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TODAY’S S&P 500 SET-UP - November 24, 2010

As we look at today’s set up for the S&P 500, the range is 22 points or -0.82% downside to 1171 and 1.04% upside to 1193.  Equity futures are trading firmer to fair value and close to session peaks as macro factors take centre stage as yesterday's geopolitical storm takes a breather.

  • A123 Systems (AONE) CFO Michael Rubino to leave in Jan. 2011
  • Cabot Oil & Gas (COG) selling $150m 
  • Guess? (GES) boosts FY 2011 EPS forecast above est.
  • McMoRan Exploration (MMR) plans to issue $900m equity-linked securities upon PXP close
  • TiVo (TIVO) 3Q loss-shr wider than est. 
  • Verigy (VRGY): Sees 1Q adj. EPS no >2c vs est. 17c
  • Oracle (ORCL) won a $1.3b jury verdict against rival SAP for copyright infringement by a now-defunct software maintenance unit


Economic data today and events with estimates:

  • MBA mortgage applications - +2.1% vs. down -14.4%
  • 8 a.m.: Soybean crush, soyoil reserves, Oct.
  • 8.30 a.m.: Durable goods orders, Oct., est. 0.1% (ex. transportation, est. 0.6%)
  • 8.30 a.m.: Capital goods orders nondefense ex air, Oct. est. 1%
  • 8.30 a.m.: Personal income, Oct., est. 0.4%; personal spending est. 0.5%
  • 8.30 a.m.: Initial jobless claims, Nov. 20, est. 435k; continuing claims, Nov. 13, est. 4,275k
  • 9.55 a.m.: Uni. of Michigan Confidence, Nov. F, est. 69.5
  • 10 a.m.: House price index, M/m, Sept., est. unch.
  • 10 a.m.: House price purchase index, 3Q, Q/q, est. -1.1%
  • 10 a.m.: New home sales, Oct. M/m, est. 1.6%
  • 10.30 a.m.: DOE Inventories, Nov. 19
  • 12 p.m.: EIA Natural Gas Storage Change, Nov. 19, est. unch.


  • One day: Dow (1.27%), S&P (1.43%), Nasdaq (1.46%), Russell 2000 (1.02%)
  • Month-to-date: Dow (0.74%), S&P (0.21%), Nasdaq (0.50%), Russell +2.36%
  • Quarter-to-date: Dow +2.30%, S&P +3.46%, Nasdaq +5.33%, Russell +6.48%
  • Year-to-date: Dow +5.83%, S&P +5.89%, Nasdaq +9.95%, Russell +15.12%
  • Sector Performance: Energy (1.96%), Materials (1.92%), Financials (1.57%), Tech (1.47%), Consumer Disc (1.48%), Healthcare (1.45%), Industrials (1.38%), Consumer Spls (1.18%), Utilities (1.09%).


  • ADVANCE/DECLINE LINE: 1697 (-1755)  
  • VOLUME: NYSE: 1023.35 (+11.38%)
  • VIX: 20.63 +12.30% - YTD PERFORMANCE: (-4.48%)
  • SPX PUT/CALL RATIO: 1.99 from 2.21 -10.21%  


  • TED SPREAD: 14.55 -0.804 (-5.236%)
  • 3-MONTH T-BILL YIELD: 0.15%  
  • YIELD CURVE: 2.32 from 2.31


  • CRB: 297.69 -0.11%
  • Oil: 81.25 -0.60%
  • COPPER: 371.10 -1.36%
  • GOLD: 1,380.10 +1.60%


  • EURO: 1.3393 -1.44% - NEUTRAL
  • DOLLAR: 79.681 +1.27%  - BULLISH



European markets:

