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R3: Being Bullish With Hindsight

R3: REQUIRED RETAIL READING

May 13, 2010

 

 

TODAY’S CALL OUT

 

Last night Whole Foods reported a solid quarter with EPS coming in at  $0.38 vs. Street $0.34.  Comps were above expectations at 8.7% (Street around 7.1%).  But that’s not the whole story.  Same store sales accelerated post quarter, to up 9.5%. Clearly the recent (stock) market turmoil has not had a knee jerk impact to the consumer’s propensity to buy locally sourced, grass fed beef. 

 

At the risk of being overly bullish with the benefit of hindsight here, the bottom line is WFMI’s results are solid by all accounts.  Importantly, key drivers to the quarter appear to have legs.  Things that struck me on the positive side include the slight reduction in the capex guidance, now $300-$350 vs. $350-$400 (without any store opening slippage), the resolution of the FTC/Wild Oats saga, and the highlighted performance and profit improvement of the Wild Oats stores.  It’s also favorable to see the younger (and for now larger) stores comping as well as they are for two reasons.  One, it validates growth opportunities which I believe are still in doubt by some, and two, it certainly helps ramp store level margins at a better than expected clip.  It’s amazing what a more stable economy can do to clear the air on the viability of the business model.  Perhaps this is also why management hinted at re-accelerating store development over the next couple of years. 

 

The bottom line here is there is still opportunity ahead for WFMI to build sustainable momentum, especially now that company’s value message and price perception is beginning to resonate with existing and new customers.

 

-Eric Levine

 

R3: Being Bullish With Hindsight - WFMI SIGMA

 

 

LEVINE’S LOW DOWN 

 

- Foot Locker’s CCS action sports brand continues to move along with the opening of two additional test locations. A store in Austin, Texas is slated to open this month with an additional location opening in Raleigh, NC this June. These openings bring the total chain to 6 locations nationwide across a range (albeit small) of malls and demographics. While no official “rollout” has been announced, we continue to believe CCS will become a key growth driver for FL over the intermediate term.

 

- Macy’s noted that its best performing stores, or those showing the biggest year over year gains, were represented by two distinct categories. Macy’s Herald Square flagship as well as the company’s smaller format stores led the chain for the quarter. Management believes the My Macy’s program is in some way a big factor in driving the improvement in the smaller footprints.

 

- Whole Foods noted that it anticipates re-accelerating growth in new stores over the next couple of years. However, given the timeline required to sign leases and complete construction, an actual pick up is likely 1-2 years out. Recently, the company has seen a slight reacceleration in new development opportunities (vs. second use), although new real estate projects remain constrained in the larger scheme of the growth pipeline.

 

 

HEDGEYE CALENDAR

 

R3: Being Bullish With Hindsight - Calendar

 

 

MORNING NEWS 

 

Textile and Apparel Imports to the U.S. Posted Double-digit Growth in March - Shipments of textiles and apparel to the U.S. rose 17.7%. For the first quarter, textile and apparel imports increased 14%. Apparel imports were up 17.3% and textile imports increased 17.9%. For the quarter, apparel imports rose 11.4% whiile textile imports were up 16%. The overall trade deficit increased to $40.4 billion in March from $39.4 billion, according to the Commerce Department. Exports in March rose 3.2% to $147.9 billion from February. Combined imports of textiles and apparel from China grew 21.5% (apparel +27%), Vietnam spiked 45.9% (textile +165.2% and apparel +13.5%). <wwd.com/business-news>

R3: Being Bullish With Hindsight - Apparel OTEXA Imports

 

Container Cargo Traffic up 18.7% in April at Port of Long Beach - The monthly container cargo count at the Port of Long Beach increased for the fifth straight month in April, rising 18.7% compared to the same period a year ago. Imports were up 21.2%, pointing to a robust recovery in the domestic retail sector, and exports rose 15.2%. Overall, the Port handled a total of 485,059 twenty-foot equivalent container units in April; 241,245 TEUs inbound, 130,155 TEUs outbound and 113,659 TEUs of empty containers. Empty containers, which are mostly bound overseas for refilling, was up 17.6%.

