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Lecturing Myself On Shorting, Part II

This note was originally published at 8am this morning, October 26, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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


In preparation for Las Vegas Sands's Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from LVS’s Q2 earnings release/call and subsequent conferences.



Post Earnings Conference Commentary



  • [Four Seasons] “We’re starting to really get a significant amount of weekend and even some midweek business, non-gaming business.”
  • [Sites 5 & 6] “We originally expected Phase I and Phase II to open somewhere late in ‘11 and beginning first quarter of ’12, where we would have about 4,300 rooms available and eventually 6,000 rooms available I think by the end of that first quarter.”


  • “MBS is about 80% open, meaning all the hotel rooms are open, 75% of the expo is open, 150 of about 280 stores and shopping are open, and the event plaza is open. So what’s left is some stores.”
  • “Present occupancy levels running mid 70s and perhaps the highest rate in Singapore in U.S. dollars—about  $270 a night.”
  • “We expect to do EBITDA margins between 50 and 60% when we fully ramp up in Singapore.”
  • “And I think of real importance is the retail market. We have 150 stores open. We are running the revenues at about half of what the anticipation is because it’s in a growth model. When that ramps up, we expect to have EBITDA numbers out of the retail area between 150 and $200 million hopefully, that’s why it was built that way, and eventually be able to sell that at a very good multiple and pay down debt and get some cash out. So there’s growth there.”
  • [available plots around MBS] “They’re all taken.”
  • [IPO in Singapore?] “No.”


  • “ We expect the tender to take place in ‘12. We are one of the leading if not the leading candidate for the integrated resort part of that [Casino] bill. That bill will include, we think, two integrated resorts, one in Tokyo, one in Osaka, and then a myriad of other small casinos in other places such as Okinawa and other suburban areas around those small areas around Japan. If in fact we win our tender in ‘12, we figure the earliest we could get open would be ‘15 and the latest would probably be the beginning of ‘16.”
  • “Not at the beginning but eventually 25,000 slots. It’s a big market. And what I planned to do is open up with 5 or 10,000 slots, about our warehouse some space and build the floor and build the infrastructure that I could put in a lot more slots. Well, I won’t go to Okinawa.”
  • “So, Tokyo would be a preferred location, second or maybe equal would be Osaka. Both of them we’ve been to, we’ve looked at very specific locations, one – and well I don’t want to mistakenly spot it out, one of the very, very good location is serviced by public transportation. And the Osaka is very, very good, very and excellent roadway system.”


Q2 Conference Call


  •  [On rates] “I think we’ve been averaging on weekends between $240 and $260….For 2011 group rates, we’re trying to stay above 200 bucks. In some groups, we are getting higher than that. I can’t tell you that we are there yet. We have some business with lag that goes back six to eight months.”
  • “Looking ahead, we expect to realize more group rooms in 2010 than we did in 2009. The pace of group bookings continues to improve and 2011 should be stronger than 2010.”
  • “We are comping less on a relative basis year on year, but it’s still too high. We’re still in the mid-20s. I think we’re probably less guilty than our competitors, but we’re still guilty of it.  Weekends are not the issue. We can get FIT and others on the weekends. The midweek has been the challenge. And I think across the market there is too much comping, but there is also too much supply in the market right now. So until we see stronger group, stronger FIT, I think you will see that continue to be a problem for us and for the market in general.”
  • “We restarted the construction of our 300-room hotel for Sands Bethlehem and expect it to open in the spring of 2011.”
  • “Group business % for 2010, we are hoping to get into the mid 20s. I think we’ll see ‘11 will exceed – hopefully, will exceed 30, but we are not there yet.”


