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HedgeyeRetail: Not An 'Equal Opportunity' Week

What a week! If there's anything we can say about earnings season thus far, is that the only stocks that were rewarded are those that beat on revenue. With such a poor Macro backdrop and so many companies missing, simple margin upside (especially if SG&A) was not enough. What we find comical is that there are so many companies that took all the credit for their success when Macro was favorable. Now they are blaming the environment on the way down. We won't name names.


HedgeyeRetail: Not An 'Equal Opportunity' Week - Earnings price action HERV


CONCLUSION: Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.



With the inclusion of this morning’s ISM data, we’ve collected a broad swath of global PMI data for the month of JUL throughout this past week. Unfortunately for growth bulls, the data implies that the global growth outlook continues to deteriorate. In the chart below, we scatter plot the nominal PMI readings of various countries and economic blocs vs. the corresponding sequential delta. As the chart shows, global PMI readings generally slowed or showed outright contraction (or both) in the month of JUL. Moreover, weakness in the New Orders subcomponent in a handful of key surveys – including the US and China – lends credence to our view that global economic growth is poised to continue slowing over the intermediate term.





On the inflation front, we continue to view any incremental monetary easing out of the Federal Reserve (and incremental front-running of said easing in the commodities markets) as the key upside risk to global inflation figures over the intermediate term. One key point we highlight in the chart below is the fact that the global trend of reported disinflation is poised to come to a screeching halt in the JUL/AUG periods, largely due the waning trend of YoY commodity deflation, which peaked in JUN (generously holding current prices flat through year-end).




Looking ahead 3-6 months, incrementally less YoY deflation in the commodities markets will become a tailwind, on the margin, for rising CPI figures. While we do not necessarily see material upside to global inflation readings in 2H12, we are keen to flag this important change on the margin, which has dire policy implications as indicated in the next paragraph.



With global economic growth continuing to slow and reported inflation statistics poised to bottom and accelerate in 2H across many economies, the global economy is at risk of experiencing marginal stagflation (i.e. “Quad 3” in our proprietary G/I/P analysis) – an event that may serve to handcuff many central bankers globally.


Recall that heading into 2012, one of the predominant factors in the consensus bull thesis was a global trend of monetary easing – particularly in across the developing world. Arresting that trend or potentially pricing in tighter monetary policy on the margin will likely become a headwind to asset classes that rely on easy money and the associated speculation therein to appreciate. Look no further than the PBOC’s recent quarterly monetary policy report that suggested that “consumer inflation may rebound after August” for emerging confirmation of our view.


Additionally, we continue to anticipate that growing fear of the Fiscal Cliff and another Debt Ceiling showdown in the US has the potential to increasingly weigh on global financial markets as we get nearer to those catalysts. Refer to our 3Q12 Macro Theme titled, “The Cliff" for more details.


In the chart below, we run the Bloomberg-coagulated World Real GDP and CPI figures through our G/I/P screen and the outlook leaves much to be desired for bulls.




All told, global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.


Darius Dale

Senior Analyst


The Economic Data calendar for the week of the 6th of August through the 10th 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

Weekly European Monitor: No “Whatever”

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Long German Bunds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +2.2% week-over-week vs +0.6% last week, in a week in which most of the move came on the Thursday/Friday rally of +2.4%. Top performers: Italy +3.9%; Switzerland +2.9%; Ukraine +2.9%; France +2.9%; UK +2.8%; Germany +2.6%; Netherlands +2.2%; Spain +2.1%; Greece +2.0%. Bottom performers: Cyprus -0.6%; Hungary -0.2%.
  • FX:  The EUR/USD is up +0.39% week-over-week vs +1.04% last week.  W/W Divergences:SEK/EUR +1.85%; PLN/EUR +1.63%; TRY/EUR +1.56%; HUF/EUR +1.11%; NOK/EUR +0.75%; CZK/EUR +0.39%; GBP/EUR -1.08%.
  • Fixed Income:  The 10YR yield for sovereigns across the region were mixed this week. Greece saw the largest decrease week-over-week by -182bps to 25.64%. But more important were the moves of Spain and Italy, up +18bps and +16bps to 6.99% and 6.09%, respectively. However, risk in the bond market came down in the week for these two countries, compared to last week, when Spain hit an all-time high of 7.58%!

