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The World As It Will Be

“No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”

-Isaac Asimov

 

Isaac Asimov was a Hedgeye type of thinker: multi-factor + multi-duration, and ample storytelling to synthesize both.

 

Asimov was a Russian-American scientist (professor of biochemistry at Boston University) but also a renowned science fiction writer. He built a base of understanding in the accepted sciences of the world before he stepped out onto the edge to consider the “world as it will be.”

 

“The world as it is” perceived to be isn’t very difficult to discern this morning. Everyone with a market quote is hanging on whether or not the US unemployment rate will be terrible or toxic. Goldman got everyone hopped up intraday yesterday that we won’t see a 10% handle on the unemployment rate – isn’t that comforting.

 

Unfortunately, “the world as it will be” after a cyclically adjusted (for census workers) employment report won’t change. Like Japan, America has laid down the structural trolley tracks for what our healthcare analyst, Christian Drake, calls Destitution’s Duration. That is, the percent of unemployed in America for 27 weeks or more which continues to make higher all-time highs. At the same time, the percentage of Americans living on food stamps continues to push to higher-highs as well.

 

The bulls may very well enjoy the headline of a 9-percent-something unemployment rate that gets trumpeted by the willfully blind. However, after the first hour of trading, every prop desk in America will have sucked what they could have out of our Government Sponsored Game of Volatility and will prepare for the weekend. No sensible intermediate term decision can be made without considering this world’s debt, deficit, and employment problems as they will continue to be.

 

Because CNBC is mesmerized by a made for American TV 830AM manic countdown, what’s going on in the rest of the world this morning certainly doesn’t cease to exist. So let’s strap on the global macro pants and take a walk down that path:

 

1. Japan – After becoming the 5th said leader of Japan since 2006 (how embarrassing is that?), newly elected PM Kan said: “First and foremost we must gain the public’s trust. I want to help the party break through Japan’s frustrations.” Isn’t that inspirational? Japan remains the precedent that Ben Bernanke and the Fiat Fools continue to be willfully blind to. “The world as it will be” with Japanese style monetary policy in America and Europe will not be good.

 

2. China – After making a fresh YTD low yesterday, the Shanghai Composite rallies a whole 4 basis points last night. Instead of being down -22.1% year-to-date, China’s stock market is down 0.04% less than that. “The world as it will be” according to this major economic leading indicator is one of slowing global growth.

 

3. Spain – After attempting to convince its citizenry that austerity measures are good, the professional politicians in the land of the 20% unemployment rate are looking forward to massive demonstrations early next week. Spain’s IBEX index is flashing a negative divergence versus European equity markets again this morning, trading down another -0.58% to -22.8% YTD. “The world as it will be” when you plug your social net with wage cuts and taxes will not be good.

 

4. Hungary – After hoping that no one in Europe would notice, finally the President of the European Commission, Jose Manuel Barroso, who presides over 26 other political professionals (commissioners of 3 hour lunches) in the European Union, called Hungary’s burgeoning deficit/GDP “a very delicate situation.” At least these guys are starting to see what they are no longer allowed to ignore. “The world as it will be” is one with a long term sovereign debt default cycle.

 

5. Copper – Dr. Copper has been making a series of lower-lows as global equity markets Buy-And-Hope ahead of this employment report. Iron ore inventories ramped another +2.1% week over week in China and copper’s price has broken our long term TAIL of support line of $3.03/lb. At $2.97/lb this morning, copper prices are down -4.5% week-over-week. “The world as it will be” according to this major global macro leading indicator is one of slowing industrial demand.

 

6. Fed’s Balance Sheet – After telling Ron Paul that he was going to “cut the Fed’s balance sheet to $1 Trillion dollars”, ole Heli-Ben has done nothing but Pile Debt Upon Debt. This week, the Fed’s balance sheet expanded by another $2.2B to $2.34 TRILLION DOLLARS. Bernanke continues to buy the toxic waste that is US mortgage backed securities. Watch what this man does, not what he says. “The world as it will be” with the US as the Global Debtor nation will not be good.

