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He Who Sees The Light?

If you didn’t know why everything “reflation” has been getting crushed for the last 3 weeks, now you know…

 

In a refreshingly objective prepared statement today, Ben Bernanke said the Federal Reserve will raise the discount rate “before long”…

 

Make no mistake folks – this is an explicit change in the Fed’s language. I have been saying for some time now that the current language of “exceptional and extended” was both unsustainable and unreasonable. Apparently the Greenspan Group-thinkers are starting to see the light.

 

My immediate term downside target in the SP500 is now 1044. I am not in the camp that a Fed hike (or implied hike due to the change in the language) is going to crush stocks to smithereens. I simply think they are going lower, for now.

 

Goldman Sachs has set unreasonable expectation that the Fed is going to maintain a zero percent rate policy in perpetuity (until 2012).

 

As Shakespeare said, “expectations are the root of all heartache.”

KM

 

Keith R. McCullough
Chief Executive Officer

 

He Who Sees The Light? - bernspan

 


R3: SNAP Participation Growth Slowing

R3: REQUIRED RETAIL READING

February 10, 2010

 

We’ve been tracking food stamp usage as a proxy for the low income consumer and the trends have been quite alarming for just over two years.  However, the recent monthly data (through Nov ’09) suggests a slight change on the margin in the year over year growth trajectory of SNAP participation.  

 

 

TODAY’S CALL OUT

 

So you may be scratching your head with the title. What the heck is SNAP? SNAP is the Supplemental Nutritional Assistance Program, formerly known as the Federal Food Stamp program. We’ve been tracking food stamp usage as a proxy for the low income consumer and the trends have been quite alarming for just over two years. However, the recent monthly data (through Nov ’09) suggests a slight change on the margin in the year over year growth trajectory of SNAP participation. Slowing growth in the number of Americans receiving benefits is flat out positive for our country. The flip side here is that this may be yet another factor in a slowing trend for those retailers (DG, FDO) that cater to consumers relying on SNAP. This is definitely something to watch. Take a look at the shorter and longer term trends below-

 

R3: SNAP Participation Growth Slowing - SNAP and FDO and DG

 

R3: SNAP Participation Growth Slowing - Food Stamps Historical

 

 

LEVINE’S LOW DOWN 

  • In an effort to source some creativity from new places, Bloomingdales flagship 59th location has conducted open casting calls for designers. However, the designers are not being sourced for apparel but rather to decorate the store’s prime window displaces. So far the company has recruited two different design bloggers to create window displays. The current Helmut Lang windows were designed by a DIY blogger who authors a site called P.S –I Made This.
  • Despite the push by marketers to tap into the “real” opinions and views of consumers via social media, a recent study by the Edelman Group may suggest this “authenticity” isn’t as pervasive as it seems. According to the Edelman Trust Barometer, the number of people who view their friends or peers as credible sources of information about companies dropped from 45% to 25% since 2008. Other information sources such as TV, radio, and newspapers showed substantial declines in their “trust” levels as well. The key conclusion from the study goes on to suggest that that American consumer is “scarred” from the last 18 months and is now much less willing to trust a single source of information when making a purchase decision.
  • After we highlighted Wal-Mart’s efforts to consolidate its vendor base and narrow its SKU count in the CPG aisles, Gildan confirmed that the same approach it being taken in apparel. In the case of GIL, they are one of the key beneficiaries of these strategic moves with their underwear program presented under the Starter brand name.

 

MORNING NEWS

 

Target enables customers to redeem gift cards through their mobile phones - To redeem a gift card, one must remember to bring it to a store. Not anymore at Target Corp., where consumers at any of its 1,740 stores need only remember to bring their mobile phones. Target shoppers can save gift card information to their Target.com accounts, either through Target.com or the mass merchant’s mobile site m.Target.com. When at a register, a customer with an Internet-enabled phone can access her card information, which pulls up a 2-D bar code. A clerk scans the bar code on the phone’s screen and the amount is taken off at the register. “The addition of Mobile GiftCards to our suite of mobile shopping solutions further simplifies the Target experience for our guests,” says Steve Eastman, president of Target.com. Target is among the first American retailers to deploy the necessary scanning hardware to scan two-dimensional bar codes, which are popular in Japan. Larger retailers like Target using 2-D bar codes could create a trend in the U.S., some experts say.  <internetretailer.com>

 

Walt Disney Japan Buys Retail Networks - All shares of Retail Networks Co., operator of Disney Stores in Japan, were recently acquired by The Walt Disney Company, Japan. RNC was a wholly owned Oriental Land subsidiary. In the recent acquisition, RNC will continue to run Japan's Disney Stores, but now as a wholly owned Disney subsidiary, beginning on April 1. Financial details were not disclosed.

