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EYE ON CONFIDENCE - OR THE LACK THERE OF…..

Consistent with our thesis, confidence among U.S. consumers fell more than the consensus forecast this past month, reflecting higher unemployment and higher gasoline prices.  The Reuters/University of Michigan preliminary index of consumer sentiment index for July came in at 64.6 compared the final reading of 70.8 for June (see chart below).  The consensus had been expecting decrease to a reading of about 70.0.

EYE ON CONFIDENCE - OR THE LACK THERE OF….. - a1

Currently consumers are focused on job security and, if they do have a job, how much it's going to cost to get back and forth to work.

 EYE ON CONFIDENCE - OR THE LACK THERE OF….. - HP mortage data.xlsx

Despite rising prices at the pump, the Michigan inflation survey saw fears of rising prices in the near term decline from last month's levels but longer term inflationary concerns increased marginally, something of a wash.   Meanwhile the current conditions survey declined from 73.2 last month to 70.4. The message from the consumer is clear, the economy may be bottoming, but it's also not really getting much better. 

We are currently positioned to express our belief that confidence has peaked for the intermediate term through short positions in Consumer Discretionary (XLY) and Consumer Staples (XLP).  In addition, Keith recently shorted McDonald's (MCD) and CKE Restaurants (CKR) in the portfolio.  

For the time being, malaise seems to be the order of the day and we will fade the US consumer accordingly.

Howard Penny

Managing Director

Andrew Barber

Director


Burning The Consumer: SP500 Levels, Refreshed...

After making the MEGA Squeeze call on US Consumer Discretionary stocks (1H09), we have reverted to the short position that we held for the better part of 2007 and 2008. No, this isn't the end of the world type call that we made back then, it's simply assuring you that everything has a price - and the price of Burning The Buck will be paid by America's Main Street.

When you burn your currency, in the short term you pay the holders of debt and assets. In the intermediate term, that reflation starts to morph into inflation. In the long term, if you're not careful, you wind up with a German Reichsbank situation of the early 1920's that is completely politicized beyond repair.

Anyway you look at it, the consumer loses - particularly as you shift from the intermediate term to the long term (i.e. Q3 into Q4). Our intermediate term view (3months or more) remains that the US market won't crash or get squeezed like we saw in 2008 or Q2 of 2009. Instead, the US market will trade in a range. We call it Range Rover, and the lines are painted in the chart below (871-954).

My new line of immediate term TRADE resistance (dotted red line) = 898. We're short the Dow (DIA) and the US Consumer (XLY and XLP). We're long the Nasdaq (QQQQ) and Healthcare (XLV).

Buy low, sell high. Manage your risk around the range.

KM

 Burning The Consumer: SP500 Levels, Refreshed... - burn


Chinese Trade Data: Continued Improvement

Research Edge Portfolio Positions: CAF, EWZ

June trade data released by the National Bureau of Statistics today showed a modest sequential improvement in exports with the total registering at a decline 0f 21.3% on a year-over-year basis (see chart below). This represents the eight consecutive declining months on a year-over-year basis, and despite the earnest efforts of Beijing to pull all levers to soften the landing for export dependant industries, there is still no indication that there is any light at the end of the external demand tunnel. Remember, the US and the UK are a mess.

(continued text post chart)

Chinese Trade Data: Continued Improvement - china1

Imports on the other hand, showed a marked improvement with a significant sequential uptick to -13.2% year-over-year as stimulus driven demand continues to chug along (see chart below).

Chinese Trade Data: Continued Improvement - china2

Imports of key industrial commodities continued to expand. NBS estimates for iron ore inputs, an input measure we follow closely, registered at the second highest monthly level ever at 55.3 million metric tons, a year-over-year increase of 46.3% (see chart below). Although on the margin we continue to collect anecdotal reports that could support buying driven in part by speculative bubble formation and transport bottlenecks we continue to regard the commodity signals as overwhelmingly positive for continued production levels driven by infrastructure development and consumer demand for durable goods.

Chinese Trade Data: Continued Improvement - china3

The clear winners in the race to provide The Client with what he needs are Brazil and Australia, who by NBS estimates have seen shipments rise to levels near 2008 highs after a tremendous rebound from January's lows (in the case of Brazil, June's total exports  to china represented a 277% increase over January's shipments on a USD basis). We remain long Brazil via the EWZ ETF and continue to be positioned to trade Australian equities opportunistically on the long side based on price action.

Chinese Trade Data: Continued Improvement - a1

We have been hammering home our message about the tactical situation for Chinese equities in recent days, and this bullish data does nothing to change that: We continue to be cautious in the face of such an extended rally. Strategically this data continues to confirm our thesis -but also intensifies our desire to search for any marginal data that could indicate asset specific bubble's forming.

In short, the data is decidedly positive and we remain decidedly confident.

