IN A FLASH (FINAL EDITION)

By Charles Payne, CEO & Principal Analyst



NEW YORK, NY

In 1940, comic character "Flash" was born by DC, unveiled as a super fast hero to the world. The story of Flash has changed several times, but essentially he was a guy that got caught in a lab while an experiment went wrong. In gayer times, he was known as the "Scarlet Speedster." These days, the technique of flash trading is also viewed as an experiment that has gone wrong. Just one component of so-called High Frequency Trading (HFT) flash trading uses technology to provide traders with an edge of seeing orders before execution and getting in front of them. While this sounds unfair, the real aim of somehow bringing Goldman Sachs (GS) down a peg will not be achieved.


It was reported yesterday that Goldman enjoyed 46 days of $100.0 million plus trading days in 2Q, up from 34 days in 1Q. Politicians hate that and have been powwowing on how to stop this company, which is faster than a speeding bullet, from being able to leap embedded regulations in a single bound. Still, at the end of the day, the playing field should be as level as possible. At the same time, we have to congratulate when our first instinct is to hate, and that goes especially to Goldman as long as the firm is playing by the rules.



Buy or Sell Signal?



I mentioned not long ago the action in some banks that were written off was looking compelling, particularly Bank of America (BAC). Well, in hindsight, we should have featured the dang on stock. Be that as it may, I was wondering if the action foretold of the kind of last inning speculation that could signal an end to the March rally. Well, as it turns out, there is another level of stocks beneath Bank of America when it comes to risky speculation. Government owned and controlled businesses were on fire yesterday. I guess the theory is that these companies can never go out of business. Earlier this week there was even scuttlebutt about AIG needing more government money.

• AIG


• FRE


• FNM

The moves in these stocks were simply mind boggling. There is no real justification for the moves, although it could prove rational down the road (way down the road) this is the kind of market that is getting frothy. When in-play stocks get hot they get super hot in a flash. So, to answer the question I think that this is a short-term buy signal and long-term sell signal. If there is an attack of lunacy then I don't mind playing the game, but keep in mind that it's probably just a game. This is where all those investors that waited it out begin coming in, and they need to do it based on a hit story. With respect to the financials, there was a general epiphany that the worst is over.


I'm not sure how much hot water will be tossed on this seismic change of heart but Prudential (PRU), the nation's second largest insurer, posted a strong earnings result but offered subpar guidance. Prudential's management offered full year guidance of $5.00 to $5.20 per share versus their previous outlook range of $5.25 to $5.65 per share.



Auto-related stocks also enjoyed the hype over "cash for clunkers," while agricultural stocks were sprouting on belief there will be major consolidation in the space. There is also betting that the program will continue even as the Senate vote was pushed off until Saturday.



"And he smiled a kind of sickly smile, and curled up on the floor, and the subsequent proceedings interested him no more." -Bret Harte



John Chambers was once the man because of his ability to work a conference call into a frenzy (think Angus Young over a speakerphone). Then, he was the man for playing it straight and narrow even as other CEOs were playing it fast and loose with assumptions and exuding the best, and only the best. These days he's not really the man to the broad market or even the tech sector, and maybe he's being cautious to a fault. Saying that there are "positive signs" the Cisco (CSCO) chief executive also said it's "too soon to call a recovery."



I was also disappointed with the reaction in Ocean Freight (OCNF), a small-cap dry bulk shipper that posted earnings after the bell and saw its share price get hammered. The action in the dry bulk shippers belies any notion of a global recovery. It's hard to imagine that with commodity prices sky-rocketing these stocks can't recapture even a fraction of their old fire. It simply doesn't jive.



If this is the week when we unofficially put the recession to bed then the shorts are going to be wiped out. I know they made boatloads of money for a long time but the March rally was bruising, and a move to 9,600 on the Dow Jones Industrial Average would be the final blow. Think of the movie "300" as these Spartans have their backs to the edge of a cliff. It has been a valiant run, but they could be done in a flash.







Economic Data



Initial Jobless Claims



The Labor Department announced this morning that the number of recently laid-off workers seeking unemployment insurance fell last week to 550,000 from a revised 588,000 figure the previous week, fresh evidence that layoffs are easing. However, to counteract this good news, the department says that the tally of people continuing to claim benefits rose by 69,000 to 6.3 million. For the fifth straight week there were fewer than 600,000 claims which only proves that employers are not laying off workers as quickly as before (however, they still aren't hiring). U.S. employers have eliminated 6.5 million positions since the recession began in December 2007, the most of any downturn since the Great Depression. The report this morning, while a slight positive, will keep the market in limbo as most are already looking towards tomorrow's job report.







Same-Store Sales Review


Brian Sozzi, Research Analyst



Comparable store sales results for July were downright ugly, with most companies falling shy of consensus by wide degrees. There haven't been any earnings bombs for 2Q09, though I would say that sales for the three-month period have largely missed consensus. As I suspected, the shift of tax free holidays to the first week of August has negatively impacted the results. Retailers will have no easy excuse to fall back on should the August numbers come in flat, as the back to school sets are in stores, tax free holidays are in play, and the lead up to Labor Day brings shoppers out for deals.



Of the 30 retailers that we track for same-store sales and earnings, five of them managed to deliver EPS upside for 2Q. Companies such as Kohl's (KSS), Gymboree (GYMB), and Aeropostale (ARO) all issued material earnings guidance revisions, under a few common threads. First, well balanced product and price drove market share gains; Aeropostale has been a share gainer for over a year, so let's break down Kohl's for a moment. Despite the company's store base being situated mostly in hard hit manufacturing areas, it had positive comps in discretionary merchandise categories while rival Target was deeply in the negative in these same categories. This is almost textbook market share improvement. Second, solid inventory management was a factor, as these companies are not over building inventories rather flowing in goods as demand warrants. Thus, this limits markdown risk and preserves gross margins. And, third, product costs are coming down finally across the industry. Deflation is hurting discounters, such as BJ's Wholesale (BJ), but for a company like Aeropostale it's able to receive this lower sourced product and mark it up while remaining a price leader. Talk about a business model to have during a recession.



We are receiving many client inquiries on how to be positioned in the retail sector pre-holiday. I hate to give a party line type answer, but it's really a matter of sticking to companies that have executed in recent months. Most of the sector is trading at valuation multiples to future earnings that simply do not quantify enough of a risk factor from continued consumer balance sheet de-leverage and joblessness. For example, Abercrombie & Fitch (ANF) trades at almost 19.0x estimated earnings for next year, in spite of horrid sales trends and a robust capital expenditure commitment that is eating into free cash flow. In my opinion, having exposure to this stock is a dangerous proposition as market share is ceded during back to school and holidays and the pricing structure is subsequently revised. It's no longer a time to bet on recovery earnings stories, as that trade has all but died. Consistent to my views coming into the year, at some point a focus will need to be on companies growing sales, and I believe that adjustment period is fast approaching as inventory is at artificially low levels and unproductive stores have been weeded from the mix.



As I sit here at the moment with coffee in one hand and pen in the other, the holiday season for the retail sector, though not as discount crazy as last year given low sector inventories, is shaping up to be very competitive once again. Perhaps competitive to a point where consensus EPS estimates are at risk of being too rosy as retailers focus on pricing and give up attempting to maximize margin.