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November 1, 2010






  • According to the Gallup-Healthways Well-Bing Index, “very religious” Americans have the highest levels of wellbeing (healthiness).  44% of Americans fall into the “very religious” category, attending church/synagogue/mosque at least once per week.
  • Add Prada to the list of footwear brands that allows its customers to create their own customized shoes.  The shoes are available in 16 colors and four different materials. 
  • According to a study by Equation Research, nearly 75% of CEO’s are looking outside the industry for retails’ next generation of leaders as retailers face increasing pressure to think outside their own four-walls to stay competitive. One of the key challenges will be attracting top talent, which 90% of those surveyed are saying the industry is failing to accomplish due to more attractive and lucrative options elsewhere.



Adidas HQ For Sale - Adidas America Inc. has put its North Portland headquarters up for sale, according to a report in the Portland Business Journal. The company is looking to lease back the facility a money-saving move and a spokesperson said the brand remains committed to the Portland region. According to a flyer announcing the property's availability, Adidas is looking for a buyer that will lease the eight-year-old, 320,000-square-foot campus back to the company for 10 years. "There are several business and financial reasons we are considering a sale-leaseback transaction, the most important being that it would free up funds which we can reinvest in our brand, employees and community in which we operate," said spokeswoman Lauren Lamkin, in an e-mail to the Portland Business Journal. "Adidas remains committed to continuing our strong local presence in Portland. According to the flyer, Adidas would pay $15 per square foot in rent, including 2%annual escalators, providing the eventual buyer with first-year operating income of $4.8 million. Adidas bought the site of the former Beth Kaiser hospital at 5055 N. Greeley Ave. in 1999. The $90 million development opened in 2002, allowing the company to consolidate its offices in Northeast Portland and Beaverton. <SportsOneSource>

Hedgeye Retail’s Take: Tough to argue with increasing one’s liquidity, particularly if you prescribe to further downside risk in real estate assets as outlined in our Hedgeye’s Housing Headwinds call.


Genesco Stock Repurchase Authorization - Genesco Inc. announced that its board of directors has authorized it to repurchase up to $35 million of the company's common stock.  The authorization replaces the remaining balance of a previous $35 million repurchase program authorized in Feb. 2010, pursuant to which the company has repurchased approximately 844,000 shares at a total cost of approximately $24.2 million, including approximately 435,000 shares repurchased during the company's third quarter ending Oct. 30, 2010 at a total cost of approximately $13.0 million. <SportsOneSource>

Hedgeye Retail’s Take: Replacing an authorization updated earlier this year, this could be either a case of poor planning at the board level, or a bullish sign of internal expectations with shares near multi-year highs – either way, we view it as a positive.


PSS Launches ATR - Collective Licensing International last week relaunched the Above the Rim brand at an event held at the Hudson Hotel on W 58th St. in New York City. Former NBA players Daryl Dawkins, Anthony Mason and Bo Kimble attended the event along with several ambassadors as part of a new community-based grant program. The 21-year-old Above The Rim brand was purchased from Reebok in January. ATR will launch with a limited basketball footwear collection available now at Payless ShoeSource, which is also part of Collective Brands. The initial collection will include three key styles, the Pivot, Crosscourt and Rise.  In addition, ATR will launch a full scale, premium basketball footwear and apparel collection geared toward specialty retail, department store and better sporting goods channel for Spring 2011 and backed by NBA star endorsements. The Spring footwear collection will be highlighted by the first signature ATR style created for Martell Webster of the Minnesota Timberwolves.  Available in four colorways, his Elevate MW5 shoe will debut in Spring 2011 and will be featured in the return of ATR's advertising efforts. <SportsOneSource>

Hedgeye Retail’s Take: One of Collective Licensing’s many brands in the portfolio, we like the opportunity ahead for ATR to capture share in a category dominated by a single player – Nike. Coming off such a small base, even modest share gains would drive meaningful growth. With the brand left for dead by Reebok, Collective has done a solid job lining up known endorsements that should drive interest at a considerably lower price point than industry average.


