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The Week Ahead

The Economic Data calendar for the week of the 22nd of November through the 26th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

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The Ber-nank Blame

This note was originally published at 8am this morning, November 19, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“When you cease to exist, then who will you blame.”

-Bob Dylan


For a global macro analyst, the early morning grind is usually bland. It’s always dark and now it’s getting cold. This morning, however, fired me up! At 530AM EST, Ben Bernanke and his Fiat Friends were holding an academic groupthink session on live TV from Europe.


Before I get into Bernanke’s proactively predictable opening remarks, here’s your morning go-juice:

  1. Bernanke said that calling what the Fed is doing “Quantitative Easing” is “inappropriate”!
  2. As Bernanke was speaking, the Chinese raised rates on their reserve requirements by another 50 basis points (5th time this year)

It’s actually pretty funny. These academic Fiat Fools obviously take themselves quite seriously and while their god of Big Keynesian Government Intervention was speaking, the Chinese poked him again.


At 533AM, the play-by-play hitting the newswires looked like this:

  1. Bernanke says “inflation is expected to be subdued for some time… and the FOMC remains committed to price stability…”
  2. China raises rates again on “global inflation concerns”

You’ll never know what World War III looks likes until it’s staring you in the face, but this war may very well be in motion – a global economic war of both rhetoric and action between the Fiats and the Chinese.


While we wholeheartedly agree with Bernanke that calling Quantitative Guessing (QG) by any other name is “inappropriate”, what we completely disagree with this morning is Bernanke effectively joining the political arms race of blaming the Chinese for American economic problems.


Canadians will remember a South Park song titled “Blame Canada” (it was actually nominated for the Academy Award for Best Song in 1999). For whatever reason the lyrics of this damn song started playing in my head while I was watching Bernanke chirp the Chinese:


                “We must blame them and cause a fuss

                  Before somebody thinks of blaming us!”


It’s really pathetic and sad altogether that the 2010 equivalent of a South Park video has turned out to be the best explanation of what’s really going on here. Xtranormal’s cartoon “Quantitative Easing Explained” video (http://www.youtube.com/watch?v=PTUY16CkS-k) has been spreading to the world’s inboxes like wildfire in the last few weeks – last count as of this morning = 1,796,284 views.


Being at the hub of the Hedgeye exclusive network certainly has its privileges. I get to see what we call “the heat” in terms of what serious people care about on a real-time basis. Serious people aren’t just money managers. We have plenty of upstanding people around the world who work in a variety of professions who are sick and tired of being lied to. We offer them a platform to share their voice.


Washington has abused the global privilege of being the world’s fiduciary of the global reserve currency. Everyone who isn’t paid to be willfully blind gets that by now. The days of conflicted and compromised politicians and financiers living in the shadow inventory of American opacity are ending. If it takes a cartoon to expose the truth, sorry Heli-Ben, YouTube is going to smoke your academic dogma out of its hole.


In a roundabout way, this is all very good news. I don’t think I can handle watching American capitalism fold into the hands of crony-socialism for much longer. Plenty of foreign-born entrepreneurs hiring in the American business community feel the same. This isn’t the country that I came to in 1995.


I’m game to play American Capitalist against the socialists. I’ll even wear the red, white, and blue jerseys instead of my homeland’s. While The Ber-nank’s broken promises have perpetuated nothing but JOBLESS STAGFLATION and a global blame game against America’s #1 client (China), I’ve gone about bootstrapping my own American small business, hired 43 Americans, sucked up Obamacare costs like a slurpee, and liked it.


Back to the data, the lastest Nielson survey shows 89% of rural Chinese citizens expecting to see inflation in the next 12 months. Chinese consumer confidence just fell for the 1st quarter in the last 6 and the #1 concern was, take a wild guess blame gamers – inflation. Meanwhile German producer prices (PPI) came in higher again sequentially (month-over-month) this morning at +4.3% year-over-year growth.


