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ROST: KM Stepping Up the Short -- Again

ROST: KM Stepping Up the Short -- Again

 

Keith dipped his toe back in the water again on ROST today, shorting a name that we’ve been on the cautious side on for a while. We remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve.  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.

 

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.  Tough to argue with that one…  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, 139 months out of 169 or 82% of the time.  In fact, of the 30 times the sales/inventory spread outpaced comps over 13 years, 5 have been since September of last 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. This is one of those names where we don’t need to see earnings collapse to be right, but rather simply stop going up.

 

ROST: KM Stepping Up the Short -- Again - ROST Comps

 

ROST: KM Stepping Up the Short -- Again - ROST Margins

 


Turkey in Perspective

In today’s Early Look (“Inflation is Popular”) Keith noted that Turkish inflation rose +9.6% in March year-over-year (but slowed for the first month in five).  While it’s true that inflation in Turkey is just one of the many inflationary signals we’re seeing across the globe, and rising inflation can be viewed negatively as it is a tax via rising prices on a country’s citizenry, chart 1 (below) shows that this level of inflation has held quite consistently since 2004. Further, this level of inflation is not inconsistent with that of an emerging market economy like Turkey.

 

Inflation has been one of the outcomes of Turkey’s Central Bank chopping 10.25 pp off its main interest rate since Nov. 2008 to weather the global economic downturn.  With rates held steady at 6.5% since Dec. ’09 and annual GDP growth of +6% in Q4, the Central Bank has issued concern over rising inflation, saying last month that it’s ready to raise rates if “increases in inflation expectations lead to a deterioration in price-setting.”

 

On 2/25 we put out a note titled “Why We Bought Turkey (TUR) Yesterday” in which we highlighted favorable upcoming GDP comparisons (chart 2).  To refresh, the intermediate term bottom in GDP of -14.7% in Q1 ’09 sets up for a very favorable comparison in Q1 ’10, and beyond. We’ve traded Turkey with the etf (TUR); according to Keith’s models TUR is trading well above its TREND line of support at $54.20 (chart 3) and the Istanbul Stock Exchange National 100 Index is up over 11% YTD.

 

Matthew Hedrick

Analyst

 

Turkey in Perspective - T1

 

Turkey in Perspective - T2

 

Turkey in Perspective - T3

 


FINANCIALS - THE XLF IS IN A BULLISH FORMATION

Our Financials analyst Josh Steiner has posted some important notes over the past few days.  I am summarizing some of his thoughts and highlighting two charts that warrant close attention.

 

First, at Hedgeye Risk Management, we think the Fed is behind the curve and that it's now just a matter of time before the Fed begins raising rates.  As Josh pointed out “while on the surface this would seem negative for Financials, in fact it has historically been a positive sector indicator.”

 

Second, headed into the 1Q10 earning season part of the industry is well positioned.  On Thursday, in a post entitled “XLF SECTOR THOUGHTS AHEAD OF 1Q EARNINGS”, Steiner states, “To summarize, we think the big banks, as a group, should fare better than the small banks in first quarter earnings. That said, going into 4Q earnings, the stocks were coming off a down 3.6% quarter for the XLF. This quarter, the XLF is coming off a +10.8% move to the upside with a more mixed profile. Margins should be better sequentially, but it looks as though reserve builds may be slightly higher than last quarter. Earning assets will be down comparably with last quarter and ASF marks should be slightly better.”

 

“On the small cap side, margins will be better, but credit should be worse, earning asset growth will accelerate to the downside and ASF marks will not be the tailwind to capital they were in 4Q09. Conclusion: we think much of the good news associated with earnings is already priced into the sector at large, but the big banks should outperform the small banks.”

 

Third, the XLF is in a BULLISH FORMATION and below are the current Hedgeye Risk Management levels on the XLF.

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - xlf1

 

On the margin front, the environment has clearly improved further for the sector.  As the following chart shows, the 2-10 yield spread - a good proxy for the sector at large - pushed higher to an average 280 bps in the first quarter, up 22 bps from the 259 bps average in 4Q09.

