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Conclusion: We at Hedgeye aren’t alone in our stance that the Fed’s Quantitative Guessing won’t end well. Several important countries and figureheads have joined in the anti-QE parade and we feel that this, combined with other factors is bullish for the U.S. Dollar – and bearish for [nearly] everything else.


Position: Long the U.S. Dollar (UUP); Short the S&P 500 (SPY); Short the Russell 2000 (IWM); Short Emerging Market Equities (FFDs);


On our Morning Macro Call (email if you are an institutional client and need a live dial-in code), Keith identified three catalysts that are potentially bullish for the U.S. dollar in the near term, which could potentially trigger a 6-9% compressed correction in U.S. equity markets. Those catalysts are: 

  1. Obama’s trip to Asia (starting now for the next ten days): Simply put, Asia is peeved with U.S. monetary policy. Central bankers from China, Japan, Hong Kong, Korea, and India are calling out U.S. monetary policy for what it is – “uncontrolled money printing” and pursuant of a weak dollar. Further, most of these nations are continuing to take measures to counter the inflation Bernanke’s printing press is creating in their countries. Obama will have to answer some tough questions and his rhetoric could prove dollar bullish if he attempts to pander to his Asian counterparts.
  2. October Global Inflation Data (now-month end): We’ve seen countries from China to India to Australia to Sweden raise rates in the last two weeks. Simply judging by the performance of the CRB Index during October, there is further tightening on the horizon. Global hiking could, on the margin, drag U.S. Treasury yields higher and the U.S. dollar with it. To some extent, we’re starting to see that occur on the long end of the curve (see chart below).
  3. G20 Summit in Seoul (Nov. 11-12): Tim Giethner might wind up playing a game of one-versus-nineteen on U.S. dollar policy. For a glimpse of what might come, see commentary out of Brazil’s Finance Minister Guido Mantega on the effectiveness of QE: “It doesn’t work to throw money from a helicopter because this won’t make growth flourish”. Germany’s Minister of Finance, Wolfgang Schauble said Thursday, "I don't think that the Americans are going to solve their problems with [QE2], and I believe that it is going to create extra problems for the world”. Timmy’s got some explaining to do come next Thursday. 



On another note, it seems everyone is bearish on the U.S. dollar and bullish on commodities and global equities, including Franklin Templeton’s Mark Mobius. More signs that dollar bearishness are at its peak are: 

  • Belarus is going to become the first country outside Russia to issue debt in rubles to borrow at cheaper rates than U.S. dollars. Countries tend to want to borrow money in currencies they think are going to depreciate, so yields on dollar bonds have gotten too expensive for Belarus. The same is happening to Chinese companies, who are seeking cheaper dollar bond rates by borrowing in Hong Kong vs. mainland China.
  • RBC said the Argentine peso (per U.S. dollar) was the most “attractive currency in the universe they watch”.
  • Turn on CNBC and listen to pundit-after-pundit tell you how QE2 will crush the dollar. For their collective references, the U.S. dollar index is down roughly (-8%) since Bernanke tipped his hand in Jackson Hole, which is a substantial move for the U.S. dollar in a short period of time. 

Clearly, we were early and right calling the accelerated decline in the dollar starting this summer, but evidence is continuing to mount that a weak dollar is solidly consensus. President Obama and his cabinet will see mounting pressure over the next two weeks to adjust their policy towards the dollar as they travel abroad.  Longer term, it is not in their best interests to ignite a currency war, so we would expect their rhetoric to adjust accordingly and be supportive of a stronger dollar policy.


Have a great weekend,


Darius Dale


R3: UA, LVMH, Cotton, & HOTT

R3: UA, LVMH, Cotton, & HOTT 

November 5, 2010




  • As an example of how much impact a viral YouTube video can have, KSWS highlighted the success of their recent Tubes training shoe effort featuring Kenny Powers from HBO’s “Eastbound and Down.” The ads, which feature Jeremy Shockey of the New Orleans Saints, mixed martial artist Uriah Faber, and Patrick Willis of the 49ers have had over 2million viewers over the BTS season and increased the company’s Facebook fans 10x since the campaign’s inception. The youth consumer has been an elusive demographic for California brand which could be changing as a result of these unconventional marketing efforts . If you haven’t seen the campaign yet have a look (http://www.youtube.com/watch?v=0_sCW1_fRDA )
  • H&M is debuting its augmented reality app, which includes a virtual fashion show comprised of looks from the retailer’s fall/winter collection. Users can view, interact and snap pictures of virtual apparel and accessories in front of any of its 10 New York City locations. Consumers will instantly receive a 10 percent discount on any purchase just by selecting the items they want to view and “capturing” them by taking a photo. H&M junkies can also use the app to try on outfits (virtually, of course), take photos and post these images to Facebook to create personalized look books. 
  • Fashion jewelry company Monet, a division of Liz Claiborne Inc., launched an e-commerce site last week. Monet.com will include more than 500 styles, with prices ranging from $24 to $148, as well as editorial content with “how to wear it” advice, videos and styling tips.  Notice the integration of editorial and e-commerce remains a key factor in fashion retailing online.