Chairman Bernanke, it’s time to think outside of your Great Depression box and strap on some of global macro and accountability pants. If you don’t start seeing the data as it’s reported real time, “when you cease to exist, who will you blame?”


My immediate term support and resistance levels for the SP500 are now 1191 and 1203, respectively. I sold our entire US Equity position (6% position in the Hedgeye Asset Allocation Model) on yesterday’s fleeting US stock market strength. I don’t buy-and-hold what I don’t trust.


Best of luck out there today and have a great weekend,




Keith R. McCullough
Chief Executive Officer


The Ber-nank Blame - 1

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We See Inflation

Conclusion: QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally].


I’ll show the above equation until I’m blue in the face. In an quick and easy-to-understand way, it shows why Chairman Bernanke’s Quantitative Guessing experiment will do nothing more than to wreak havoc on global economies and markets.


Inflation is quickly percolating throughout the global economy. With the exception of a conflicted and compromised U.S. CPI report and the U.S. Housing market (we expect a 15-20% decline in prices by year-end 2011), INflation, rather than deflation, is what the rest of the world sees on a marked-to-market, real-time basis.


In fact, only about a handful of Fed Presidents fail to see what the rest of the world sees: inflation. So, in the spirit of service and being good Samaritans, we’ve decided to help Chairman Bernanke out in his tireless search for inflation. Below, we highlighted a few of the more interesting data points and nuggets from the global economy from just this week alone:



  • After six rate hikes YTD, Indian inflation (WPI) came in a whopping 4bps slower in October at +8.58% YoY.


  • Euro area and EU inflation accelerated 10bps each, coming in at +1.9% YoY and +2.3% YoY, respectively.
  • Korea hiked interest rates for the second time this year, raising the 7-day Repo Rate 25bps to 2.5%.
  • Chinese vegetable prices were reported up +62.4% YoY. To put this in context, China has roughly 477 MILLION citizens that live on less that $2 per day a PPP, with food being their largest expense. That’s 53% larger than the world’s third most-populous nation (U.S.).
  • Chinese Central Bank Governor Zhou Xiachuan said, “China is under pressure from capital inflows” and hinted that price controls may be in China’s near future.


  • Chinese consumer confidence fell for the FIRST TIME IN SIX QUARTERS on increasing inflation expectations. The percentage of consumers expecting inflation to quicken grew 600bps from the prior survey to 76%. In rural areas, that delta was +1,100bps, coming in at 89%.


  • Korea will reinstate a 14% tax on foreigners’ holdings of the nation’s bonds, as well as a 20% tax on capital gains in an effort to spur speculative inflows of capital into the nation’s economy.


  • In classic form, three minutes into Bernanke’s QG campaign speech in Frankfurt, China hiked its banks’ reserve requirements (+50bps) for the second time in as many weeks and the fifth time this year.
  • China’s State Administration of Grain said it will ensure adequate grain supplies to manage inflation and cited speculation and excessive liquidity, NOT supply and demand imbalances, for pushing up the prices of grain in the nation. “China’s grain demand and supply are basically balanced with relatively ample stockpiles, so fundamentals don’t support a rally in prices,” the administration’s Zeng Liying, Deputy Director of the State Administration of Grain, was quoted as saying. “The government has the ability to ensure supply.”
  • According the United Nations’ Food and Agriculture Organization’s World Food Price Index, global food prices have climbed to the highest level since July 2008, when countries from Egypt to Haiti experienced deadly riots due to rising food costs.
  • Hong Kong imposed a 15% tax on home sales and raised down payments 1,000bps to curb the ascent in home prices (up ~50% since January 2009). Hong Kong Monetary Authority Chief Executive Norman Chan said plainly, “The Fed’s Quantitative Easing may spur inflows of cash into Hong Kong”, which would effectively serve to make a bad situation worse. Earlier this month, Goldman Sachs Group Inc. raised its 12-month target for Hong Kong’s Hang Seng Index to 29,000, saying the city has the most to gain from extra liquidity released by quantitative easing programs and China’s growth. I guess the operative saying here would be, “Don’t fight the Hong Kong Monetary Authority”, no?
  • German PPI came in higher sequentially at +4.3% YoY.
  • Brazil’s IGP-M General Market Prices Index rose 1.2% MoM in the second November reading, following a 0.89% MoM gain in October. Consumer prices (+0.59%), producer prices (+1.55%), agricultural prices (+4.65%) and industrial prices (+0.49%) all accelerated sequentially on a MoM basis.
  • Argentine President Christina Fernandez’s 2011 budget has been stuck in Congress since November 10th, on political opposition that she and her cabinet are understating their 2011 inflation forecast. At 8.9% the forecast is well below the estimates of current Argentine consumer surveys and economist calculations of ~25-30% YoY price increases.. “This budget is a lie,” remarks Francisco de Narvaez, a lawmaker for the Federal Peronism opposition party. “Approving this bill is lying to the people, it’s telling them that there won’t be price increases.” Argentine economic statistics have been under heat since January 2007 when then-President Nestor Kirchner was rumored to have started tampering with the official inflation statistics. Reminds me of a certain government we’re all familiar with… 

