prev

R3: TVs, HOTT, Levi’s, supply chain disruptions, etc…

R3: REQUIRED RETAIL READING

August 19, 2010

 

Lots of noise here today across the global supply chain with issues both new and existing... 

 

 

RESEARCH ANECDOTES

  

- Substantial traffic increases at TJX continue to be the main driver of same store sales, although the company is now anniversary these gains in the back half.  As a result, the company will be spending incremental marketing dollars in an effort to lap these tough traffic compares.  Expect to see even more ads on TV.

 

- In one of the worst category performances so far this earnings seasons, BJ's TV sales comped down 25% in the quarter.  This weakness is consistent across most retailers however the magnitude here is noteworthy.  Management is expecting further asp declines to help spark demand over the back half.  A tax-free event this past weekend in MA was noted to have helped sales in the category.

 

- From goth to Justin Bieber, Hot Topic admits that in the process of trying to determine what style it wants to embody its customers are in two distinct camps – pop and more alternative/goth (what HOTT has been known for historically). Noting that the “pop camp” is winning out, expect to see a new Hot Topic going forward from what we have come to know.

  

 

OUR TAKE ON OVERNIGHT NEWS 

 

China Anti-Dumping Victory Over EU - The WTO has disapproved the EU’s imposition of extra duties on imports from China, which may bring broad implications to the EU trade policy. Sources said that the WTO panel will say that the EU discriminated against Chinese exporters of screws and bolts compared to exporters from other countries when it applied a single anti-dumping duty based on the national principle. In future, the EU will have to set individual duties for companies on case-by-case basis in order to comply with the WTO position rather than a blanket duty for the whole country. The EU already uses the individual duty model in cases of countries it considers not to be market economies, such as Cuba, Albania or Vietnam.  <fashionnetasia.com>

Hedgeye Retail’s Take: More important than many are likely to realize at first blush as this may be the first step of several such measures. Recall that China brought another case against the EU regarding duties on footwear back in May 2010.

 

Bangladesh Labor Unrest May Divert Garment Orders to India - Bangladesh’s ongoing labor strife over minimum wages may cause some of the country’s garment orders to be switched to its neighboring India. In 2009-10, India lost out to its neighbor in apparel exports as the minimum wages of $100 per month were no match to the monthly $24 paid in Bangladesh. However, the recent labor strife forced Bangladesh to increase wages of its garment workers by 80% to $43 per month. The wages are further set to rise as despite the hike leaving India with the opportunity to overtake Bangladesh. The optimism in the industry stems from the recent enquiries coming from new retailers like Tricot (Chilie), Puntroma (Spain), Aibonito (Spain), Distri-Center (France), apart from the likes of Wal-Mart and M&S. <fashionnetasia.com>

Hedgeye Retail’s Take: While the target wage rate at $75 is still below India, it matters little as customers place a premium on avoiding supply disruptions. Expect increased interest in India to accelerate a resolution to this issue.

 

South African Outbreak Halts Raw Wool and Mohair Exports to China - An outbreak of Rift Valley Fever among South African livestock has forced the country to halt exports of raw wool and mohair to China. South Africa is the world’s second-largest supplier of apparel wool and the leading supplier of mohair, which comes from the fleece of the Angora goat. The country exports about 4 mm kilograms of mohair wool a year, roughly 70% of the world’s supply. China is the country’s biggest customer. Wool and mohair exports have continued to other countries, including the U.K., Germany, India and Taiwan. A spokeswoman for Cape Wools, the executive arm of the Wool Industry Forum of South Africa, said the loss of China as an export market could have serious repercussions on the price of wool and worldwide supply.  <wwd.com/business-news>

 Hedgeye Retail’s Take: Cost increases in cotton, disruptions in wool supply – will 2011 mark the return of polyester?

 

Adidas Launches Flagship Online Store on Taobao - Adidas has opened a flagship online store (http://adidas.taobao.com/) on China's Taobao Mall, the business-to-consumer (B2C) platform within Taobao. The adidas store on Taobao Mall will be its only official online retail channel in China.  <sportsonesource.com/news>

Hedgeye Retail’s Take: A bit slow to the party, but it’s a start. We expect the focus here to ramp significantly.

