Blimling and Associates Blog

If our recollection of literary history is correct, the Greek's are credited with inventing drama for the stage. Sophocles and all that. Continuing in that tradition, the road to "solving" or at least addressing the debt crisis in Greece has been full of drama. Austerity measures proposed by the government are not being well-received by public sector employees. Various protests have sprung up.

That this is not all going down easily has not been lost on capital and currency markets. The Euro is taking a beating, with support at the 1.32 level versus the US Dollar gone and the market zooming in on 1.30. This, presumably, goes in the "unfriendly" column for US exports.

And, if things were not already shaky enough this morning, The Financial Times website features this headline: "China Slowdown Fears Add to Debt Worries." Apparently a report today showed growth in manufacturing activity in China at its lowest levels in about six months.

Looks as though things in the global markets could get interesting....and not necessarily in a good way.

Economic data from China overnight offers continued suggestion of improved economic health globally. According to published reports, exports from China in February jumped by nearly 46%, easily besting estimates for 35-40% growth. Imports were up too, climbing nearly 45% on a year-over-year basis. 

Export performance for January and February was up 34% -- which some say may be a better figure that takes into account activity (or lack of activity) around China's New Year celebrations/shutdowns.

A dispatch by the Associated Press on published by The New York Times offered a couple of comments:

''China's trade is extending its recovery,'' said Zhu Jianfang, an economist for Citic Securities in Beijing. ''Exporters are getting more orders these days.''

February's growth rate was boosted by comparison with last year's weak trade amid the global downturn and came despite the weeklong Lunar New Year holiday, when many companies shut down.

Zhu said the data increase chances the government might allow China's currency, the yuan, to rise in value. Beijing has held the yuan steady against the dollar for 18 months to help Chinese exporters but is under pressure from Washington and other trading partners that say it is undervalued and is swelling China's trade surplus.

In a reflection of stronger global trade, China's total Fe bruary imports and exports were up 45.2 percent from the same month last year. China overtook Germany in 2009 as the world's top exporter.

Chinese economic growth accelerated to 10.9 percent in the final quarter of 2009 on the strength of massive stimulus spending and bank loans. That drove demand for imported iron ore and other materials used in stimulus-financed construction projects.

''Stronger domestic demand led to the good performance of imports,'' said Liu Qiyuan, an economist for China Merchant Securities. ''We can see the domestic economic is on track for recovery.''

Equity markets in China have been on a bit of a comeback since fading earlier in the year. The benchmark Shanghai Index is up 4% since early February. But as the chart below shows, the market appears to be at an interesting "decision point" -- trapped in a narrowing gap between the 50-day and 200-day moving averages.

A year ago today, the US stock market made a bottom. On March 9, 2009, the S&P500 closed at 676.5. Yesterday, it was 1138.5. So we have made a 58% comeback. According to a report published by Bespoke Investment Group, the current bull market so far ranks 14th on the all-time list.

At times it is not easy to believe that things have gotten a lot better since last March. That view is perhaps mostly deeply colored by unemployment, which is rampant. But a look at a number of indicators shows real gains. Look at the data "in hand" today versus the same month a year ago:

Consumer Confidence +84%

Retail Sales +5%

Auto Sales +13%

ISM Purchasing Managers Index +61%

Durable Goods Orders +10%

Housing Starts +22%

So: we survived and there has been traction.

Of course, that is not the same thing as saying "everything is great" or that there is somehow no bad news. The housing sector remains in tatters -- foreclosures, unsold inventory, "upside down" mortgages and construction spending all remain areas of concern. Moreover, the mood around everything remains tentative. In short, we could write the "glass is half-empty" narrative without straining.

But for today, on the one-year anniversary of the market making a major bottom, we'll stick with a "glass is half-full" view.

McDonald's Corp (MCD) today reported worldwide same-store sales growth of 4.8% for February, besting estimates. Domestic sales were up 0.6% -- performance that some commentators say was decent considering horrific weather in many areas. Sales were up 5.4% in Europe and 11.0% in other foreign lands. France, the UK, Japan, China and Australia were cited as strong spots.