In the ECB press conference yesterday, President Mario Draghi directly addressed the risk of rising yields across the periphery (without directly naming Spain and Italy) and went on to announce that the ECB “may undertake” non-standard measures, hinting at a reactivation of the SMP to buy bonds on the secondary market and a reengagement of the EFSF to buy bonds on the primary market, with focus on the short end of the yield curve. No target size of buying was mentioned beyond “size adequate to reach its objective” and the details of this buying is expected to be defined in the coming weeks.


What this spells is the willingness (one again) by central authorities to manipulate the Spanish and Italian bond markets.  We’ll be looking for further evidence of this buying and expect yields to make dramatic moves down alongside these expectations. 


Weekly European Monitor: No “Whatever” - ccc. yields



No “Whatever”

As we hit on in a note yesterday titled “No “Whatever”, No Bazooka at August ECB Presser!”, ECB President Mario Draghi did not deliver the drugs, aka the bazooka, following his statement last Thursday (7/26) that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” adding, “believe me, it will be enough.”  


We were not surprised that Draghi under-delivered. As recently as 7/27 in response to Draghi’s “whatever” comment we wrote:


“The issue here, though, is that Draghi hints at possessing some bazooka that he’s been concealing for all this time.  We frankly don’t think there is one, particularly because we can’t envision what one grand bazooka would look like.“

We’re frankly disgusted with the political risk in Europe. While this is not a new development, Draghi’s mismanaged comments late last week add a further layer of disguise to Eurocrats and will continue to contribute to the extreme capital market volatility across Europe.  Keith brought this point home today in his Early Look titled "Sucker Economics":


1.   745AM EST (yesterday), Spanish stocks rip to the upside, +2% on the day, after the ECB decides not to cut rates, but plenty of print, tv, and radio pundits proclaim their faith that “it’s at 830AM that we get the good stuff.”


2.   835AM EST (yesterday), Spanish stock stop going up, and fast, as pundits comb the release looking for “hints” that the ECB really is going to deliver the drugs, like Bernanke was supposed to in the day prior.


3.   1130AM EST (yesterday), Spanish stocks close down -5.2% on the day, a 7% (not a typo) intraday reversal. Pundits feel shame.


Given this environment, we’ll work to keep you abreast of the most important calendar catalysts that we think large expectations will be built into.



Calendar Catalysts:


20 August - Greece has a payment of a €3.2B bond (held by the ECB) that matures. Payment is still being discussed.


September - Troika officials will return to Greece in September to complete their final assessment of the implementation of the bailout program. Could there be another debt restructuring?


12 September - Germany’s Constitutional Court rules on the constitutionality of the ESM and Fiscal Compact.


Late September - According to La Tribune, Moody's will evaluate the consequences of the Eurozone crisis on France's AAA rating by the end of Q3. We think a downgrade to AA is a real probability.


Mid October - There’s a possibility of a German Sovereign credit rating downgrade, especially should France be reduced by a notch beforehand.


29 & 31 October - Spain’s debt maturity schedule scares as the Treasury is bumping up against sovereign debt maturities of €20.27 of debt maturing on two days.


Much hangs on Germany’s Constitutional Court ruling on 12 September when it decides on the constitutionality of the ESM and Fiscal Compact. If Germany doesn’t pass the ESM, in particular, the ESM program is back to square one, and leaves the region further in stitch as the EFSF funding ticks down (and is massively undercapitalized to deal with potential sovereign and banking bailout needs/risks on the horizon). Please note that as of now, even if the German Court passes, there is no specific language governing the scope of the ESM, namely if it has a banking license, as the only clarity on the program is three vague paragraphs issued at the June 28-29 Summit Meeting.



Call Outs:


Germany - the Emnid poll for the Bild am Sonntag showed 51% of Germans believed that the economy would be better off without the euro, while 29% said it would be worse off, and 71% wanted Greece to leave the Eurozone if it did not live up to the conditions of its bailout package.


Germany - a survey by YouGov published in the Bild newspaper showed that only 33% of Germans still believe that Chancellor Merkel is making the right debt decisions when it comes to addressing the Eurozone sovereign debt crisis. However, a poll by ZDF-Politbarometer showed 63% of Germans backed Merkel's handling of the crisis, though a majority thought she should explain her policies better.


