R3: WMT, SKS, AMZN, and E-commerce


October 27, 2010 


Wal-Mart may be onto something with its Groupon-style Facebook promotion.  With consumers required to “buy in” to a particular offering, we wonder if this isn’t the newest and most clever way of clearing large amounts of a single item in a very short, efficient time frame. 





- Yet another reason why pet products continue to sell well.  Think the canine costume concept is crazy? Online searches for Halloween “dog costumes” outpaced searches for baby and toddler costumes this year, according to search analytics provider Searchmetrics.  Sounds like a positive for PETM.


- As Carlyle plans its IPO for luxury skiwear company Moncler, it’s clearly painting a retail growth story.  After only having one boutique in the US for years, two new stores have opened in NYC and Chicago over the past several months.  Expect to hear about unit growth on the roadshow as the model shifts towards owned distribution.


- Under Armour is back in Manhattan for another holiday season, this time with a pop-up store in Soho. Recall that last year’s location occupied a vacant location on 57th st and 6th Ave.  This year’s Spring St. location fills a spot that Limited used last year as a pop up location.





Wal-Mart Takes A Hint From Groupon - Daily deals service Groupon is the current belle of the ball when it comes to the digital world. It's no surprise that retail giant Walmart is paying attention. Yesterday Walmart began running Facebook ads promoting a new service it is calling CrowdSaver. The offer: Walmart will give 18% off a plasma TV if it gets 5,000 likes. Walmart encourages its fans to rally their friends in order to ensure the deal happens. The move is a twist on the Groupon model, which offers steep discounts on goods and services if a critical mass of people take up the offer. <>

Hedgeye Retail’s Take:  With peer influence at the top of the list of purchasing drivers, we’d expect the Groupon model to move beyond imitation at just Wal-Mart.  There’s nothing better to a retailer than knowing exactly what demand is for a particular item.  If executed properly, Groupon can act like a “forward” order book on the consumer level. 


Saks and Macy's on E-Commerce - is Saks Inc.’s second-largest store, and although it lags the revenue of the chain’s Fifth Avenue flagship, the luxury retailer’s e-commerce unit is generally twice as profitable as the brick-and-mortar business, Denise Incandela, president of Saks Direct, said during a panel discussion. The emphasis has shifted to making sure e-commerce continues to grow and takes a disproportionate piece of total market share as it does so. Macy’s Inc., with more than 600,000 Facebook fans, is also using social media primarily for relationship building. Digital garnered about 10% of Macy’s media spending this year ­­­­­­— compared with zero three years ago — and the percentage is expected to double in another couple years. When it comes to digital media, Macy’s knows what it’s getting. <>

Hedgeye Retail’s Take: When your core business is barely profitable, it’s not saying much when your e-commerce platform runs at 2x the profitability of the base. 


Amazon and QVC Meet the iPad - Both and QVC have reworked their sites specifically for the iPad. The Amazon app enables consumers to post products on Facebook and Twitter, while QVC shoppers can watch a high-definition feed of the retailer’s live broadcast.  <>

Hedgeye Retail’s Take:  With so many iPads in the market already, it won’t be long before this is no longer news.  The iPad is essentially a modern day HD, live action catalog.  Clearly a big opportunity here for retailers looking to sell their wares anytime, anywhere.


REI to Appear on Oprah Friday - National outdoor gear and clothing retailer REI will be featured on two upcoming episodes of “The Oprah Winfrey Show.” The episodes, titled “Oprah and Gayle’s Big Yosemite Camping Adventure,” highlight their first-time camping adventures in Yosemite National Park and a trip to the REI store in Fresno, Calif. <>

Hedgeye Retail’s Take: The ‘Oprah Effect’ still matters and hits REI in stride as the retailer continues to open stores aggressively. With an typical footprint of ~25,000 sq. ft., the outdoor retailer has been opportunistic in taking over locations from defunct concepts like Linens-N-Things and is now planning three new locations in the New York tri-state area in 2011 including a Manhattan location next fall.


