Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: Short the SP500 (SPY)


We shorted the SP500 today at 9:53AM, so our view of the US stock market here is implied. We are very time and price sensitive and all the while respectful of the reality that immediate term tops are processes, not points.


This morning’s early run-up was real. On my immediate term TRADE duration, it was the first one-day 3 standard deviation move I’ve observed since October 13th. While the selloff from October 13th to October 19th wasn’t a big one. It was enough to stop the slope and expediency of the market’s weekly ascent. Looking forward at the next two weeks of market catalysts, I won’t be surprised if we look back at today’s intraday highs the same way.


I’m not bearish for bearish sake. In terms of bearish calendar catalysts, here’s what I see coming down the immediate term pike: 

  1. Tuesday = Case Shiller Home Prices for August (bearish)
  2. Wednesday = New Home Sales for September (bearish)
  3. Thursday = the Bank of Japan’s outlook report (bearish)
  4. Friday = US GDP for Q3 (bearish) 

Most importantly, I now have the immediate and intermediate term TRADE (1191) and TREND (1216) lines of resistance in close proximity to where I shorted SPY this morning.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


In preparation for Royal Caribbean’s Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL’s Q2 earnings call. 




  • “Simply put, the year is progressing better than we expected it to and generally, our business is as good or better than projected both in this country and abroad.” 
  • “The best way to describe demand for our cruises today is stable and remarkably consistent. With the exception of currency fluctuation, our revenue projections today are virtually identical to the ones we did 3 months ago.”
  • “Bookings since our last call has been up about 11% over the same time last year and our booked load factors and average per diems are both running ahead for the second half of the year. Despite a high degree of uncertainty about the economy and the volatility we see in the stock market, our domestic bookings have been very consistent over the last several months.”
  • “Since the beginning of the year, we have seen a steady expansion in the booking window and we’re now quite close to pre-recession levels.”
  • “Just under half of our revenue will come from guests outside of the United States. While the majority of these guests pay for their cruise in local currencies, virtually all of our onboard revenue is in U.S. dollars.”
  • “For 2010, we estimate that approximately 30% of our revenues and 20% of our non-fuel Net Cruise Costs will be denominated in currencies other than U.S. dollars. Our revenues are most influenced by changes in the euro, British pound, and Canadian dollar. Our expenses are most influenced by the euro and to a lesser extent, the British pound.”
  • “Our capacity is forecasted to be up approximately 7.1% and we expect to continue to benefit from the exceptional response to our newest vessels.”
  • “As you saw on the booking window chart, the window is expanding so we do have higher load factors in the second half. Pricing is up a bit.”
  • “From a strict statistical point of view, by our analysis, Epic has about a 3% impact on Caribbean capacity for the full year and about a 6% impact on Caribbean capacity for the back half of the year which is not that significant and so our sense is that her arrival, although it has generated a lot of publicity for the industry which is always a good thing, is not having a significant impact on our Caribbean performance.”
  • [Pricing in the 4Q] "It’s proceeding as expected."
  • “As we look at the third quarter, we’re seeing this year an increase in the number of guests that we’re getting out of Europe and a big increase in the number of guests that we’re getting out of the UK because we put Eclipse in the UK market. So we’ve seen our sourcing mix at Celebrity change quite a bit this year. As we get into the fourth quarter and the ships are doing a more traditional Caribbean business for us, we’ll see a shift away from where we were in the third quarter to more of our guests coming out of the North American markets.


Less bad and better are not the same thing...



