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Breaking The Buck's Third Act

The US stock market bulls like to talk about 2 things: growth and earnings. We like both, but only when they are accelerating sequentially (unless we see a price that reflects the pending slowdown in sequential growth).

 

Since market prices don’t lie, we use them as leading indicators for future growth. This is what made us bullish on US equities in June of 2009 inasmuch as it makes us bearish on US equities in June of 2010.

 

What’s a little tougher to discern is what a weakening US Dollar might do to stock market prices. While most recent history (the last 3 years – see chart) suggests that the $88 level in the US Dollar index is a formidable level of long term resistance (a long term lower-high, going back 30 years), what will be interesting this time around is seeing how the US Consumer reacts to any sequential price spikes in major US Dollar based consumption items (i.e. gas at the pump).

 

One of the major reasons we outlined as catalytic to calling the stock market crash of 2008 was the Burning of The Buck. A predictable go-to-move by the Keynesians in Washington would be the debauchery the currency in exchange for a hope that the Buy-And-Hope community would buy into the idea that cheap moneys would save the stock market from noticing the US Consumer going on strike (sound familiar? How about 2010 Europe?).

 

In the most recent three weeks prior to the US Dollar going down, US Consumer confidence in the weekly ABC/Washington Post survey had been improving week to week. The US Consumer likes it when prices at the pump go down. What will be interesting is seeing her reaction to rising pump prices. Last week’s -1% drop in the US Dollar Index fired up the price of WTI oil by +3.2% week-over-week. We’ll get the weekly reaction from the ABC survey on Wednesday morning.

 

For now, we are short the US Dollar via the UUP. We’re short it because it’s the best way to be explicitly short the tired strategy of the Fiat Fools in Washington. Until they realize that going back to the well of destroying this country’s currency rather than cutting the real problem (debt financed deficit spending), there is no reason for the objective mind to believe that any of the lines of support in the chart below will hold, over time.

 

What this will mean for the stock market remains to be seen. For the last 3 days, Breaking the Buck’s Third Act has certainly been reflationary. Good for the stock market bull how hasn’t seen a 3-day rally since April? Sure. Good for Americans? We’ll see…

KM

 

Keith R. McCullough
Chief Executive Officer

 

Breaking The Buck's Third Act - DOLLAR


Casual Dining - TX and FLA Exposure

If there were any “black cloud” questions being asked of the Restaurant management teams in NYC last week, the issues stemming for the oil spill were front and center but future consequences are impossible to predict.

 

The magnitude of the spill is staggering and the images of oil flowing into the gulf are painful to watch.  With some oil already being found in the Florida panhandle, the odds appear high that the oil slick will feed into the Gulf Stream, likely carrying the oil through the Florida Keys, past Miami and up the east coast.  The Gulf Stream travels at an average speed of 4 miles per hour, so once the oil hits the Gulf Stream, it will take 26 days to hit the Hamptons. 

 

As the events unfold, tourism will suffer in the state of Florida and in other parts of the east coast.  Looking past the summer, many snow birds will likely look for a new place to rest for the winter.   This is a worrying scenario for the Sunshine State’s economy.

 

Longer term, another concern would be the potential impact of a slowdown in drilling, particularly in Texas, which is an important state for a number of restaurant companies. 

 

The following table shows the casual dining industry exposure to different regions of the country, based on the Malcolm Knapp data.  The chart shows the regions of the country that are performing better or worse than the national average for the month of March. 

 

The two chains that stand out the most to exposure to Florida and Texas are EAT and PFCB, but CAKE RUTH, DRI and TXRH have significant operations too. 

 

Casual Dining - TX and FLA Exposure - StateExposure


Credit Markets . . . Bearish Is As Bearish Does

Conclusion: The TED SPREAD and junk bond yields are pointed up and to the right.  That’s bearish for equities.

 

Despite the bounce in equities over the past week, debt markets continue to flash bearish signals as spreads widen and bond prices hit new lows.  Below we’ve outlined a chart of high yield bond yields in the United States and the Ted Spread, both going back three months.   Admittedly,  high yield bond yields and the ted spread both measure slightly different types of risk.