At any rate, the likelihood that Bernanke sees this note is about as likely as him seeing inflation with $150 oil – very low. Given, we offer it to you as an opportunity to position your portfolio(s) ahead of what we’re deeming World War III, which is a global economic war of rhetoric and monetary policy action.


Like most World Wars, this won’t end well for the global economy in the near term. For more details, please check out this clip of Keith on Bloomberg t.v. today discussing in just a few short minutes what took me 900 words to say: www.youtube.com/user/bloomberg#p/u/5/kKFD1dEwkoI 


Have a great weekend,


Darius Dale



We See Inflation - 1

We Think Ackman Is Wrong on Housing

While we weren’t at the most recent Value Investors Congress, we have heard about a number of the ideas that were presented.  As usual, it sounds as if most of the ideas were thoughtful and well researched.  The one idea that we would take the other side of, though, was Bill Ackman from Pershing Square’s idea to be long, literally, U.S. housing, which was unveiled in a presentation titled, “How To Make a Fortune”.  To state it bluntly, we think Ackman is wrong on housing.


We understand his thesis on U.S. housing focuses on a few key points.  First, affordability is at its highest (so most affordable) in decades due to low low mortgage rates.   Second, household formation will rebound and go back to long term trends, which suggest growth in demand.   Third, supply of housing, which he admits is high, will start to decline as builder production rates are as low as they have ever been.  Finally, he believes the downside in housing is limited because at a price institutions could step in and soak up the excess inventory.  To be fair to Ackman this is a secondhand summary of his thesis, but we wanted to address some of these key points and highlight where this thesis falls short.




The oft used point to support a bottom in U.S. home prices is affordability, which is underscored by the fact that mortgage rates are at all time lows and make the financing costs as low as they have ever been.  While we can’t disagree that mortgage rates are at all time lows (that is just a fact), we do disagree on affordability.  First, credit standards have increased and lenders typically require larger down payments and more upfront points, which increase the “all-in cost” of a house. (If the consumer can get a loan at all.)  Second, we believe, based on our supply and demand models, that home prices have anywhere between 15 – 30% more downside, which implies that the U.S. housing stock is actually overpriced.  Finally, and most importantly, our analysis actually shows as houses get “cheaper”, or more affordable, demand goes down.


Household formation


As we’ve highlighted in the chart below, based on our proprietary census work, household formation has turned negative for literally the first time ever.  This is attributed to the fact that individuals are getting married at later and later ages.  In fact, we have seen a 1000 basis points growth in unmarried people in the aged of 25 – 34 over the last decade.  As these people get married less and later, it has a commensurate impact on household formation.  In the shorter term, unemployment is also a key negative catalyst for household formation.   If the long term trend in the chart below tells us anything, we shouldn’t look at history as a guide for future household formation.