Spain - a Metroscopia poll published monthly in El Pais showed that support for Spanish Prime Minister Rajoy fell sharply in July after his government announced a €65B austerity package. The poll showed that if the general election was to take place now, the ruling People's Party would still win with a 30% share of the vote, though it would only retain a 5.3% advantage over the Socialist opposition, down from 15.9% in the November vote. It also showed that 80% of Spaniards now had little or no confidence in Rajoy.


Spain - Catalonia, Spain's most indebted region, said on Tuesday that it cannot pay subsidies in July to hospitals, old age homes, and other social services already hit by sharp budget cuts. A government spokeswoman said the inability to pay is due to a liquidity problem, but added that the situation is expected to normalize in September. While the government would not say how much money in grants it will not be able to pay, El Pais put the figure at €400M.


Spain - Spain's 17 semi-autonomous regions will have to comply with debt ceilings starting this year. Budget Minister Cristobal Montoro said all but four regions voted in favor of the debt limits, which average 15.6% of GDP this year and 16% in 2013. The regions had an aggregate debt-to-GDP ratio of 13.1% and a deficit of 3.3% in 2011. Several regional representatives told reporters yesterday that the new rules will force them to implement deeper budget cuts.


Italy - Italian Prime Minister Mario Monti said in an interview with Finnish daily Helsingin Sanomat that while Italy does not currently need assistance from its Eurozone partners, it may in the future need a "breathing break" from its high interest rates.


Spain - Standard & Poor's Ratings Services said Wednesday it is keeping Spain's long and short-term sovereign debt rating at BBB+/A-2 and the outlook negative.  


Germany - Standard & Poor's said that it had affirmed its unsolicited 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the Federal Republic of Germany. The outlook on the long-term rating remains stable.


Slovenia - Moody's credit agency downgraded Slovenia's creditworthiness by three notches from "A2" to "Baa2," which puts the country just two steps away from junk status.


Greece - the Greek government is expected to wrap up talks with troika officials on Sunday on the €11.5B in spending cuts over the next two years. The paper said that among the subjects that Finance Minister Yannis Stournaras will discuss with the troika are where else Greece will find more than €200M in savings so that it can avoid cuts to "special" salaries in the civil service and how it can make up a shortfall in revenues that would be caused by allowing Greeks to pay their income tax in installments.


IMF - said on Thursday that the Eurozone needs a "policy game changer" to stem the contagion from the debt crisis. The fund argued in a spillover report that "despite progress in the face of constraints, the sense is that not enough has been done to stop the spread of stresses and attenuate fiscal-growth-banking feedback loops". It added that in a worst-case scenario, Eurozone output could be cut by five percentage points if policymakers did not act and the crisis worsened.


Italy - Italian Prime Minister Monti's government won a confidence vote in the Senate to speed up the passage of more than €4B in spending cuts this year. Recall that the cuts, which are in addition to the €10.5B of cuts announced in an austerity package last December, would allow Italy to push out a planned VAT increase.



Risk Monitor:

Sovereign CDS were down across the peripheral countries this week. On a week-over-week basis Ireland declined the most, down -36bps to 495bps, followed by France -18bps to 154bps, Italy -17bps to 495bps, and Spain -10bps to 562bps.


Weekly European Monitor: No “Whatever” - ccc. cds   a


Weekly European Monitor: No “Whatever” - ccc. cds   b



Data Dump:


Weekly European Monitor: No “Whatever” - ccc. PMIs


Eurozone Business Climate Indicator -1.27 JUL (exp. -1.09) vs -0.95 JUN
Eurozone Consumer Confidence -21.5 JUL Final (exp. -21.6)

Eurozone Economic Confidence 87.9 JUL (exp. 88.9) vs 89.9 JUN

Eurozone Industrial Confidence -15.0 JUL (exp. -14) vs -12.8 JUN

Eurozone Services Confidence -8.5 JUL (exp. -8) vs -7.4 JUN

Eurozone Unemployment Rate 11.2% JUN vs 11.1% MAY, revised to 11.2%

Eurozone July preliminary CPI +2.4% y/y vs consensus +2.4% and prior +2.4%

Eurozone PPI 1.8% JUN Y/Y (exp. 1.9%) vs 2.3% MAY   [-0.5% JUN M/M (exp. -0.4%) vs -0.5% MAY]