Cherokee Goes China - California-based Cherokee Inc. has officially launched its namesake brand in China through a distribution deal with RT-Mart, the country’s largest supermarket chain by sales volume. “This is one of the biggest launches we have ever had in a huge country and with a very aggressive company,” Cherokee chief executive Henry Stupp said at a recent launch event, which featured a runway show of the fall-winter collection. “We felt right from the beginning that RT-Mart had a long-term vision for where they wanted to take this brand, and they respected the culture, the history and the legacy of Cherokee.” Cherokee inked the exclusive, multi-year international licensing deal last November with RT-Mart, a division of Ruentex Industries Ltd., a Taiwan-based textile company. French retailer Groupe Auchan SA also owns a stake in the hypermarket chain, which first opened in China in 1997 and now has 134 stores on the mainland. <WWD>

Hedgeye Retail’s Take: Smart move for a company and brand that is essentially an exclusive at Target.  With growth 100% tied to TGT and it’s license, China makes a ton of sense.


Loehmann’s Running Out of Options -  The Melville, N.Y.-based off-price chain has defaulted on its credit agreement and is exploring reorganization options, including a possible bankruptcy or prenegotiated restructuring. The discounter said Friday it was unable to complete a swap of old notes due next year for new ones due in 2014, falling shy of the 97 percent of required votes by 4.6 percent. Without completing the swap, the off-pricer was unable to make its October interest payment to bondholders, as it had planned to do today. Loehmann’s last month was able to get a 30-day extension on its October interest payment in order to execute the swap. Istithmar, the investment arm of Dubai World, which owns Loehmann’s and Barneys New York, was expected to provide additional funding for the beleaguered retailer had the transaction been completed. Loehmann’s said Friday it was in discussions with certain bondholders and Crystal Financial LLC, its revolving credit lender, regarding its options. “While this dialogue has been generally constructive to date, there can be no assurance that these negotiations will be successful,” the company said. Jerald Politzer, chairman and chief executive officer of Loehmann’s, could not be reached for comment Friday. Earlier last month, the retailer said it had the approval of a requisite number of bondholders to close up to 15 stores over the next year. It currently operates 60 stores in 16 states. <WWD>

Hedgeye Retail’s Take: With the competitive landscape becoming more consolidated (Syms/Filene’s Basement) and the rich getting richer (ROST/TJX) it’s not surprising that Loehmann’s struggle for survival may ultimately be nearing an end.


Patagonia Driving Green Awareness - Later this month, Patagonia catalogue shoppers will be among the first to find out about the company’s Common Threads Initiative. Instead of just hailing the benefits of recycling and reusing clothing, the program is also meant to encourage consumers to think twice before they buy something new. “Don’t buy this jacket unless you really need it” will be one of the cautionary messages used on hangtags, posters and other in-store signage. Self-defeating as that might sound, founder Yvon Chouinard said this unconventional approach will “increase my business like crazy,” namely because the brand will cut into competitors’ sales. Over the past few years, the recession has made people more conservative about spending, more interested in long-lasting and better-quality items, he said. “We want people to imagine our lives consuming less and living simpler lives based on what we need as opposed to what we want,” said Chouinard, whose company has donated 1 percent of its annual sales — $40 million to date — to environmental organizations for years. The brand’s four Rs — reduce, repair, reuse and recycle — will be fleshed out in the holiday catalogue, which ships to about 1.2 million shoppers Nov. 15. To reduce, Patagonia is recommitting to making durable, multifunctional clothes that stay reasonably in fashion. Repair guarantees that if a zipper fails before a garment does, the company will fix it for free. As part of its reuse effort, the brand will help provide a way for shoppers to sell, trade or donate garments they no longer want. <WWD>

Hedgeye Retail’s Take: Check out Patagonia’s blog for another interesting initiative which tracks the manufacturing of its garments by country and by component.  If you’ve ever wondered how complex it is to make a piece of outerwear (and in a social responsible way) then this is worth a look.


