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TIP: Selling Some Inflation Protection

My cost basis in TIP dates back to buying it on 4/3/09 at $100.27. Since this summer I have been carrying a double digit percentage exposure to TIP (Treasury Inflation Protected bond ETF) in the Asset Allocation Model.

 

Today, with inflation expectations coming my way (see chart), I am selling that exposure to TIPs down to 3%.

 

Obviously the narrative fallacy shopped by the Depressionistas has been decimated, and so have perpetual expectations of deflation alongside that.

 

Expectations dominate these returns, not lagging CPI or PPI data. The two positions that I have taken to protect against inflation expectations are long Gold (GLD) and long TIP. I remain long of both… just less of both, as prices melt higher.

 

I’ll buy TIP back on pullbacks to the following TRADE and TREND lines in the chart below. TRADE line support = $102.89 and TREND line support (intermediate term) = $101.43.

KM

 

Keith R. McCullough
Chief Executive Officer

 

TIP: Selling Some Inflation Protection - a1

 


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS

On EAT’s 1Q conference call, management just stated that California continues to be weak.

 

Last week, CKR and CPKI reported worse than expected sales results, which suggested that sales trends in California are not getting any better.  The divergence in gas prices between the west coast and the national average, which is illustrated in the first two charts below, might help to explain the regional weakness.  Although there is a normal seasonal divergence in the price of gasoline geographically within the U.S., the current divergence is the most pronounced in more than 15 years. 

 

CKR’s CEO Andrew Puzder continues to attribute weakness in sales trends to the current unemployment rates in California and stated just last week that “In particular, record levels of California’s unemployment exceeding 12%, and 18% for the broader unofficial statistic, have negatively influenced consumers’ buying habits.”  Higher unemployment rates combined with this growing spread between regional gas prices, which has been accelerating since mid May, does not bode well for California-centric concepts, such as CPKI, CAKE, RRGB, MSSR, PFCB, JACK and CKR.  On a more favorable note, the third chart also highlights the regions of the country, which benefit from relatively lower gas prices, most notably Texas. 

 

Overall, gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, national average gas prices were down 38% on average.  This YOY favorability continued into 3Q with gas prices down 33% on average.  Looking at the final chart below, this YOY cost benefit has already started to moderate and based on current prices should reverse come the end of October. 

 

RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost recent

 

RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost historical

 

RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - gas prices regional difference

 

RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas Prices


TJX: Inside the Debate

Our internal process is one that openly encourages debate when we disagree. That’s when our hit ratio goes up… Here’s our take on TJX.  The bottom line is that big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts -- at least at this price.

 

 

Keith: Stock looking to be way overbought now fyi… on the news… I like shorting these for a TRADE.

 

Brian: Yes, TJX gets put in the ‘quality’ bucket in retail. But let’s not forget that margins are at peak, and we’re coming off an 18-month period that helped off-price retailers like TJX and ROST materially. The preannounced comp was a definite positive, but in looking at the 2 and 3-year trend, there is really no change in trend. If anything, it is slightly negative. The gross margin story here will be short-lived, with one more quarter before the financial profile looks less favorable. I’m not going to get too excited about the company’s announcement about an increase in long term unit growth to 4-5% as we’re already looking at a mature company with 2,700 big box stores.  There are other names I’d short before this one, but there will be a time over the next 1-2 quarters where this will make a lot of sense. If it is overbought on this news, then I won’t argue to stay away.

 

Levine: Recognizing that the incremental data points on TJX are likely to remain positive, I wanted to make a few points before putting the short TRADE on. 

 

Key factors to look out for over the next 3 months:  1) EPS guidance way too low, but the Street is obviously tuned in to this, 2) they took up the square footage growth rate for next year to 5% from 4%, which is fairly respectable for a company of this size.  I can’t knock them for investing into strength. And 3) the gross margin compares in Q4 are a joke (last year they got caught like the rest of retail with too much inventory).

 

On the flip side, the 2 year comp is holding steady but not accelerating.  With that said, this is still one of a few retailers with positive 2 year trends. 

 

Final note here, is that there may be support from other retail/apparel earnings as they begin to trickle out.  We’re now seeing a handful of positive pre-announcements as well which is likely to build momentum.  To the extent you view this is as a negative to being short, it is probably one of the biggest risk factors in the near-term.

 

 

Team Conclusion: Hold off at this price. Big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts.

 

TJX: Inside the Debate - TJX Comp Trends


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Retail: Gas Divergence Implications

What has been a gas price tailwind vs. last year is going the other way. Further, California is posting the biggest (unfavorable) spread in recent history. There are implications for retail.