Fleece-Maker Polartec Said to Be Seeking Acquirer in $200 mm Sale - Polartec LLC’s parent, Versa Capital Management, is seeking a buyer for the century-old maker of the Polarfleece material, according to two people with knowledge of the matter. <>

Hedgeye Retail’s Take: Couldn't be better timing for soliting bids with cotton hitting new highs again this week.


Luxottica Group Sees Renewed Interest in Luxury - Strength at retail and wholesale across all regions and renewed interest in luxury brands helped Luxottica Group SpA lift its sales 19.7%. Sales in Europe and in the U.S. grew 12.7% and 8.5%, respectively. Emerging markets gained 26.2%. Luxottica, which owns the Oakley and Ray-Ban labels, holds eyewear licenses with brands including Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Prada, Salvatore Ferragamo, Tiffany and Versace. Earlier this month, the company also inked an agreement with Coach starting in January 2012.  <>

Hedgeye Retail’s Take: With an increasing amount of product shortages across the luxury sector (LV, Chanel) it should come as no surprise that licensed eyewear is also following suit with strength.


Mastercard's Web View - Although coming off a smaller base, e-commerce is growing at a significantly higher percentage than overall retail. In September, total e-commerce rose 7.8%; apparel e-commerce was up 13.4%; children’s e-commerce gained 14.4%, women’s apparel e-commerce rose only 1%, and jewelry was off 5.9%, versus a year ago. E-commerce in women's apparel has grown from a 9% share in 2007 to 13.8% of total sales year-to-date in 2010, and the year’s not over yet. But, they’re not seeing the same progress in jewelry as they’re seeing in apparel categories. Looking at the pace of online business this year there were online peaks in terms of share due to weather and people at work an not on vacation with January peaking at 18.6% of sales. Online holiday sales will ramp up on Nov. 9 with 14 of the top 50 online spending days in the last 22 days of the month. The top spending online day is expected to be Dec. 14., and the biggest day for retail overall is Nov. 26, which is forecast to do $19 billion in sales. The top 10-day total is estimated to be a $151 billion spending opportunity. <>

Hedgeye Retail’s Take: More confirmation that e-commerce remains the bright spot of growth within the retail space.  Recall that December 14th is now known as Green Tuesday. 


Ni hao, Big Chinese Tourist Who Spends - China’s fast-growing economy is fueling a rise in outgoing tourism, with shopping for high-end fashion and beauty products near the top of travelers’ agendas — a windfall that is creating happy smiles among luxury brands and retailers from Paris to Los Angeles. Brands from Louis Vuitton to Ralph Lauren, Graff to Gucci have all pointed to the wave of Chinese tourists traveling abroad as a key factor in luxury’s resurgence after the global recession of 2008. Indeed, the China Tourism Academy estimates Chinese tourists spend about 500 euros, or about $700, an hour when shopping in Paris, home to Galeries Lafayette and Louis Vuitton’s flagship on the Champs-Elysées.Chinese tourists made 47 million trips abroad last year, according to China’s National Tourism Research Institute. The pool of tourists from China who like to spend big now largely consists of the country’s wealthiest elite — a small percentage of the overall population. The latest numbers available show that tourists from Mainland China spent $42 billion abroad in 2009, with more than $17 billion of that spent in Hong Kong, by far the most popular shopping destination for wealthy Chinese tourists. <>

Hedgeye Retail’s Take:  China’s growing wealth has been a windfall for retailers with exposure to Hong Kong, particularly luxury watch companies, which have reflected the surge in demand – a trend we expect to continue at least for the near-term.