Holiday Spending Forecasted to Rise Per Deloitte Survey - Consumer spending during this year's holiday season is expected to be slightly higher than in 2009, despite worries about the general state of the economy, according to Deloitte's 25th Annual Holiday Survey. The survey found that 62% of those questioned plan to spend more or the same on the holidays, up 11% from Deloitte's 2009 holiday survey and the highest level since 2006. The average total holiday spend per consumer is expected to grow to $1,160 this year, up from $1,145 in 2009. Consumers plan to spend a total of $466 on gifts, the first increase since 2004. However, the average number of gifts fell for the third consecutive year, to 16.8. Consumers hold a conservative outlook on the U.S. economy, with nearly four out of 10 (39%) of those surveyed expecting the economy to improve next year, down from more than half (54%) who anticipated an improvement at this time last year. Two-thirds (66%) of consumers surveyed indicate their household financial situation is the same or better than last year at this time, a 10 percentage point rise from 2009. <SportsOneSource>

Hedgeye Retail’s Take: While the holiday is likely to end up being better than last year, we won’t know it until it’s pretty much over.  Last minute shopping and post holiday deal scavenging will be bigger than ever.


November Key Month for e-Commerce - Forget Black Friday, the deal-crazy day after Thanksgiving when turkey-fattened holiday shoppers scour the web and race into stores in search of the most outrageous deals. For online retailer Newegg Inc., the holiday effort really kicks off Monday with a month of deals the e-retailer is calling Black November. “We plan a pretty strong assault beginning Nov. 1,” says Bernard Luthi, vice president of Internet and product marketing at Newegg, which sells computer and electronics equipment. “We’re looking to offer strong bargains, category-wide promotions and specific hot deals. We’re sending the message that this is an opportunity to land some bargains before the crazy, mad rush begins the day after Thanksgiving.” He expects other retailers also will begin a big push this week. “Everyone’s looking to get a head start,” Luthi says. <internetretailer>

Hedgeye Retail’s Take: Despite the hype over November e-com sales, the largest online shopping day is expected to be Dec 14th aka Green Tuesday.


Mobile Functionality a Challenge for Retailers - US internet users place great demands on multichannel retailers. A majority expect to be able to track, modify, complete and order from any channel, according to a July 2010 survey from Sterling Commerce. Shoppers expect to use a variety of routes from research to purchase, especially during the holiday shopping season. And as smartphones continue to proliferate and more consumers use their phone as yet another shopping channel, retailers must be ready to offer capabilities through the mobile web or an app, or both. While many retailers focus on the price-comparison ability of smartphones, which allows in-store shoppers to check competitors’ prices, web users surveyed by Sterling Commerce said the single most important shopping function of a mobile phone was the ability to check whether a product was in stock. <eMarketer>

Hedgeye Retail’s Take: This should come as no surprise to any retailer who is in touch with their customers.  Instant satisfaction and accurate information are now prerequisites for consumers.  After all, a mobile platform should be viewed as merely an extension of desktop shopping.


R3: ADI, PSS, CHKE, GCO - R3 1 11 1 10


Cambodian Strikes Likely - A local workers’ union in Cambodia plans to restart workers’ strike in front of clothing outlets and shops if the cases of the suspended workers are not solved. The secretary general of the Coalition of Cambodian Apparel Workers Democratic Union (CCAWDU) has been urging the government as well as garment industry representatives in an offer to help the union workers who had been suspended before the court’s verdict on the validity of the unions’ strikes came. The Ministry of Social Affairs had told CCAWDU to give them some time in order to solve the problem before restarting strikes and requested workers to respect the company rules and the Labor law of the country. According to the CCAWDU, ninety-four union representatives had been suspended from their jobs as they were related to the strikes that took place last month. The Secretary General of the Garment Manufacturers Association in Cambodia requested workers to remain away from the strikes which will do more harm than good to the industry. <FashionNetAsia>

Hedgeye Retail’s Take: Further labor unrest can only lead to one thing over time. Inflation.