We Think Ackman Is Wrong on Housing - 1


Housing supply


Despite new homebuilding rates being at all time lows, we have seen no meaningful improvement in the national housing inventory overhang.  In the chart directly below, we highlight months of supply of homes on the market.  Currently, there are almost 11 months of supply on the market, which is near the highs of 2008.  Specifically, there are now 4.04 million housing units on the market, a number which has accelerating throughout the year.  So, while it would be nice if low new homebuilding rates had an impact on this massive inventory overhang, they do not.  The primary reason for this is, of course, that new home sales are a small percentage of the overall housing market. (As an aside, there are also an estimated 6 million houses that are not on the market, but are considered “shadow” inventory.)


We Think Ackman Is Wrong on Housing - 2


We Think Ackman Is Wrong on Housing - 3


Institutional buying of houses


While on a limited basis, small funds have been created to buy housing stock, we have not seen institutions stepping up on a larger scale to buy houses.  The primary reason for this is that individual homes don’t lend themselves to purchases of scale due to their localized nature.  Each and every neighborhood is unique and has its own attributes from which value must be determined and researched.  As well, the management of single family housing as an asset is labor intensive as it relates to managing the rentals of these properties.  Further, a wide-scale institutional buyout of housing stock would require banks to suffer massive losses on their loan books – a scenario that they have been avoiding the entire time, as evidenced by the growth in average number of days homeowners spend in foreclosure (which is also impacted by other factors such as moratoriums and litigation).


Our Financials Sector Head Josh Steiner and his associate Allison Kaptur have done the bulk of our work on housing, include a 101 page presentation, and as noted above, one of the primary reasons that we remain bearish on housing is that we expect future prices to decline anywhere between 15 – 30%.  Specifically, supply of housing is in the top two deciles of inventory levels, and historically prices have typically fallen more than 15% over the following 15 months when at these levels.  The correlation on an r-squared basis of supply and future pricing is 0.83.


As our CEO Keith McCullough likes to say, facts don’t lie, people do.  As the housing river cards continue to show their data, it is becoming increasingly that U.S. housing in no bargain.


Daryl G. Jones

Manging Director



November 19, 2010






  • Foot Locker management confirmed our view that acceleration in the basketball category remains in the early stages.  This is consistent with our weekly trend data that showed a 50+% increase in the category for October.  Management also highlighted that demand is across the board, with key products from UA, NKE, Adi, and Reebok selling well.
  • GPS noted that it will pull back on holiday marketing spending this year.  Recall that last year the company returned to TV for the first time in three years, only to find that it did little to move the needle on sales.  Capital preservation remains the key here.  Consistent sales growth in core Gap remains elusive.
  • In a positive sign of improving traffic, SCVL highlighted trends were up +2.5% in Q3 against the first tough comp (i.e. +5.7%) in over 2-years. Moreover, while posting a +7.2% comp for the quarter, the company reaffirmed comps would still have been up mid-single digit excluding the positive contribution from toning reflecting the underlying strength in core sales.



APP and Groupon Hookup - American Apparel Inc. today launched a nationwide Groupon offer in which consumers pay $25 for $50 of merchandise. However, unlike Gap Inc. , which offered its Groupon deal in August only for in-store purchase, American Apparel is allowing consumers in markets that do not have an American Apparel store to use the voucher online. For consumers in markets that do have a bricks-and-mortar store, the Groupon offer is in-store only. The offer also excludes shoes, sale items and various other categories. “We wanted this to be a truly national deal and it didn’t feel right to exclude people just because we haven’t opened a store in their city yet,” says a spokesman for American Apparel, No. 269 in the Internet Retailer Top 500 Guide. “This hybrid model should allow us to reach new customers we otherwise wouldn’t have met and drive traffic to our retail stores and web site.” American Apparel says that its goal is to give consumers an opportunity to try the retailer’s new knitwear products, its nail polish line and other products that are new to the company in the past year. “There is simply no other opportunity around to do something like that on a such a large scale,” he says. While Groupon typically takes a 50% share of the revenue generated from its offers, American Apparel says it negotiated a special rate for its offer. The company declines to disclose the specific arrangement. <internetretailer>

Hedgeye Retail’s Take: With 10k consumers in NYC, 6k in LA, and 7k in Chicago purchasing the offer by 4pm yesterday, Groupon has once again proven it can drive traffic. While positive, it’s far cry from the success Gap experienced for its $25 for $50 deal back in August that drew close to 500,000 customers stores.


