Inflationary Compares

With the December 2009 CPI now in the history book, the inflationary pressures following the collapse of oil prices in 2008 has worked its way through the system, leaving annual CPI inflation close to 3%. 


Importantly, what follows in the months ahead will be still higher annual inflation, with the pace picking up in response to the weak dollar policy of the “WE SEE NO BUBBLES” administration.  The 2009 weakening of the U.S. dollar resulted in a spike in oil and energy prices, as a well as in other dollar-denominated commodities.  Our 1Q2010 theme “RATE RUN-UP” is based on inflation stemming from 2009 monetary policy decisions, not from stronger economic demand in the USA.


The increase in the December CPI was primarily due to the Energy index, which rose 18.2% in 2009 after falling 21.3% in 2008.  The December CPI confirms some of the key issues facing the consumer.  The increase in the Energy index was caused by the gasoline index, which rose 53.5% in 2009 after declining 43.1% in 2008. The food index, which rose 5.9% in 2008, fell 0.5% for the 12 months ending December 2009, the first December-to- December decline since 1961.  The December CPI report was the first time since June 2009 that food-at-home prices rose faster than food-away-from home, and both increased for the month.  


Given the underlying reality that the economy is being propped up by the Obama Administration and a more serious inflation problem than is generally expected, the risks to reporting a trend towards higher-than-expected inflation and weaker-than-expected economic growth is growing.


Howard Penney

Managing Director


Inflationary Compares - bb



An analyst jacked up her Q4 estimates to unrealistic levels.



We were fans of WYNN and its Q4 outlook.  Expectations were creeping up along with the stock price and today Bernstein dropped a bomb.  Their Revenue and EPS estimates went to $878 million and $0.46 up from $771 million and $0.13, respectively.  Consensus is $0.10 and $781 million.  That’s quite an outlier.  Why they still have a market perform rating and a $64 price target on the stock with those estimates is a another issue.


In our 1/8/09 note we discussed higher numbers for WYNN.  While there could be upside to our $818 million revenue estimate and our $204 million EBITDA estimate, we think Bernstein is over the top, potentially setting the stage for a disappointment come earnings day.  EPS is less important for WYNN but our projection there is $0.17. 


Now that Q4 expectations have been ratcheted up the focus should be on the forward numbers.  The Baccarat business in Vegas and Macau has been off the charts.  Is it sustainable?  We worry about the sequential slowdown in the Chinese economy, the waning federal stimulus, and the Chinese stock market.  These macro variables could deflate the baccarat VIP “bubbles” in both Las Vegas and Macau.


MCD is scheduled to report December same-store sales numbers in conjunction with its 4Q09 earnings results before the market opens on Friday.  Contrary to the last two months, there should not be any significant calendar shift/trading day adjustment as December 2009 included the same number of weekends as the prior year; though Christmas did fall on a Friday in 2009 versus a Thursday in 2008.  It is important to remember that the reported numbers in December 2008 did include a calendar shift, which negatively impacted comparable sales growth by 0.5% to 3.2%, varying by area of the world.   


Taking that into consideration, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be GOOD, NEUTRAL, or BAD results based largely on 2-year average trends. 


U.S. (facing +5.0% comparison from last year; calendar shift hurt result by 0.5% to 3.2%): 

MCD removed the Double Cheeseburger from the Dollar Menu in December 2008 and raised the price to $1.19 (the Double Cheeseburger was replaced by the McDouble on the Dollar Menu). The YOY pricing favorability associated with this menu change went away in December 2009.

GOOD: Any positive result would reverse the prior two months of declines.  Looking at the October and November results together to normalize the impact of the calendar shift in both months, a positive result in December would signal a slight acceleration in 2-year average trends.  For reference, a 0.5% or better would point to a return to 3.0%-plus 2-year average trends on an underlying basis.  Although 3%+ 2-year average trends are not that impressive for MCD, it would imply a pick-up in trends relative to October and November.


NEUTRAL:  -1% to flat implies 2-year average trends that are in line with what we saw in October and November on a normalized basis.  Like last month, this range of results, though neutral from an investor sentiment perspective as it relates to expectations, is not a favorable sign for current trends.  Before October, MCD had not reported a decline in U.S. same-store sales growth since March 2008 so three consecutive months of declines would not be good.  Prior to November, MCD had not reported consecutive monthly declines since early 2003. 