 

 

We’re in an interesting position right now as it relates to gas prices.  As consumers, we see prices going up sequentially, which has been the case for almost this whole year.  We’re now looking at prices near 12-month peak levels. But relative to last year, we’re still looking at prices nearly a buck lower. As it relates to share of wallet, that’s big. But by late November, we’re at a point where the yy positive delta goes away due to the precipitous decline in oil we saw around this time last year. In other words, this has been a tailwind for most of ’09, and it’s about to turn into a headwind.

 

My colleague Andrew Barber brought something to my attention that otherwise slipped right past me. That’s the relative trajectory of West Coast prices. Simply put, over the past month, we’ve seen a divergence in West Coast prices vs. the National Average that we’ve not seen in over 15 years.  In effect, National prices are rolling and California prices are going the other way.

 

We can speculate all day about how this will negatively impact players like Ross Stores (which is on my short bench), but the bigger impact, I think, will be on smaller (mostly private) regional players that are hanging by a thread. They have visibility on cash flow today – like the rest of retail – but as holiday approaches, that visibility goes punk. My sense is that accelerates the rate at which players like Dick’s will step up and acquire real estate as incumbents go bust.

 

Retail: Gas Divergence Implications - 1

 

Retail: Gas Divergence Implications - 2

 

Retail: Gas Divergence Implications - 3


DELAYED HARVEST

The cold wet weather that has dogged the Midwest this year has caused projected harvest start and completion times to be delayed for staple grains, with Corn and Soybean harvests off to the slowest start in decades.  As of October 11, the USDA estimated that only 13% of the total corn crop had been harvested versus an average of 35% by that time in the past five harvests.  Although the harvest is seriously delayed, in absolute size it’s anticipated to be a bumper crop: The USDA estimates a 13 billion bushel season for 2009, which would make it the second largest harvest on record. 

 

Futures markets ultimately function as insurance markets however, and despite the size of the yield, anticipated prices have risen sharply as more time in the field creates further risk of weather damage and other unknowns. With the harvest expected to drag into late November, the price of December delivery corn has bounced back from last month’s low close of $3 per bushel on September 4th  to  almost $3.85 per bushel in today’s session.

 

Sanderson Farm (SAFM) is trading lower after being downgraded at KeyBanc.  The thesis is that rising corn prices make feed costs more expensive.  As the story goes corn prices will continue rising due to a declining U.S. dollar boosting exports and expectations that ethanol producers will use more corn.

 

Keith bought SAFM today on the downgrade.  At research edge we do not agree that corn is headed much higher.  At the current prices for crude oil, Ethanol is not a concern and the bumper crop for corn will ultimately dictate the future of corn prices, which is likely lower.   In two weeks, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and the state of the industry.  Notwithstanding a slight uptick in the price of corn, the industry outlook is positive and SAFM is one of the best managed companies in the space.

 

Our bottom line: Corn has a broken TAIL and a bullish TREND… within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.

 

Andrew Barber

Director

 

Kerry Bauman

Senior Analyst

 

DELAYED HARVEST - corn1

 

DELAYED HARVEST - corn2

 


GOOD AIRPORT NUMBERS, TOUGH REV COMP

McCarran Airport reported a decline of only 1.2% in September passenger traffic. However, the September revenue comp is the most difficult for the foreseeable future.

 

 

A 1.2% drop in enplaned/deplaned McCarran passengers is the smallest since February 2008.  The airport traffic comparison was relatively easy.  Nonetheless, the number was decent and could contribute to positive growth in Las Vegas visitation.  We now project visitation will show ever-so-slight growth - the first growth month since May 2008 - when the Convention Authority reports its numbers in a few weeks.

 

What's going on?  The calendar was very favorable, hence the easy comparison, with Labor Day weekend falling mostly in August of last year versus September of this year.  We also think the 17.5% year-over-year decline in gas prices in September will help drive auto traffic from California up around 10%.

 

So revenues will be strong too, right?  Not so fast. We are projecting Strip gaming revenues to fall 13% despite the decent traffic number.  Slot and table hold last September were each a full percentage point above the average.  The high hold % last year contributed a 10% offset to the gaming revenue decline.  Gaming revenues would've fallen around 15% rather than the relatively strong 5% that was reported in September 2009.  Of course our projections assume normal hold percentages this year and relatively stable Baccarat volumes.  Visits from a few Baccarat whales can have a big impact on revenues.  Indeed, an otherwise dreadful August was somewhat saved by strong Baccarat volumes.

 

The details of our projections are portrayed below.  Investors may be disappointed when the revenue numbers are released in a few weeks, particularly given the potential enthusiasm surrounding last night's airport numbers.

 

 

GOOD AIRPORT NUMBERS, TOUGH REV COMP - Estimated Strip Metrics

 

 

 

GOOD AIRPORT NUMBERS, TOUGH REV COMP - McCarran trends sep

 

 

 


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