Oriental Land is the operator of Disneyland Tokyo. <licensemag.com>

 

Marc Jacobs Sues Ed Hardy - Marc Jacobs has filed an infringe‑ment lawsuit against Ed Hardy parent company Nervous Tattoo Inc. over a handbag design. The complaint, filed by Jacobs’ Marc Jacobs International, centers on an Ed Hardy handbag the Jacobs firm claims infringes on its pending Scrambled trademark and the trade dress associated with its Pretty Nylon tote. According to court exhibits, the Ed Hardy bag at issue is a quilted tote with the brand’s name in stitched block print, features shared by the Jacobs Pretty Nylon bag. The Jacobs bag has been available since early 2007, according to the complaint. Attorneys for Jacobs wrote that the tattoo-based brand’s bag makes use of a trade dress that is “confusingly similar” to their client’s and that any infringement “has been intentional and willful, calculated specifically to trade off the goodwill that plaintiffs have developed in their successful Marc Jacobs Pretty Nylon tote bags.”  <wwd.com>

 

Bergdorf's Opens Children's Department - When it comes to children’s wear, Bergdorf Goodman isn’t kidding around. A 1,200-square-foot shop on the seventh floor for infants to size 6, with a floor-to-ceiling tree house, opened Tuesday. It’s called Little BG and displays a mix of traditional and contemporary styles and designer brands, which suggest you’re never too young to be chic. For a relatively small department, there’s a wide range, from suitings to casual sportswear, as well as Steiff mohair stuffed animals, sterling silver gifts from Monica Rich Kosann, rattles, rocking horses and keepsake boxes. The department is particularly comprehensive in layette, with a collection of hand-embroidered footies and playsuits made from soft Pima cotton, Italian-made cashmere booties, onesies and receiving blankets, and Moses baskets and gift sets.  <wwd.com>

 

25% of the top 100 retailers have no formal Facebook presence, says study - 

A quarter of the top 100 retailers in the Internet Retailer Top 500 Guide have no formal Facebook presence and another quarter have fewer than 10,000 fans, according to a new study from customer satisfaction measurement firm ForeSee Results Inc. That means that those retailers are missing opportunities to engage consumers, says the report, since of the 69% of online shoppers who say they use social media sites 56% follow at least one retailer on at least one social network. Shoppers who interact with a company on a social media site report being more satisfied, more committed to the brand and more likely to make future purchases from that company. The study found that 49% of respondents who become a fan of, or follow, a retailer do so to learn about special deals and options, 45% to learn about products, and 5% for customer support. That’s exactly what marketers want to hear from consumers, says Ertell. <internetretailer.com>

 

E-retail spending finished flat for 2009, comScore says - A strong holiday season kept online retail from finishing 2009 in negative territory, and offers hope for a better year for e-retailers in 2010, web measurement firm comScore Inc. said in a report released today. E-retail sales trailed the prior year for most of 2009, but year-over-year gains of a few percentage points in November and December allowed e-retail to finish the year at $129.8 billion in sales, essentially unchanged from $130.1 billion in 2008. The holiday season comeback “does suggest that the tides of consumer sentiment are beginning to turn and that 2010 may be a healthier year for retail e-commerce,” noted comScore’s report, “The 2009 U.S. Digital Year in Review.” Despite the fall-off from growth rates that were consistently in double digits before slipping to 6% in 2008, the web remains a relative bright spot for retailers, comScore says. “New buyers continue to enter the channel, and as average spending per buyer rebounds off its 2009 lows, the e-commerce channel should return to healthy growth rates,” the report says.  <internetretailer.com>

 

Sales at Wholesalers Climb, Stockpiles Decrease -  Sales at U.S. wholesalers climbed in December for a ninth consecutive month, leading to an unexpected drop in stockpiles that may keep spurring orders. Purchases increased 0.8 percent after a 3.6 percent gain in November, the Commerce Department reported today in Washington. Inventories fell 0.8 percent following a revised 1.6 percent increase that was the largest in more than five years. A record inventory drawdown last year has opened the door for factories to pick up production, leading a recovery from the worst recession since the 1930s. Another report showed job openings climbed in December for the first time in three months, signaling employers are gaining confidence the expansion will be sustained in coming months.  <bloomberg.com>

