Bombed Out Buck: Changing Dynamics

When we first began pounding the table about the relationship between the US Dollar and the equity market  (“Breaking the Buck” Q1 09, “Burning the Buck”  Q2/Q3 09 and our present “Bombed out Buck” thesis)  what was a matter of debate has become consensus and it seems like every pundit on CNBC has been talking the subject up. We were early to the game on this call, we are also now likely to be among the first to walk off the court: as the facts change, so do we.


The reality is that over time the Dollar oscillates between a role as a driver and that of a reflection of the US asset markets (including equities) with great frequency.  To help illustrate this point, I have put together the crude illustrations below. The chart shows the rough correlation between the S&P 500 and the US Dollar Index on a rolling 250 day basis.


As you can see, the relationship flips between strong positive and negative correlation with a very high frequency.  In the background of the second chart I have charted a rolling measure of the absolute difference between year-over-year returns for the two indices to map out periods of long term performance convergence/divergence. Intuitively the periods of broadest divergence tend to coincide with period of strong negative correlation and vice versa (with the notable exception of Volker’s interest rate crusade in the early 1980’s).


Obviously there is a huge difference between calculating positive and negative correlation and understanding when the dollar is the driver for this, but it does serve to illustrate how volatile this relationship is. 


Bombed Out Buck: Changing Dynamics - barber1


Bombed Out Buck: Changing Dynamics - barber2


Early this year we realized that the US Dollar was setting up to assume the role of equity market driver and the strong negative correlation between the two indices has proved us right. We now see the fundamental dynamic between shift starting and expect that –just as the USDI/SPX relationship can easily revert to a reflective measure as we move forward, so too can the correlation between the two weaken. This is supported by recent declines in shorter term r2 calculations.


Our point is simply, it would be a mistake to assume that the relationship between US equities and the dollar is static. Our process is one of risk management and a critical part of that is understanding when a trend is changing.


Andrew Barber



I see no reason to fight the trends at PNRA.  The concept operates in a segment of the industry that has very little direct competition.  The breakfast day-part is being challenged by rising unemployment but PNRA’s customers appear more loyal than the bottom feeder customers that are causing MCD some difficulties.


PNRA reported 3Q09 earnings after the close yesterday and there was little not to like.  Following the recent trend in restaurant earnings, PNRA’s earnings of $0.65 per share easily beat the street’s $0.58 per share estimate.  Bucking the trend, however, PNRA’s same-store sales growth at both the company and franchise operated restaurants also came in better than expectations.  And, the good news did not end there.

  1. Same-store sales have improved sequentially on a 2-year average basis each quarter this year.
  2. Same-store sales growth also improved on a sequential basis throughout the quarter (+2.6% in July, +3.0% in August and +4.4% in September).
  3. Unlike its peers, this growth was fueled by both traffic growth (+1.8%) and average check growth (+1.5%).  This transaction growth represented a significant sequential improvement from 2Q’s 1.4% decline.
  4. Same-store sales continued to improve in Q4 with quarter-to-date underlying trends up 6.9%.  This is a strong number on its own, but it is even more impressive relative to the soft October trends cited by both SONC and MCD. 
  5. Q4 same-store sales guidance was difficult to decipher as the company provided both calendar and fiscal ranges but the given 5%-6% range seems to be the more important range to consider as it represents underlying business trends.  This guidance assumes continued sequential improvement in both transaction and average check growth in Q4.
  6. Mix turned positive in September and has remained positive in October.  Management attributed this mix improvement largely to the tick up in catering trends.  PNRA’s soft catering trends have been a drag on mix as it is typically a low transaction/big ticket business.  PNRA expects catering to be up 5%-10% in Q4 (was running -5% in 1H and positive in Q3), which should add about 30 bps to average check growth.
  7. Operating margins improved 230 bps in the quarter and PNRA is guiding to an additional 75-125 bps of improvement in Q4 and 25-75 bps in 2010.
  8. PNRA’s full-year 2010 EPS guidance of $3.05-$3.15 is above the street’s $3.03 estimate and assumes 3.0%-5.0% same-store sales growth (flat to 2% transaction growth).