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - yield chart

 

FINANCIALS - THE XLF IS IN A BULLISH FORMATION - xlf

 

Howard Penney

Managing Director


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The Elephant in the Room

March’s ISM Non-Manufacturing Report on Business confirm just what we have been seeing on the inflation front: more acceleration to the upside.

 

The March ISM Non-Manufacturing survey came in at 55.4, up 4.5% sequentially and above consensus, which was at 54. Going back in time, this is the highest reading since May 2006! Similar to last week’s ISM Manufacturing report, this release screams inflation. Even the service industry, whose costs aren’t necessarily married to the price of commodities like their manufacturing counterparts, is expecting inflation to accelerate meaningfully in the near-to-intermediate future.

 

Naysayers and tellers of narrative fallacies will point to all the unemployment figures, slack numbers, and core CPI readings in order to keep alive their fledgling Depressionista narratives. That’s fine. They can miss the bus and be late to class all they want. Fortunately for us (and the bond and currency markets), we’ll be at our desks when the bell rings and global cost of capital will start to rise.

 

Here’s a current snapshot of the global inflation picture:

  • ISM Manufacturing for March just made another higher-high at 59.6 (versus 56.5 in February).
  • Prices Paid continue to ramp, coming in at 75.0 in March (versus 67 in February).
  • After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  • After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  • 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%.
  • Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD.
  • Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD.
  • Turkish inflation for March was reported at +9.6% year-over-year growth.

 

While we take some issue with the U.S. government's calculation of inflation (they’ve changed the calculation nine times since 1996), even federal economists have reported inflating prices this year. The January CPI came in at 2.6% and February reported at 2.1%. We expect March figures to accelerate even further. There will come a point in the next 3-6 months when He Who Sees No Inflation will no longer be able to be willfully blind towards inflation picture.

 

When you keep feeding the four-ton elephant in the room (which Bernanke is doing with his “extended and exceptional” emergency interest rate policy of ZERO percent), there will come a point where you can’t avoid bumping into it. We can only hope that he bumps into it soon and ready to reacts in a manner that takes into account the best interests of the citizens who actually feel in their wallets ALL the components of an accelerating CPI report. Unfortunately for America at large, Helicopter Ben has only raised the Fed Funds Target Rate once since taking over back in early 2006 (June 29th, 2006 to be exact). Let’s just say experience is not on his side.

 

The next FMOC meeting is scheduled for April 27th - 28th.

 

Darius Dale

Analyst

 

The Elephant in the Room - ISM Non Manufacturing

 

The Elephant in the Room - Fed Funds Target Rate


R3: Notable Athletic Trends in Advance of 'Sales Day'

R3: REQUIRED RETAIL READING

April 5, 2010

 

 

TODAY’S CALL OUT

 

With sales day on the near-term horizon, we released our first monthly Edge on Athletic Trends report capturing the latest market share trends by channel, category, and brand last week. Here are some of the highlights:

 

  • After a long period of underperforming, footwear consistently stood out as a top performer over the past month.
  • But over the past two weeks, athletic apparel and footwear have tracked retail in aggregate over the past 2-weeks, suggesting that weather trends are in fact influencing traffic – though all sales remain at a very healthy level.
  • We’re seeing Athletic Specialty sales trump Family and Mass channels – exactly what we should see at the start of the cycle we’re seeing develop.
  • Nike brand dominating. Jordan status quo. Converse raising yellow flags.
  • UA’s numbers will look weak until around the 1Q EPS report.
  • The Adibok story hinges on hope and prayer.
  • Columbia emerging as potentially good long idea – something to consider into next week’s earnings report.

 

R3: Notable Athletic Trends in Advance of 'Sales Day' - Footwear Apparel Athletic Specialty Chart

 

R3: Notable Athletic Trends in Advance of 'Sales Day' - Sporting Goods Table

 

R3: Notable Athletic Trends in Advance of 'Sales Day' - Retail Industry Chart

 

 

LEVINE’S LOW DOWN 

 

  • Due to overwhelming demand, a sample sale for American Apparel was shut down by police in London. After letting just 100 customers into the event, the unorganized crowd became restless and violent. As people in the crowd began to get crushed, the police stepped in and closed the entire event down. With so many controversial image problems, this yet another black mark for the brand.

