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Chinese Retail Sales data for April was great, while Industrial Production was merely good

Research Edge Position: Long Chinese Equities via CAF

At 7.1%, year-over-year Industrial output data released by the National Bureau of Statistics On Tuesday evening came in lower than anticipated by most observers. While in light of collapsed external demand the lessened output growth is not surprising, it was still disappointing for bulls like ourselves to see lagging components like electricity which declined 3.5% Y/Y, and Telecommunications/Computers which grew by just 1.1% Y/Y.  We were hoping to see a broadening of production increases beyond just components directly tied to stimulus infrastructure investments like transportation equipment and cement up 9.6% and 12.9% Y/Y respectively.


Retail sales data for April also released by the NBS on the 13th provided better support for the bullish long term domestic demand thesis. At 934 billion Yuan, total retail sales grew at a 14.8% Y/Y -a massively bullish number even if the figures have not yet had the impact on the manufacturing sector we were looking for. While stimulus rebates have helped sales of big ticket items (as expected after last week's CAAM sales data, automotive figures crushed it with Motor Vehicle production up 17.9% y/y and sales up 18.5%) , retail shoppers have not appeared to abandon their taste for small luxuries either, with discretionary components like cosmetics and furniture showing healthy double digit y/y growth.


Put in contrast with yesterday's disappointing US retail data, the growth rate of China's consumer spending underscores the changing nature of global consumption. If the individual consumer in China continues to spend money with confidence, ultimately it will translate to imports beyond just cotton and iron ore and production growth beyond just rebar and concrete.


Andrew Barber


More confident in MAY


Tomorrow the University of Michigan will report that consumer confidence is much better than expected.


Despite general employment concerns, declining home prices, retail sales, the H1N1 virus and the general feeling that things are still bad, the Oracle of Obama and the Dow at 8,300 appear to be bolstering consumer sentiment in May.  Tomorrow we will learn that consumers are becoming more confident that there is a chance for a strong economy over the next six months. 


The preliminary May reading of the University Michigan will suggest that confidence has risen to the highest level in six months.


Going into University of Michigan report we are long the XLY and have been buying some select consumer discretionary names (see www.researchedgellc.com) for our entire long and short positions.  On the flip side, yesterday we noted a significant increase in PUT activity in the XLY.  Clearly, somebody smells the fear that we don't!


With consumer confidence on the rise it's likely that consumers could also ease back on prioritizing needs over wants.  While the trend in April retail sales suggests that the majority of consumers maintain a needs-based bent when buying, an increase in confidence measures could suggest that consumers may wade back into the "want" spending pool.


Howard Penney

Managing Director


More confident in MAY - consumer

Russia’s Monetary Bandwidth


Russia's central bank cut its refinancing rate 50bps to 12% yesterday, the second cut in the last month. 


We've had our EYE on Russia this year and have been in and out of the Russian etf RSX on the long side. (We currently do not have a position). The Russian stock market (RTS) has now moved to +50% YTD, overtaking China as the best performing stock market YTD across the globe.  


This year we've been cautious in pointing out the risk premium associated with owning Russia, yet assertive that Russia's commodity based economy stands to benefit greatly from commodity reflation and its ability to supply China with the resources it needs for domestic growth. Further we believe that Brazil, Australia, and Canada share in this thesis. Yesterday we bought Brazil via the etf EWZ and Australia via EWA. Last week Andrew Barber noted in his post "Meet The New Boss: China" that Brazil's total exports to China exceeded those to the US for the first time in March, with iron ore leading the charge. Clearly getting long countries that can feed China's appetite has worked this year. Brazil is up 30% YTD and Russia (especially mining companies) will push higher from increased Chinese demand, which is now being confirmed by copper shipments. 


And there's continued confirmation that Russia understands who the client is.  Yesterday President Medvedev met with Wu Bangguo, chairman of the National People's Congress, to discuss their "strategic partnership" and a number of meetings are scheduled for the two nations this year.


Yesterday's interest rate cut will help to arrest the deflationary environment Russia is experiencing and in theory decrease the cost of borrowing.  In the case of Russia, it is worth noting that the central bank has room to cut, unlike major economies such as the US, UK, Japan, Switzerland, Sweden, and ECB-countries, all of whom are hovering at or around zero percent.  For the commodity levered Russia, inflation is a double edged sword. On the one hand it increases the price of its commodity exports that drive growth, yet on the other puts extreme pressure on domestic prices. By some estimates, inflation could slow to 9% this year, down from the central bank's target of 13%. In any event, Russia enjoys the ability to cut rates due to the stability of the Ruble versus the USD and Euro in the last months.


