Screenshots of the homepages of American media web pages versus the BBC and Al-Jazeera yesterday. Striking.
Screenshots of the homepages of American media web pages versus the BBC and Al-Jazeera yesterday. Striking.
R3: REQUIRED RETAIL READING
April 6, 2010
Sports Authority is accelerating square footage growth, in another step to dress the pig in lipstick for a 2H IPO. Good for most of the supply chain, incl NKE, UA, COLM, KSWS and even FL, DKS and HIBB. The problem is that we’d argue that TSA need not exist. Another ‘brilliant idea’ until it proves to be a disaster.
TODAY’S CALL OUT
We think the most notable recent nugget out of retail is that The Sports Authority noted it is looking to step up expansion in 2011/2012 with the opening of approximately 35 units each year. The company also noted it is stepping up its store remodel efforts as well as its marketing and advertising messages. TRANSLATION = TSA is dressing itself up for an IPO. Accelerating unit growth, better product/comp cycle, leveraging fixed costs for the first in 3+ years. Sound familiar? Yes, Dollar General. Do we really NEED more Sports Authority’s? Only to the magnitude that we needed Linens ‘N Things and Circuit City. But the reality is that this will help Nike, Under Armour, Columbia, North Face (VFC) and most other brands that sell into this channel. It also helps the competition in that a better cycle eases up on the need for incumbents (DKS, FL, etc…) to get aggressive on price. Ultimately, this will sound like a really good idea until we all wake up one day and it will prove to be disaster.
LEVINE’S LOW DOWN
The Democratization of Fashion - As crowdsourcing continues to gain force, consumers are having their say about specific designs and being compensated for them monetarily, with prizes, discounts or other recognition. The trend is huge in Holland, San Francisco, New York and Chicago. Crowdsourcing is largely underused in the apparel industry. Threadless.com, FashionStake.com, and Made.com utilize this tactic. Threadless.com lets consumers decide which designs it produces in graphic T-shirts. And when FashionStake.com bows this fall, shoppers will be able to offer their two cents about collections and buy stakes in designer collections that will lead to discounts, freebies and fashion show invitations. Launched last week, Made.com, a London-based designer furniture site that only produces what consumers vote for and sells directly to them, is already looking into expanding the concept to clothing. By relying solely on crowdsourcing for its assortment, the site reduces the odds of having unsold inventory, eliminates the middleman altogether and offers voters discounts should they choose to actually buy the furniture. <wwd.com/business-news>
Home Depot's Blake Adds Jobs for First Time in Four Years on Sales Rebound - Home Depot Inc., the largest U.S. home-improvement retailer, is adding store jobs for the first time in four years in anticipation of a rebound in sales. <bloomberg.com/news>
Tory Plans Do Not Include a VAT Increase - The Conservative Party has insisted that it would not need to increase VAT in order to cut the deficit if it forms the next Government as Prime Minister Gorgon Brown is today expected to confirm that the next general election will be held on May 6. <drapersonline.com>
Spain Retail Tough in Downturn - Sales in Spain’s fashion industry slid 8% last year from 2008 to 18.3 bn euros in 2009. A 19% jobless rate has left 4.1 mm unemployed; GDP fell by 3.6% last year, the steepest drop in decades, and the deficit is a whopping 11.4% of GDP. Key to the sector’s revitalization is an immediate boost in consumer demand, greater globalization and a more viable made-in-Spain image, especially in foreign markets. The biannual apparel fair has taken a hit in recent editions, losing roughly 50% of its vendors. <wwd.com/retail-news>
Crocs Feel the Love Campaign - Crocs is on a mission to show consumers the "soul" and "foot-loving sole" of its shoes. The brand debuted a new campaign on March 29 centered on a single message of "Feel the Love," and it focuses on a proprietary technology called Croslite, which is built into every Crocs shoe. The campaign, created by the band's new lead agency Cramer-Krasselt/Chicago, is now rolling out in the U.S. and Europe. It spans TV and print (books such as Real Simple and InStyle), out-of-home, POP, and includes a major social media/digital component. <brandweek.com>
