ROST: Can it Get Any Better?

With Keith managing risk around our cautious view on ROST (shorted again today), we remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve.  Recall that on November 19th we posted a note suggesting that the anniversary of the best time in recent history for off-pricers is now upon us.  When you add in eight quarters in a row of inventory declines (while sales have accelerated) it remains hard to envision anything but a deceleration in momentum is on the horizon.  There is no question that this has been a great run, as it has been for other retailers benefitting from value pricing and the consumer trade-down effect.  But, if you’re curious what could happen while results remain robust on an absolute basis, with growth continuing at a decreasing rate, take a look at Aeropostale’s recent performance. 


Check out this historical perspective below, which takes a detailed but long look at the relationship between the industry’s inventory management (represented by the Sales/Inventory spread) vs. ROST historical same-store sales.  The Sales/Inventory spread for clothing and accessories retailers is currently at its widest margin since before 1996.  Truly amazing!  We then line this up against Ross’ topline results and you will see that ROST’s same-store sales exceed the Sales/Inventory spread far more frequently than not, 138 months out of 166 or 83% of the time.  In fact, of the 28 times the sales/inventory spread outpaced comps over 13 years, 3 have been since September of this year alone.


The cleanliness of the inventory pipeline for retailers and manufacturers alike is about as good as we’ve ever seen and as a result, there are simply less “quality”  goods for ROST to procure.  Additionally, with fewer units floating around in the pipeline, we should begin to see ROST (and others) no longer being able to buy as close to need as we have seen over the past year.  This should have an adverse impact on inventory turns as well as the industry’s ability to flow fresh, unique good as frequently.  All this points to diminishing upside on margins and earnings…



ROST: Can it Get Any Better? - ROST SInv vs Comps 12 09



ROST: Can it Get Any Better? - ROST SInv Spread vs EBIT 12 09



Negative Datapoint from H&M

Negative Datapoint from H&M


H&M’s sales comps are flat-out manic. Substantial slowdown in November, but pick-up in first two weeks of Dec. The volatility in sales trends has picked up at H&M – which (aside from Li&Fung) is the closest thing to a barometer for global apparel spending.


Comps accelerated their rate of decline drastically on a 1 and 2 year basis.  Comps almost fell to August’s levels which were the worst seen in over 5 years.  Only August 2009 and April 2008 experienced greater declines over the last 5 years.


As we’ve said in the past, H&M’s results are important to follow because it serves as a meaningful pulse on global discretionary spending. Many people underestimate how truly massive and relevant H&M is. While slightly smaller on the top line than Gap, its $2.6bn in EBIT dwarf’s Gap’s $1.6bn. Aside from being one of the largest, most profitable and highest-return apparel companies in the world, it is clearly the most diverse. 


In a move that we’d say is somewhat out of character for this company, it provided no commentary on the month’s results, but instead pointed to the more positive December trends which are up 11% over the first two weeks.  In other words – ignore the bad, focus on the good.  Nonetheless, if December holds at a double digit rate, then the 2-yr trend will be net positive. Let’s hope this continues. But ‘hope’ as we often say, is not an investment process.


Negative Datapoint from H&M - 1 year H M


Negative Datapoint from H&M - H M 2 yr




As a reminder this is what “He Who Sees No Bubbles” said recently…


“Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.  “The Federal Reserve is committed to keeping inflation low and will be able to do so.”


-          December 7, 2009 - Fed Chairman Ben S. Bernanke in a speech to the Economic Club of Washington


The US Dollar has strengthened over the past few weeks and is strong again today.  Today’s PPI reading and Wednesday’s CPI could be the river card that reveals why?  We have been calling for inflation to return and that time is now. 


The consensus estimates for the seasonally-adjusted November CPI is 0.4% according to Bloomberg versus 0.3% in October.  Given the implied relative strength of gasoline and food prices in the November retail sales data, an upside surprise to consensus is a better than average possibility.


