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Bear Market Macro: SP500 Levels, Refreshed...

Position: longer, for now.

 

Maybe now I’ll pretend I am bullish, beg for QE3, and then sell into it.

 

In all seriousness, the last 48 hours have definitely tested the this market’s immediate term TRADE pain thresholds. I outlined these levels in this morning’s Early Look, but they are worth revisiting - anything sub 1053 would be 2.5 standard deviations oversold on our most immediate term risk management duration (TRADE, which is 3-weeks or less) and 1040 would be a 3 standard deviation event, which rarely occurs.

 

Fundamentally, we are chaos theorists. Therefore today’s intraday low of 1041 being a point away from the line we’d consider max-immediate-term-pain isn’t entirely surprising. We’ll call today’s action proactively predictable.

 

My immediate term support and resistance lines for the SP500 are now 1046 and 1074, respectively. Manage risk with a bearish bias around that range.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - 1


Japan - The World's Easiest Layup

Conclusion: The Japanese government is under pressure to artificially weaken the yen. Regardless of any potential action that may be taken, it is not likely going to be enough to prevent growth from slowing on the island economy.

 

Position: Short the Japanese yen (FXY).

 

Japan’s exports slowed sequentially for the fifth consecutive month in July, furthering concerns that the Japanese central bank will intervene in the currency market to stem the yen’s recent rise to a 15-year high against the dollar and a nine year high vs. the Euro. Exports came in at +23.5% Y/Y vs. a 27.7% increase in June and the data looks to continue to weaken from here in the face of the yen’s 12% advance vs. the U.S. dollar since its April 5th cycle low.

 

Japan - The World's Easiest Layup - 1

 

Japan - The World's Easiest Layup - 2

 

Of course this is absent any intervention by the Bank of Japan in the currency market, a tool that has not been used by Japanese policy makers since March of 2004 when they sold 14.8 trillion yen in 1Q10 after record sales of 20.4 trillion yen in 2003. The gloomy backdrop for global growth and waning final demand from Western consumers suggest 3Q10 to be potentially as ominous from a decision-making standpoint and both the Japanese and American bond markets have been signaling slowing growth for months.

 

Japan - The World's Easiest Layup - 3

 

Just today, Japan sold 4.8 trillion ($57 billion) of three month treasury bills at the lowest yield (0.1123) since the Bank of Japan ended its QE policy over four years ago (April 26, 2006), which indicates investors are likely speculating that Japan will ease its monetary policy to stem the recent gains in the yen. Japanese Finance Minster Yoshihiko's recent change in tone supports such speculation, saying today, “We have to take appropriate action when necessary, though I plan to continue to watch currency movements very closely with great interest.”

 

This statement follows similar commentary out of Japan’s Trade Minister Masayuki Naoshima, who said Friday, “The yen is too strong against the dollar and should weaken about 6% to help the country’s exporters.” Officially, the government has not yet outlined a response to the yen’s surge, though last week Prime Minister Naoto Kan ordered his ministers to submit plans for additional economic stimulus (how shocking). The Nikkei Newspaper reported today that the Bank of Japan’s funding program which provides funds to lenders at 0.1% may be expanded to 30 trillion yen ($356 billion) from 20 trillion and the duration of loans may be increased to six months from the current three. To date, Kan has been tight lipped on government intervention in the currency market, though that could change by the next Bank of Japan meeting, which is scheduled for September 6-7.

 

All told, we continue to be bearish on Japan’s economic health for the long term as a result of unfavorable demographics (ageing population), burgeoning sovereign debt (way past the Rubicon of 90% Debt/GDP), and trade exposure to a deleveraging, jobless U.S. consumer (~16.5% of exports). Regarding that exposure, Toyota, the world’s largest carmaker, has said every one-yen gain against the U.S. dollar reduces their annual operating profit by 30 billion yen. Sony, which generates over 70% of its sales outside of Japan, echoes similar sentiment, claiming it loses about 2 billion yen of annual operating profit for each one-yen gain vs. the dollar.

