November 12, 2010





  • JCP noted that “Cotton prices are the biggest driver of concern throughout 2011 and particularly in the second half.  In some cases, manufacturers aren't taking orders at this point. They don't feel like they can anticipate what their costing is going to be.”
  • During a recent walk through of FL’s flagship in Manhattan, Timberland had a prominent presence at the front entrance with a standalone display as well as several panels throughout the store with signage rivaled only be a few key basketball launches (UA’s new Micro G and Reebok’s new John Wall ZigTech shoe). It appears that additional SKUs in the company’s Mountain Athletics line is starting to play a key role in shelf space gains.
  • If you’re in the market for new work threads take a look at Jos. A. Bank’s weekend sale. These deals are noise at this point on the radio, but this one’s worth a callout. In a painfully obvious move to shed excess inventory, the company’s offering 2 pants, 2 shirts, and 2 sweaters with the purchase of a sportcoat or leather jacket for the first time ever. In taking a closer look, the sale applies even for sportcoats on sale for as low as $125! If a closet worth of goods for $125 doesn’t drive traffic to stores this weekend, what will…



Google Going Retail? - Google may be taking a page from eBay’s recent foray into exclusive collections with designers, if a certain anonymous fashion tweeter is to be believed. “Breaking news: Google is launching an ecommerce site with shop in shops by major designers #google #theyrgonnabepissed #geturshopon” went the tweet from @NoBtotheS. This could explain why the search company is planning a big bash in New York Wednesday night with retailers, designers and other fashion industry insiders, including a performance by the Misshapes. A Google spokeswoman said, “We are hosting an exclusive fashion party to celebrate our partners. We don’t have further details to share.” <WWD>

Hedgeye Retail’s Take:  Don’t expect GOOG to actually sell anything, but rather act as a virtual mall for the holidays.  GOOG remains very focused on driving traffic to retailers via its shopping search tool.


Skechers Int'l Retail Expansion - Skechers USA Inc. is expanding its retail license. The Manhattan, Calif.-based company bowed its first branded retail store in Ireland last month, and in December will open a second location in Portugal. And early next year, the retailer will open three stores with Canadian partners. “Every Skechers retail store is a highly effective outlet for consumer interaction with our brand,” President Michael Greenberg said in a statement. “We’re excited to deliver the complete Skechers experience through our partnerships in Ireland, Canada and Portugal. This growth illustrates the strength of our brand and Skechers’ retail licensing opportunities around the globe.” With the addition of the new stores, Skechers’ global presence will rise to more than 200 locations. <WWD>

Hedgeye Retail’s Take:  In an effort to sell through a 70% increase in inventories, it’s no surprise to see incremental openings taking place on foreign soil.  Recall that the licensed retail model is a low cost, lower risk strategy to expansion rather than pursuing company-owned locations.


Victoria's Secret Next on Facebook -  Victoria’s Secret is hitting the New York streets with an interactive slice of its annual fashion extravaganza that will be promoted on Facebook. The lingerie specialist is launching a campaign on the social media Web site to promote a display of nine vintage Angel Wings near the brand’s SoHo store, on Broadway between Houston and Prince streets, from Nov. 19 to 30. “It’s fun and artistic and engages people with the brand,” Sharen Turney, president and chief executive officer, said during the 16th annual Victoria’s Secret fashion show on Wednesday night at Manhattan’s 69th Regiment Armory, where Katy Perry was the headliner along with R&B singer Akon. “The wings represent angels and they really a re an icon for the brand.” The exhibit, which follows a test launch in Chicago last year, will showcase Angel Wings worn by models such as Heidi Klum, Miranda Kerr and Adriana Lima in huge, sealed Plexiglas cubes. The boxes will have a small step in front where visitors will be able to stand and have a picture taken. <WWD>

Hedgeye Retail’s Take:  Interestingly, though not surprisingly, Victoria’s Secret’s facebook fans are predominately male.