China Footwear Brand Upgrades Image by Moving to Beijing - China’s footwear brand Kangnai has recently opened its first national flagship store in Beijing as a way to build itself a more high-end image. President of the group Zheng Xiukang said the opening of the Beijing store marks the beginning of the company’s transformation from a shoe maker to a high-end brand.  The new “Kangnai Family” leather shoe collection will be sold at the newly opened store with prices ranging from  CNY1200 to CNY1800. Currently, Kangnai has 2,900 retail stores worldwide and five hundred stores will be selling the new Kangnai Family products. The company is also planning to open more flagship stores nationwide. As the first Chinese footwear company opening stores overseas, Kangnai has 270 retail stores in the EU and the US, and 2,600 domestic franchise stores in China. <FashionNewAsia>

Hedgeye Retail’s Take: Yet another example of a Chinese company looking to tap into its domestic consumer rather than just being a “manufacturer.” 











DIY Under Pressure

There’s mounting anecdotal and macro evidence that suggests momentum has slowed in the home improvement sector over the past 4-6 weeks.  Below we’ve taken highlights (lowlights) of commentary from major suppliers to the DIY channel from earnings calls over the past few weeks.  While this is hardly scientific, the breadth of product categories covered here along with the consistency of the negative commentary is something to consider.  Yes, we know that the supplier base to HD and LOW is highly, highly fragmented.   Either way, these are several of their largest suppliers.


Putting anecdotes aside, we’re also including a handful of the latest data points supporting Hedgeye’s Housing Headwinds call.  The data simply speaks for itself and on the very surface should be factored into anyone’s process for evaluating further recovery in the DIY marketplace.  In our view, the topline challenges resulting from a double-dip in domestic housing will likely be too big to overcome in the near-term.  As such in the absence of accelerated revenue growth, earnings should come under pressure.


Finally, to complete the trio of comments and supporting macro data we’ve included our Macro team’s quantitative (and bearish) view on LOW.  Of all the home related names, LOW stands out as the name with the greatest downside risk.  Hedgeye’s key price levels are below:


DIY Under Pressure - LOW 10 29 10

Supplier comments


10/14 Universal Forest Products (UFPI)- We were disappointed in our sales to our big-box customers, but pleased with the advances we're making with other retail business. We were equally disappointed with our drop in margins, but I can't imagine a circumstance again that would lead to such challenges with inventories.


By market, our sales to the DIY market decreased 8% due to a decline in unit sales as a result of soft consumer spending. Within this market, our mix changed as well.  Sales to our big-box customers declined 13% while sales to other retailers increased 11% due to market-share gains.


10/20 Stanley Black & Decker (SWK)- On the mechanical side, they're still battling tough market conditions. They had a negative 6% organic growth in legacy Stanley, five points of that was attributable to a large retail customer destocking residential hardware. That was pretty much as expected.


Okay, well I would say the weeks on hand, first of all, we have one major retailer that took about half a billion dollars of inventory out in their system in the last 90-120 days, and that may or may not continue into the fourth quarter, probably will continue to some extent.


…we see a scenario where point-of-sale is not robust at most of these customers. It's not terrible. It's just kind of bumping along flattish kind of territory, and our invoice sales was very consistent from a volume point of view, from a unit point of view, with that in the legacy Stanley business in the third quarter. So as we would step back from it I'd say we would probably see caution at the winds in the retailers, and part of our outlook reflects that, so we've kind of baked in the environment in a very reasonable way here.


10/21 Briggs & Stratton (BGG)- We continue to believe that overall inventories in the channel are reasonable for this time of year. It appears that OEMs, mass retailers and dealers are continuing to be very conscientious with regard to the amount of working capital invested in inventories.