 

  • According to Pew Research, in 2008, an estimated 49 million Americans, or 16% of the population, lived in a family household that contained at least two adult generations or a grandparent and at least one other generation. In 1980, this figure was just 28 million, or 12% of the population. The last time this high a percentage of the US population lived in a multi-generational family household was in the late 1950s. Most economist believe the recent recession is the key driver of families consolidating under one roof.

 

  • According to online private sale operator, Gilt Groupe, 7% of the company’s weekend sales are originated from the company’s iPhone app. Interestingly, only 3.8% of consumers used mobile devices to actually purchase goods on Cyber Monday, the busiest online shopping day of the year. It’s no wonder the company has already developed an iPad version of its mobile commerce interface. A bigger and better screen likely means far more shopping…

 

HEDGEYE CALENDAR

 

R3: Notable Athletic Trends in Advance of 'Sales Day' - Calendar

 

 

MORNING NEWS 

 

Chinese Labor Squeeze - Chinese labor squeeze could fuel higher apparel prices. A continuing shortage across China’s manufacturing zones, particularly in the lowest-paying jobs, appears to be showing no signs of letting up and could eventually lead to price hikes in Chinese goods as factories are forced to pay higher wages. Labor experts said that as the scarcity of labor increases, companies may need to choose between moving their operations further inland or pay more to attract workers to the Pearl River Delta and other manufacturing hubs. The shortage arose in part because of the government’s aggressive economic stimulus efforts.  <wwd.com/business-news>

 

Stats On Chinese Manufacturing - Nearly 83% of 202 foreign manufacturers in China said that their primary motive for locating there was to access the Chinese marketplace, up from 71% two years ago, according to a recent survey. Yet the survey also shows fewer foreign manufacturers consider China a good export platform for the rest of Asia because of rising labor costs and other factors. <sportsonesource.com>

 

Japanese Teens Seeing Budgets Tighten - Young people in Japan are some of the most fashionable on the planet, but teenagers and young adults are facing shrinking budgets for apparel and accessories. High school students’ average monthly allowances fell 11.4% in 2009 to $64.68. That’s the lowest level in 19 years. Allowances of university students fell 4%. <wwd.com/retail-news>

 

Carter’s Launches Two E-Commerce Sites - The children’s clothing manufacturer has launched two e-commerce sites, www.carters.com and www.oshkoshbgosh.com. The sites feature a shopping cart that collects items from both sites, enabling consumers to check out once. <internetretailer.com>

 

Haggar Clothing Co. Launches E-Commerce Site - Haggar Clothing Co. this week launched an online retail site where consumers can buy such items as pants, shorts, suit separates, outerwear and accessories.  <internetretailer.com>

 

Old Navy Posts a 287% Month-over-Month Traffic Increase in February - Old Navy attracted 6.34 million visitors in February, a 287% increase from February 2008, as it registered the biggest traffic jump among apparel and beauty products during the month, Nielsen NetView reports. <internetretailer.com>

 

Furniture Retail Orders Up - New retailer orders for furniture rose 4% in January compared with the same month last year, according to the Furniture Insights survey of residential furniture manufacturers and distributors conducted by the High Point accounting and consulting firm Smith Leonard. <hfbusiness.com/news>

 

Upper Deck and Tiger Woods Items - All the polls might reflect that Tiger Woods is at his lowest approval ratings, but the memorabilia market for Woods' items hasn't cooled in the same fashion. Upper Deck spokesman Terry Melia said that the company will sell range balls hit by Tiger with an autograph in a display case for $499, autographed Black TW Nike hats for $999.99, Tiger autographed 2010 golf cleats for $1,399.99 and the same style Nike Dri-Fit shirt Woods will wear on Masters Sunday autographed for $1,799.99. <cnbc.com>

 

Children's Trends: Zippers - Zippers are doing double duty this fall. No longer just functional, the metal fasteners are taking on a decorative role, snaked across uppers and cuffs and even twisted into rosettes. <wwd.com/footwear-news>

 

R3: Notable Athletic Trends in Advance of 'Sales Day' - boot

 


Inflation Is Popular

“In spite of the cost of living, it’s still popular.”