  • FTSE 100: +0.67%; DAX +1.16%; CAC 40 +0.47%
  • European markets opened higher, major indices gaining around +0.7%, before continuing concerns over peripheral Europe and North Korean News Agency report that South Korea's actions are driving the peninsula to the brink of war led markets to turn mixed.
  • S&P's downgrade of Ireland's sovereign credit rating two notches to 'A' weighed, with political and financial uncertainty remaining ahead of the country's announcement of its austerity plan later today.
  • Better than expected German IFO data and an unrevised Q3 UK GDP reports provided some support.
  • Commodity related shares were initially amongst the leading gainers, before reversing gains and along with technology and bank shares currently lead declining sectors.
  • Advancing sectors lead decliners 10-8, with chemical and travel & leisure the leading gainers. US futures trade lower
  • Danone to buy YOCREAM International for $39.82/share in cash
  • German Nov IFO business climate index 109.3 vs consensus 107.4, expectations 106.3 vs consensus 104.7, current conditions 112.3 vs consensus 110.3
  • UK Q3 GDP +2.8% y/y vs consensus +2.8%


Asian markets:

  • Nikkei (0.85%); Hang Seng +0.6%; Shanghai Composite +1.12%
  • Asian markets were mixed today as fears about tensions on the Korean peninsula eased when South Korea stopped falling after opening down.
  • On bargain-hunting, large-cap banks lifted China even though Industrial and Commercial Bank of China plunged by the daily 10% limit on resuming trade after completing a $6.8B rights issue.
  • Banks, property stocks, and resource-related stocks rebounded in Hong Kong, but investor sentiment remained fragile.
  • Australia closed flat, shedding opening losses as Telstra and Woolworths gained 1% each. Investors moved away from risky assets on the Korean tensions.
  • Taiwan fell, but Digital China TDRs rose 3% on their trading debut. Acer edged down on announcing its entry into tablet PCs.
  • Blue chips were sold in Japan as the market opened with a 2% loss. But some of the loss was recovered as concerns about the North-South Korea situation dissipated.
  • Japan October department-store sales +0.6% y/y; Tokyo October department-store sales +2.7% y/y; both figures are the first time in 32 months that increases have been recorded.

Howard Penney
Manging Director

THE DAILY OUTLOOK - levels and trends















November 23, 2010






  • With Gap continuing on its quest for global expansion, the company opened its Milan store over the weekend.  However, the big news coming out of the launch does not surround the store itself but rather the merchandise inside.  It turns out that the opening included a collaboration with Valentino, only available in very few locations in Europe.  Unfortunately, the domestic chain is still awaiting a designer partnership that rivals those of H&M, Uniqlo, and Gap Europe. 
  • Bowing to the pressure created by an impending AFA boycott, Dick’s Sporting Goods renamed its “holiday shop” the “Christmas Shop” on its homepage.  Recall that yesterday we wrote about the AFA’s efforts to ensure that retailers were using the term “Christmas” rather than “holiday” in their marketing messages.  Will the AFA demand what DKS actually sells next?
  • According to a survey from Pew Research and Time Magazine, about half (52%) of all adults in this country were married in 2008; back in 1960, seven in 10 (72%) were.. In 1960, two-thirds (68%) of all 20-somethings were married. In 2008, just 26% were.



TPG & JCG Round 2 - J. Crew Group Inc. has inked a $3 billion deal to be acquired by TPG Capital and Leonard Green & Partners. The private equity firms will pay $43.50 cash for each share of retailer—a 15.5 percent premium over Monday’s closing price. Millard “Mickey” Drexler, chairman and chief executive officer, will remain with the firm and maintain a significant equity stake in the company. “We are in this for the long term and we do what we do day in and day out so we can deliver the best possible products to our customers,” Drexler said. Private equity firms have been circling retailers in recent months as a combination of relatively low stock prices and readily available financing have made the sector more attractive. This would be TPG’s second round as a J. Crew owner. It acquired 88 percent of the company in 1997, sold most of its stake when J. Crew went public in 2006 and only sold off the final pieces of its investment last year. <WWD>

Hedgeye Retail’s Take: TPG going back to the well here and just in the nick of time for JCG with the deal announced on the same day as scheduled earnings, which were incidentally weak as expected. After what will be one of the best year-end bonuses in retail, Drexler will stay on to run the privately held company.


