Conclusion:  Many shorts were squeezed by the better-than-expected top line results from earnings thus far.  Watch out for high short interest names and the risk of results surprising to the upside (or being less bad than expected).


Short interest has been building in a selection of names over the past couple of months (of reported short interest data) with PFCB, CMG, DPZ, PNRA, and BWLD being the most notable in both their respective increases in, and absolute levels of, short interest.  PFCB is reporting tomorrow and the street seems convinced that management’s assertion in July that the company stands a “reasonable chance” of achieving roughly $2 in earnings is slightly over-stretched.  There are several reasons why being short the stock ahead of earnings could be ill-advised.  Firstly, Knapp-track data and recent earnings results are showing buoyant top-line trends in the restaurant space.  Regarding PFCB specifically, management expressed confidence that the EPS target of $2 would hinge largely on top line momentum established in 1H10 continuing into the back half.  While my initial reaction to this target was one of skepticism, recent industry data and peer earnings results suggest that – absent significant market share loss – PFCB could be closer to achieving its target than the street thinks. 


CMG is a very different concept than PFCB and is at a different stage of their business development but their recent earnings caught many – myself included – by surprise.  One only needs to look at the surge in short interest over the last two months to realize that.  While there is a cogent short thesis on CMG, timing is everything and the squeeze on Friday underlined this fact.  Other names that I see as being dangerous to be standing in front of are JACK and PEET.  Both names are heavily shorted and trends around their respective categories have been less bad of late.   I believe BWLD will post a good quarter later today on the back of favorable commodity costs and also overall strong industry sales trends.  With the exception of the most recent two weeks reported, short interest has been building significantly in that name. 


SHORT INTEREST DATA - short interest 1025


Howard Penney

Managing Director

R3: WMT, AMZN, DKS, Puma, and UA


October 26, 2010 


As the policies in India allowing direct foreign investment begin to relax, expect to hear a whole lot more about expansion into the world’s second most populous nation.  However, we note that the floodgates are not likely to open immediately or without restrictions.  This will be a long, complicated process as Western companies attempt to accustom the Indian consumer to more modern means of distribution.




- “Green” products continue to be one of the largest growth categories in retailing.  There are approximately 73% more green products on retail shelves this year vs. last, according to a TerraChoice study.  Additionally, the same study notes that 95% of these products commit at least one of the seven sins of “greenwashing” (essentially making false claims about the greenness of the product”.


- Tommy Hilfiger is jealous of Ralph.  In a conversation with Jimmy Fallon for Interview magazine he was quoted as saying, “"Every time I pass a Ralph Lauren store, I think, I know he's been in business for more than 40 years and I've only been in business for 25, but, boy, do I ever want what he's got,".



- Expect to see and hear about Nike’s latest 90 second commercial aiming to rehab Lebron’s image as the NBA season kicks off tonight.  Like it or not, the controversy is already brewing.  See the latest from Nike here:





Wal-Mart `Optimistic' India Will Allow Foreign Retail - Wal-Mart Stores Inc. Chief Executive Officer Michael Duke said he is “optimistic” that overseas companies will be allowed to invest in India’s retail industry. Wal-Mart and rivals including Carrefour SA and Tesco Plc are pushing India’s government to allow foreign investment after the trade ministry invited views from the industry on removing the restriction. The government’s discussion paper said in July that allowing foreign investment in retail will lower prices and benefit farmers. “The opening of dialogue the ministry has initiated is very productive, and I view that as progress,” Duke said at a press conference in New Delhi yesterday. Easing the rules on foreign investment in retail will help curb inflation and may lead to the creation of 3 mm jobs in India, he said today. India is the third most attractive retail market for global retailers among the thirty largest emerging markets. <>

Hedgeye Retail’s Take:  Despite the sheer number of “consumers” in India, we believe the effort to allow foreign direct investment will be one that evolves over time.  We do not expect the floodgates to open overnight.  Furthermore, given the underdeveloped infrastructure across much of the country, we believe it will take substantial time for WMT to build any critical mass in the world’s second most populous country. Gets a Texas-Sized Tax Bill - Amazon is liable for $269 million in uncollected sales tax from December 2005 to December 2009, Texas says. Amazon disputes the bill in the latest skirmish in the battle over whether online purchases should be taxed. <>

Hedgeye Retail’s Take:  We continue to believe AMZN and other online only retailers are close to losing their tax free status.  See our work on e-commerce for specifics on recent efforts to finally even the playing field between brick and mortar retailers and their online only peers.