Top Brands of Chinese HNW Consumers - A Shanghai-based research firm focusing on the luxury goods market, FDKG, has carried out a study about China’s high net worth individuals and has compiled a top ten for the luxury brands that wealthy people in China like to buy. The top ten brands by ownership amongst Chinese net worth individuals are Louis Vuitton, Dunhill, Gucci, Ports, Dior, Armani, Hermès, Chanel, Zegna and Prada. The study examined the spending habits of almost 800 wealthy Chinese businessmen and women from across the country, whose annual income reaches RMB1m ($150,000) on average. Ken Grant, managing director of the consultancy firm, commented: “Our view is that the habits of wealthy individuals in this market remain embryonic but that this will not last for long. Now is the time for luxury goods businesses to seriously consider engaging with the Chinese market.” <FashionNetAsia>

Hedgeye Retail’s Take: While high fashion dominates the list, China’s growing wealth suggests early movers in luxury retail like Ralph Lauren have share to gain.


Forever 21 to 5th Ave - Forever 21 is out to prove it has universal appeal — from Fifth Avenue here to London’s Oxford Street. The chain today opens a 45,000-square-foot unit at 693 Fifth Avenue, formerly home to the tony Takashimaya, where spare merchandise was artfully displayed and fresh flowers bloomed in the first-floor floral shop. Now there’s a shoe salon and trendy items such as fake fur vests ($22.80), fake leather bomber jackets ($24.80), looped wool ponchos ($24.80) and one-shoulder velvet dresses ($19.80). Forever 21 has a temporary six-month lease. “We want to be on Fifth Avenue permanently,” said Larry Meyer, Forever 21 Inc.’s senior vice president. “We are focused on making this store work. We hope the economics work out.” In the meantime, the space is being marketed by Thor Equities, the building’s owner. “We’re negotiating now with 10 different retailers,” said Joseph Sitt, chief executive officer. “They [Forever 21] are one of the 10.” <WWD>

Hedgeye Retail’s Take:  Forever 21 remains the poster child for being the retailer with the MOST flexible retail strategy.  While we’re not sure how taking a location on 5th Ave and in former Mervyn’s locations creates much synergy, we do know that being private certainly helps. 


Swiss Watch Exports Still on the Rise - Swiss watch exports rose 18 percent in October to 1.6 billion Swiss francs, or $1.65 billion, fueled by sales of watches priced between 200 and 500 francs, or $206 to $516, the Federation of the Swiss Watch Industry said Thursday. "The main markets for the Swiss watch industry achieved better than average growth in October," the federation said. Watch exports rose 20.6 percent between January and October to 12.82 billion Swiss francs, or $12.16 billion. Dollar figures are calculated at average exchange rates for the period in question. Hong Kong, the largest market for Swiss timepieces, continued to achieve a sustained rate of growth, up 38.1 percent on the month. But China overtook it as the leading growth market with a rise of 42.6 percent in October. <WWD>

Hedgeye Retail’s Take: This continues to be a trend driven by currency arb and China’s growing wealth amongst the country’s young population.


