Yesterday, the markets avoided what could have been a disastrous day given the data flow from the MACRO calendar.   In early trading today, U.S. Futures and commodities are all higher on speculation that Ben will be good on his word. 


Also after the close, the ABC consumer confidence index rose to -45 in the week ending December 13 -up 2 points from a week earlier.


The S&P 500 was lower on Tuesday, declining by 0.6%.  From where I sit the MACRO calendar was unfavorable and the PPI data was troublesome.  The Financial (XLF) continues to struggle as the banking group is drowning in a sea of dilutive capital raises.  Not to mention the reality that the FED needs to raise interest rates. 


On the MACRO calendar inflation is rearing its ugly head with a 1.8% month-to-month gain in November PPI – 1% above expectations.  In addition, the regional manufacturing recovery lost some momentum as the Empire index fell to 2.6 in December from 23.5 in November; the lowest level in five months.  The one bright spot was industrial production, which rose 0.8% last month vs. consensus expectations for a 0.5% increase.


The dollar index rose 0.8% yesterday to close at 76.96. Despite all the bad news and the strength in the Dollar the market managed to avoid a major breakdown. 


Yesterday, every sector declined except Energy (XLE) and Healthcare (XLV).  Several sectors that benefit from the RECOVERY theme outperformed – Energy (XLE), Consumer Discretionary (XLY) and Industrials (XLI). 


The Energy (XLE) was the best performing sector yesterday, benefiting from the potential for more M&A activity and a stronger commodity.  January crude improved $1.18 at $70.69 a barrel, its first increase in ten days.  Crude benefited from the potential for increased demand coming from the better-than-expected increase in November industrial production; an upwardly revised 2010 economic outlook from Germany and OPEC boosted its 2010 demand forecast. 


The Healthcare (XLV), especially managed care stocks (HMO +0.8%) continued to benefit from expectations for a more watered down reform bill out of the Senate. 


The Consumer Discretionary (XLY) was the third best performing sector yesterday.  The XLY outperformed although the retail group was one of the worst performers yesterday with the S&P Retail Index down 1.2%.  The retail sector was dragged down by Best Buy.  While BBY reported better-than-expected fiscal Q3 EPS, the quality was low.  In addition, the top line was disappointing and it now expects a lower fiscal Q4 gross profit margin due to a continued negative mix shift.


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 15 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading higher.


In early trading today, crude oil rose for a second day before a report forecast to show that U.S. crude inventories declined last week. The consensus believes that the Energy Department will likely report that stockpiles dropped 2 million barrels for the week ended December 11.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.91) and Sell Trade (74.30).


In London Gold is trading higher by 1.0% to $1,134.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,090) and Sell Trade ($1,149). 


According to Bloomberg copper rose in London on the speculation of interest rates will remain low in the US.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.12) and Sell Trade (3.26).


Howard Penney

Managing Director














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



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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




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


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