The Economic Data calendar for the week of the 17th of May through the 21st is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Apparel Margins: Underlying Cross-Currents
Talk about weather, penned up demand, and pretty looking products all you want. The margin structure for Apparel retail just went through a statistical abnormality. Be careful what you own, folks.
It’s tough to miss the fact that consumer discretionary was the worst performing sector yesterday, and it’s not exactly knocking the cover off the ball today either. Chalk it up to market beta, or whatever you want. But don’t forget that there are fundamental headwinds that parts of Consumer discretionary will start to bump against starting, well… now.
Take apparel, for example. We don’t think enough people watch the spread between the prices consumers are paying for apparel vs. the cost of the goods coming in from Asia. The growth spread between these two items has a direct impact on the pot ‘o money that retailers have available to pad margins, and drive unit demand. Consider this; using a mere 147 month benchmark, 8 of the past 12 have been 2 standard deviations above the mean. Yes, a statistical anomaly.
It’s a good thing that this does not have any margin implications. (That was a failed attempt at sarcasm).
Check out the second chart below. The relationship between apparel industry margins and this cost spread is pretty tight, to say the least. Is this doomsday? No. Companies that are proactively preparing and have been investing in growth when times were tough will benefit now. That’s NKE, RL, PSS and UA. We also like BBBY and FL. Those that have benefitted by the luck of the draw and have mirrored/leveraged Industry margin trends are gonna have a tougher go at it. That’s JNY, CRI, JCP, M, ROST, DG and FDO.
Yesterday’s U.S. budget update has got a lot of investors thinking about the U.S.’s balance sheet issues. To recap, April’s contribution to fiscal 2010’s federal budget deficit was a staggering $82.69B – roughly 4x the April 2009 deficit of $20.91B. This most recent sign of the times is especially telling considering that there’s been a budgetary surplus in 43 of the past 56 Aprils (certainly a function of the April 15th income tax deadline). All told, this marks the 19th consecutive month of monthly deficits.
The U.S. must rollover 40% of its debt by 2012, which includes issuances of prior years as well as planned and unforeseen intra-year issuance. That number amounts to roughly $3.4 trillion dollars (including estimates) of refinancing needed over the next 2.5 years! In fact, according to Michael Pento of Delta Global Advisors, the U.S. Treasury auctioned $8.8T in debt during fiscal 2009 – more than 100% of all publicly traded debt! The chart below shows the Treasury maturity schedule from now through 2020. The budget deficit is added to give a sense of roughly the minimum amount of treasury issuance needed each year. These numbers are, of course subject to change based on treasury issuance in the coming years, but as of today, the U.S. public debt maturity schedule is outlined in the chart below.
We will be hosting an upcoming call on the fiscal future of the United States debt where we present our downside budget scenario, but for the time being keep this chart front and center as you think of whether the United States can keep her AAA rating longer term.
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April Retail Sales rose 0.4% headline, 0.4% ex-autos and 0.4% ex-autos and gasoline.
Ex auto’s were in line with expectations but headline was 0.2% above and ex-autos and gasoline was 0.1% above (March was revised higher).
Building materials rose by 6.9% after a 7.8% rise in March, motor vehicles/parts rose by 0.5% and gas station sales were up 0.5%.
BUT if you take out building materials, autos and gasoline sales (a core figure), retail sales were DOWN 0.3%. Sales in clothing, sporting goods, general merchandise, furniture, electronics and in food/beverages all fell.
Thus, on the surface, sales look good but the core figure of ex-autos, gasoline and building materials fell for the first time since Dec ‘09.
The TED spread is widening, credit risk is trading higher. On the margin this is a bearish sign.
Keith is bearish on France, the S&P 500, and Japan for a variety of reasons. One of those reasons is that the TED spread has been expanding steadily, indicating an increase in perceived risk in the general economy. Sovereign debt concerns in Europe are garnering a lot of attention from the investment community over recent weeks. It is interesting to note that the correlation between the TED Spread and the EURUSD is -0.93.
It’s been so long that we have put up a chart with our old mascot from 2008 (Squeezy The Shark), that the boys on our Macro Desk here in New Haven have resorted to stitching their own plush version of the deadly one from the depths. Hedrick and Dale took a picture of their creation and superimposed it on this chart – this thing looks like a minnow! We’ll work on making this thing look as concerning as the SP500 does on a breakdown through 1144.
We call the line that will create accelerating volatility The Shark Line (moves below/above have the propensity to get people leaning on the wrong side of the line eaten). For now, that line is the intermediate term TREND line for the SP500. Its not always the TREND line; it just is now. A lot of the bulls who missed the initial correction in this market got sucked into believing that all weakness was to be bought; expectations are what the Shark Line is built upon.
If this market can close at or above 1144, I’ll cover my short position in the SPY. If it can’t, there is no downside support for the SP500 to the immediate term TRADE line down at 1111.
If you are betting on another Monday bailout of these waters from professional politicians in Europe, all we’d recommend is to swim at your own risk.
Keith R. McCullough
Chief Executive Officer
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.