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US STRATEGY - SAME AS IT EVER WAS

The market's post reactionary bounce to the GS news on Friday lacked conviction.  Clearly we are seeing much broader damage in the secondary stocks, with the S&P 500 up 0.45% and the NASDAQ and the Russell 2000 declining yesterday.  The trend toward RISK AVERSION and a number of other conflicting forces were at work to underpin the lack of overall direction in the market yesterday.

 

The earnings calendar and the M&A trends continue to be a net positive for the broader market.  So far in this earnings season, 26 of 28 S&P 500 companies have beat earnings so far in 1Q10.  On the MACRO front, headwinds continue to blow from both Greece and China, which is putting pressure on the RECOVERY trade and particularly the commodity-related equities. 

 

Volume declined 28% day-over-day and the VIX declined 5.5%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.04) and sell TRADE (19.62). 

 

The Hedgeye Risk management models are still showing Utilities (XLU) is broken to both TRADE and TREND, while Healthcare (XLV) is broken on TRADE.

 

Yesterday only two sectors outperformed the S&P 500 - Financials (XLF) and Healthcare (XLV).   The XLF rallied 1.0% yesterday as the banking index (BKX) improved by +1%.  Citi was a strong performer after the bank reported strong 1Q results.  The trust names benefited from the more defensive tone in the market, along with a favorable mention in this weekend's Barron's.  Regional names were among the laggards with the KBW regional index up only 0.5%. 

 

The RISK AVERSION trade helped some of the more defensive sectors to outperform after losing out to the BETA shift trade last week.   Most notable was the Healthcare (XLV) and Consumer Staples (XLP).  Within the XLV, managed care provided a big boost for the healthcare sector, with the HMO +2.8% on the day. 

 

Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity-related sectors.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.65) and sell TRADE (81.71). 

 

While the materials (XLB) traded flat yesterday, it’s has fallen 1.3% over the past week.  Contributing the demise of the XLB, over the past two trading sessions the Chinese market has declined 5%, the biggest two-day drop in eight months.  The government continues to take additional steps to rein in speculative buying in real estate.  Steel stocks came under outsized pressure with the NYSE ARCA Steel Index declining 1.3% yesterday, after falling nearly 4.6% last week.

 

The CRB declined 1.0% yesterday as oil continues to decline.  OIL traded down 2.1% yesterday and 4.8% over the past two days.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (79.93) and Sell TRADE (83.46). 

 

In early trading, gold is trading at a two-week low, but lacking conviction on the downside.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,124) and Sell TRADE (1,150).

 

In early trading, copper rose from a three-week low in London on signs of stronger consumption trends in Japan.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.49) and Sell TRADE (3.64).

 

In early trading, equity futures are trading above fair value in a follow-through of yesterday's positive finish helped by earnings from Citi and news the SEC was split on whether to sue Goldman Sachs. 

 

Today, Fed Chairman Bernanke testifies at a House Financial Services Committee hearing on public policy issues raised by the bankruptcy examiner's report on Lehman Brothers.  Treasury Secretary Geithner and US SEC Commission chairman Schapiro also testify at the hearing.  As we look at today’s setup, the range for the S&P 500 is 37 points or 1.7% (1,177) downside and 1.4% (1,214) upside. 

 

On the MACRO calendar today:

  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

Managing Director

 

US STRATEGY - SAME AS IT EVER WAS - S P

 

US STRATEGY - SAME AS IT EVER WAS - DOLLAR

 

US STRATEGY - SAME AS IT EVER WAS - VIX

 

US STRATEGY - SAME AS IT EVER WAS - OIL

 

US STRATEGY - SAME AS IT EVER WAS - GOLD

 

US STRATEGY - SAME AS IT EVER WAS - COPPER



RETAIL HEADCOUNT ON THE RISE

For the first time in almost three years, the growth in total retail hires has turned positive.  This shouldn’t come as a surprise given the positive sales recovery that has been in place for two quarters, but it’s worth noting for a couple of reasons: 

 

First, the productivity gains we’ve seen across most of the space have in some part been at the expense of headcount reductions and reduced store labor hours.  This is evident in the charts below, although what stands out to us is the duration of the prolonged hiring malaise.  Clearly retail hiring has been in a multi year secular decline until now. 