K-Swiss Enters a Sponsorship and Endorsement Deal - K-Swiss has entered into a sponsorship deal with Home Team Marketing to put its name in about 100 high schools in the Dallas, Houston, Los Angeles and Pittsburgh markets. K-Swiss indicated the list could grow to 1,000 in 2011 if successful. K-Swiss announced a global endorsement deal with "Biggest Loser" trainer and coach Jillian Michaels. She will represent K-Swiss and participate in interactive retail and consumer-facing programs throughout the year. In the future, Michaels will develop collaborative product line with K-Swiss. <sportsonesource.com>
Hugo Boss's Revamped E-Commerce - Hugo Boss opens its redone e-commerce site in the US today. It is part of a major worldwide initiative by the German luxury brand to update its Internet presence. The U.S. site will be on a new platform with entirely new design, navigation and functionality compared with the e-commerce sites running in Europe, which will eventually also relaunch on the new platform. The company’s efforts will turn to Asia next year. Chief executive officer Claus-Dietrich Lahrs predicted in November that Hugo Boss would sell more than 50 mm euros of goods online within two years, up from about 10 mm euros. <wwd.com/retail-news>
The Men’s Wearhouse Expands Prom Rep Program - Launched last year, the program offers teens 10% off their tuxedo rentals for every friend who rents at the Men’s Wearhouse. Ten referrals translates into a free tux. Female prom reps who earn a free tux rental can either transfer it to a friend or opt for a $100 Visa gift card. In 2009, participants had to visit a store to take advantage of the program, but this year, the company has instituted more social and online tools.<wwd.com/retail-news>
Wal-Mart Loses Fashion Driver from the Board - Allen Questrom is saying goodbye to Wal-Mart Stores Inc. After three years on the retailer’s board of directors, Questrom has decided to not seek reelection. Questrom saw little chance remaining to influence the company, though his expertise in apparel retailing and overhauling store presentations could come in handy considering Wal-Mart has a strong reputation for offering the lowest prices, but has limited fashion appeal. Two years ago, the giant discounter beefed up its New York apparel office in an attempt to stay on top of trends and elevate its apparel. Questrom was chairman and chief executive officer of JCP, Macy’s and Barneys New York. <wwd.com/retail-news>
Having indulged in all of the vices of the “boom years”, Ireland is now in more familiar territory.
“The public are entitled to have an absolute guarantee of the financial probity and integrity of their elected representatives, their officials and above all Ministers. They need to know that they are under financial obligation to nobody.”
-Bertie Ahern, member of the opposition, Dáil Éireann transcript, December 1996
Taken in light of all that has transpired in Ireland since 1996, I believe that the above quote perfectly captures the essence of Keith’s mantra, “Numbers don’t lie; politicians do”. In 1997, Mr. Ahern was elected Taoiseach, or Prime Minister, largely due to his man-of-the-people image that earned the public’s trust. Suffice to say, he is not held in the same esteem today. From 1997, his government was credited with creating the “Celtic Tiger” and he held power for over a decade before resigning in 2008. Given the current state of affairs, and the obligations that the Irish people are now under, the phrase “Celtic Tiger” is almost embarrassing to recall. The issues facing Ireland are similar to those facing the U.S. Elevated debt, personal and private, loom over future generations and political leadership, not fear-mongering, is desperately needed.
In the last decade, Ireland’s close-knit power circles worked closely to keep the good times rolling. In 2006, Bertie Ahern astonishingly declared that the “boom times are getting boomier”. In 2007, he was reelected. In early 2008, Leader of the Senate and “property investor” Donie Cassidy said the following, “I will remind the House, perhaps in 12 or 18 months, when prices have again increased by 25% or 30%, that they were told this by the Leader of the House.” Irish leaders and businessmen grew increasingly vocal, and spoke with more and more certainty, on housing and the economy as warning signs mounted. The bubble in the property-fueled Irish economy had the three signature characteristics, as discussed by Richard Peterson and Keith on Bloomberg TV last week. It was a great story, it was not going to end, and prices kept confirming that it was a great story that was never going to end.