U.K. Retailers Rush To Develop and Harness Power of E-Commerce - U.K. Retailers are developing more advanced Web sites and own-brand products to drive profit as they seek to stave off “zero growth” in sales in 2011. Online is “an absolute essential priority now as opposed to before when it was seen as something that was an emerging thing, not high on the list,” Ian Geddes, head retail partner at Deloitte, said in an interview at the World Retail Congress in Berlin. Stores are investing in more multichannel options, which allow shoppers to order a product online and pick it up at a store, he said. U.K. retailers are facing a “very tough” first quarter as the government’s spending cuts, unemployment, the value-added tax increase and inflation weigh on consumers’ ability to spend, the executive said. He forecasts zero growth or a slight contraction in retail sales in 2011. Retailers have been showing a renewed online push after the recession pulled their focus towards cutting costs, according to Geddes. They’re becoming more active in social networking sites such as Facebook and Twitter and adding more price comparisons and product reviews to drive sales, he said. Retailers are also using the Internet as a way to expand without having to invest in more store floor space, executives said. <>

Hedgeye Retail’s Take: As we’ve seen here in the U.S., those companies that have been proactively investing in their e-commerce infrastructure will be at a substantial competitive advantage.


Scaring Up Last-Minute Halloween Sales With Shipping Offers - With fewer than five days until Halloween, online retailers are hyping shipping promotions to capture last-minute shoppers. Sites, such as are discounting goods up to 90% and promoting sale prices on their home pages next to  shipping offers that will still get items delivered by Halloween. puts urgency into a home-page promotion, tagged with “The End is Near” on a tombstone next to a zombie, noting that shoppers can place Halloween orders only until 3 p.m. on Oct. 26 to ship via FedEx’s second-day air service. offered free priority shipping for purchases of $90 or more made on Tuesday, Oct. 26, for delivery on Friday, Oct. 29. The site also offered discounts of up to 90% for costumes for adults, kids and dogs. Some merchants gave an extra push to shipping in e-mail and social media promotions. <>

Hedgeye Retail’s Take: While free shipping is a key consideration for consumers, expect more of these ‘empty’ offers which present the option at unattractively high levels primarily for marketing purposes.



Marriott Americas Division Commentary + Q&A




  • NYC: There have been 8k net room additions of hotel rooms since 2008 & 2009, occupancies are up 7% from 1H 2009
  • Net new rooms by 2013: 669-679k from an estimated 608k at year end 2010
  • 21-28% return on invested capital over the next 3 years

Bob McCarthy – Group President of the Americas

  • Competitive advantages: Leading brands, global scale/ leverage, and culture
  • Have grown from 67,000 rooms in 1985
  • 70% of their full service room pipeline is outside of the USA
  • Room refreshes underway and estimated to be completed by 2013:
    • Full service - 153 complete:  increased RevPAR vs. index by 3.2%
    • Courtyard - 200 complete: increased RevPAR vs. index by 7.6%
    • Springhill - 49 complete:  increased RevPAR vs. index by 2.2%
    • Residence Inn – 80+ complete:  increased RevPAR vs. index by 10.5%
  • Have changed their global sales strategy by aligning sales force by customer vs. by property
  • Estimate that annual growth in travel and tourism demand will grow 7% globally from 2009-2019, and 13% in BRIC countries
  • Have 33MM MAR rewards members and account for 50% of room nights
    • Use the data to market to existing members and increase their share of wallet (e.g. when someone is close to the next level of reward status)
    • 7.4MM members are non-US based (close to 25% of which are non-European/mostly Asia)
  • Their reservation systems is the most effective distribution in the industry:
    • $27BN in room revenues
    • 45.4% sales conversion rate
    • Highest contribution to occupancy & lowest transaction costs
  • site represents 85% of their internet reservations
    • 8th largest consumer retail site by gross sales
    • $5.6BN of sales in 2009
  • Average tenure of managers is 11 years at MAR

