I am getting a lot of questions on the subtle shift I made this morning in my US stock market view. Subtle is as subtle does but, on the margin, it matters…
On this morning’s market weakness I made the following moves in US Equities:
1. Covered my short position in the SP500 (SPY)
2. Covered my short position in US Energy (XLE)
3. Bought a long position in US Technology (XLK)
This doesn’t make me the bull, but it definitely signals my moving from bearish on the SP500 to neutral. On the margin, that’s a bullish shift.
I can make this move without changing my view on our Top 3 Macro Themes in Global Macro:
1. Buck Breakout (bullish on the US Dollar)
2. Rate Run-up (bearish on US Treasuries)
3. Chinese Ox in a Box (bearish on China)
I have been managing risk around my US Equity long and short positions throughout Q1 as my conviction bobs and weaves in and around the SP500’s intermediate term TREND line (in the chart below at 1099). While price momentum is only one factor in my multi-factor risk management model, it is weighted heavily alongside volume and volatility factors.
As the VIX breaks down further today (no support to $18.11), the probability heightens that we’ll see a near term upside test of the dotted red line in the chart below (1122). I have added 3% to the US Equity side of our Asset Allocation Model so that I can capitalize on some of this potential upside. Remember, risk management works both ways. Markets can work higher when consensus is leaning too bearish.
Keith R. McCullough
Chief Executive Officer
For now, price momentum has trumped interest rate fear (see the table below for TRADE and TREND updates, by sector study).
The SP500 finished the week up 3.2%. As we respect price first and foremost, we have taken a small loss in our Short SPY position (-1.23%). The interest rate hike (Rate Run-up) and dollar up move (Buck Breakout) of last week were good for stocks; markets’ closing prices did not reflect a fear of higher rates.
For the SP500, 1099 was resistance but now it is support; 1119 is now the new resistance line and we are seeing posistive price momentum building in the market across all durations. We now have 7 out of 9 sectors in positive TRADE zone and intend to manage risk around the data.
The lower volume in the market moves at the end of last week, and the lower-highs being reached (relative to the prior closing highs of 1/19/10), makes for a mixed outlook and one that we will be monitoring closely as the week plays out.
In particular, we will be observing whether or not new TREND lines of support manage to hold. As of this morning, the US Dollar Index was trading at 80.56 and the trendline support line lies at 79.57. Volatility is now indicating bullish for stocks and has broken its TREND line at 22.43, which is now resistance. Gold and Oil are also testing their TREND lines to the upside, which are now support at 1,122 and $77.09, respectively. We will look for these levels of support to be confirmed over the next 3 days.
In the immediate term, we have covered our short SPY position and bought XLK (Technology Sector ETF). On Friday, we bought some small cap and mid cap exposure via Penn Gaming (PENN) and Glacier Bancorp (GBCI).
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
R3: REQUIRED RETAIL READING
February 22, 2010
The market seems to be suggesting that underlying fundamental strength will be there to support margins, and subsequently the stocks. That might be the case. But it has to be the case for the group to outperform, and perhaps even to tread water.
TODAY’S CALL OUT
The only thing that has moved higher and faster than margin expectations ahead of the hike in the discount rate has been the retail group itself. Here’s some recent historical context around movement in retail stocks around changes in the discount rate. Mid-04 through mid-06 is probably the best example, as that period shows the systematic rise in rates. It was textbook, actually. The consumer was healthy, industry margin tailwinds were strong, and earnings largely kept trudging higher. Over that time period, we had consensus margin expectations in retail rise by 3 points (from 10.2% to 13.2%).
What do we have now? Margins have collapsed, and some of these reasons go beyond the simple economic climate. There are several reasons related to sourcing that should make that low-teens margin rate unattainable for a long, long time. Since the March 9 low, the MVR is up 133%, and margin expectations have accelerated by 3.3 points to 9.4%. That’s the largest 1-year boost in expectations in at least 20 years.
The point here is that the market seems to be suggesting that underlying fundamental strength will be there to support margins, and subsequently the stocks. That might be the case. But it HAS TO be the case for the group to outperform, and perhaps even to tread water.