  • “Although we expect as much as $450 million of that amount [$750MM] to be paid out of cash flow generated by Marina Bay Sands during the remainder of the year, an additional $430 million, principally retainage payments on the development, will be paid out of cash flow from operating the property in 2011.”
  • [Rolling volume] “But as you get into the beginning of June, that number has ramped up significantly where it was above the $600 million range, and now in the 8 to $900 million range on a weekly basis.”
  • “The non-rolling and slot per day, when you started off in May, were kind of in the 2 million plus range per day, and then when you’ve gotten to the beginning part of June, it started to go upwards, pushing into the 2.5 million range. And now as we have progressed into late June and into the early part of July, it’s kind of pushed up above the US$3 million per day…. Our hold number on the VIP rolling situation has been lower than expected, but we are very consistent in our mass market and slot wins.”
  • “By September 3, we will have a total – we will have over 300 electronics, including Rapid Roulette and Rapid Sic Bo. Some of that will come in August, but the whole project will be completed by September 3.”
  • [Commission rate] I would say, 1.2 to 1.3, something like that is where it is going to be.
  • “Casino margin varies, 52-55% depending upon the day…. The overall margin of 43.7 is probably dragged by the hotel and the various expenses.”


Estimates have come down 10c through the quarter. We think that is about right.



We know slot demand was not strong during the quarter and we're pretty sure Konami and WMS had good quarters.  that probably means BYI's slot sales were weak.  Good thing that BYI is not overly reliant on box sales. 


We’re in-line with consensus estimates of $0.46 and $184MM of revenue.  Expectations are very low going into this call. The sentiment in the investor community is that BYI will have a bad quarter.  We don’t necessarily disagree but think that they can offset some of the weakness in machine sales with lower SG&A and other expenses to eke out an in-line quarter.


1Q2011 Detail:

  • Gaming equipment revenue of $54MM and gross margin of $27MM
    • We assume 3,300 slot sales (1,950 to North America and 1,350 Internationally)
    • ASP of $14.5k
    • $6.4MM of parts and other sales
  • Systems revenue of $51MM at a 72% margin
  • $78MM of gaming operations revenues at a 71% margin
    • 25 unit increase in WAP units and flat LAP units
    • 100 unit increase in premium daily fee games
    • All other units flat
  • Other stuff:
    • $50MM of SG&A
    • $21MM of R&D
    • $6MM of D&A
    • 35.8% tax rate
    • 56.6MM shares outstanding

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JNY: As Good As It Gets

JNY: As Good As It Gets

“Come on in, and try not to ruin everything by being you.” – Hunt to Nicholson in 1997’s As Good as it Gets.


This is going to be a great quarter for JNY. Mid teens top line growth due to refilling the wholesale channel in Better Apparel as well as Footwear, adding on the Stuart Weitzman acquisition, and smaller launches such as Jessica Simpson denim, etc… But, mark these words, for JNY, this is as good as it gets.  


Even if we look at the factors above and plot against the puts and takes vs. a year-ago, the company faces a decelerating top line starting in 4Q.  This does not assume a significant rollover in the consumer (i.e. real consumption goes negative – again). On top of that, JNY goes against some big margin numbers at the same time cotton has gone parabolic. Does the company have an appropriate risk management process around this? In fairness, one of JNY’s strengths over time has been its ability to get product to the customer packaged to spec in a tight delivery window with a low failure rate. But the last time it was in front of investors, cotton was at $0.80. Now it is at $1.27.


What else has happened?

  1. Two weeks ago, JNY announced a sudden departure of the CEO of its wholesale footwear and accessories business, as well as the CEO of its Retail business. For what it’s worth, wholesale footwear is perhaps JNY’s most defendable business, and 9 out of 10 bull cases I hear involve a turnaround in its perennially money-losing retail operation. We can’t imagine that these two gents where shown the door because the business was knocking the cover off the ball.
  2. JNY dropped the name ‘Apparel’ from its name. I don’t get it…


Key Questions In My Mind

  1. I don’t understand how JNY’s Better Apparel business is running at a 13-14% margin – exceeded historically only by the time when JNY operated $1bn+ of Ralph Lauren business at a 25% margin.
  2. Ditto for denim. The last time margins broke double digits was when Polo Jeans was a meaningful part of the mix. How can this be sustainable?
  3. The Jones of old would get to this point, and then they’d use free cash flow to buy something. With Stuart Weitzman, CEO Wes Card worked out a ‘merge now and pay later’ deal with former JNY CEO Peter Boneparth for the sale of Weitzman (owned largely by Boneparth’s private equity partners). I’m not saying this to pick a fight – but simply to point out that JNY’s leverage at this point leaves little room in its model to revert to its old bad practice of buying growth.