 

Levi Strauss Creates Asian Brand Denizen Targeting Youthful Emerging Middle Class - Levi Strauss & Co. is embarking on an aggressive expansion in China. The brand, named Denizen, is a first for Levi Strauss, the iconic purveyor of Americana that introduced jeans in the U.S. in 1837. It is rolling out in China, Singapore and South Korea with 50 stores by the end of the year, marking the first time the company has started a brand outside the U.S. Levi’s has opened more than 600 branded stores across the country and has a considerable presence in China’s key retail districts. The company joins Hermès International in the rush to develop a brand in China.  <wwd.com/retail-news>

Hedgeye Retail’s Take: A great example of what a retailer can do once it has roots placed firmly in foreign soil. Let the U.S.-based denim battle begin with VF also intently focused on the opportunity to grow in China.

 

Industry Executives Praise Toning and Boot Categories - Industry executives praised the toning and boot categories as key growth areas in footwear right now in a discussion at FN Platform. The panel included Debbie Ferrée, vice chairman of DSW Inc.; Scott Prentice, VP of sales at Jimlar Corp.; Tom Romeo, president and CEO of Bearpaw; Sonny Shar, CEO of Pentland USA; Cliff Sifford, EVP and GMM of Shoe Carnival Inc.; and Diane Sullivan, president of Brown Shoe Co. Despite upcoming price increases and issues with delivery from China, panelists agreed that the toning category has been good for sales. Sullivan added that the whole wellness category has exploded, with the success of barefoot product demonstrating a consumer interest in fitness and innovation. The panelists also said boots would continue to drive the market going into the next season. “Early reads [on boots] have been extremely positive,” said Sullivan. “The shift we’ve seen is almost as though the consumer goes directly from sandals to boots. That closed-up category is more [difficult].” <wwd.com/footwear-news>

Hedgeye Retail’s Take: Mirroring the buzz out of MAGIC, it appears that boots are indeed back again this year after a major return and resurgence last year increasing shoe chains’ chances to comp.

 

Modell's and REI: Sporting Goods Continue to Expand Store Base - Modell's Sporting Goods gave its flagship store location at West 42nd Street in Times Square New York City a major facelift as the next step its its "Rebirth" store renovation strategy. It also announced plans to open its first stores on the Upper West Side of Manhattan. REI (Recreational Equipment, Inc) plans to open a new store in Santa Barbara, CA and relocate its current location in Santa Ana, Calif. to The Market Place in Tustin, CA.  <sportsonesource.com>

Hedgeye Retail’s Take: One down, many many more renovations to go at Modells. We still think Sports Authority files for IPO before year end.

 

Levi's Workwear by Bill Reid - The limited edition capsule collection that Billy Reid designed with Levi’s combines Southern-flavored tailoring and rugged workwear, and will bear the label Levi’s Workwear by Billy Reid. The line, handcrafted in the U.S., will launch in September at 14 Bloomingdale’s stores, including the New York flagship, as well as five Billy Reid stores, bloomingdales.com and billyreid.com. Among the 10 styles in the range are cotton jersey, crewneck pieces with a “Calabama” graphic, a melding of Levi’s California headquarters and Alabama, where Reid lives. Prices range from $45 for the Calabama T-shirt to $295 for a heavy twill hunting coat with detachable apron. <wwd.com/retail-news>

Hedgeye Retail’s Take: The latest apparel offering from this solid American brand, which has struggled to get it right. Hat’s off to taking another cut at it – results to TBD.

 

Vans Shows Some New Styles - Slim silhouettes are the style prescription this spring from Cypress, Calif.-based Vans, a division of VF Corp. Low-profile girls' sneaker looks appear both in both low and midcuts (and, in a surprising departure, hard soles), but the brand’s laid-back surf DNA remains the inspiration, with the color palette including cool neutrals, whimsical prints and bold stripes. Styles range from $45 to $60 and retail at mall-based stores, boutique accounts and at Vans.com. <wwd.com/footwear-news>

 Hedgeye Retail’s Take: Vans going preppy? Perhaps another sign that skate has slowed.

 

R3: TVs, HOTT, Levi’s, supply chain disruptions, etc… - 1


INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH!

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - rolling

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - 1

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - rolling

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - raw

 

2-10 Spread Compresses Further

 

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been collapsing in the past two quarters.  The current value of 214 bps compares to 217 last week.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - perf

 

Below we show the correlations between initial claims and each of the 30 Financial Subsectors. We have refreshed this table to reflect prices through the end of July. Using this updated measure, Credit Card and Payment Processing companies remain the most correlated to initial claims, with R-squared values of .63 and .65 over the last year, respectively. Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims subsector correlation analysis as of 8.4.10

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .33 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims company correlation analysis as of 8.4.10

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

SBUX: LINKING CAFÉ AND CPG BUSINESSES

Starbucks announced an interesting strategy to construct a relationship with supermarkets through its own cafes. 