The New Slim - Slimming down is all the rage today in the dress shirt and neckwear markets. Driven by demand from a younger consumer, shoppers are responding to narrower silhouettes in both categories, and manufacturers are responding by slicing material from billowy shirts and narrowing the width of their ties. Updated patterns in dress shirts and new fabrications in neckwear are also garnering interest as customers seek a quick and simple solution to update their wardrobes. “Both businesses have been good,” said Lou Amendola, chief merchandising officer of Brooks Brothers. “We’re selling ties that are more youthful in width and pattern, and on the shirt side, slimmer silhouettes are driving the business.” <WWD>

Hedgeye Retail’s Take: Whether by design or demand, less material is yet another way to offset higher costs. While this trend may indeed be more a function of macro dynamics than anything else, we wonder if the same opportunity is already exhausted for denim brands with skinny jeans now in Yr2.


Black Friday Expectations Optimistic - Talk of discounted toys, e-readers, appliances and even HDTVs has millions of Americans already mapping out their Black Friday plans and filling out their wish lists. According to a preliminary Black Friday shopping survey, conducted for the National Retail Federation by BIGresearch, up to 138 million people plan to shop Black Friday weekend (Friday, Saturday and Sunday), higher than the 134 million people who planned to do so last year. According to the survey, approximately 60 million people say they will definitely hit the stores while another 78 million are waiting to see if the bargains are worth braving the cold and the crowds. "The rules for Black Friday have changed significantly,” said NRF President and CEO Matthew Shay. “Instead of waiting until Thanksgiving Day to announce their promotions, many retailers are getting shoppers excited about Black Friday by offering sneak peeks of deals in advance, using social media to create buzz, or teasing upcoming deals on their websites.”  <NRF>

Hedgeye Retail’s Take: An increasing population of technologically literate consumers coupled with retailers embracing new e-commerce/mobile concepts are sure to keep consumers abreast of the latest deals – not to mention the flexibility to adjust promotions mid-stream if need be.


New Bill Against Online Counterfeits - The Senate Judiciary Committee unanimously passed a bill on Thursday that would crack down on counterfeit merchandise and pirated products sold online by “rogue Web sites.” The bill, approved by a vote of 19-0, will advance to the Senate for a vote but it is uncertain whether the leadership will take it up in the truncated lame-duck session. If the Senate were to pass the bill, it would still not be enacted this year because there is no companion bill in the House. The bill will have to be reintroduced in the Senate next year, introduced in the House and pass both chambers before it can head to the president’s desk for his signature. Still, proponents of the bill saw the Senate committee’s approval as a big step in the right direction. “Today’s Senate action on legislation to combat online counterfeiting and digital theft is a major step forward for protecting American jobs and consumers,” said David Hirschmann, president and chief executive officer of the U.S. Chamber of Commerce’s Global Intellectual Property Center. The bill targets Web sites that primarily engage in online piracy and counterfeiting and are often foreign owned and operated. It would give the Department of Justice an expedited process to clamp down on Web sites dedicated to selling infringing goods and services and counterfeits, give authority to Justice officials to file civil action against domain names repeatedly selling counterfeits or providing online piracy and go after foreign site operators. <WWD>

Hedgeye Retail’s Take:  Score another one for the “brands” which have slowly but steadily been winning the war on counterfeiting.  We just wonder how this will play out for those brands actually looking to grow in China.  Bringing authentic goods into the largest counterfeit market on earth is certainly going to pose a challenge.  We’re pretty sure there is no “Senate Judiciary Committee” in China to deal with these issues.


Indian Workers to Strike - Apparel factories across India will close down today, the first such strike in the country’s clothing industry, to protest rising domestic cotton prices. The industry is seeking a total ban on exports of cotton yarn, the primary material used in the industry, which employs some 80 million Indians indirectly. In April this year, in response to pressure from the industry, the government banned raw cotton exports. Although that ban was later lifted, further export restrictions were put in place in October. “Because of cotton yarn exports, there is a serious problem of cotton yarn availability in the domestic market,” said the All India Apparel Export Promotion Council, an umbrella body that represents most apparel manufacturers. It added that its representatives across India, the world’s second-biggest exporter of cotton after the United States, would meet government officials to push for a ban. <WWD>

Hedgeye Retail’s Take:  One word (again). Inflation.


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