Retail Sales Unimpressive

http://biz.yahoo.com/ap/080508/retail_sales.html

Retail sales data is out today and sales are up ~2%.

Many folks are spinning the news as positive. But most are aware that this isn't good news.

http://www.marketwatch.com/news/story/calendar-shift-lifts-april-sales/story.aspx?guid=%7BEB4E014A%2D0338%2D4180%2D9C33%2D738E9FD7FFC9%7D&siteid=yhoof Technically April sales were higher but they also enjoyed an extra day in the calendar - creating the extra 2% bump in sales.

Also, I don't know if those figures are real or nominal. That is, if these are nominal and not adjusted for inflation, then sales are actually down.

Discretionary spending is getting pinched. Consumers are both buying less and buying at Walmart and Costco to stretch the dollars. Toyota is even expecting lower sales through 2009 - 18 months due to lagging US sales. http://biz.yahoo.com/ap/080508/earns_japan_toyota.html
Jewelry sales were sluggish as well. (ZLC and HOG puts could be looking better)

The markets may take this news as a positive omen. The atttitude seems to be that the economy is limping along and not stumbling. Certainly this data shows that to be the case. Does that mean the market will panic at the signs of stumbling?

Meanwhile, the experts are now thinking that the stimulus checks will bypass retailers and be used instead to pay off debt. But then I look at the reports showing last month's rise in consumer borrowing and maybe folks shopped last month in anticipation of the check. In either case, new sales don't look to be strong.

Quick Update on our Options

THE LONGS

THE SHORTS
AGN – We have the July $55 puts and we’re solidly in the money. Earnings released and they were better than I expected. I was right about the Botox slowdown. Botox is 30% of their business and it’s slowing.
Then there is the valuation challenge. They have slowed from 32% to 23% and the P/E is 32. Maybe they will hit $50 and we cash out.

AN – AS I expected, profits took a beating. Down 37% Year-over-Year. No wonder: Autonation is the largest retailer of new and used US cars, and sales are down, down, down. Operating income is down from $185M to $147M but the EPS looks better because they have reduced shares 15% from 210M to 180M.
I shorted them because I expected more blood on the way.
Indeed, their books aren’t that great.
Assets are $641M in receivables and $2.3BM in inventory. I ignore the goodwill assets
Liabilities are $2.01B in payables, & $943M in liabilities
Not only are the hard assets barely covering their costs, I notice that the inventory has been stable ~$2.3B but the payables keep increasing $120M each quarter for 3 quarters. Their bills are piling up.

The last 4 quarters drove $1.31 EPS and it’s safe to assume a continued 30% drop from here, for ~$0.90 EPS. At an 11 P/E, that’s a price of $10. That’s why I selected the $10 puts, but I expected much more negative sentiment by now.

For whatever reason, Lampert keeps buying shares. Meanwhile, shorts seem to be rising: another 1M shares shorted last month

HOG – GMAC announced that they won’t finance things like boats and RVs. What about motorcycles? HOG is actually up since their horrible earnings release. Another bad quarter should do the trick.

MGM – They are hurting in every way. Fewer travelers, lower hotel rates, less gambling activity. Earnings were down 30%. Bear in mind that MGM is different form the Tropicana and Sands in that the MGM customers are high end: Monte Carlo, Bellagio and so forth. These are the folks who are supposed to be immune to a contraction. Apparently not. The short term pain of the fire at the Monte Carlo continues (about 600 rooms remain unavailable). Fix that and a few million comes back to the bottom line.

But I expect the pain to accelerate as more and more companies cancel conventions and Vegas business meetings.

We have the Sept $50s and are doing well. I’d like to sell soon, perhaps if they pullback closer to $45 and we can get $9.

NKE – Uggh. It’s just sitting there. Unless the market has a major pullback and these guys drop, I think we lost big here.

VMC
Missed earnings and guided down EPS from $4.65 to $3.65 and even that is probably high. VMC is a big asphalt and concrete maker and I expect road projects and construction projects to get delayed and cancelled. Also as an asphalt maker, VMC has deep exposure to rising oil costs. Margins have dropped precipitously.
Already Colorado and Florida are slowing public infrastructure to meet budgets.
They have a P/E that is way too high for their business. Their PEG is 1.6.
And they have ~$4B in debt and no cash.

I can’t understand why their stock didn’t get hammered after the major miss. We have the $50 puts and this thing is hanging in the low $60s. I was counting on a 10% haircut into the $50s to put some meat on the puts . Interestingly enough, massive put activity on the Jan 09 $50s and $40s. Almost 350 contracts each

ZLC – Another one that makes no sense. We know business will be bad. We know that things are hurting. This is another RSH that took forever to finally crash and burn. I was right in my assessment but my puts ran out of time. Lets hope that isn’t the case this time.

It is possible that we just saw a bit of a short squeeze: ZLC has 32% of shares shorted. With options expiring next week, a market pullback should hit them harder.

LONGS
ETFC – A pullback in sympathy with the market and with FNM’s weak announcement yesterday. The short side is pretty heavy here but it’s clear that $4 is the price point. Which is to say, one big buy move will drive the shorties to panic and cover and then hello $5. The longer ETC stays at $4, the more incentive there will be for the shorts to leave their position.
We have 2000 shares under the May covered call $4 strike price and I’ve been sitting on another 1000 shares. I had hoped to sell more covered calls a few days ago but the pullback made me wait.

For May, there are 44,000 options at the $4 price, out of 64,000 options. So I expect us to stay there pending some major move
Shift to June and there are only 13,000 total options, and most of those are calls.
Then looking at July, the volume is up again with a whopping 77,000 contracts of which 60,000 are calls and 38,000 are $5 or more strike price.
So you can see a bit of ebb and flow. The $4 price next week is the hammer keeping things bottled up, then the money is on a big upwards move. Let’s try and wait another 2 weeks to take advantage. I’d love to write some $5 calls on 3000 shares.

