Friday, November 27, 2009

Black Swan on Black Friday?

Just like a seasoned fighter is better at taking  hits than the undefeated newbie, this market can shrug pretty much anything at this point, as long as it is one drop at a time.
It is interesting that the Dubai debt extension comes on American Thanksgiving and a half day trading on Black Friday. Asia over reacts while in Europe cooler heads prevail. In the US, tryptophan releases and black Friday shopping madness has a calming effect.

In Canada, even rumors of  RBC exposure to Dubai is not preventing the markets from holding its own and Canadian markets are stabilizing after a sell-off yesterday.

I wouldn't want to be an HSBC investor with $17BB in Dubai paper though. So don't expect the equities markets to do much but commodities and currencies will be the menu du jour for the next 3-4 months. If the region was rife with an irresponsible dumb jump in real estate supply, there must also have been scores lured into commodity leverage. Margin calls will be abundant next week and expect the flood gates to open up again depressing an over extended market. OIL and COPPER are probably going to have the biggest whiplash where GOLD will retreat as the flight to dollar counter balances. For Europeans and Canadians converting their currency into gold sound like a good move as world debt has increased 45% since 2007. That paper is only backed by willingness of taxpayers.IF the later revolt, CDWs will again be the talk of the day. Now let's move to much calmer waters

Black Friday is the only time of the year when we opine on US retail sales outlook.



Let's start with Boy toys
Any electronic retailer can get 1000 people to line up outside theirs stores as long as it can sell products at no margin or even at a loss... Is HP really supplying these stores with $199 laptops? How do you pay overhead with those kinds of margins. Everybody knows and expect comparables over  2008 to be easy, What are they over 2007? What is the inventory turnover? Has is doubled or tripled?What kind of net margins are we looking at? What kind of P/E multiples are there out there. What is the distribution over the industry, Is it a Bell Curve or a scatter chart? If retailers now have a better handle on inventory, what does that do for factory workers still laid off. What does it do for mall space?

High End Luxury

What is happening at Saks and Bergdorf? Claims on no discounts  are being branded about... Let's see LVMH... that chart must be telling ... losing money over the last 10 years ... a lost decade and those damn bags are not getting cheaper!

Mass Merchandisers
As Wal-Mart, Costco and Home Depot have changed their merchandise to much more practical items, It was more interesting to watch WHAT people bought rather than HOW MUCH. We expect these companies to have +10% y/y numbers. Again very easier to deliver

Specialty retail
When the pie gets smaller, appetite moves out of indices and into the 2-3 names that make or break. Big short interest battles estimate beaters and overall lots of wounded investors leave the market and shrink the pie. Watch J Crew, Gap etc...

High end food vs Family fare
The one surprising sector is how different this recession/depression has affected dining out. Usually savvy MMs usually know for being ahead of the crowd, moved out of momentum trendy names and vow for the family fare names down market. Unfortunately they just got pummeled as this time it was "different".
This sector is a good indication that dining out has affected MANY Americans and is probably the best sign that things are about to get worse.

With 10.2% Unemployment, the US consumer is not here yet and any comparison with  December 2003
is as moronic as need be. In 2003 people were piling up into real estate after the remaining debacle of Dot com era  was still being felt. This time people have no nest egg, the real estate market is still down with over 10MM mortgages upside down and the elephant in the room is still commercial real estate.

In conclusion the US consumer needs cheap thrills. Movie tickets, Confectionery goods cloth shopping at Wal-Mart or TJ max sounds like the perfect safe ticket.


On US Government and Elected officials
All the talking heads in the US government predict and shout a recovery is at hand in Q1 of 2010 and employment recovery to lag behind it with numbers picking up in Q2.
 In election terms November 2010 is so close Republicans are counting the days. As Naysayers and rabid defenders of  special interest groups, they need to last only 343 odd days to get their day... As the Democrats are now realizing, a majority means very little when the party is a hodge podge of Non-Republicans rather than a common voting block. Can any meaningful Obama legislation be passed wiht that kind of a group... doubtful...

Again what the US needs is an omnipotent ruler with the power to erase $15TB of debt. A Constitutional law professor isn't about to cross the Rubicon and really clean house. Too bad!



In the meantime I am still happy to short hard commodities and vent my frustration around the cupidity surrounding the trading of carbon credits, the whole idiocy of cap and trade and the upcoming folly behind the Copenhagen summit. With 17% reduction in emission targets over 10 years, you should take that trip to the Biminis and Samoa as they will long been the new Atlantises before the next decade is out... That's for another story!




Happy trading to you!