Of course, everyone had a stake in keeping the party alive and there is now a massive price to pay. The fiscal deficit of Ireland stands at 11.7% of GDP. With the national debt ballooning and the International Monetary Fund “monitoring” Ireland’s situation, many have been calling for a right-sizing of the bloated public sector in Ireland. While politically frail, the current government has taken some small steps in addressing that issue. Despite the importance of the public sector cutbacks to date, the cuts amount to a mere €4 billion in savings. To run the country day-to-day, the government is currently borrowing €20 billion per annum. The numbers don’t add up.
Anglo Irish Bank is the bank most synonymous with the property bubble and enjoys close ties with the ruling political party, Fianna Fáil. When the government first moved to insure the liabilities of the six major Irish institutions in 2008, Anglo was to receive €4 billion. Currently it is expected that the cost of bailing the bank out may amount to €22 billion (this will almost certainly increase). For context, Ireland’s 2009 Gross Domestic Product is estimated to be $177 billion, or €131 billion. It’s not only banks that are being allowed to redistribute losses. According to The Irish Independent, Sean Quinn - then Ireland’s richest man - had amassed a €2.7 billion exposure to Anglo over two years. His losses on that investment now are estimated to be €3 billion. The government and Anglo struck a “share placement” deal to reduce the bank’s exposure to the entrepreneur.
Exactly how burdened the taxpayer will be due to the government’s National Asset Management Agency (NAMA) taking on toxic property loans from financial institutions is unclear. The book value of loans acquired form Anglo Irish Bank is estimated by NAMA to be €10 billion. While some are speculating that the bailout for Anglo alone could cost each taxpayer €22,000, as yet it is uncertain exactly what value the securities will be assigned.
Ireland’s primary trade partner is the U.K. and the Euro is currently trading at £0.88. As a result, Ireland’s economy is far less competitive; for much of the last decade the Euro traded in a range from £0.55 to £0.70. Furthermore, with free movement of people and goods between the Republic of Ireland and Northern Ireland, small businesses have been adversely affected by consumers taking advantage of the “cheap” Pound in Northern Ireland.
With the cumulative debt on Irish mortgages having grown at three times the annual rate in the euro zone between 2004 and 2008, the subsequent crash has left many homeowners in negative equity. Egged on by politicians and “experts”, many paid prices that were “bottoming out” in 2006. According to the TSB/ERSI House Price Index, house prices have declined 31.5% from their February 2007 peak. As prices continued to slide, politicians and media personalities only firmed in their convictions that prices would “never be cheaper” again. With private debt servicing at elevated levels (chart below), Irish consumers face significant interest rate risk should the ECB decide to raise interest rates.
The impact of public and private debt being saddled on the Irish for generations to come is clear to see in the data. Following years of immigration, the familiar flow of emigration has returned. In 2009, 93% of Irish emigrants were under the age of 44, according to the Central Statistics Office. These people are valuable; 61% of the total Irish population have attained a third-level degree (I suspect that this is skewed towards the younger cohorts of the population).
This chart paints a depressing picture for Ireland’s future. During previous waves of emigration in the 19th and 20th centuries, there were countries with fairly lax immigration policies that Irish people quickly took advantage of. Despite popular destinations such as the United States, Canada, Australia, and New Zealand now carefully limiting the number of immigrants coming through their borders, it is telling that the number of emigrants from Ireland has increased so steeply. While the politicians bicker, people are voting with their feet.
Many commentators are gaining optimism following a marginally positive comment from Moody’s last week. The agency downplayed the role of debt in Ireland’s future, instead emphasizing the prospects for economic growth as being of primary importance. The agency also decried that NAMA is an “ingenious mechanism”. Perhaps they are correct; that is certainly what I want to believe. However, the statement from Moody’s reminds me of a passage I read recently on Wittgenstein’s ruler, “Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler”. The less credible a source, the more a statement from that source will be about itself rather than the object of its statement. At Hedgeye, that sums up how we feel about compromised ratings agencies. For many Irish people, it also captures how they feel about the vast majority of Irish politicians and their lack of ability or inclination to resolve the country’s dilemmas.
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The S&P 500 is signaling another push higher is underway after a short but sweet consolidation. The MACRO tailwind came from the focus on the March employment report released last Friday. In addition, the above consensus ISM non-manufacturing and housing sector data helped to underpin the RECOVERY trade.
