NFIB Observations

Yesterday, the National Federation of Independent Businesses released results from its latest survey. Most readings slipped month over month.

* Optimism fell 1.3 to 88; the low last March was 81.0 and the record low was 80.1 posted in 1980.
* Will increase employment: -1%.
* Will increase inventory: -7%
* Earnings expectations were less negative but abysmal still

We need small businesses to save the day, but that can't happen until the coast is clear. The battle against business has to cease. I'm not sure why the White House doesn't listen to any of the major organizations representing small businesses and yet claim to be friends to small businesses. Perhaps it's because these organizations have been critical of policy proposals, but that shouldn't matter. In fact, skepticism should be welcomed and there should be a willingness to learn from those that are in the trenches. NFIB on healthcare reform: http://www.nfib.com/tabid/565/Default.aspx?cmsid=50819.

The government really can't create jobs unless they raise taxes on the shrinking pool of taxpayers, thereby negating any positive impact. The fact is that I think the government should abandon its ambitions to create jobs and instead find a way to extend an olive branch to the people that know how to create real jobs that generate economic prosperity. The government needs to fertilize the environment so businesses know they will not be railroaded and demonized. There aren't many people out there that pay their bills, pay for their children's education, and put cash away for retirement that don't do this as part of riding the coattails of the wealthy.

The Market

It was summer like weather in New York yesterday, and summer like action in the market. Volume had already been anemic like a lazy, hazy week in late August. The bias is to the upside and that's the good news. But, we are reminded of trepidation bubbling not so deep beneath the surface. Less visible is the angst of those that have missed the entire party. Yesterday was the anniversary of the market bottom and today is the anniversary of the new bull market. I don't like to use these terms, by the way, bull and bear... who cares? It is only one more thing to fret about. You know that even though the market is significantly higher from the lows this is still the least celebrated rebound I've ever seen. The rally that began in 2003 was largely ignored by the media and was only mentioned by politicians as evidence the rich were detached from Main Street reality.

Yesterday, 1,072 stocks closed at their 52-week high or within 2% of that high water mark. Most are significantly lower than their all-time highs. By the way, there were only 20 new lows. In a way this only exacerbates the dilemma for fence-sitters. Keep in mind that bull markets don't fizzle out quickly. I haven't done in-depth research, but will; in the meantime Hays Advisory wrote a piece saying that the average bull market is 29 months. Also, Sam Stovall has published work stating that the average bull market is 3.7 years long with a median of 3.2 years. He actually breaks down bull market moves for each year: 1st year is 38%, 2nd year is 12%, 3rd year is 3%, and the 4th year is 14%.

We'll see what happens this time around, but in the meantime we are focused on finding companies taking market share, expanding margins, and growing the top line organically. For the broad market, the next leg up could be powerful. The S&P 500 is holding above its 50-day moving average and clearing 1,200.0 would be significant, and without a doubt lure many of those fence-sitters into the game. Keep in mind that according to ICI in the week of February 24, $8.0 billion flowed into bond funds while Americans only invested $151.0 million in equities.

American Eagle Shares Should Not be Shot Down
By: Brian Sozzi, Research Analyst

Before the open, American Eagle Outfitters Inc. (AEO) announced its 4Q09 financial results. Now that the fate of Martin & OSA is well known, as the company issued a press release yesterday evening detailing the planned closure of the 28 store chain by July, investor attention has returned to the 4Q09 results and forward looking commentary. As we stated in a note providing color on the M&O closure announcement, the decision is very welcome music to shareholder ears. We grapple with, however, why the decision was so "difficult" to begin with, and we plan to inquire about the company's review process when it comes to brands being incubated. Nevertheless, the announcement removes a material item hanging over the stock; we estimate the business negatively impacted earnings by $0.11 to $0.15 per share in FY09 when stripping out non-cash charges. Theoretically, the company should see a boost to earnings in 2H10 by removing M&O from the equation; by the looks of the company's capex plan for FY10 (flattish) it appears cost savings are a goal for the management team.

Regarding the 4Q09 results, the company reported EPS of $0.33, in line with our estimate. Merchandise margin, a component of gross margin, expanded a robust 600 bps in spite of a greater emphasis on promotional prices to regain lost market share. The increase y/y reflects the sharp drop off in demand in 4Q08, but also well sourced merchandise and more aesthetically pleasing merchandise (in particular denim for men and women, and within women knits). As we stated in our M&O note, the announcement of the store closure was not a foreshadowing of an earnings disappointment for 4Q09, rather a much needed course of action to cut ties with a money losing brand.

For 1Q10, management guided to $0.15-$0.17 per share, in line with our $0.16 per share estimate. Once again, as we outlined in our earnings preview, the company preferred to stay conservative in its outlook despite recent positive comp trends given the slow start to the quarter (weather related) and unknowns heading into the spring break/Easter selling seasons. Given margin concerns on the Street prior to the guidance, an in line outlook could be viewed favorably.

Email me at Brian.Sozzi@wstreet.com for your free copy of our pre-earnings report. Be sure to include your name and a good day-time number.