Tony Caputo: Executive VP of Global Development

  • Global Footprint: Impact of distribution:
    • Aims to be in all markets where their customers travel
    • Provides lender comfort
    • Economies of scale help drive owner returns
  • 60% of their developers are located internationally
  • Global footprint:
    • 493,000 rooms in NA (4.2 average hotels/owner)
    • 47,000 rooms in Asia Pacific (1.5 average hotels/owner)
    • 41,000 rooms in Europe (2 average hotels/owner)
    • 17,000 rooms in LAT/SA/Caribbean (1.5 average hotels/owner)
    • 10,000 rooms in M.E. & A (2 average hotels/owner)
  • Use their capital to fuel growth through:
    • Loans, minority equity, guarantees, key money
    • 25,000 rooms in their pipeline were enabled by some kind of MAR investment
    • Committed $400MM of capital and $80MM of guarantees to enable their pipeline
  • Average Contract Terms
    • 20-30 years
    • Rarely terminable on sale or termination at will
    • Average years remaining on contract
      • NA: 18 years (22 for Full Service)
      • Caribbean & Latam: 27 years
      • Europe: 25 years
      • ME&A: 15 years
      • Asia Pacific: 20 years
  • Expect to have 15-20 Autograph & Edition hotels open by 2010
  • Gross 80-90k pipeline opening by geography through 2013:
    • NA: 49%
    • Europe: 11%
    • Caribbean & LATAM: 9%
    • Asia Pacific: 19%
    • ME &A: 12%
  • Gross 156k pipeline opening by geography from 2006-2010E:
    • NA: 74%
    • Europe: 7%
    • Caribbean & LATAM: 4%
    • Asia Pacific: 14%
    • ME &A: 1%

Dave Grissen: President, Americas

  • Growth in NA:
    • Low supply advantage (estimate that current demand is 1% > supply)
    • Margin improvement
    • Unit growth through FS conversions and limited service franchising
  • Forecast for NA RevPAR company operated Marriott hotels:
    • 2010E:
      • Room Rev: $108
      • Other revenues: $63
      • House profit margin: $56
    • 2013 Base case (7% RevPAR):
      • Room Rev: $132
      • Other revenues: $75
      • House profit margin: $80
  • Property cost savings specific:
    • Carved off hours of operations (eliminated non-peak)
    • Downgraded to cheaper F&B sourcing
    • Cut back of the house costs
    • Renegotiated vendor contracts
  • House profit margin for 2010E (32.6%) vs. 2007
    • Rooms : -540bps
    • Wages and benefits: -1.5%
    • Food & other procurement cost leverage: 0.8%
    • Controllables: +1.4%
    • Utilities: -0.8%
    • Expect 2013 margins Base case: 38.6%
      • Rooms : +320bps
      • Wages and benefits: +0.2%
      • Food & other procurement cost leverage: 0.6%
      • Controllables: +1.5%
      • Utilities: +0.5%
  • Operating efficiencies:
    • Rolled out core standard menus
    • E-procurement
    • Centralized engineering service model (sometimes share teams with several hotels)
    • Other: housekeeping/ flatter management structure model and standardization for adding new staff/ rooms preventative maintenance
  • Autograph:
    • Anticipate 15-20 new units per year
    • 35% Membership rewards penetration in 2010
  • OTA’s penetration of their bookings have declined to 4% from 11%
  • Limited brand growth (gross) through 2013: 23-26K
    • Residence Inns: 22%
    • SpringHill: 18%
    • Fairfield: 25%
    • Courtyard: 24%
    • TownPlace: 11%
  • Total NA rooms growth projected to increase from 493,000 at 2010E to 516-520k rooms by 2013



  • Gross room growth of 80-90k rooms excludes 10k rooms in Asia, related to identified preliminary deals
  • Broadly, they aren’t assuming that they will have any significant new builds for full service hotels in NA
    • There is some new capital “leaking out” for limited service higher quality brands like MAR
    • Mostly FS growth will come through conversions
  • Every room in Asia Pacific pipeline is managed, Europe is almost all franchised; in NA, the rooms are more oriented towards managed vs. franchised.
  • Issue of amenity creep in prior recoveries?
    • Lots of it is a competitive response and based on customer feedback. Right now it’s not an issue.
  • From a demand standpoint, they are still very GDP driven. They were pleasantly surprised how fast business demand came back this year.
  • Expect healthcare cost to grow barely under double digits in 2011. Will see additional pressure in 2012 & 2013. Expect 2014 to really hit them with double digits. 
  • 3 reasons why they feel great about Autograph growth:
    • Power of the system
    • Positive impact on margins by shifting to their reservation system
    • Strength of owner support structure