Eurozone Retail Sales -1.2% JUN Y/Y (exp. -1.9%) vs -0.8% MAY   [0.1% JUN M/M (exp. -0.1%) vs 0.8% MAY]


Germany Retail Sales 2.9% JUN Y/Y (exp. 0.4%) vs -1.1% MAY   [-0.1% M/M (exp. 0.5%) vs -0.3% MAY]

Germany Unemployment Rate 6.8% JUL vs 6.8% JUN

Germany Unemployment Chg 7K JUL vs 7K JUN


France Producer Prices 1.3% JUN /Y (exp. 2.1%) vs 2.1% MAY

France Consumer Spending 0.2% JUN Y/Y (exp. 0.4%) vs 0.5% MAY


UK GfK Consumer Confidence -29 JUL vs -29 JUN

UK Nationwide House Prices -2.6% JUL Y/Y (exp. -1.9%) vs -1.5% JUN   [-0.7% JUL M/M (exp. -0.2%) vs -0.6% JUN]

UK M4 Money Supply -5.2% JUN Y/Y vs -4.1% MAY

UK PMI Construction 50.9 JUL (exp. 48.7) vs 48.2 JUN


Italy CPI 3.7% JUL Prelim Y/Y vs 3.6% JUN

Italy PPI 2.2% JUN Y/Y vs 2.3% MAY

Italy Unemployment Rate 10.8% JUN Prelim vs 10.6% MAY


Spain Q2 GDP Prelim -0.4% Q/Q (exp. -0.4%) vs -0.3% in Q1   [-1.0% y/y (exp. -1.0%) vs -0.4% in Q1]

Spain Total Housing Permits -32.6% MAY Y/Y vs -32.4% APR

Spain CPI 2.2% JUL Prelim Y/Y (exp. 1.8%) vs 1.8% JUN

Spain Retail Sales -4.3% JUN Y/Y vs -4.3% MAY


Sweden Q2 GDP Prelim 1.4% Q/Q (exp. 0.2%) vs 0.9% in Q1   [2.3% Y/Y (exp. 0.6%) vs 1.5% in Q1]

Switzerland PMI Manufacturing 48.6 JUL (exp. 47) vs 48.1 JUN


Portugal Consumer Confidence -50.4 JUL vs -51.5 JUN

Portugal Economic Climate Indicator -4.4 JUL vs -4.4 JUN

Portugal Industrial Production -4.4% JUN Y/Y vs -6.7% MAY

Portugal Retail Sales -5.2% JUN Y/Y vs -4.4% MAY

Ireland Unemployment Rate 14.8% JUL vs 14.8% JUN


Denmark Unemployment Rate 6.3% JUN vs 6.2% MAY

Belgium Unemployment Rate 7.2% JUN vs 7.1% MAY

Belgium CPI 2.32% JUL Y/Y vs 2.26% JUN


Greece Retail Sales -9.2% MAY Y/Y vs -11.4% APR


Russia Consumer Prices 5.6% JUL Y/Y (exp. 5.8%) vs 4.3% JUN

Romania Producer Prices 5.8% JUN Y/Y vs 6.7% MAY

Romania Retail Sales 4.0% JUN Y/Y vs 5.6% MAY

Turkey CPI 9.07% JUL Y/Y vs 8.87% JUN

Turkey PPI 6.13% JUL Y/Y vs 6.44% JUN



Interest Rate Decisions:


(8/2) BOE UNCH at 0.50% and Asset Purchase Program on HOLD at £375 Billion

(8/2) ECB UNCH at 0.75%

(8/2) Romania Interest Rate Announcement UNCH at 5.25%

(8/2) Czech Republic Announcement UNCH at 0.50%



The Week Ahead:


Sunday - Jul. UK Lloyds Employment Confidence


Monday - Aug. Eurozone Sentix Investor Confidence; Jul. UK BRC Sales Like-For-Like, New Car Registrations; Jul. Greece Consumer Price Index


Tuesday - Jun. Germany Factory Orders; Jul. UK NIESR GDP Estimate; Jun. UK Industrial Production, Manufacturing Production; Jun. Italy Industrial Production; 2Q Italy GDP - Preliminary