A consensus report would boost year-to-year CPI inflation from minus 0.2% in October to roughly a positive 1.9% in November.  The November CPI data will officially end the recent period of formal DEFLATION.


Inflation is moving lower?


Howard Penney

Managing Director




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Charting Bernanke's Vision

Howard and Matt have a post coming out later today that You Tube’s the Fed Chief’s views on US Consumer Price Inflation. As a teaser, here’s a chart of He Who Sees No Bubbles (Bernanke) vision impairment.


Note that in 2006 (when this chart bottomed) neither Bernanke or Greenspan could foresee the mountain of Producer Price pressure that were on the horizon. I suppose it’s hard to see the easy money price bubbles that those engulfed by their own predetermined Doctrines create.


Buyer of Perceived Wisdom that the Fed won’t have to raise rates in 2010 beware. At this stage of the game, the data doesn’t lie – people do. Ben Bernanke is going to be playing some political football with a +2.7% year-over-year PPI report.


The US Dollar and bond yields are now breaking out to the upside on both an immediate term TRADE and an intermediate term TREND basis.


We remain short the SHY (short term Treasuries).



Keith R. McCullough
Chief Executive Officer


Charting Bernanke's Vision - USPPI



The 2010 MGM outlook looks bleak and the valuation rich by historical standards. Does that mean it's a short right here?



We're not so sure.  We've written about the likely low CityCenter return on investment and more importantly, the potential for serious cannibalization (see CITYCENTER: A GROWTH OR DONNER PARTY FOR MGM?, 11/23/09).  The valuation at 11.5x 2010 EV/EBITDA looks high especially relative to the historical range of 7-11x.  Moreover, cost of capital is likely going higher as MGM will be forced into refinancing much of its debt in 2010.  We think some form of equity issuance (convertible or straight equity) is likely. 


That's a compelling short story, no?  The problem is that shorting MGM into the CityCenter opening this week is consensus.  Look at the following chart that measures sentiment and short interest among select gaming, lodging, and leisure stocks.  MGM sits farthest down the sentiment line, which measures average analyst rating along the vertical axis and overall short interest along the horizontal axis.  MGM maintains the highest short interest and one of the lowest average ratings in this universe.


MGM: THE CONSENSUS SHORT - sentiment and short interest


The sentiment surrounding MGM could hardly be worse.  Even after a big two day move, the stock is 20% off its recent high in an otherwise strong stock market and the short interest has been climbing.  Any encouraging data points surrounding Q1 2010 room rates or indicating a solid opening of CityCenter could spark a short squeeze.  Don't forget that MGM has extra incentive to spin the CityCenter opening and market absorption favorably.  After all, 2010 will be a year of financing and fundraising. 


So far, we don't have any positive data points to report.  Indeed, CityCenter is still pricing rooms at a discount to the peer group for January and MGM is offering attractive promotions for the Aria and now Bellagio (see below) for Q1.  However, shorter seller beware.


MGM: THE CONSENSUS SHORT - bellagio offer

Again! Higher Highs

“Success is how high you bounce when you hit the bottom.”

-General George S. Patton


In this game, there is no better measurement for success than the rate of return on an investment. Undoubtedly, people who live their lives making excuses and pointing fingers will take issue with that; particularly on Wall Street, where some people like to keep a relative score. In the arenas of professional sport however, the score is absolute. I think that professional accountability model has higher standards.


When considering investment opportunities, I tell my team that they can be one of three things: Bullish, Bearish, or Not Enough of one or the other. I, for one, have not remained Bullish Enough on US Equities into yesterday’s closing YTD high. That’s no one’s problem other than my own.


I made multiple sales at the YTD highs established between November 17th and December 3rd (multiple tests of SP), but was relegated to watching us make a higher-high yesterday from the cheap seats.