 

U.K. January retail worst in fifteen years - Despite the Christmas sales which boosted the UK's fashion retailers, January saw the lowest sales growth in fifteen years. UK retail sales values fell 0.7 per cent on a like-for-like basis from January 2009, when sales had risen 1.1 per cent. On a total basis, sales rose 1.2 per cent against a 3.2 per cent increase in January 2009. The snow and terrible weather hit the retail sector, especially discretionary items. Over the month, clothing and footwear showed gains on a year ago, but other sectors, like homewares and furniture showed declines.  <fashionunited.co.uk>

 

European Outdoor Group Restructures Board - Members of the European Outdoor Group (EOG) elected Monday a new president and agreed to restructure their board. “As the industry itself changes, the European Outdoor Group has felt it necessary to restructure to ensure the appropriate flexibility to accommodate the requirements and demands of its growing membership and the industry itself,” said Mark Held, secretary general, of the EOG. From the existing EOG Board, Albrecht von Dewitz of Vaude, announced his decision to step down from the Board. Rolf Schmid of the Mammut Sports Group, has stepped down as president and Claes Broqvist of Odlo, has stepped down as vice president. Both Schmid and Broqvist will remain on the board as ordinary members and this will aid continuity and ensure the EOG retains experience. Bernd Kullmann of Deuter has been elected as vice president and Jean-Marc Pambet of Salomon and Eddy Codega of C.A.M.P. have formally joined the board.  <sportsonesource.com>

 

Education costs top consumer price increases since 1990 - Prices paid by urban consumers in 2009 for a sampling of goods and services increased the most since 1990, especially for items heavily influenced by government policies. The cost of education increased by more than 200 percent during the 20-year period, followed closely by the cost hikes in health care and fuel, according to data gathered by the Bureau of Labor Statistics for the Consumer Price Index. The index, which will be released for January next week, measures buying habits of urban wage earners and clerical workers. The index is used as an economic indicator -- to measure inflation, for example, and as a means of adjusting the value of a dollar. On the other side, the cost of personal computers declined by nearly 90 percent, leading the list of price drops on items tracked by the Bureau of Labor's CPI index. Other large drops were seen in the costs of TV sets, audio equipment, toys and photographic equipment. The cost of all items in the index increased by more than 71 percent from 1990 to 2009, the American Institute for Economic Research analysis of CPI data shows. <indystar.com>

 

Gallup Economic Weekly: No Super Bowl Boost - No change in economic confidence, job creation, or consumer spending last week. Falling stocks, a lower unemployment rate, winter storms, and even the approach of the Super Bowl and the parties that surround it seem to have had little impact on American consumers last week, as Gallup's Economic Confidence Index was unchanged at -29 -- virtually the same reading as those of the prior three weeks. Job market conditions also remained essentially the same, as Gallup's Job Creation Index was at 0 -- compared to -1 the prior week and 0 for the week ending Jan. 24. Even with parties to hold and paychecks in hand, self-reported consumer spending remained unchanged at an average of $60 per day last week.

R3: SNAP Participation Growth Slowing - G1

What Happened (Week Ending Feb. 7)

  • Economic Confidence was unchanged once again last week, as Gallup's Economic Confidence Index stood at -29. Forty-eight percent of Americans rated the economy "poor" and 11% rated it "excellent" or "good." Thirty-seven percent said the economy is "getting better" while 57% said it is "getting worse." Consumers' mood seems largely unaffected by weekly events these days, as economic confidence remains flat. Not only did the Super Bowl seemingly make no impact, but neither did the plunge in the stock market nor the global credit market concerns that spawned the plunge.
  • Job Creation inched back to 0 last week from -1 the prior week -- matching conditions of two weeks ago. Twenty-four percent of employees reported that their companies are hiring and 24% said their employers are letting people go. Both hiring and firing activities have shown virtually no variation so far in 2010 -- a situation that might not be so bad if overall job market conditions weren't so bleak.
  • Consumer Spending continues to disappoint. Last week's Super Bowl preparations -- particularly because it was a paycheck week -- might have encouraged consumers to increase their spending, at least on the margins. Instead, self-reported daily spending in stores, restaurants, gas stations, and online was flat, averaging $60 per day -- the same as the prior week and identical to spending during the same week a year ago. Evidence continues to mount that what turned out to be a "new normal" for spending during most of last year may also characterize consumer spending during the first part of 2010 -- if not longer.