Andrew Barber
Director
 

 


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Restaurant Industry – Feeding the Homeless

Any concept can drive strong top-line results with increased marketing initiatives that are focused on communicating the concept's compelling value proposition. Nearly 100% of the time, the increase in same-store sales does not come without cost - increased traffic with its value message at the expense of average check and restaurant margins. While the increase in sales might be good for the Franchisor, the operational complexities associated with extreme discounting can be a net negative.

The recent Kentucky Grilled Chicken promotion from KFC is a classic example.

What do you think McDonald's can expect with its new Mocha Mondays promotion? McDonald's is offering a complimentary 7 oz. Iced Mocha or indulge in an 8 oz. Hot Mocha each Monday from 7 a.m. to 7 p.m. at participating McDonald's restaurants from July 13 through August 3.

According to McDonald's "This is one of the largest sampling initiatives we've taken on as a company." It's going to be very interesting to see how this plays out for MCD.

Burger King Holdings Inc. (BKC) appears to be headed down a similar road. The Burger King operators shot down a plan to sell double cheeseburgers for $1 nationwide. Those operators understand the consequences of this move.

The marketing muscle behind these value messages by the larger chains will hurt the little guys more. In this context, CKR will continue to see pressure on its industry leading margins.

Restaurant Industry – Feeding the Homeless - mochamonday


Retail Second Look: Closing The Loop

I just got an email response from a subscriber who asked if I would tie all my thoughts together from this morning's First Look post on China vs. the US. The wording was kind, but what he really meant was... "C'mon McGough...Throw me a bone. Your macro analysis doesn't do squat for me if you don't tie it back to an investable theme."  Fair point.

 

I admit that sometimes I get too hung on up the big picture. The crux of my First Look China comments were as follows...

As exports go up due to government stimulus, then FOB (delivered price of goods in question) comes down, and the balance of power in the fight for margin dollars shifts to the US part of the supply chain.

I had been (and still am) concerned that as exports kick up, it could come at the expense of local consumption in China, therefore hurting multinationals with large China presence. That is not yet happening.

The key to watch out for now is whether increased export activity overshoots demand and we're left with a stuffed channel in 2H. That's definitely not the '2Q is a slam dunk' consensus call.

I don't think we'll see that, but as always will stay intellectually honest in evaluating the data.

I still think the big call is that we'll see a divergence between quality and junk starting in 1Q10.

 


RETAIL FIRST LOOK: CHINA TRUMPS SKINNY JEANS

While the US Retail mafia is drilling down how many pairs of cargo shorts Abercrombie sold last week, and whether 'skinny jeans' are 'trend right' as we look toward back-to-school, there are a few much bigger picture points worth kicking around - and both were supported by data releases out of Asia over the past 24 hours.

  

  • First, did anyone notice that passenger car sales in China were up 48% last month? We're not talking about a little piddly low ticket item here, folks. China is on track to pass the 11mm unit threshold this year. Importantly, domestic Chinese passenger automotive sales are outpacing commercial sales, and sales in total are outpacing production growth by a significant measure.This is the real deal.

 

  • Second, this morning China printed another sequential (month over month) improvement in exports alongside the 4th straight monthly gain in Chinese home prices.

 

What does this mean? Home prices heading higher alongside improving auto consumption trends clearly augers well for the state of the consumer. But the fact that this is happening in conjunction with an improvement in exports is noteworthy.  You've heard me talk about how the Chinese are exerting their inner capitalists by using changes in the VAT rebate structure to flex manufacturing capacity available for export. We started to see such activity (higher VAT rebates) three months ago, and we're ALREADY seeing factories reopen and exports tick up.

 

RETAIL FIRST LOOK: CHINA TRUMPS SKINNY JEANS - USRetailv.ChineseAuto 7 09

 

 

LEVINE'S LOW DOWN

Some Notable Call Outs

 

  • By this morning, June same store sales results are old news. However, it's worth noting some trends from the month. From a product category perspective, dresses and footwear were the most often mentioned positive callouts (same as May). As expected, seasonal categories in both apparel and non-apparel were the weakest for the month. In the non-apparel categories, home, domestics, and housewares were mentioned as either having overall positive comps or were highlighted as categories that showed improving trends. Food and consumables also remained strong, despite deflation in meat and produce. Regional performance was mixed, with no prevailing trend.

 

  • Luxury retailers including Saks reported another challenging month with no underlying pick -up in demand. To further illustrate the weakness, Barney's just broke its third markdown of the spring/summer season for total savings up to 70% off original prices. While inventories are much tighter across the luxury channel, it appears that the level of discounting is approaching similar levels last seen over the holidays.

 

  • Retailers were quick to remind us that the back-to-school season will be later this year, which will negatively impact July results. Expect a calendar benefit in August as school start dates fall later this year vs. last. With consumers historically waiting later and later to make back to school purchases, this year's calendar set-up has the potential to stretch out the selling season even further.