Wednesday - Jun. Germany Exports, Imports, Current Account, Trade Balance, Industrial Production; BoE Inflation Report; Jul. BoF Business Sentiment; Jun. France Trade Balance; Jun. Spain Industrial Output


Thursday - Aug. ECB Publishes Monthly Report; Jun. UK Trade Balance; Jun. Spain House Transactions; Jun. Italy Trade Balance; Jun. Greece Industrial Production; May Greece Unemployment Rate


Friday - Jul. Germany Consumer Price Index – Final; Jun. France Industrial Production, Central Government Balance, Manufacturing Production; Jul. UK PPI Input, PPI Output; Jul. Italy CPI - Final


Matthew Hedrick

Senior Analyst


Is MO a precursor for another poor month for the regional markets?


  • We believe July gross gaming revenues in Missouri fell 5% YoY but same-store revenues fell almost 8% — 4% lower than the seasonal trend would've predicted.  Same-store is lower because the St. Jo Frontier Casino was closed during July of last year.  Official results will be out next week.
  • July 2012 is down a Saturday but that is mostly captured in the model so results are definitely below recent trend
  • Missouri continues to underperform the regional markets due to new competition from Kansas



FDO: Idea Alert

Keith shorted FDO on today’s up-move – central planning isn’t quite the elixir of life should we see $5 at the pump. We remain bearish on the dollar store space; we don’t need Operating Margins to contract in order to build a short case but simply for the prior drivers of expansion to fade.


Last month, we had the pleasure of attending FDO’s analyst day where management left investors with something to be desired offering no change to its long term guidance which was initially provided back at the October 2010 analyst day calling for MSD comps, Operating Margin expansion and double digit EPS growth. Importantly however, with operating margins sitting around ~7.5% over the past 2 years and running flat to potentially down this year, it was notable that there was no clarification on the “operating margin expansion” guidance. When asked in the Q&A to elaborate on what that meant in terms of the magnitude of growth and timeline for expansion, CFO Mary Winston declined to provide additional detail and simply reiterated the qualitative drivers of improved profitability.


Over the past three years, the spread between FDO margins and DG margins, despite both reaching their respective peak levels, has expanded sequentially with FDO now running nearly 300bps below DG. With no additional insight into what levels of operating margins can truly be achieved over the next few years, what does “margin expansion” really mean for FDO as we sit 1 quarter away from a potential year of compression? We definitely think that FDO is a safer place to be on the short side than DG.


Here are some additional thoughts on our thesis:

  • Operating Margins have expanded from ~5.7% in 2007 to 7.5% in 2011. At the same time, while a drag on margins, an increase in consumables penetration (from 59% to 67% in 2011 and 68% YTD) has been a traffic tailwind. As an offset, FDO has drastically increased its private label offering from 4% to 25% today and while management expects to enhance its private label offering further, the rate of growth has slowed drastically. FDO does expect to double its private label offering by 2015 via an expanded assortment (which implies penetration just below 40% relative to 25% today), though we’re not so sure private label can continue to increase as a percent of sales as quickly as management expects especially considering the primary category to grow in is consumables.
  • Sadly, during the 5 years where margin expansion drove earnings, the percent of Americans on food stamps increased from 9% peaking at 15% last year. Should consumables penetration increase further without a correlated growth in consumers using food stamps as well as private label penetration, gross profitability will continue to deteriorate and strain earnings growth.
  • Capital expenditures are expected to run around 7% of sales this year following 3.7%, 2.5% and 2% over the last 3 years respectively due to reaccelerated store growth, an entire chain refresh set to be completed in 2015 and expanded DC capacity. These investments may not be timely given the deceleration in private label penetration and top line growth coming in below both internal and external expectations.
  • Finally, management highlighted at its investor day that digital would not become a meaningful part of the business in the foreseeable future. While the consumables business doesn’t necessarily cater to an online model as seamlessly as most other brick and mortar models, the missed opportunity for increased digital penetration to drive margin expansion through a lower cost structure is important nonetheless.


We continue to feel that with operating margins at peak, tailwinds fading, the inability to grow online and management teams offering no new insight into the drivers of future earnings growth, the dollar store space is not a safe place to be.


FDO: Idea Alert - FDO TTT

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