Puma to Acquire Control of Chinese Operations - Puma said it would acquire full control of its China operations as it reported a 14.2% rise in third-quarter profits. In China, Puma said it would take full control of its joint venture with Swire Resources Ltd., in which it holds a 51% stake, effective Jan. 1. Financial terms were not disclosed. The activewear firm also raised its full-year 2010 sales forecast to a mid-to-high single digit increase, citing an improvement in the overall outlook for the fourth quarter. Revenues in the third quarter rose 16.5% with footwear up 6% cc, apparel up 1.3% cc and accessories up 25% cc. <>

Hedgeye Retail’s Take:  Add Puma to list of Western brands taking back full control over their Chinese operations in an effort to maximize the market’s potential.  


Dick's SG Lays Out State-by-State Expansion Plan - In a filing with the Securities & Exchange Commission, Dick's Sporting Goods outlined a state-by-state plan for where it sees its potential to double its store count in the years ahead. Not surprisingly, its biggest expansion potential was seen in the West but sizeable growth was also forecast in Texas, New York, Maryland, Oklahoma, Arizona, New Jersey, Wisconsin, Louisiana, Iowa, Michigan and Illinois. More mature states were seen as Pennsylvania, Maine, Tennessee, Alabama, and Indiana. <>

Hedgeye Retail’s Take:  With Dick’s plan looking for a doubling of the store base we wonder just how aggressive TSA will be with its IPO growth story.  Overstoring the country with sporting goods boxes is something that always ends badly.


Under Armour Close to Deal for MLB Footwear License - Under Armour Inc. is close to completing a deal that would gain it the rights to manufacture performance footwear with Major League Baseball logos and the ability to use its stable of baseball players in advertising wearing MLB uniforms, according to the Baltimore Business Journal. <>

Hedgeye Retail’s Take:  It appears that the “free” advertising done by players choosing to wear UA footwear may be running out of juice. The more formal arrangement would certainly give UA a boost in its effort to market the category more effectively and inline with other similar league partnerships, although keep in mind the cleated business is and will continue to be of secondary importance to the key footwear growth categories – running and basketball.


Walmart Expands E-book Offerings to Include the Nook and the Kobo - Walmart is expanding its ebook reader offerings in stores. This week, Barnes & Noble's Nook and Borders' Kobo hit shelves. The retailer began selling Apple's iPad earlier this month. Two versions of Barnes & Noble's Nook (the 3G and Wi-Fi) are being stocked at 2,500 Walmart stores, as well as online at The retailer is also launching a Nook-branded ereading area in stores. The Nook Wi-Fi debuted in June. <>

Hedgeye Retail’s Take:  With e-readers making their way into the mainstream via WMT, it’s only a matter of time before we see pricing of the actual books start to erode.  Mass adoption will only occur at a price point that makes the content a compelling purchase for not just higher-end consumers.


Athletic Propulsion Lab's Concept 1 Sneaker Benefits From NBA Ban - With the NBA officially banning players from wearing Athletic Propulsion Labs’ Concept 1 sneakers last week, business has only gotten better. APL debuted in 2009, with the Concept 1, which is targeted to basketball players and has a patent-pending “propulsion device,” a spring technology under the ball of the foot that its makers claim increases vertical leap. The NBA has stated that the shoes give players an unfair competitive advantage. The decision by the NBA has created a considerable market opportunity putting the brand out there in the public consciousness. The company sold more shoes on the day the shoe was banned than the entire previous month. The day the ban was announced, “Athletic Propulsion Labs” and “Concept 1 shoes” were the fourth and fifth most searched terms on Google. The APL website was also unable to deal with the increased traffic and the site shut down for several hours. Expansion is in the works and only a question of strategy.  <>

Hedgeye Retail’s Take:  Nothing like a negative turning into a major positive.  A visit to the company’s website reveals the slogan “Banned by the NBA”. 