 

The Ted Spread  is the difference between the interest rates on interbank loans and short term U.S. government debt, and is an acronym formed from T-Bill and Ed (the ticker symbol for the Eurodollar futures contract).  A typical range for the Ted Spread is between 10 and 50 basis points.  Obviously, a widening Ted Spread means that liquidity is being withdrawn and perceived credit risk, generally, is going up.  During the 2007 subprime mortgage crisis, the Ted Spread was routinely in the 150 – 200 basis points region.

 

Currently the Ted Spread is at 47 basis points, which is up 5 basis points week-over-week.  While this is not flashing an extreme, it is certainly at the high end of its normal range and climbing.  For the equity market to continue to rally, we will likely need to see the Ted Spread narrow.

 

In conjunction with the widening of the Ted Spread, high yield bond yields in the U.S. have been climbing over the course of the past few months.  As we wrote on May 7th:

 

“Credit spreads widening in conjunction with a declining stock market typically indicate a dramatic shift away from any type of risk by institutional investors.  More specifically, they also signal bond investors getting increasingly concerned about fundamentals and cash flow.   Over the course of the past few days, corporate high yield yields widened dramatically from 8.2% to 8.6%.  This morning yields continue to climb.”

 

This dramatic widening of junk bond yields was obviously a precursor to the equity market sell-off, and indicative of less certainty related to specific company cash flows and their ability to refinance at comparable rates.  In Europe, there hasn’t been a high yield bond offering in over a month, although there are a number of offerings on the docket for this week.  The success of these offerings will be an important indicator for the health of debt markets in Europe.

 

As ever, the credit markets are leading indicators for equity markets.

 

Daryl G. Jones
Managing Director

 

Credit Markets . . . Bearish Is As Bearish Does - 1


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THE M3: DICJ: JUNE GGR TO SLOW DOWN; GALAXY MACAU OPENING; PACKAGE TOURS AND OCCUPANCIES....

The Macau Metro Monitor, June 14th, 2010

 

JUNE CASINO REVENUE LOWER THAN MAY, SAYS REGULATOR Macau Daily Times, Intelligence Macau

Local gaming revenues for June will be lower than in May, Director Neves from DICJ told MDT. The regulator stood by his prediction of 30% GGR growth in 2010 and believes the rise “will be smoother in the second half of the year” because of tougher comparisons.  According to Neves, in the first nine days of June, GGR totaled less than MOP 3.9 billion (average of MOP 430 million per casino).  If this average remains steady, June will finish with MOP 12.9 billion GGR, up 54.7% YoY.

 

IM believes the relatively soft GGR in the first week of June was due to the anticipation of the three-day public holiday for the Dragon Festival on the mainland, which starts today.  IM does not believe this slowdown will continue for the rest of June.

 

GALAXY MACAU TO OPEN IN MARCH Macau Daily Times

Galaxy Entertainment's Peter Caveny said that the Galaxy Macau resort on Cotai will open in March 2011.

 

In other news, the president of Philippine Amusement and Gaming Corporation (PAGCOR), Rafael Butch Francisco,said the Manila Bay integrated resorts are likely to attract many Filipino nationals currently working in Macau. Around 40,000 jobs would be created, he added.  Francisco believes the wages in the Manila Bay integrated resorts will match the MSAR ones “in three, four more years," which he hopes would entice the Filipinos workers to return home.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR APRIL 2010 DSEC

Visitor arrivals in package tours increased by 20.3% YoY to 572,157 in April 2010. Visitors from Mainland China (429,510) and Hong Kong (22,594) rose by 17.8% and 6.3% respectively.  At the end of April 2010, total number of available guest rooms of the hotel sector increased by 2,053 (+11.7%) YoY to 19,631 rooms.  A total of 664,286 guests checked into hotels and guest-houses in April 2010, up by 15.1% YoY.