R3: Being Bullish With Hindsight - Long Beach Container Traffic APril

 

LULU acquires Majority Interest in Australian JV Partner - The Vancouver-based firm boosted its equity interest ownership to 80.3% from the previous 13% stake. The remaining 19.7% is held by David Lawn, who heads up Lululemon’s Australian operations, and another unidentified investor. “This increased ownership interest, combined with David’s ongoing strong leadership and the expertise of the Australian operating team, provide a solid foundation for Lululemon’s expansion in the Australian market,” said Christine Day, chief executive officer of Lululemon. The brand entered Australia in October 2004 with a store in Melbourne, Victoria. There are now nine stores and four showrooms throughout Australia, the firm said.  <wwd.com/business-news>

 

Juicy Couture Enters Canada - Juicy Couture is entering Canada with its first freestanding store at the Yorkdale Shopping Centre in Toronto. The 2,100-square-foot store, which opens May 20, will showcase Juicy’s signature spirit and whimsical decor. It’s the first of what Juicy Couture anticipates will be several stores in Canada. “We see the potential for at least three stores in Toronto within the next three years, and strategic expansion to other major metropolitan Canadian cities within the next five years,” said Laura Mays, senior vice president of North America for Juicy Couture. While Juicy officials declined to give first-year sales projections, industry experts estimate sales could exceed $2 million in the first year. Juicy’s summer women’s collection, which includes relaxed, romantic dresses, shorts and fresh designs on the tracksuit, as well as summer accessories, will be showcased in the new store. <wwd.com/retail-news>

 

QVC Starts Off the Year With Healthy Web Sales - The e-commerce channel grew nicely for QVC in the first quarter. U.S. and international web sales increased 21.7% and 21.1%, respectively, while total sales grew 10.7%. Good news for LIZ who has an exclusive partnership with QVC. <internetretailer.com>

 

U.K. Consumer Confidence Fails to Recover From Drop on Budget-Cut Concerns - U.K. consumer confidence failed to recover in April from the biggest drop in almost two years the previous month on uncertainty about the election and proposed government spending cuts.  <bloomberg.com/news>

 

WMT May Sell Apple's Ipad Later this Year - Wal-Mart may start selling Apple Inc.’s iPad in 2010 in some U.S. stores as it competes with electronics chains for consumers who want to connect their e-mail, movies, games and music. “We anticipate being able to have the iPad later this year,” Gary Severson, senior vice president of entertainment for Wal-Mart’s U.S. stores, said in a telephone interview. Apple has sold more than 1 mm iPads since they went on sale in the U.S. last month, making the debut more successful than the introduction of the iPhone in 2007.  <bloomberg.com/news>

 

The National Council of Textile Organizations and 74 U.S. textile companies sent a letter to House and Senate leaders on Tuesday imploring them to pass legislation suspending duties on imports of rayon and acrylic fibers because the unexpected tariffs are threatening their businesses. The bill, known as the Miscellaneous Tariff Bill, must be renewed by Congress periodically and is meant to help domestic manufacturers compete by giving them tariff breaks on components such as yarns and fibers that are no longer made in the U.S. and must be imported. Acrylic and rayon fibers are no longer produced in the U.S. and have enjoyed tariff breaks for years, but inaction by Congress to pass a new bill reinstating the duty suspensions has imperiled a wide swath of the beleaguered U.S. textile industry.  <wwd.com/business-news>

 

Hugo Boss Eyes China JV - German fashion house Hugo Boss is in talks with Chinese fashion retailer and frranchise partner Rainbow Group to start a joint venture to drive growth in China. <drapersonline.com>

 

ColdwaterCreek.com again leads in high broadband availability - ColdwaterCreek.com ranked first in high broadband availability tests among large retailers for April, says Gomez. <internetretailer.com>

 

