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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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  • Permanently Parked on the Sidelines By: Charles Payne 0 comments
    May 13, 2010 1:32 PM | about stocks: KSS, WMT, HD, LOW
    What the heck is going on with jobless claims? Initial jobless claims were higher than expected at 444,000. This is a mind numbing number. I just don't get how this could be when companies have cut through fat and bone and now some larger businesses are saying they are hiring again. I think that it has to be a couple of real odd, yet sad, factors.

    Small businesses have been ignored while being trampled by Washington. They can't get money to expand their businesses, on the contrary too many have seen credit lines cut or taken away completely. Without small businesses providing jobs there is no way to make a real dent in unemployment.

    It's easier to be unemployed than to keep a job with declining wages. On Varney & Co. today, we had a guest on discussing the difficulty in finding people to take seasonal jobs in Detroit. These are jobs like landscaping that pay about $12.00 an hour. Michigan has 14.9% unemployment, and Detroit damn near 50%, yet people are sticking their noses up to jobs that barely pay more than unemployment.

    Both of these drivers for persistent reliance on unemployment come from failed polices that look to appease rather than to motivate or create. I will be happy when all of the haggling is done with respect to financial regulatory reform, cap and trade, and immigration (not to mention bailout out socialist Europeans) so the White House can maybe do more than give job creation lip service. Unfortunately, gains in coming months will be accompanied with ticker tape parades, self congratulations, and hype in the media. This will lessen the sense of urgency and justify the inaction to date.

    Afternoon Musings

    Brian Sozzi

    Retail Deep Dive

    It has been a retail analyst's delight this week, the start of the earnings season. There were many questions in my head in the days prior to the first quarter earnings regarding what the management teams would say to an ever enthusiastic analyst bunch. The risks to the euphoria I saw included (1) inflation in the supply chain as China capacity gets gobbled up; (2) with the reinvestment in inventory comes increased markdown risk, a risk that has not been in play to a large degree since 2008; (3) given strong spending patterns in the business entering 2Q10, are they sustainable; (4) what are the thoughts around holiday receipts, which are presently being placed. All in all, from the subset of retailers I have crunched numbers on and queued into the conference call, I sense caution as it pertains to the outlooks for the second half. While retail management teams have acknowledged a more engaged consumer (that is engaged with their wallets), inflation is a legitimate point of contention and so is investment spending to facilitate future growth. The S&P Retail Index (RLX) has remained flat since the market correction last Thursday, I think in large part to the uncertainty heading into the back half of 2010 and earnings outlooks that have only met, or been below, healthy consensus forecasts.

    The Good
    * Online is truly turning into a retail sector game changer (mobile apps; integrated online operations with store level operations).
    * Consumers are willing to trade up in price if the fashion and quality is on the mark.
    * Average price-points well below those from 2007.
    * Retailers investing in technology (data mining to attain knowledge on shopping patterns and preferences) will make for a more pleasing shopping environment in the future.
    The Negative
    * Inflation in China, specifically for basic apparel.
    * Inflation in transportation (ordering closer to season not helping matters).
    * Inventory out of stocks.
    * Soft earnings outlooks.

    Other Areas of Interest
    * One of the retailers taken private in the boom (2007), Express, received lukewarm reception in the market for its IPO. The stake sold by Golden Gate Capital valued the apparel chain at a steep 22.3x EBITDA, by far the priciest among comparable companies in the sector. Going back to the chain's days as a member of the Limited Brands portfolio, the division was a perennial underperformer.
    * Next week is the mother of all earnings weeks for the retail sector, with prominent names such as Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), and Lowe's (NYSE:LOW) shedding light on their starts to the year. Of this esteemed group, Wal-Mart may have a disappointing quarter as its traffic at domestic stores fell 0.2% in the holiday quarter and the dollar strength hurt translation of international sales. The impact of price rollbacks on margins is also an added concern.
    * The sales and earnings from retailer Kohl's (NYSE:KSS) certainly are interesting in the context of the improved manufacturing data to start the year. Kohl's stores are primarily situated in manufacturing dominated towns.
    David Urani

    Foreclosure Filings Fall but We're Far From the End

    Foreclosure filings in April showed a somewhat promising drop, falling by 9.1% month to month, and 2.4% year over year to 333,837. Certainly a positive to see filings go down, but at over 300,000, we are still in crisis territory. While the drop is welcome, we wouldn't be too quick to call a downtrend at this point, considering the data does often show volatility month to month. We will be more assured after we see a few months in a row of decreases, considering filings fell in January and February before rising to a record high in March.