MORTGAGE LOANS CONTINUE TO INCREASE macaubusiness.com

For the first quarter of 2010, new RMLs approved by Macau banks increased by 5.4% QoQ (208.3% YoY) to MOP7.0 billion.  New CRELs approved decreased by 16.0% QoQ to MOP5.3 billion but increased 164.3% YoY.

At the end of March 2010, the delinquency ratio for RMLs stood at 0.15%, down 0.04% points from three months earlier The ratio for CRELs went up 0.11% points from the previous quarter.


R3: Adding WMT to the List of iPhone 4 Retailers

R3: REQUIRED RETAIL READING

June 14, 2010

 

Add Wal-Mart to the growing list of retailers that will have the iPhone 4 at launch. This marks the first time the world’s largest retailer will have the Apple phone available on day one, despite selling the 3Gs after it launched at other venues. While the buzz/hype surrounding the new product is a boost for retailers, it’s interesting to see Apple’s tight rein on distribution slowly relax as each subsequent launch has taken place.  With the phone available at thousands of doors at launch this go around (vs. hundreds for earlier versions) we wonder if this strategy actually leads to the sale of more units or just dilutes sales productivity and leads to shorter lines for consumers.  For those using length of lines to determine iPhone 4 demand, we suspect this time around may be different. 

 

 

LEVINE’S LOW DOWN 

  • It was only a matter of time before the hit TV show, Glee, had its own line of merchandise. Thanks to Macy’s and Claire’s Stores, a line of Glee branded products will be hitting the shelves soon. Macy’s will have an exclusive range of apparel and accessories while Claire’s will sell a line of jewelry. Aside from the popularity of the TV show, the show’s music has been downloaded 7 million times (so far).

 

  • Keep an eye open for Target’s latest collaboration, this time with former child actor Soleil Moon Frye a.k.a “Punky Brewster.” The organic line of baby clothing will debut in July and will carry the brand name, The Little Seed. Frye already operates an organic children’s clothing store in Los Angeles, which serves as a base for the Target line.

 

  • With much of the industry is focused on utilizing social media i.e. Twitter, Facebook, Foursquare, etc. to attract new customers, Lululemon has stayed true to the age old strategy of building the business one hand shake at a time. As part of its retail strategy, managers integrate themselves into the fitness community in an effort to get top instructors involved with the brand – such is the case in Tampa ahead of the company’s June 18th store opening. While recent studies suggest social media sites have a modest impact on consumer behavior at best, the bottom-line is there is no substitute for direct word of mouth persuasion.  

 

 

MORNING NEWS 

 

Teen Retailers Run into Some Fashion Trouble - Specialty stores catering to fickle 13- to 19-year-olds are struggling as these consumers grow tired of the Americana and surf-and-skate fashions they’ve long snapped up and search for a new look — even if they’re not quite sure what that look might be. Their ennui is setting off alarm bells over the crucial back-to-school season even as schools let out for the summer. Not only is demand soft, but competition is growing. Fast-fashion retailers such as H&M, Zara and Forever 21 are gaining momentum since their looks change every six weeks or less, and mass merchants are picking up market share, as well. 4% to 6% of teens last year shifted from shopping at specialty stores to shopping at mass merchants and discounters. According to The NPD Group, apparel spending among 13- to 19-year-olds dropped 9.4% to $34.7 billion in the 12 months ended April from $38.3 billion during the comparable prior-year period. Soft demand in the teen segment and a glut of inventory that built up since the first quarter at key stores could trigger an all-out price war in the space, pressuring results for the second quarter and b-t-s, according to analysts. Comparable-store sales at teen stores fell 2.7% in May, Thomson Reuters’ reported. The need to clear out inventory in advance of b-t-s shipments at retailers including Gap Inc., American Eagle Outfitters Inc. and Abercrombie & Fitch Co. not only could put stores under higher price and margin pressures, but also affect consumer psychology going into the important b-t-s selling season. <wwd.com/business-news>

Hedgeye Retail’s Take: While we wouldn’t characterize the current apparel supply as a “glut”, there’s no denying that retailers including AEO and ANF have begin to take bets again on key product categories in an effort to drive sales.  What’s least surprising is that consumers have essentially migrated towards “newness” and away from fashion that seems to repeat itself season after season. Maybe teens finally have enough polos and cargo shorts? 