Nail Polish Key M&A Target? - Nail polish is the latest hot accessory in the M&A game. Coty Inc., which already controls roughly half the retail nail market with its Sally Hansen and New York Color brands, is said to be the leading contender to snatch nail lacquer company OPI Products Inc. from the hands of its competitors in an auction. If Coty doesn’t nail down OPI — the company is believed to be asking upward of $1 billion — the runner-up could be Procter & Gamble Co., the consumer packaged goods behemoth that many consider the most logical partner for OPI because of its nail polish position, which is weaker than Coty. Private equity firms are also circling OPI. Whoever ends up owning it, the pending OPI deal could be the largest in the history of lacquered nails, trumping Coty’s $800 million purchase of Sally Hansen and New York Color owner Del Laboratories in 2007, and far exceeding L’Oréal USA’s April purchase of Essie Cosmetics, which was thought to be around $100 million. The estimates of OPI’s wholesale volume vary wildly from $180 million to $400 million. In any event, it is at least five times larger than Essie, which registered $25 million in wholesale sales in 2009, but the $1 billion price tag estimated for OPI would still be a nail care industry stunner. Recent color cosmetics mergers and acquisitions have commanded 1.8 times revenues. <WWD>

Hedgeye Retail’s Take:  Over the past year we have periodically highlighted nail polish as one of fashions most popular accessories.  Perhaps the sign of a top in the “polish” market was the recent launch of Justin Beiber’s exclusive nail polish line at Wal-Mart.  Purples and metallics are this seasons hot color themes.


Hilfiger Coming Back to TV - After a five-year hiatus, Tommy Hilfiger will return to the airwaves with a holiday TV campaign called “Feast Interruptus.” It will launch Monday on U.S. national and local TV networks, as well as Featuring “The Hilfigers,” who made their debut in the fall 2010 global ad campaign dubbed “The Ultimate Tailgate,” the commercial is directed by Francis Lawrence and styled by Karl Templer. Trey Laird, chief executive officer and executive creative director of Laird + Partners, Hilfiger’s ad agency, is the creative director. <WWD>

Hedgeye Retail’s Take:  Good news for Macy’s which is likely the key beneficiary of increased Tommy advertising given its exclusive distribution agreement.


O"Mega" U.S. Store Growth - Omega, the Swiss watch manufacturer, is planning a significant retail rollout. The company will open nine stores in the U.S. in the next six weeks, including locations in Chicago, Seattle, Los Angeles, Nashville and Jacksonville, Fla. The company currently operates one unit in the States, on Fifth Avenue in New York. Omega president Stephen Urquhart will hit Manhattan next week to reveal the company’s retail plans, which include the addition of 20 to 22 locations in 2011. <WWD>

Hedgeye Retail’s Take:  This has to be one of the more aggressive luxury growth rollouts we’ve seen in a long, long time.  We wonder if the effort actually includes taking the brand a bit downstream given its choice of locations in a-typical luxury markets such as Nashville and Jacksonville.


Social Site Marketing at its Best - Jay-Z is launching his first book, “Decoded,” with a scavenger hunt of sorts sponsored by search engine Bing — with Gucci in on the game. Pages of the book have been placed in various places meaningful to the hip-hop impresario, with clues revealed on Jay-Z’s Facebook and Twitter pages, and on a dedicated Bing site, with fans winning prizes for finding them. On Thursday, Gucci revealed two of the pages in the windows of its Fifth Avenue flagship, printed on the lining of a one-of-kind leather bomber jacket designed by creative director Frida Giannini. The display will remain on view until Nov. 16, when the book goes on sale — and then the jacket will be gifted to Jay-Z. Other places where pages from the book can be found include the bottom of the pool of the Delano hotel in Miami and underneath plates at the Spotted Pig restaurant in New York. <WWD>

Hedgeye Retail’s Take:  2010’s version of the scavenger hunt actually seems pretty cool.  Most interesting is the traffic-driving component which directs “fans” to actually physical locations as part of the hunt.  We’re just wondering who has time to run around the city collecting Jay-Z’s pages?