While same-store sales growth of less than 1% in the United States hardly seems cause for believing that economic malaise has entirely melted. But this morning's report was of a piece with other retail numbers published in recent days showing some traction with the consumer. Indeed, Friday's editions of The Wall Street Journal included a story about better-than-expected retail performance across the spectrum in February -- with Retail Metrics showing same-store sales growth of 4.1% across the outlets it tracks:

The results, on the heels of similar activity in January, show how consumers, even if they aren't spending as much, are giving up the ultra-frugal habits they took on last year. Instead of waiting for deep discounts or buying items only when they need them, shoppers are back to buying a season ahead when prices are higher. They're also spreading around more of their carefully counted dollars to sellers of higher-priced goods, including luxury, which saw sales hit a wall last year. The turnaround has caught industry observers by surprise. More than three-quarters of the retailers who delivered February results Thursday did better than analysts had expected. 

Darden Family Restaurants unexpectedly raised guidance for the current quarter yesterday. According to Fox Business News:  

The owner of Red Lobster and Olive Garden restaurants, Darden Restaurants (DRI: 40.4, 1.4, 3.59%), upped its outlook for profits thanks to heightened consumer traffic. The company now says per-share earnings from continuing operations will be up by 5-8% for its fiscal year ending in May, up from December’s prediction of flat to a 4% rise.

"The signs of sales and traffic improvement we began to see late in the second quarter and discussed during our December conference call with investors continued into January and February," said Darden CEO Clarence Otis in a statement.

The Orlando, Florida-based company, which also owns LongHorn Steakhouse and Capital Grille restaurants, says it will add between 50 and 55 new restaurants to its roster during the year.

Shares of Darden rose 3% on Tuesday to $40.16.

In the previous quarter (ending in November) Darden's concepts all showed declines in same-store sales on a year-over-year basis, with Olive Garden down 1%, Red Lobster down 8% and LongHorn down 5%. Moreover, most chains that have over the past two weeks reported results quarters ending in December also said same-store sales had declined. For all that, there has been discussion in recent weeks that things have firmed some -- a notion affirmed by Darden today. 

While Darden's report won't be an immediate game changer in terms of dairy product demand, the mid-stream boost to estimates stands out -- and may be a sign that things are, at long last, turning some in the beleaguered restaurant space.

The Euro has been crushed over the last week or so as markets react to concerns about Greece's fiscal woes and presumed need for help from its European brethren. On February 3, the Euro traded to as high as 1.40 versus the US Dollar. This week the Euro has been flirting with 1.36 versus the US Dollar (down nearly 3%).

As European leaders search for ways to help, the Prime Minister of Greece -- George Papandreou -- has indicated that he will try to get the house in order, declaring that the government will embark on a fiscal austerity program. 

Such plans have not, to put it mildly, been embraced by Greece's powerful public sector unions. Indeed, they have gone on strike (from The New York Times):

A strike by civil servants shut schools and grounded flights across Greece on Wednesday, as unions challenged cutbacks aimed at ending a government debt crisis that has shaken the entire European Union.

Air traffic controllers, customs and tax officials, hospital doctors and schoolteachers walked off the job for 24 hours to protest sweeping government spending cuts that will freeze salaries and new hiring, cut bonuses and stipends and increase the average retirement age by two years to 63.

The strike left state hospitals working with emergency staff only and disrupted national rail travel, although urban mass transport was unaffected.

''It's a war against workers and we will answer with war, with constant struggles until this policy is overturned,'' said Christos Katsiotis, a representative of a communist-party affiliated labor union.< /em>

So much for austerity...and for quick, easy solutions to a serious challenge for the European Union. A challenge, that many note, could grow if Portugal, Spain and Italy have to line up for help, too.

Restaurant operators are reporting fourth quarter results. As was the case for the third quarter, earnings have been strong -- "beating the street" in most cases -- but domestic sales continue to drag. The headlines on all the McDonald's reports this morning, for example, tout +2.6% same store sales growth in January...but those are global numbers. Domestic same store sales in January were down 0.7%,making for back-to-back months of declines at what had been a strong performer. Sales outside the US were up 4.3%, prompting this comment from one analyst:

"The U.S. continues to be impacted by unemployment and aggressive discounting across the industry, but the results outside the U.S. were encouraging," said Morningstar analyst R.J. Hottovy.

Some of the casual dining chains have seen improvement versus Q3 -- Chili's, to cite one instance, saw same store sales decline 3% in Q4 compared to -6% in Q3. But down is down -- signaling continued struggles for those marketing dairy products into the food service arena.

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The latest consumer credit numbers published by the Federal Reserve show that deleveraging continued in December, albeit at a somewhat slower pace. Total credit outstanding was down $1.8 billion, or 0.1%, versus November and down $102.3 billion when compared to December 2008.