10/26 Masco (MAS)-  We'll start with Cabinets. Tough quarter in both North America and internationally. Sales for Cabinets were down 18%.


Other question I wanted to ask was on key retail sales or sales to key retailers that softened in 3Q, it looked like four points versus 2Q. Can you give any further perspective on to that and to sell in relative to sell through perhaps trends in the quarter and kind of how things have started out in 4Q there?


I think we saw slowness pretty much across-the-board, whether it's a smaller ticket item like paint or plumbing or a big ticket like cabinet, so there isn't any issue or concern relative to share. No concerns, just outside of the macro environment I think our feeling is that consumers have just sort of closed down to a certain extent and we talk a little bit about that coming out of the second quarter. So I don't think there's any unique trends or anything else going on Donny that I'm aware of.


I'll take the repair/remodel related activity. I think if anything, you can kind of see that in our sales to our key retail customers.  We were positive in the first quarter of this year. We were flat in the second quarter. We're down a little bit in the third quarter, so if anything, our experience is that even lower ticket items we're seeing a little bit of slowness. Now, again, is that temporary? This year has been kind of funny. It started out very slow. March and April were pretty strong and since that point in time, things have tended to slow up a bit. Still not seeing a lot of traction for larger ticket repair/remodel activity.


I think there's maybe been a little bit more traffic. A little bit more in terms of people looking or considering but not necessarily willing to pull the trigger. In terms of price commodity over the last three months or your specific question is about price, I don't know that I would say that things are any more difficult than they normally are. That's always a tough conversation and will continue to be a tough conversation but I don't know that it's any more difficult. We continue to manage price commodity very aggressively and I don't know Donny if you have anything you want to add.


10/27 Whirlpool (WHR)-  And we did see some softness in demand during the third quarter. In spite of this weakening demand environment, over all we performed very well from a branded share perspective.


And while we have had a very positive consumer receptions to our new product innovations launch during the third quarter, the overall price mix environment was more challenging than our previous expectations particularly North America.


But at the same time industry volumes and the pricing environment were more challenging than expected and we took actions to make some aggressive competitive pricing pressure.


Let me also allude a little bit to this one. North America has, right now, flat to high inventory levels so it's about what we consider optimal. And that's basically twofold, one is yes there's quite a bit of Q4 pre-build and the other piece, we saw the market slow down in particularly during the second part of the third quarter and obviously it takes a little while to take that out of inventory. We have taken measures to work the end of September particularly in October, November to run down production to what we would consider appropriate levels of inventory which given the somewhat choppy demand environment will be slightly higher because we have got to be able to respond to the change in demand trend.


Housing Headwinds


The following are excerpts from recent posts published by Hedgeye’s Financials team.  If you’d like additional data or more detailed analysis supporting the Housing Headwinds thesis, please let us know


New Home Sales 

New Home Sales rose 6.6% to 307k SAAR. Is this a cause for celebration? Remember that it was just six months ago that a then-record-low print of 300k caused significant angst and a material selloff. Since then the numbers have remained in this 300k range. Expectations appear to have come a long way. To summarize our cumulative displacement theory, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300k, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero. Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.  


DIY Under Pressure - eric new


Home Sales Rise as Prices Fall

Existing Home Sales rose 9.7% to 4.53 million (seasonally adjusted annualized rate) in September.  As Existing Home Sales are a lagging data series, it is still benefiting from a rebound off of the post-tax-credit lows. Below we show charts of existing home sales and median prices.


DIY Under Pressure - eric existing



The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  


DIY Under Pressure - eric case shiller




Eric Levine



The Macau Metro Monitor, November 1st, 2010


Robert Drake, CFO at Galaxy,  said, "The fourth quarter remains very positive. The first part of the quarter, October, is very strong. We remain very optimistic about the prospect of Macau. We think the future is very bright." On Galaxy Macau, he said, “We haven’t given an exact date out, it’s a little premature to give out an exact day. We want to make sure that we execute operationally and move forward. In the not too distant future we will release when our opening date is. We are on time, on budget."

