US Market Performance: Week Ended 3/13/09...

Index Performance:

Week Ended 3/13/09:
DJ +9.0%, SP500 +10.7%, Nasdaq +10.6%, Russell2000 +12.0%

MAR09’ To-Date:
DJ +2.3%, SP500 +2.9%, Nasdaq +3.9%, Russell2000 +1.1%

2009 Year-to-date:
DJ (17.7%), SP500 (16.2%), Nasdaq (9.2%), Russell2000 (21.3%)

Keith R. McCullough
CEO / Chief Investment Officer

Anybody watching cotton?

We’re entering the period where cost comps get easy on a 1 and 2-year basis. Add this to my theme of every other line on the P&L improving on the margin in 2H, and the bullish cocktail gets more powerful.

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.

Andrew Barber
Brian McGough

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In Secular No-Confidence Do Americans Trust?

The Reuters/University of Michigan preliminary index of consumer sentiment climbed to 56.6 from 56.3 in February. Importantly, the index reached a 28-year low of 55.3 in November. The consumer confidence index is holding its 28-year low, reflecting mounting job losses, a declining economy and asset deflation. Correct! Right now there is no reason for anybody to feel good about anything.

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.

Howard Penney
Managing Director

Bloated Bear: SP500 Levels, Refreshed

This was, by all measures, a wonderful week. We picked up a pile of points being long the “Buy for a Trade” range that we established in the shaded green zone (see chart below). Cramer was taken down a few notches by the transparency/accountability rules of The New Reality (thank you Jon Stewart). And, generally speaking, the world just seems like a better place…

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

Question: Could DKS' Comp Expectations Have Bottomed?

Comp guidance is in for 2009, and FL is predictably unclear. I'm more interested in HIBB and DKS. Check out the gaping hole between comp trajectories for each of them on a 1 and 2-year basis in the charts below. My usual cynical self would point to HIBB being unrealistic. But the reality is that I think it is doable. That leads me to ask the question as to whether the gap between the two is justifiable? True that DKS has Golf Galaxy, which is dogging it. But that does not have enough juice to drag down the comp by 8-10%. I haven't been a fan of DKS in a long long time. In fact, I never have been. But could they finally have set the bar low enough to start beating again? I'm starting to think that the answer is Yes.

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 80.47%
  • SHORT SIGNALS 78.68%