Coty Purchases Philosophy from Carlyle - Coty Inc. has agreed to purchase skincare brand Philosophy from investment fund The Carlyle Group. Philosophy, which is expected to generate sales upwards of $200 million this year, will join the Coty Prestige portfolio. The deal, for an undisclosed sum, is expected to close next month. “The acquisition will allow Coty to strengthen its presence in the skincare category, which is one of our key strategic objectives,” Coty chief executive officer Bernd Beetz stated. “We believe the brand still has significant growth potential in the U.S. and tremendous opportunities in the international markets,” Coty Prestige president Michele Scannavini added. Founded in 2006 by Cristina Carlino in Phoenix, Arizona, Philosophy was bought by Carlyle Group in January 2007 for an estimated $450 million. The brand is sold in QVC, Sephora, Ulta and Nordstrom in the U.S., and still does the majority of its business in North America. <WWD>

Hedgeye Retail’s Take: The beauty sub-category remains one of the most active in all of retail. Recall that rumors began circulating earlier this month about Coty looking to purchase nail care company OPI. With the OPI deal was rumored to be close to a $1Bn deal, it’s unlikely the world’s largest fragrance company with revs north of $4Bn will look to acquire both, but in this environment it can’t be ruled out either.


Global Sourcing Shift - “Life as we know it has changed,” said Peter McGrath, executive vice president and director of product development and sourcing at J.C. Penney Co. Inc. McGrath told an audience at the annual Textile & Apparel Importers Trade & Transportation Conference last week to forget about the past 20 years, notable for product deflation. Addressing rising prices for cotton, which he called “white gold,” McGrath said Americans will be impacted by them as the “recession lingers. “Demand from the U.S. no longer sets the world’s prices,” he said. “The days of inexpensive apparel are over.” This will likely translate into a surge in the growth of private brands, which would change the assortment mix at mass merchants and department stores. He also predicted a “consolidation from retailers to spinners” that will make the supply chain much “leaner” than before. “Strategic alliances are paramount today…the laws of supply and demand are back at work,” he said. McGrath urged his colleagues at Bridgewaters South Street Seaport to petition their governments to “eliminate tariffs on apparel and shoes,” which is the goal of the dormant Doha Round of global trade talks. Sourcing executives at the conference, sponsored by the U.S. Association of Importers of Textiles and Apparel and the American Import Shippers Association, said apparel companies faced an array of sourcing challenges in the past year, from labor pressures in China to rising cotton prices and complicated trade rules. And they said firms that successfully navigated those obstacles will have to remain flexible and astute. <WWD>

Hedgeye Retail’s Take: With other southeast Asian countries facing their own issues, two countries that came up as additional considerations as a source for apparel exports were Egypt and South Korea with governments in each country taking steps to become more accommodative. Additionally, an opportunity for further capacity out of Indonesia was also suggested.


European Brands Brace for Cost Change - Europe’s fashion brands — from luxury to high street — are bracing for a perfect storm of currency headwinds, higher raw materials costs and, in the U.K., a rise in the value-added tax to 20 percent from 17.5 percent. They are struggling with the issue of whether to pass along price increases and risk less demand or absorb them and put margins at risk. With gold, cashmere and cotton costs reaching new highs, companies such as Compagnie Financière Richemont SA, the parent of Cartier and Van Cleef & Arpels, already have begun to increase prices — albeit quietly — while the U.K. retail chain New Look warned when it disclosed quarterly results this month that clothing prices could rise by as much as 8 percent next year. Other firms, such as Burberry and Sir Philip Green’s retail group, Taveta, plan to tweak supply chains and focus on delivering a merchandise mix that will counterbalance the rising costs. Versace, too, said it would not pass on those costs to the consumer. “We have no plans to increase retail prices in the short term,” said Gian Giacomo Ferraris, Versace’s chief executive officer. “We believe in this particular phase of the global economy that an increase in retail prices could affect sales in Europe and America. Asia, as of today, is probably less sensitive to this.” But keeping a lid on prices won’t be easy. “Many of the raw materials are from countries outside the Eurozone, which theoretically should allow a reduction in costs,” Ferraris said. “Based on our experience from previous years, we expect that producers will increase their prices in order to gain margins, and this will lead to significant pressure on our retail prices and margins.” <WWD>

Hedgeye Retail’s Take: Higher prices are a foregone conclusion, but the wrangling over who gets pinched will continue to play out well into next year.


