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UK and Inflation’s Ugly Head

Conclusion: UK Producer Price Index (PPI) numbers were released today for September and show that inflation will remain a headwind for the island economy over the intermediate term TREND.  We sold the British Pound via the etf FXB today as it hit our overbought TRADE target of $1.59 versus the USD.

 

Input prices +9.5% year-over-year and +0.7% month-over-month

Output prices +4.4% year-over-year and +0.3% month-over-month

 

The elevated levels of input and output prices reflect an inflationary environment that the Bank of England will have to address over the intermediate term TREND. With CPI floating above the Bank’s target rate of 3.0% over recent months, commodity inflation should remain a headwind for the consumer over the next months.  In particular, the country’s energy set-up as a slight net importer of oil over recent years with declining production rates over the last 10 years (averaging an annual decline of -6.7% over this period) should help support upward inflation. As the chart below suggests, imported oil prices have increased steadily since their fall in late ’08. And if we’re right on our call on oil, this trend should continue over the intermediate term.  

 

Cameron’s government is now at a crossroads. Having issued austerity measures (job, wage, and benefit cuts and a further squeeze on the consumer with higher VAT), Cameron and Co. must address the broader economy from a fiscal and/or monetary perspective in the next months.

  1. Go the likely route of the US (and potentially the Eurozone) in issuing some form of QE2, ie printing money which should further inflate prices and depreciate the Pound, and/or
  2. Raise the benchmark interest rate to quell inflation, but risk further choking off growth. 

While we’re not going to speculate on the government’s next move right here, we’d be quick to stay away from an investment in the country.

 

In Europe, we’re currently short Italy via the etf EWI. 

 

Matthew Hedrick

Analyst

 

UK and Inflation’s Ugly Head - pel1

 

UK and Inflation’s Ugly Head - pel2


JCP: A simpler TARGET for Ackman.

The chain of events leading up to his 16.5% 13D this morning is rather sad. But not as sad as the lack of process behind managing risk around the margin squeeze that is yet to come as consumer spending and realized input costs converge. We’re throwing down the gauntlet.

 

 

Am I the only one sickened by the turn of events with JC Penney’s stock? The stock was up 70% -- yes SEVENTY percent – over the past month. There’s no doubt that JCP’s business was getting better on the margin. There’s also no doubt that someone knew that before others that play by the rules. Yesterday, when the comp was finally reported, the stock traded down roughly 5%, which clearly did not please anyone taking part in Wall Street GroupThink – or at least those that were unlucky enough to get the information so far down the line that they watched others capture all the alpha. So what happens next? Miraculously the stock staged a 15% intra-day turnaround, and near the close rumors became official that JCP was an LBO candidate. Amazing…

 

But then we got an extra kicker this morning only to find out that good ‘ol Billy Ackman has filed a 16.5% position in JCP – by far the largest active position in JCP.  

 

This is just sad in so many ways.

 

Maybe after going down in flames in the TGT proxy battle, Ackman has chosen a simpler target – one with management that is more easily influenced due to a less defendable model.

 

But all I have to ask you, Mr. Ackman, is one thing… Are you managing risk around the high potential for US Consumption to go negative by 6%+ in the upcoming 2 quarters at the same time that 80% of the goods JCP sells face 40% COGS inflation? I’m willing to bet that the answer is no.

 

Let's debate this one. I’ll do this with you anytime, anywhere and in front of any audience. Mano a mano, or better yet, my team vs. yours...if you dare.

 

Brian McGough

Hedgeye

 

JCP: A simpler TARGET for Ackman. - jcpba


EMPLOYMENT DATA MARGINALLY POSITIVE FOR QSR

Unemployment data released this morning by the Bureau of Labor Statistics were positive for Quick Service restaurant stocks.  While joblessness has been dragging consumer spending for some time now, and management teams in quick service and casual dining cite it regularly as an issue, quick service restaurants have been the most susceptible to deteriorations in the employment outlook.  As I wrote on September 7th in a post entitled, “QSR: EMPLOYMENT DATA POSITIVE ON THE MARGIN”, MCD, SONC, JACK, BJC, YUM, and WEN have mentioned unemployment (particularly among younger age cohorts) as being a primary impediment to same-store sales growth.  

 

The most recent data from the BLS, for September, reveals that 20-24 year olds saw a year-over-year uptick in employment levels for the second consecutive month.  August’s improvement was the first since September 2007.  It is important to keep in mind the significant headwinds facing the industry, such as increasing price competition and increasing commodity costs, but this morning’s news is positive nonetheless. 