High street giant vows to increase prices by 8% to protect profits in face of rocketing cotton costs. Next stands to lose £60m profit in the first half of 2011 if it does not pass the spiralling cost of cotton on to customers, according to chief executive Lord Simon Wolfson. Wolfson this week lambasted a report by analysts Investec Securities which claimed the price of the average autumn shopping basket at Next had already surpassed its equivalent at Marks & Spencer for the first time in a decade - but conceded the retailer would be forced to pass on price hikes of about 8% next year. <drapersonline.com>

Hedgeye Retail’s Take:  One of the most vocal examples of cotton inflation and its impact on retail.   While most have been dismissive about cotton’s impact and strategies to deal with it, Next is about as clear as can be.  Cotton up, AUR’s up.


UA Sponsoring Manhattan’s Largest Sports Complex- Under Armour Inc. has inked a deal with Chelsea Piers, a sports and entertainment complex on the West Side of Manhattan, to be its official athletic apparel and footwear sponsor. Under the terms of the deal, Under Armour will outfit the trainers, coaches and instructors at the Field House, which offers indoor soccer, basketball, batting, rock climbing and gymnastics, as well as at the center’s health club. The brand will also be the exclusive athletic performance apparel to be sold at the two venues. Other Chelsea Piers sponsors include Izod, Capital One Bank, Coca-Cola, Johnnie Walker and Jet Blue Airways.  <wwd>

Hedgeye Retail’s Take:  While not on the same caliber of a Tom Brady signing, the grassroots local sponsorship is more akin to the company’s core marketing efforts.


Jimmy Choo One Step Closer to Lifestyle Brand- Tamara Mellon has unveiled the latest iteration of the Jimmy Choo brand — fragrance. Beginning in January, the brand’s eponymous first scent, created with Inter Parfums SA, will be introduced.  “We’ve transitioned into a lifestyle luxury brand, and it seemed like the next natural step for us,” said Mellon, founder and chief creative officer of Jimmy Choo, at a London event to launch the fragrance last week. A similar event was held in New York on Tuesday. “Fragrance is such an important accessory for women — I think it will have a very broad reach. Our customer is every woman.” <wwd>

Hedgeye Retail’s Take:  With shoes, handbags, and now fragrance we wonder how long before apparel enters the Jimmy Choo line up?


LVMH/Hermes Soap Opera Evolves-  France’s market regulator AMF will investigate LVMH Moët Hennessy Louis Vuitton’s acquisition of a 17.1 percent stake in Hermès International to determine if rules were respected, an AMF spokeswoman said on Friday. LVMH filed a statement on Oct. 23 revealing that it had purchased more than 15 million shares, representing 14.2 percent of Hermès, and had options for another 2.9 percent.  In France, companies are required to declare stock purchases when they surpass 5 percent of the share capital.   Luxury mogul Bernard Arnault’s group said it achieved the Hermès stake through several cash-settled equity swaps, in which an investor essentially bets on the future value of a stock without actually owning the underlying shares. <wwd>

Hedgeye Retail’s Take:  As expected, this luxury house showdown continues to heat up.  Most likely a page one store for many weeks to come, especially in Paris.


Oil on the Rise, Biking Looking Attractive?- The League of American Bicyclists and the Alliance for Biking & Walking announced a three-year campaign to double federal funding for bicycling and walking by 2013, even while bemoaning the defeat of one of their great champions in Congress in Tuesday's mid-term election.  The League and Alliance have been awarded up to $1.2 million from SRAM over the next three years to unite active transportation advocates across the nation and give them tools and resources to secure increased funding from existing federal transportation programs for critical bicycle and pedestrian projects. <www.sportsonesource.com>

Hedgeye Retail’s Take:  This may be the first time we’ve included a blurb on cycling but probably not the last as many urban centers have and will become much more biker friendly over the next several years.  Did anyone initially believe NYC would permanently close traffic in Times Square to accommodate bikers?



