Copper Is Breaking Down Again: What Does It Mean?

Dr. Copper's class was back is back in session yesterday as indications of loosening current and future supply inspired selling.

Reports that striking workers are returning to the mines in Peru, combined with the return of law and order to Mongolia's capital (with opposition leaders acknowledging that the recent elections where fair, for the most part...), has provided a fundamental backdrop for committed selling in the futures market over the past 24 hours (see chart).

Copper has remains a fascinating leading indicator for me to analyze. On one hand, copper breaking down assures me that Asian economic growth is slowing, which is ultimately deflationary. On the other hand (supply side), copper's June ascent amplified the reality that this brave new interconnected world cannot absorb supply shocks, which is ultimately inflationary.

At this spot price, copper is breaking down. Class dismissed.

ECB Rhetoric Raises A Fist!

Italian central banker, Mario Draghi, flashed Bernanke and Co. a victory fist this morning as he pointed to the ECB's recent vigilance on inflation fighting as being responsible for this week's drop in commodity prices.

The ECB raised rates last week and this, of course, is what the governor of the Bank of Italy is alluding to in terms of the efficacy of European timing.

European and Australian central bankers continue to have this right. Their respective currencies are the current "Kings" of the foreign currency market, as a result. King Dollar is nothing but a historical name that used to actually mean something other than lip service.

The US Peso is wallowing again this morning, stoking inflation, on the heels of helicopter Ben Bernanke assuring investment bankers yesterday that he is there to bail them out.


One for the Gipper! Weekly Consumer Data Finds Some Light...

Ronald Reagan played the "Gipper" in his 1940 film, "Knute Rockne: All American". By the time he was President of the United States he was equally as inspirational, empowering a consumer spending revolution.

Not all movies end well, and this week's consumer data doesn't change our view of the negative consumer spending "Trend" that is emerging. That said, we have to call the data like it is, and this week we saw upticks in two important readings:

1. The weekly ABC/Washington Post Consumer Confidence # came in at -41, higher than it's all time lows, and up from -43 last week

2. MBA Mortgage Applications accelerated +7% this past week. Again, that's certainly better than the toxic readings we've been getting.


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Rally to Zero

Today's late-day rally did wonders for apparel/footwear retail. The sell-off in the CRB and supportive comments from the Fed came at a good time for the group - which is trying to figure out how to be positioned in advance of same store sales this Thursday. I'm not one for predicting the primal reaction of this heavily-shorted group when numbers come out, but I can analyze the facts. The facts are not encouraging.

One of the most notable is in looking at the RTH versus the S&P in the periods leading up to sales day over the past 12 months. There are three key takeaways.

1) The stability of the RTH this month has been surprising. There has not been a month in over a year where we have not seen anything less than a 2% relative performance gap from one sales day to the next. This time, we are sitting at zero.

2) With everyone freaking out about the consumer, I'd have thought the market would be discounting more bad news. Maybe the market is looking at the earnings revision chart I posted earlier today and is assuming that most revisions have already passed. They probably did not read the second part of my posting that talked about earnings expectations still being 1,000bp+ too high.

3) The May comp reported 5 weeks ago came in at 3.1% based on my math. While little changed sequentially, this represented a 220bp improvement in the 2-year run rate. It just so happens that to maintain this 2-year rate, we need to see a 3% comp out of the industry this Thursday. Let's hope that the consumer is spending more than recent newsflow suggests.

The Exhibit shows the RTH relative to the S&P 500. Recent stability is very surprising.

Performance Outperforming

Data points continue to come in to support my 'shift back to athletic' theme.
  • The chart to the right shows the year/year change in market share for the running category (the best proxy for Performance), and 'Low Profile' (i.e. fashion) through the end of June. The trend is unmistakable.
  • I continue to think that on the margin this helps Foot Locker, and hurts Low Profile beneficiaries such as Skechers, DSW and Brown Shoe.

TXRH - A Nonsensical Press Release

DJ - Texas Roadhouse Inc. (TXRH) said Tuesday in a regulatory filing that its board approved a $50 million increase in the company's stock-repurchase program to a total of $75 million.

Call me old fashioned but I just don't get this move by the Board of TXRH. What exactly is this supposed to mean? Here are some possibilities...

(1) Buy the stock now because we are going to make the quarter.
(2) We are confident in the long-term prospects for our business.
(3) We have so much cash lying around we have nothing better to do with it.
(4) The BOD has a crystal ball that says commodity prices are going down and the consumption recession is over.
(5) Management got the board to prop up the stock because some the large shareholders want out
(6) The stock is undervalued!

The reality is they have no intention of buying this much stock; TXRH does not have the money to do it. Sure they can go to a bank and borrow the money to do it. But why? At this point in the cycle why would you want to add leverage to the balance sheet?

I can understand a share repurchase program when a company has excess capital to put to work. This is not the case for TXRH. Since 2005 the company has not generated free cash flow and its debt/equity ratio has gone from 3.2% to 20.1%. In other words the company has needed to fund it growth with incremental leverage. Over the same time period the company's return on capital has gone from 14% to 10%.

The economics of the casual dining business have changed dramatically over the past twelve months and nobody is immune. I don't care how under penetrated the concept is. What the Board of Directors should have done was announce that they were cutting square footage growth by 50% to improve its ROIIC and using the excess cash flow to buy back stock. Then I would argue that there is more than just a trade into a nonsensical press release. The long term trends for TXRH look suspect to me.

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