 

EMPLOYMENT DATA MARGINALLY POSITIVE FOR QSR - Employment by Age Sept 2010

 

Howard Penney

Managing Director


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R3: JNY, Li&Fung, GPS, SKX, URBN

R3: REQUIRED RETAIL READING

October 7, 2010

 

M&A activity and chatter picking up in retail while international competition in e-commerce is keeping domestic players on their toes. 

 

RESEARCH ANECDOTES

 

- Count Glow-in-the-dark shoes among the new product you’ll see at Foot Locker this month as footwear retailers look to join in the Halloween spend. While the feature isn’t particularly new or novel, Nike takes it a step further this year with its Nike Dunk Halloween Edition sporting an upper that is entirely glow-in-the-dark. We don’t expect these styles to be a key top-line driver, but they’re at least more inconspicuous than light-up alternatives that have been banned by many schools.

 

- After stirring an initial wave of controversy with the unveiling of an unloved new brand logo, Gap is now asking its Facebook fans for input.  In fact, they are also soliciting consumers to submit their own logo ideas.  Why would they do that if they weren’t having second thoughts?

 

- Leave it to Skechers to knock-off even the shoes with the best of intentions.  The company launched a line of fabric shoes which look strikingly similar to TOMS.  Recall that TOMS gives a pair of shoes away to people in need for each pair sold.  At least Skechers is following suit by also giving away a pair to charity for each pair of “BOBS” it sells.  Would it have been that difficult for SKX to come up with an original charitable contribution of its own?

 

  

OUR TAKE ON OVERNIGHT NEWS 

 

Nine West Group to Grow Mid-Tier Business - Nine West Group has appointed Richard Olicker to spearhead growth of its mid-tier brands division. Rick Paterno, wholesale president for better footwear brands at Nine West Group said now is the time to step up the growth of the mid-tier segment, as well as the first cost direct business segment, which started last year to source and make product for private label. “There is certainly growth with private label [business] throughout the industry, and many of our competitors have been in that business for quite some time,” he added. Nine West Group’s mid-tier brands include Mootsies Tootsies, Sam & Libby, Dockers, Nine & Co. and Gloria Vanderbilt. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  With Aldo becoming the fashion vendor of choice for both JCP and KSS, it looks like Nine West is attempting to step up its effort to remain on the shelves.

 

Manhattan Beachwear Acquires Apparel Ventures - Manhattan Beachwear, Inc., has reportedly acquired Apparel Ventures, Inc., effectively merging two large portfolios of swim labels. Apparel Ventures swimwear brands include a large portfolio of proprietary and licensed brands, distributed to national department stores, luxury boutiques, and specialty swimwear chains.  Proprietary brands include La Blanca and 2 Bamboo.  Licensed brands include Ralph Lauren, Trina Turk, ABS, Puma and Rampage. Manhattan Beachwear's owned brands include The Bikini Lab, 24th and Ocean and Maxine of Hollywood. Licensed swim brands include Kenneth Cole New York, Kenneth Cole Reaction, Nanette Lepore, Hermanny by ViX and Sofia by ViX. <sportsonesource.com>

Hedgeye Retail’s Take:  Perhaps the key to the swimwear business is remaining “private”.  With extreme seasonality, the product category has never been a very good business for any public traded manufacturer given it only makes money in one quarter (usually) and can sometimes be derailed by the weather.  Speedo is a case in point.

 

Li & Fung Sees 'a Lot of Orders or Next Year - Li & Fung Ltd. said it expects “a lot of orders” for next year as purchases and sourcing deals boost its market share. “With the acquisitions we have done, outsourcing deals we have done and the new business, next year looks very good,” President Bruce Rockowitz said in a phone interview late yesterday. “It looks less and less likely that there will be a double-dip recession.” Li & Fung yesterday won court approval for the more than HK$7 billion ($903 million) purchase of Integrated Distribution Services Group Ltd. that will increase revenue from China and Southeast Asia. The company wants to build a higher margin business selling brands to Asian consumers. This will create a whole new growth driver. <bloomberg.com/news>

Hedgeye Retail’s Take: While we may question the company’s “macro” view, we do believe that Li & Fung is best positioned to benefit from rapid changes in the Asian sourcing base.