Easton-Bell's Q1 Sales Up 5% on Resurging Team Segment - Easton-Bell Sports Inc. said net sales for the first quarter ended April 3 rose 5.0% to $194.1 million on an 8.8% rise in team sports sales and 4.4% decline in action sports sales on a constant currency basis. <sportsonesource.com>


JOBLESS CLAIMS: UNCHANGED

There's not much to get excited about in this morning's claims print. Initial unemployment claims came in at 444k, unchanged from last week, although after upwardly revising last week's print by 4k, this week's print is being cited as a 4k improvement sequentially. On a 4-week rolling basis, the improvement was meaningful, falling 9k to 450.5k.  

 

As we pointed out last week, we remain concerned that without significant improvement in claims, a leading indicator, there will 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 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, May is the expected peak employment month. Beginning next month the census will become a headwind for job creation.  

 

JOBLESS CLAIMS: UNCHANGED - rolling

 

JOBLESS CLAIMS: UNCHANGED - raw

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment. 

 

JOBLESS CLAIMS: UNCHANGED - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


JOBLESS CLAIMS: UNCHANGED

There's not much to get excited about in this morning's claims print. Initial unemployment claims came in at 444k, unchanged from last week, although after upwardly revising last week's print by 4k, this week's print is being cited as a 4k improvement sequentially. On a 4-week rolling basis, the improvement was meaningful, falling 9k to 450.5k.  

 

As we pointed out last week, we remain concerned that without significant improvement in claims, a leading indicator, there will 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 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, May is the expected peak employment month. Beginning next month the census will become a headwind for job creation.  

 

JOBLESS CLAIMS: UNCHANGED - rolling

 

JOBLESS CLAIMS: UNCHANGED - raw

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment. 

 

JOBLESS CLAIMS: UNCHANGED - census chart

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE M3: BANKS LOSE MONEY ON SANDS FINANCING; RISING CASINO WORKER SALARIES

The Macau Metro Monitor, May 13th, 2010

 

 

RLPC-BANKS FACE LOSS ON SANDS CHINA LOAN-SOURCES Reuters

 Bank underwriters of a $1.75 billion loan for Sands' sites 5 and 6 are expected to lose money in the secondary loan market, bankers said on Wednesday.  Banks are expected to sell the loan at 87% of face value or lower after many bank investors declined to join the loan in a lengthy four-month syndication.  The loan raised around $150MM which left underwriters overexposed to the tune of $1.6 billion.  Underwriters included Bank of China Macau ($250MM), BNP Paribas ($250MM), Citigroup ($250MM), Barclays Capital ($200MM), Goldman Sachs ($200MM), UBS ($200MM), Industrial & Commercial Bank of China Macau ($150MM), Banco Nacional Ultramarino ($100MM), DBS Bank ($75MM) and OCBC Bank ($75MM).

 

Sands China's loan is expected to trade at a deeper discount than fellow subsidiary Marina Bay Sands' loan, which is trading at 87% of face value, according to Thomson Reuters LPC data.  Despite higher pricing of 450 basis points over HIBOR or LIBOR, bank investors remained wary of the risk.  A senior loan syndicator, whose bank did not join the deal, said that the greenfield project and overcapacity in the Macau market weighed against his bank joining.  Two sources - one from an underwriting bank - said the deal was also kept open for covenant changes, which required banks to seek new credit approvals.

 

RISING SALARIES IN GAMBLING INDUSTRY HAS ATTRACTED A LOT OF PEOPLE TO CHANGE THEIR OCCUPATION Macaudaily News

Gambling enterprises have announced that they will increase the salaries of their workers, though it is mainly for front line staff, to promote employee loyalty and attract more staff to maintain the service quality of the casinos. For example, City of Dreams have already announced for a substantial pay raise for their front line workers. But aside from a higher salary, It is still uncertain if people would be willing to retrain through government-subsidized, short-term training courses in hospitality and gaming. Also, there are concerns that higher gaming salaries may exacerbate social imbalances and entice young people to drop out of school. Nevertheless, a robust gambling industry have been a positive impact on many other industries in Macau.