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



  • “We are in the middle of a very sharp recovery from what is being described as the worst downturn in our industry since the Great Depression.”
  • “We are in the end primarily a business-to-business enterprise. 75% of our business comes from corporations. As long as the expectations for corporate profits is good, we expect that corporate travel will stay good.”
  • “If you look at where occupancies are today, they’re approaching where they were at peak levels. I think in the second quarter, for example, the occupancies in our owned hotels were within 150 basis points of absolute peak levels.”
  • “We now expect rate to be the driver of RevPAR as we go forward, that’s not atypical in the cycle. This year will be 70, 80% of our RevPAR growth coming from occupancy as we get into next year. That may shift more towards rate.”





  • “For the first time in two years, total group business on the books is in positive territory.”
  • “New leads were up 20% and rates for 2010 bookings were up 16%.”
  • “North American properties saw occupancy above 71% in the quarter, with midweek levels in June for New York, Boston and Chicago over 90%. So it’s not a surprise that ADRs [average daily rates] are up roughly 5% in North America for June and July. And in London, June midweek occupancies were 98%, with Paris and Rome at 92%.”
  • “Asia continued its sharp recovery track…China once again led the charge with growth of 46%. Rate was up 7% and occupancy was up 10 points. RevPAR growth was around 14% in India, Australia and the rest of Asia, more than offsetting weakness in Thailand,  which was down 6% due to the political crisis. Even Japan, which has been sluggish to date, was up in the double digits driven by occupancy gains. This recovery trend continues into July but comparisons get a lot tougher. Between Q2 and Q3 2009, RevPAR at company-operated hotels in Asia improved by 800 basis points, and by another 1200 basis points between Q3 and Q4. So despite the strong demand trends, on a year-over-year basis the rate of growth will slow down.”
  • “RevPAR growth accelerated during the quarter from 12.6% in April to 14.6% in June as rate turned positive in May and was up 5% in June.”
  • “The tone of business remains strong in North America as we enter Q3. Short-term booking trends as well as conversations with customers about future plans remain positive. In the year, net group production is running at three times last year’s depressed levels.”

 Guidance/Forward looking commentary

  • “Over time, the real driver of cost is head count, which is flat in the quarter and will remain flat through 2011.”
  • “While Q3 business demand is strong, it is important to point out again that comparisons get a lot tougher. In 2009, RevPAR at company-operated hotels improved 700 basis points between Q2 and Q3, and by over a thousand basis points between Q3 and Q4. As such, year-over-year RevPAR revenue growth will be lower in Q3 and Q4 than it was in Q2, even as absolute levels of RevPAR continue to rise.”
  • “The trajectory of recovery is slower in Europe than in the U.S., and the weaker euro adds an additional headwind to reported numbers. As we enter Q3, we expect some benefit from the weaker euro at our owned hotels in Italy. However, the timing of Ramadan will hurt business originating from the Middle East. The euro was at 142 in Q3 last year, versus 125 to 130 today, further impacting numbers as reported in dollars.”
  • “As we enter Q3 conditions will remain challenged in the Gulf, stronger in Egypt and the rest of Africa, but Ramadan will affect August.”
  • “In Latin America, strong growth in the south and Mexico – Mexican H1N1 impact last year resulted in RevPAR up 30%. Argentina grew 44% and Brazil 32%. In Mexico business travel is recovering, but results have been hit by drug-related crime concerns. These trends remain intact as we enter Q3. This quarter we will lack the significant impact from H1N1 we saw in South America last year.”
  • “We expect the margin improvement trend to continue into the back half, with operating margins increasing 100 to 150 basis points worldwide.”
  • “SG&A will be up again in the 10 to 12% range. We made deep and what we believe are sustainable cuts in SG&A last year, and we remain determined to maintain them.”
  • “In our vacation ownership business, which is our most consumer-dependent enterprise, the tone of business is best described as sluggish. Customer propensity to tour is lower, close rates are stable, and pricing is lower due to our reductions as well as mix…With consumer confidence declining, we do not expect these trends to improve in the second half.
  • “We expect 8 to 10% local currency RevPAR growth in Q3 at company-operated hotels. Exchange rates will be a headwind, reducing dollar-reported RevPAR growth to 5 to 7%. The FX impact will remain a headwind in Q4 too. For the full year, we are raising constant-dollar RevPAR growth to 7 to 9%, 200 basis points above our prior expectations, and 6 to 8% as reported in dollars. Our full-year EBITDA expectations have also increased to a range of 815 to 845 million.”
  • “We are working on the securitization of vacation ownership receivables, market conditions are favorable, and assuming they stay that way, we should get a deal done in Q3.”
  • Q: “If I look at your guidance for the second half of the year it seems to imply RevPAR growth up in the 7% range for the fourth quarter, but EBITDA growth of kind of up 1 to 3 or 4%. Am I missing something on that?”
    • A: “There’s some comparison issues relative to last year, as you said, asset sale differences. Second, it doesn’t underestimate the impact of a significant move in FX YoY, compared to last year. We also have the SG&A incentive comp deltas from last year that we’ve talked to you about. So you put those together and it does explain a big chunk of that.”