California Sues Brazilian Blowout - The state of California filed a complaint in Superior Court for injunctive relief and civil penalty against GIB LLC, the company that is doing business as hair-smoothing treatment Brazilian Blowout, alleging that it failed to warn consumers and stylists that the treatment contains formaldehyde, a violation of California’s Safe Cosmetics Act. The firm has “knowingly and intentionally exposed salon workers and customers to formaldehyde,” states the document, which was filed in Alameda County by the state attorney general’s office of Jerry Brown, governor elect of California, on Wednesday. The formula of Brazilian Blowout was brought into question in early October after the Oregon Health & Science University’s Center for Research on Occupational and Environmental Toxicology released lab results that indicated the Brazilian Blowout formula contained formaldehyde. The tests were conducted after stylists at two Portland-based salons complained of eye irritation, burning noses and other symptoms, and submitted samples of the product from their salons to the center. <WWD>

Hedgeye Retail’s Take:  Formaldehyde=bad PR=not good for business.


Social Stickiness - Social media marketers who have successfully attracted fans of their brand to their Facebook or Twitter page have only just begun their real task: keeping those fans interested and engaged, and hopefully turning them into advocates on the brand’s behalf. According to a September 2010 survey by social media marketing agency Cone, incentives remain the biggest draw for consumers connecting with brands online. New-media users expect deals, but also look for brands to help solve their problems and get their feedback on products and services.  What they aren’t looking for is equally important. The top two reasons new-media users said they stopped following brands online, tied at 58%, were brands sending out too many messages or acting irresponsibly. A majority of respondents also complained about content being irrelevant. <emarketer>

Hedgeye Retail’s Take:  Note to brands, don’t over saturate your most loyal customers with relentless digital marketing.  These are already your most informed consumers, not ones that need additional motivation to spend.


R3: JCP, JOS, GOOG, SKX - R3 11 12 10


China's Expanding Sportswear Market - China’s leading sports shoe company Pou Chen has further stepped up its production of sports goods and marketing to seek more business opportunities in the mainland market. Currently, China and other Asian countries have overtaken the US and the EU to become the world’s largest sports footwear market. For example, mainland China consumes 2.2 billion pairs of shoes each year. Sportswear market in China represents 0.3% of total gross domestic product. There is still a huge gap as compared with 1% to 3% in developed countries. With increasing of income and sales of outdoor sports clothing, China’s fashion sportswear market is expected to expand to US$5.1 billion by the year 2012. <FashionNetAsia>

Hedgeye Retail’s Take: Don’t think Chinese domestics are the only brands salivating at the fat-tailed growth potential here. With foreign brands stepping up their own presence on domestic soil, expect U.S. powerhouses to step up their own offensive in this nascent athletic market.




While Genting’s Q3 was a disappointment, Singapore is off to a roof blowing start, even eclipsing Macau in some metrics.



Genting Singapore’s disappointing quarter notwithstanding, the overall market rose handily in Q3 as did the important productivity metrics.  Net gaming revenue increased from S$983 million in Q2 to S$1,164 million in Q3. 


As can be seen in the following charts, win per slot, revenue per VIP table, and revenue per Mass table all increased in Q3.  Not surprisingly, win per slot is much higher in Singapore than in Macau where mainland Chinese are not as enamored with machines as southeastern Asians are.  Singapore is pretty close to Macau in terms of Mass revenue per table but overtook Macau in VIP revenue per day in Q3.  No doubt, the favorable tax rates on Singapore VIP has been a boost.


In terms of Singapore market share, with a fully quarter under its belt, Marina Bay Sands (LVS) has moved ahead of Genting’s Resorts World.  As can be seen in the last chart, the market share war is close on all of the important metrics, although MBS is winning each battle.  We expect MBS to continue to grow its market share.










Out With The Rhetoric And In With The Facts On The Budget - Replay Podcast

On Wednesday afternoon, we held a conference call with Special Guest Peter Orszag, former Director of the OMB under President Barack Obama. On the call we analyzed in great detail the midterm elections results’ potential impact on fiscal and monetary policy in the United States, and the associated investment implications.