 

On that cheery note, enjoy the manic media’s coverage of the US employment report and have a great weekend.

 

My immediate term support and resistance levels for the SP500 are now 1077 and 1111, respectively. We invested 3% of our bulging cash position in gold yesterday (gold was down), taking the cash position in the Hedgeye Asset Allocation Model down from 76% to 73%.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The World As It Will Be - Unemployment Fed Funds Rate


A Look Into May

A mixed bag for the month of May, but plenty of nuggets below the headlines worth highlighting.  Notably, business picked up across the board over the final week of the month for most retailers.

 

 

 

May sales are old news by now, but as with any month there’s a fair amount of company-specific detail that should not go overlooked.  In aggregate, a few themes emerged from the month.  First, business almost universally picked-up over the final week of the month, with most retailers citing a return to favorable (i.e warm) weather as a driver of apparel and seasonal sales.  Second, California was oft-mentioned as one of the weaker regions for the month.  Most retailers cited unseasonably cool and wet weather as the culprit, but is something bigger looming in one of the weakest (financial) states in the Union?  Finally, home categories stood out as the most consistently positive product areas across a wide range of distribution points.  With the Memorial Day calendar shift aiding most retailers and the early read on a better start to the month, it’s fair to expect a meaningful pick up in absolute results come next sales day. 

 

Additional highlights/lowlights:

  • Target noted that groceries and HBA were strong categories for month, increasing by mid to high single digits.  Apparel was also above average, driven by footwear and ladies.  Notable weakness occurred in the electronics category, which was “well below the company average”.  Comments on electronics are consistent with Costco’s recent commentary which suggested promotional activity in flat panel TV’s remains limited, which in turn is impacting demand. 

 

  • ROST continues to report exceptional strength in the dress and home categories, both of which increased by a mid-teens percentage for the month.  From a regional perspective, there was a wide range of performance amongst key states.  California registered a disappointing month, down 1% vs. Florida/Southeast which posted a high single to low double digit increase.  Management believes cool and wet weather during the month had a disproportionate impact on CA results. 

 

  • Kohl’s is awarded the e-commerce growth of the month award after registering a 50% increase in online sales.  This is consistent with Q1 trends and with management’s previous commentary on the growth potential for the .com business.  Recall, that infrastructure investment to support online growth is a key focus in 2010. 

 

  • While JWN did miss Street expectations, it is worth noting that the timing of the company’s Half-yearly sale did negatively impact the month’s results by 350-400 bps (amongst the highest calendar impacts of any retailer for the month).  As a result, the true measure of whether or not momentum is slowing at JWN cannot be measured until June is complete.  Jewelry, dresses, and men’s shoes were top performing categories for the month. 

 

  • While maybe more of a moral victory than anything else (given overall same store sales decreased by 1.8%), JCP noted that men’s apparel was the leading merchandise category for the month of May.  Management attributes this outperformance to changes the company has made in the merchandising and marketing of the category. Recall that men’s remains a key area of focus and was one of the focal points at the company’s recent analyst day.  E-commerce is also a top priority, however it continues to lag its peers, posting only a 3.1% increase for the month. 

 

  • Contrary to most retailers which saw a pick-up in business over the final week of the month, Abercrombie noted that sales were weaker over the second half of the month.  Management attributes the weakness to the Mem Day calendar shift and difficult compares with a summer clearance event last year. 

 

  • Costco noted that it is beginning to see very slight signs of inflation of the meat and produce area.  For the month, average prices for beef and pork were up, while chicken was down slightly.  Deli and frozen food also showed slight inflation.  Other standouts include softline sales, which were up in the mid-teen range for the month. Strength was driven by housewares, home furnishings, small appliances, domestics, and jewelry. 

 

  • Mark your calendars for the annual Aeropostale back to school line preview on July 14th.  We expect to see many positive sell side notes following the event, as this has become standard practice over the years.  How much do denim, hoodies, and graphic tees really change in one year?  