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In preparation for what looks to be a strong Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PNK’s Q2 earnings release/call. 




  • “We’ve seen margin improvement this last quarter, but I’ll tell you it’s just the beginning of our ability to thoughtfully look through each one of our operations and for us to improve our margins.”
  • “There is much activity in this company to improve things even beyond margins as we rationalize our delivery system, if you will, for our product, our entertainment casino product, as we look at hotel optimization, as we look at our floors, as we examine assets and discard those that are unnecessary or drag on our system, and as we consolidate offices to be a better management team here in Las Vegas.”
  • “But in the quarter, in particular at River City, we did overstaff on a payroll basis. We did have a couple of unlucky workers comp items in the quarter at that property. We also had some base stock amortization, which will normalize after six months, and so those numbers are higher. We expected some higher numbers in that category, but that’s not the run rate. We’ll get that in-line in the next quarter or two.”
  • “And so our expectation is that, while the economy as a whole is not great and the recovery is slower than anybody will like, we feel fairly optimistic about our prospects going forward, and where we sit competitively in the markets we’re in.”
  • “We don’t have a CRM system today. And we have done a good job driving revenues with really a lack of tools.”
  • “I’m going to guess out loud it’s [effective tax rate] 10% or perhaps south on an annual basis.
  • [Corporate expense in 3Q] “8 million. I think it’s in-line with that."


TODAY’S S&P 500 SET-UP - October 27, 2010

As we look at today’s set up for the S&P 500, the range is 25 points or -1.66% downside to 1166 and 0.45% upside to 1191.  Equity futures are trading below fair value having finished narrowly in positive territory on Tuesday after indices pared earlier losses. A stronger dollar has dampened risk appetite across Asia and Europe as investors curtail expectations for QE and look to cover naked short dollar positions ahead of next week's FOMC meeting. Earnings will again take center stage, while Sep Durable Goods and New Home Sales are the primary economic releases.