Our discussion included a look into key questions such as: 

  • What, if anything, can the government do to quickly narrow the deficit from both a revenue and expenditure perspective?
  • What will change from a budget and fiscal perspective with a change in the parties in Congress?
  • What do we need to do to create a more effective relationship between government and business?
  • How will ObamaCare get repealed, and what is its impact on business investment and healthcare costs as it currently stands?
  • General thoughts on QE and whether we should be pursuing it as monetary policy. 

With the midterm elections now in the rearview mirror highlighted by a dramatic 65+ seat gain in the House by the Republicans, what's next for fiscal and monetary policy?  Is it possible for Republicans to implement a dramatic shift in the fiscal direction of the country?


To hear an insider’s take on the above questions, copy & paste this link into the URL of your browser:


Best regards,


The Hedgeye Macro Team

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TODAY’S S&P 500 SET-UP - November 12, 2010

As we look at today’s set up for the S&P 500, the range is 27 points or -0.29% downside to 1210 and 1.93% upside to 1237. 

  • California Pizza Kitchen (CPKI) forecast 4Q adj. EPS 5c-7c vs est. 15c
  • Caribou Coffee (CBOU) reported 3Q EPS 8c vs est. 5c (2 ests)
  • Cumberland Pharmaceuticals (CPIX) reported 3Q EPS 5c vs est. 1c
  • Dynavox (DVOX) cuts FY2011 adj EPS forecast to 21c-27c from 56c-62c, vs est. 47c
  • Essex Rental (ESSX) buys Coast Crane for $80m; sees deal adding to earnings, 2011 FCF
  • Finisar (FNSR) sees 2Q adj. EPS 41c-43c vs est. 36c
  • Jefferies (JEF) agrees to sell some ops to Bank of New York subsidiary Pershing; sees small gain on sale
  • Matthews International (MATW) reported 4Q adj. EPS 66c vs est. 64c (3 analysts)
  • Microsemi (MSCC) sees 1Q EPS 36c-39c vs est. 37c
  • Nvidia (NVDA) sees 4Q rev. up 3%-5%, implies $869.2m-$886.1m, vs est. $863.9m
  • Thomas & Betts Corp. (TNB US) says it will sell its Communications Products Business to Belden for $78m in cash
  • Walt Disney (DIS US) reported 4Q adj. EPS 45c vs est. 47c, sees 2011 capex increasing by $1b


  • One day: Dow (0.65%), S&P (0.42%), Nasdaq (0.90%), Russell 2000 (0.45%)
  • Month-to-date: Dow +1.48%, S&P +2.56%, Nasdaq +1.92%, Russell +4.01%.
  • Quarter-to-date: Dow +4.59%, S&P +6.34%, Nasdaq +7.76%, Russell +8.2%.
  • Year-to-date: Dow +8.20%, S&P +8.83%, Nasdaq +12.62%, Russell +16.97%
  • Sector Performance: Tech (1.54%), Financials (0.98%), Industrials (0.56%), Consumer Disc (0.14%), Utilities (0.06%), Consumer Spls (0.10%), Healthcare +0.29%, Materials +1.03%, Energy +1.10%
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Gamestop +4.77%, H&R Block +4.40% and Halliburton +4.19%/CISCO -16.03%, JABIL -4.64% and Linear -4.47%.


  • ADVANCE/DECLINE LINE: 869 (-1566)  
  • VOLUME: NYSE - 949.51 (-15.00%)
  • VIX: 18.64 +0.92% - YTD PERFORMANCE: (-14.81%) - BEARISH TREND
  • SPX PUT/CALL RATIO: 1.64 from 1.61 +2.06%  


  • TED SPREAD: 16.49 0.406 (2.522%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.21 from 2.21


  • CRB: 314.85 -0.71% -
  • Oil: 87.81 flat - BULLISH
  • COPPER: 402.95 +1.33% - BULLISH
  • GOLD: 1,405.75 +075% - BULLISH