 

Japan - The World's Easiest Layup - 4

 

Company commentary like this is particularly valuable as it relates to timing central bank action. According to the central bank’s Tankan survey released July 1st, Japan’s large manufacturers expect the yen to average 90.16 per U.S. dollar in the fiscal year ending March 2011. Currently, the average is slightly stronger for the fiscal year-to-date, averaging 90.06 per USD. With the negative barrage of economic data we are likely to receive from the U.S. and W. Europe in the next 6-9 months, the yen will have further upward pressure as investors flock to “safety” globally (we disagree that holding a bag full of yen is safe, but that is the subject of another debate).

 

It appears that Japanese policy makers will be under increasing pressure to artificially weaken the yen or risk economic stagnation and rising unemployment from declining export competitiveness in the face of what is already slowing consumer demand from western economies. Regardless of any potential action that may be taken by Japan’s central bank, it is not likely going to be enough to prevent growth from slowing on the island economy. The Japanese equity market agrees with our assessment on both a short term and longer term duration, down 22% from its YTD peak on April 5th  and down 77% since its January 1990 peak. Ironically, April 5th is the same day the yen put in its YTD low vs. the U.S. dollar. In the end, the deep simplicity that is Chaos Theory always wins in the land of Macro investing.

 

Simple is as simple does, at least according to Ichiro Ozawa (the former No. 2 official in the ruling Democratic Party of Japan) when referring to his American counterparts. For the sake of U.S. equities, let’s hope the Fed keeps it simple and avoids getting too cute with stimulus going forward, or else stocks in the U.S. will continue to be “cheap vs. bonds” for the foreseeable future.

 

Hope, however, is not an investment process.

 

Darius Dale

Analyst


MACRO: Where are the housing bulls now?

This post was available to RISK MANAGER SUBSCRIBERS in real-time.

 

____________________________________________

Conclusion: New homes sales in July were the lowest ever reported (excluding May’s downward revision).  Our street low 1.7% GDP estimate for 2011 is officially under review by the Hedgeye Research Committee, and will be going lower. Call us dogmatic if you will, but it looks like we nailed our Housing Headwinds Q3 theme call.


It’s no secret, Hedgeye has been very bearish on housing.  Our Financials Sector Head Josh Steiner presented his seminal work on this topic in a 101 page presentation about two months ago (if do not have that presentation and are not yet subscribing to our Financials vertical please email sales@hedgeye.com).  The presentation boiled down to one key point: home prices have anywhere between 15 – 50% more to fall nationally based on the supply and demand dynamics we see in our mathematical models.
 
New home sales reflect contact signings and deposits, which is more real-time than yesterday’s Existing Home Sales release (which reflect activity from 1-2 months prior).  The chart below shows New Home sales fell off a cliff in May, which are post tax-credit.  The July number reported today is not positive.  More aptly, it is a disaster.  (And this low-key Canadian isn’t prone to hyperbole.)
 
Specifically, purchases fell 12 percent from June to an annual pace of 276,000, the weakest initial release prior to revision since data began in 1963.  As it relates to price, the median price of $204,000 was the lowest since late 2003 and down 4.8% year-over-year.  We’ve outlined new home sales data going back 18 months in the chart below.  Not surprisingly, consensus estimates were off large with the range being 291,000 to 355,000.

 

 

 

MACRO: Where are the housing bulls now? - Screen shot 2010 08 25 at 1.41.50 PM

 

 

We obviously have had many debates on the housing topic with the bulls. The key push back we get is in regards to the longer term tail of demand and reversion to the mean of housing.  That is, over time household formation will, sooner rather than later, drive the market back into balance.  That, of course, assumes that household formation is positive.  Fortunately our proprietary census research shows just the opposite. The following chart shows household formation data. It shows new household formation rates through June 2010. The first half of this year saw negative household formation rates in the US, which is unprecedented.

 

 

MACRO: Where are the housing bulls now? - Screen shot 2010 08 25 at 2.01.42 PM

 

 

To conclude, and to quote our Financials Team from earlier today:
 
“New home sales came in at just 276K, near their record low.  This anemic level is consistent with our cumulative displacement theory, published on 7/13/10 and republished below.  To summarize, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300K, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero.  Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.”  
 
The question now is of course: where are the housing bulls?  We hope renting.
 
Daryl G. Jones
Managing Director


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Looking for Fear?

