within the current RE Macro models, and it’s currently flashing bright red to us. The lynchpin to market sentiment is the financials. As I said last week (see Hedgeye’s Early Look: Rust – 1/23/09), the debate over the status of some financial service firms reminds me of last year’s debate over whether GM was bankrupt or not! Of course, it was bankrupt, and yes, the government is running our largest financial institutions.

In the short run, the ever bigger US Government socialist stimulus plans and government bailout expeditions are going to be good for the stock market. As the government transfers “risk” from the balance sheets of our defunct financial institutions to its own balance sheet, it will be good for whatever financials remain and therefore, good for market psychology. But everything has its price!

Unfortunately, the deterioration in America’s balance sheet has severe implications on how the world views the US dollar. The more we show the world that we are willing to socialize our financial system, the less the US Dollar will be worth. There is a price to pay for the lack of accountability in the US financial system and that will result in a devalued US dollar. Year-to-date the U.S. dollar index (UUP) is up 5% and the S&P 500 has declined nearly -8%. The bulk of the decline in the S&P 500 has been driven buy the -29% decline in the XLF – Financials.

Over the years, mismanaged countries have had to de-value their currency in order to pay for the sins of the past. While there is a psychological impact associated with devaluation as a cheaper US dollar could be perceived as a sign of weakness, a devaluation of the US dollar would boost aggregate demand in the economy. This would help in the effort to fight rising unemployment. In addition, a decline in the value o f the dollar would help increase the value of assets in the US. In the end, an efficient way to clean up the toxic assets inherent in the US financial system is to create a cheaper dollar.

Keith continues to emphasize the fact that stocks cannot go up if the dollar is rising. The market knows that the quickest way to fix America’s problems is to print more of our currency so if the dollar goes down, stocks will rally. At the time of writing this missive the S&P is down -0.7% and the US$ is up +0.75%. This is The New Reality.

Howard W. Penney
Managing Director

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SP500 Levels Into The Close...

The combination of a strengthening US Dollar and US hedge fund rumor mill are tough winds for the US stock market to stand in front of today. That said, the SP500 is setting up to make another higher low versus that of November 2008. Don’t miss covering your shorts on the way down.

There is an important breakout “Trade” line in the SP500 at 839, and you saw some serious pin action around that line today – first on the breakout above it, then on the breakdown intraday below it – we have outlined that line as the dotted green one in the chart below.

Aggressively buying/covering on the SP500 811 line is my game plan. Hopefully, we get a real nasty jobless claims number before the open tomorrow that can take us there. What is bad for the buck is good for stocks.
KM

Keith R. McCullough
CEO & Chief Investment Officer

Eye on Copper and the Baltic Dry Index

We have a couple of call outs that we want to make in commodity and shipping land today that support a view of a sequential acceleration in global economic activity in Q1 2009 from the thralls of the Q4 2008 bottom.

First, as outlined in the chart below, the Baltic Dry Index is in a veritable bull market year-to-date and is up+15%, which is its best start since 1985. The BDI measures shipping rates for dried goods such as coal, building materials, metals, and grains. In theory, a pickup in the BDI should positively correlate with a pickup in end market demand for these goods, which is a leading indicator for a reacceleration in economic activity. Reports suggest that a primary driver in this resurgence in the BDI year-to-date is demand for iron ore from China where inventories are now 22% below their January highs.

Second, copper, or as we like to call it Dr. Copper for its economic predictive abilities, is showing price stabilization in the face of negative global economic news, which we also noted in a 1/6/2009 note entitled “Dr. Copper is Poking Up His Head”. The backdrop of this point today is that while inventory is still increasing in London, it is doing so at a much lesser rate and the price of copper is no longer going down.

Combined, these data points support what the Chinese stock market has already been telling us, which is, namely, that the global economy is likely re-accelerating from its Q4 2008 lows, even if from a very low level.

Daryl G. Jones
Managing Director


Eye On Leadership: Harry Markopolos

Harry Markopolos just finished testifying in front of the US Government re the Madoff case. No matter what your politics, you have to give this man some credit - this took some bravery.

I have attached the Boston Globe's picture of Harry below. Look for this man's name to be more commonplace in the mainstream media in the weeks to come. During the testimony, he's said he is getting ready to reveal a "mini-Madoff" - while its sad, "mini" in this country now includes $1 billion dollar frauds.
KM

Keith R. McCullough
CEO & Chief Investment Officer

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