R3: SNAP Participation Growth Slowing - G2

 <gallup.com>


Fast Monkeys

“Never hold discussions with the monkey when the organ grinder is in the room.”

-Winston Churchill

 

If the early part of the 20th century had their organ grinders performing on the streets, the 21st century has CNBC. Given the repetitious nature of their consensus music, we must be very thankful. I don’t know what I would do without them.

 

Squeezing the monkeys has to be one of the funniest things to watch in modern day markets. After not focusing on sovereign debt when they should have, the manic media quickly becomes a perceived expert on everything Greek - right at the bottom of both European currency and stock market moves.

 

What does squeezing the monkeys mean? Well, in a short seller’s market, a monkey is the contra-indicator. He is the last primate to jump out of his tree and try to short something that’s already been in free fall for all other monkeys to see. Monkey see, monkey do.

 

Typically, the monkey lives in the Zoo of Consensus. So, you can really think about Greece like a banana – after the stock market has collapsed for a -35% down move, enter CNBC’s Fast Money monkeys to clamor for the last feeding.

 

The actual squeezing of the Fast Monkeys is plainly obvious to anyone watching from outside the Cage of Consensus. This morning, for example, one of the top headlines on Bloomberg is, “Stocks Rise, Greek Bonds Soar on Speculation of German Bailout.” That’s called the monkeys getting squeezed.

 

Having covered most of my commodity and international equity market shorts at the lows, I can call these monkeys out for who they are. If you don’t know what they look like, tune into the ex-football player with the braided ponytail and Joey, who pronounces Asia’s largest country “China-rrr”, at 5PM on CNBC. The only thing funnier than watching monkeys at the zoo, is watching these ones stare seriously into the camera.

 

So what to do from here? I think this is pretty straightforward actually. Let the monkeys chase one another all the way back up into their trees. Once they get really quiet again, feeling shame, it will be safe to start selling again.

 

So far, Greece’s Athex Index is squeezing the monkeys for a +3.9% move in early morning trading. This is after seeing the Greek stock market jam them for a +5% up-move yesterday. At the same time, Greek bonds have dropped 55 basis points overnight  (the biggest one-day move for that local bond market since 1998) and credit default swaps (CDS) in Greece have dropped -17% in a straight line.

 

Even though Greek CDS has dropped from +428 basis points at the peak of the monkeys yelping (February 4, 2010), credit default swaps are still 357 basis points wide this morning. To put that in context, THE magic risk management line for CDS at both Lehman and Bear Stearns was 300 basis points. So the monkeys are rightly worried about having no more Bailout Bananas, but they forgot the most critical part of this risk management game – timing.

 

I wrote about this 3 months ago, because I saw no irony in both the Greek and Middle Eastern stock markets locking in their recent cycle-highs on exactly the same day. On October 14th, both Greece’s Athex and the United Arab Emirates DFM Indices locked in their highs. Since, both markets have lost over one-third of that peak-to-trough value, and it’s critical to observe their collective behavior.

 

As all of the monkeys are clanging for the Germans to bailout the Greeks this morning, stocks in the United Arab Emirates are trading down almost -1.5%. I don’t see any media outlet talking about it yet, nor do I hear any of the monkeys.

 

For 2010 to-date the Greek and UAE stock markets (inclusive of this morning’s moves), are down -10.3% and -9.1%, respectively. Since October 14th, now they are both down the exact same percentage, -32%. Irony or simplicity? Chaos or complexity? Or is there no or in Bailout Banana?

 

The most recent Piling of Debt Upon Debt data points this morning are as follows:

 

1.       Romania wants to sell another 1 Billion Euros in Euro denominated debt

2.       Dubai World (UAE) is asking for a “freeze” on their $22 Billion Dollars in debt

3.       Yale University edges out Harvard in issuing a massive muni-bond deal ($530M of 2025 notes)

 

Tying all of these things together can be frustrating, particularly if you don’t have a repeatable risk management process. You need to have your feet on the floor before the entire zoo wakes up. You need to do it every day, including snow days.

 

There is no glory. There are no lights. But at least no one can call you a Fast Monkey.