Nielsen discloses flaws in how it measures online traffic- Audience measurement firm The Nielsen Co. today told its clients that its data for traffic to online sites is flawed. The company put most of the blame on its failure to properly account for longURLs, such as those used by shoppers when following links from a search engine to an online retail site. Nielsen said it expects to have fixed the problem in time for December reports, which will be released in January. <internetretailer.com>

Hedgeye Retail’s Take:  Interesting that even the data-driven internet can’t be tracked with a high level of accuracy.  Not good for what was once thought as THE king of measurement statistics.


Hot Topic Debuts Harry Potter Boutiques- Warner Bros. Consumer Products and retail partner Hot Topic are launching dedicated in-store boutiques with exclusive merchandise inspired by Harry Potter and the Deathly Hallows. The boutiques are opening in Hot Topic's 680 locations in the U.S. and Canada. Exclusive product includes juniors', young men's and women's apparel (i.e. Gryffindor and Slytherin polo and tie combination tees), bags, throws, jewelry, key chains, stationery and posters. Select items will also be sold only online at Hottopic.com. In addition, an in-store mobile application will offer challenges and rewards to shoppers who participate through their iPhone and Android phone. Harry Potter and the Deathly Hallows: Part 1 hits theaters on Nov. 19. <licensemag.com>

Hedgeye Retail’s Take:  Hard to believe that a retailer primarily known for goth and punk is going all-in on Harry Potter.  Clearly they expect to attract a different audience than the 7-10 year old Quidditch fan.


Li & Fung to source for Li Ning brand- Hong Kong-based multinational Li & Fung, the global consumer goods exporter, will become a sourcing agent for Li Ning’s brands in both international and domestic market. The agreement will cover sourcing for a certain range of brands in both international and domestic China market, including soft goods for Li Ning’s popular running, basketball and lifestyle lines.  <fashionnetasia>

Hedgeye Retail’s Take:  Even the Chinese need Li & Fung to navigate their own factory base.  Clearly a vote of confidence for the world’s largest sourcing conglomerate.

CMG - channel checks on Asian food


Our sources tell us that CMG CEO Ells has actually been poking around this Momofuku store in NYC. A loose association but an interesting data point.


Momofuku is more high end NYC, his underlying concept mixes asian flavors with high quality ingredients.


At one point at one of his places he also offered a korean style burrito called a Ssam. The main restaurant, Momofuku, runs an open kitchen and is primarily counter seating. 


If you are in NYC its worth a look....




CMG - channel checks on Asian food  - momo


This is also of interest 





Howard Penney

Managing Director

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP - November 5, 2010

As we look at today’s set up for the S&P 500, the range is 36 points or -2.54% downside to 1190 and 0.4% upside to 1226.  Equity futures are trading lower tracking an early sell off among European equities and ahead of the key US jobs data due later. Concerns over the state of the economies of Spain and Ireland linger over markets. The focus will be on the Oct employment report at 08:30 ET. Sep Pending Home Sales

  • Activision Blizzard (ATVI) 3Q adj. EPS beat est.; raised 2010 adj. revenue, EPS forecasts
  • Atmel (ATML) 3Q adj. EPS, rev. beat ests.
  • Blue Nile (NILE) 3Q EPS beat ests., sees 4Q rev in-line with ests.
  • CBS (CBS) adj. EPS, rev, missed ests.
  • Crocs (CROX) 3Q adj. EPS beat est.
  • Dolby Laboratories (DLB) 4Q adj. EPS beat ests.; Forecast 2011 rev. below est. (may not compare)
  • Fluor (FLR) forecast 2011 EPS midpoint below ests., boosted share buyback
  • JDS Uniphase (JDSU) 1Q adj. rev. missed est.
  • KKR Financial (KFN) 3Q adj. EPS beat est.
  • Kraft Foods (KFT) 3Q adj. EPS beat est. 
  • Sotheby’s (BID) 3Q loss narrower than est.
  • Starbucks (SBUX) boosted 2011 EPS forecast. 3Q adj. EPS beat est.


  • One day: Dow +1.96%, S&P +1.93%, Nasdaq +1.46%, Russell 2000 +2.56%
  • Month-to-date: Dow +2.85%, S&P +3.19%, Nasdaq +2.79%, Russell +4.28%.
  • Quarter-to-date: Dow +6.00%, S&P +7.00%, Nasdaq +8.81%, Russell +8.48%.
  • Year-to-date: Dow +9.65%, S&P +9.50%, Nasdaq +13.58%, Russell +17.28%
  • Sector Performance: Financials +3.4%, Materials +3.3%, Energy +3%, Industrials +2.2%, Tech +1.6%, Consumer Disc +1.6%, Telecom +1.4%, Consumer Spls +1.2%, Utilities +1%, Healthcare +0.4%
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Whole Foods +15.10%, NY Times +8.28% and Dr Horton +7.78%/Apollo -8.03%, Big Lots -6.84% and Expedia -5.26%.