"We saw both stabilization and improvement in our business, as we reported the smallest declines in revenues and EBITDA since the third quarter of 2009. We are encouraged by our results so far in October, and expect fourth-quarter comparisons will be the best of the year. As conditions improve, we remain focused on deleveraging our balance sheet and controlling costs, ensuring we will be well-positioned to capitalize on the opportunities presented by a recovering economy."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • Las Vegas Locals: "As expected, we saw trends similar to the second quarter, as consumers remained cautious with discretionary spending. However, in actual dollars, the Adjusted EBITDA decline matches the smallest quarterly gap in the last two years. Although spend-per-visit was lower, visitation to our Las Vegas Locals properties remained strong."
    • "Strong" is a relative term... i.e. not getting worse from already terrible levels.
  • Downtown: "Results reflect lower spend-per-visit, combined with lower ticket prices and increased fuel costs associated with our Hawaiian charter business. There is evidence of a strengthening recovery in Hawaii's tourism economy, which bodes well for our Hawaiian visitation."
  • Midwest and South: "The region delivered the best revenue and EBITDA comparisons so far this year, as our Louisiana properties made considerable progress toward closing the gap on their strong 2009 results. In addition, we maintained or increased market share at all six properties in the region."
    • Less bad is good... but they did say that things would actually be better at some point in the second half
  • Borgata: "Slot win was nearly flat during the quarter, compared to a 9% decline overall in the market, and hotel occupancy rose slightly year-over-year. However, these positive trends were offset by unusually lucky play by table game customers during the quarter, which decreased our hold percentage to below historical levels."



  • "Positive trends they have experienced in the third quarter have continued into the 4th"
  • It appears as if Las Vegas is beginning to recover
    • Increased visitation to Vegas
    • Growth in retail sales (July)
    • Gaming win rose 21% in August and slot win grew 13.2% in August and the locals market also grew in the month
    • Convention visitation increased
  • Thinks that there is a perception that the locals Las Vegas market will only improve when job growth and housing prices increase.  But they believe that consumer confidence is more important to increased spend. Total employment have been stable despite increases in the unemployment rate...
    • Per our math, consumer confidence is irrelevant and housing prices and unemployment are all that matters
  • Deleveraging is their highest priority
  • Actively examining opportunities to refinance their debt and extend maturities
  • Will only pursue deals that give an attractive return to shareholders
  • Will continue to look for ways to operate more efficiently
  • Have had positive comparisons in October so far in the Las Vegas locals markets for revenue and EBITDA.
    • Believe that that will have increased spend per visitor going forward
  • Estimate that they increased their market share in the Las Vegas market by 1%
  • Encouraging signals in Downtown
    • gained market share
    • experienced the lowest decline
    • Hawaiian economy is strengthening and will eventually lead to a revenue improvement at their properties
    • Rated spend increased slightly
  • Midwest and south
    • Occupancy increased
    • Market share increased
  • Borgata positives:
    • Slot win was nearly positive
    • Occupancy at Borgata and Waterclub was over 96% - 1% better than last year
    • Table hold impacted them by $9MM
  • Leverage ratio was 6.9x - covenant remains at 7.25x in the next quarter and expect to remain in compliance
  • Pre-opening expense relates to Echelon
  • Increase in interest expense is due to refinancing at Borgata and a $2MM debt write-off retirement of old facility.
    • Expect interest expense there to be $22MM in 4Q
  • Expect tax rate to be approx. the same next quarter
  • Borgata made a $240MM to its owners - they received $145MM in total distributions (included: $10MM consent fee and $40MM reimbursement of expenses)
    • Property reduced debt by $28MM since financing was completed


  • Positive comps in October so far in the Las Vegas locals markets for revenue and EBITDA
  • Why did they pass on Borgata?
    • have other opportunities and are focused on deleveraging their balance. Not interested at that price.
  • Capitalized interest at Borgata? Capex was $4.5mm of maintenance and there was no capitalized interest
  • What was the EBITDA impact of the low hold at Borgata? $8MM (All flows through ex. taxes)
  • Still interested in making an acquisition in the Las Vegas locals market?
    • Yes - at the right price
  • How long will Borgata remain consolidated for?
    • Only if there are changes in the JV agreement - so expect it to remain consolidated for some time.
    • Once a deal is reached between a potential buyer and MGM - as long as there is no change in the JV agreement they will continue to consolidate Borgata. They are unlikely to approve any changes in the JV.
  • Capex in the quarter:
    • Maintenance capital of $7MM
    • Given the current environment, the numbers for 2010 are good for 2011. Going through their 2011 budgeting process now.
    • Don't feel the need to spend any more right now
  • Perspective on Revel opening in AC?
    • Thinks there is plenty of capacity and any new capacity would just add competition
  • Any interest in selling their stake in Borgata?
    • The only current decision point they have right now is the right of first refusal
  • Borgata table play: No material change in mix of play. Haven't changed their credit policy. The market in AC has gotten more promotional but they haven't participated.
    • Table drop decline 10% YoY
  • Will likely start the Borgata room remodel sometime in 2011.
  • Refinancing will occur between now and next year when it goes current.  Are having ongoing discussions with the banks.
  • Do they think that STN's re-emergence from BK and change of hands in M Resorts will impact the promotional environment?
    • they don't compete with M
    • STN's has been more promotional since re-emerging
  • 3Q in Nevada is the weakest quarter. When you combine low volumes with fixed costs, you get margin compressions.  Aren't going to ignore STN's renewed efforts, will be as competitive as they need to be.
  • Doesn't see the impact of the election impacting their results
  • Why has the hold at Borgata been low all year?  Just bad luck
  • Boyd's corporate tax rate is 35% and Borgata's is 9%
  • Plans for Florida updates? none