  • Aflac (AFL) 3Q rev., EPS beat ests.
  • Broadcom (BRCM) 3Q rev. beat est., said it is to acquire Percello for ~$86. Offers $600m senior notes
  • Buffalo Wild Wings (BWLD) sees net earnings growth next year below est. 3Q adj. EPS beat est.
  • C.H. Robinson Worldwide (CHRW) 3Q rev. missed est.
  • Delphi Financial Group (DFG) 3Q operating EPS, rev. beat est.
  • DeVry (DV) 1Q EPS, rev. beat est.
  • DreamWorks Animation SKG (DWA) 3Q EPS beat est.
  • Equinix (EQIX) sees 2011 rev. above est.
  • F5 Networks (FFIV) announces buy back of up to $200m shares and 4Q adj. EPS beat est.
  • Fiserv (FISV) 3Q EPS beat est., affirmed 2010 EPS forecast
  • Illumina (ILMN) 3Q EPS, rev. beat ests.
  • JDA Software (JDAS) 3Q adj. EPS beat ests, said it sees achieving higher end of 2010 software rev. forecast range
  • McKesson (MCK) reaffirmed its 2011 fiscal earnings forecast of $4.72 to $4.92 a share. Earnings showed positive impact of non-cash, pre-tax asset impairment charge of $72m in Technology Solutions
  • Molex (MOLX) forecast 2Q EPS below est.
  • Netgear (NTGR) 3Q adj. EPS beat est., forecast 4Q rev. above est.
  • Novellus Systems (NVLS) 3Q adj. EPS beat est. 
  • Panera Bread (PNRA) sees 2011 EPS above est. 
  • Western Union Co. (WU) 3Q EPS beat est, raised its outlook for the year


  • One day: Dow +0.05%, S&P 0.00%, Nasdaq +0.26%, Russell 2000 (0.14%)
  • Month/Quarter-to-date: Dow +3.54%, S&P +3.89%, Nasdaq +5.43%, Russell +4.55%
  • Year-to-date: Dow +7.11%, S&P +6.33%, Nasdaq +10.05%, Russell +13.04%
  • Sector Performance: Consumer Disc +0.4%, Energy +0.3%, Tech +0.1%, Financials +0.1%, Telecom +0.1%, Utilities (0.2%), Materials (0.2%), Industrials (0.3%), Healthcare (0.3%), Consumer Spls (0.4%)


  • ADVANCE/DECLINE LINE: -239 (-832)  
  • VOLUME: NYSE - 966.37 (-4.02%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Coach +11.92%, Natl Oilwell +8.46% and Carnival +6.37%/Lexmark -20.98%, Tellabs-13.15% and Regions Financial -7.82%.
  • VIX: - 20.22 +1.86% - YTD PERFORMANCE - (-6.73%)
  • SPX PUT/CALL RATIO: - 1.97 from 1.91 +3.22%


  • TED SPREAD - 16.06 -0.609 (-3.651%)
  • 3-MONTH T-BILL YIELD 0.14%    
  • YIELD CURVE - 2.27 from 2.22


  • CRB: 301.29 +0.33%
  • Oil: 82.55 +0.04% - BULLISH
  • COPPER: 386.90 +0.16% - OVERBOUGHT
  • GOLD: 1,339.05 +0.27% - BULLISH


  • EURO: 1.3864 -0.69% - BULLISH
  • DOLLAR: 77.708 +0.78%  - BEARISH



European markets:

  • FTSE 100: (0.49%); DAX: 0.5%; CAC 40: 0.15%
  • European markets opened lower as investors reviewed a mixed set of European earning releases and a stronger US dollar weighed on commodity prices sending the sectors lower.
  • Results from SAP and Heineken saw their shares decline whilst Deutsche Bank bucked the trend post its Q3.

Asian markets:

  • Asian Markets: Nikkei +0.1%; Hang Seng (1.9%); Shanghai Composite (1.46%)
  • Asian markets were mostly down today.
  • A stronger US dollar led to sell-offs in materials and commodities stocks.
  • Japan finished flat after a rollercoaster day.
  • South Korea fell as investors waited for earnings reports later this week; sentiment was dampened when Q3 GDP growth slowed sequentially. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Isolated Curiosities

“Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.”

-Benoît Mandelbrot


To say Benoît Mandelbrot lived a great life would be an understatement.  The recently deceased Sterling Professor of Mathematial Sciences at Yale University had the opportunity to follow and study his passion his entire life and, as a result, his contributions to the field of mathematics were vast.