Li & Fung Acuires Oxford Apparel Group - Trading giant Li & Fung Ltd. continues to rack up deals this year, acquiring the Oxford Apparel Group division of Oxford Industries Inc. for $121.7 million. Li & Fung USA, the New York-based subsidiary of Hong Kong-based Li & Fung, has signed a definitive agreement to purchase substantially all of the assets of Oxford Apparel. The division owns the Ely, Cattleman and Cumberland Outfitters brands, as well as a two-thirds interest in the Hathaway trademark. It also produces apparel under the licensed Dockers and United States Polo Association brands and operates private label programs for Macy’s, Target, Sears and Costco. Oxford Apparel is the second-largest division of Oxford Industries, and the sale will allow Oxford Industries to focus on building its key branded divisions, Tommy Bahama and Ben Sherman, as well as its tailored clothing division, Lanier Clothes. <WWD>

Hedgeye Retail’s Take: By selling off the apparel group (~30% of total sales), the capital infusion will enable OXM to focus on growing  featured brands Tommy Bahama and Ben Sherman, which together account for more than half of the company’s top-line.


Ben Sherman Footwear Deal - Ben Sherman announced on Monday it has inked a licensee agreement with GMI. Under the terms of the deal, GMI will design, manufacture, market, and distribute footwear under the Ben Sherman label in North America beginning with the fall 2011 season. For its inaugural season, GMI will product about 25 styles with casual items priced at $65-$110, and dressier styles for $100-$150. A higher end component of the footwear offering, called The Plectrum collection, will feature Italian-made, more fashionable product, including trainers, moccasins, and Chelsea and desert boots. The collection will retail at $280 to $420. “We’re truly excited to partner with GMI in North America,” Ben Sherman CEO Pan Philippou said in a press release. “Ben Sherman is a lifestyle brand and the footwear collection rounds out our offering for men, head-to-toe. We’re confident that GMI understands the Ben Sherman brand will deliver a fashion-forward, quality product.” <WWD>

Hedgeye Retail’s Take: Per the sale of Oxford's apparel group announced today, the company is wasting no time.


SmartSilver Fabric Now in India - NanoHorizons Inc. has extended the worldwide distribution of its SmartSilver antimicrobial products to India in a move that enhances  the country's ability to offer outdoor and sports brands fabrics used for performance and technical apparel. SmartSilver sales in India will be supported by a partnership with Indorama Polyester Industries Ltd. (IPI), which already uses  SmartSilver into its Ambs polyester fiber line. Headquartered in Thailand with annual sales of US$3.5 billion, IPI is a global leader in polyester production and the second largest producer of PET bottle polymers in the world. SmartSilver® is presently available in other Asian markets such as Thailand, South Korea, Taiwan, and Japan and is used extenisvely in performance apparel and footwear. The partnership comes as many in the textile industry are looking to diversify awar from China where rapid shifts in the labor market and rapid growth are pushing up costs. <SportsOneSource>

Hedgeye Retail’s Take: No surprise as India’s trajectory as a top apparel exporter continues to rise - having access to the industry's latest innovative technology is key to maintaining global leadership.


