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He Who Sees No V's

Ben Bernanke pandered to the political wind yesterday. Shocker.

 

What might also shock some life into the ‘I love Janet Yellen’ because she’s perma-dovish crowd is this thing we Real-Time Risk Managers call marked-to-market prices. We acknowledge that there are better functions on Bloomberg’s terminal to calculate what is embedded in TIPs (expectations), but the actual price chart of TIP, on its own price merits, is decisively bullish.

 

While we are aware that inflation expectations dampened on sequentially decelerating February inflation reports, we have seen nothing but the opposite occur (hence the V-Bottom in this chart) ever since. Today, of course, is April and with the insulation of an expectation for a continued European sovereign debt collapse, we see nothing in the immediate term that changes our view of Inflation’s V-Bottom (if you’d like a copy of our Q2 Macro Themes slides that outlines how a sovereign debt default cycle will lead to sustained inflation, please email us at ).

 

We remain long of TIP in the Virtual Portfolio and outline the intermediate term TREND line of support for TIP below at $103.96.

KM

 

Keith R. McCullough
Chief Executive Officer

 

He Who Sees No V's - TIP


R3: Athletic Divergence

R3: REQUIRED RETAIL READING

April 29, 2010

 

 

TODAY’S CALL OUT

 

For the first time this year, we're seeing a meaningful divergence between sales trends in the athletic space and the rest of retail – with athletic underperforming. Perhaps chalk it up to a disproportionate increase in more fashion-forward apparel given 23 months of suppressed demand -- yes, athletic is ‘lower beta’ as it relates to being impacted by changes in consumer spending, and therefore did not decline as much last year.  But regardless, a fact is a fact. The numbers for the past week were mixed, but we always look at the trailing 3-week trend – as it’s proven to be the most consistent tell tale sign of what’s really happening out there.

 

We wouldn’t be surprised to see the group take a breather as long as a chart like this exists. We’re ok with that. In fact, we think that the most power trend in retail over the next 2-years has already begun, which will be a resurgence in the athletic space as a whole. This is largely Nike driven – with a helping hand from Under Armour and Foot Locker. It will help everybody from Dick’s to Finish Line and will even be a backstop to bring a dog like Sports Authority public again. See our Nike Black Book for full details on why we think this theme is so powerful.

 

So why are sales weak today? The fact is that the product in the market right now is a function of the prior R&D cycle – think 9-12 months ago. By summer, there will be a meaningful turn in top line. In fact we’re already started to see it in order levels and manufacturing activity.

 

If this group takes it on the chin over such near-term concerns, as well as some wind coming out of the sail after Nike’s analyst meeting, there’s going to be some great entry points around a powerful multi-year call.

 

R3: Athletic Divergence - Sports Apparel and Footwear Chart

 

R3: Athletic Divergence - Table

 

 

LEVINE’S LOW DOWN 

 

- Carter’s indicated that sales to off-price retailers, including ROST and TJX are down dramatically this year in large part to growing demand and better inventory management for the company’s brands. Upon further clarification, management noted that sales to the off-pricers are down 70-80% year over year. Clearly this speaks the big year over year shift in availability of branded goods for the off-price channel.

 

- JNY management noted that while inflation in cost of goods is likely to remain minimal in the back of the year, it may become a bigger issue in 2011. In an effort to combat cost pressures, the company expects to take price in areas where “value” supports it, focus on product differentiation and fashion which can command higher price points, and shift the assortment towards higher margin items. Cotton and leather were both mentioned as areas to watch over the next 12-18 months.

 

- In an effort to emphasize and highlight that change is potentially on the way for Sam’s Club (yes, we’ve heard this many times before), CEO Brian Cornell expressed in detail the number of new executives the WMT division has hired over the past year. These hires include a new CFO, new chief merchant, the former President/COO of Michael’s Stores, and the former CEO of the military’s worldwide retail operation.

 

- With Skechers nearing the anniversary of its Shape-Ups sales ramp, it’s time for the next growth category – apparel. Through various licensing deals, management spoke of aspirations to have consumers dressed head-to-toe in Skechers on Wednesday’s earnings call. Following the launch of kids apparel in Q1, it sounds like there is more in works for the whole family.