 

Reports came through last night about a new strategy by Starbucks to use its rewards program to bring grocery store customers to its cafes.  Starbucks’ Via product reached sales of $100 million in its first 10 months and Starbucks has reiterated several times over the last few months that creating a significant packaged goods business is a centerpiece of its growth strategy. 

 

The chart below shows TRADE line resistance for SBUX building at $25.03.

 

SBUX:  LINKING CAFÉ AND CPG BUSINESSES - sbux levels

 

Howard Penney

Managing Director


EARLY LOOK: Spread Your Wings

Subscribers have access to the EARLY LOOK note every trading morning at 8am (in real-time).  This is a one-off post for this morning.

 

 

_________________________________________________________

“You need to be decisive, open- minded, flexible and competitive.”
-Stanley Druckenmiller
 
Our profession saw one of its all-time greats retire yesterday. Stan Druckenmiller, as one of his good friends told me, was one of the best at this game because “when he knew he was going to be right, he just spread his wings.”
 
After they get access to an interview, the manic media quickly comes to realize that hedge fund people aren’t Avatars. The most consistent hedge fund managers in this game are very matter of fact and common sense people. They have their own repeatable risk management process. They are as competitive as a professional athlete in executing it. And they are mentally flexible enough to change their positioning as the game changes.
 
Stan Druckenmiller likes to look at charts. I have a beauty that’s taped on the inside of my notebook that I often show clients to depict the correlation between hedge fund strategies going back to the early 1990’s. I use the early 90’s because that’s when we started to see the divergence between the real pros in this business and the monkeys in the hedge fund mafia who chase one another’s positions.
 
This chart demonstrates one very obvious fact: hedge funds used to have very low correlations to one another (0.3 in 1993) and now they have very high correlations to one another (averaging between 0.7-0.8 from 2007-2009). Therefore, you should invest with those hedge fund managers that can generate absolute returns in down markets. Druckenmiller was +11% in 2008.
 
From our skunk-works of chaos theory here in New Haven, CT, here are some deep simplicities associated with hedge funds who consistently drive absolute returns across bull and bear markets:
 
1.      Hedge funds that consistently find alpha in their idea generation.

2.      Hedge funds that maximize that alpha (spreading their wings) when they find it.

3.      Hedge funds that hedge.

 
What not to do: run 140% net long and cut your net your exposure to 107% when you realize it’s a bear market. That’s not what I call being hedged. That’s called being levered long. The nascent history of this industry has shown plenty of real pros who end up feeling like monkeys when they go there.
 
Another way that a real pro can start having performance issues is when they miss a big macro move. On top of the statistical reality that there are upwards of 10,000 hedge funds trading their gross and net exposures in a highly correlated way, you also have the institutionalization of asset management driving fund flows. When the macro wind moves from bullish to bearish, you need to be flexible.
 
Going back to 1993, when hedge fund returns weren’t correlated, the % of the US market controlled by “institutional investors” was running just inside of 45%. Today, that number is running closer to 65-70%, and there is an intense amount of pressure for asset managers to be “fully invested.”
 
Being “fully invested” means having a very low position in cash as a percentage of assets under management. After all, the art of managing money is actually having money to manage, so asset managers need to feed the beast. That doesn’t make it right.
 
If you look at the cash positions in US Equity Mutual Funds today versus the early 1990’s, the chart may or may not shock you. Cash as a percentage of assets under management has plummeted from 13% in 1991 to less than 4% today. Which way do you think this chart goes next?
 
And what do you do when long only investors are chasing relative performance bogeys on a monthly basis while levered long funds (disguised as hedge funds) are chasing them daily and weekly? I think those asset managers who are “open-minded and flexible” about thinking through this question of dynamic asset allocation to cash are going to continue to deliver to their clients what they really want – not losing their money.
 
I wake up every day with one risk management goal in my head – don’t lose our clients money. Maybe I should have been a goalie – or maybe I should have submitted my resume to a pro like Druckenmiller who could have taught me how to spread my wings when I get the hot hand. I have much to learn.
 