 

Moncler Plans IPO in 2011 - Moncler confirmed plans to go public on the Milan bourse by the spring-summer of 2011 and has appointed Merrill Lynch and Morgan Stanley as its global advisors. According to a spokesman for Carlyle Group, which acquired a 48 percent stake in Moncler in mid-2008, the timing isn’t set in stone but is subject to market conditions. The operation would value the company at between 600 to 800 million euros. Most recently Moncler lured fashion veteran Alberto Lavia from Façonnable to become its chief executive officer with the aim of further strengthening its managerial structure. <wwd.com/business-news>

Hedgeye Retail’s Take: Perhaps best known for its down jackets, the Italian-based apparel brand is the latest to test the IPO waters – a process that has likely been accelerated by the country’s debt concerns. 

 

The Future of Toning - How does toning top a full year of massive sales and major buzz? By exploring new avenues of growth and reenvisioning the category itself, industry experts said. Athletic players from across the spectrum have joined the crowd with their own toning shoes. American Sporting Goods Corp. brands Avia and Ryka premiered instability-based toning shoes to accounts such as DSW and The Finish Line; and in May, Collective Brands Inc.-owned Grasshopper debuted a health and wellness style exclusively with HSN. Even core running brands, including New Balance, which launched into toning in April, have gotten in on the act. NPD estimates that the toning footwear market for men and women has increased to $74 million in April from $3.6 million in May 2009. While the long-term direction of the market isn’t clear, almost everyone agrees that toning will enjoy more success. “Every business — new or old — has a ceiling attached to it, and the question is how much growth can you expect? I don’t know yet when the saturation point comes for toning, but we, at least, have not seen it yet,” said Uli Becker, president and CEO of Reebok. “We’re not even close to reaching a limit in 2010.” <wwd.com/footwear-news>

Hedgeye Retail’s Take: While the ultimate size of the toning market opportunity remains unclear, one this is – competition is up meaningfully over the last 6-months including MBT (the trends originator) joining the fray with a $100 offering.

 

England-US World Cup Game Hurt UK Retail Traffic Saturday - England’s first World Cup game hit shopper numbers on Saturday, when footfall fell by 4.7%.  <drapersonline.com>

Hedgeye Retail’s Take: Retailers take note. The World Cup provides upside to sales for some retailers, but interest around the sport can’t be ignored when allocating headcount.  

 

Amazon Stays On Top As Healthiest Retailer - Amazon.com Inc., the world’s largest online merchant, won the top spot in an annual survey of the healthiest U.S. and Canadian retailers for a second year in a row as more shoppers make purchases online. Amazon.com’s technology keeps inventory levels and expenses down, said Consensus Advisors Chief Executive Officer Michael O’Hara, whose firm did the survey. Aeropostale Inc., Urban Outfitters Inc., CVS Caremark Corp. and Wal-Mart Stores Inc. round out the top five in the list, which comes out tomorrow. Amazon.com has posted three consecutive quarters of profit growth as consumers begin spending again amid the economic recovery. 1)  Amazon.com (no change), 2)  Aeropostale (+2), 3)  Urban Outfitters (no change), 4)  CVS (+2), 5)  Wal-Mart (no change), 6)  Bed Bath & Beyond (+6), 7)  Coach (-5), 8)  The Buckle (+1), 9)  Guess (-1), 10) Lululemon Athletica (new).   <bloomberg.com/news>

Hedgeye Retail’s Take: The study, which looks at multiple factors including growth, debt levels and pricing over a 5-year period leaves us with many questions including the definition of “healthy.” A quick look at our SIGMAs suggests the weighting of these factors are not equal with all but two companies (CVS and WMT) sporting overcapitalized balance sheets. While all are currently in Quadrant 1 (margins expanding and sales/inventory spread positive), the differentiation in near-term trends are notable.