Our core thesis with JNY remains simple. Without a major reinvestment in the company – JNY is locked into earning $1-$1.50 in perpetuity. When people start to believe $2EPS numbers (as we do today), then the short case becomes more powerful. When the cash flow stream inevitably blows up because the company can’t kick the can down the alley anymore, then we can put on our bull hats.


As it stands today, this quarter will be “As Good As It Gets.” The party will, in fact, be ruined once the real JNY shows up. Fundamentally this name should break down within 2 quarters.


As it relates to Keith’s levels… “JNY starting to see price momentum breakdowns (trading below its TRADE line of 19.74) as volume accelerates = bearish immediate term signal. The intermediate term TREND line of 17.62 remains intact, so that would be my risk mgt target on the downside for now.”


JNY: As Good As It Gets - 1


JNY: As Good As It Gets - 2


JNY: As Good As It Gets - 3


UA: The Gap is Gone

Very solid quarter all around for Under Armour. 20%-22% organic growth in sales, EBIT and EPS is nothing to shake a stick at – especially when lesser consumer discretionary names without a real growth platform and risk management process are struggling to stay afloat. That said, this was not the result that a $47 stock needed. We’re taking down our 2011 EPS estimate by $0.14 to $1.56. This is likely still at the high end of where consensus will shake out. But one of the factors that kept us bulled up on this name when it was at $35 is that the Street was at $1.10 for 2011 vs. our $1.70. That gap is officially gone.


Our downward revisions are two-fold.

1)      Cotton Risk: The one factor that UA has been largely immune to – exposure to cotton – is now a risk. “Cotton is the Enemy” is the old tagline. Now there’s a big cotton-based campaign starting in 2011. Not for a minute do we question the salability of the product. UA will brand it and sell it better than almost anyone else could. But they’ve simply never had to have a meaningful process around buying and hedging cotton. This idea was on the drawing board – including researching ideal consumer price point triggers – when cotton was around $0.80/lb. Now it’s at $1.27. That's a painful change.


2)      Inventory Risk: Under Armour had a gnarly turn in the triangulation of its sales/inventory spread vs. EBIT margin in the latest quarter, and the company mentioned on the call that the spread will erode further in 4Q. High multiple stocks simply don’t go up when this happens. It’s no accident that UA’s massive tear occurred during the six quarters it had a positive spread.


UA: The Gap is Gone - UA S 10 10


There are many more details about the quarter – and most are quite positive. But those are consistent with our thoughts all along. This remains a world class brand, a great company, and (at a price) a great stock (those three things need to be evaluated separately). But we would not look at getting back involved here without a meaningful pullback.



Our Notes From The Conf Call

Clean beat $0.63 vs. $0.60 with both revenues and gross margins slightly lighter than expected with expectations more muted near-term on the margin. Full year guidance increased as expected, suggesting the additional (incremental) $20mm we expected in the Q3 pushed to Q4 and margin degradation in Q4 vs. our prior expectation and implies EPS of $0.34-$0.35 below the Street at $0.36 placing greater importance on ultimate success of basketball launch. Initial commentary on 2011 better than expected and Street estimates calling for revs and EPS up +20%-25% implying $1.48-$1.55 in EPS vs. Street at $1.40.



P&L Notables:

EPS: Beat $0.63 (clean) vs. $0.60E ($0.68 HE)

  • Reported $0.68 ($0.05) from tax benefit
  • ~$0.02 benefit from shift in media costs out to Q4


Sales Growth: +21.9%

    - Apparel: +28% growth across all businesses (mens’, women’s and youth) though lighter than we expected down

      on both 1Yr & 2Yr

  • Men's, women's and youth all growing 25%+
  • $ growth in women's equal to men's this quarter (moving towards growing women's to same size as men's)
  • Opened 5 new factory house stores; total to 50 locations, expect 54 by year end vs. 35 in 2009