 

 

HEDGEYE CALENDAR

 

 R3: Athletic Divergence - Calendar

 

 

MORNING NEWS 

 

 

China Commodity Demand on the Rise - The country posted its first trade deficit in six years in March mainly because of the surge in imports of raw materials. Exports dropped due to Chinese factories were slow to reopen after the Lunar New Year holiday. Exports surpassed $112 billion in March, up 24% year on year, while imports increased by 66%.  <fashionnetasia.com>

 

Weyco Acquires Umi Brand - The Grafton, Wis.-based children’s brand Umi has been acquired by Weyco Group Inc., which markets footwear under the Florsheim, Nunn Bush and Stacy Adams brands, among others. Weyco will also acquire Umi’s U.K. operations. The head of Umi will join Milwaukee, Wis.-based Weyco, where he will continue to helm the Umi brand. Umi’s existing design and development teams will also remain under the transition. A new Umi sales team is expected to be announced shortly by Weyco. All fall ’10 orders will be processed and shipped from Weyco’s Glendale, Wis., warehouse. <wwd.com/footwear-news>

 

Walking Co Exits Chapter 11 - The Walking Company Holdings Inc. has emerged from Chapter 11. The firm, as previously reported, said it exited bankruptcy with 207 of 210 former locations in tact. It also plans to pay off all debts and credit obligations. <wwd.com/footwear-news>

 

Kobe Bryant Tops NBA's Most Popular Jerseys - The Los Angeles Lakers' Kobe Bryant once again topped the NBA's list of most popular jerseys, where he has reigned as No. 1 since the start of the 2008-09 season. The list is based on sales at the NBA Store in New York City and on NBAStore.com since the start of the 2009-10 NBA season through April 2010. <sportsonesource.com>

 

US CEOs of Multinationals Concerned Over Earnings Estimates Due to Euro Weakness - United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated. The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009. Terex Corp., DuPont Co., McDonald’s Corp. and Johnson & Johnson also said in the past two weeks that the euro’s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy. <bloomberg.com/news>

 

Unilever Sees a Tough Environment Ahead - Unilever reported its first-quarter profits increased 31% on sales that grew 6.7%. “We showed strong momentum across all geographies with continued strengthening of our competitive position in line with our strategy,” stated Paul Polman, chief executive officer of the Anglo-Dutch consumer goods giant. “We will face a tougher environment as the year progresses, and thus it is more important than ever to stay focused on the consumer. Commodity costs will increase in the second half, economies remain sluggish and competitive intensity will remain high." <wwd.com/business-news>

 

Hugo Boss Posts Earnings and Sales Decline in Q1 - Despite decreases in both earnings and sales in the first quarter, the Hugo Boss Group reasserted it will “return to growth” in 2010. Net income declined 11% in the three months ended March 31 while group sales slipped 8%. Boss said lower pre-order volumes from the recession year 2009 continued to impact its wholesale business, but noted sales from directly operated stores surged 25% to reach 83 million euros, or $115 million. For 2010 as a whole, Boss is forecasting single-digit sales growth, with adjusted EBITDA expected to increase somewhat more strongly than sales.<wwd.com/business-news>

 

Levi's to Launch Chinese Brand at Lower Price Tag - Levi's has announced plans to launch a new global brand in China and other selected Asian markets this autumn, marking the first time the brand is to be launched in markets outside America. The company has not revealed the name of the brand, but said the prices of the new products may be lower than its existing products. The new products are designed for the Chinese market, but the company will also develop the new brand into one of its major brands, targeting well-educated young people ages 18 to 28. Levi's plans to open about 20 new stores under the new brand and will increase the number to 1,000 by 2015. <licensemag.com>

 

Sears's Lands' End Styles - Since introducing Lands’ End Canvas, the company’s younger, more stylish collection in November, Lands’ End has quietly been testing a few other initiatives that were detailed at its fall preview. First, the Heritage Collection, a range of perennial Lands’ End classics such as the Squall jacket and the Drifter sweater, was introduced in the catalogue and online three months ago. Updating and expanding on the company’s roots appear to be priorities for Coe, who oversaw an overhaul of the classic down outerwear, redesigned for fall with an eye toward more modern fits, a broad range of colors and three groups: everyday, luxury and chevron. <wwd.com/retail-news>