Fiat Fools

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction.”

-Albert Einstein

 

At this stage of the Sovereign Debt Dichotomy, it’s fascinating to observe how little professional politicians know about what they don’t know. From Athens to Albany, finding resolve in Piling Debt Upon Debt Upon Debt via fiat currencies is not going to end well. Anyone who isn’t paid to be willfully blind gets this by now.

 

With Ben Bernanke and Jean-Claude Trichet printing moneys from the Keynesian heavens, we thought we’d do some minting of our own this morning and introduce Fiat Fools as our new Hedgeye nickname for politicians running European and American monetary policy.

 

Adam Smith be damned - there is nothing invisible about the heavy hands of these governments. When it comes to their latest storytelling of a “fat finger” causing volatility in the US stock market, take their word for it. It’s a big fat middle finger from the creditors of our broken promises.

 

In Latin, the word fiat means “let it be done” … and so our modern day Roman Gods of finance will do exactly that. Let us debauch the value of our currencies and inflate our way out of this colossal mess. All the while, let us hope that our creditors and citizens alike don’t notice Main Street inflation while Wall Street gets paid to underwrite it.

 

Alas, we all know that hope, unfortunately, is not an investment process for anyone other than the Fiat Fools. The inconvenient truth of history reveals that debtor nations who become hostage to foreign lenders are just that – hostages. As David Walker points out in his latest book “Comeback America”, “the British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt.” All US President Eisenhower needed to do was threaten to sell the British Pound.

 

What if the Chinese or Japanese imposed that credible threat on the US? Up until Greenspan went global with the Fiat Fool system of US economic policy, US public debt held by foreigners was less than 20%. Now it’s pushing north of 50%, and that’s the point. The Buck stops there - and don’t think for a New York minute that America isn’t setting herself up on the trolley tracks to get run right over by the same oncoming train that European pigs have.

 

This is why we call it the Sovereign Debt Dichotomy. There is simply a Duration Mismatch between when the Fiat Fools of Europe and America will see their debts come due. There is absolutely no irony that Greece started to unwind before Spain did. Nor will there be as Spain starts to unwind before France and the US do. The timing of debt maturities matters. Only a Fiat Fool who has never traded a market in his life couldn’t tell you that.

 

As our head of US Strategy, Howard Penney, recently wrote, America has to roll over 40% of US Treasury debt by 2012. Even compared to a country like the UK that has already been forced to devalue its fiat currency, that’s more than a double versus UK gilt maturities as a percentage of the total outstanding!

 

Altogether, this is the #1 reason why we have sold into US stock market strength this week. The duration gap is finally starting to narrow between the Fiat Fools of Europe having their pants pulled down in front of the world and the tide rolling out on our professional US politicians.

 

This morning the Euro is making another lower-low, and remains broken across all 3 of our investment durations (TRADE, TREND, and TAIL). As a result, since 58% of the US Dollar Index is Euros, the Buck Breakout that we have been calling for since the beginning of 2010 continues as the US Dollar hits higher-highs.

 

At a point, and we are not there just yet, the US Dollar is going to be a raging short again. There is a reason why we called for the Burning Buck last year. That reason hasn’t gone away. The European Fiat Fingers are simply taking their turn at the wheel. Unless Ben Bernanke stops behaving like Arthur Burns did between 1, and gets this US currency and the sovereign debt that underpins it under control, we are going to go to a very scary societal place.

 

From a risk management perspective, the US Dollar Index looks like a short again up at the $86.97 level. As both the US Dollar and gold push to higher-highs as a refuge away from a Euro that continues to make lower-lows, I don’t see why we don’t test that upward boundary. The Buck Breakout will continue until the Euro finally becomes the most consensus trade in modern day Rome.