-Kathleen Norris

 

That’s what Kathleen Norris had to say about inflation in the Roaring 20’s. She was a romance novelist from California. Writing books between 1911 (“Mother) and 1941 (“The Venables”), Norris made more money than most female authors of her time. She was well known for her San Francisco perspective on living the upper-class lifestyle. To this day, inflation remains popular at the high end of America’s society.

 

After WWII, inflation has been a popular short-term market solution for easy money politicians. With the exception of the late 1970’s and early 1980’s, most of the revisionist economists advising Washington have been able to get away with pretty much anything on this front. The US government has changed the calculation for inflation 9 times since 1996, so we’ve pretty much made this popularity-fest permanent.

 

If you are wealthy and fully invested right now, inflation has to be popular with you. The politicized Federal Reserve is keeping interest rates at an “emergency” rate of ZERO percent, so that the bankers get paid while savers in America pay the bill. We call this the Piggy Banker Spread and the US government underwrites it. At +285bps wide this morning (10-yr yield minus 2-yr), it is within 0.08% of its all-time widest spread ever. Oink, oink.

 

If you are poor and fully committed right now, inflation is not popular with you. It’s your cost of living. You feel it at the pump. You feel it in your wallet. No matter where you go, there it is. Don’t even try thinking about saving either; you wouldn’t be making any money on those treasury bonds or cash-savings accounts anyway. So you may as well buy yourself another scratch bingo card and hope to live another day; the rest of us will buy iPads.

 

In the moment, Ben Bernanke is popular amongst many politicians and long-only market participants. Sadly, Greenspan was too. Since Volcker left, Washington has had zero credibility in proactively managing inflation risk.

 

Most mathematicians understand that the global economic system and the prices born out of it are leading indicators. Bernanke is a historian trapped in his own confirmation bias. If you are in the inflation ‘doesn’t bother my cab ride to work’ camp (only the cab driver’s margins), you won’t agree with this morning’s reality. Inflation is a leading indicator that is marked-to-market every day. Here are some global inflation readings to consider this morning:

  1. After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  2. After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  3. 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%
  4. Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD
  5. Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD
  6. Turkish inflation for March was reported at +9.6% year-over-year growth

Now if you aren’t living in Istanbul, you probably don’t see the inflation that 73 million people in Turkey do. If you wake-up on Park Avenue and take the US Government’s word for it, you probably don’t see the +18% food inflation that 1.2 billion people in India aren’t paid off to be willfully blind to ignore.

 

Wall Street is funny and sad altogether this way. While the revisionist historians are getting well versed on the sovereign debt chapters of Reinhart & Rogoff’s “This Time Is Different”, they don’t seem to be spending a whole lot of time getting what will be born out of Piling Debt Upon Debt Upon Debt - INFLATION.

 

For 7% of the price some of these analytical savants are willing to pay for an iPad, they should buy the book and focus on chapter 12. That’s where the boys show you the risk embedded in Reactive Fiat Currency Management. Inflation is not new. According to the Reinhart & Rogoff data, the 5-year moving average for all countries (for the years 1500 through 2007) is currently breaking out to the upside.

 

Now you might say that wage inflation in America is low, because in Friday’s hawkish employment report, it was. I have a simple question in response to that – what is a poor person in this country to do then as their wages remain low and everything they buy goes up in price?

 

I suppose this is why Ben Bernanke is overseeing the highest percentage of Americans living on food stamps since WWII (11%). Almost 1 in 4 American children are forced to eat off that same program. I don’t see any Piggy Bankers eating off those troughs and I doubt Kathleen Norris would write a best-selling romance novel about this either.

 

Even though we disagree with the conflicted and compromised government calculations, our forecast is that we are going to see a meaningful sequential acceleration in both global and US inflation for the months of March and April.

 

All the while, the Keynesians at Groupthink Inc. will be parroting what those who never see inflation until it’s too late always do: “This Time Is Different.”

 

Sadly, there is nothing different about this at all. This is the high-low society that politicians from Moscow to Mumbai have been paid to create as their political powers maintain an explicit mandate to keep inflation popular.

 

I shorted the SP500 for an immediate term TRADE on Thursday at 1180. My immediate term support and resistance lines are now 1170 and 1182, respectively.

 

Best of luck out there today,

KM

 

Inflation Is Popular - pic

 


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