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UA: Thoughts Into and Out of the Quarter

The quarter looks really good – we’re at $0.68 vs. $0.60E driven by the top-line with upside in gross margin. We’ve been a big fan of the story as evidenced by our $1.70 estimate for next year when the Street was at $1.10 and the stock was trading around $35 – since then, consensus has come up to $1.40. In addition, while product in the marketplace has strong momentum, the reality is that UA’s top-line comparisons get materially harder over the next 4-quarters and our estimate is ~20% below the Street next quarter.


Nit-picking the growth on a company that’s putting up such stellar numbers could be the equivalent of complaining about the trunk space in a new Ferrari, but  the reality is that we’re going to be seeing a decelerating rate of growth in sales – given that shares are trading at a ~35x 2011 EPS, this flat out matters. This is not a short into the quarter – repeat, this is not a short into the quarter, but as any bears out there get squeezed, we’re more inclined to get involved on the short-side post the event.


UA: Thoughts Into and Out of the Quarter - UA Q3 Walk1 10 25 10

UA: Thoughts Into and Out of the Quarter - UA Q3 Walk2 10 25 10



Greece CDS spread Inflects

Below we show charts of 5YR Sovereign CDS spreads (in bps), Greece’s equity market (ASE), and the Greece 10YR bond yield.  Interestingly, last week the Greek CDS spread and 10YR bond yield showed an upward inflection. Of the many risks being priced into Greece’s credit markets, we think it’s worth note that the country’s budget deficit is likely to be revised upward for both 2009 and 2010, as rumors spread that the country’s accounting (in conjunction with Eurostat) was wrong. 


We are currently not invested in Europe after selling our position in Germany (via the etf EWG) this morning in the Hedgeye Portfolio. Keith sold EWG to take a gain with its immediate term TRADE overbought; however its intermediate term TREND is bullish. The DAX is up +11.4% YTD versus the UK FTSE at +6.4% or SPX at +6.7% YTD).


Matthew Hedrick



Greece CDS spread Inflects - mh1


Greece CDS spread Inflects - mh2

R3: LVMH, JNY, TRU, PSS, & Puma


October 25, 2010


Positioning for the upcoming holiday season remains the top priority for retailers with a few companies aggressively ramping both footprints and inventories while most of the industry continues to run lean and clean.




- With strict rules governing the sale of the iPad, retailers are still willing to comply for a chance to sell what it is likely the most popular item for the holiday season.  As part of Apple’s requirements, retailers selling the device must include the iPad in their circular with a FULL page dedicated to it.  Of course discounting isn’t allowed, however Target seems to have found a loophole by allowing the device to purchased under the company’s recently launched 5% rewards program.


- Spirits Halloween, the pop-up store subsidiary of Spencer’s Gifts, has opened 870 locations this year.  This marks a substantial increase of 150 units over last year.  With less than a week to go,  most anecdotes suggest that Halloween candy and costume sales are up year over year.  Recall that the NRF predicted a robust increase in this year’s Halloween spending.


- According to a BBC/Harris poll, 63% of American’s are angry about the economy.  This slightly outpaces the 62% of Americans that are angry about the government as well as the unemployment situation.  Taxes registered anger with 58% of those polled.





