Stagflation: Where The Pain Is...

“I want to be clear on something: less bad is not good”, “That’s not how President Obama and I measure success”  Vice President Biden, WSJ Saturday September 6th on last week’s unemployment number… 


The single biggest market story of last week was unemployment re-accelerating to new highs and the subsequent crashing of the US currency. In our investment process, what happens on the margin is critical, and on the margins of the US Employment data –the demographic and duration tails, the picture is becoming increasingly grim:



In the charts below we have taken the monthly unemployment figures compiled by the Department of Labor for the estimated total of individuals without work for a period of 27 weeks or greater and averaged it to quarterly for the past 60 years. Chart 1 illustrates the raw number, while chart 2 shows the same figures divided by the Labor Department’s estimate of the total working population. Note that in chart 2 we are now exceeding the early 80’s industrial-job death rattle for ultra long duration unemployment.


Stagflation: Where The Pain Is...  - a1


Stagflation: Where The Pain Is...  - a2




Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).


DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.


Stagflation: Where The Pain Is...  - a3


Obviously the data we are working with are only estimates, and we are making some big assumptions, but the data clearly seems to paint a bleak picture with more people unemployed for sustained periods and fewer young people with the disposable income that comes with a job. With a depleted currency, structural stagflation is becoming a legitimate risk.


Andrew Barber

Directordrew Barber

MCD – Premium products are not driving incremental traffic

Given the sluggish sales trends in the USA, senior management must be questioning the most expensive new product launch in the company’s history.


Relative to my August sales preview, both the U.S. and APMEA numbers were bad and Europe results were neutral.  In the U.S., MCD’s same-store sales growth was up 1.7%, which signals a return to the slowed 2-year trends we saw in May and June, making the strength in July look like an aberration.  Again, I would point to bad timing.  MCD is pushing more premium menu items (the Angus Third Pounders and McCafe espresso-based coffees) at exactly the wrong time, considering the difficult economic backdrop.  The all important 16-24 year old age group is facing extremely high levels of unemployment so for the most part, they don’t have the discretionary income to pay up for these more expensive menu items. 


Additionally, this continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working.  MCD’s business is coming under pressure at the same time SBUX’s is posting sequentially improved results.  SBUX’s numbers are still negative relative to MCD’s low single-digit increases but the directional moves are telling.  SBUX’s results are becoming less negative at the same time MCD is really pushing its McCafe products. 


APMEA’s August comparable sales growth came in down 0.5%.  This decline marks the first time this segment has posted a YOY monthly decline since May 2005 and represents a significant shortfall from the 5%-plus numbers to which investors have become accustomed.  MCD attributed the decline to weakness in China and Japan.  On a 2-year average basis, August results were similar to June and July, which signals that MCD may be facing a period of sustained weakness in its APMEA segment. 


In Europe, MCD reported 3.5% same-store sales growth.  I outlined this type of result in my sales preview note as Neutral because it represents a 2-year average trend that is similar to that of July.  For August, the two-year average growth is 7.6%.  To be clear, this is a strong result, but people expect this type of growth out of Europe. 


MCD – Premium products are not driving incremental traffic - mcdussss


MCD – Premium products are not driving incremental traffic - mcdeursss


MCD – Premium products are not driving incremental traffic - mcdapmeasss






Anyone who thinks that they can hide behind duration mandate and not at least acknowledge how near-term sentiment impacts their stocks is simply not being intellectually objective. 


Our analysis below breaks down over a hundred retail-related companies and triangulates buy-side sentiment, our sell-side ratings factor, and the delta in insider buying/selling. The visuals clearly flag areas of both risk and opportunity.


We break out the analysis into four charts/segments to avoid the visual from being illegible. We look at 1) apparel/footwear retail, 2) brands, 3) specialty retail, and 4) all other. We could write pages interpreting the charts, but we’ll let you make your own conclusions. Some of our initial take-aways are as follows:


  1. Bearish Callouts: These are names with low short interest, high sell-side factors, and no positive momentum with insiders buying. TJX, GPS, GCO, NKE, WWW, COH, CVS, KR, MAT, and FGXI.
  2. Bullish Callouts: Hated across the board. High short interest and negative sell-side factors. We omit any names where management is selling, and of course, look for instances where the opposite is happening. UA, BKS, VLCM, EK, ETH, LIZ, KSWS, and COLM. WFMI would be on this list of the insider selling factor was not the highest in the entire group (!).