LEVINE’S LOW DOWN
- In what is sure to be viewed as a controversial merchandising move, Sears has decided to sell its coveted Craftsman tool brand outside of its own stores. Late Friday, Ace Hardware announced it will begin selling Craftsman products in 100 doors. By June, 4,500 Ace stores will have the opportunity to the also carry the brand. This marks the first time that Sears is experimenting with selling its most coveted brand in a wholesale manner. We wonder how long it will be before we see Kenmore and DieHard showing up at other retailers as well…
- While most retailers and manufacturers have begun to note cost pressures building out of Asia for the back half of 2010, JC Penney is still expecting to see year over year declines. As a result of the company’s extensive sourcing network, and longer lead times, management expect to see cost savings continue throughout the year, albeit a bit more muted in the back half. Cost of goods savings coupled with tight inventory management and substantial reductions in clearance activity were the key drivers in JC Penney’s reporting of its highest gross margins in 100 years for the year just completed.
- Good news for US Ski Team Sponsor, Under Armour. Through February 15th, Freestyle and Downhill skiing topped the list of most watched Olympic events, ranking 1 and 2 respectively. An average of 26.9 million viewers tuned in for the Freestyle events on opening weekend according to Neilsen.
- Olympic merchandise sales in Vancouver have already hit their goal of about $50 million in sales and that’s with about 50% more events to go. In some cases, retailers have decided to stay open 24 hours in the host city to meet demand and to help alleviate long lines. Sales of official merchandise in Torino were only about $23 million, far less than this year’s expected total.
- The IOC is struggling to monitor ambush marketing in Vancouver whereby companies that have not paid for sponsorship rights are tying their products to the Olympic Games. Among brands mentioned in recent articles is Canadian favorite Lululemon, which is selling red and white mittens that resemble the wildly popular “official” mittens that have now sold over 1million pair. While publicly badmouthing the company for trying to profit without supporting the Games, the Vancouver Olympic Committee (VANOC) failed to mention that the company actually lobbied to be an official sponsor, but lost out to The Hudson’s Bay Company. Oh, and they’ve also hosted over 200 athletes and their families at the “Lululemon House” near the athlete’s village over the past year during their training for the Games – sounds like athletes aren’t the only ones in need of a reminder on the merits of sportsmanship.
EBay to Launch New Selling Formats, Boost Fashion Quotient - EBay Inc. moves more apparel online than any other company. Yet that’s simply not enough for the giant Web site. In March, eBay will launch “the fashion vault” for “flash” sales of designer goods in a format not dissimilar from that of Web sites Gilt Groupe and Ideeli. Hugo Boss, DKNY, Max Mara and Cole Haan Outerwear were tested last year and there’s a good chance they’ll be seen on the fashion vault again. Initially, there will be weekly flashes, but the frequency will increase in subsequent months. EBay also is creating an online outlet mall for the U.S. with some well-known retail and apparel brands. Lord & Taylor’s outlet division is already on board and Brooks Brothers will be added next month. More brands and stores are seen joining, as they have in Europe, where eBay operates extensive outlet sites, such as in the U.K. with 16 stores including Debenhams, House of Fraser and Schuh, and in Germany, with 24 branded apparel shops including Eastpak, Fila, Speedo and Triumph. <wwd.com>
Carrefour to Revamp Apparel Division - Carrefour SA, the world’s second-largest retailer behind Wal-Mart Stores Inc., will radically overhaul its apparel division as part of a revamp of its hypermarket operations in France, chief executive officer Lars Olofsson said Friday. “We will have to change our textile [business] quite dramatically. We will have to inverse basically what we’re doing,” Olofsson told analysts and journalists. His statements came a day after Wal-Mart revealed it was re-evaluating its entire apparel merchandising strategy after a disappointing performance. Reporting full-year 2009 results, Carrefour said net income fell 74.2 percent as it absorbed more than 1 billion euros in nonrecurring impairment and restructuring charges. Since his arrival one year ago, Olofsson has implemented measures to cut costs and improve the retailer’s price image. Last month, he appointed former Tesco executive James McCann as executive director for France, charged with tackling underperforming hypermarkets in its home market, which accounts for 40 percent of the group’s sales. Olofsson said Carrefour’s new apparel direction would start taking shape in 2011 or 2012, and likely shift from its current purchasing model toward a shorter cycle, placing Carrefour in competition with fast-fashion retailers like Sweden’s H&M and Spain’s Inditex, operator of the Zara chain. <wwd.com>