We don’t get the media’s freak-out over Ireland over the last two days, but agree that the increase in investor fear is a natural consequence of Standard & Poor’s cutting the country’s credit rating one step to AA-. In its report, S&P increased its estimate for recapitalizing the banking system to as much as €50 Billion ($63 billion) from a previous estimate of €35 Billion. In summary, we believe that more pain could be ahead for the island nation.

 

From a fundamental perspective we’ve yet to see meaningful improvement from the country over the last months. Despite improvement in quarter-over-quarter GDP to +2.3% in Q2, Ireland has the highest budget deficit in Europe at 14.3% of GDP; unemployment at 13.7%; and banking and housing issues that loom, including news that the Bank of Scotland has decided to pull out of Ireland in the new year, which could negatively impact the hotel sector in particular. And further data shows that its important tourism industry is suffering. According to the Central Statistical Office Ireland, the number of overseas visitors to Ireland between January and May in 2010 stood at 2,026,100, down from 2,951,800 in the same period in 2008, or the equivalent to a drop of 6,130 visitors per day.

 

In context, Ireland’s economy is ~ 1/15 the size Germany’s; we’re nevertheless mindful of the impact that the periphery (PIIGS) can have on the region.  Below we chart increases in the risk premium via sovereign bond yields and CDS prices over recent days from the PIIGS, while the economies of Germany, France and the UK remain front and center on our screens as a greater gauge of the region’s health. Importantly, over recent days we’ve seen the TREND line (3 months or more) in the DAX and FTSE break, decidedly negative factors in our model, and an initial signal of the trouble ahead that we’re forecasting for Europe in the back half of the year. Our TREND lines for the DAX and FTSE are 6075 and 5293, respectively.

 

Further, the initial data out in August has largely been in line with our forecast for a negative inflection in August:

  • Germany’s ZEW confidence survey showed a material decline in economic sentiment to 14 in August versus 21.2 in July
  • Manufacturing and Service PMI numbers largely slid for Germany, France and the Eurozone
  • The German IFO Business climate survey for expectations 6 month ahead declined, from 105.6 in July to 105.2 in August

As a reminder, we believe the legacy of European sovereign debt is by no means rear-view, including the question of bank exposure to sovereign debt, which was largely unaccounted for in the 91 bank stress test. Further, continued fiscal and political weakness throughout the region should persist (in Greece and Hungary in particular).

 

Tomorrow Ireland will issue between 400-600 Million Euros of bills. This is but one immediate term hurdle to keep your eye on.

 

Matthew Hedrick

Analyst

 

Looking for Fear? - mh1

 

Looking for Fear? - mh2


Where Are The Housing Bulls Now?

Conclusion: New homes sales in July were the lowest ever reported (excluding May’s downward revision).  Our street low 1.7% GDP estimate for 2011 is officially under review by the Hedgeye Research Committee, and will be going lower. Call us dogmatic if you will, but it looks like we nailed our Housing Headwinds Q3 theme call.

 

It’s no secret, Hedgeye has been very bearish on housing.  Our Financials Sector Head Josh Steiner presented his seminal work on this topic in a 101 page presentation about two months ago (if do not have that presentation and are not yet subscribing to our Financials vertical please email ).  The presentation boiled down to one key point: home prices have anywhere between 15 – 50% more to fall nationally based on the supply and demand dynamics we see in our mathematical models.

 

New home sales reflect contact signings and deposits, which is more real-time than yesterday’s Existing Home Sales release (which reflect activity from 1-2 months prior).  The chart below shows New Home sales fell off a cliff in May, which are post tax-credit.  The July number reported today is not positive.  More aptly, it is a disaster.  (And this low-key Canadian isn’t prone to hyperbole.)

 

Specifically, purchases fell 12 percent from June to an annual pace of 276,000, the weakest initial release prior to revision since data began in 1963.  As it relates to price, the median price of $204,000 was the lowest since late 2003 and down 4.8% year-over-year.  We’ve outlined new home sales data going back 18 months in the chart below.  Not surprisingly, consensus estimates were off large with the range being 291,000 to 355,000.