Let us know if you’d like any additional depth or color on the analysis.












Some Notable Call Outs


  • While the Street continues to reward GPS for its turnaround of Old Navy, lean inventories, and steady margins, the company is quietly experimenting with its direct brand, Piperlime. The multi-branded shoe site launched women’s apparel today. The offering consists of about 65 premium and designer contemporary brands. The offering is denim heavy, but also includes a wide range of sportswear. Free shipping and free returns are also included with each order. We wonder if this is now GPS’ in-house laboratory for testing fashion and then using the data in real time to influence the company’s vertically integrated merchandise.


  • The numbers and raw data associated with Walmart are always staggering and sometimes worth repeating. In this case, I stumbled across some data on Walmart’s private label brand “Great Value”. At an estimated $10 billion in annual sales, the brand would be the 39th largest retailer in the U.S if it were to stand alone. This makes it bigger then Bed Bath and Beyond, Whole Foods, and Family Dollar. The brand is also very close to the amount of business P&G does with Walmart on an annual basis, which was just under $12 billion in fiscal ’09. We know the numbers are huge, but when we get a nugget like this it just acts as a reminder of the power and scale that Walmart exerts.


  • In yet another example that consumers continue to be driven by price, Craigslist debuted at No. 25 on the annual STORES Favorite 50 online retailers list ahead of well-known retailers like Gap (No. 28) and (No. 38). With consumers increasingly accustomed to shopping both traditional and non-traditional channels for best prices, it should come as no surprise that the other newcomers included Footlocker’s (No. 27) and (No. 39).





-Online retailer Yoox Group has decided to push ahead with an initial public offering despite the uncertain financial markets - Shareholders of the Bologna, Italy-based e-tailer approved the IPO on Tuesday. Yoox is expected to list on the Milan Stock Exchange STAR segment for small companies by yearend. In the first half of 2009, Yoox’ revenues rose 46.6%. Geographically, Italy accounted for 27.6% of sales; Europe, excluding Italy, for 49.8%; North America for 14.9%, and Japan for 5.9% of revenues. The nine-year-old company operates its own online stores, and, and runs e-commerce sites for designer brands, from Marni and Diesel to Emporio Armani and Emilio Pucci. During the first half, Yoox developed online stores for Moschino, Bally and D&G, bringing the total stores to 13. <>


-Message at WWDMAGIC: High Fashion at Value Prices - Apparel and accessories retailers and manufacturers at the trade show here found common ground in the new reality — consumer frugality — and in how to deal with it. Although major challenges persist as the economy struggles for consistent traction, the three-day show at the Las Vegas Convention Center last week appeared more upbeat. But price sensitivity and cost-cutting remained key themes. <>


-Many online consumers come face to face with ads on Facebook - Online social networks like Facebook and MySpace accounted for more than 20% of U.S. online display advertising in July, says comScore Ad Metrix. MySpace and Facebook account for more than 80% of advertising on social networks. <>


-Maidenform Brands, Inc., a global branded marketer of intimate apparel, has entered into a license agreement with Komar Company -  The license agreement grants Komar the exclusive right and license to manufacture, market, sell and distribute women's and children's sleepwear, women's long underwear and women's swimwear under certain Maidenform brands to select retailers in the U.S., Canada and Mexico.  <>


-Indonesia's man-made fiber sector has been given a boost - Three major manufacturers having invested US $7.1 million on new factories and machinery which will help lower production costs. The three fiber manufacturers are PT Teijin Indonesia Fiber Corp PT Indonesia Toray Synthetic and PT Sulindafin. The new machinery will run on cheap gas instead of costly electricity. According to Secretary General of the Indonesian Synthetic Fiber Producers Association, new machines can cut from 5 to 10% of the current energy costs incurred by the companies. These three companies had purchased the new machineries under the technology up-gradation program initiated by the government, which entitles them to claim a subsidy of 10% on total investment. He said that there were 18 synthetic fiber manufacturing companies in Indonesia in 2007, out of which only 12 were operational. The sector had been experiencing a 10% hike in production costs because of the surge of crude oil prices.  <>