 

Hiking Shoes/Boots Declined 16% in 2009 - Sales of hiking shoes/boots declined 16% to $873 million in 2009, according to NSGA’s soon-to-be-released “Sporting Goods Market in 2010.” The study found that despite a 4% decline in unit sales, the overall athletic and sports footwear market reached $17.1 billion in 2009, down just 1% in dollar terms from 2008. <sportsonesource.com>


CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

This past week initial jobless claims fell 11k to 448k from 459k (revised up 3k), which brought the rolling four-week average higher by 1.5k to 462k. As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date. The following charts demonstrate this. We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.

 

As a reminder around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 1 day away. 

 

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

The following chart shows the raw claims data.

 

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

The following chart shows the census hiring timeline.

 

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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HOT: QUICK READ

Evidence of V-shaped recovery.

 

 

HOT’s Q1 and guidance is pretty incredible. It feels like we went to sleep a few months ago and woke up 2 years later. Double digit RevPAR growth for 2010? This recovery certainly is starting in true V-shaped formation. We also know what we don’t know - how sustainable this is given the structural issues on the economy. Not much more to say about the great quarter and terrific guidance but here are some detailed observations.

  • HOT has really cleaned up their system – meaning when you look at comparable RevPAR statistics, you can see that they culled a lot of the worst performing assets out of the system (as 1Q09 SS #’s are materially higher than 1Q2010). 
  • Same goes for the owned portfolio. The assets they sold in 2009 had an aggregate EBITDA margin of only 12%.  Therefore, simply eliminating those assets is accretive to the balance of the portfolio. Hence, if you look at the entire owned portfolio there was margin expansion this quarter, despite same store margins being down 10bps.
    • North American SS owned margins were down 50bps to 11.9%
    • International SS owned margins were up 50bps to 17.6%
  • As expected, currency had a huge benefit in the quarter. North American RevPAR had a 3% benefit from currency in the quarter since Mexico and Canada make up 35% of the mix here. Unlike the Euro, these currencies, at current levels will continue to provide a tailwind for HOT for the balance of 2010.
  • We also thought it was interesting that HOT’s international owned portfolio only had 0.8% constant dollar RevPAR growth - considerably behind NA.  We thought the reverse would happen.
  • RevPOR was up this quarter (70bps). F&B looks to have improved 2.3% y-o-y
  • CostPAR increased 50 bps - just below RevPOR growth - hence the margin expansion.
  • Incentive fees increased 8% y-o-y or $2MM.
  • The only disappointing aspect to the quarter was net room growth was below our expectations and guidance, especially with the Sheraton brand. Managed rooms were 2k below our estimate as were franchised rooms.
    • Managed and Franchised rooms increased 2.1% y-o-y or by 5,597 net rooms. However, new brands contributed 3,410 rooms to the system and accounted for 61% of the growth.
    • Sheraton managed and franchised rooms shrank 4.7% y-o-y.
    • Managed and franchised rooms decreased sequentially by 20bps. This is the first 1Q to 4Q decline since 2005.

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

This past week initial jobless claims fell 11k to 448k from 459k (revised up 3k), which brought the rolling four-week average higher by 1.5k to 462k. As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date. The following charts demonstrate this. We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.

 

As a reminder around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 1 day away.

 

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

The following chart shows the raw claims data.

 

 CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

The following chart shows the census hiring timeline.

 

CLAIMS REMAIN TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


Grinding Lemmings

“I am turned into a sort of machine for observing facts and grinding out conclusions.”

-Charles Darwin

 

It’s only fitting that after the weekly Institutional Investor “bearish” survey dropped to its lowest level since 1987 (only 17% of investors admitted to being bearish in the week of April 19th) that the US stock market got clocked. If you didn’t know that the buy-side of this business chases performance, now you know.

 

It’s actually somewhat sad that this profession has become a game within a game of who is the largest lemming. Like Moody’s or S&P’s ratings, I suppose everything has to be measured on a relative basis. The Johnny Come Roubinis getting amped up on the bearish side of the Sovereign Debt Dichotomy this morning are only -18.7% and -13.2% late (Greek and Spanish YTD stock market performance, inclusive of this morning’s short covering rallies).