Credit has now contracted for 11 consecutive months, with the amount outstanding declining by $124.8 billion (5%) from the June 2008 credit cycle peak. While the reversal of such a long term trend is in itself fascinating, some of the internal components are all the more revealing about consumer behavior. For example, in December revolving credit was down by an annualized rate of 11.7%. That is basically credit card spending. Non-revolving credit -- the stuff of home, auto and student loans -- was up 5.2%.

A story in USA Today highlights consumers' retreat from using plastic:

Credit card usage is slowing. Revolving credit — largely made up of credit card debt — fell by nearly 20% in November, the largest drop on record, according to the Federal Reserve, reflecting less borrowing by consumers and banks' tighter lending standards. Through October, the number of new credit card accounts was down 46% from the same period in 2008, according to Equifax.

For as many signs/stories that exist about newfound consumer conservatism, there are some signs that upper income consumers are emerging from more than a year of hibernation. From the Financial Times:

Fabrizio Freda, chief executive of Estée Lauder, has said that sales of its beauty products at “prestige” stores – such as traditional department stores – had grown faster than at “mass” drugstores and discounters during November and December, reversing the trend seen earlier in the year. “We view this as a return of the aspirational consumer,” he said. Sales of cognac in the US had jumped 19 per cent by volume during the fourth quarter compared with the same period last year, according to BNIC, France’s trade association of cognac makers.

Why should we care about any of this? In our estimation, consumer deleveraging is a drag on consumption, particularly in the food service arena where credit card use is ubiquitous.

Currency valuation is a two-way street. That is, price can be dictated by forces affecting either side of the currency pair. Strength of the US Dollar versus the Euro could be as much about Euro-zone weakness as it is about US economic strength. The former appears to be the case presently, as concerns about financial conditions in Greece, Ireland and elsewhere are weighing heavily on the Euro. Indeed, the Euro has fairly crashed in recent days, with the market dropping from over 1.45 versus the USD to near 1.40. That is huge currency movement in just five or six trading sessions. 

Strength in the USD has weighed on commodity pricing this week, as have actions taken by China to stem inflationary pressures. The comparatively small, comparatively insular US dairy markets can sometimes stand to the side, somewhat insulated from forces that affect, say, crude oil. Yet it is perhaps not entirely coincidental to see some downward pressure in the US dairy space this week and a significant downtick in prices for European butter.

As retailers of all stripes wrestle with ways to adjust to the "new frugality" grocery stores in are in something of a unique, and perhaps advantaged, position. First, peopler are generally going to eat. Second, grocers have ostensibly been the beneficiaries of the trend reversal that has slowed restaurant visits.

This is not to say that it has been a walk in the park for grocers. Yesterday, SuperValu reported results for the quarter ending December 5. Same store sales were down 6.5%, with revenue declining 9.5%.The company did, however, top earnings expectations for the quarter.

During the earnings call with analysts, SuperValu executives made some thought provoking comments about general business conditions and the ways in which the chain (operator of Jewel, Albertson's, Save-A-Lot and Cub Foods) is interacting with customers. A few snippets (courtesy of seekingalpha.com):

"We are making progress in narrowing the gap between our regular shelf price and our promotional pricing."

"As a backdrop to the quarter, the overall industry remains challenged by the economic environment, heightened competitive activity and deflationary pressures."

"Industry wide we are seeing increased promotional activity targeting the thrift conscious consumer. In my 30 plus years in retail I have never witnessed the intense level of price reductions and promotional activity now occurring. My belief is that the recent industry trend towards lower pricing is here to stay. However, a hyper promotional environment can encourage routine cherry picking and may not in my view necessarily build long-term brand equity. This trend has on ly intensified an already competitive landscape. Consumers have become adept at tracking weekly advertisements and executing with surgical precision the purchase of those items that maximize their own savings. Accordingly price tactics once used to drive foot traffic and tonnage are now driving lower transaction size and margin erosion."

"The fall in identical store sales was attributable to a 2% decline in customer count and a 4.5% drop in average basket size."

"Trade down remained a factor as customers continue to look for ways to stretch their shopping dollars."

"We continue to see approximately ½ items less per transaction. This trend was driven by the same factors I spoke to last quarter namely the consumer’s adherence to shopping lists and a reduced willingness to add impulse items to their baskets."

"We have seen some great success as we have looked at consolidating suppliers with some of our owned brand categories and we have seen really, really good benefit and cooperation partnership with our supplier partners clearly with the ones who end up getting the business."