-Report says Dick's Sporting Goods Top of Mind for Sporting Goods Shoppers - Full-line sporting goods retailers like Dick’s Sporting Goods and Sports Authority are top of mind when consumers think about where to shop for sporting goods, including footwear and apparel, but the larger and broader mass merchant stores like Wal-Mart and Target rise to the top when consumers are prompted with retail store names.  Data from the SportsOneSource 2009 Where America Shops report. Full-line sporting goods retailers are at the top of list, with Dick’s Sporting Goods (42%) and The Sports Authority (32%) at the top of the list for unaided awareness levels.  Both retailers ranked ahead of discount/mass merchant giant Wal-Mart (28%), indicating that when in the market for sporting goods, the first thought would be to go to a full-line retailer rather than an a other type of retailer. Foot Locker (21%) was the mall specialty retailer mentioned most often and Cabela’s (10%) was the most often mentioned outdoor retailer on an unaided level. Combining the unaided and aided awareness responses, Wal-Mart received the largest number of respondents (86%) indicating they were aware of the retailer, Foot Locker was second (85%) and Target was third (82%).  However, Foot Locker was the top-ranked retailer in awareness among teens and young adults. A bit surprising given the focus of the retailer, Foot Locker actually had a higher overall awareness level with females than males when assessing the adult (over 25 years old) survey demographic.  Only five retailers, including Dick’s Sporting Goods, Bass Pro Shop and Cabela’s, received higher awareness levels from males over the awareness level received by females. <>


 -Anna Sui for Target - Anna Sui for Target, part of the retailer’s Designer Collaboration series, channels the well-dressed women of “Gossip Girl” and debuts in 600 select Target stores out of more than 1,700 units, and on Sunday at Designer Collaborations taps established talents to create collections inspired by a muse, creative element or collaborative partner. Alexander McQueen launched the effort in March with McQ Alexander McQueen for Target, inspired by Leila Moss, lead singer of The Duke Spirit. Sui had wanted to design for Target for some time but “couldn’t figure out what the concept would be,” she said. When the retailer approached her with Designer Collaborations and the muse element, the project began to make more sense. <>


-After being sold by K-Swiss Inc. in May, Royal Elastics is repositioning itself under new ownership - John Bondoc, who previously worked at Royal as creative director and now heads REH, the investment group that bought the brand, said he has sharpened the demographic focus of the label. “We needed to tweak the brand identity,” he said. “Now, it’s younger, [directed at] the 15- to 25-year-old consumer, who is typically a creative-minded person in art, sport or fashion. It’s a lifestyle. The inspiration has to come from being young.” To help reacquaint the Royal Elastics team with the culture it’s targeting, Bondoc opened a design studio in a loft in downtown Los Angeles. “A lifestyle brand has to be embraced by the culture,” he said. Bondoc said he also was taking price points down. While the brand had sold for $80 to $250, the spring line will range from $60 to $80, with some signature product topping out at $110. “The idea is to cut off the extremely expensive end and add a lower-priced shoe,” he said. That move was made possible by one of the brand’s investors, a China-based footwear factory. Bondoc said he realized as he was putting together investors to buy the company that a strategic partner that could also produce more value-oriented shoes was imperative. <>


-True Religion Nugget on Credit Card Division - True Religion, the Vernon, Calif.-based premium denim brand, stopped using factors in mid-July, opting to expand its own credit division and work closely with international distributors as well as small boutiques that pay with credit cards or cash on delivery. <>


-For Neiman Marcus Inc., it’s been one tough year of mounting losses and declining sales - The luxury chain Tuesday reported a $168.6 million net loss for the fourth quarter ended Aug. 1, including noncash pretax impairment charges of $143.1 million, compared with a net loss of $35.7 million in the prior year’s quarter, when there were $31.3 million in charges. On an operating basis, the company lost $192.1 million in the last quarter, versus a $6.2 million loss a year earlier. With the nation’s affluent dramatically curtailing their store visits and purchasing less per visit, Neiman’s total revenues in the quarter fell to $768 million, compared with $1.03 billion in the prior year. Comparable revenues decreased 23.4%. Neiman tightly managed expenses, resulting in a total reduction of $183 million, which included the elimination of approximately $100 million of non-variable costs from our expense structure this year. <>