Being the resident bear, I have a hard time believing this Q4 and 2010 guidance but the company’s Q3 same-stores sales and traffic trends were pretty unbelievable as well!  This company is driving both traffic and average check growth in an extremely challenging environment.


I would say the only somewhat concerning issue discussed today stems from the company’s decision to accelerate company-owned unit growth next year.  PNRA announced that it would increase its new company-owned units by more than 50%.  Yes, the company’s margins have gotten significantly better in the last two years, but I would attribute a lot of that improvement to its having slowed new unit development.  PNRA opened 89 company-owned restaurants in 2007, 35 in 2008, an estimated 25 in 2009 and is now forecasting about 40-50 new units in 2010. 


Management said it must take advantage of the current real estate opportunities and that current returns warrant becoming more aggressive with growth now.  Management also highlighted my concerns about doing so, however, when it said that new stores often generate lower returns initially due to opening costs and higher training costs.  This accelerated growth will lead growth-related costs right back into the P&L and put increased pressure on returns.  This might help explain why the company is forecasting 25-75 bps of margin growth in 2010 with 3%-5% same-store sales growth after driving nearly 180 bps of growth on only 1% comparable sales growth year-to-date.


 I am not saying that growth is never warranted, but I would have preferred to see the company take up its new unit growth goals in a more conservative manner.  That being said, this company’s current trends continue to surprise me and time will tell whether returns will hold.






Relax: SP500 Levels, Refreshed...

The tones and frequencies of my inbox are relatively good indicators of the behavioral side of this market. Some people are a little freaked out here. So, take a deep breath, and realize that what you are feeling isn’t unique.


The Bad, the Good, and the Relax lines (see chart below):

  1. Bad – two days ago, the SP500 broke our immediate term TRADE line at 1067; that’s not new
  2. Good – the SP500 has an immediate term TRADE line of 1049; that’s the same line I had in this morning’s note
  3. Relax – the intermediate term TREND line = 1017

TRADEs are what they are, trades. They are 3-weeks or less in duration. They matter.


TRENDs are much more dominant. They are 3-months or more in duration. They are very difficult to break.


Understanding that I only have a 6% Allocation to US Equities means I can probably be more relaxed here than the guy who got fully invested at the top of October 19th. But the fact of the matter remains that Mr. Macro Market couldn’t care less about my or his individual portfolio position.


As risk managers, all we can do is manage the risk that’s in front of us. From the lows of this morning (1054 on the SP500 as I type this), you have another -0.5% of immediate term TRADE downside, and another -3.5% downside to a fortified TREND line.


Relax, and wait for your price. This is not a crash, yet…



Keith R. McCullough
Chief Executive Officer


Relax: SP500 Levels, Refreshed...  - SP10 28



Ahead of the company analyst meeting tomorrow, corn is testing two-week lows. 


It was just two-weeks ago that the “street” was cutting estimates and downgrading SAFM due to higher corn prices.  Now look what is happening to corn. 


According to Farm Futures Daily, “Corn should open lower this morning, with more chart-based weakness emerging after a failed rally attempt overnight. Futures tried to bounce back at the onset of the electronic-only session, but lost ground after stock market losses in Europe deepened.  December futures are testing two-week lows below $3.65."


I certainly don’t expect the street to adjust estimates or ratings weekly on SAFM, but corn has a broken TAIL and a bullish TREND.  Within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.


We are LONG SAFM.  As we said two weeks ago, 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.   Tomorrow, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and on the state of the industry.  The industry dynamics are positive and SAFM is one of the best managed companies in the space.





US Strategy – Volatility, Take Two

On Tuesday, the S&P 500 closed at 1,063, down 0.3%.  Yesterday’s was the third down day in a row for the S&P 500 and it finally broke the trade line.  The heightened volatility continued yesterday with the VIX up 2.1% yesterday and has now moved 18.8% in the past week.       


On the MACRO front, the drag on the market seemed to be the weaker-than-expected October Consumer Confidence data. For now, Consumer Confidence continues to make a series of lower-highs (see the chart in our post from yesterday). Americans are not as stupid as Washington thinks they are. The Conference Board’s index of Consumer Confidence fell to a three-month low of 47.7 from 53.4 in September.