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Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 10 improved / 5 of 10 unchanged / 3 of 10 worsened
  • Intermediate-term (MoM): Positive / 5 of 10 improved / 3 of 10 unchanged / 2 of 10 worsened
  • Long-term (150 DMA): Negative / 1 of 10 improved / 1 of 10 unchanged / 7 of 10 improved / 1 of 10 n/a



1. US Financials CDS Monitor – Swaps were split last week, tightening for 19 reference entities and widening for 10. 

Tightened the most vs last week: COF, ACE, TRV

Widened the most vs last week: PMI, MTG, GNW

Tightened the most vs last month: ACE, ALL, TRV

Widened the most vs last month: BAC, WFC, COF




2. European Financials CDS Monitor – In Europe, swaps were similarly mixed. Swaps tightened for 23 of the 39 reference entities tightened and widened for 16, but the average level rose 13 bps, largely driven by increases in Greek bank CDS levels.    


Tightened the most vs last week: Commerzbank, Banco Popolare, Svenska Handelsbanken

Widened the most vs last week: Greek banks: Alpha Bank, EFG Eurobank Ergasias, National Bank of Greece

Tightened the most vs last month: Erste Bank, National Bank of Greece, Bakinter

Widened the most vs last month: Alpha Bank, Bank of Ireland, Swedbank




3. Sovereign CDS – Sovereign CDS increased 36 bps on average last week as Greece, Ireland and Portugal continued to surge higher.   




4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 7.85 on Friday.  




5. Leveraged Loan Index Monitor – The leveraged loan index rose 7.3 points last week, closing at a new YTD high. 




6. TED Spread Monitor – Last week the TED spread rose, closing at 17.5 bps.




7. Journal of Commerce Commodity Price Index – Last week, the index fell 1.6 points, closing at 16.5.




8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields continued to climb sharply, rising 120 bps week over week, and are now rising on a month-over-month basis as well.




9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell to their lowest level for at least four months before rebounding slightly to close at 189.   




10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index fell five points, closing at 268 versus 273 the prior week.  




Joshua Steiner, CFA


Allison Kaptur


TODAY’S S&P 500 SET-UP - November 1, 2010

As we look at today’s set up for the S&P 500, the range is 23 points or -1.21% downside to 1169 and 0.74% upside to 1192.  Equity futures are trading above fair value in what is set to be a pivotal week for the markets with QE2, ISM, mid-term US elections and payrolls on the agenda. Strong Chinese manufacturing data is supporting Asian and European markets while the soft tone to the dollar has pushed commodity prices higher.


Today sees the release of Oct ISM data with StreetAccount forecasting a reading of 53.6 for Oct vs a prior 54.4

  • Anworth Mortgage Asset Corp (ANH) 3Q core EPS missed ests.
  • Avanir Pharmaceuticals (AVNR)’s Nuedexta (dextromethorphan hydrobromide/quinidine sulfate) approved by FDA for treatment of pseudobulbar affect (PBA)
  • Forest Laboratories (FRX)’s Teflaro (ceftaroline fosamil) approved by FDA to treat community-acquired bacterial pneumonia, acute bacterial skin and skin structure Infections, including MRSA.
  • Fortinet (FTNT) received a takeover approach from IBM, according to two people close to the situation
  • GlaxoSmithKline (GSK) is voluntarily recalling Emo-Cort 2.5% Lotion in Canada, citing mold contamination
  • Idenix Pharmaceuticals (IDIX) 3Q loss-shr 18c vs est. loss 22c
  • Microsoft (MSFT): Barron’s Eric Savitz suggests Microsoft may be too cheap to ignore
  • Northeast Utilities (NU) raises 2010 adj. EPS forecast
  • Stryker (SYK) buys Porex Surgical, sees neutral to 2010, 2011 EPS, accretive after
  • UIL (UIL) sees 2010 EPS $1.95-$2.05 vs prev. forecast $1.92-$2.07; est. $1.90.