Lucy Activewear Moving HQ From Portland to San Francisco Area - Lucy Activewear is moving its headquarters from Portland to the San Francisco Bay Area to be in closer proximity to its Outdoor Coalition offices and resources. VF Corp., the parent of lucy, said approximately 82 positions will be eliminated. VF will be relocating lucy's offices to Northern California at the end of August. In addition, the brand's primary distribution facility, also located in Portland, will be merged into VF's Outdoor distribution center in Visalia, Ca. during the first quarter of 2011. In a statement, VF said one dozen of the approximately 95 Lucy associates based in Portland will be offered the opportunity to relocate to California. VF reassigned lucy from its Contemporary Coalition, which includes 7 for All Mankind, Ellas Moss and Splendid, to its Outdoor Coalition this past fall to leverage that division's expertise in technical performance. VF's Outdoor Coalition also includes The North Face, Vans, Reef, Napapijri, Kipling, JanSport, Eastpak and Eagle Creek. The offices of The North Face and Jansport, among others, are in San Leandro. The move also comes as VF took a $114.4 million after-tax impairment charge in the fourth quarter because results for lucy, Nautica, and Reef were below the company's expectations since the time each was acquired. The charge reflected the devaluation of goodwill and intangible assets since each acquisition. <sportsonesource.com>
New CompUSA Integrates Ecommerce Site Into Retail Stores - CompUSA went out of business in 2007, but now is under new management that is experimenting with a hybrid concept dubbed Retail 2.0, which integrates their ecommerce site into their retail stores. The online shopping experience at an ecommerce site is becoming increasingly comfortable to most consumers, so CompUSA decided to enhance their retail stores with easy access to a retail site via their computers so they can research products. This new way to shop in a retail store, empowers consumers to take control and learn the product details they want quickly by using one of the touch computer screens in the shop. There are roughly 30 CompUSA stores in the U.S. which are testing this Retail 2.0 model, which now takes a lot of stress off of the staff to provide customer service. <zippycart.com>
Burlington Coat Told to Pay Fendi $4.7M - A federal judge ordered Burlington Coat Factory Warehouse Corp. to pay Fendi $4.7 million for violating a decades-old injunction barring the off-pricer from selling the luxury brand’s trademarked goods without permission. The retailer agreed to the prohibition in 1987 to settle charges that it sold fake Fendi products. Fendi North America Inc., the brand’s U.S. unit, filed a new infringement lawsuit in 2006 accusing Burlington Coat of continuing to sell counterfeit handbags. U.S. District Court Judge Leonard Sand in Manhattan on Feb. 8 granted Fendi’s motion for summary judgment in the latest case. Sand adopted a December report and recommendation from U.S. Magistrate Judge Michael Dolinger that required the off-pricer to pay $4.7 million to Fendi for being found in contempt of the injunction. The sum includes $2.5 million in profits, $1.6 million in interest and more than $540,000 in attorneys’ fees. A Burlington Coat representative said Friday the company will appeal the decision and declined further comment. Bain Capital Partners acquired the retailer and took it private in 2006 for $2.06 billion. <wwd.com>