Cotton Soars to New High on China Cold - The fiber on Monday hit $1.2471 per pound, rising by 4.2pc, or 5 cents, which is the maximum allowed by the ICE exchange in New York. Chinese weather forecasts are saying that the current cold snap will last for at least another day. Prices rose 9pc last week, adding to the record 140-year high hit on October 15, after hail storms hit in the southern US. There are mixed views as to whether the current price spike will remain. Supplies have not been this tight since 1995 and prices are already up by 58pc in New York this year. There are six key reasons why the cotton price is so high: tightening US fundamentals, the battle for arable land, a deteriorating Chinese crop, the weak dollar, the Indian export ban and floods in Pakistan. <>

Hedgeye Retail’s Take:  Nothing new here except the record highs.  We continue to focus on companies whose process may not have properly and proactively accounted for such a dramatic increase in this core textile commodity.


R3: WMT, AMZN, DKS, Puma, and UA - 1 


EU To Launch New Labeling Law - The European Union is considering launching new labeling laws during the first half of 2011. According to reports, EU representatives voted 525-49 last week in favor of a country of origin labeling law in order to ensure that it is clear where imported goods such as leather, furniture and shoes are made when they are being sold in Europe. Countries in southern Europe such as Italy and Spain have been pushing for this legislation for some time in a bid to protect the European market from cheap imports, particularly from Asia. However, nations such as the UK and Sweden have campaigned against the measure, which they believe is protectionist and threatens competitiveness. <>

Hedgeye Retail’s Take:  Despite improved labeling, it will now be even more clear to see how many goods are coming from Asia.  Labeling alone won’t help the Europeans protect their manufacturing base so long as cost advantages remain in place driving production away from their borders.



TODAY’S S&P 500 SET-UP - October 26, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.64% downside to 1178 and 0.29% upside to 1189.  Equity futures are trading below fair value having closed higher on Monday in what was an otherwise quiet start to the week. Today sees steady flow of corporate earnings, including Dupont, Bristol-Myers and US Steel. In economic releases, Conference Board Consumer Confidence, Aug Case/Shiller Home Prices plus the FHFA House price index are center stage.

  • Amgen (AMGN US) reaffirmed 2010 guidance; 3Q rev., adj. EPS beat est.
  • Berkshire Hathaway (BRK/B) hired Castle Point Capital Mgmt’s CEO Todd Combs to manage a “significant portion” of the investment portfolio
  • Digital River (DRIV) 3Q rev. beats, sees 4Q rev. above est.
  • Edwards Lifesciences (EW) sees 2010 rev. $1.435b-$1.455b vs est. $1.44b, had seen bottom $1.43b-$1.50b   
  • Plum Creek Timber (PCL) sees 2010 EPS cont. ops $1.28-$1.35, had seen $1.35-$1.50 in July vs est. $1.46
  • Prologis (PLD) plans to lower its quarterly div. to 11.25c-shr
  • Rent-A-Center (RCII) exploring strategic alternatives with respect to its financial services business, may include sale or divesture of such business
  • Synovus Financial (SNV) 3Q loss 25c-shr vs est. loss 22c
  • Texas Instruments (TXN) sees 4Q rev. $3.36b-$3.64b, est. $3.52b; 4Q adj. EPS 59c-67c, est. 63c
  • Veeco Instruments (VECO) sees 4Q adj. EPS $1.46-$1.74 vs est. $1.45, sees 4Q rev. $285m-$320m vs est. $316m
  • Williams (WMB) boosted its quarterly dividend payout to 68.75c- shr from 67.25c-shr