 

Secondly, in looking ahead we’d note that this is a clear sign that retailers are feeling better (and understaffed).  While it makes perfect sense to see hiring pick up against a commensurate rise in sales, we do wonder how much further the hiring will actually go.  The risk of staffing up against a still uncertain topline is one of the bigger risks we see.  This especially holds true after such a short and unprecedented period of EBIT expansion driven in large part by cost containment. 

 

With cost of goods also creeping higher, this is just another sign that peak EBIT margins may be unsustainable if sales don’t remain robust.

 

Brian McGough

 

RETAIL HEADCOUNT ON THE RISE - Job Hires

 

RETAIL HEADCOUNT ON THE RISE - job openings


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DG: KM Stepping Up to Short – Again

DG: KM Stepping Up to Short – Again

 

Keith is going back to the well on DG today, shorting a name that we’ve been cautious on since its re-emergence as a public company back in November of 2009. We remain convinced that the opportunity to sustain both unit and comp growth is becoming harder to achieve. Despite reporting solid results on March 31st, it appears that Q4 F09 is likely to mark the post-offering peak for DG as it relates to rate of acceleration in business growth.

 

With the stock up over 12% since the Q4 print and coincidentally at the average price target ($29) of the seven brokers launching coverage after the IPO and several quarters of earning pretty much anything it wanted – 2010 will likely prove to be a different story. This is a year where both top and bottom line compares for DG will be at their toughest in the company’s history.  Comp guidance is suggesting deceleration and reliance on margin enhancing strategies such as “better buying”, increased private label penetration, and improvement in more discretionary categories such as home and apparel is far more speculative and risky than it has been over the past year.  At the same time year-over-year GM compares get very difficult effective immediately, and SG&A/Capex begin to accelerate along with stepped up square footage. We continue to believe momentum will slow on the margin, much like it has already done with the pace of Americans entering the “sweet spot” of the DG demographic. 

 

DG: KM Stepping Up to Short – Again - DG SIGMA

 

 


R3: Retail Headcount on the Rise

R3: REQUIRED RETAIL READING

April 19, 2010

 

 

TODAY’S CALL OUT

 

For the first time in almost three years, the growth in total retail hires has turned positive.  This shouldn’t come as a surprise given the positive sales recovery that has been in place for two quarters, but it’s worth noting for a couple of reasons: 

 

First, the productivity gains we’ve seen across most of the space have in some part been at the expense of headcount reductions and reduced store labor hours.  This is evident in the charts below, although what stands out to us is the duration of the prolonged hiring malaise.  Clearly retail hiring has been in a multi year secular decline until now. 

 

Secondly, in looking ahead we’d note that this is a clear sign that retailers are feeling better (and understaffed).  While it makes perfect sense to see hiring pick up against a commensurate rise in sales, we do wonder how much further the hiring will actually go.  The risk of staffing up against a still uncertain topline is one of the bigger risks we see.  This especially holds true after such a short and unprecedented period of EBIT expansion driven in large part by cost containment. 

 

With cost of goods also creeping higher, this is just another sign that peak EBIT margins may be unsustainable if sales don’t remain robust.

 

R3: Retail Headcount on the Rise - Job Hires

 

R3: Retail Headcount on the Rise - job openings

 

  

LEVINE’S LOW DOWN 

 

  • Be on the lookout for targeted online marketing the next time you check your online bank account. A company called Cardlytics is a pioneer in the effort to link targeted promotions with prior transaction activity. Retailers including Macy’s and Staples as well as McDonald’s are already using the service to target existing customers.

