Looking the Retail Sales number that was reported today, you would think we took a page from the Chinese playbook – making up the numbers!

In January, after six straight months of declines, the Commerce Department said total retail sales rose 1% last month versus a revised 3% drop in sales in December. December sales were originally reported to have declined 2.7%. Nearly every rational person looks at this number with a high degree of skepticism. That being said, should it be dismissed?

The biggest aberration was in apparel purchases, as many specialty clothing chains reported big declines in their January same-store sales. It’s a foregone conclusion that the January number will be revised lower next month. However, even if it is revised down by 1%-2%, it still shows that the lights went out in December, but came back on in January.

The consumer is the lynchpin to stabilizing the market. Yes, the year-over-year sales statistic is horrific and will be for some time. The month-to month trend points to a bottoming process and not a continued acceleration to the downside. Yesterday, while sitting on the hot seat in Washington, all of the bankers that make consumer loans disclosed increased loan activity in the month of December and I assume will continue in January. The U.S. financial institutions that took TARP money are being forced to loan money to consumers. If the banks are lending again, was January retail sales number an aberration? The politics of the TARP and the stimulus will have a way of working themselves out to the benefit of the consumer, and ultimately, the market.

Howard W. Penney
Managing Director

Covering/Buying: SP500 Levels Into The Close...

Realizing that 2009 YTD performance anxieties are heightening on the way down here, my best advice is to take a deep breath and patiently start to cover/buy all the way down to the 803 line in the SP500.

The VIX is only up +4% here at 46.34, which is far away from the aneurisms associated with Q4 of 2008, when volatility was 40-45% higher. Provided that the VIX stays in check under the 53.96 line, I think this is a very trade-able SP500 range that we can nestle into. See chart below for the Trade(dotted red) and Trend (thick red) lines that we could easily bounce to.

Keith R. McCullough
CEO / Chief Investment Officer

India's Economic Disaster Continues Brew...

“The most barbaric and basic truth about the Indian state. That it has failed the country's poor” -Sanjeev Srivastava

BBC News Editor Sanjeev Srivastava wrote the quote above in January 2007 in an article about a series of grisly murders committed in the Noida suburb of Delhi by two men who are members of a privileged class and ignored by local law enforcement officials because the victims, all children, were from poor families who lived in a neighboring slum.

The two men were convicted of those killings this week and are due to be sentenced tomorrow in the final chapter of a case that has been a source of newspaper headlines in India for months and is seen by many as a symbol of the class divide within the nation.

The other dominant headline story today was a 152 point decline in the SENSEX in the wake of Industrial Output and Inflation data that point to likely rates cuts by the RBI as the government struggles to meet growth targets for 2009 that seem increasingly implausible. For Prime Minister Singh, still recovering from open heart surgery, this is a battle of political life or death … and India’s elections are looming.
Industrial output registered -1.97% for December, only the second negative year-over-year number since 1993. This suggests that the suspicion we discussed in our post on the 16th of last month that the declining WPI data issued then was being driven by sluggish industrial demand on the subcontinent rather than declining global commodity prices was correct.

We have had a consistently negative bias on Indian equities since we launched the firm early last year, and our thesis rests, in part, on the class divide underscored by the Noida murders. Simply put, We believe that the Indian population, grappling with rampant poverty and poor health and education services, will not be able to sustain internal consumption levels sufficient to sustain the growth levels targeted by the Singh administration.

Andrew Barber

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US Jobs: Not Horrendous Enough...

At 623,000 this week’s initial jobless claims came in 8,000 less than the last week (last week was revised up by 5,000 to 631,000) and 15,500 above the 4 week moving average.

While this nudges up the moving average, I don’t think it provided the kind of shock that the US Financial system really needs. A horrendous number relative to the already sufficiently bearish expectations out there is what we need to break the US Dollar. Until we get that, the US Dollar is going to continue on the path of least resistance – higher.

Today the US$ Index us up another 50 basis points to $86.24, hammering home the same inverse correlation that has held steady for the better part of 2009 – US$ up = stocks down. This equity market continues to be worried about her government’s credibility. A Crisis in Credibility leads people to hoard cash and gold – that’s what people do when they don’t trust the system.

Keith R. McCullough
CEO / Chief Investment Officer

Cost Spreads Matter

9 out of 10 CEOs can’t tell me within a 20% band how many units of apparel are consumed in the US. That’s why I think monitoring the relationship between unit cost and sales matters so much.

Now that so many are realizing the importance of factoring in a macro view with the (always important) company fundamentals, I am getting more questions about changes in the import price environment.

A common mistake out there is that many people look at the percent change in apparel/footwear CPI vs. the percent change in the import cost. If import costs are off by 1%, but consumer prices are off by 2%, then that’s actually a POSITIVE margin event, right?


Think about it. The average retail price for a garment of apparel is about $10, yet the average fully manufactured/imported cost is $3.50. If costs are down 1%, then that saves $0.035 per garment. This might not seem like much, but multiply it by the 23 billion units of apparel consumed in this country last year and that’s $800mm – yes folks, that’s real money. But if consumer price is down by 2%, then we’re talking a $0.20 hit on each of those garments, or about $4.6bn. So net out the two and the industry is in the hole by $3.8bn. Not good… This is the basis for much of the multi-year call I’ve had – and continue to have – on the industry. Most CEOs I talk to cannot tell me within 5 billion units (yes, that’s 20%) how many units of apparel are consumed each year. Macro might not have mattered over the past decade. But now it does.

That’s why I track the chars below so closely. I don’t care as much about the percent change in cost vs. retail sales as I do in the dollar spread. That’s what really matters. The notable point here is that the past 6 months has actually shown a positive trend for consumption vs. manufactured cost. The latest month turned down again meaningfully. The data is on a one month lag, so we’re looking at Dec – which is hardly relevant about what is to come. But straight lining the trend throughout ’09 does not bode well for margins through mid-year.
Unit cost/revenue spreads have been so positive for so long. They even looked good for 2H08 but recently turned down.


I thought the MAR earnings call was positive on the cash flow front. The rough lodging environment is no secret. MAR’s ability to drive cash flow significantly higher might have been. Here are the highlights:

• MAR cut capex by $400MM YoY, is financing fewer loans to owners, and will still sell off timeshare notes receivable even at a loss. This strategy is very positive for cash flow.
• I think that the guidance was conservative, certainly more so than HOT. HOT probably couldn’t give realistic guidance because that would show a covenant breach. MAR has no covenant issues.
• The capex cuts were good but they still can cut another $200-250MM per our math, and I think they will.
• Timeshare will be a positive free cash flow generator in 2009
• MAR doesn’t have the same nasty tail on the flow through here because of the fee-based model, so 2009 could be a real bottom.

We will follow up with a more detailed post.

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