 

My immediate term support and resistance levels for the SP500 are now 1048 and 1078, respectively.

 

Best of luck out there today,

KM

 

LONG ETFS

 

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).

 

EWG - iShares Germany — We added to our position in Germany on 2/4/10 on 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.  

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.
 
SHORT ETFS

 

RSX – Market Vectors Russia We shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.

 

XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

 

EWW – iShares Mexico Mexico short is a solid compliment to our concerns about sovereign debt risks and our bearish intermediate term view on oil.

 

EWJ – iShares Japan We re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.

 

UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 

 

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.


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THE M3: SINGAPORE TOURISM NUMBERS, SHUN TAK AIRLINE JV SHUTS DOWN, RWS OPENING UPDATE

The Macau Metro Monitor.  February 10th, 2010.

 

VISITOR ARRIVALS TO SINGAPORE HIT 9.7 MILLION LAST YEAR channelnewsasia.com

The number of visitors to Singapore declined 4.3% to 9.7MM, but still exceeded forecasts of between 9 - 9.5MM visitors. Tourism receipts between January and December were S$12.4BN, similar to 2006 levels. Singapore Tourism Board said the business travel sector is picking up for 2010.


MACAU ASIA EXPRESS SHUTS DOWN macaubusiness.com

Jornal Tribuna de Macau reported that Macau Asia Express, JV between Air Macau (51%), China National Aviation Company and Shun Tak, is preparing for dissolution. Macau Asia Express lost its sub-concession with Air Macau because it failed to start operating before an August 21, 2009 deadline, due to its inability to find new investors.


RESORTS WORLD SINGAPORE (RWS) CASINO TO OPEN THIS WEEK The Star Online

Genting Singapore might open its Universal Studios theme park at RWS on Feb 11 and the casino on Feb 12. ECM Libra Research stated “With MBS slated to open between April and June, RWS will take the lion’s share of the Singaporean gaming market which we value at S$4bil. With two to four months lead time, avid Singaporean gamblers will opt to pay the annual levy of S$2,000 rather than pay S$100 per 24 hour visit and commit themselves to gambling at RWS.”


MAINLAND CRACKS DOWN ILLEGAL GAMBLING macaubusiness.com

The Ministry of Public Security stated that Beijing will commence a crack down on online gaming and underground casinos, including illegal banks, financial institutions and websites that support illegal operations that will last through August 2010. The campaign will concentrate on investigating major and important cases of online gambling, shut down domestic and foreign groups that organize online gambling, and severely punish the criminal participants .


US STRATEGY - BREES WAY

I never had a policy; I have just tried to do my very best each and every day. 

~Abraham Lincoln

 

Some might say that the positive bias in the S&P 500 on Tuesday was driven by the dampened RISK AVERSION trade following some positive news regarding the European sovereign credit contagion.  Yesterday was really all about the FEEL GOOD trade.  With the Dollar index and the VIX comfortable above the TREND and TRADE and not doing much of anything yesterday, the 1.3% rise in the S&P 500 is all about the New Orleans Saints winning the super bowl (it just took a day to sink in.) 

 

Seeing Bourbon Street come alive last night was amazing to watch.  I have never watched a super bowl parade until yesterday.  Four years after being ravished from hurricane Katrina, New Orleans is back and is a small metaphor for the USA.  It makes you FEEL GOOD knowing that someday the US recovery story will be well grounded under the right leadership!  Unfortunately, it still feels like the USA is in training camp. 

 

Sovereign credit contagion concerns have been among the strongest macro headwinds facing the global markets over the last few weeks, and while there no explicit EU backstop for Greece, the market had a more positive tone on the belief that there will be.  To use the line that Jerry Maguire made famous and Drew Brees is thinking - “show me the money.”

 

Yesterday’s performance made you FEEL GOOD about the global RECOVERY trade.  While some of the more defensive leaning sectors such as Healthcare (XLV) and Utilities (XLU) lagged the market, the two best performing sectors are leveraged to a global recovery - The Materials (XLB) and Energy (XLE).  A sell-side upgrade of the Industrials (XLI), rounded out the three top performing sectors. 

 

The Materials (XLB) sector was the best performing sector yesterday, on the back of dollar weakness.  The Dollar index has now declined for the past two days, declining 0.55% yesterday.  The Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64).  Within the XLB the Steel and Ag chemicals names were some of the strongest performers. 