BAD: Below -1% would signal a slight deceleration in 2-year average trends from October and November.  MCD has not reported a monthly comparable sales decline of greater than 1% since March 2003.


Europe (facing a relatively easy +5.4% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +6% would signal a sequential acceleration in 2-year average trends from November.  To recall, November sales trends in Europe were not good as 2-year average trends decelerated rather significantly on a sequential basis from October (even after adjusting for the calendar shift).  MCD attributed the slowdown to continued weakness in Germany and more broadly, to the sluggish economy.  A +7% or better is needed to show that the November weakness was only a 1-month occurrence.


NEUTRAL: +5% to +6% would imply that 2-year average trends are about even with November levels.  Like in the U.S., this range is neutral relative to expectations, but would point to continued softness in top-line trends in Europe relative to results for the better part of 2009.


BAD: Below +5% would highlight that trends have not improved in Europe, but instead, have actually decelerated on a 2-year average basis from the already depressed November level.


APMEA (facing a relatively easy +5.7% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +4.5% would signal that 2-year average trends have remained strong and actually accelerated sequentially from October and November on a normalized basis.


NEUTRAL: +3% to +4.5% would imply underlying 2-year average trends that are about even with what we saw in October and November on a normalized basis.


BAD: Below +3% would point to 2-year average trends that have slowed somewhat from the prior 2 months and would likely be a sign of continued weakness in Japan and China.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

R3: Peak of the Earnings Revision Cycle?


January 19, 2009


We’re seeing signs that the end of the earnings revision cycle may be near.





We think that 2010 will be the year we shift away from the group call, and towards the individual company/stock call. The first three weeks of the year are not particularly supportive of this view, but seem to be setting up for the delta on revisions to finally be hitting peak.


Why do we say this? Simply put, we’re seeing earnings revisions decelerate and stock performance erode on the margin at the same time we’ve got an acceleration in expected EPS growth approaching peak growth on near-peak multiples.


Remember that back in March, we had trough multiples on trough earnings. Ten months later, we’re close to the opposite.


Could there be another 5% hidden in there? 10%? Yeah…I guess. But we’re definitely past the 7th inning stretch.  As the 9th inning approaches, we’d better have done our analysis on which team can win a championship regardless of a Macro tailwind.


R3: Peak of the Earnings Revision Cycle? - 1


R3: Peak of the Earnings Revision Cycle? - 2




  • After acquiring leather goods brand Lambertson Truex from bankruptcy this past summer, word has it Tiffany is nearing the brand’s relaunch. The new line is expected to be shown to the press in April and is likely to hit stores in September. This will mark the Tiffany’s first efforts in the luxury leather goods arena.
  • As one of the few brands still without functional e-commerce, Carters is on track for its .com launch in the first half of 2010. While management is conservative with expectations for sales and profits coming from the direct business, we can’t imagine why over time this won’t become a meaningful contributor to both Carters and Osh Kosh. We wonder if baby registry is also on the horizon…
  • Unlike other off price retailers that have been reporting consistently strong results, Burlington Coat Factory seems to have been hit hard by unseasonably warm November weather. After posting positive same store sales for September and October, the company finished the quarter with a 5.2% decline. Management attributed the weak results to warm weather patterns in November. Given that scenario, we wonder how much sales picked up in December/January when the cold freeze swept across the country. Management did not offer any insights, but given the company’s “coat” heritage it would not be surprising for the trends to have changed dramatically in the last 3-4 weeks.




Carlyle Planning Moncler IPO Next Year, Weighing Acquisitions - The Carlyle Group, the world’s second-largest private-equity firm, is planning an initial public offering of skiwear maker Moncler next year after adding stores and boosting sales. “We’re doing a number of things that would allow us to hold an IPO” of Moncler, Marco De Benedetti, head of Washington-based Carlyle’s private equity business in Italy, said in an interview at his Milan office. “That may be in a year or so.” Moncler “is a business that’s caught the attention of buyers, but we’re not in negotiations to sell it right now.” Carlyle bought a 48 percent stake in Milan-based Moncler in 2008 and has helped the brand add more than 30 stores, compared with four previously. Sales probably grew 23 percent to about 370 million euros ($532 million) in 2009, the company said. Carlyle is now looking at potential investments in the fashion industry that could be merged with Moncler before a sale. “We’re looking at potentially buying a brand we could add to Moncler, something that could be integrated” into the label, De Benedetti said. The ideal target would have sales of as much as 100 million euros, he said.  <>