LVMH Takes A Slice of Hermes - In a surprising revelation that could ignite a battle for one of luxury’s most hallowed names, LVMH Moët Hennessy Louis Vuitton said Saturday it holds a 14.2% stake in family-controlled Hermès, and plans to be a “long-term shareholder.” The luxury conglomerate LVMH said it holds more than 15mm shares of Hermès, plus more than 3mm derivative instruments it intends to covert into shares. That eventually would give LVMH 17.1% of the share capital. LVMH moved quickly to squash any takeover speculation, saying it has no intention of launching a tender offer, taking control of Hermès nor seeking board representation. <>

Hedgeye Retail’s Take:  If you can’t beat em, join em.  The success of super-luxury brand Hermes even through the recession clearly caught the eye of LVMH.


Christian Siriano Increases Presence at Payless For Fall 2011 - The designer is branching out from his dress shoe looks, adding a more moderately priced line. (Price points were not disclosed, but current retail is between $25 and $60.) The collection will include up to 20 styles of footwear and handbags, and feature on-trend details such as shearling and suede on a variety of boots, casuals, flats and sandals. <>

Hedgeye Retail’s Take:  Lower price points make a ton of sense here for the retailer which does a much better job managing a high volume, lower priced offering.  PR will likely not suffer, even if they’ve taken a haircut on the price points.


JNY's Stuart Weitzman Holdings On the Expansion Trail - Following several top executive appointments, the company is sketching out plans for a deeper move into branded retail stores, a wider international reach and a full push into e-commerce. Gaetano Sallorenzo, CEO of Italian denim company Replay, was tapped as CEO last week, while Wayne Kulkin was promoted to the post of president after 20 years with the company. Stuart Weitzman shoes and accessories are sold in more than 65 countries, with 33 retail stores in the U.S., and 35 locations in international markets including Canada, Mexico, Europe, Russia, China, Singapore and Australia, among other locales. In addition to wholesale and retail growth globally, executives are betting on the online business. <>

Hedgeye Retail’s Take:   Not surprising as JNY looks to “professionalize” its latest acquisition following years being of being run and managed by Weitzman himself. 


Puma to Restate 2009 Earnings Over `Irregularities' at Greek Joint Venture - Puma AG, the sporting-goods maker controlled by PPR SA, said “irregularities” at its Greek joint venture will cause the company to write off as much as 115 mm euros ($162 mm). <>

Hedgeye Retail’s Take: A JV gone rogue reportedly colluding with local Greek government officials is every retailers worst nightmare – unfortunately for them, it’s reality for Puma.


TRU to Roll Out Online Purchase and In Store Pickup - Toys ‘R’ Us Inc. plans to roll out a service in time for the holiday season that enables shoppers to buy any of more than 7,500 items online and pick them up in 260 Babies ‘R’ Us and select Toys ‘R’ Us bricks-and-mortar stores in such major U.S. metropolitan areas as Boston, Chicago, Seattle and Washington, D.C. The retailer will guarantee that the products will be available within two hours.  <>

Hedgeye Retail’s Take: Translation = higher inventories and traffic. Most retailers that have offered a similar option have realized meaningful increases in store traffic and incremental sales in 2010. Take into account the company’s plans to open 600+ pop-up stores over the holidays and the plan is likely to drive a meaningful uptick in traffic.


USPS Denied Another Rate Hike - The U.S. Postal Service has appealed a recent decision by The Postal Regulatory Commission to reject proposed postal rate hikes. In a statement, the U.S. Postal Service says it is requesting a review of the commission’s interpretation of the law that governs how prices are set and is asking again for permission to increase rates. It’s also asked for more clarity on how postal pricing laws will be applied if it wants to raise rates in the future. The U.S. Postal Services also says it is exploring other ways to come up with the  $2.3 billion the rate hikes were expected to generate. The Postal Service had sought a new rate schedule that would have raised most of its rates between 4% and 6%, effective next January. But some rate increases would have been higher for particular mail categories, including 23% for standard mail parcels and 5.1% for catalogs, the Postal Service says. <>

Hedgeye Retail’s Take: Expect a prolonged battle here – as the outcome will likely mean higher shipping rates in the end, it’s just a matter of by how much and when.