 

  • Add cosmetic/beauty retailer L’Occitane to the list of company’s coming public soon. The French based global retailer of Provencal beauty products is expected to complete a $700+ million offering with a listing based in Hong Kong. The company currently operates a 1,200 store global network in 70 countries as well as a wholesale business. There are approximately 170 stores in the U.S alone.

 

  • As Reebok attempts to build a domestic turnaround with its recent success with its Easytones fitness shoes, keep an eye on the athletic brand’s move with the NBA. Rumor has it that the company is the frontrunner to endorse the likely No. 1 NBA draft pick, John Wall. It’s been a while since Reebok paid up for anyone, which makes the rumored $3-4 million annual endorsement deal even more eye opening.

 

HEDGEYE CALENDAR

 

R3: Retail Headcount on the Rise - Calendar

 

 

MORNING NEWS 

 

M-commerce sales to Hit $2.42 bn this year (1.53% of e-Commerce) - U.S. mobile commerce sales hit $1.20 billion in 2009 and will grow to $2.42 billion this year and $23.83 billion in 2015, according to forecasts from Coda Research Consultancy. M-commerce will account for 1.53% of e-commerce this year, the firm predicts. <internetretailer.com>

 

Pier 1 Imports Plans to Return to Selling Online - After pulling the plug on its e-commerce site three years ago as a cost-cutting move, Pier 1 Imports Inc. wants to get back in the online retailing game. Though details aren’t set, a new shopping site is forthcoming, says Pier 1 CEO Alex Smith. <internetretailer.com>

 

 Chinese Apparel Filling Indonesian Store Racks - After more than three months of ASEAN-China Free Trade Agreement (FTA), chinese imported garments have started to fill up shelves and counters at department stores and shopping malls in Indonesia, reducing sales of local clothing of 20%.  “Chinese clothing, especially ladies’ wear, has begun to grow in number. It is now available in department stores while it could only be found in Glodok or Tanah Abang, “ said Poppy Dharsono, the Head of Association of Garment and Accessories Suppliers (APGAI). “Before the FTA, 40% of the products were imported from China. Now, their number can be up to more than 50%,” she said. <fashionnetasia.com>

 

Bangladesh Apparel Exporters to Get a 2nd Stimulus - Finance Minister of Bangladesh AMA Muhith has assured readymade garment (RMG) exporters of implementation of Tk 1,000 crore second stimulus package in a month. Any garment factory owner exporting clothes worth $250 mm will be considered for the stimulus. There are at least 1,500 companies in the apparel sector entitled to the exemption of licence renewal fee for captive power plants. <fashionnetasia.com>

 

R3: Retail Headcount on the Rise - US Apparel Import Table

 

German Cosmetics Firm Takes Over Cosmolab - German color cosmetics firm Schwan-Stabilo Cosmetics has taken over Cosmolab Inc. Lewisburg, Tenn.-based Cosmolab will continue to make cosmetics pencils from its current headquarters and it is expected to have total revenues of $40 million this year, according to Schwan-Stabilo. Cosmolab, which was in bankruptcy proceedings, was acquired by Schwan-Stabilo through its All4 Cosmetics Inc. subsidiary. “Cosmolab’s specific know-how and the production capacity fit perfectly into Schwan-Stabilo Cosmetics’ portfolio,” stated Ulrich Griebel, Schwan-Stabilo Cosmetics’ managing director. “We are confident to secure Cosmolab’s existence and its 300 positions for the long term through its incorporation into the very well organized Schwan group.” <wwd.com/business-news>

 

Uniqlo Signs Fifth Ave. Flagship Lease - Fast Retailing Co., Ltd. said Monday it has signed a lease for a new Uniqlo store on Fifth Avenue. An opening date has not been established, but unlikely to happen this year. The 89,340-square-foot flagship will be located at 666 Fifth Avenue. The Fifth Avenue boutique will be the Japanese brand’s second location in New York. Its 36,000-square-foot Soho store opened in 2006. Uniqlo has spearheaded an international push in recent years, rolling out stores in Paris, London, Singapore, Moscow as well as several locations in South Korea and China. <wwd.com/retail-news>