  • One day: Dow +0.04%, S&P (0.04%), Nasdaq (flat), Russell +0.33%
  • Month/Quarter-to-date: Dow +3.06%, S&P +3.69%, Nasdaq +5.86%, Russell +4.02%.
  • Year-to-date: Dow +6.62%, S&P +6.11%, Nasdaq +10.50%, Russell +12.47%
  • Sector Performance: Materials +0.81%, Consumer Staples +0.35%, Utilities +0.16%, Industrials +0.16%, Energy +0.07%), Tech +0.16%, Consumer Discretionary (0.03%), Financials (0.11%), and Healthcare (0.42%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Monster WW +25.5%, Estee Lauder +10.50% and US Steel +5.73%/Genworth Financial -9.86%, First Solar -8.91% and Sunoco -5.66%.


  • ADVANCE/DECLINE LINE: 574 (+556)  
  • VOLUME: NYSE: 1036.73 (+3.36%)
  • VIX: 21.20 +1.53% - YTD PERFORMANCE: (-2.21%) - THE VIX IS UP 12.9% LAST WEEK
  • SPX PUT/CALL RATIO: 3.37 from 2.22 +51.85% - UP EVERY DAY LAST WEEK


  • TED SPREAD: 17.84 0.304 (1.735%)
  • 3-MONTH T-BILL YIELD: 0.12% -0.01%    
  • YIELD CURVE: 2.29 from 2.32


  • CRB: 300.67 +0.26%
  • Oil: 81.43 -0.91% - BULLISH
  • COPPER: 373.35 -1.43% - OVERBOUGHT
  • GOLD: 1,357.88 +1.26% - BULLISH


  • EURO: 1.3947 +0.18% - BULLISH
  • DOLLAR: 77.266 -0.05%  - BEARISH



European markets:

  • FTSE 100: +0.30%; DAX +0.35%; CAC 40 +0.03%
  • Major indices are firmer in reaction to Chinese manufacturing data which shows manufacturing activity strengthened markedly in Oct. The upside move looks broad based with Basic Resources, Oil & Gas and Autos pacing gainers.
  • While there has been little news flow across the continent so far, the week will be a busy one with central bank decisions on Thursday, plus the earnings season continues.
  • Markets will take comfort from news that Portugal's minority Socialist government and opposition Social Democrats have been able to reach an agreement on the 2011 budget and averting a potential political crisis
  • BHP Billiton is preparing to "sweeten" its $39B hostile takeover bid for Potash.

Asian markets: 

  • Nikkei (0.52%); Hang Seng +2.39%; Shanghai Composite +2.52%
  • Most markets closed higher although the strong yen knocked export orientated stocks in Tokyo.
  • China and Hong Kong led the region on strong manufacturing data.
  • South Korea rose, led by automakers who jumped on results
  • China Oct PMI +54.7 vs prior +53.8, Oct HSBC PMI 54.8 vs prior 52.9
  • Japan Oct domestic auto sales (26.7%) y/y 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Taking Sanity Seriously

“Everything is changing. People are taking their comedians seriously and the politicians as a joke.”

- Will Rogers


This weekend during his 200,000 plus people “Rally To Restore Sanity And/Or Fear”, Jon Stewart joined the ranks of calling the press out as the Manic Media. “If we amplify everything, we hear nothing,” he said. “The press is our immune system. If it overreacts to everything, we eventually get sicker.”


I don’t think he was precluding the financial media from that statement either. At least in politics there’s a core competency in being raging Republican or Democrat. In the arena of finance, the incompetence of academic dogma and Keynesian policy is pervasive. What sell-side lovers amplify as “news” becomes a contra-indicator that we make money from. Thank God for that.