Credit cards are losing some luster with online shoppers - Online shoppers have increasingly turned to prepaid, gift and debit cards, along with so-called alternative payments such as PayPal and Google Checkout, according to new research from Javelin Strategy & Research. Credit cards remain the preferred payment method for online shoppers, capturing 43.5% of the online total payments volume in 2009, Javelin says. The research firm estimates that consumers spent $205 billion online in 2009. The share of credit card payments, however, will decline to 39.4% in 2014, Javelin predicts. Debit cards also will represent a smaller share of online payments, declining to 25.6% in 2014 from 28% in 2009. Meanwhile, prepaid and gift cards will account for 10.7% of online payments by 2014, up from 6.6% in 2009, while PayPal, Google Checkout and other alternative payment methods will capture 19.2% of online purchases in 2014, up from 15.9% in 2009. The remainder, about 5%, will come from store-branded credit cards. By 2014, prepaid and gift cards will have the highest compound annual growth rate for online payment forms between 2009 and 2014—26%. “Prepaid and gift cards are hitting stride in the online payments environment,” says Javelin analyst Elizabeth Robertson. A large part of the reason for the growth of non-credit card payments is that consumers, shaken by the recession and high debt loads, have switched to more immediate methods of payments rather than credit card borrowing. <internetretailer.com>
Young and well-educated consumers are likely to go online before a purchase - 46% of consumers with a college degree say that they use a search engine before making an online purchase, and the percentage rises to 50% among consumers between the ages of 25 and 34, Opinion Research Corp. says in a recent study it conducted for digital advertising firm ARAnet. That compares to 39% of all respondents. The survey also found that adults between the ages of 25 to 34 and those with college degrees are also more likely to read an article online or consult social media before making a purchase. Following are information sources cited as important to consider before making a purchase by all respondents, adults ages 25 to 34, and those with a college degree:
- Search engine: 39%, 50%, 46%
- Articles read online: 28%, 39%, 36%
- Marketing e-mail: 20%, 32%, 26%
- Online ads: 19%, 30%, 25%,
- Social networks: 18%, 31%, 23%
Opinion Research conducted the study of 1,029 adults in January. <internetretailer.com>
Malcolm Knapp reported January same-store sales and traffic results of -2.3% and -2.8%, respectively. For same-store sales, this represents a decline of 3.2% on a two-year average basis, which marks a significant improvement from December’s two-year number of -7.0%. The traffic number shows a clear improvement in trends as well; traffic improved 330 bps from December 2009 on a two-year basis. As Knapp points out, January trends benefited from New Year’s Eve falling in the first week, the super bowl shift into February this year, and the increased redemption rate of gift cards during the month.
January was the second month in a row where comparable store sales exceeded guest counts. From May through November 2009, largely due to heavy discounting, guest counts had exceeded comparable store sales.
There has been a surge in consumer confidence from January 2009; as Knapp notes, the January 2010 Consumer Conference Index is up 18.5 points compared to a year ago. However, consumer spending is not reflecting this turnaround. High unemployment, combined with the increasing savings rate and inflationary headwinds (especially at the pump), is taking share of wallet from consumer discretionary companies. However, as PFCB management has noted recently, “expense account” corporate spending may be improving and providing a boost to higher-end casual dining trends.
The Macau Metro Monitor, February 22nd, 2010
CNY PASSENGERS SLIGHTLY HIGHER YOY macaodaily.com
2.33MM passengers, slightly higher than the 2.27MM passengers last CNY, passed through the Macau border gates from the start of the Chinese New Year to Saturday, Feb 20th. Border crossing control improvements and an increased number of ports helped deal with a larger immigration crowd.
GAMING TAX RECEIPTS SOAR macaubusiness.com
According to the Financial Services Bureau, direct gaming tax receipts for January 2010 rose 45.9% to MOP4.3BN. The receipts accounted for 85.3% of total government revenue.
GAMING COMMISSION MAKEOVER POSITIVE macaubusiness.com
Macau’s Gaming Commission recently got a makeover with the appointment of new members to the posts of Secretary for Administration and Justice, Secretary for Transport and Public Works, the head and also a representative from the Chief Executive's Office, The Secretary for Social Affairs and Culture and the commissioner of Legal Affairs with the former Gaming Commission, Jorge Oliveira, are out are out of the new bureau.
The new commission will “do more besides grant licenses” and become less gaming-oriented in order “to solve conflicts that have emerged with the boom of the gaming industry”. The new commission will be more transparent around issues like land granting procedures to casino operators.
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.