  • One day: Dow +0.28%, S&P +0.21%, Nasdaq +0.46%, Russell +0.63%
  • Month/Quarter-to-date: Dow +3.49%, S&P +3.89%, Nasdaq +5.16%, Russell +4.7%
  • Year-to-date: Dow +7.06%, S&P +6.32%, Nasdaq +9.77%, Russell +13.19%
  • Sector Performance: Materials +1.73%, Consumer Discretionary +0.56%, Healthcare +0.47%, Telecom +0.37%, Tech +0.27%, Industrials +0.2%, Consumer Staples +0.17%, Energy +0.1%, Utilities (0.32%), and Financials (0.41%)


  • VOLUME: NYSE: 1007.37 (+30.32%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Advance Micro +5.37%, Eastman +5.08% and Dow Chemical +4.50%/Radioshack -9.04%, Avon -4.10% and Legget & Platt -3.43%.
  • VIX: 19.85 +5.70% - YTD PERFORMANCE: (-8.44%)
  • SPX PUT/CALL RATIO: 1.91 from 1.06 +80.63%


  • TED SPREAD: 17.18 -0.203 (-1.169%)
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%   
  • YIELD CURVE: 2.22 from 2.24


  • CRB: 300.31 +1.04%
  • Oil: 82.51 +1.02% - BULLISH
  • COPPER: 386.30 +1.74% - OVERBOUGHT
  • GOLD: 1,335.45 +0.86% - BULLISH


  • EURO: 1.3961 +0.05% - BULLISH
  • DOLLAR: 77.103 -0.48%  - BEARISH



European markets:

  • FTSE 100: (0.62%); DAX (0.11%); CAC 40 (0.49%)
  • Major indices were weaker with the Basic Resource sector hit by a cautious outlook statement issued by ArcelorMittal with banks down despite UBS reporting a return to positive net money flows at its private bank.
  • Sweden's central bank raised its repo rate by a quarter of a percentage point to 1%
  • UK Q3 prelim GDP +0.8% q/q vs cons +0.4%
  • France Oct Consumer Confidence (34) vs cons (36)  

Asian markets:

  • Nikkei (0.25%); Hang Seng (0.11%); Shanghai Composite (0.32%)
  • Markets closed mostly lower in fairly quiet trading.
  • Japan opened slightly lower on a strong yen, turned positive in the afternoon but ended in the red.
  • Investors, however, seemed to be waiting for earnings reports later this week.
  • Tech stocks were mostly lower in South Korea although the market was flat.
  • Financial stocks retreated in Australia after making gains yesterday on M&A news
  • Japan Sep corporate services price index (1.1%) y/y, (0.1%) seq. 
Howard Penney
Managing Director


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The Macau Metro Monitor, October 25th 2010


Steve Wolstenholme, COO of Galaxy Macau, and Jeff King, senior vice president of marketing for Galaxy Macau, have decided to leave.  Galaxy said Mr. Wolstenholme resigned for personal reasons and will leave the company in November. Galaxy Entertainment President Mike Mecca will assume his duties in the interim.  Raymond Yap, the company's senior vice president of international premium market development, will take over Mr. King's duties while the company looks for a permanent successor.


Galaxy said the management changes won't affect the company's performance or its Cotai project, which is still set to open in early 2011.


IGT sales manager Mick Caban is bullish about the outlook of the local gaming market in Macau and confident the company will be able to expand their business activities by up to 55% across Asia in the foreseeable period, despite increased competition and tougher regulations from the SAR government.


According to China Securities News, real estate prices in China will remain fairly stable for the rest of the year and the property tax pilot program will potentially roll out by the beginning of March 2011.

Lecturing Myself On Shorting, Part II

“Learn to fail with pride and do so fast and cleanly. Maximize trial and error, by mastering the error part.”