  • ADVANCE/DECLINE LINE: 2050 (+1597)  
  • VOLUME: NYSE - 1374.71 (+24.59%)
  • VIX: 15.52 -5.32% - YTD PERFORMANCE: (-14.58%)
  • SPX PUT/CALL RATIO: 1.73 from 1.97 -12.18%  


  • TED SPREAD: 17.20 0.102 (0.594%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.08 from 2.20


  • CRB: 312.30 +2.37%
  • Oil: 86.49 +2.13% - BULLISH
  • COPPER: 391.20 +3.36% - BULLISH
  • GOLD: 1,380.60 +3.25% - BULLISH


  • EURO: 1.4191 +1.08% - BULLISH
  • DOLLAR: 75.882 -0.78%  - BEARISH



European markets:

  • FTSE 100: (0.06%); DAX +0.06%; CAC 40 +0.05%
  • European markets fail to keep meagre opening gains and are trading lower led by weakness in the Oils, Retail and Utilities sectors as profit taking kicks in.
  • Oct Germany Construction PMI at 04:30 ET
  • Oct UK PPI input at 05:30 ET
  • Oct UK PPI output at at 05:30 ET
  • Sep Eurozone Retail Sales at 06:00 ET
  • Sep Germany Factory Orders at 07:00 ET

Asian markets:

  • Nikkei +2.86%; Hang Seng +1.39%; Shanghai Composite +1.38%
  • Major Asian markets ended higher, continuing the global rally in response to the Federal Reserve’s quantitative easing announcement.
  • Singapore is closed for Deepavali.
  • Japan leaves overnight call rate target unchanged  

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














“Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That's all it takes really, pressure, and time.”

-Red, The Shawshank Redemption


On a daily basis, we grind through a constant channel of noise.  E-mails, instant messages, text messages, Bloomberg messages, and phone calls all can interrupt our train of thought.  Generating valuable investment ideas for our clients in real-time requires pressure (effort) and time (focus) so at Hedgeye we value the time we take away from the various stimuli that surround us for so much of the day so that we can share ideas across sectors, discuss ideas with clients, or simply think in solitude.  As Keith referenced in his Early Look titled, “AMERICAN SOLITUDE” last week, solitude and leadership often go hand-in-hand. 


That said, I think I can speak for everyone at the firm when I state that the unique nature of our business model offers valuable dialogue channels with our clients.  The nature of that dialogue can vary broadly, agree or disagree, angry or calm, data based or pure qualitative opinion.  The fact is, all of it is critical to our process and all of it is appreciated. 


Besides the wide array of views we receive from our exclusive network, the disparate perspectives of our readers are also a key differentiator for our firm.  We hear from people managing billions and we hear from people managing a few thousand from their bedroom. 


While I am sensitive to the trust our clients have in us, I think it is important to highlight one of the more powerful thoughts that have come across our screens lately:


“What is the relatively small retirement investor to do?  He is long stocks--that is what has been taught to him over 80 years.  He is long on American patriotism and innovation.  He is disgusted with American politics.  He is naive on currencies, trade, global economics and the bigger picture.  He has income investments that he needs to pay the bills.  He lives in fear of the next bubble bursting.”


The reason why I think this thought is powerful is that it highlights a lot of the ideological dogmas that shackle people’s investment perspectives.  That is not a criticism, and I am not claiming to be immune to the influence of emotion or groupthink.  The best one can do is to be aware of it.  The above thought highlights several handcuffs that need to be removed in order to hold as dispassionate and lucid a view of the markets as possible. 


1)      American Patriotism, while admirable, should not be confused with American Delusion.  I love my country (Ireland) as much as the next man.  Thinking critically, especially about government and the path of the country, is a necessary feature of a democracy.

2)      American innovation is not what it used to be.  Some in the media may pine for the days when auto stocks used to “double and double” as soon as “they get going”, but this theme doesn’t sit well with our data-based conviction that Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

3)      Currencies, trade, global economics and the bigger picture are all part of the same patient that we examine each day.  Interconnected markets are here to stay.  We strive to fully respect that fact in the positions we hold in the Hedgeye Virtual Portfolio; we are short the Euro and long the Dollar, while being short the S&P 500.


The last sentence of our client’s message is powerful.  Living in fear of the next bubble bursting is certainly a powerful engine driving market sentiment.  Whether it’s the “relatively small retirement investor” that “needs to pay the bills” or the banker that wants to get paid at year end, fear is a very persuasive mechanism.  In the end, we are as grateful to hear the perspectives of our individual investors as we are to hear the views of our most successful PM’s. 