 

Gap and CVS E-Commerce Sites Crashed This Week - The Gap site went down Monday at about 9:20 a.m. Eastern time. The web site started loading very slowly, taking over 11 seconds to load. The problem only continued to get worse with intermittent time-out errors and persisted until 12:30 p.m.

The CVS site went down Monday at about 1:50 p.m. Eastern and was brought back up by 3 p.m. <internetretailer.com>

Hedgeye Retail’s Take:  With so much focus on the growth in e-commerce these days, we often forget that these platforms are not bulletproof.  Yet another reason why we’re also seeing measurable increases in .com infrastructure investments to support future growth. 

 

Urban Outfitters Jams with Scarlett and Crimson - A range of Scarlett & Crimson-inspired cosmetics and accessories are now being stocked at Urban Outfitters, following success in Boots and Superdrug, according to Coolabi. Urban Outfitters' flagship U.K. stores (Oxford Street and Bluewater), as well as its major Scandinavian outlets in Copenhagen and Stockholm are featuring the Scarlett & Crimson lines. The lines include mascara and eyeliner. If the initial range proves successful, further plans are to roll out the products to more stores in time for Christmas. <licensemag.com>

Hedgeye Retail’s Take: Yet another apparel retailer getting into the cosmetic accessories game. Given the success of others ramping efforts here over the last year and the favorable margin profile of the category it’s no surprise to see a proliferation of offerings as core apparel margins continue to be squeezed.

 

Holiday Sales Could Be Good If September's Luxury and Bigger Ticket Strength Continues - It might not be a bountiful holiday, but if September same-store sales are any indication, consumers are likely to splurge on select higher-priced items, as luxury retailers got their groove back and better goods performed well for many mainstream stores. “The fact that luxury continued to post a strong performance is not surprising given the recent improvement in high-income household consumer confidence,” said Michael Niemira from the ICSC. Saks Inc. and Neiman Marcus Inc. called out robust sales in their fine jewelry categories last month, but so did Macy’s Inc., J.C. Penney Co. Inc. and The Bon-Ton Stores Inc. Comparable-store sales rose 2.6% in September, led by luxury’s 6.6% leap. <wwd.com/business-news>

Hedgeye Retail’s Take: We’d caution straight-lining any pickup in consumer spending particularly one that’s accelerating heading into the holiday’s. Importantly, along with the ramp in luxury sales, most retailers acknowledged a shift into September as BTS spending was realized later this year.

 

British E-tailer Asos Launches US Site - The U.K.’s largest online fashion store just got a little bigger. Asos.com, which has more than four million registered customers, made its U.S. debut this week with the launch of a website exclusively for the American market. The London-based e-tailer, which offers more 800 brands and 42,000 product lines spanning men’s and women’s apparel, accessories and beauty products, was launched in 2000 and did about $370 mm in international sales for the year ending March 2010. More than 100 footwear brands are sold on the U.S. site, including Converse, United Nude, House of Harlow, Timberland and Asos’ own label. Before the launch, Asos had already established a database of 200,000 customers based in the U.S. and has been actively marketing to boost traffic there. Initial efforts, according to a press release from the company, have nearly tripled U.S. traffic and doubled U.S. sales. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Offering customers the full gamut from suits to swimwear, the UK retailer offers an impressive array of name brands online including many European brands not available through most domestic competitors. Offering free shipping and returns in the UK, international rates of $6 for standard 8-day delivery is competitive as long as you are willing to wait a few more days. Perhaps the cost of offering free shipping for a limited time would do the retailer well in terms of accelerating the build out its U.S. customer base.

 

 


Shallow Charlatans

"A modern philosopher who has never once suspected himself of being a charlatan must be such a shallow mind that his work is probably not worth reading."

- Leszek Kołakowski

 

Listening to Bloomberg’s Tom Keene interview Alan Greenspan last night gave me clarity on something that I haven’t quite been able to put my finger on for a long time. On the topic of US economic policy, the world has been transfixed by Shallow Charlatans.

 

Now let’s not confuse the word transfixed with convinced. Per the Merriam-Webster definition, to be transfixed is “to become motionless with horror, wonder, and astonishment.”

 

I became motionless last night – literally - as I was driving home down the Merritt Parkway listening to their discussion, I had to pull over to make sure I wasn’t selectively being astonished. Maybe it was my own personal prelude to listening to what I was hearing. Maybe it was meant to be listened to, rather than watched. I’m not sure. I’m still young enough to know what I don’t know.