Our cash position in the Hedgeye Asset Allocation model is currently 61% (when we were bullish in August of 2009 it was 23%). We remain a short seller of both the US Dollar (UUP) and the SP500 (SPY) on strength and our best long ideas in global equities remain Utilities (XLU), Brazil (EWZ), and Indonesia (IDX).
 
My immediate term TRADE levels of support and resistance for the SP500 are now 1062 and 1099, respectively.
 
Enjoy time with your family and friends Mr. Druckenmiller. Your world class risk management performance will be missed, but never forgotten.
 
Best of luck out there today,
KM


Spread Your Wings

“You need to be decisive, open- minded, flexible and competitive.”

-Stanley Druckenmiller

 

Our profession saw one of its all-time greats retire yesterday. Stan Druckenmiller, as one of his good friends told me, was one of the best at this game because “when he knew he was going to be right, he just spread his wings.”

 

After they get access to an interview, the manic media quickly comes to realize that hedge fund people aren’t Avatars. The most consistent hedge fund managers in this game are very matter of fact and common sense people. They have their own repeatable risk management process. They are as competitive as a professional athlete in executing it. And they are mentally flexible enough to change their positioning as the game changes.

 

Stan Druckenmiller likes to look at charts. I have a beauty that’s taped on the inside of my notebook that I often show clients to depict the correlation between hedge fund strategies going back to the early 1990’s. I use the early 90’s because that’s when we started to see the divergence between the real pros in this business and the monkeys in the hedge fund mafia who chase one another’s positions.

 

This chart demonstrates one very obvious fact: hedge funds used to have very low correlations to one another (0.3 in 1993) and now they have very high correlations to one another (averaging between 0.7-0.8 from 2007-2009). Therefore, you should invest with those hedge fund managers that can generate absolute returns in down markets. Druckenmiller was +11% in 2008.

 

From our skunk-works of chaos theory here in New Haven, CT, here are some deep simplicities associated with hedge funds who consistently drive absolute returns across bull and bear markets:

  1. Hedge funds that consistently find alpha in their idea generation.
  2. Hedge funds that maximize that alpha (spreading their wings) when they find it.
  3. Hedge funds that hedge.

What not to do: run 140% net long and cut your net your exposure to 107% when you realize it’s a bear market. That’s not what I call being hedged. That’s called being levered long. The nascent history of this industry has shown plenty of real pros who end up feeling like monkeys when they go there.

 

Another way that a real pro can start having performance issues is when they miss a big macro move. On top of the statistical reality that there are upwards of 10,000 hedge funds trading their gross and net exposures in a highly correlated way, you also have the institutionalization of asset management driving fund flows. When the macro wind moves from bullish to bearish, you need to be flexible.

 

Going back to 1993, when hedge fund returns weren’t correlated, the % of the US market controlled by “institutional investors” was running just inside of 45%. Today, that number is running closer to 65-70%, and there is an intense amount of pressure for asset managers to be “fully invested.”

 

Being “fully invested” means having a very low position in cash as a percentage of assets under management. After all, the art of managing money is actually having money to manage, so asset managers need to feed the beast. That doesn’t make it right.

 

If you look at the cash positions in US Equity Mutual Funds today versus the early 1990’s, the chart may or may not shock you. Cash as a percentage of assets under management has plummeted from 13% in 1991 to less than 4% today. Which way do you think this chart goes next?

 

And what do you do when long only investors are chasing relative performance bogeys on a monthly basis while levered long funds (disguised as hedge funds) are chasing them daily and weekly? I think those asset managers who are “open-minded and flexible” about thinking through this question of dynamic asset allocation to cash are going to continue to deliver to their clients what they really want – not losing their money.

 

I wake up every day with one risk management goal in my head – don’t lose our clients money. Maybe I should have been a goalie – or maybe I should have submitted my resume to a pro like Druckenmiller who could have taught me how to spread my wings when I get the hot hand. I have much to learn.

 

Our cash position in the Hedgeye Asset Allocation model is currently 61% (when we were bullish in August of 2009 it was 23%). We remain a short seller of both the US Dollar (UUP) and the SP500 (SPY) on strength and our best long ideas in global equities remain Utilities (XLU), Brazil (EWZ), and Indonesia (IDX).

 

My immediate term TRADE levels of support and resistance for the SP500 are now 1062 and 1099, respectively.

 

Enjoy time with your family and friends Mr. Druckenmiller. Your world class risk management performance will be missed, but never forgotten.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Spread Your Wings - EL st


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
next