Front-month cotton futures finished Friday’s session up almost 4% on the NYBOT for the week after data released by the USDA Thursday showed US cotton exports up by 23% for the week ending March 5th from the week prior with a significant increase in Chinese buyers. That data however, is a drop in the bucket after the declines over the past year. We’re literally just entering the period (i.e. today) where compares are getting easy on both a one and two-year basis. And I mean really easy…
All in, let’s not forget that cotton accounts for about $5 in costs for a $100 garment at retail. We can debate up and down where in the supply chain any cost saves would show up – but quite frankly, I really don’t care at this point. We’ve had a 1.5year cost headwind that is starting to ease on the margin. This will help everyone to some degree. It pains me to say this, bc I have zero confidence in management or company strategy, but Gildan would be a disproportionate beneficiary to the reduction in cotton costs given that cotton is 35% of its COGS. If you want to play in that sandbox, then knock yourself out. I’m sticking with the winners like RL, HBI, UA (though it has zero cotton exposure – it competes with those that do), and LULU.
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There was also no reason for anyone to feel good in 4Q74 and 1Q80 either, the other periods in America’s history when the index was this low (see long term chart below). The other common denominator between today and the other two confidence recessions is the lack of confidence in leadership.
In 1974, the country was gripped by the Watergate scandal, which created a nightmare that I hope we never see again. In late 1979 and early 1980, the US was being governed by Jimmy Carter, who did not instill confidence anywhere on the planet. On President Carter’s watch, we witnessed the Iranian crisis and the US boycotted the summer Olympics in Moscow. By the end of 1980, Carter was voted out of office and the Reagan revolution began.
Today’s crisis started under President Bush’s presidency, which saw the melt down of the US Financial System and the end of the Great Consumer Credit Cycle. Now the Republicans were voted out of office and it is President Obama’s turn to set the country’s course of action.
With confidence holding at 28-years lows, will the Obama administration’s policies set the tone for recovery or further failure? Or is there another leg down regardless of what Obama does? Only time will tell, but I’m leaning toward an improvement in confidence from here. History’s behavioral patterns find a way of rhyming.
This part bears repeating from my thoughts from yesterday. In this environment the consumer is increasingly rethinking or being more thoughtful with his/her purchases. Consumers are more focused on needs over wants…… Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, yesterday’s better than expected retail sales number indicates there is still some level of spending.
What are more important are the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It’s likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the “new normal” and large credit card balances will be considered a sin.
As volatility (VIX) has broken down, and volume accelerated, what we have accomplished this week is the formation of what I see as a very trade-able Bear Market range. In Bear Markets, rather than the Fast Money Bull ones, you simply buy low and sell high. No, you don’t need Donny Deutch’s mauve dress shirt and Charlie Gasparino’s IQ (check them out yapping at each-other on CNBC right now) to figure this out. Maybe the next bull market begins when GE’s financial comedians are off the air – definitely not now.
In the chart below I have shifted our buying range up to the 656-710 SP500 zone. The dotted white line at 710 is what we call the Shark Line – bad things happen to traders, depending on their being long or short, above/below that line. This week, the Shark ate the shorts.
The dotted red line up at 765 in the SP500 is the immediate term Trade line where the Bear Market Rally is Bloated. As we approach that pain threshold for the consensus short sellers (like we did this morning), I’ll be making sales. I re-shorted the Dow (DIA) this morning. I have dropped my Asset Allocation to US Equities down from 24% on Monday, to 4% today. On the way back down to 710, I might buy things back, but patiently…
Have a great weekend,
Keith R. McCullough
CEO & Chief Investment Officer
Daily Trading Ranges
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