 

What I do know is that I don’t surround myself with politicians or sell-side “economists” who are prone to groupthink. After yesterday’s market close I left the office for New Haven’s Owl Shop to have a cigar with some of the most sophisticated European buy-side investors I know. After that, I had a nice dinner at Mory’s with some colleagues who are trying to figure out how to not repeat history’s risk management mistakes.

 

Then, no matter where I wanted to be, there I was… in my car… parked at the Mobile station in the dark…. left in horror with what I thought would be this morning’s headline news…

 

When I woke up this morning, it was still dark… and I was still astonished – but the best news was that Greenspan’s revisionist history from last night wasn’t a top 3 Bloomberg headline. This is progress. Americans aren’t as stupid as the professional politicians who have been pillaging their savings with ZERO percent interest rates purport them to be.

 

HEADLINE: “Greenspan Says U.S. Creating `Scary' Deficit as Borrowing Rises”

 

The only thing that’s “scary” here folks is that an 84 year old man still fails to realize that what he’s scared of are the problems he perpetuated.

 

Even though Keene and Greenspan weren’t focused on it last night, the #1 factor in global markets today is the US Dollar. Yes, that could very well change next month or next year, but for those of us who are accountable to what comes out of our mouths, today’s prices are what matter most.

 

While it’s kind of astonishing to hear a Shallow Charlatan talk about the market when he’s never traded one, this remains the contrarian investor’s greatest opportunity – fading the sell-side and groupthink consensus. Consensus is that QE is a must and Burning The Buck is ok (until it isn’t). Consensus has given birth to some of the highest inverse correlations to the US Dollar that I have ever seen.

 

Rather than being transfixed by the radio or television, take 30 seconds out of your day to stare at this math embedded in correlations to US Dollars:

  1. High Grade Copper = -0.98
  2. Gold = -0.97
  3. Silver = -0.97
  4. Platinum = -0.93
  5. Reuters CRB Commodity Index = -0.96
  6. India’s Sensex Index -0.92
  7. Brazil’s Bovespa = -0.91
  8. SP500 = -0.88
  9. Rough Rice = -0.87

Now the way Keene whipped around his “7-standard deviation” jargon and Greenspan found a way to obscure just about the most basic of algebraic relationships, understand this folks – there are a lot of market practitioners out here who are playing this game with live ammo who get the math. Our job isn’t to talk over you. We have your back.

 

The basic math that I am showing you here is on our immediate term TRADE duration. In the immediate term is where you’ll find critical market risk. Yesterday the US Dollar was up a mere +13 basis points, or 0.13%, and the deleverage on the price of gold and oil were huge.

 

If this government and the Shallow Charlatans that advise it want to pretend that they aren’t perpetuating volatility and systemic risk, they can go do that. But I have a funny feeling that the nasty US Consumer Confidence readings we’ve had as of late (ABC/Washington Post weekly reading down to minus 47 this week) already tell you everything you need to know about Americans and their money – they know a ponzi-scheme when they smell one.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1148 and 1164, respectively.

 

Have a great weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shallow Charlatans - greenspan


THE M3: GOLDEN WEEK STATS; RWS/MBS

The Macau Metro Monitor, October 8th 2010

 

VISITOR ARRIVALS UP TO 1.8 MM GOLDEN WEEK Macau Daily News

During Golden Week, visitor arrivals from Mainland China soared up to 1.8 million, of which 835,000 were mainland residents.  Visitor flow at 3 major checkpoints during the period: Gongbei had 1.7 MM visitors, Hengqin had 70,000 visitors, and Wang Cha had 33,000 visitors.


HOTEL ROOM RATES STANDING HIGH Macau Daily News

Even though Golden Week has ended, the majority of the hotel room rates in Macau are still high.  5-star hotel ADR (single-room) was MOP $1,800.  During the first two days of Golden Week, standard double sized hotel room rates in Cotai were up to MOP $2,000; Wednesday ADR was $1,800; and Friday's rate was $1,600.  Peak rates in Central Macau Peninsula were up to $3,388.  Surveys indicated that consumer expenditures during Golden Week were mainly on souvenirs and daily personal necessities.  Retailers said overall sales rose 30% YoY.  Immigration statistics revealed that the majority of independent travelers were from Shenzhen, Zhuhai, and Foshan.

 

RWS 'HAS EDGE OVER RIVAL' Strait Times

Architects and gaming industry experts at the Asian Casino and Gaming Congress at MBS said that RWS has the edge over MBS because of its accessible location and RWS' loyalty program, which has received high marks for customer service and satisfaction.


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