Australia's Rebel Group IPO plans on hold - Private equity firm Archer Capital has stalled plans for an initial public offer of shares in Australian sports retailer Rebel Group due to market concerns, a source with direct knowledge of the situation said on Monday. Rebel Group has been valued at up to $735 million. The decision could dim the outlook for other IPO hopefuls in the retail sector, such as Pacific Equity Partners' REDGroup Retail, which owns Australia's two largest bookstore chains, Borders and Angus & Robertson. The source, speaking on condition of anonymity because the matter was confidential, highlighted that the market prices of some recent retail offers remained below their issue prices. Rebel Group, which includes the Rebel Sports and A-Mart All Sports sporting goods chains, was formerly known as Ascendia Retail. Local media put the value of the group at up to A$800 million ($735 million) and said it had planned to list by March. <>


Gap hires a Limited Brands exec as its chief information officer - Tom Keiser has joined Gap Inc. as executive vice president and chief information officer. Keiser is responsible for improving Gap’s global technology platforms. He reports to Gap chairman and CEO Glenn Murphy. Keiser had been executive vice president and chief information officer at the Limited Brands, operator of such multichannel retailers as Victoria's Secret and Bath & Body Works. “I’m excited about joining Gap Inc. as the company executes on its plan to further expand online and internationally,” says Keiser. “And I look forward to leading the I.T. team to ensure we have the most effective infrastructure and platform to support this growth strategy.” <>


Gilt Groupe names communications and brand execs - Online luxury retailer Gilt Groupe Inc. has hired Conde Nast Digital executive Jennifer Miller as its vice president of corporate communications and named Christian Leone, Gilt Groupe's vice president of marketing and communications, as its vice president of brand relations. Miller will focus on developing relationships with the consumer press, engaging consumers directly and enhancing employee communications. She previously was executive director of public relations for Conde Nast Digital where she oversaw the public relations team for the company’s web-only brands such as and Leone is responsible for building and developing relationships with brands. He reports to Alexandra Wilkis Wilson, the company’s founder and chief marketing officer. <>


Nike Launches Golf Clubs Without Tiger Woods  - Nike Inc. will launch new golf clubs that are not directly linked to Tiger Woods. Instead, Nike said its Victory Red STR8-FIT Tour fairway woods, which will go on sale Jan. 28 for $299, were designed with input from all 13 U.S. golf endorsers. Promotional materials make no mention of Woods, whose tradition of wearing red shirts on the final day of golf tournaments inspired the Victory Red name, according to the Wall Street Journal. The materials note that the clubs were tested in tournament play by  Lucas Glover, who claimed his first major victory last year when he won the U.S. Open Championship. <>


Gildan Activewear Missing Six Employees in Haiti - Gildan Activewear Inc. is unable to account for six of its 44 employees in Haiti, Chief Executive Officer Glenn Chamandy said in a memo to employees. As reported, one of Gildan's three contractor facilities in Haiti was "substantially damaged" in the magnitude-7 earthquake that struck Tuesday. In an internal memo, the Montreal apparel maker said its immediate efforts have been focused on trying to provide assistance to the operator of the destroyed facility, Palm Apparel. As the earthquake occurred when the plant was in full production, a large number of workers have been trapped under the collapsed building structure. The company said the six Gildan employees it hasn't yet been able to reach in Haiti may be trapped in the building rubble.   <>


Macy’s CEO elected National Retail Federation chairman - Terry J. Lundgren, chairman, president and CEO of Macy’s Inc., was elected this month chairman of the board of the National Retail Federation, a major trade association whose e-commerce arm is Lundgren succeeds Myron E. Ullman III, chairman and CEO of J.C. Penney Co. Inc.

Other officers elected during NRF’s recent annual convention include:

  • Stephen I. Sadove, chairman and CEO of Saks Inc., first vice chairman
  • Kip Tindell, chairman and CEO of The Container Store, second vice chairman and chairman of NRF’s awards and nominations committee
  • Robert M. Benham, president and CEO of Balliet’s LLC, corporate secretary
  • Roger N. Farah, president and chief operating officer of Polo Ralph Lauren Corp., chairman of NRF’s finance committee.

