This bull is Asian. This bull is Small Cap. This Bull is Short Interest – This bull is a stock picker!
This is a bull shark ripping the underbelly of everything complacent and consensus. The last thing you want to be short out there in these trading waters this morning is a high short interest Chinese internet company like say, Baidu.com (BIDU -trading +13%). Realizing that you’re smarter than everyone else didn’t pay you staying short the US Financials this past week, nor is it going to pay your “fundamental” short Amazon (AMZN) or Qualcomm (QCOM) bets this morning (they’re trading +8% and +10% respectively). If you’re short a trifecta ticket with Chipotle (CMG), Sketchers (SKX), and Ryland (RYL) – you’re a winner!
CMG and SKX are trading down -12% and -13% pre-open, respectively, and yes they have high short interest – but that factor gets wiped aside on alpha day, so be careful out there – some of these bulls are not like the others. I have to give some Obama knuckles to my partners, Brian McGough and Howard Penney, for nailing these two shorts in their portals. Great job, Gentlemen.
I know this has to be a frustrating month for some, if not for many. I’ve been bearish on the market’s “Trend” for 9 months, but I’m having another good month riding this bull “Trade”; lucky me, I guess. Understanding where we go next continues to weigh to the bullish side of an extended “Trade” higher, and as depressing as my notes may have been in months past, it is only too ironic that I am depressing the shorts with these key strokes. This is a complex market system of interconnected factors. They change daily, and they must be respected.
In the last 72 hours we’ve been issued macro facts that are outright bullish. Most of these factors center around deflating an inflation bubble. You can find these facts littered all over the world. They’re fairly straightforward too. So let’s go through a list of 9 bullish factors, for starters:
1. Oil broke my support level of 126.16
2. CRB Commodities Index broke my support level of $428
3. US Dollar recovered from crisis zone, through my resistance level of 72.61
4. US Treasury 10 year yields rallied through my resistance level of 4.05%
5. Brazil raises interest rates overnight to 13%, and remains hawkish
6. US Federal Reserve rhetoric changes to explicitly hawkish after Plosser and Bernanke comments
7. Canadian and Brazilian stock markets continue to break down (Food and Oil inflation proxies)
8. Russian, Norwegian, and Middle Eastern equities (Energy inflation proxies) continue to break down
9. Asian currencies and stock markets strengthen in tandem
The facts have changed, and unless these levels reverse in unison, there is no reason to be short this bull shark. That does not mean I want to buy everything. That certainly does not mean I want to run out and buy US Financials after they have ripped the shorts for a +30% 6 day move. It means, I don’t want to be long commodities (including Gold); and it means I want to be picking stocks, assets, and country’s that fit the macro short squeeze profile. Vietnam reported the 1st of global inflation numbers we will see for July, and it was the 1st sequential deceleration since guess when – October 2007. I am looking for CPI and PPI July inflation reports to decelerate, globally.
China traded up +2.6% overnight to 3053 on the Shanghai Index. As I said yesterday, that’s a contrarian macro “Trade” that I think works. Conversely, a country that’s levered to the Euro pinned up at 1.57, and hostage to their own balance sheet malaise like Spain is, should be avoided like the bubonic plague. Spain reported a whopper of an unemployment number this morning at +10.4% year over year, and Spain’s stock market is trading down -1.1% as a result, taking its cumulative losses from October 2007 to -26%.
This bull is a “Trade” that can run for longer than some “wanna be” short sellers can remain solvent. This bull isn’t Spanish. This bull needs to be understood.
*Full Disclosure: I am long FXI.
This bull is Asian. This bull is Small Cap. This Bull is Short Interest – This bull is a stock picker!
I always pause and consider the contrarian case when I have so many reasons to be negative on a name. But there really were not many positive factors coming from this quarter. Here’s a couple worth pointing out.
1. The quality of earnings was abysmal. Sales +1%, EBIT -8%. The way I am doing the math, FX helped the top line by about 3.8-4% (management danced around the question and did not provide an answer on the call). Assuming a 25% flow-through rate, this helped EPS by about $0.04, pegging real EPS decline of about 15%.
2. While I’m on the topic of International, I still do not understand why this company should grow internationally!! It is a knock off company. Real aspirational brands work overseas. When brands don’t matter, then it’s speed to market, local consumer expertise, and low cost production that does matter. Perhaps with the exception of speed to market, I don’t think that Skechers excels at any of those things. The real challenge is that SKX falls squarely into the bucket of a company that has not managed through an unfavorable FX cycle. I challenge anyone to find me a company in retail that came out of its first negative FX swing with flying colors. I’ll dare not ask the question as to whether this management team is conservatively assuming that Big Ben will play some offense, take rates higher, and get the dollar to reverse course.
3. It’s clear from my sources as well management’s comments that the ‘low profile’ shoes that drove SKX’s business are seeing impact from what I think is a sustainable long-term downtrend (my 6/4 SKX post).