 

  • Only three weeks after Michael Jackson's unfortunate death, retailers are preparing for a wave of products to hit the shelves. The speed to market is noteworthy given the expected breadth of items to be released. However, the timing is purely coincidental as the large merchandise program designed by Jackson was already in the works as he prepared for the London comeback tour.

 

 

 MORNING NEWS   

Household Spending Remains Strong in China - Ikea, the world's largest home- furnishings retailer, is seeking a suitable site to open a second store in Beijing to meet rising demand as household spending increases in the world's most populous nation. The second Beijing store will likely be larger than the first, which covers about 42,000 square meters (452,084 square feet), she said.  "We typically build a store from the ground up, instead of leasing from an existing location," according to Xu. "We're now looking for a suitable location that will allow us to construct it this way." China is promoting local consumption to boost economic growth and counter a slump in exports after global demand worsened. Chinese retail sales rose 15 percent in May, the fastest pace in four months, government data showed. The new Beijing store, should Ikea decide to proceed with the investment, will be its tenth in the country, Xu said. The retailer has seven stores in China, and is building one in the northern city of Shenyang and another in Shanghai, she said.  <bloomberg.com>

 

Activewear Company Sues Nike Over MJ HOF Induction Related Apparel - Not everyone is excited about Michael Jordan's induction into the Basketball Hall of Fame this summer. SportsFuzion Inc., an activewear firm based in Massachusetts, has filed a suit in the Massachusetts Superior Court in Norfolk, accusing Nike Inc. of fraud, contract interference and other violations for the Hall of Fame collection its Jordan brand is planning to commemorate the induction. SportsFuzion contends that, in 2005, it created the concept and detailed marketing plan around a product line for Michael Jordan's induction to the Hall of Fame. "Having Nike and the Hall of Fame go behind our backs to cut us out of the deal has become my worst nightmare," Andrew Mirken, president and co-founder of SportsFuzion, said in a statement. The firm, which has held a license for Basketball Hall of Fame apparel since 2006, also names the Hall of Fame as a defendant in the suit.  <Women's Wear Daily>

 

Premium Denim for the Youngins - Cherokee Inc. wants to resurrect the spirit of the counterculture. The Van Nuys, Calif.-based licensor will reintroduce A. Smile, a young men's and juniors denim-based line that had its heyday in the Seventies. Cherokee has tapped Graj + Gustavsen, a branding firm, to help it in its efforts to reintroduce the brand and make it relevant to today's consumers. The brand spoke to the hippie generation with its styling and marketing, which included an ad of a donkey wearing a pair of jeans that read: "Put a smile on your ass." In similar news, Joes Jeans just entered a new license agreement with Kids Jeans to provide premium denim for infants, girls and boys.  <Women's Wear Daily>  & <DJ Newswires>

 

eBay Looks to Loosen EU Competition Laws - In a new bid to lift what it sees as unfair barriers to online trading, eBay on Thursday sent all its users in Europe a petition urging the European Commission to amend its competition laws. EBay hopes the support of its vast customer base will help persuade the commission as it considers whether to change legislation governing online retailing when regulations expire at the end of 2009. "We are asking all our eBay customers in Europe to sign our online petition against online trade barriers," a spokeswoman said. "This, in turn, asks European decision-makers to amend an European Union competition law in order to make it harder for certain brands and manufacturers to block the sale of products on eBay and other market places." Existing regulations allow for selective distribution - the right that brands have to choose where and how their products are sold. In its e-mail to customers, eBay argued some brands unfairly prevent the sale of their products by contending that the online world is fertile ground for counterfeit goods. EBay said only 0.15 percent of posts on its site have been detected or signaled as presenting a counterfeit risk.  <Women's Wear Daily>

 

Sports Equipment Update - Sales in athletic sports equipment, apparel and footwear were flat for 2008 after a 4 percent rise the year prior, according to a recent report.  The NPD Group's Global Sports Estimate 2009 report showed that 1 percent declines in sales in Europe and the Americas were offset by growth in Asia, where sales rose 4 percent (led by China, with a 15 percent jump), and in the Middle East and Africa, where sales were up 7 percent. Running, walking and hiking, swimming, cycling, the workout/fitness category and soccer all saw gains in market size, while golf, basketball and tennis shrank. Apparel decreased 1 percent globally, with footwear flat for the year worldwide, despite a 3 percent decline in the Americas. Looking ahead to 2009, the Port Washington, N.Y.-based research group's report forecasts sales declines driven by the economy in China, with the European market trending toward private-label expansion and manufacturer consolidation. <Women's Wear Daily>

 