Each officer will serve a two-year term.

Also elected to the NRF’s board for three-year terms were:

  • Marty P. Albertson, chairman and CEO, Guitar Center Inc.
  • Daniel Lalonde, president and CEO, Louis Vuitton North America Inc.
  • Laurent Milchoir, CEO, Etam Group.



EMC Sports Acquires Soffe Accessory Business - EMC Sports Inc., a division of Eric McCrite Co., has purchased from New Balance the Soffe Accessory business, patents and licenses. The patented hair and sleeve scrunchies are sold by major retailers and team dealers. Since 1989 Eric McCrite Co. said it has been distributing “Soffe” and other brand name sporting goods, at wholesale, to team dealers, retailers and decorators. Eric McCrite, at EMC Sports, Inc., said, "When we first looked at this business we thought the majority of sales came from cheerleading, but that is not the case, the bulk of the sales are with the sports related sleeve and hair scrunchies. Our basketball, lacrosse, softball and volleyball scrunchies in 12 team colors are what drives the business with cheer and dance following close behind." <>


Crabtree & Evelyn to Exit Bankruptcy - Bath and body soap marketer Crabtree & Evelyn Ltd. plans to emerge from bankruptcy by the end of this month. The Woodstock, Conn.-based company set the timetable Thursday when a Manhattan bankruptcy court approved its first amended reorganization proposal. After coming out of bankruptcy, the company will close on a $26.3 million exit loan from its parent, Malaysian firm Kuala Lumpur Kepong Berhad. As part of its restructuring, the retailer exited 35 retail sites, leaving 91 locations in operation. It also has a new e-commerce platform,  <>


Caccia Dominioni Said Leaving Benetton -  Benetton chief executive officer Gerolamo Caccia Dominioni is expected to leave his post in April at the end of his three-year contract, according to sources in Italy. A spokesman at the Italian apparel manufacturer declined comment Monday. Caccia Dominioni was previously the London-based vice chairman and chief operating officer of Warner Music International, a division of Warner Music, and he succeeded Silvano Cassano as Benetton ceo in 2007. Cassano left the company after clashing with the Benetton family over international strategy. Alessandro Benetton holds the title of executive vice president, and his father, patriarch Luciano Benetton, that of chairman. Sources say the involvement of the family could also have led to friction with Caccia Dominioni. As for the future, the question is: Could another nonfashion executive take Benetton’s helm? Cassano is a former Fiat executive and his predecessors Luigi De Puppi and Carlo Gilardi came from the worlds of home appliances and banking, respectively.  <>


Consumer Prices Rise in December - Retail apparel prices rose a seasonally adjusted 0.4 percent in December compared with November and advanced 1.9 percent compared with a year earlier, the Department of Labor said today in its Consumer Price Index. Women’s apparel prices rose 0.6 percent month-to-month and increased 2.9 percent year-over-year. Men’s apparel prices declined 0.3 percent in December, but rose 0.5 percent in 12-month comparisons. The overall CPI was up 0.1 percent in December, and rose 2.7 percent compared with a year earlier. The so-called core prices, which excludes the food and fuel sectors, also rose 0.1 percent for the month and advanced 1.8 percent year-over-year. Discounts in December weren’t as steep this year as in previous year’s, which helped drive prices up, said Jessica Penvose, an economist with the Labor Department. <>


Gallup Economic Weekly: Job Creation Remains Weak - Economic confidence falls, but consumer spending continues to exceed year-ago comparables. Gallup's Job Creation Index suggests that the job situation deteriorated last week with slightly fewer companies hiring while slightly more were letting employees go. Add in the disappointing December jobs report, and it is not surprising that economic confidence also worsened last week. Still, consumer spending continues to be encouraging. Although flat compared with the prior week, it remains slightly above last year's same-week comparables, as upper-income Americans who are less affected by job market conditions are spending a little more now than they were at this time last year. Job Creation as reflected by U.S. workers' reports of their own employer's hiring/firing activities deteriorated last week. Gallup's Job Creation Index was at -2 -- down from the +1 of the prior week. Hiring was down slightly as 23% of employees reported their companies were hiring compared with 24% the prior week.of U.S. workers said their company was hiring and 14% said their company was letting workers go. Economic Confidence took a tumble last week as Gallup's Economic Confidence Index worsened to -29 -- 7 points worse than the -22 of the prior week. Economic confidence is essentially where it was last month after showing improvement during each of the past three weeks. nearly a dollar from levels a year ago.Consumer Spending was unchanged last week with self-reported daily spending in stores, restaurants, gas stations, and online averaging $68 -- the same as during the prior week and up a modest 6% from the same week a year ago. <>