-Nassim Taleb


Before I shorted the SP500 on October 13th, I wrote an Early Look note that was titled “Lecturing Myself On Shorting.” I shorted the SP500 again yesterday, so I figured I’d call this morning’s note Part Deux. Immediate term tops are processes, not points.


Chapter 1 of Pablo Triana’s “Lecturing Birds On Flying” provided some food for thought in my initial note and this morning I’ll review Chapter 2, “The Financial Economics Fiefdom” where Triana takes the ball right up the middle on the academic dogma that permeates the US economic system.

  1. On Milton Friedman – Triana argues that the heart of Friedman’s economic theory is that “theories should not be judged based on the realism of their assumptions.”
  2. On Business School – Triana writes on page 37 that, “In sum, B-schools discarded tangibly accurate knowledge and information while embracing what may be deemed as analytical make-believe.”
  3. On Herbert Simon – Triana reminds us that it was Simon who “held behavioral parapet, embracing observation-based empiricism and avoiding dogma-based economic theory.”

Most financial types know who Milton Friedman was but couldn’t tell you much about Herbert Simon. As I read Triana amplifying his point by calling out Simon’s name, I couldn’t help but smile.


Herbert Simon wrote one of my favorite multi-factor modeling books, “Models of My Life.” Charlie Munger recommended it at one of Berkshire’s annual meetings. As Triana points out, Simon was a Hedgeye kind of guy - he “ruthlessly ridiculed the financial economists’ assumptions about human action.”


My analytical team doesn’t wake-up every morning looking for someone to chirp. Keynesians are easy targets right now. They missed Jobless Stagflation in the 1970s too. Fed Chief Arthur Burns opted to monetize US Treasury debt and a Debauched Dollar was the result. Back then, the Nobel Prize in Economics was a new award. Today, some of the biggest risks in life are associated with investing alongside the academic premise of a Nobel winner.


This is where the likes of Simon, Soros, and real-time market practitioners of daily risk management take over the game. Anytime we see someone talking up an economic theory (QE2) that we’d have reserved seating for in the cheap seats, we’d just as soon call these wannabe market players out for who they really are. They travel in packs and are rarely accountable to their theories where it matters – on the tape.


On page 41, Triana offers a solution to this mess. He writes that “once you have mastered the analytical toolbox through your PhD training, churning out research output that may be simply the result of repeatedly applying well-worn techniques… the amount of true innovativeness may be limited. Much more creativity is required from those who can come up with applicable actionable breakthroughs and hard industry knowledge.”


Then on page 43, Triana supports his solution by quoting the former dean of MIT Sloan School of Business, Richard Schmalensee: “The academic system’s current methods for hiring and rewarding professors don’t necessarily attract or encourage the kind of practitioner-oriented faculty we need to make business-school research and MBA education much more attuned to meeting today’s and tomorrow’s management challenges.”


Point made, Mr. Triana. Point made.


Anytime you take a position in this game, measuring time and space is critical. When it comes to timing a short position, I don’t think I ever really had anyone teach me in real-life never mind at school. Maybe that’s what makes me better than bad at shorting stocks. I teach myself by doing. I learn to fail with pride. And, in most cases, I try to do so “fast and cleanly.”


My immediate term support and resistance lines for the SP500 are now 1178 and 1189, respectively. For now, by all of +0.10% my current short position in the SP500 (SPY) is in the black. I raised the Cash position in the Hedgeye Asset Allocation Model to 64% yesterday.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lecturing Myself On Shorting, Part II - lecture

Spirit Of Defiance

This note was originally published at 8am this morning, October 25, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is no week nor day nor hour when tyranny may not enter upon this country, if the people lose their roughness and spirit of defiance.” 

-Walt Whitman


The world’s short-term US Dollar Debauchery trade is back in motion this morning: dollar DOWN = commodities and stocks UP. As the Buck Burns, Bloomberg’s #1 headline reads “G-20 To Avoid Competitive Devaluation.” Never mind the hypocrisy of it all - America’s currency is the only one being devalued. Provided that we don’t get suckered into buying stocks today, these will be looked back on as fascinating days in the Fiat Republic.