The ISM non-manufacturing index improved to 55.4 in March from 53 in February, ahead of the 54 consensus. The components of the report were fairly upbeat, as new orders jumped to 62.3 from 55.5, business activity increased to 60 from 54.8 and order backlogs spiked to 55.5 from 46. In addition, the employment component continued its push towards expansionary territory, increasing to a new cycle high of 49.8 from 48.6.
March’s ISM Non-Manufacturing Report on Business confirms just what we have been seeing on the inflation front: more acceleration to the upside. Similar to last week’s ISM manufacturing report, this release is hawkish. 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.
Other signs of inflation are evident too. The REFLATION trade is back with a vengeance with the dollar down yesterday and commodities along with commodity-oriented equities outperforming for the second day in a row. The Dollar index closed at 81.094, down 0.1% on the day. The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at: buy TRADE (80.68) and sell TRADE (82.26).
The CRB index has risen four of the last five days and is up 2.3% in the last two. Crude oil has risen five of the last five days and is up 8.2% since the start of last week. Energy (XLE) and Materials (XLB) have been the best two performing sectors for the last two days. The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.87) and Sell TRADE (87.21).
For the second day is a row Consumer Discretionary (XLY) outperformed Consumer Staples (XLP) on the back of the strength in Retail and Homebuilders. Housing-leveraged stocks were among the best performers today, with the XHB +1.9%. The group was underpinned by an 8.2% m/m increase in February pending home sales, which followed a downwardly revised 7.8% decline in January. The market was expecting a flat reading in February. The XLP was dragged down by food and beverage names.
The other two sectors to outperform yesterday were Technology (XLK) and Financials (XLF). The XLK seemed to benefit from the outsized coverage of the this weekend's iPad launch, while semis provided the bulk of the upside leadership with the SOX +3%; its biggest one-day gain since March 1st.
With the positive momentum in the RISK/RECOVERY trade the VIX continues to be broken on all three durations. The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.37) and sell TRADE (17.88). We are currently long the VXX.
In early trading, with the dollar trading slightly higher, gold is giving up some of its recent gains. The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,115) and Sell TRADE (1,136).
Copper is trading at its highest level since August 2008. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.50) and Sell TRADE (3.70).
In early trading, Equity futures are trading modestly below fair value ahead of the latest FOMC minutes and the auction of $40B in 3yr notes. As we look at today’s set up the range for the S&P 500 is 20 points or 1.3% (1,172) downside and 0.4% (1,192) upside.
Today's MACRO highlights are:
BYI lowering of guidance wasn’t a complete surprise and smart move in light of the Rainbow sale announcement. This doesn’t really change our long term outlook but does highlight the near term risk we were concerned about.
BYI lowered its EPS range for FY2010 to $2.15 to $2.25 ($0.15 to $0.25 below original guidance) due to:
“1) slower than expected deployment of capital by customers thus far in calendar 2010; 2) the interruption of gaming in Alabama (discussed below); and 3) lower-than-anticipated win per unit in Gaming Operations in the third quarter. Despite lower revenues than previously anticipated, gross-margin percents are expected to be within the normal ranges. The Company now anticipates the range of systems revenues to be $217-$223 million for fiscal year 2010 versus the previous $220-$230 million.”
So basically the guide down of $0.15-$0.25 cents breaks down as follows:
While no one likes to see lower guidance, the reality is this doesn’t change the outlook for the future but rather highlights the near term risk we’ve written about. Not surprisingly, BYI was very positive about their outlook as well:
“While we are disappointed with the pace of customer capital deployment so far in calendar year 2010, we remain confident in our longer-term prospects. We have just begun delivering our new wheel-based recurring revenue product including Cash Spin, which won “Best Slot Product” at last year’s Global Gaming Expo (G2E). Pre-orders for Cash Spin have been the strongest of any product in the Company’s history. And, this summer, we will be releasing our new ALPHA 2 platform and Pro Series™ Upright gaming cabinet, which have received very positive feedback.”
Other positives mentioned on the call included:
In addition to pre-announcing the EPS miss, BYI also announced several other material events:
“Creativity comes from trust. Trust your instincts. And never hope more than you work.”