Look for use to get in on the long side of Russia via RSX at the right price.


Matthew Hedrick


Russia’s Monetary Bandwidth  - russia

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Bear Hunter Claims


This morning's jobless claims report was what it was - fundamentally bearish, on the margin.


Bearish for what? is the question however. If this acceleration in both the week-over-week and 4 week moving average (see chart below) is bearish for the US Dollar - then you know what that means for stocks - its bullish.


If this entire blow-off of the peak February Fear Factor on unemployment was a "head-fake", I will be surprised. That said, based on the latest fact, that probability is now back in play, and I'll call that for what it is. The only thing I can do from here is wait on next week's report.


One week doesn't a legitimate Depression redo make, but the Bear Hunters have every right to be back on the field here, armed with this chart and data point in hand. Bearish for what, will remain the question. Mr. Market is forward looking, and in early trading response telling us so far that Bear Hunters are better served being short volatility (VIX) and the US Dollar (UUP), rather than US Equities.



Keith R. McCullough
Chief Executive Officer


Bear Hunter Claims - employ

GIL: Smoke in Mirrors

Here's a statement you'll never hear a management team utter. "We have very little confidence that our largest customer will survive as an ongoing entity."  GIL stated the opposite on its call, which shot the stock higher despite abysmal results. I wonder why GIL managed receivables down to 7% of total for a 32% customer if it is so confident in solvency. Using every ounce of analytical objectivity, I simply can't get to a positive narrative here.


This is one story where you absolutely can't look at the name today without historical context .What we know in piecing together a longer-term narrative...

1) GIL used the multi-year financial windfall associated with a well-executed offshoring strategy to create an offensive weapon to dominate market share in its core business (55%-60% in T-shirts and Fleece).


2) That ended about a year ago, and GIL has since been attempting to grow into lower-margin businesses where the competitive landscape is steeper, the customer relationship is stacked against GIL, and it must compete more heavily on price.


3) The first foray was Wal*Mart and US mass channels. That has clearly not turned out as management planned.


4) This happens at the same time when Broder (1/3 of sales) is on the ropes, and its status as an ongoing entity is in serious jeopardy. Even if it does not go under, it is a mess.


5) So what's next? Yes, the company is looking at Asia (China) to be over 40% of its business within 2-3 years.


6) It is restating prior year's results, reclassifying depreciation, and cutting existing capacity to boost utilization due to weak demand.


So let me get this straight... This is a company that is currently the low cost producer of an unbranded commodity that is looking to grow into Asia. It manufactures almost 100% of its goods in Honduras and the Dominican Republic. So it would be competing with the likes of Li&Fung and thousands of existing local factories that can make product cheaper, would not be subject to import duties, and have a far deeper understanding of the Chinese consumer. This smells so wrong to me in so many ways.


On the flip side, I look at the potential for GIL to boost its capacity utilization by putting Chief Jay Strongbow's 'Sleeper Hold' on existing production and shuttering capacity. Most investors don't remember what leverage this can add to a pure vertical apparel manufacturer given that there are only 1 or 2 that still exist (as opposed to the 1980s where this was the standard). That's something we're clearly researching and will be back with some insight. Also, GIL has a great balance sheet, and that we can't ignore.


But the bottom line for me is that unlike other troubled companies like Crocs, Eddie Bauer, and Warnaco or industry standards like VF Corp, PVH, and even Hanesbrands, I can argue that GIL does not need to exist. If some (unwelcome) act of nature wiped out its major manufacturing facilities, there would be another manufacturer that would step in GIL's place in a heartbeat. With no brand value, the residual value here would be ZERO. I repeat, there is NO call option on monetizing brand value. That factor grows in importance in a climate like this.



With this coupon Chili’s has effectively taken its $7 price point down to $4.50…..  I’m having a hard time seeing how this can be good news!  If the consumer was inspired by the $7 price point why would you need to provide further incentive!


If you noticed yesterday Keith bought EAT for a TRADE.    It’s consistent with his view of the Consumer Discretionary (XLY) and the market in general.


I continue to be cautious on the early cycle casual dining names!








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