The Economist Says it Best

THE spirit of St Augustine hovered over the Federal Reserve this week. “Oh Lord, let us stop cutting interest rates, but not yet,” is pretty much what America's central bankers decided on April 30th. The Fed's governors cut their policy rate by another quarter-point, to 2%. But the accompanying statement gave a small hint that they may now pause.

There are plenty of reasons to stop cutting. Real interest rates are now firmly negative. Although the housing market continues to contract—the latest figures show sales falling, prices tumbling and the number of vacant homes soaring—the economy is limping rather than slumping. According to initial GDP estimates released on April 30th, output grew at an annualised rate of 0.6% in the first three months of the year—the same pace as in the previous quarter and faster than most people expected. The mix of growth was not good. Final sales fell while firms built up their stocks, which bodes ill for future output. But with tax-rebate cheques arriving in the mail, a dose of fiscal stimulus is imminent.
A growing chorus worries that ever lower policy rates are adding to America's problems. Some prominent economists, including Martin Feldstein of Harvard University and Bill Gross of PIMCO, a big money-management firm, have urged the central bank to stop. Fed cuts, they argue, are doing little to reduce borrowing costs but have sent commodity prices soaring—fuelling inflation and hitting Americans' wallets hard.

Thanks to the credit crunch, Fed loosening plainly packs less punch than hitherto. Lending standards are tightening across the board. The cost of a 30-year mortgage has risen over the past six months, even as short-term rates have tumbled. But monetary policy has not been impotent. One route through which it has worked has been the weaker dollar. Although the greenback has been sliding for over five years, the pace of decline stepped up as the Fed slashed rates. Since August the dollar has fallen by 7% against a broad basket of currencies and 13% against the euro. Together with strong global growth, this weakness has cushioned and reoriented America's economy. Strong foreign earnings have boosted corporate profits. Strong exports have countered the weakness in construction. Exclude oil, and America's current-account deficit has shrunk to an eight-year low of 2.4% of GDP.

But oil—and other commodities—are the crux of the problem. In the past, economic weakness in America has usually pushed the price of oil and other commodities down. That relationship has weakened thanks to demand growth in big commodity-intensive emerging economies. But the recent surprise is that commodity prices have soared even as America's economy has stalled and forecasts for global growth have been trimmed as well. No one expects global growth to accelerate this year, yet the price of crude oil is up 20% since the beginning of the year, The Economist's overall commodity-price index is up 18%, the metals index is up 24%, and the food-price index is up 18%. Supply shocks—from drought in Australia to strikes at Nigerian oil wells—are clearly part of the problem. But the fact that prices have soared across so many commodities suggests a common cause.

Could the culprit be the Fed? Advocates of this idea point to two channels. First, by slashing real interest rates, the Fed has encouraged speculation in commodities by reducing the cost of holding inventories. Second, by pushing down the dollar, Fed looseness is pushing up the price of dollar-denominated commodities.

Jeff Frankel, a Harvard economist, has long argued that low real interest rates lead to higher commodity prices. When real rates fall, he points out, commodity producers have more incentive to keep their asset—whether crude oil, gold or grain—in the ground or in a silo, than to sell today. Speculators, in turn, have more incentive to shift into commodities. There is no doubt that commodities have become an increasingly popular investment category—in fact they bear many of the hallmarks of a speculative bubble. But inventories for many commodities, particularly grains, are unusually low.

What about the dollar link? Chakib Khelil, president of the Organisation of Petroleum-Exporting Countries, argued this week that oil could reach $200 a barrel largely because the market was being driven by the dollar's slide. Movements in the euro/dollar exchange rate and the price of oil have become extremely close (see chart). An analysis by Jens Nordvig and Jeffrey Currie of Goldman Sachs shows that the correlation between weekly changes in the oil price and the euro/dollar exchange rate has risen from 1% between 1999 and 2004 to 52% in the past six months.

That link is partly a matter of accounting. If the dollar falls, the dollar price of a commodity must rise for its overall price—in terms of a basket of global currencies—to remain stable. But commodity prices have risen even when priced in non-dollar currencies. And the correlation between changes in the price of oil and the euro/dollar exchange rate has risen even when oil is priced in a basket of currencies, such as the IMF's special drawing rights.

So is the weaker dollar driving oil prices up or are high oil prices driving the dollar down? The Goldman analysts argue the latter. Dearer oil is pushing the dollar down, they claim, because oil exporters import more from Europe than America and hold less of their oil revenues in dollars. A second factor lies with central banks. Because the Fed focuses on “core” inflation (which excludes food and fuel), whereas the ECB targets overall inflation, America's central bank runs a looser policy in response to higher oil prices, thus pushing the dollar down.

Another reason to suspect that the Fed is more than a bit player is that American interest-rate decisions have a disproportionate effect on global monetary conditions. Some emerging economies still peg their currencies to the dollar; many others have been reluctant to let their exchange rates rise enough to make up for the dollar's decline. As a result, monetary conditions in many emerging markets remain too loose. This fuels domestic demand, pushing up pressure on prices, particularly of commodities. All of which suggests that the Fed's decisions are propagated widely through the dollar.

The most recent circumstantial evidence also suggests that the Fed may bear some responsibility for the commodities boom. The dollar slipped after the Fed's rate-cut decision as investors reacted to its doveish tone, though at $1.56 per euro, it was still up 2.6% from its low of $1.60 on April 22nd. The price of oil, after hitting a record high of almost $120 a barrel on April 28th, had tumbled to $113 on April 30th. But the price of crude and other commodities rose afterwards. If those reactions persist, America's central bankers may have to reflect carefully.