    Another point to note from the foreclosure report is the rise in bank repossessions of foreclosed homes. Repossessions hit 92,432 in April, marking a new record high. What we are seeing is the large overhang of delinquent mortgages, which generally go for more than a year without payments before finally getting repossessed, finally cycle over. Broad efforts to bottleneck the amount of foreclosures last year through programs such as HAMP and other mortgage modification plans helped to slow the rate of housing inventory buildup, but it appears as though we are at the point now where we cannot delay those foreclosures any longer. With the tax credit having ended at the end of April, it's concerning to think about the effects of rising vacant home supply combined with a potential drop in home sales demand.
    David Silver

    Greek Shipping Not Sinking

    With all the problems in the Greek economy, one area that has been relatively exempt from the troubles is the shipping industry. The shipping industry is the second largest part of the economy (behind tourism), and the industry has weathered the storm relatively well. The industry is still far from the pricing power it saw during 2007 and the beginning of 2008, but all the worries about overcapacity and the decrease of demand have been unfounded. Coal, oil, and other food products remain in such high demand (namely from China and India) that the shipping industry has escaped relatively clean from the global economic slowdown. Additionally, as the economy in the United States, Asia, and some South American countries begin to improve more, the shipping industry should benefit. Even if China raises rates to try to slow its growth, demand for goods will still remain high. For instance, China is the second largest grower of corn in the world (behind the United States), but it is expected to become a net importer this year. We have featured a few dry-bulk shipping stocks in the past, and it is an industry we are watching closely.
    Carlos Guillen

    Expect Strong Semiconductor Revenues in 2010

    Now that the March quarter earnings season is virtually over, I am becoming more optimistic that the semiconductor industry will post yearly revenues that will come in much better than many expect. PC and handheld demand has held up well and will likely greatly contribute to worldwide semiconductor sales in 2010.

    Consumer demand has continued to fuel the semiconductor industry recovery we have been witnessing. Quite surprisingly, demand for consumer electronics has been strong despite a seasonally down quarter. Clearly, consumers see a strong product value equation in consumer electronics and are willing to spend despite a still shaky unemployment situation. It is also quite encouraging that most semiconductor companies continue to operate at lean inventory levels, and I believe that as end demand continues its momentum, semiconductor companies will have to build inventories up to prevent shortages. This of course should serve as another component of the forces lifting revenues higher in 2010.

    I continue to see strong demand for PCs and handhelds in 2010, and I believe 2010 will be a good year for the semiconductor industry as demand for PCs and handhelds will continue to boost revenues. Moreover, improving technologies are allowing the development of new products that are creating new markets. Some of these new market makers include devices such as smart-phones, net-books, and tablets. These new devices will also create opportunities for sales of memory components during the second half of 2010.

    The semiconductor industry should also benefit from an improving economic backdrop and from a corporate sector that is slowly but surely ramping up spending. At the moment, I see minimal downside risk in terms of corporate spending and am much more optimistic about a sharp upturn in IT spending in the second half of 2010. All signs are indicating that world economies are, in general, improving. Despite the current debt crisis, the European economy grew better than expected during the March quarter. And China, of course, will be the leader of the pack in terms of GDP growth, providing continuing momentum to semiconductor revenues.

    Conley Turner

    Hydrocarbon Prices Still on Negative Ground

    U.S. crude futures continue to be under pressure partly due to elevated inventory levels. This is especially the case in Cushing, Oklahoma which is the delivery point for the Nymex. The price continues to be under pressure as the dollar index continues to strengthen against a basket of other international currencies, including the euro. Crude oil is priced in dollars and as a result, becomes more expensive for investors using other currencies to purchase the commodity when the dollar appreciates in value. Investors are also mulling the fact that crude oil demand in the U.S. still remains relatively weak despite the pickup in economic activity.

    In its most recent report, the Labor Department indicated that first-time jobless claims declined by 4,000 in the previous week to 444,000. This does convey some incremental improvement in the economic environment. Furthermore, import prices in the U.S. showed a 0.9% jump in the month of April, representing the largest increase in three months.

    The latest fix from BP for the spill in the Gulf of Mexico has also failed. The robots were able to secure the "plug" on top of the leak, however, the seal wasn't airtight and oil was still able to escape.

    Disclosure: none
    Stocks: KSS, WMT, HD, LOW
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