This week brings us the Super Bowl of market hope:

  1. Tuesday = Midterm Elections
  2. Wednesday = Federal Reserve’s Decision to Debauch The Dollar
  3. Thursday = European Central Bank and Bank of England Fiat Fool statements

Then on Friday, everyone will come back from their mid-term election and Dollar debasement parties in Washington DC to be hung-over by Hedgeye reminding them that neither Republicans or Quantitative Guessing will result in anything more than what we already have in this country, Jobless Stagflation.


Jobless Stagflation? What’s that? Don’t ask Barron’s – they decided to title this weekend’s cover story “Bye-Bye, Bear”…


No, I couldn’t make that up if I tried… and no, I don’t think the probability is very high that Barron’s is a leading indicator on the US stock market’s next major move either.


Let’s start Taking Sanity Seriously and understand what’s occurred since Ben Bernanke exercised his conflicted and compromised right to give the perma-bulls and financial media alike something to cheer on since the Jackson Hole Groupthink Summit on August 27th:

  1. The SP500 is up +13%
  2. The CRB Commodities Index is up +14.5%
  3. The Input Price component of Chinese manufacturing is up +15.5%

Seriously? Yes, this is a very serious level of expedited inflation folks.


But what does it mean? Doesn’t this mean that Burning The Buck at the stake is a credible, everybody-wins, strategy? Or does the Manic Media on the Western side of the world get paid to suspend disbelief and take the Groupthinker’s word for it that this is going to end in jobs?


The Manic Media doesn’t do buy-side equations, but we’ll give them another one to chew on now that our clients have their positions on:


QG = COGS inflation


Seriously. It’s sort of one of those IF/THEN equations that they can build upon using the equation we gave them a few weeks back:


QE = i


Take these equations very seriously.


If, Quantitative Easing (QE) = inflation, and QE = QG (Quantitative Guessing), then QG = COGS (cost of goods) inflation. I know, I know. This is as brilliant a mathematical revelation as Morgan Stanley cutting its US Dollar forecast this morning “As The Federal Reserve Sets To Ease.” That and “Thirty Three Hour Race May Induce ECB Surrender on Weak Dollar” are top Bloomberg headlines this morning, fyi.


Notwithstanding the analytical incompetence of the political media on financial matters, this turns Jon Stewart into a very savvy politician, of sorts. Or is he a politician? Maybe he’s just simplifying the common sense signals that normal human beings have in their heads as Washington attempts to fear-monger you into believing that there is only deflation and, as a result, you should earn 0.17% on your hard earned savings in perpetuity?


Here’s what the Chinese think about this American style Burning of the Buck this morning:

  1. “US Dollar depreciation exacerbates currency war” –China Trade Ministry
  2. “China should buy gold, oil, to avoid US Dollar losses” –Chinese Business Reports
  3. “Yuan deposits rise as Hong Kong currency peg debate heats up” –Bloomberg Asia

Seriously? Yes, the Chinese  are seemingly sane folks.


Oh, and they have the real-time price data to support it. There was a creepy little Halloween critter in China’s better than expected PMI reports last night (54.7 OCT vs 53.8 SEP) called COGS (cost of goods) that showed input prices rise to 69.9 in October versus 65.5 and 60.5 in September and August, respectively. At the same time, South Korea released a new high in their inflation report of 4.1% overnight versus 3.6% in September.


If you’re taking the global interconnectedness of markets and prices seriously, you’re seeing inflation rise, globally, as joblessness stagnates locally. This is called Jobless Stagflation. And we don’t think the Manic Media’s stock market cheerleaders will make that go away by the end of this week.


My immediate term support and resistance lines for the SP500 are now 1169 and 1192, respectively. In the Hedgeye Portfolio, I remain short both the US Dollar (UUP) and the SP500 (SPY). I’ll be a seller of all buy-and-hope oriented strength this week.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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