 

Yesterday, the Consumer Discretionary (XLY) was the second sector to turn positive on TREND.  Helping the XLY was the above-consensus January global comps from MCD and some fairly upbeat commentary on the retail space.  A headwind for the XLY yesterday was the Homebuilders.  The strength is the housing recovery story is government sponsored and that sponsorship will start to disappear in 2Q10.  We remain very cautious on the housing recovery story!

 

The two notable underperformers yesterday were Technology (XLK) and Financials (XLF).  The banking group was a slight laggard, with both money-center and regional’s underperforming.  Yesterday we shorted CIT.  Josh Steiner wrote a great research note on CIT Monday after the media got too excited about John Thain entering the building.  In short, the cost of capital is a major issue that will not go away anytime soon.

 

As we look at today’s set up the range for the S&P 500 is 36 points or 2.0% (1,048) downside and 0.74% (1,078) upside.  Equity futures are currently trading above fair value, rallying on news Germany said to consider Greek aid beyond loan guarantees.  News about Europe (or Germany) offering Greece some life support continues to be a significant driver of the RISK AVERSION trade.  I still FEEL GOOD that the party in New Orleans will continue into Mardi gras next week.   The Hedgeye Risk Management models have the following levels for VIX – buy Trade (24.30) and Sell Trade (28.12). 

 

Copper is trading higher for a third day as January imports by China rebounded from last year.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.14).

 

The correlation for gold continues - gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,047) and Sell Trade (1,111).

 

The American Petroleum Institute reported that crude inventories rose to the highest since October last year and gasoline supplies reached the highest since March 1999.  Currently Oil is trading up slightly on the day!  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.02) and Sell Trade (77.27).

 

Howard Penney

Managing Director

 

US STRATEGY - BREES WAY - sp1

 

US STRATEGY - BREES WAY - usd2

 

US STRATEGY - BREES WAY - vix3

 

US STRATEGY - BREES WAY - oil4

 

US STRATEGY - BREES WAY - gold5

 

US STRATEGY - BREES WAY - copper6

 


VFC: Right for the Wrong Reasons

VFC likely has enough gas in the tank to make numbers on Thursday, but we think that the consensus is right for the wrong reasons. We are in line with the street at $1.46 for Q4, and would not be surprised to see a beat (in typical VFC style). Next year they HAVE TO do a deal in order to hit estimates, which they are likely to do. Both forward trends and yy compares look decent for 2 quarters until then. These guys are wizards at financially engineering their way out of a negative growth scenario, and managing expectations accordingly. I don’t have any ammo to suggest that this will break fundamentally.

 

Revenue: Should print a flat to slightly down top line vs. a -2.2% last year. Then they go up against a -6.5% and -11.4% in 1Q and 2Q, respectively. This happens at the same time a 3-5% FX drag turns into a 2-3% tailwind.  Also, VFC has accelerated store growth and added almost 90 retail stores over the past 4 quarters, which naturally boosts sales as mix shifts to fully captured-retail sales instead of shared wholesale. Putting it into numbers, VFC grosses about 1.5mm annually per store, with about $400k in the fourth quarter. All said, we’re looking at a 1.5%-2% boost in revenue simply from the addition of VFC retail. So we’re looking at a boost from retail and FX and even a point in growth from acquisitions – which is in consensus numbers.  I’m not sure that the consensus knows why it’s right. But that might not matter.

 

Margins: Gross Margin compares are easy in 4Q and ridiculously easy in 1Q. And yes, both retail and FX will start to help. The consensus numbers only have a 1pt GM rebound in 1Q – even though they face a -3pt compare vs. last yr. Considering how FX was blamed for a good portion of 1H 08’s declines, it alone should get them a point in recovery. As guided, nothing major on SG&A, though higher retail costs will pinch a bit. I actually like how they’ve been investing in SG&A despite downturn over past 6 quarters. This makes them either careless, or good, proactive managers. They’re the latter.

 

Balance Sheet/Cash Flow: Inventories have been tight in 2009 and should continue in Q4 and 2010. Capex coming down this year to 1.5% of sales. Good near term. But can’t go any lower. It will need t go up next year, which will pinch cash flow later in the year. For now it’s a wash.

 

VFC: Right for the Wrong Reasons - 1

 

VFC: Right for the Wrong Reasons - 2

 

VFC: Right for the Wrong Reasons - 4


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