  • EURO: 1.3654 -0.62% - BEARISH - Down 3.84% in the last 4 days
  • DOLLAR: 78.217 +0.75%  - BULLISH - Up 3.05% in the last 4 days



European markets:

  • FTSE 100: (0.84%); DAX: (0.61%); CAC 40: (1.81%)
  • European markets fell from the open before paring losses.
  • The decline is lead by lingering concerns over the Irish financial crisis and fears China may tighten policy weighed.
  • Regional economic data provided little support.
  • The G20 agreed to move towards market-determined exchange rates and shun competitive devaluation.
  • Peripheral debt spreads were mixed as worries lingered and ahead of supply in Italy.
  • EU statement that new rules concerning bond writedowns would only apply to future issues and German Chancellors comments that EU is ready to deal with any scenario in the Irish financial crisis provided support.
  • All sectors apart from travel & leisure trade lower led by oil & gas and mining sectors down over (2.5%).
  • France Q3 preliminary GDP +0.4% q/q vs consensus +0.5%
  • Germany Q3 preliminary GDP +0.7% q/q vs consensus +0.7%, +3.9% y/y vs consensus +3.7%

Asian markets:

  • Nikkei (1.39%); Hang Seng (1.93%); Shanghai Composite (5.16%)
  • Asian markets followed Wall Street down today, as the region waits for China to raise interest rates.
  • China dropped more than 5% on tightening fears. Property stocks went down on a report that the government is limiting real-estate investment by foreign companies.
  • Renewed worries about European sovereign debt also dampened the mood.
  • Energy stocks declined as oil prices fell.
  • South Korea retreated to flat after earlier being the only market to rise, rebounding from yesterday’s almost-3% fall that was said to be due to a single trade by Deutsche Bank in the last minute of trade on options expiry.
  • National Australia Bank fell 4% on becoming the third major bank to raise interest rates by more than the 25 bp that the country did in its most recent hike; Westpac, which finished flat, made it four of four later in the day.
  • Hi-tech shares fell in Japan on declines in US peers, and exporters went down on concerns about global growth rates. 

Howard Penney
Managing Director

On the Road

"Behind us lay the whole of America and everything Dean and I had previously known about life, and life on the road. We had finally found the magic land at the end of the road and we never dreamed the extent of the magic."

-Jack Kerouac, On the Road


Jean-Louis Kerouac, or Jack as he was more popularly known, was the leader of the beat generation and is one of the most well known American novelists of the last half decade.  I recently took a break from my weekend readings of the Economist, Barron’s, Grant Interest Rate Observer, and other similar publications that make my girlfriend go to sleep, to reread Kerouac’s classic, On the Road.


I think it is fair to say that most type “A” investor types operate in stark contrast to the beat generation, and in particular to the writing style of Mr. Kerouac.  In 1950, Kerouac outlined The Essentials of Spontaneous Prose, which was an overview of his style of writing - a style which emphasized the unplanned spewing forth of ideas, emotions, experiences and so forth.


Our CEO Keith McCullough wrote his own book, which came out earlier this year, titled, Diary of a Hedge Fund Manager.   Far from being the spontaneous prose of a beat, the book is a well thought-out overview of the last decade of Keith’s journey in the world of Hedge Funds.  As one reviewer wrote:


“In telling his story, McCullough may end up inspiring a whole new generation of Wall Street achievers and innovators. He may also succeed in tipping a few sacred cows and instilling new paradigms for investing before all is said and done.”


Admittedly, I may be a little biased as I appear in the book via my nickname Jonesy a few times, but I would recommend you consider it as a stocking stuffer in the upcoming holiday season for that emerging fund manager in your family. ( )


Coincident to reading Kerouac’s book, I was literally on the road this week.  I flew out to Colorado Springs to participate in a bi-annual forum with a subscriber of ours, Huntley Thatcher Ellsworth Advisors ( Aside from being very innovative in the ETF field, twice a year the folks at HTE get up in front of their clients, put on the accountability pants, and talk about what they got right, what they got wrong, and what’s next.  At the forum, I gave a presentation titled, “Should U.S. Debt Be Rated Junk Status?” and then participated in Q&A. An interesting question that came up a number of times from the audience was: should we own gold?