-A new home range, the Country Living Collection, hits 1,200 Kmart stores and 500 Sears stores this week - The line features modern and traditional styles from the pages of the Hearst-owned lifestyle magazine. The collection includes fashion bedding, kitchen textiles, tabletop and bath ranges, as well as furniture. Items retail from $6.99 for washcloths to $279.99 for furniture. "The addition of Country Living to our portfolio increases the options available to our Sears and Kmart customers in both look and style, and in a broader range of products that our customer has already told us she wants," says Doug Wurl, vice president and general merchandising manager for home fashions at Sears Holdings Corp. "The magazine's reach, coupled with the accessibility of our stores and online channels, create the potential for a true national brand with elevated design sensibilities and enormous appeal." Country Living magazine offers more than 11 million readers content on decorating, gardening, entertaining and travel.  <>


-Burberry Group plc is set to join the most exclusive club on the London Stock Exchange, the FTSE 100 - The FTSE 100 is a listing of the companies with the highest market capitalization on the LSE. As of Tuesday’s close, Burberry’s market capitalization was 2.2 billion pounds, or $3.63 billion. The figure has tripled over the past year. Burberry is the only fashion and luxury goods company currently in the FTSE. By contrast, L’Oréal, PPR and LVMH Moët Hennessy Louis Vuitton are listed on the CAC 40, the benchmark French stock market index. On Tuesday, Burberry’s shares closed at 5.08 pounds, or $8.38, up 0.5 percent on the previous day. “Burberry is so fortunate to have such a strong momentum, both at a corporate and brand level,” Burberry chief executive Angela Ahrendts told WWD on Tuesday. “The team remains focused on pursuing our core strategy, which we believe will continue to deliver shareholder value.” <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): BBBY


09/08/2009 03:23 PM


Just doing a little housekeeping; making some sales in names we bought well on last wednesday's lows. We can always buy a stagflation victim lower. KM






  • Eva Sage, EVP, HR, sold 100,000shs (~$2.1mm) upon exercising the right to buy 100,000shs accounting for 100% of total common holdings.
  • Sabrina Simmons, EVP, CFO, sold 40,000shs (~832k) upon exercising the right to buy 40,000shs accounting for 60% of total common holdings.
  • Robert Fisher, Director, sold 277,013shs ($4.9mm) roughly 2% of total common holdings.



  • Ernie Herrman, SEVP, Group President, sold 6,658shs ($241k) roughly 7% of total common holdings.
  • Jerome Rossi, SEVP, Group President, sold 1,331shs ($47k) less than 5% of total common holdings.


PSS: Matt Rubel, Chairman, CEO & President, sold 100,000shs ($1.6mm) under 30% of total common holdings.


SKS: Stephen Sadove, Chairman & CEO, sold 100,000shs ($598k) less than 10% of total common holdings.


CHS: John Burden, Director, purchased 10,000shs ($610k) adding approximately 20% to total common holdings


Early Look

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The Creditor

“It does not matter how slowly you go so long as you do not stop.”

Finally! Last night, someone had Steve Forbes give Larry Kudlow a tutorial on our two factor global macro model: Chinese Demand and The US Dollar. At the end of Forbes walking through our Burning Buck thesis, Kudlow actually cited Confucius – well done Larry, you’ve evolved!
What this means is that consensus on the US Dollar is finally registering as bearish enough. What are this morning’s confirmations of our 6-month old Burning Buck thesis?
1.      Wall Street Journal – Dollar Down is a front page story this morning

2.      UBS - the world’s 2nd largest currency trader is “cutting their US Dollar” forecasts this morning (thanks for the Early Look!)