Yesterday, the Case-Shiller report showed that the composite index of home prices in 20 metropolitan areas rose 1.2% month-to month in August, above the consensus estimate of a 0.7% increase.  The magnitude of the increase, however, declined on a sequential basis for the first time in four months.  In July, the index improved 1.6% month-to-month.  Nonetheless, the rate of annual decline in home price values continues to improve. 


The question about whether these trends will continue to show sequential improvement rests on the upcoming November 30 expiration of the government's $8,000 tax credit for first-time home buyers.  Also impacting these housing numbers are the anticipated higher unemployment rates through year-end and the apparent trend toward lower consumer confidence numbers, which was more evident today following the disappointing conference board reading. 


These issues, coupled with a new wave of foreclosures hitting the housing market in early 2010, suggest that the improvement in pricing trends are sure to slow down and may even begin to deteriorate further.


Yesterday, four sectors outperformed the S&P 500 and three sectors were positive on the day.   The three best performing sectors were Energy (XLE), Healthcare (XLV) and Consumer Staples (XLP), while Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB) were the bottom three. 


The Energy sector was the best performing sector despite the pick-up in risk aversion and dollar strength.  Also helping performance was better-than-expected earnings and cost-savings guidance from BP. 


Managed care rallied today with the HMOs up 3.7%, following a decline of 2.7% yesterday.  Healthcare reform continues to be a major headwind for the group. 


Today, the set up for the S&P 500 is: TRADE (1,060) and TREND is positive (1,015).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 3 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations are Energy, Technology and Consumer Staples.     


The Research Edge Quant models have 2% upside and 1.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open to the down side. 


The Research Edge MACRO Team.



US Strategy – Volatility, Take Two - S P500


US Strategy – Volatility, Take Two - s pperf


US Strategy – Volatility, Take Two - sv oct 28




October 28, 2009





I maintain my view that those with sophisticated infrastructure as it relates to branding, consumer experience, demand creation, procurement and order fulfillment will not only command a meaningful valuation premium as we head into 2010, but they will be targeted by retailers that are willing to blur the lines between new and traditional channels in order to keep pace with the consumer. Last night, GSI Commerce (GSIC), one of the largest e-commerce service providers, bought Rue La La for $350mm in cash and stock. I guess deals like this are easier to do when your currency is up vs last year. This values Retail Convergence (Rue La La’s parent) at 1.5x revenue, but at a much steeper 35-40x EBITDA given the thin margins. Perhaps that will be irrelevant as GSI scales Rue La La on to its own infrastructure – if fact that is part of the plan. Yes, this smells a lot like when Amazon bought Zappos, but it is far more relevant to the purchaser (now at $967mm in revs, but that goes to $1.2bn with a solid growth engine). People will start paying attention to GSIC. But this is only the first of many deals to come. (By the way, the ‘Terry’ in my title refers to Macy’s – a reacceleration in ecommerce is going to take this business a step back in time – again. Isn't he glad he consolidated it and now has a monopoly?).




Some Notable Call Outs


  • Now that JC Penney has a established a presence in Manhattan, it appears to be joining the creative pulse of the city as well. In an effort to promote the Olsen Twins’ new line of junior apparel, Olsenboye, JCP is selling the line (at a discount) and handing out free cupcakes out of a pink ice cream truck in NYC. This whole promotion sounds very Target-like…


  • Cabela’s 3Q results confirmed that the positive trend for firearms and ammo is slowing sequentially, largely due to difficult comparisons. Offsetting this slowdown was a pick-up in softgoods, which tend to carry higher margins. While the firearms trend is slowing, management did suggest there are still some types of ammunition that remain in short supply.


  • Iconix indicated that two of its portfolio brands that had trouble comping over the first half of the year are now starting to do well. This includes both Candies (Kohl’s) and Mossimo (Target). The pick up in Mossimo is notable, especially given the size of the brand and the commensurate positive margin implications it should have for Target.