 

Our immediate term TRADE range for the Euro is now $1.24-1.28 and until Spain has its Greek moments in June/July, I’d stay with the Euro short bias as the most obvious way to be short the decision making process of the Fiat Fools. In terms of the capitulation zone, I am now looking at an ultimate 2010 bottom for the Euro at $1.21. That quantitative risk management view lines up pretty well with where I see the US Dollar Index finding its final crescendo.

 

Politics may indeed be local. Fiat Fools, unfortunately, have gone global.

 

My immediate term support and resistance lines for the SP500 are now 1144 and 1186, respectively.

 

Best of luck out there today,

KM

 

Fiat Fools - TR


US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.

- Benjamin Graham

 

The issues that surround one of our three key themes for 2Q10 (Sovereign Debt Dichotomy) are not going away despite a $1 trillion bail out of the PIIGS in the EU. Although our conclusion has been that it will bring May showers (another 2Q10 theme), the prevailing market structure is bullish and is begging us to speculate once again.

 

Yesterday, US equities finished higher, the move was muted with volume down 13% day-over-day and down sequentially for the past four days. The S&P 500 rose 1.37% yesterday, while the Russell 2000 rose 2.97%. Globally, equity markets continue to be focused on macro developments in the EU, particularly as additional austerity measures adopted by Spain helped to dampen some of the moral hazard concerns that had have dominated the market since the beginning of May. This too shall pass, as Spain’s underlying fundamentals suggest an even rockier road ahead (email if you’d like to take part in our Monthly Strategy Call on May 18th: Sovereign Debt: Bearish Enough on Spain?). While these austerity measures are needed, the monstrous amounts of debt being taken on by European governments continues to debase the Euro.

 

At the time of writing, equity futures are trading below fair value, giving back some of yesterday’s gains. In Europe, Greece, Spain, France and Italy (all problem deficit countries) all trading lower again this morning. Since the market close yesterday, CSCO reported numbers above estimates (but trading lower) and the SAP bid for Sybase (SY) is now official. As we look at today’s set up, the range for the S&P 500 is 42 points or 2.4% (1,144) downside and 1.2% (1,186) upside.

 

On the MACRO calendar we have:

  • April Import Price Index,
  • Initial jobless claims
  • Treasury Auctions in 30-yr bonds 

The reduced level of moral hazard concern can also be seen in the VIX, which was down 9% yesterday and has declined sequentially for the past three days. It should be noted that the VIX is still up 63% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (20.41) and sell Trade (39.39).

 

The Dollar bullish TREND remains (up 0.43% yesterday) and is trading higher today. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (83.85) and sell Trade (84.99). In contrast, the Euros bearish TREND remains as the Hedgeye Risk Management model registers its lowest low of immediate term support YTD at 1.24. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.28).

 

The XLK was the best performing sector yesterday after selling off on Tuesday. M&A and the credit-card names were among the standouts in the sector. SY was up 35.1% on reports that the company will be acquired by SAP. IBM (up 4.6%) was one the best performers in the hardware space after the company said it expects to double its earnings to at least $20 a share by 2015. The SOX also rallied 2.8% yesterday.

 

The Industrials (XLI) and Materials (XLB) outperformed the broader market today. Both sectors have been significantly impacted the macro influences that have been driving the market over the last couple of weeks. The Machinery group and Transports were big gainers yesterday with the S&P Machinery Index +3% and the Transports up 2.1%.

 

The low beta Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three performing sectors yesterday.

 

In early trading, Copper rose for the first time in three days in London as concerns about European budget deficits eased as Spain announced its biggest round of budget cuts in 30 years. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.07) and Sell Trade (3.21).

 

Oil is looking lower for a third straight day as U.S. crude inventories grew and the dollar is stronger. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.99) and Sell Trade (80.34).

 

Gold’s safe-haven status continues with Gold up 1.8% yesterday and is now up 12.4% YTD. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,199) and Sell Trade (1,246).

 

Howard Penney

Managing Director

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - S P

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - DOLLAR

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - VIX

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - OIL

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - GOLD

 

US STRATEGY - DOING WHAT WE ARE TRAINED TO DO - SPECULATE - COPPER


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