Thursday, May 6, 2010

Morning Note...

Futures down ~30bps this morning as EUR weakness (1.27!!) and USD strength drive many macro-types to speculate about the long-term prospects for the euro and the European Union.  Additionally, hotly contested U.K. elections and their looming $170 billion budget shortfall – not to mention the fates of Greece, Spain, Portugal, and Ireland – have investors concerned.  U.S. economic data was mixed, depending on your perspective.  Q1 Nonfarm Productivity was +3.6% vs. the +2.6% survey but the prior reading was +6.3%.  Unit Labor Costs were lower, at -1.6% vs. the -0.7% estimate and the -5.6% prior.  Initial Jobless Claims were 444k vs. the 440k estimate and the 451k prior.  Continuing Claims were 4.594M vs. 4.610M estimated.  Same-store-sales for retailers are out today, and on the aggregate they look worse than expected.  See quote section below for the most recent summary.  Note that Geithner and Paulson will testify before Congress today, and Bernanke speaks in Chicago.  It’s worth mentioning that Goldman Sachs CDS are wider than Citi’s for the first time since February 2009 (RBC research) and that the VIX is up 56% since Monday April 26th and closed over its 200-day moving average (BTIG). 

As I consolidate the morning’s slew of news/research, four important themes – for the next 48 hours – come to the fore:  First, the ECB interest rate decision, which hit the tape at 7:45am, to leave rates unchanged at 1%.  The read-through there might be bearish as they have left themselves at least 1% of room to actually cut rates if the European situation becomes more dire.  (Bloomberg headline:  ECB Keeps Rate at 1%, May Be Forced Into Crisis Mode.)  Second, tomorrow’s official jobs report.  Third, the U.K. elections and how they begin to address their massive budget shortfall.  (See commentary below…How would austerity measures play with the Brits?  Would we see Greek-like strikes?  Note that Greek strikes are no joke – three people were killed!)  And fourth, the German vote on ratifying the Greek bailout this weekend.  Again, people are starting to ask the question:  after thousands of years of culture-clash, religious fervor, and outright war, is the Eurozone a viable organization?  Or will it prove a failed experiment and – in hindsight – a blip on the radar of the larger European history?

Regarding the U.K., the guys at Capital Economics posted this commentary yesterday:

Whatever the outcome, the key economic issue after the election will be the size and timing of the action needed to address the UK’s fiscal problems. The parties’ existing fiscal plans are all based both on largely unspecified cuts in public spending and optimistic forecasts for the economy. A new Government will come under strong pressure to produce a more credible deficit-reduction plan quickly, almost certainly incorporating further major tax increases.

Regarding Europe, the words “counterparty risk” and “exposure” are starting to make the rounds.  (Shades of Lehman??)  Here’s a solid summary from BCAP – at least for retailers – of where exposure to Europe falls:

Consumer Discretionary: 
GES – 48% of earnings
ANF – 13% of sales and growing
TJX – 10% of sales and growing
NKE - 30% of sales
Signet - 25% of sales from the UK
NTY – primarily UK, with a bit in the Netherlands
SYY – global hospitality supply business, but not big.  Also owns a small distributor in Ireland
WFMI – handful of (loss-making) stores in the UK BBY - 10% of its sales and 5% of its EBIT from Europe.
SPLS - 15% of its sales and 8% of its EBIT from Europe.
ODP - 17% of its sales and 20% of its EBIT from Europe.
VFC - 25% of sales
PVH - buying Tommy will increase their exposure

Gaming, Leisure, Lodging:
HOG-  15% of total 2009 retail sales were in Europe; also, a stronger dollar hurts them as they are a US manufacturer
CCL - 39% of revs from Europe
RCL - 30% of revs international and most of that is Europe HOT - 16% of fees are from Europe MAR - dont provide revenue breakdown but 6% of their rooms are in Europe.
OEH - about ~40% of profits

Consumer Staples: 
KO - Europe 31% of profit, Central & Eastern Europe <6% (these #’s will be lower after CCE deal closes) PEP – Europe 11% of sales TAP – UK 11% of sales CCE – Europe 50% (going to 100% after KO deal closes) COT – UK 18% of sales PM – EU 45%, Eastern Europe Middle East and Africa 24% HNZ - 33% of sales SLE - about 30% of sales KFT - 22% of sales
K   - 19% of sales
PG = 21% sales from West. Europe
CL = ~19% of op profits (includes S. Pacific) AVP = ~28% of sales (includes E. Europe, ME and Africa)

Finally, for those interested in Hedgie performance YTD, this made the rounds yesterday as well:

Performance Numbers YTD
·                     Brevan Howard, down 0.83% thru 16-Apr
·                     Harbinger, up 0.87% thru 15-Apr
·                     King Street, up 3.92% thru 23-Apr
·                     Kingdon, up 4.05% thru 23-Apr
·                     Maverick, up 5.42% thru 23-Apr
·                     Millennium, up 4.41% thru 22-Apr
·                     Perry, up 9.94% thru 23-Apr
·                     Sandell, up 2.48% thru 23-Apr
·                     Tudor (Global Macro), up 2.64% thru 23-Apr
·                     Tudor (Quant), up 0.89% thru 23-Apr
·                     Viking, up 1.42% thru 23-Apr