 

Neiman Marcus Testing Discount Retail Concept - Neiman Marcus is testing a discount retail concept for aspirational shoppers who fled the luxury chain when the financial crisis hit in 2008. The 11,000-square-foot test store, part of the retail company’s Last Call clearance division, opened April 2 at Inwood Village, a popular outdoor shopping complex next to the wealthy University Park section of Dallas. It presents brand-name fashion and accessories, including Michael Kors, Badgley Mischka and Diane von Furstenberg, in an environment that looks like a hybrid of a boutique and an outlet. The emphasis is on contemporary apparel, handbags and shoes, and most prices fall between $45 and $300. <wwd.com/retail-news>

 

`Get-It-Cheap Party' for Luxury Goods Ends at Saks; Tiffany Raises Prices - Lisa Hagen bought a $395 Diane von Furstenberg sundress at Barneys New York last week, paying 58 percent more than she did for a similar dress two years ago. <bloomberg.com/news>

 

JCP and People Watch - J.C. Penney has a new fashion director for its shoppers — People StyleWatch. Beginning in September in Penney’s stores and on jcpenney.com, select items in misses’, contemporary and junior apparel, accessories and shoes will be flagged with “People StyleWatch Must Have” displays, effectively putting the magazine’s seal of approval on what it considers the trendiest, most desirable items developed by the retailer and its stable of designers, including Mary-Kate and Ashley Olsen and Charlotte Ronson, who have created the Olsenboye and I [Heart] Ronson collections, respectively, for the department store chain. Penney’s will launch exclusively Liz Claiborne and fast-fashion brand MNG by Mango this fall. <wwd.com/retail-news>

 

Shaun White Designs Shoe for Target - Shaun White has mastered skateboarding and snowboarding, and now the Olympic gold medal winner (who also plays a mean guitar) has added another title to his resume: shoe designer. His line of men’s and boys’ skate sneakers, created with his brother Jessie, come out this fall at Target. But the Whites and the Bullseye go way back: They launched an apparel line there in 2007, and Target started sponsoring Shaun eight years ago. <wwd.com/footwear-news>

 

Jillian Michaels from Biggest Loser Talks K-Swiss - Trainer Jillian Michaels is getting “tubular.” The “Biggest Loser” badass — who recently signed on as the face of the K-Swiss running and training Tubes product — said she’s been a fan of the sneakers since they debuted. And while she gave props to the shoes’ stability and lightweight cushioning, it was the surface that got her, she said. ”They’re cool-looking, and I’m not going to lie, that matters!” she confessed to Insider. <wwd.com/footwear-news>

 

New Balance Debuts New Shoe with Boston Marathon - New Balance is debuting an integrated 'Run Faster Boston' marketing campaign this April to coincide with the 114th running of the Boston Marathon today. The imagery highlights popular Boston landmarks and provides a sneak peek of the New Balance 759, one the company's new fall 2010 running shoes. <sportsonesource.com>

 

Majestic Introduces FanZones - Majestic Athletic, the official uniform supplier of Major League Baseball, has introduced Majestic FanZones in 17 MLB parks this spring. Each Majestic FanZone can quickly produce a replica jersey of any current player, not just those that concessionaires stock. Since some teams wear as many as five jerseys, fans can now chose from more than 100 different player jersey options right at the ball park. Majestic FanZones rely on real-time data, so consumers can get a jersey for a recently acquired or activated player immediately. <sportsonesource.com>

 


GS Risk: Obama Is Going For A Win

As flagged by NPR’s Planet Money blog, a Google search ad from Obama on the terms “goldman sachs SEC”:

 

GS Risk: Obama Is Going For A Win - obama


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