e-Commerce Shipping Ante - A week ago, Sony Corp.’s SonyStyle.com offered free shipping on orders of $75 or more. Today, the consumer electronics retailer’s home page is promoting free shipping on all orders as “Our gift to you.” Like other e-retailers in the week approaching Thanksgiving, Sony is using free shipping as a lure to win over holiday shoppers. According to a review over the past few days by Internet Retailer of the top 100 online merchants as ranked in the Internet Retailer Top 500 Guide, others that were offering free shipping on most if not all orders included Art.com, Blue Nile, CSN Stores, L.L. Bean, Neiman-Marcus, Nike, Saks Fifth Avenue, Shoebuy.com and Yoox Group. Overstock.com is offering $1 shipping on all orders. The number of top 100 retailers offering some form of free shipping, at 61, was down from a year ago, when 68 offered it during the week prior to Thanksgiving. Though as happened last year, more are likely to introduce free shipping as a promotional tool as the holiday shopping season officially kicks off during the Thanksgiving weekend. <internetretailer>

Hedgeye Retail’s Take: Free at what cost? While some retailers tout a $25 hurdle (e.g. Walgreens, Amazon, etc.) others require a $50 minimum (TRU); $75 (FL, REI, URBN); $150 (JCG); and Dell with the highest threshold at $699.



Global Shakedown

This note was originally published at 8am this morning, November 23, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“No matter what you do I'm gonna take you down.”

-Bob Seger


Bob Seger is a 65-year old American singer-songwriter from Detroit, Michigan. In 1987, he released “Shakedown.” It eventually became a #1 hit on the Billboard Hot 100. Most movie-soundtrack buffs will recall this song from Beverly Hills Cop.


This morning the Fun Cops of global risk management have apprehended the perma-bulls. Lest the bulls who don’t do mean-reversion forget that the SP500 is still up +77.1% from the March 2009 lows and, as Seger sings, “everybody wants into the crowded line.”


This morning’s headlines are multi-factor, multi-duration, multi-risk:

  1. Korea sees both civil and military casualties overnight as a 27-year old boy-king in the North makes a statement to the South.
  2. Asian stocks continue to breakdown with China closing down another -1.9% overnight, taking its cumulative decline since 11/8 to -10.5%.
  3. Sovereign yields 3-mth Spanish debt rocket to the upside in a terribly received bond auction yielding 1.74%! versus 0.95% prior.

What does this mean? What do we do? I think those of us who have seen the confluence of the following Top 3 global macro factors colliding for the last month are already positioned:

  1. Global growth is slowing
  2. Global inflation is accelerating
  3. Interconnected risk is compounding

There are plenty of other risk factors causing a Global Shakedown in the immediate term TRADE lines across our interconnected global risk management model (Quantitative Guessing, Financials freak-out, Yield Spread compressing, etc.),  but before we revisit the aforementioned Top 3, let’s look at those breakdown lines in some of the major country indices:

  1. SP500 Index = 1,997
  2. Dow Jones Industrial Avg = 11,199
  3. China’s Shanghai Composite = 3,008
  4. Hong Kong’s Hang Seng = 23,902
  5. India’s BSE Sensex = 20,386
  6. UK’s FTSE = 5,792
  7. Spain’s IBEX = 10,591
  8. Italy’s MIB = 21,181
  9. Brazil’s Bovespa = 70,929

In risk management speak, we call this Geographical Risk Factoring. Weakness in one country doesn’t always interconnected risk make in others. However, sustained weakness across geographies on our most immediate-term risk management duration (TRADE) is usually a very early signal for global risks to compound. These risk factors include: Style Factoring, Size Factoring, Liquidity Factoring, etc…


I’m not saying this market is going to crash today. I’m simply saying that the probability of a correlated and compressed-crash continue to climb. To a degree, this has already happened in Chinese and Spanish equities (down -10.5% and -9.5%, respectively, from their recent peaks in very short order). Again, these are equity market signals. But the equity bulls will have a hard case to make that the Mr. Macro Bond Market has been flashing anything bullish for the last three weeks.