3.      China, Russia, and even the United Nations are calling for a redo of Bretton Woods!

As Forbes pounded home last night, this isn’t rocket science (maybe that’s why the hockey head got this right!). It’s been politically unacceptable for Washington to confront while in the moment. Now, as the STAGFLATION 101 tutorial takes its time morph into Wall Street’s storytelling, President Obama is going to have to deal with this political football. He is more of a basketball guy. Unfortunately, on his currency bench, all he really has to defend the Dollar is a Squirrel Hunter.
Understanding that his glaring partisan political views perpetuate his being allowed to understand Forbes’ Burning Buck revelations, Kudlow and many other raging Republicans are definitely going to take the Democrats to task on this – as they should. Bush was held liable for a cycle high August of 2008 US CPI (Consumer Price Index) reading of +5.3%. Remember $150/barrel oil? Goldman’s analyst would rather you wouldn’t – so would the politically polarized US Federal Reserve. Politicians are perpetuating price volatility, not “traders”…
At the end of the day, this isn’t about political parties. This is about the most politicized monetary policy that this country has ever seen. Both Bush and Obama signed off on a Burning Buck. This isn’t about being a Republican or a Democrat. This is all about having The Creditor’s pay the Debtors bills.
Again, Forbes was much more eloquent than my arthritic hockey knuckles can be in the morning in explaining that America’s Creditor is CHINA. So, I’d like to thank him for explaining that. The Creditor is no longer interested in sponsoring Lehman leverage ratios of 40:1, or the bonuses embedded therein. Nor are they interested in seeing the Fed’s balance sheet ramp for the 4th consecutive week to a new high of $2.09T US Dollars.
Back to stagflation – let me be clear that this one isn’t global this time. It’s very much a pending US problem. It’s born out of Burning the Buck. As the US Government torches the US currency, they’ll import inflation in Q4. As inflation accelerates sequentially and growth remains stagnant, that’s called stagflation.
I know, I know – some of the Big G (government) Keynesians aren’t going to like this. Don’t worry, they got run-over being blind to it in the 1970’s as well. However, be sure that The Creditor has done the required reading on global economic history. That’s why the Chinese are buying gold and selling US Dollars. They aren’t paid by Hank Paulson and Co’s Wall Street of Gordon Gekko past to be willfully blind.
The Creditor’s stock market closed up for the 6th consecutive session last night, taking the Shanghai Composite Index to 2,946. Yes, Chinese shares have corrected -15% from their YTD high, but don’t forget that they are still +62% for 2009 to-date. The metaphor of American style leverage, the Dow Jones Industrial Average, is only up +8.2%, lagging almost every major stock market index in the world.
The Creditor’s New Reality trading partners continue to prosper alongside strengthening domestic currencies. Germany, Australia, and Hong Kong are all within 1% of their YTD stock market highs. At the same time, all of these countries do not sponsor the USA “Great Depression” emergency rate of ZERO percent for their respective countrymen’s savings accounts, nor do they sign off on Burning their local Bucks.
Germany reported 0% Consumer Price inflation for the month of August this morning. The way that this is going to work from here is that Germany’s white hot Euro ($1.45) is going to import consumer price deflation for their domestic savers. Again, stagflation is going to be a US centric problem – not the world’s problem. That’s why Gold can rage higher at the same time that US Treasuries hold a bid.
US Treasuries aren’t going down because the bond market doesn’t smell a sustained level of US growth going up. Gold is going up because the world’s reserve currency is burning. The combination of the two doesn’t enthuse The Creditor. The Creditor will be looking elsewhere to invest their savings as a result. When it comes to selling down their US exposures, “it does not matter how slowly” they go, so long as they don’t stop.

If the US Dollar stops going down today, I expect stocks and commodities that are priced in those Dollars to stop going up. Will the SP500 make a lower-high? We will have to see about that. My intermediate term Range Rover target to the upside for the SP500 remains 1041. I have my first level of support at 1016. Next stop after that is 1008.
Best of luck out there today,


VXX – iPath VIX We bought volatility on its lows on 9/3 ahead of last Friday’s employment report.

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong The current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.



Construction of Macau’s Light Rapid Transit project is to begin in June 2010, according to Lei Chan Tong, director of the Transport Infrastructure Office.  The first phase will focus on the completion of two main routes, costing an estimated MOP4.2 billion to build.  The "skytrain" system will connect the Macau Peninsula with Taipa over a 20 km-long track, complete with 23 stations. 



Henry Mong Hengli’s attorney’s requested that a high court judge deny a motion by Wynn Resorts Macau seeking a summary judgment over HK$30 million in unpaid gambling debts.  One of the arguments being advanced is that the credit agreement between Mong and the operator was never approved by the local gaming regulator.  Wynn has argued that the Macau laws in question apply to credit agreements between casinos and VIP junket agents and were not focused on direct loans to players.  Wynn also points out its view that having casinos acquire advance approval from the bureau each time credit is issued to players would be impractical.

The implications of this landmark case are crucial to Macau’s gaming market, given the reliance on credit-driven casino play. 

Starbucks Bracing For 'Tough' Consumer Recovery

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