Higher-highs, in my macro model, are bullish until they aren’t. One day, we can all look back at the YTD high for what it was – an event in the rear view mirror. Tops are processes, not points. If you need a Wall Street/Washington economist, strategist, or academic to give you a replay of it all, we are choke full of those in this country. They are called revisionist historians.


My role as a global macro risk manager is to proactively call out probable outcomes, before they occur. Sometimes I am wrong. Sometimes I am right. We called the topping process in both Gold and Oil this year. We also called the bottoming process in short term Treasury yields. At the same time I feel shame for missing yesterday’s SP500 ringing the register at 1114.


Yesterday’s higher-high in the SP500 coincided with a higher-high in one other major global equity market – Brazil. That’s the only country we are currently long on the International Equity side of our Asset Allocation. It’s the only major country index, other than the USA, to hit a higher-YTD-high in the last few weeks. The rest of the world’s Great REFLATION trades have started to unwind.


Brazil’s stock market bottomed just inside of a week before the US stock market did back in March. Since, the EWZ (Brazilian ETF) is up +146%. Meanwhile, the SP500 has tacked on one of the most expedited 9 month moves ever (+64.5% since March the 9th). Yes, ever is a long time. And, yes, the absolute score here has been a monstrous success for those who didn’t buy into the Groupthink Inc. fear-mongering. “Success is how high you bounce when you hit bottom.”


Today, my risk management task isn’t to live in some of the mistakes I made yesterday. It’s to wake up, smell the coffee, and make moves based on the most probable outcomes for tomorrow. Today, is just another opportunity to play the game that’s in front of me.


My favorite scene in the movie Miracle is when Kurt Russell lines the boys up on the goal line and makes them skate until they puke. “Again” … “Again” … “Again”…


Over and over again, I have learned through the lessons of my own mistakes that chasing higher-highs doesn’t work; particularly when they are not confirmed by the rest of the market prices in my global macro model. Here are some risk management thoughts for you to consider before you hit the ice out there this morning:


1.       China’s A-Shares closed down -0.86% overnight, failing to make a higher-YTD-high

2.       Japan’s stock market was down -0.22% again overnight; it remains the worst performing major equity market in the world YTD

3.       Hong Kong’s H-shares were down another -1.2% overnight; they have recently broken their immediate term TRADE line, making lower-highs

4.       Greece, turned sharply lower again this morning after their PM’s assertions of budget cuts were voted on negatively by Mr. Macro Market

5.       UAE resumed selling its stock market down another -1.5% after 1 up day of hope that Dubai’s debts for 2010, 2011, 2012 don’t matter

6.       Russian stocks continue to lose price momentum, having recently broken their immediate term TRADE line, and now making lower-highs

7.       Oil is now broken from both an immediate term TRADE ($76.91) and an intermediate term TREND ($74.30) perspective

8.       Gold has broken her immediate term TRADE line of $1148/oz and looks ripe to continue making a series of lower-highs

9.       US Dollar Index is now breaking out of its intermediate term TREND line base ($76.31), making a 2-month high, and a series of higher-lows


“Again”… “Again” … “Again”…


Its 630AM right now and I’m just getting started here. This is a short list of risk management factors that my model has flashed to me in the first few hours of what we call the grind. I know my style and process is not for everyone, but you know that I know it has edge. Closet indexers don’t grind.


The only way to solve for making a mistake like I have in not being long the SP500 at the YTD high is to find a different way to win this morning. Real men and women of this gridiron know that this is all that matters. Not losing is always the highest probability position to be in if you want to start winning.


My immediate term line of TRADE support for the SP500 is -1.5% lower at 1098. I’ll buy and cover US stocks if we hold that line. A strong US Dollar is going to lead this country to higher real-rates of return on American fixed incomes. It’s also going to expedite the exit of losing players who we need to get off the ice. I look forward to that. “Again”!


Best of luck out there today,






VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.


EWZ – iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.


XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.  


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.


TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.





EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer DiscretionaryWe shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.


SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.