 

 Where Are The Housing Bulls Now? - 1

 

We obviously have had many debates on the housing topic with the bulls. The key push back we get is in regards to the longer term tail of demand and reversion to the mean of housing.  That is, over time household formation will, sooner rather than later, drive the market back into balance.  That, of course, assumes that household formation is positive.  Fortunately our proprietary census research shows just the opposite. The following chart shows household formation data. It shows new household formation rates through June 2010. The first half of this year saw negative household formation rates in the US, which is unprecedented.

 

 Where Are The Housing Bulls Now? - household formation

 

To conclude, and to quote our Financials Team from earlier today:

 

“New home sales came in at just 276K, near their record low.  This anemic level is consistent with our cumulative displacement theory, published on 7/13/10 and republished below.  To summarize, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300K, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero.  Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.”  

 

The question now is of course: where are the housing bulls?  We hope renting.

 

Daryl G. Jones
Managing Director


R3: FL, OSTK, PSUN, SKX, Puma

R3: REQUIRED RETAIL READING

August 25, 2010

 

With signs pointing towards another challenging holiday season for retailers expect creativity, content, and positioning to prevail. 

 

 

RESEARCH ANECDOTES

  

- In less than a year, Barnes & Noble’s market share in digital books has eclipsed that of the company’s physical bookselling share which currently stands at 17%. Management believes online book sales for the industry will top $500 million this year.

 

- According to Nielsen, kids under the age of 18 text 90 times as much as those over 65. Not surprising to some, but eye opening when you consider those under 18 send 2,800 texts each month! Some quick math suggests that’s about 100 texts per day.

 

- Keep an eye on the progress of “visual search” following Google’s acquisition of Like.com. The company’s technology allows consumers to comparison shop based on a image. So if you find a pair of jeans online and then hit the visual search button, the results will pop up based on finding items similar to the original pair of jeans. So much for search engine optimization based on keywords.

 

 

OUR TAKE ON OVERNIGHT NEWS 

  

Outlook on Holiday is Cautious at Best - While still early to predict holiday sales with any degree of certainty, several retailers and analysts contacted said single-digit gains in the 2 to 4% range would be attainable, slightly better than last year, when retailers on average were up 2.1%. People are nervous and retailers are already pretty aggressive promotions happening, particularly in jeans. One thing is certain: This holiday will be no less promotional than last year, although it is unlikely to approach the 70% panic markdowns seen in the dismal days of 2008. Retailers say their goal is to plan them better, although in the end, the level of promotions will depend on consumer demand in the run-up to Christmas. The list of concerns is long and includes: Hot items in hard and soft goods don’t seem to be materializing, consumers are saving more than spending, most retailers for b-t-s seem to be dragging though some department store executives said early fall fashion is doing well, there are no signs of significant economic recovery soon, with job creation and the housing market remaining weak, credit is still hard to get, recent government data show consumers are saving 6.4% of their aftertax income, which is three times the rate of savings seen in 2007. <wwd.com/retail-news>

Hedgeye Retail’s Take: With lackluster BTS results to date and housing figures that caught many consumers by surprise, expect retailers to start getting more aggressive in order to counter signs of potential consumer retrenchment as we head into the holidays.

 

Random House Gets Ebook Rights From Wylie Agency - The publisher says it will again do business with the agency, which it severed ties with in July after Odyssey Editions signed an exclusive deal with Amazon to sell electronic versions of 20 classic books, 13 of which were Random House titles. The Random House titles will now be available at other ebook sellers, as well. The article does not indicate that the agreement has resolved the more fundamental question of who owns the rights to publish ebooks for works published at a time when publishing contracts did not specify who owns those rights. <nytimes.com>

Hedgeye Retail’s Take: The proliferation of the e-book astounds me. 2-years ago it was unheard of to the masses. Now I can't even count the number of e-readers. And that's coming from a guy who owns a kindle. 

 

Overstock Launches a Private-Sale Site - Eziba.com offers limited quantities of home goods for a set time period, typically between 48 and 72 hours. Eziba is Overstock’s first private-sale site. The company will market the site to existing customers. <internetretailer.com>

Hedgeye Retail’s Take: With less exclusive brands relative to similar models al la Gilt Groupe and RueLaLa, price will be the key driver to ‘lower luxury’ concepts such as this. Perversely, exposing the masses to this model is likely to also drive traffic to the original players as consumers adjust buying patterns.