-H&M Eyes Expansion in U.S. and Canada - Daniel Kulle, H&M’s new president of North America, has a can-do attitude. Neither the recession that has sapped consumers’ fervor to shop nor the competition from lower-priced mass merchants has dampened Kulle’s desire to expand in the U.S. “The potential in the U.S. market is very big,” he said. “We have the strength of a very good business. We have the people here. We have logistics, with three distribution centers. We have the framework to move more [product].” Of H&M’s 169 U.S. stores, most are on the East and West Coasts and in the middle of the country. Now the retailer wants to make a move on the South. In addition, Kulle said, “there’s loads of potential in Manhattan, Chicago and Los Angeles. We have seen that the U.S. customer likes us.” <>


-Limited Details Major Overseas Push - After decades of taking it slow overseas, Limited Brands Inc. is charged up and aims to double international revenues to $2 billion in three years. “We’re taking it very seriously,” Limited’s chairman, chief executive and founder Leslie H. Wexner said during an analysts’ meeting in Columbus, Ohio, on Tuesday. “A paradigm shift happened in the last 12 months.” Wexner said the $1 billion in revenue currently generated abroad is “very profitable” and that Limited’s La Senza intimate apparel chain in Canada, acquired in 2007, is “an area of accelerating growth.…We will start plowing forward very aggressively.” <>


-Tommy Hilfiger European retail sales soar - Tommy Hilfiger has revealed that global sales increased by 3.5% to EUR772m (£697.9m) in the six months to September 30. In Europe retail sales rose 24.4% with like-for-likes up 2.5%. However, European growth was offset by a slowdown in wholesale sales resulting in an overall sales decrease in Europe of 6.4%. Tommy Hilfiger, which is owned by Apax Partners, said that wholesale sales dropped in Europe because of a more cautious stance by wholesale customers and due to Tommy Hilfiger’s strategic decision to reduce its wholesale customer base. <>


-Guess? Founder Georges Marciano Faces Bankruptcy Petition - Guess? Inc. co-founder Georges Marciano faces an involuntary bankruptcy petition from three former employees seeking $95.3 million.

The petition for Chapter 11 bankruptcy was filed in bankruptcy court in California yesterday by Joseph Fahs, Steven Chapnick and Elizabeth Tagle, who were among five ex-workers awarded $370 million in damages from Marciano by a Los Angeles jury in July. <>


-Tesco to Create 1,000 New Jobs at Banking Unit in Newcastle - Tesco Plc, the U.K.’s largest retailer, said its banking unit will start a customer service center in Newcastle, northern England, creating 1,000 jobs. Tesco Bank, the supermarket chain’s personal finance unit, is expanding after starting a joint venture with Fortis U.K. to provide home and car insurance. Tesco has also added 1,000 jobs this year in the Scottish cities of Edinburgh and Glasgow, the retailer said today in a statement on its Web site. <>


-Japan’s Retail Sales Drop 1.4%, Less Than Forecast - Japan’s retail sales fell less than economists forecast in September, adding to signs that consumers may be becoming confident about the resilience of the recovery. Sales slid 1.4 percent from a year earlier, the Trade Ministry said today in Tokyo, the smallest drop in 10 months. The median estimate of 13 economists surveyed by Bloomberg was for a 1.6 percent decline. <>


-TRU Reveals Its Plans for FAO Schwarz - In time for the holiday season, FAO Schwarz will open branded in-store boutiques in Toys"R"Us stores nationwide, re-launch its e-commerce site and more. FAO Schwarz was acquired by Toys"R"Us in May 2009. A selection of FAO Schwarz's classic toys will be available on Nov. 1 within branded boutiques at 585 Toys"R"Us stores nationwide. Items will include the FAO Schwarz signature holiday ornament and 2009 collectible bear, as well as the brand's mascots, Patrick the Pup and his sister, Penelope, among others. The iconic FAO Schwarz large piano replica from the Tom Hanks movie Big will also be available. <>