 

  • Keep an eye on June results for American Eagle, which will highlight the company’s efforts to clear slow selling merchandise in advance of the arrival of the company’s first back to school floorset on July 10.  Recall that AEO is betting heavily on denim and will likely need a material acceleration in same store sales to keep inventories in a favorable position relative to sales. 

 

  • With better than planned sales and substantially lower inventories year over year, The Limited is planning a substantial reduction in the number of days in BBW’s semiannual sale.  The event will be 10 days shorter this year, which is expected to negatively impact June comps by 7-10 points.  Overall, LTD continues to highlight substantially higher margin rates as the company has taken inventories down substantially across both brands. 

 

  • The Buckle noted that denim was a leading positive category for both men and women during the month.  On the flipside, footwear was one of the weaker categories.  While not a major driver of the overall business, the weakness in footwear is notable given the category’s strength across most other mall based retailers. 

 

  • TJX reported a notable divergence in the performance of the company’s apparel and home business.  Within the core MarMaxx division, apparel sales increased by 2% vs. an 11% increase in the home category.  Management noted that it believes home categories tend to outperform when unfavorable weather tends to impact apparel sales.  Overall, the trend in the strength of the home categories was consistent across most retailers during the month.

 

 - Eric Levine

 

 


The EU’s Unemployment Line-Up and a Flight to Safety

Position: Short France (EWQ)

 

1.       European Union Unemployment Rates

 

While unemployment is a lagging indicator, it is nevertheless a formidable metric that can tell quite a story about a country’s “health”.  While country statistical offices may have different measures for calculating employment, we’ve used Eurostat data below to present the high-low divergence that exists across Europe.  As we pointed out in our Q2 Theme call Bearish Enough on Spain?, a high rate of unemployment, especially among persons 18-35, can have significant longer-term TAIL implications on economic growth. Simply said, higher levels of unemployment beget lower levels of consumer spending and tax revenue; pile on government austerity measures, ie cutting spending and levying higher taxes (which we’ve recently seen from  Spain, UK, Italy, and Portugal) and we believe you have a cocktail that will push growth prospects further out on the curve (chart 1).

 

The EU’s Unemployment Line-Up and a Flight to Safety  - M1

 

We’d draw your attention to the Baltic countries in chart 2 below, in particular. Over the trailing 6 months based on most current readings, Estonia, Lithuania, and Latvia show some of the largest gains in unemployment rates.  While the Baltic economies account for only 0.5% of total European Union’s GDP according to IMF data, investment risk is embedded in the region’s continued leverage to western European mortgages and loans, especially Swedish banks, and is nevertheless not insignificant. Remember that the Baltic countries experienced some of the largest contraction in GDP last year. We have seen sequential improvement in GDP for these countries over the last 3 quarters off bombed out year-over-year levels, which has helped contribute to the outperformance of the underlying equity markets YTD, yet we’d caution that rising unemployment will eat into the region’s potential growth prospects.

 

One country that stands out in chart 2 is Germany. As we’ve noted in our recent work, the decline in German unemployment over the last months is decidedly bullish, however last week we sold our position in Germany due to the drag we expect from the continent’s debt-laden peers.

 

Another key take away from the EU unemployment divergences is that a one-size-fits-all monetary policy is clearly not working in the Eurozone.  This is a longer term structural negative for the Euro.  We believe that there will be increasing conflict between countries within the Eurozone as their economies recover at different rates (or don’t recover at all) as the monetary union continues to weaken due to a lack of political solidarity.

 

The EU’s Unemployment Line-Up and a Flight to Safety  - m2

 

2.       ECB Deposit Levels Ramp to Historical High

 

Although the Europeans in collaboration with the IMF issued their $1 trillion “loan” facility in early May, European capital markets continue to shake day-to-day. Data from the ECB today may confirm investor worries as banks in the Eurozone parked record levels of cash with the ECB. Overnight deposits totaled €320.4 billion yesterday versus €316.4 billion in the previous day (chart 3).

 

As the chart points out, the flight of banks to safety began with Lehman and the financial crisis blowing out in the Fall of 2008 and has continued since then. With Euribor heading to a new YTD high of 0.706% today, it’s clear banks are cautious on the road ahead. Our call remains that Greece is not an anomaly, but rather that the fiscal imbalances of much larger economies such as Spain, France, and Italy are next, followed by the USA in 3-6 months.