In Ben Bernanke’s op-ed in the Washington Post, published yesterday morning, he writes that the dual mandate of helping promote increased employment and sustain price stability compelled the FOMC to announce its intention to buy an additional $600 billion of longer-term Treasury securities by mid-2011. 


The introduction to his piece refers to the actions taken by the Federal Reserve and other governments to “stabilize” the crisis in 2008 with a clear aim of claiming legitimacy for further quantitative easing in 2010.  In that same vein, I would refer to the uselessness of past forecasts by government employees like Bernanke and Christina Romer, former chairwoman of President Obama’s Council of Economic Advisers (remember the prediction of 8% being the “peak” of unemployment?).  When Keith coined the term Quantitative Guessing, he was not being flippant; these people do not – and cannot be expected to – offer anything more than guesswork in their economic forecasts. 


What does not involve guesswork is the monitoring of real-time market prices.  The impact of QE2 on the markets is clear to see in the data.  As the dollar has declined, oil, gold, corn, cotton and many other commodities have seen parabolic moves to the upside.  The jobless claims numbers yesterday underscore the dire circumstances that America’s unemployed find themselves in.  The actions of the Federal Reserve are not even close to meeting the expectations that the government set.  With respect to the “dual mandate” of the Federal Reserve, it is failing on both counts.  The consumer is experiencing inflation and job growth has been rather disappointing.


An intuition exists among the American public that I am convinced is lost on many inside the beltway in Washington.  The 401(k) is a significant depository of wealth for the American people so the fear of the “relatively small retirement investor” is understandable.  That investor can see and hear the realities of the economic situation.  The realities of the economy are all around for us to see - 43 million people on foods stamps and growing; a foreclosure crisis that shows no signs of abating and will likely get worse before it gets better.  Investing under a cloud of fear of the bubble bursting is exactly the kind of position we do not want our clients to be in.  In the end, all it will really take for the “Bernanke Bubble” to burst is pressure and time


In The Shawshank Redemption, the result of Andy Dufresne’s meticulous application of pressure and time resulted in him burrowing out of a prison over a twenty year period using only a small rock hammer.  As those of you who have seen the movie will remember, the prison warden was shocked to say the least.  Pressure, sustained by time, can work both ways.  In 2010 America, the pressure is being provided by a broken political system, government-sponsored inflation, and a merciless devaluing of the dollar.  All else that is required is time.


One thing is for sure, we will not be complacent.  The last thing we want to do is look like the warden of Shawshank when he realized what had become of Andy Dufresne.  As you can see in the chart below, the VIX Index has traded below its 15 year average.  Being bearish at this point is not consensus and we are down 2.18% on our short position in the S&P 500.  Yesterday’s move was significant but our conviction has not wavered that the largely policy-induced pressure building inside the market is reaching a critical point.


Time is ticking and pressure is growing.


Have a great weekend,

Rory Green




Conclusion: It has been just over two years since the completion of the merger and management appears to finally be on the right track with Wendy’s.


We have learned recently that WEN is going to be testing some new products and advertising that could bring back the Wendy’s of old.


First, next week Wendy’s will be testing some new advertising creative that focuses on Wendy, the company’s namesake.  Yes, senior management is bringing out the daughter of Dave Thomas, the founder of Wendy’s.  The commercials are folksy but it looks like the company may finally be pursuing an advertising strategy that will resonate with core Wendy’s consumers.


Second, management is about to embark on a massive plan to upgrade the menu to enhance the quality of its offerings.  This new menu strategy focuses on introducing new products that compete with some of the more premium products and brands in the QSR segment.  The company is currently testing new “natural cut” French fries that rival the style you get at Five Guys.  Additionally, the company will be rolling out a new hamburger called the “golden burger” which is expected to compete with the quality offered at In-N-Out Burger.  They will also follow up in the coming months with a new chicken sandwich to compete with Chick-fil-A.


Given that Wendy’s is a more premium-priced brand, this menu upgrade initiative should bode well for incremental business.  In fact, in test market where the new “natural cut” fries are being sold, same-store sales are up 8-9%.


As for the quarter, sales trends improved at both concepts, but a 15% increase in beef costs did not help margins in the quarter.


I imagine we will learn more about the new menu and advertising initiatives on the company’s quarterly conference call (WEN is reporting 3Q10 earnings on November 12), but the franchise system appears very enthusiastic about the direction the company is headed.


Now, if they could only get rid of Arby’s…



Howard Penney

Managing Director

Daily Trading Ranges

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