 

Per Wikipedia, “the behavior of lemmings is much the same as that of many other rodents which have periodic population booms and then disperse in all directions, seeking the food and shelter that their natural habitat cannot provide.”

 

We’ll have to see where Darwin washes out the blindly bullish lemmings this go around, but this isn’t just about bulls having a couple of down days. Plenty a wannabe short seller has had their playoff season end the way that the Washington Capitals did last night in DC – miserably.

 

To have a deep respect for the opportunity that is developing on the short side of global markets, look no further than the quantification of the Pain Trade that the Roubinis and Rosenberg lovers of 2008 have endured. According to the Jedi Master of Grinding Lemmings, Sir Jeremy Grantham, “this time the recovery for the total market was 80% in one year, second only to 1932, and the really speculative stocks are almost double the market, as they also were in 1932.”

 

Now some lemmings will give you a blind stare when you start whipping around dates that don’t go beyond 2003, because a lot of people my age in this business had never really been forced to incorporate the macro morning research grind into their risk management process until 2008. Call your buddy and see if you can get a bead on what Ackman is going to file on next. While you are at it, sleep in.

 

After the Volatility Index (VIX) broke down below the 20 level in 2003, the VIX almost never traded above 21 until 2007. I for one made way too much money during that period, and I hardly believe that it had anything to do with anything more than a period of massive liquidity and depressed volatility. Never say never, but that was an aberrational performance run that will ring in my ears forever.

 

Four years like that can make people truly believe that their performance is due to their own intellect. When I was watching ex-Goldmanite, Josh Birnbaum, testify on Tuesday, I couldn’t help but think of the depressing reality that there are still some guys like that out there in this business. No regret or societal responsibility. No shame. The name on the back of their jersey always means more than the one on the front.

 

Now if you want to see someone who operates under a different mantra than that in real-life, turn on the NHL playoffs and watch a man drop his face in front of a 90 mile an hour slap-shot. He’ll take it in the teeth and hand his chicklets to the trainer on the bench so that he can get out there with his teammates for the next shift. The difference between what Blankfein’s and the NHL boys encounter is called accountability. Hockey dressing rooms have 4 walls, not a P&L and 4 trading screens.

 

Back to the macro grind, here’s what I am seeing out there today:

 

USA

  1. SP500 range has immediate term upside downside in the SP-1201
  2. SP500 intermediate term support down at 1140; not closing/holding above 1201 into early May should perpetuate May Showers
  3. VIX breakout above both my immediate and intermediate term lines of resistance (intermediate term TREND support = 19.46)
  4. Volume studies continuing to flash bearish (yesterday’s up day came on -16% day/day volume)
  5. Sector Studies showing 4 out of 9 SP500 sectors now broken from an immediate term TRADE perspective (XLV, XLF, XLB, XLP)
  6. Sentiment moved, barely, yesterday in the II Survey with Bears going from 17% (lowest since 1987) to 18%

International

  1. China down another -1.1% overnight to -12.5% YTD remains broken on both TRADE and TREND durations
  2. Hong Kong equities down again last night (-0.81%) with the Hang Sang finally breaking its intermediate term TREND line = 21,129
  3. German unemployment surprises to the positive again at 7.8% in April versus 8% (March); remains our favorite country long side
  4. Russia cuts interest rates for the 13th time in the last year and the market was up another +0.73% taking YTD to +9% = inflation signal
  5. Latvia is getting hammered, trading down -4.6%; just one of the many countries with sovereign debt problems that are taking turns day-to-day
  6. Greek CDS finally narrows to 650 bps wide; every dog has its day; Greek stocks are still down -18.7% YTD, trading below the February 8th low

Grinding Lemmings is what we really enjoy doing. All is good and fine until you become one. Maybe that’s why the life cycle on a Wall Street prop desk is so short. After all, “it is unknown why lemming populations fluctuate with such variance roughly every four years, before plummeting to near extinction” (Wikipedia).

 

We love to win; we hate to lose; and if we ever lose respect for the name on the front of our jerseys, we won’t be pointing fingers or saying we don’t know and don’t remember. That’s what losers and lemmings do.

 

Best of luck out there today,

KM

 

Grinding Lemmings - Pic of the Day

 


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