 

PSUN Partners with Modern Amusement Brand - Pacific Sunwear of California Inc. hitched its merchandising fortunes to Mossimo Giannulli’s Modern Amusement brand. PacSun will hold exclusive rights as licensee to Modern Amusement for apparel, accessories and footwear through 2013, with an option to renew through 2020. The Anaheim, Calif.-based specialty store will work in tandem with Modern Amusement’s parent company, Dirty Bird Productions Inc., to develop additional licensing and distribution opportunities, the parties said, and will share in royalties generated by the association. They also will share approval rights for such arrangements. <wwd.com/business-news>

Hedgeye Retail’s Take: A step up for PSUN in terms of content with upside in channels that have given little thought to carrying the brand prior to the its partnership with Mossimo’s Modern Amusement brand typically carried in higher end department stores.

 

West 49 Shareholders Approve Billabong Take Over - West 49 shareholders voted almost unanimously in favor of Billabong's $99-million takeover bid for the Canadian clothing retailer. West 49 said 99.9% of its shareholders were in favor of the sale to Australia's Billabong International. <sportsonesource.com>

Hedgeye Retail’s Take: As expected – but it’s worth noting that while West 49 is Canadian-based, it will significantly add to Billabong’s footprint with 300+ stores globally with approximately half mall-based.

 

SKX Wraps Up 20 City Tour - Skechers USA Inc. on Thursday wrapped up a 20 city tour in New York City's Times Square. Denise Austin, America's favorite fitness expert, hosted the festivities in Times Square. <sportsonesource.com>

Hedgeye Retail’s Take: Between the new television ad campaign and multi-city tour, Skechers is putting its marketing muscle behind the new SRR resistance runner for men. As trend data begins to track sales of the product, we’ll see just how successful the effort and interest will be.

 

FL Opens 2nd RUN by Foot Locker - Foot Locker Inc. has opened its second RUN by Foot Locker store in Menlo Park Mall in Edison, NJ. The first RUN by Foot Locker opened in February on 14th Street in New York City.  <sportsonesource.com>

Hedgeye Retail’s Take: With the first RUN store having opened over 6-months ago, don’t expect it to take as long before we see RUN stores #3, #4 & #5 as FL rolls out this initiative as part of its store optimization strategy.

 

Puma Keeps Usain Bolt Through 2013 - Puma’s love affair with Jamaican track-and-field star Usain Bolt continues. The three-time gold medal winner renewed his contract with the athletic company Tuesday. It will now continue through the end of 2013. Although terms were not disclosed, Puma did say Bolt will receive more than any track-and-field athlete has earned.  Bolt, 24, has been with Puma since he was 16. As part of the new deal, the runner will appear in ad campaigns, including the company’s London 2012 Olympic program, expected to launch in 2011. And he will continue to collaborate on such product lines as the Bolt Collection of footwear, apparel and accessories. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Pay day! After taking a firm hold of the world’s fastest man title in 2008 at the Beijing Olympics, Bolt has quickly become synonymous with running and a key element in Puma’s resurgence.

 

Facebook Usage Still Rising in Europe, But Growth Slows in UK - The Facebook juggernaut rolls on in Europe, but the first sign of declining growth rates has appeared. In particular, the site’s meteoric expansion in the UK is tailing off. The social network gained more than 2.2 million active UK users in May 2010, according to Inside Facebook—an 8.9% rise that took total UK user numbers to 27.1 million on June 1. Growth was higher in the UK than anywhere else in Western Europe. By midsummer a different pattern was emerging. In France, user numbers continued to climb, reaching 19.4 million on August 1, according to data from Inside Facebook. In the UK, by contrast, the tally of active users fell in June, and rose only 1.8% in July. <emarketer.com>

Hedgeye Retail’s Take: At 44% penetration in the UK let’s be real, growth is going to show signs of slowing at some point. I’m more interested in two other figures, the countries with the highest growth rates. With India up +9.4% and Brazil +12.1% and penetration of only 1% and 3% respectively…looks like plenty of runway for growth from this seat.

 

R3: FL, OSTK, PSUN, SKX, Puma - 1


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