As we think about gold, it is pretty simple.  If the dollar continues to get debased, gold will go higher.  So longer term, it is likely an asset you want to own if you believe the dollar is going lower.  That fact is, if there weren’t monetary value in gold stock, the U.S. Federal Reserve wouldn’t be sitting on over 8,000 tonnes of gold and not selling it.  In the short term, we aren’t long gold and have highlighted a key reason in the chart of the day below, which shows the dramatic increase in the price of gold over the past few months juxtaposed against a recent front page New York Times article, “In Anxious Times, Investors Seek Cover in Gold.” If newspaper and magazine covers aren’t the best contrarian indicators, they are close. 


Another topic we discussed was the implications of Quantitative Easing, the monetary policy more popularly known at Hedgeye as Quantitative Guessing.  Our view is that QE will lead to inflation, without the commensurate pickup in economic activity. While we can debate whether we are seeing inflation in the U.S., globally we are seeing it.  In fact, yesterday Chinese CPI accelerated dramatically.  As Darius Dale wrote to our subscribers yesterday:


“Chinese October inflation numbers came in white hot this morning.  CPI accelerated to a 25-month high of 4.4% Y/Y and PPI also quickened substantially to 5% Y/Y.”


Chinese inflation will lead to one thing, Chinese tightening. If you don’t think that has global growth implications, then you haven’t turned on your Bloomberg terminal yet this morning. In the anticipation of tightening, Chinese equities are down more than 5% and the commodity complex is getting taken behind the barn and shot. Copper is down 2%. Silver is down 2%. Cotton is down 3.6%. Sugar is down 3.4%. It seems we may not have to guess as to the implications of Quantitative Guessing much longer.


My last road trip to Colorado Springs was about 15-years ago when Keith and I were members of the Yale Hockey team.  (Keith was a little quicker and I had a little more hair back then.)  We were playing Air Force in a two game series.  As I recall, Keith was suspended for the weekend and we were swept by Air Force. (Keith would likely suggest there was something to that correlation.)  Ironically, the Yale hockey team is back in Colorado Springs this weekend taking on Air Force and Colorado College.  Much has changed in the last 15-years, including the fact that Yale is now ranked 3rd in the country.  Let’s hope the Bulldogs find the “magic land at the end of the road” this weekend.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


On the Road - 1


The Macau Metro Monitor, November 12th, 2010



The Macau Theme Park and Resort Ltd, led by Angela Leong On Kei, Stanley Ho Hung Sun's fourth wife and local businesswoman,  will build a MOP10.4BN Cotai theme park. Pending approval from the Land, Public Works and Transport Bureau, the resort project will consist of 3 phases, each taking around 2-3 years to complete.  The entire family resort will consist of one 5-star, four 4-star and one 3-star hotels with over 6,000 guest rooms, shopping malls, convention facilities, an indoor beach and wave pool, amusement rides, a 4D theatre, an equestrian centre, a horse carriage trail, and a water sports performance centre.


7,500 construction jobs are expected and once the theme park becomes fully operational, about 9,000 employment opportunities will be added to the job market.  Director Angela Leong disclosed that the project is for now only financed by Industrial and Commercial Bank of China (ICBC) and to date MOP 1BN has already been secured.  Of the MOP 10.4BN total investment, MOP 9.4BN is for the hotel development and MOP 1BN is for the theme park. The amount will be divided into MOP 4.4BN for the first phase construction, and then MOP 3BN each for the second and third phases.


CPI rose 4.4% YoY, beating estimates of 4%.  This has led to speculation of further tightening measures by the Chinese central bank.



According to the Securities Times, China plans to limit foreigners from investing in its real estate market.  The Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange have issued a notice to outline the rules, which will only allow individuals to purchase one housing unit for their personal use.  Foreign companies can only acquire non-residential office facilities in their registered cities, the newspaper said.

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