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Retail Awakenings?

|Includes: AMD, Costco Wholesale Corporation (COST), INTC, M, WMT

Our phones are ringing off the hook with questions about the upcoming holiday season. Will it be good? Will it be bad? Will it be somewhere in between? If one thing is for sure it's that the level of angst is much higher regarding the state of the consumer as opposed to just a few months earlier. If you remember, consumer confidence had been rebounding, retail sales were improving, and chain-store sales suggested that mall traffic has resumed. However, the angst is back in the air as the holiday season approaches. In line earnings guidance for the fourth quarter from Macy's (NYSE:M) yesterday and Wal-Mart (NYSE:WMT) today are not helping the situation. Such guidance, which comes against the ever rising estimates from sell-side analysts, reflects management teams desire to under promise and over deliver for a quarter that comprises a significant amount of annual revenue and profits (not to mention has implications to how the new year begins). The in line forecasts are being looked upon as worrisome given the level of discounting already popping up into the picture. We wouldn't call it discounting per se, rather just clever promotion by retailers. Ultimately, the level of discounting will be much lower this holiday season relative to last year as retailers were caught off guard by the swift descent in sales that led to bloated inventory positions.

Next week is peak earnings season for the retail sector. We would expect holiday forecasts to be conservative; the market appears to be pricing that outcome in at the moment.

Things you won't hear from the Media
Brian Sozzi

As I briefly touched upon in this morning's Hotline report, I had the pleasure of attending the Costco Wholesale (NASDAQ:COST) analyst conference yesterday. The company was putting on display to analysts its new Manhattan store, which is one heck of an interestingly situated retail box. For all of those Costco lovers out there, I would like to share some statistics. Most of these statistics were outright staggering, and I wish I was able to put into words the excitement seen at new Costco sites opened overseas (Japan, Australia). Aisles are mobbed, checkout lines huge, and of course sales on a nice trajectory at new Costco stores internationally.

Interesting Costco facts

In an effort to drive productivity, the company has trimmed 7 centimeters from the tops of its fresh grape packaging (who would have known this!). This has maximized transportation outlays. Total savings: $2.0 million annually.

  • Total annual wine sales: $1.0 billion
  • Total annual fine wine sales: $600.0 million
  • Total annual meat sales: $3.7 billion (company now sells prime cuts for you high quality meat devotees)
  • Total annual private label toilet paper sales: $405.0 million
  • Select Costco's now have car washes (highly profitable business thus far)
  • Average worker wage: $19.00 an hour ($0.70 of each sale goes to pay for employees; no layoffs throughout the recession)
  • Has changed to square packaging from round packaging on certain Kirkland private label goods to improve stackability (and lower costs)
  • CEO and Founder Jim Sinegal noted (to an outcry of laughter) in response to entering the China market "why invest money, our business could be taken over at the drop of a hat."
  • Typical Costco warehouse does $2.9 million in sales a week
  • Those stores opened in metro markets are being built vertically due to space constraints (think two levels of selling space and parking garage on top of the Costco building)

Housing Details
David Urani

Foreclosure filings decreased by 3.3% from September to October, marking the third month in a row the number has decreased. According to the people who compile the data, RealtyTrac, three months in a row is unprecedented. Perhaps we can say now that foreclosures have truly been on a downtrend, although they are still well above 300,000 which is disastrous. In addition, the numbers continue to be skewed by various government foreclosure programs, the effectiveness of which is questionable. In Illinois during September, foreclosures rose by a whopping 56.0% month to month as a result of a law passed in April to give troubled borrowers more time; the effects have now elapsed and a large portion of pent up foreclosures were released into the market. On the other hand, a moratorium program in California ended in mid-September, but with no visible boost in foreclosures. Perhaps the program in California was more effective, or banks are holding the homes rather than putting them on the market. Another program that began in July was likely the culprit for a 26.0% drop in filings in Nevada for the month.

In addition, the latest update on the White House's "Making Home Affordable" program showed than over 600,000 people are now enrolled in the three-month trial period. It is unclear how many people the program has actually delayed foreclosures for, and furthermore, whether or not it will actually save foreclosures or just push them back a few months. The fact remains that the housing market is still in critical condition, and without government lifelines, the picture would be even uglier.

With more than 300,000 homes entering foreclosure monthly, there is still significant pressure on home prices. And, with hundreds of thousands of people losing their jobs each month, the ingredients are still in place to keep the problem alive. Luckily the nationwide homebuyers' tax credit, as expensive and poorly run as it may be, was extended through April. It may have been a necessary evil to keep the rate of sales high enough to keep the massive flow of foreclosures in check. Just remember though, each program we use to prop up the housing market is just more air in the bubble. Perhaps we need some air though to cushion the fall and to keep the country out of a double-dip recession.

AMD Gives Support to the Tech Sector
By Carlos Guillen

Despite the fact virtually all indices are in the red so far into the trading session, the chip sector, as measured by the Philadelphia Semiconductor Index (SOX), is trading slightly in the green and trying to stay above water, with a lot of volatility. The reason for the strength in the tech sector is that shares of Advance Micro Devices (NASDAQ:AMD) are trading well over 20% on positive litigation settlement.

Intel Corp. (NASDAQ:INTC) said it will pay its Silicon Valley rival Advanced Micro Devices $1.25 billion to settle a legal battle over Intel's sales tactics, a rift that led to antitrust charges against Intel in several countries and was headed toward a costly and nasty trial next year. AMD had, for a long time, accused Intel of having kept AMD's market share from rising no higher than about 20% by threatening PC makers and offering financial incentives for avoiding AMD chips. However, the situation will not end here for the 800 lbs gorilla as it will still have to deal with the antitrust charges that AMD pressed other governments to file.

Perhaps the largest threat to Intel's pockets comes from Europe, where regulators have fined the company a record $1.45 billion over what they described as Intel's illegal tactics to bully PC makers into choosing Intel chips over those from AMD. Although today's settlement with AMD will likely favor Intel's case, it will not dissuade the European Commission from moving forward to enforce its antitrust laws.

Two other cases Intel also needs to fight against is an $18.6 million fine in Korea and a federal lawsuit filed last week by New York Attorney General Andrew Cuomo, who accused Intel of abusing its market dominance to "rule with an iron fist." The U.S. Federal Trade Commission also is investigating.