While tight elections are always just that - tight - we thought it was worthwhile to point out that over the weekend the Intrade contract on this election sank like a stone. The expectations that Democratic candidate Martha Coakley will win fell from over 60% going into the weekend to 23.6% this morning.


As our prior post explains, the outcome of the Massachusetts Special Election has significant ramifications for the performance of the Financials sector, as it will likely play a major role in determining the outcome of Financial regulatory reform.


Joshua Steiner, CFA





He Who Sees No Inflation

“A perfection of means, and confusion of aims, seems to be our main problem.”
-Albert Einstein
Is there inflation on Main Street America? If you want the right answer to that question, don’t ask the willfully blind in Washington. They have enough political issues to deal with right now and can’t handle this ugly truth.
What’s ugly is what you don’t see on CNBC. The participants in the USDA’s Food Stamp Program has almost doubled since He Who Sees No Inflation (Bernanke) took the helm. A shockingly high 11% of Americans are now on food stamps. Almost 1 in 4 American children are in the program. Creating a high-low society by starving American savings accounts of fixed income yield, and plugging them with food, energy, and medical care inflation seems to be our main problem.
On Friday we saw US Consumer Price Inflation (CPI) reported at +2.7% year-over-year growth for December. That’s not only a 6-month high, but a massive +480 basis point move off of what Bernanke labeled a deflation problem of “Great Depression” proportions. You have to be kidding me Ben. I thought you were “data dependent”?
Plenty a political pundit and Washington academic who has been prognosticating a benign CPI here in the US is seeing their inflation forecast blown out of the water once again. This isn’t new. These guys didn’t see inflation with oil at $150/barrel either. Newsflash: for Main Street, $65-85/barrel oil is still inflationary.
Both the energy and medical care services components of the December CPI report came in higher than the CPI average of +2.7%. Energy was up +18.2% and Medical Care Services were up +3.4%. Again, we can be willfully blind to these realities, but it doesn’t change the fact that year-over-year price inflation is here to stay for the foreseeable future. Inflation is the nasty price a citizenry pays when their government clips the value of their coins.
This isn’t just an American problem. It’s a problem for countries who are levering up their balance sheets with debt and debasing their currencies. The United Kingdom reported a record one-month pop in inflation this morning. At +2.9% year-over-year CPI growth, the UK hasn’t seen inflation accelerate this fast in 13 years. That’s a long time.
When asked about the numbers, this is what the UK’s Prime Minister, Gordon Brown, told reporters in London this morning: “I don’t think you should read too much into one month’s figures.”
Oh, ok. We trust you Mr. Big Government bailout. Sure…
Now, even though her headline inflation is a good deal lower than that of the US or the UK, China still took a +1.4% year-over-year inflation reading quite seriously and went ahead and raised interest rates for the 3rd time in 3 weeks last night.
China raised rates on 1-year bills to 1.92% and continues to show that they are willing to manage the inflation risk their citizenry faces, proactively. After all, in a state-managed economy, you don’t have to come up with a political dance to solve for a mathematical reality.
Stock markets around the world have obviously weakened on all of this accelerating inflation data. In a perfect world, one could argue that this price reaction makes sense. Then again, this world’s western political leadership is far from perfect. Paying the bankers a Piggy Banker Spread at the expense of fighting Main Street inflation obviously has an implied “confusion of aims.”
My immediate term support and resistance levels for the SP500 are now 1131 and 1151, respectively.
Best of luck out there today,

EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.
XLK – SPDR Technology
— We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 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.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
FXE – CurrencyShares EuroWe shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
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.

SHY - iShares 1-3 Year Treasury BondsIf 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.

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