 

We’ve positioned ourselves to take advantage of weakness in European markets. We’re currently short France via the etf EWQ and have been short Spain (EWP) in our virtual portfolio this year.

 

The EU’s Unemployment Line-Up and a Flight to Safety  - M3

 

Matthew Hedrick
Analyst

 

 


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Plug The Hole! SP500 Levels, Refreshed...

If the SP500 breaks down and closes through its long term TAIL line of support (1077) in the next few days, there may not be enough hands in the West Wing to plug the pricking of America’s last giant bubble - the Bubble in US Politics.

 

In the long run, I’ll take that short term stock market pain for America’s long term gain. Government’s heavy hand in markets is creating some of the highest levels of market volatility we have seen in generations.

 

In the meantime, I’ll keep playing the game that’s in front of me, no matter how conflicted or compromised some of the rules of this game of government sponsored volatility has become. The VIX is up +1.3% here to 30.57 and has ominously held its immediate term TRADE line of support (29.86).

 

Ominous is as ominous does. As a reminder, there is no upside resistance in the VIX to the 45.31 level. That means that any breach of the 1077 line in the SPX has plenty of probability to wreak some havoc on market prices.

 

In terms of upside resistance, nothing has really changed so far here in June. As of this afternoon’s price, the SPX is around flat for the month-to-date and the immediate and intermediate term TRADE and TREND lines of resistance remain overhead at 1109 and 1144, respectively.

 

Homebuilder Hovnanian (HOV) is down -13% in response to a -17% decline in net orders and bearish commentary on May demand trends (post homebuyer tax credit expiration). We put out a note titled “Shorting US Housing” yesterday and, at the same time shorted Toll Brothers (TOL). After being bullish on housing since around this time last year, we are making a call to get out.

 

If you’d like to take a look at Josh Steiner and Allison Kaptur’s work on housing, please email Jen Kane at . Being bearish on housing right here and now is not even in the area code of what this market is currently focused on. Lack of focus doesn’t mean opportunities on the short side cease to exist.

 

We remain short the SPY and QQQQ.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Plug The Hole! SP500 Levels, Refreshed...  - S P


R3: Have’s and Have Not’s in the IPO pipe.

R3: REQUIRED RETAIL READING

June 3, 2010

 

Many interesting call outs today. The usual about Toning shoes picking up mo... but GSI making a key acquisition, 2 doggies coming public bc they have to (Toys R Us and Prada), while another postpones – bc it should.

 

 

 LEVINE’S LOW DOWN 

 

- Laundry at Kmart. When the going gets tough, get creative. Word has it that Kmart is testing a laundromat in one of its stores in Iowa.
Hedgeye Retail’s Take: While it seems a bit odd, the combination of shopping and doing laundry kinda makes sense from time efficiency standpoint – though it’s a stretch. Kill time shopping while laundry is cooking. Clearly SHLD is pulling out all of the stops here with yet another attempt to drum up same store sales. I guess where I struggle is figuring out who wants to haul their laundry to and from a Kmart/Sears store.

 

- PSS Toning.  PSS management noted that the company aims to have a multi-brand, multi price-point effort underway to offer a wide range of toning products over the next few months. On the high end, Saucony is expected to introduce a toning product while the Champion brand represents the company’s value priced offering (at ~$40). The company also noted early success with the selling of the mid priced Grasshopper GetFit sneakers, which were debuted on HSN and are a sub-brand of the company’s Keds division.

 

- More Toning. You tired of hearing this yet? SCVL noted that toning shoes, especially Reebok, remain in short supply and there is little sign of demand letting up in the near –term. Management went on to say that pricing remains stable at the high end (~$100), with vendors still setting the pricing in the market. The company expects to see more products coming into the market over the remainder of the year, including a “fitness” effort by Nike (based on Free).