    -  Footwear: -20% declined as expected, down 1Yr up on 2Yr basis

  • Expect return to growth in 2011 driven by basketball

     -  Accessories: +19% better than expected (rounding error)

     -  Licensing: +23% better than expected (rounding error)

     -  Direct-to-Consumer: +47%



  • Revs up 60% on strength of Europe and Japan
  • Japan partner to surpass $100mm in 2010 with launch of first non-cleated footwear in Q4

New Product:

  • First performance  cotton t-shirt to be introduced in spring 2011
    • Primary benefit expanding reach of customer base

GM: 50.9%; +150bps due to:

  • primarily due to lower sales returns and other reserves (+60bps)
  • more favorable year-over-year impact of liquidations and inventory reserves (+50bps)
  • higher percentage of revenue from our higher margin Direct-to-Consumer channel (+45bps)

SG&A: 33.7%; +170bps due to:

  • continued expansion of the Factory House stores as well as increased investments in product innovation and supply chain. Marketing expense for the third quarter of 2010 was 10.9% of net revenues compared with 10.5% in the prior year - increased sponsorships and
  • Reflect $2mm shift of media costs to 4Q
  • Expect marketing costs of ~12% in full year at low end of prior guidance (12%-13%)

Tax Rate: received a state tax credit and federal reserve tax credit

  • Expect full-year rate of 39.2%
  • 2011 rate of 40.5%-41%

Balance Sheet: inventories up +28% on +22% sales growth

  • Cash to $134mm; no debt on $200mm facility
  • Inventory up as safety stock increased around core programs + increased 'made for strategy' across factory house store base

CapEx: expect to come in at lower end of $35-$40mm range




Increased guidance as expected, provided incremental view on 2011 (aggressive and above Street expectations):

  • 2010 annual net revenues in the range of $1.030 billion to $1.035 billion, an increase of 20% to 21% over 2009.
  • 2010 diluted EPS in the range of $1.23 to $1.24, an increase of 34% to 35% over 2009.
    • The updated earnings outlook reflects a full year effective tax rate of approximately 39.2%.
  • 2011 Outlook: Based on current visibility, the Company expects both 2011 annual net revenues and 2011 diluted EPS to grow at the higher end of its long-term growth target of 20%-25% implies $1.48-$1.55 in EPS
  • “mportant steps include the evolution of our current ColdGear product, the introduction of our first basketball shoes this past weekend, and leading the market once again with an innovative new apparel launch in early 2011”


Implies: EPS of $0.34-$0.35, Street at $0.36

Revs up 23%-28% ($20mm-$30mm of incremental revs – about same amount short in Q3) an acceleration on both 1Yr and 2YR 

  • SG&A growth approaching 30% in Q4
    • Includes $2mm marketing cost shift from 3Q
  • Tax rate of 40.5% to 41% in 2011
  • Inventories growth to outpace revs in Q4 to increase safety stock and new product for 2011 (i.e. hats, bags, and cotton apparel)
  • GM improvement in Q4 similar to Q3 (~+150bps)
  • Revs to see small benefit from footwear in Q4

Sports Marketing Progress:

  • In keeping with Football heritage, continuing to invest in marketable assets
  • Auburn Tigers #1 in BCS, UA has 5-year deal with the team
  • New NFL endorsements in Boldin and Miles

New Benchmarks (4 areas) as UA embarks on 2011:

  • Product
    • Introduce new market in cotton
    • 5th year making footwear, think overtime footwear could lap apparel business 
    • "challenge is to invest and win outside the cleated business" with focus on growth in running and basketball
  • Story
    • Telling the story globally in UK, Japan, and first steps in China (will become more visible in coming months)
  • Service
    • 30% YTD growth in apparel positive, but not satisfied with servicing customer demand for product
  • Team
    • Will continue to add industry pros to build out the team


Gross Margin Negative Offsets:

  • Had more apparel liquidations yy in Q3 - modest impact
  • Left inventories clean will be an offset in Q4
  • Biggest drivers growth in direct business (margin enhancing) and footwear business (negative impact)
  • Cotton not a significant driver of costs (yet) - smaller as a % of revs - don't expect a negative impact in 2011