-Rita Mae Brown
Some of the best American quotes come from the hardest working American people. Rita Mae Brown is known in some circles for being tennis star Martina Navratilova’s ex-girlfriend, and in others for being a bestselling author about American fox hunting. She was born in Pennsylvania, but was raised in Florida. She’s lived a typically anonymous, yet public American life.
Despite the politically inspired fear-mongering of this being a “Great Depression”, many Americans still wake up every morning with hope in their hearts and hard work on their sleeves. As another University of Florida grad who is becoming popular in conservative political circles recently quibbled about Washington: “They think Americans need a guardian class of really smart people who went to the right schools to tell us what to do.”
That was Cuban-American politician Marco Rubio, who was quoted in this weekend’s edition of The Economist in an article titled “The anti-Crist” (that’s not a spelling error; it’s in reference to the 38 year old Rubio crushing the sitting Governor of Florida, Charlie Crist, for the open US Senate seat in FL). Ironically enough, that same issue of The Economist has a cover titled “Hope At Last”, with a nice blue sky, an American flag, and a rainbow…
Ah… with the weather this nice on the East Coast, how romantic a hope that is… Unfortunately, hope is not an investment process.
The Economist opened its hopeful missive with something that resembled a story line from Little House on the Prairie suggesting that “great storms and floods have a way of altering landscapes”… “the financial deluge has passed and the recession it caused, the worst since the 1930’s, is ebbing”…
Little House, of course, was a series of children’s books by Laura Ingalls Wilder that were published during the real Great Depression (1). When I see shoppers hurling toward the counter at an Apple store for an iPad, I still can’t find it in me to accept prefacing every analytical point I hear with this narrative fallacy of how bad the lives of America’s upper-class have become.
But that doesn’t mean that a levered up American economy is going to get better from here. It certainly doesn’t mean that we are sitting on the edge of a rainbow that is going to lead us to another inflated pot of gold either. It could mean we just stay the same – politically conflicted, compromised, and confused.
With all of the debts we have created, we are most certainly going to inflate a lot of things in our lives – not the least of which is hope that this US stock market’s +75.6% gain from the March 9th low is going to sustain itself.
I shorted the SP500 on Thursday. So far that position has not worked. It has gone 0.64% against me. It doesn’t make me happy. It doesn’t make me sad. I understand where my risks are, and I will deal with them accordingly. If I see any SP500 price north of 1192 in the coming days, I will short it again. If it holds 1072, I’ll probably cover the position. If it doesn’t hold, and starts to break down like the US Treasury market has, well… that’s not a risk I’ll be bearing.
After you see market melt-ups like this, the most difficult thing to reconcile is that immediate term tops are processes, not points. The more hope you see in the Manic Media, the more careful you need to tread on the high-wire of making sales. Not unlike buying in April of 2009, selling here in April of 2010 is not for the faint of heart.
Wall Street is all about selling stories, not risk management. In early February, after the SP500 dropped -8% in a virtual straight line from its January 19th high, we acknowledged the selloff for what it was – Wall Street and Washington “Selling Fear” – and we got longer. Now, after a +12.3% monster rally from the February 8th low, the only fears that remain are those of either getting squeezed on the short side or missing the next bull market in hope.
Selling high is never easy, and I certainly don’t always get it right. From an intermediate term TREND perspective, the SP500 is undoubtedly in a bullish position. In fact, its in what we call a Bullish Formation, where all 3 of our core investment durations underpin one another. That said, Bullish Formations always get immediate term overbought. Nevertheless, our TRADE, TREND and TAIL lines of support are as follows:
At this stage of the rally, hopes and fears are the same thing. You can hope you aren’t chasing another immediate term top, and at the same time fear that you are selling something that will never go down again. That, of course, isn’t born out of anything other than what’s inside your brain.
My friend, Dr. Richard Peterson, who wrote the book on this (Inside The Investors Brain, 2007), would chalk this up to your stress hormones and how they behave when you are faced with something that isn’t working. Whether that be your short positions in the SP500 or your view that this “recovery can’t be real”, they are one and the same.
The art of this game is sometimes simply turning everything, including your iPhone, off. After all, corrections always come. Timing the when is more about math than hope.
My immediate term lines of support and resistance in the SP500 are now 1172 and 1192, respectively.
Best of luck out there today.
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