4. Bad debt exposure heading higher. With disproportionate exposure to troubled mid-tier retailers vis/vis its share of the total market, I think that the hits we’re seeing from Goody’s and Shoe Pavilion will only be the beginning. I guess a bigger question is why SKX is increasingly showing up as a large creditor (with Goody’s being the best example). That probably points back to the fashion shift and the need for SKX to find non-traditional channels for its wares.
5. I love watching the progression of how a management handles their respective business in different market environments. SKX is a textbook example of an organization that simply does not learn from its mistakes – specifically as it relates to inventory/margin trade-off. Check out my little Sales/GM/Inventory analysis. The vertical axis measures sales growth less inventory growth (i.e. a higher number is better) and the X axis measures the yy change in Gross Margin. Plotting SKX’s path over 2+ years is simply classic.
The narrative sounds something like this…
a. 1Q06-2Q06: “Business is solid. We’re on trend and margins are up. Life is good. Let’s order more stuff.”
b. 3Q-6-1Q07: Ok margins are still decent, but inventory is building. We’re gonna hang on under the assumption that we can sell this built-up inventory at a respectable margin.”
c. 2Q07: “We were wrong. Inventories are still too high, and now margins are down Ouch!”
d. 3Q07: “Ok, we messed up. Let’s clear the inventory – even if at an undesirable margin.”
e. 4Q07-1Q08: “We’re geniuses. Problem solved, and now we’re back on trend. Let’s up our growth plans again.”
f. 2Q08: “Uh oh. Inventory building and we’re back to where we started.”
- PFCB’s same-store sales results were also impacted rather severely by the company’s geographic exposure to Arizona, California, Florida and Nevada, which accounted for 84% of the Bistro’s total comparable sales decline, and same-store sales declines in these four states worsened sequentially from 1Q08. Pei Wei experienced considerable weakness in its Phoenix, Las Vegas, Southern California and Dallas markets. These four regions represent 41% of the concept’s comparable units and were down more than 7% in the quarter after being down 6% in 1Q08.
- Despite weakening top-line results, the company is taking the right steps to manage the parts of the business it can control. Although the company is facing higher commodity costs, management stated that it does not expect to increase prices at either of its concepts over the next 6 to 18 months as the risk to traffic trends and customers’ overall value perception is too great. With traffic down in the 6%-7% range at the Bistro and negative at Pei Wei, I would agree that raising prices in this economic environment would be detrimental to both concepts.
- Additionally, the company announced that it is significantly slowing its new unit growth in FY09 and plans to open 12-14 Bistros (down from the expected 17 in FY08) and 6-10 Pei Wei restaurants (down from 25 in FY08). I would be happy to see the company stop its expansion of the Pei Wei concept all together until it can generate the necessary returns, but cutting the concept’s FY09 growth by more than 60% is a step in the right direction and management is focused on improving Pei Wei margins by 200-250 bps off of 2007 levels. I was surprised and encouraged to hear management say (in response to a question) that they are currently evaluating the existing Pei Wei locations and would consider closing some locations if they determine any sites don’t have the potential to get where they want them to get. Management was clear in saying, however, that no such units have been identified as of yet. As a result of this slowed FY09 development, capital expenditures are expected to come down in FY08 (now expecting to spend $80-$90 million versus prior guidance of $105 to $115 million), which will generate increased free cash flow in the current year. This capital spending number will come down even further in FY09.
- As it relates to things management can control, the 70 bp YOY decline in labor expenses at the Bistro is somewhat concerning as such declines in labor expense can be a red flag for a company trying to protect margins at the expense of the customer experience. Management attributed the year-over-year decline to improved efficiency and scheduling in the back of the house and said that the magnitude of the decline is not necessarily sustainable, which is encouraging.
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Provided that the XLF doesn’t close higher than 23.78, the negative “Trend” in this sector will remain firmly entrenched. The US Financial Industry needs a full makeover, not a 5 day rally. Sell high, Cover Low.
HSY reported a better than bad quarter today, and closed up +5.4% on solid volume. Short interest is vibrant at 11% of the float. If you're short it, and you think you have a unique thesis, you don't anymore (or a catalyst, for that matter).
If the stock can hold today's gains, you can buy it using a $36.17 stop loss. You'll get paid a 3.2% dividend to wait this turnaround out in the meantime.
See Howard Penney's notes for more.
The picture below comes from the two day visit Chavez is having in Russia this week. Yesterday he was lobbying Putin and Medvedev to form a "strategic alliance" with Venezuela. Chavez went on record saying "if Russia's armed forces want to be present in Venezuela, they will be given a warm welcome."
See our earlier post today on Russia's stock market breaking down for more.
Because geopolitical risks are ignored, certainly does not mean they cease to exist. That’s why one of my investment themes remains keeping an “Eye On Putin Power.”
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