-Cabela's Nearly Doubles Q3 Net Income; Raises Guidance - Cabela's Inc. reported that total revenue for the third quarter increased 2.0% to $624.3 million compared to $611.8 million for the third quarter of 2008. Retail store revenue increased 6.1% to $348.0 million led by a 3.5% increase in comparable store sales; direct revenue decreased 6.2% to $226.2 million as the company lowered direct marketing costs 15.1% resulting in increased revenue per catalog page; and financial services revenue increased 15.0% to $48.2 million. <>


-An apparel era ends in Winston-Salem - Hanesbrands plans to stop hosiery production at its Weeks plant by end of 2010, cutting 240 jobs. Hanesbrands said yesterday that it will end hosiery production at the 850,000-square-foot plant by the end of 2010, eliminating 240 manufacturing jobs and transferring 80 distribution jobs to its Almondridge Road center in Rural Hall. It will begin reducing production at Weeks -- its last Forsyth County plant -- in the second quarter. The company said that consumers have been purchasing fewer sheer-hosiery products for more than 10 years, with sales off 14 percent in 2008 and down another 18 percent through June 30. <>


-Poll Finds Holiday Shoppers Averse to Hype - Holiday shoppers are in no rush to get the season under way, but when the spirit seizes them, about half will spend between $300 and $1,000 on presents, according to a new poll by Zogby International. With Christmas decorations creeping into the stores and holiday ads and catalogues surfacing before Halloween in the past several years, 53 percent of those surveyed online from Friday through Monday agreed: “Christmas-holiday shopping should start after Thanksgiving and I do not like seeing decorations and hearing holiday music until then — when I’m ready to start shopping.” <>


-Q&A With Geoffrey Miller, Author of “Spent: Sex, Evolution and Consumer Behavior” - Geoffrey Miller believes sex is a primary basis for how consumers decide what to buy. Miller, the author of “Spent: Sex, Evolution and Consumer Behavior” (Viking), is a professor of evolutionary psychology at the University of New Mexico and a consultant to companies such as Procter & Gamble Co. and The Coca-Cola Co. He argues consumers buy and wear what they do because of their desire to attract potential mates, rather than fashion trends. <>





NKE: Phil Knight, Director sold another 577,600 shares  for a gain of $36.1mm.


COLM: Michael McCormick, EVP-Sales & Marketing, purchased 2,500 shares for $100k.



  • Douglas Jakubowski, President, sold 15,000 shares for a gain of $147k.
  • Jeffery Cohen, President Consumer Direct, sold 1,880 shares for a gain of $18k.


GPS: Marka Hansen, President-Gap Brand, sold 86,750 shares after exercising options to buy 86,750 shares for a net gain of $798k.


JWN: Margaret Myers, EVP, sold 11,500 shares after exercising options to buy 11,500 shares for a net gain of $357k).




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends…


  • Retail stocks significantly underperformed the market yesterday with apparel, accessories, and luxury goods leading the charge down 5% followed closely behind by sporting goods down 4.6%.
  • Biggest losers of apparel, accessories, and luxury goods include CRI, UA, VFC, APP, ICON, LIZ, and MOV.  EVK and KCP were only the only positive stocks in apparel, accessories, and luxury goods but their gains were on low volume.
  • Every sporting goods retailer was down yesterday with GOLF, FINL, FL, and BGFV posting the largest losses on positive volume.
  • Footwear and consumer electronics were the only positive sectors yesterday.  Footwear was up on volume for the day while electronics was down.  Consumer electronics flashes as the best looking sector because it is green across all three durations, but internet and catalog retailers are nipping at their heels from AMZN's massive moves early this week.
  • LULU took the top spot for biggest gainer yesterday driven by its preannouncement of killer earnings.
  • HOV, FLWS, IRBY, SKX, and BBY deserve positive callouts for their gains across all durations.  Keep an eye on FLWS because it has flashed positive for the last 2 weeks and continues to move higher in the face of an adverse market.  With the total group of retailers down 5.2% on the 3-week, FLWS is up 36%.
  • Biggest losers are CRI, CMRG, ACAT, POOL, WINN, SMRT, and BBI.  CMRG rejoins CONN, BKS, and APP on the list on the biggest losers of the most durations after posting a few positive days this early this week.  APP remains hated on price and confirmed by volume.




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