 

 

MORNING NEWS 

 

TOY IPO – how are they going to sell this doggy? Lot’s of hope and prayer.... Here’s a story from the venerable NY Post on Toys R Us – meaning that it must be true. Per the Post, Toys R Us Owner KKR Has Been Pushing Analysts to Give Positive Assessments - Sources tell the NY Post that analysts felt "grilled and cajoled" about TOYS's valuation, making the analysts suspect they were competing for investment-banking business. Sources say that Bank of America (BAC) chose not to take part in the analyst interviews, thinking they might run afoul of a 2003 settlement between the SEC and most banks. Sources say that KKR has been similarly aggressive and pressurizing in other recent IPOs, and the article notes that KKR is not in danger of violating the law with such tactics, only the investment banks that are part of the pact are. The four banks underwriting the deal: Goldman Sachs, JPMorgan Chase, Bank of America, and Credit Suisse. <nypost.com>

Hedgeye Retail’s Take: There’s not enough room on this page for me to say what I really think about this. Sad. Truly sad.

 

WAG Off the Wagon: Walgreens Reversing 15-yr Old Policy and is once more Selling Alcohol - The store is once more selling beer and wine as it seeks to become a one-stop shop without damaging its family friendly image. Up until the mid-90's, the store had been one of the country's largest alcohol retailers. Alcohol and other beverages had comprised about 10% of sales. It stopped when the sales become cumbersome and time-consuming for staff. It now has a limited beer and wine selection in about 3100 of its 7500 stores. <wsj.com>

Hedgeye Retail’s Take: Makes sense…and a lot of it.

 

GSI Acquires Retargeting Solutions Company - GSI Commerce Inc. announced its Marketing Services division has acquired FetchBack Inc., a Tempe, Arizona-based provider of retargeting solutions for more than 500 advertisers. <sportsonesource.com>

Hedgeye Retail’s Take: GSI is one of the more important companies that many people have not ever heard of. The leading outsourced web-enabled commerce business buying a top ‘retargeting’ advertiser makes sense – knowing little else about the economics. The business is focused on the 98% of consumers that show interest in a company by visiting a site, but ultimately leave for one reason or another without transacting. This is one to watch.

 

Prada Considers IPO… Again - Prada SpA, buoyed by surging profit at the eponymous fashion label, is exploring options to revive an initial public offering, according to four people familiar with the talks. Prada, which has scrapped an IPO four times in the last 10 years, is considering a Hong Kong listing in addition to Milan. Prada has cut debt and opened new stores in Asia as the industry rebounds from the worst year on record. The strong rebound in the first quarter, which may continue through the end of the year, would make it an opportune time to consider an IPO. While Prada may hold an IPO as soon as this year, it’s more likely the firm will wait for stock markets to rise and sell stock in 2011. <bloomberg.com/news>

 Hedgeye Retail’s Take: Wing and a prayer. At least it’s better than Toys R Us going public.

 

UK Discount Clothier In No Rush on IPO After Postponement in February - New Look Group Ltd., the U.K. budget clothing retailer, said it has no immediate plans to revive its IPO after reporting an 18% profit increase driven by refurbished outlets and online fashion sales. New Look postponed an IPO in February. The 1,108-store retailer, taken private in 2004 by Permira Advisers LLP, Apax Partners Worldwide LLP and founder Tom Singh, cited “unfavorable” market conditions when it put off the IPO on Feb. 12. New Look has opened outlets in the Netherlands, Egypt, Poland and Singapore as well as larger-format premises in the U.K., and is expanding online overseas to drive profit.  <bloomberg.com/news>

Hedgeye Retail’s Take: Isn’t it fascinating to see how troubled companies are accelerating IPO calendar, while others that are more in control of their own destiny are postponing?

 

Wal-Mart's Apparel Woes - Apparel is Wal-Mart Stores Inc.’s perennial Achilles’ heel and the question remains whether it will ever be able to repair it. Even during the recession apparel lagged while food and areas such as consumer electronics soared. And the problem has only become more intense now that the economy has begun to recover and Wal-Mart’s competitors such as Target are closing the gap with clothing driving sales and profitability while Wal-Mart admitted its apparel sales were below expectations and continues to be a work in progress.  <wwd.com/retail-news>

Hedgeye Retail’s Take: Wal-Mart is already scaling back footwear, which is a solid move. Apparel is a less complex category from a logistical standpoint, but the abysmal track record for WMT is just flat-out embarrassing. WMT needs to buy Liz Claiborne, or some other down and out brand that holds massive brand-equity with middle America.