 

Note: Our Q1 SIGMA book will be available for distribution later this week – if you’d like to see the SIGMAs for the aforementioned companies please let us know.

 

Study Shows Social Sites Have Had Little Impact Over 6 Months - Some consumers show interest in discussing and interacting with brands on social sites like Twitter and Facebook. But research shows little change since six months ago in users’ likelihood to participate in these activities. <emarketer.com>

Hedgeye Retail’s Take: Hard to know if Twitter in general is losing steam or consumers just aren’t continuing their rapid growth in using social networking as a means to influence other consumers.  Either way, the fact that over 50% of Twitter users still recommend a company or product is noteworthy.  At the very least, companies need to be focused on these “influencers” in an effort to keep brand images favorable.

 

R3: Adding WMT to the List of iPhone 4 Retailers - 6 14 10 R3 chart

 

 


WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE

Most troubling this past week is that high yield and leveraged loans broke to new lows (price), while the CDS for Financial companies (US) was generally wider week over week even though equities were slightly higher. The TED Spread continues to widen, even as LIBOR marks time. Overall, six of our eight risk metrics registered negative week over week changes, while two were positive.  

 

Our risk monitor looks at the following metrics weekly:
1. CDS for all available US Financials (30 companies).
2. High Yield
3. Leveraged Loans
4. TED Spread
5. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit Subprime Spreads
8. AAII Bulls/Bears Sentiment Survey

 

1. Financials CDS Monitor - Spanish banks were the best performers in CDS last week, with three of the four improving. In the US, the environment was less sanguine, as Moneycenters and Brokers CDS rose an average of 11%, Consumer Finance companies rose an average of 7%, and Insurance companies rose an average of 15% (median 9%). Conclusion: Negative.

 

Tightened the most versus last week: Spanish banks (SAN-ES, BBVA-ES, SAB-ES, POP-ES)
Widened the most versus last week: ACE, XL, ABK, AGO
Widened the least versus last month: BAC, COF, MMC, SAN-ES
Widened the most versus last month: ACE, XL, ABK, AGO

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - cds

 

2. High Yield (YTM) Monitor - High Yield rates rose 20 bps, continuing their recent march upward.  Rates closed the week at 9.29% versus 9.09% the prior week This is a new high on yield post-February (new low on price).  Conclusion: Negative.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - high yield

 

3. Leveraged Loan Index - Leveraged loans fell last week to close at 1453, down 11 bps from the prior week.  This is also a new low on price post-February. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - lli

 

4. TED Spread Monitor - A great canary, the TED spread continued to close higher on almost a daily basis, finishing the week at 46 bps, 6 bps higher than the previous week.  Even though the Libor component was flat, we still regard this as a meaningful negative. Remember, a persistently high TED Spread was one of the ways markets knew for sure that the fundamental backdrop was not improving in the 2007/2008 credit crisis. Conclusion: Negative. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - ted

 

5. Journal of Commerce Commodity Price Index - A sharp sell-off in this index served as a harbinger of the 2008 crash. This week the JOC Commodity Index closed at 16.11 on Thursday, down 4.3 from the previous week.  Conclusion: Negative. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - joc

 

6. Greek Bond Yields Monitor - Greek Bond yields fell 11 bps  last week to 811 bps.  Conclusion: Positive. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - gr bond

 

7. Markit ABX Index Monitor - We include this measure as a reflection of what is going on in deep subprime distressed paper.  We use the 2006-2 series and look at the AAA, AA, A and BBB- series.  The Markit ABX Index was generally flat last week, except the A series, which made a strong move to the upside.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - markit

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin, with bulls falling 2.6% to 34.5% and bears gaining 2.3% to climb to 43.1%.  This leaves the spread at 9% to the bearish side, up from 4% bearish last week.  We consider extreme readings in this series to be notable (particularly to the bearish side) as a contraindicator, but moderate readings are less indicative of short-term movements. Conclusion: Negative.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur

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