Juicy Out of Madison Ave. - Juicy Couture is abandoning Madison Avenue, reflecting hard times and high rents along the posh Manhattan retail venue.  The division of Liz Claiborne Inc. has been paying $2 million in annual rent for its two-level, 3,300-square-foot store at Madison and 70th Street.  "It's been a lot to pay," said Edgar Huber, Juicy Couture's president. "The lease was signed at the height of commercial real estate in New York. Landlords will have to bring down prices. Nobody will be willing to pay them."   Rents on Madison remain high, though they have begun to decline. As of last spring, rents were down 8 percent to $979 per square foot from $1,066 in 2008, according to the Real Estate Board of New York.  In addition to the rent, Juicy Couture's business on Madison has been hurt by slower customer traffic as consumers pull back on apparel purchases. In addition, the brand, known for its upscale, girly, contemporary clothes, opened a glitzy flagship on Fifth Avenue and 52nd Street. "People prefer the big store on Fifth Avenue, which is doing extremely well," Huber said. "The Madison location became a neighborhood store, not a high-traffic store. It was never extremely strong for us. It's important to have a store on Madison. It's prestigious, but $2 million [in rent] is too high. Our average transaction is not as high as our neighbors."  Huber said the Madison Avenue closing is "an exception" to the company's strategy of opening stores. The location is being marketed by Juicy Couture and its brokers.  <Women's Wear Daily>

 

Christmas Comes Early to Sears and Kmart - The retailers owned by Sears Holdings Corp. decided they don't need snow, pine-scented trees, deeply discounted merchandise or any other harbingers of the holiday to sell Christmas products in July. Christmas Lane, a pre-holiday program, runs from July 5 to 25 on the Sears Web site and in 372 Sears and Kmart stores. With consumer spending down in the recession, Hoffman Estates, Ill.-based Sears Holdings is offering shoppers "a jump start" and several financing options, including layaway and zero percent financing," a spokeswoman said. "This enables them to spread out payments over a certain period of time. They may be able to buy more in the end."

 <Women's Wear Daily

 

M&S and Primark Spitting Match - Marks & Spencer executive chairman Sir Stuart Rose said at Wednesday's AGM that it was impossible to sell a t-shirt in the UK for £2 while covering business costs and paying a "fair and living wage to the person who made it". The comment was taken as a thinly veiled attack on low-price specialist Primark. But yesterday, when Primark-owner ABF updated on trading, group finance director John Bason said it shared some suppliers with M&S. "Sometimes people think Primark sources from people different to everyone else on the high street," Bason observed. He said 98 per cent of its top 250 suppliers also supply other high street names. Anti-poverty campaigners said M&S was being hypocritical. War on Want senior campaigns officer Simon McRae said: "This underlines the systemic problem that no British fashion retailer can guarantee a living wage and decent conditions for garment workers." <retail-week.com>

 

Blue Jeans Bandits Caught - Police arrested 11 suspected "blue jeans bandits" after they were discovered cutting tags off about $10,000 worth of stolen merchandise in the backyard of a southeast Atlanta home. Most of the merchandise, which included hundreds of pairs of jeans as well as shirts, still had labels and security tags, said Sgt. Lisa Keyes, a police spokeswoman.  The suspects - three adults and eight juveniles - are believed to have been involved in a series of robberies in the Atlanta metropolitan area that have resulted in the loss of premium denim and sportswear worth an estimated $1.5 million. More than 70 retailers, including Macy's at the Lenox Square mall, have been hit in the last two-and-a-half years. Police dubbed the gang the "Blue Jeans Bandits."  <Women's Wear Daily>

 

Scoop on the Ropes - Scoop NYC, the contemporary retailer created 13 years ago as "the ultimate closet," is under increasing financial pressure. Several factoring companies have stopped giving Scoop credit and approving orders. The chain, which was purchased about two years ago by billionaire Ron Burkle's Yucaipa Cos. LLC, is said to be undercapitalized and has been slow in paying its vendors, according to financial sources.  "Some designers will ship them regardless, but we have not approved them for quite some time - since September 2008," said Gary Wassner, president of Hilldun Corp.  "They're unresponsive in their accounts payable department," Wassner added. "They're not cooperative. They're not providing any financial information to make any kind of analysis of how they're doing. In today's market, it's important to be transparent." He said other factors in the market are not approving the retailer either, citing Rosenthal & Rosenthal, CIT Group, GMAC and Wells Fargo. <Women's Wear Daily>

 

 

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):

XLY

07/09/2009 11:07 AM

SHORTING XLY $22.01

Re-shorting our view on US Consumer Discretionary, on an up day... Short green. The intermediate term TREND in this US Sector View remains broken. KM

 

 

MACRO SECTOR VIEW AND TRADING CALL OUTS

 

RETAIL FIRST LOOK: CHINA TRUMPS SKINNY JEANS - SV 7 10 09 


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