Asian markets are weaker as Japan re-opened over 3% lower after their Monday to Wednesday holiday.  Shanghai was also down 4% overnight.   Europe lower except for France.  USD +44bps.  Oil -2%.  Gold +20bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
JDS UNIPHASE               12.45    -9.12%  436858
DILLARDS INC-A             27.01    -5.39%  4150
ABERCROMBIE & FI        41.85    -5.38%  9225
SYMANTEC CORP           17.00    +4.62% 156300
FREDDIE MAC                1.37      -4.2 %  478062
TARGET CORP               53.73    -4.16%  294960
BMC SOFTWARE INC      36.50    -4.15%  8800
GAP INC/THE                 23.80    -3.57%  22940
TITANIUM METALS         14.95    +3.53% 2160
CBS CORP-B                  15.10    -3.08%  10190
CIGNA CORP                  32.80    +2.5 %  900
COSTCO WHOLESALE     58.94    -2.35%  18294
MBIA INC                       9.60      -2.34%  1930
TJX COS INC                  45.25    -2.31%  4425
EL PASO CORP               12.05    +2.29% 42500
WEYERHAEUSER CO       48.85    +2.11% 1330

Today’s Trivia:  What traits was Knight of the Round Table Sir Galahad most noted for?
Yesterday's Answer:  Dinosaur roughly translates to “terrible lizard.” 

Best Quotes: 

Better Than Expected (5)

Costco April SSS up 11.0% - slightly better than 10.9%
(Net Sales $5.83B vs $5.18B, up 13% y/y)

Macy's, Inc. Same-Store Sales Up 1.1% In April - better than 0.1%

Kohl's April Comparable Store Sales Decline 7.7% - better than (8.0%)
(Co. Raises 1Q View To EPS 61c-EPS 62c)

Fred's reports April SSS up 0.6%-  better than (2.0%)

Limited Brands April Comp Sales Up 4.0% - better than 3.3%

In-line (1)

TJX April Comp Sales Up 4.0% - inline with expectations
(Expects 1Q near high end of range)

Worse Than Expected (18)

Target Corp April Same-Store Sales Fell 5.9% - worse than (2.0%)
(April Sales In Higher Margin Categories Strong, Sees 1Q EPS Meeting Or Beating 86c Street View)

BJ's Wholesale April Same-Club Sales 4.6% - worse than 5.5%
(Total Sales increase 9.5% to $787.0 million from $718.7 million, y/y)

Saks Inc. April Comp Sales Up 3.2% - worse than 4.9%
(Total Sales $246.9 million vs $238.7 million, up 3.4% increase)

JCPenney Reports April Comp Sales Fell 3.3% - worse than (0.8%)
(Co. Boosts Forecasts, Sees First Quarter EPS 25c, Est. 24c)

JW Nordstrom April Comp Sales Up 7.5% - better than 6.8%
(Total Retail Sales $636M, Up 13.3%)

Dillard's, Inc. Reports April Comp Sales Fell 5.0% - worse than (0.7%)
(Total Sales Fell 5% To $406.3M vs. 429.2M, y/y)

Gap Inc. April Same-Store Sales Down 3.0% - worse than 0.5%
(CFO - “With sales growth across all of our brands and significantly improved earnings, we are very pleased with our first quarter performance.”)

(Net Sales $214.3 million, up 8% from $199.1 million, y/y)

Aeropostale Reports April Sales Results; Same Store Sales Decrease 5.0% - worse than (1.4%)

Amer Eagle Outfitters April Same-Store Sales Fell 6.0% - worse than (3.9%)
(Co. Affirms 1Q Adj EPS 15c-17c; Analysts 17c)

Stage Stores April SSS down 8.3% - worse than (5.0%)
(Co. Raises 1Q EPS Forecast 4c-5c vs Analysts 1c)

Hot Topic reports April SSS down 12.5% - worse than (8.0%)
(Reported yesterday - SEES FISCAL QTR LOSS OF 3C-4C-SHR, HAD SEEN 2C-5C-SHR)

Ross Stores April Comparable Store Sales Up 3.0% - worse than 5.7%
(Co. Raises 1Q View To EPS $1.15-EPS $1.16)

The Buckle reports April comparable SSS down 5.7% - worse than 1.2%
(Total Sales decreased 1.1% to 58.4M from $59.1M, y/y)

The Wet Seal, Inc. Announces April Comparable Store Sales Declined 6.1% - worse than (4.7%)

Bon-Ton Stores April Same-Store Sales Down 5.0% - worse than Flat
(April Total Sales Down 5.2% To $189.1M, y/y)

Stein Mart April Same-Store Sales Down 5.4% - worse than (4.5%)
(CEO – “Sales for the combined March-April period, while still slightly negative, represent an improvement over our recent sales trend.”)

Zumiez April Same-Store Sales Up 2.1% - worse than 4.5%
(Reported yesterday – Total Sales 25.7M vs. $23.8M, up 7.8%)

News and Notes

Cato Reports April Comp Sales Down 7.0%

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