CFO Study Reveals Retailers Focus Shift - Retailers have shifted their focus from downsizing their businesses to downsizing the risks associated with renewed but slow growth. That was among the conclusions of the third annual survey of chief financial officers conducted by PricewaterhouseCoopers LLC’s Retailing Consulting Services. The study found that cfo’s were using many of the skills picked up during the economic downturn to maximize sales on minimal inventory, tighten up their supply chains and even look for ways to make their investments in marketing and advertising more productive in the wake of the worst recession in more than a generation. Survey results were gleaned from 32 retail cfo’s, 21 in North America and 11 abroad, and include department stores as well as apparel, jewelry and footwear specialty stores ranging in volume from $200 mm to more than $10 bn. There is a natural dynamic tension within retail between cfo’s, trained to focus on the bottom line, and buyers, who tend to be optimistic and upbeat. The cfo’s are forcing re-forecasts on a more regular basis, looking to make sure that the store is flowing goods closer to need rather than bringing them in and stacking them high.  <>

Hedgeye Retail’s Take: With inventories still at very lean levels relative to prior year levels, it’s no surprise to see CFO’s winning over buyer interest to stock up for the holiday – a trend we’ve seen in most of retail with the exception of sporting goods retailers with substantially more new product selling into the channel this year after a dearth of options in 2009.


Retailers Mixed on Job Hiring for Holiday - Retailers might be optimistic about holiday sales, but they still are mixed on whether to boost their ranks for the season. Larger retailers, from Macy’s to Finish Line, have announced plans to increase hiring during the fourth quarter, but smaller stores are hanging back. Many retailers are waiting until November to decide whether to add more associates, and will be watching the consumer mood closer to the holiday season — as well as the nationwide unemployment data — before making any moves. Larger retailers are feeling more confident than the small players as Macy's, Finish Line, and Kohl's all announced increased holiday hires. Overall, outplacement consulting firm Challenger, Gray & Christmas Inc. forecast a total of 550,000 to 600,000 retail hires during the months of October, November and December this year, compared with 501,400 last year. Despite the bump, these numbers still do not match the holiday hires before 2008, when retailers added about 700,000 new positions.  <>

Hedgeye Retail’s Take: Driven in part by a trend towards pop-up stores, our view is that this year’s holiday hiring figures are slightly inflated as a result. With customer service still on at the top of the list in terms of deciding factors for customers, the investment in employees are likely to win out at the end of the day when we’re looking back on the holiday 2010 season.


Leather Finishing Supplier Increases Prices to Offset Raw Materials - Due to escalating prices of raw material feedstock in the last couple of months, Stahl has announced to increase prices for several of their leather finish and performance coatings products, effective December 1 2010, or as contracts allow. The company is therefore forced to pass on part of these increases to their own product prices, in order to guarantee undisturbed supplies to its customers, which Stahl see as their main responsibility. Stahl is one of the world’s leading suppliers of wet-end products, dyes and finishes to the leather industry.  <>

Hedgeye Retail’s Take: Further evidence of cost inflation across raw materials. We saw news on raw hide prices increases last week, now we are seeing leather goods finishers take up price, next are accelerating handbag markups from retailers.


New Technology For Online Apparel Retail - Start with an armadillo. Then dress it up and take its picture. That’s the latest approach to the digital dressing room, and the “armadillo” in question is a robotic mannequin developed by Biorobotics. A few European companies have already launched the virtual try-on tool. The goal is to reduce disappointment for online shoppers and costly returns for the merchants. Other retailers have tried computer-generated 3-D animation or augmented reality. The robotic torso’s armadillo-like moving surface plates can contort to 100,000 body shapes, driven by algorithms drawn from more than 30,000 three-dimensional human body scans. <>

Hedgeye Retail’s Take: This tech has been in the works for some time, but is likely to pay dividends. Consider this – according to Infosys, the average return rate for retail stores is roughly 6%. With rates significantly higher for apparel stores at nearly 20% and online apparel at ~35%-40% - you can expect to see the technology on retailer sites as soon as it’s made available. 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%