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Bear/Bull Battle: SP500 Levels, Refreshed...

Finally, after an +11% melt-up, the US stock market perma-bulls are back. Crank up the volume and get them on stage to spew it out. Just like in early April (beginning of a new quarter), the more of them the merrier. An abrupt crash-like correction won’t be possible without their wholehearted participation chasing these prices.

 

Make no mistake, in their guts the perma-bulls that blew up in 2008 are half-baked. They have no competence in calling crashes or corrections so the best they can do is have their hearts and minds hoping for QE year-end bonus-ing. All the while, the world is Burning The Buck.

 

On the heels of Fed Head Bullard literally co-hosting CNBC to talk up QE during the employment report this morning (how pathetic is that?), the US Dollar Index is down again on the day – down for the 16th week out of 19, as US Treasury yields hit all-time lows with 2-years yielding 0.34% intraday.

 

I’m not brave or forgetful enough yet to forget how October of 2007 ended. That’s helped me not get squeezed like I did in September 2007, but it certainly hasn’t made me feel any more confident in the in the said leadership of the American financial system. Sadly, Wall Street has learned very little from its mistakes. Groupthink is as pervasive as it has ever been.

 

The biggest mistake perma-bulls made in October of 2008 is the same one they are making right here and now. Putting 100% of this market’s daily beta in the hands of Bernanke. I don’t know how or why it is that people don’t get this yet. But it will end very badly. Most price complexes that hinge on government supports do.

 

What do we do with all this? Whine, Wait, and Watch.

 

The 2 lines I have been focusing on for US Equities remain:

  1. SP
  2. VIX 20

As we melt up in the SP500, I’m registering an immediate term TRADE line of resistance now at 1169 (another lower-high). As I wait on that to get short, I’ll keep selling things with extremely high inverse correlations to DOWN DOLLAR (I sold our long positions in Corn and the British Pound today).

 

That’s the best I can do. Betting on myself is better than betting on Bernanke. That much I have figured out.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear/Bull Battle: SP500 Levels, Refreshed...  - spxx


4Q10 THEME UPDATE: THE CONSUMPTION CANNONBALL

One of the important caveats within our Consumption Cannonball theme is that the transition to real income growth, from government subsidized income growth, will be difficult. 

 

The numbers released this morning by the Bureau of Labor Statistics confirm our thesis that the private sector is not picking up the slack.  Government employment fell by 159,000 in September while private-sector payroll employment continued to trend up modestly, increasing 64,000.  This resulted in a net nonfarm payrolls decline of 95,000 in September.  The private-sector increase missed expectations while the winding down of census workers and state and local level cutbacks exacerbated the decline in government payrolls.  The private sector is clearly not picking up the slack and the underemployment rate, U-6, increased to 17.1% from 16.7% in August. 

 

The labor market’s worse-than-expected performance in September supports slowing consumer spending and all but guarantees the FED will resume large-scale asset purchases sooner rather than later.

Three key takeaways from today’s jobs report:

  1. More QE is on the way
  2. Inflation will accelerate
  3. The outlook for sub 1% GDP growth in 2011 is looking more likely
  4. Interest rates to remain low through 2011

Lastly, the September report contained a preliminary estimate for the upcoming benchmark revisions showing 366,000 fewer jobs for the year ended March 2010 (30,500 jobs per month).  This is not news – we are proactively prepared for the compromised nature of government data.  The bottom line is that the labor market is not improving fast enough and QE is not helping Main Street.

 

Howard Penney

Managing Director

 

4Q10 THEME UPDATE: THE CONSUMPTION CANNONBALL - lfpr2

 

 


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


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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


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.

 

 


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