The good news is that, in addition to Americans pushing back against Washington’s economic policies, there is a Spirit of Defiance that’s building globally against Quantitative Guessing. Here’s a taste of what the respectable likes of Germany and Canada are saying:

  1. “It’s the wrong way to prevent or solve problems by adding more liquidity. Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.” –Germany’s Economy Minister, Rainer Bruederle
  2. “I agree that there’s suggestion that aggressive quantitative easing in the United States would create devaluation pressure on the US currency.” – Canada’s Finance Minister, Jim Flaherty

Maybe not so surprisingly, while Canadian and German interest rates remain higher than America’s, both countries have lower structural unemployment levels and both of their respective stock markets are outperforming the SP500 for the YTD (Germany’s DAX +11.7% and Canada’s TSE +7.3%).


As both the Euro and Canadian Dollar strengthen, their citizenry is becoming wealthier. As both the German and Canadian populations age, the rate of return on their hard earned savings accounts isn’t being compromised for the sake of Banker of America’s earnings. As the world turns, both German and Canadian culture isn’t being held hostage by CNBC and US style Congressional commercials. Fancy that.


In the end, this won’t end well for America. Most of us who aren’t creating an economic strategy that conforms to the confirmation-bias in our year-end bonus package get that. “There is no week nor day nor hour” that we can pinpoint when this will all become crystal clear. But that time will come.


Last week was interesting in that the US Dollar Debauchery trade actually paused. However fleeting that moment was, it certainly gave the buy-and-hope crowd something to think about. Like a cold buddy shower, that was a healthy risk management exercise to observe.


The US Dollar closed up +0.55% on the week. That was the 1st week that Burning Buck was up in the last 6 and only the 4th week out of the last 21. All the while, both weekly US Consumer Confidence (ABC/Washington Post poll) and the MBA Mortgage Applications indices fell.


Americans having no confidence to lever themselves up with a “cheap mortgage” or chase the stock market higher (after a +13% rally since Bernanke introduced QE2 at Jackson Hole on August 27th) is not new news. What is news is what happens to asset prices when, God forbid, someone (China) attempts to give the US Dollar and the cost of capital some credibility.


Gold closed down -3.4% last week and was the standout loser in a relatively strong week for the US Dollar. That will, of course, all reverse this morning as the Buck Burns again, but it’s more interesting to note that almost everything else didn’t react as poorly as I would have thought in the face of US Dollar strength. Everything macro was actually quite flat.


On a week-over-week basis, here’s what was flat despite the US Dollar being up:

  1. Small Caps (Russell 2000)
  2. Euro
  3. CRB Commodities Index
  4. Oil
  5. Volatility (VIX)
  6. Yield Spread (10s minus 2s)

Given the extremely high inverse correlations between the US Dollar and everything else, the most obvious question here is why flat? Well, the week didn’t occur in a vacuum. It was very lumpy. The US Dollar picked up all of its strength in a 24 hour move after the Chinese raised interest rates on Tuesday (USD up +1.7% that day and the SP500 was down -1.6%). Otherwise, the US Dollar was flat to down for the remaining trading hours in the week.


The other obvious reason as to why, is the discounting mechanism that I think poses the greatest financial risk to your net wealth - the undeniable market expectation that the US Dollar will be compromised by Quantitative Guessing in t-minus a few weeks. This, Ben Bernanke, is the government sponsored risk that’s got the bulls in heat. God Speed with that by the way. In the Spirit of Defiance I’ll be a short seller of the SP500 from here until then.


My immediate term support and resistance levels for the SP500 are now 1165 and 1188, respectively. In the Hedgeye Virtual Portfolio, I’m currently short both the US Dollar (UUP) and the SP500 (SPY). The Cash position in the Hedgeye Asset Allocation Model is a healthy 61% (down from 67% last Monday). I’ll look forward to raising that Cash position today.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spirit Of Defiance - ww

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