 

Sport Chalet Sees First Positive Comp in 11 Quarters - Sport Chalet's posted its first gain in comp store sales in 11 quarters in the fourth quarter ended March 28, thanks to favorable winter weather in Southern California that propped up winter prices. Same-store sales increased 5.7%, contributing to a 6.8% increase in sales to $90.2 million that reduced the net loss for the quarter. <sportsonesource.com>

Hedgeye Retail’s Take: The athletic space continues to beat to its own drum.

  

Cole Haan Gets Callout by Clinton and Obama - Cole Haan got a big boost from not one but two U.S. presidents during a World Cup event at the White House last week. President Barack Obama, along with Vice President Joe Biden and former President Bill Clinton, gave the U.S. World Cup team a big sendoff on Thursday before they departed for South Africa. Clinton took notice of the team’s Cole Haan caramel Caper shoes, a cap-toe oxford. “I want to join the team to get the shoes,” said Clinton, according to a transcript from the event. And the former president event made a point of showing them to Obama following the current president’s remarks. “Those are nice-looking shoes,” said Obama, who has regularly worn Cole Haan, including on his inauguration day. “This is the best-dressed soccer team I’ve ever seen.” Cole Haan reps said they are excited about the buzz surrounding the shoe. <wwd.com/footwear-news>

Hedgeye Retail’s Take: This might seem insignificant, but it actually matters. I still struggle with why Nike still owns Cole Haan, but I guess press like this helps the cause.

  

Berkshire Cites Strength in Fruit of the Loom as Driver of Other Manufacturing Business Profit Growth - Berkshire Hathaway said pre-tax earnings in its Other Manufacturing businesses jumped 89% in the first quarter to $332 mm. The gains were driven by higher profits in its apparel businesses, Fruit of the Loom (FOL) in particular.  <sportsonesource.com>

Hedgeye Retail’s Take: It’s been a while since Berkshire called out FOTL as a profit growth driver. We don’t think they are gaining outsized market share, which is a likely positive read through for HBI, which continues to have top line wind at its back this year.

 

Another Promotion for Golfsmith - Just months after Phil Mickelson's Masters win resulted in Golfsmith giving away a $1 million in golf clubs, Golfsmith said it is teaming up with TaylorMade and a trio of golfers, Retief Goosen, Sergio Garcia and Sean O'Hair with a new national promotion tied to the U.S. Open Golf Championship.  <sportsonesource.com>

 Hedgeye Retail’s Take: The last promo was geared towards unloading excess inventory. This time it is about promoting growth in the category.

 

 

 


ISM: What's Next For This Chart?

In macro, particularly when it comes to probability weighing mean reversion, pictures are often more powerful than prose.

 

When I look at this 3-year picture of the most important part of the US economy (the non-manufacturing base of business), this is what I see:

 

1.       A reading of 56 or higher (the red line) = unlikely

2.       A sequential continuation of positive momentum in the V-shaped recovery from the lows (the green V) from here = unlikely

3.       A sequential slowdown from this month’s reading of 55.4 (the blue line) = likely

 

What never ceases to amaze me is how Wall Street analysts come to consider the unlikely, likely.

 

The sell-side consensus for the May ISM non-manufacturing reading was 55.6. That estimate implied a higher-high, not only for this stage of the cycle, but beyond the highs of one of America’s most levered up economic cycles (2007).

 

With all of Asia and Europe slowing, what’s next for this chart? Our bearish positioning and answer to this question are also both implied. US economic growth will slow within 3-6 months; that’s if it’s not slowing here already.

 

Cheers,

KM

 

Keith R. McCullough
Chief Executive Officer

 

ISM: What's Next For This Chart? - ISM Non Manufacturing


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