Most interesting to our Hedgeyes was Mandelbrot’s work on fractals, which underscore many of our own market models.   In fact, Mandelbrot actually coined the term fractal in his consummate work, The Fracatal Geometry of Nature.  He also did what many academics actually have a hard time doing, he extended his academic studies into the more practical areas. According to our friends at Wikipedia:


“Although Mandelbrot coined the term fractal, some of the mathematical objects he presented in The Fractal Geometry of Nature had been described by other mathematicians. Before Mandelbrot, they had been regarded as isolated curiosities with unnatural and non-intuitive properties. Mandelbrot brought these objects together for the first time and turned them into essential tools for the long-stalled effort to extend the scope of science to non-smooth objects in the real world. He highlighted their common properties, such as self-similarity (linear, non-linear, or statistical), scale invariance, and a (usually) non-integer Hausdorff dimension.”


Mandelobrot passed away at the age of 84 years after more than 60 years of pursuing his passion.  He was one of the most celebrated mathematicians of the last 50 years and won innumerable awards for his work, including:  the Wolf Prize for Physics in 1993, the Lewis Fry Richardson Prize of the European Geophysical Society in 2000, the Japan Prize in 2003, and the Einstein Lectureship of the American Mathematical Society in 2006.  Most interestingly of his awards was perhaps that fact that he has an asteroid named after him:  27,500 Mandelbrot.


As it relates to financial markets, his primary contribution was determining that price changes in “financial markets did not follow a Gaussian distribution, but rather Lévy stable distributions having theoretically infinite variance.”  In addition to his study of financial markets, he also had an idiosyncratic character that was near and dear to our hearts. So much so in fact, that he actually gave himself his own middle initial, “B”, which actually did not stand for anything.


So in memory of Professor Mandelbrot and chaos theorists everywhere (especially our Harvard friend at a well known money management firm in Canada), we are going to focus on only 3 important global macro events this morning as it relates to managing risk, which are as follows:


1.  The Election – As many of our subscribers know elections are near and dear to our hearts and the upcoming midterm election is one we’ve been very focused on. (If you would like to trial our research and to see some of proprietary election analysis, please email  In fact, we are on record saying that we are more bullish for Republican chances than our friend Karl Rove.   For us, though, it is not about politics, but is simply math.  As the math stands now, and excluding races that are “too close to call”, the Republicans will win 233 seats in the house (a majority) and will win 45 seats in the Senate.  We believe that turnout could be the wildcard and slide many of the “too close to calls” to the Republicans as many poll internals show a highly motivated Republican base.  The primary implication of this is that the Republicans will likely implement immediate budget cuts, which, according to reports this morning, could be as much as $100BN as soon as January.  While in the short term a decline in government spending may hurt GDP, in the longer term deficit reductions will put the U.S. economy on a more stable path of growth.


2.  Greek Deficits – If you don’t think that government numbers can be wrong or revised lower, well now you know.  Greek deficits this morning were revised higher to 15% of GDP as, shockingly, tax revenues were worse than expected.  As we’ve been saying for months, sovereign debt issues in Europe will rear their ugly heads again and obviously Greece is at the forefront of that again this morning.  We’ve highlighted this point of Interconnected Global Risk in the Chart of the Day below, which highlights that credit default swaps in Europe are making higher lows. As these CDS spreads increase, we are likely to see equity markets act inversely to those spreads widening.


3.  U.S. Dollar – The U.S. dollar is appreciating this morning (not a sentence we have been used to typing over the last few months) on the back of Wall Street Journal reports that while Quantitative Guessing will likely be implemented on some level, it won’t be the “shock and awe” type that many proponents of Krugman Kryptonite were hoping would be implemented.  It seems Chairman Bernanke may actually be listening to some of his colleagues at the Fed like Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, who said Monday that more expansive monetary policy was a "bargain with the devil."  Indeed.  The most immediate term impact of a stronger dollar is likely a correction in those commodities that are priced in dollars.


Just like Mandelbrot, many of the fine folks at Hedgeye have left higher paying jobs to pursue their passion. This passion is the art and process of producing objective and real-time investment research, which we believe is Hedgeye’s core competency.  We aren’t always right and we aren’t always popular, but we passionately believe in what we do and we thank you for your support. 


Yours in risk management,


Daryl G. Jones

Managing Director


Isolated Curiosities - brots


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