SG&A in 2011 given new investments:

  • Targeting modest SG&A leverage in 2011

Basketball Footwear:

  • No shoes shipped in Q3
  • Will take a few years to really start to see market share gains

New Cotton Product:

  • Mostly an allocation program, little bit replenishment on the cotton side
  • From a distribution perspective, no significant changes in 2011 (including cotton product)

Footwear Trends:

  • Have seen good success in outlet channel with footwear
  • Down overall given size of the running launch last year
  • Expect margin profile in 2011 similar to 2010

Reality - Opportunity in Basketball:

  • $1.3Bn market opportunity in US alone
  • Mid-single digit share would get UA to #2 player (target) = ~$60-$75mm annual sales goal

What Mgmt has learned:

  • Emphasis on youth - can't cut out key existing customers from future launches (e.g. running)

What it's doing about it:

  • Taking the time to test and build great product - not rush

Gross Margins in Footwear:

  • Pure leverage on tooling
  • Still see ~1000bps+ opportunity overtime
  • Started off with 1 partner 5-years ago, now working with 5-6 partners

Store Growth Plans:

  • Expect another 4 factory house in 4Q
  • ~20 new FH stores in 2011 more front-end loaded
  • No plans for add'l full price retail
  • Pop-up store in NYC in November

Cost Inflation:

  • Good visibility through spring-summer 2011
  • Less than 10% of apparel manufactured in China
  • Footwear realizing cost pressure

Int'l Opportunities:

  • Gaining momentum with Japanese partner growing from $35mm in 2007 to $100mm+ in 2010
  • Expect to have a shop-in-shop up in China over next several months - approaching that market conservatively
    • First full price store in 2011
  • Typically first 5-years about understanding culture and building team (Europe now at that point)
  • Int'l overall up 60% in qtr and 59% YTD
  • Overtime goal see opportunity to build int'l to 50% of revenue base

Retail Store Performance:

  • Made for strategy around 75%-95% industry average, UA well below that
  • Currently around 2x where they were last year


  • Started footwear business with 1 partner 5-years ago; now working with 6 partners - all in China
  • Recent trip to explore geographical diversification
  • Want to keep concentrated partner base






Sweden’s Riksbank Preemptively Fights Inflation

Compared to the politically compromised Fed, statements from Sweden’s Riksbank today couldn’t be more sober. In its press release the Bank summarized its move to raise the main repo rate 25 bps to 1.00% as:


The Swedish economy is growing rapidly. On the other hand, the strength of the recovery in the United States and Europe remains uncertain.  Inflationary pressures are low in Sweden, but are expected to increase as economic activity strengthens. In order to stabilize inflation close to the target of 2 per cent and attain normal levels of resource utilisation, the repo rate needs to be gradually raised. The Executive Board of the Riksbank has therefore decided to raise the repo rate 0.25 of a percentage point to 1.0 per cent. However, due to the weak developments overseas, it is not deemed that the repo rate needs to be raised so much in the coming years.


Sweden’s inflationary environment is rather tame: the Consumer Price Index (CPI) stands at +1.4% in September Y/Y and the Producer Price Index (PPI) rose only +0.4% in September month-over-month, or +2.6% Y/Y. However, the Bank notes that currency appreciation and the country’s forecast for growth of +4.8% in 2010 and +3.8% in 2011 will boost inflationary pressures in the coming quarters.


Much like the Chinese, Norwegian and Australian central banks, which have raised interest rates to curb inflation and increase the rate of personal savings for their citizenry this year, Sweden joins the club of countries proactively addressing domestic economic policy in an environment in which global growth, particularly in the US and continental Europe, slows.  


The Swedish Krona has steadily gained versus the EUR this year, up 10.2% year-to-date. We’ll be monitoring the currency as it stands to continue to benefit alongside GDP growth that should outperform most of the European continent and gradual interest rate hikes that should buoy confidence. Equally, because the Riksbank is not hostage to the EUR, we like the set-up from a monetary standpoint, should the Bank need to maneuver around slowing global demand.


Matthew Hedrick



Sweden’s Riksbank Preemptively Fights Inflation - schweden