Back to my Top 3 fundamental risks:

  1. Global Growth Slowing – After seeing broad based slowdowns in Asian Q3 GDP reports yesterday (Indonesia, Malaysia, Thailand), this morning South Africa reported a sequential slowdown in Q3 GDP to +2.6% (vs +2.8% last quarter).
  2. Global Inflation Accelerating – The good news here is that post Bernanke’s QG = INFLATION experiment taking plenty of commodity prices at or above all time highs, prices have come down in the last 2 weeks. The bad news is that the global inflation genie is out of the bottle and she’s hard to stop. Consider this Bloomberg News quote from a Chinese noodle shop dude this morning: “Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, ower Liu Heliang says meat and vegetable prices have climbed 10% in a year and staff wages are up 40%.”
  3. Interconnected Risk Compounding – review all of the factoring I have gone through so far. In the US we think it all equates to Jobless Stagflation.

Now a bull could say that Germany’s GDP growth of +3.9% for Q3 was outstanding on both a relative basis to the EU (and the US) and on an absolute basis as the Germans continue to drive exports into a friendly Chinese relationship (Exports up +2.3%). I’ll agree with that. That’s why we have a 6% position in our Hedgeye Asset Allocation Model to German Equities (EWG).


While we have plenty of short positions to express the Global Shakedown risk (see my Early Look Note from November 8th titled “Tightly Squeezed” where we published our top 15 short ideas across asset classes), there are some things that we really like on the long side (alongside Germany) on a day like today:

  1. Long the US Dollar (UUP)
  2. Long the Chinese Yuan (CYB)
  3. Long Gold (GLD)

From yesterday’s price levels, I also think a 64% position in Cash is the right position to be in. Most asset managers will quibble with that for obvious reasons that are structural to their business models, but I really think the better benefit of the doubt this morning should go to the Thunder Bay Bear.


“Shakedown… Breakdown…Takedown… Everybody wants into the crowded line…”


My immediate term support and resistance lines  for the SP500 are now 1172 and 1197, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Global Shakedown - fire

Early Look

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Never Bet Against Oprah

Oprah is at the forefront of a major re-launch of one of Nike’s best technologies in a decade – one that will finally get t he attention it deserves. Good for Nike. Great for FL.


Even though her show starts after the market closes, I do not watch Oprah. But 7.4 million (mostly female) American consumers do. Every year, thousands of products arrive at HARPO studios around the holidays for Oprah to pick her list of ‘Ultimate Favorite Things’. Last year she downplayed higher-priced items due to the recession. But this year the list is in full force. (ie, Oprah loves the iPad. Surprised? I didn’t think so…).


Two of the items caught our attention in particular.


Lululemon: The first item is a pair of Lululemon pants that offer more flexibility (in usage) that than the standard ‘Down Dawg’ and doubles as everyday ‘around town’ pants. Also, in Oprah’s words, “I’ve got to tell you, anything that cuts your but in half should be your favorite thing too.”  It’s also notable that the model wearing the pants was wearing a pair of Nike Free. That brings to the second item…


Nike Free is made the cut and is staging a big comeback. I mean REALLY big. This is a fairly old technology in that it came out around 6-years ago as a way for elite runners to practice running as if they were barefoot on grass. But for several reasons, Nike chose to hold off from stepping the accelerator. That was in part because Reebok and Adidas were hemorrhaging share in the US, and Nike didn’t have to do a lot to see its share go from 37% to 48% (while Adibok went from 18% down to 7%). Heck, maybe the timing was not right.


Now what?

  • “Toning” has become a $1bn+ category. Nike might play down this category in public. But internally, they’re livid – as any winner would be after losing a match to a seemingly lesser opponent.
  • Has anyone read ‘Born to Run?” A truly exceptional book documenting how a Mexican tribe absolutely dominates the sport of Ultra-marathoning, and no, they don’t wear Air Max 360s. They run barefoot. A great read…I’d recommend it.
  • Let’s not forget about UnderArmour’s FW product. This is the year they hit stride.


So all of a sudden, Nike has 2 stronger large competitors, mid-and small size competitors like New Balance and Newton running, plus some Asian imports like Anta and Li-Ning, and too top it off, they missed growth in a category that could and should own. Yeah… not good for job stability if you’re in charge of Running at Nike.


But does that mean that Nike will bow to the pressure and become more mainstream? No!!!


What you should expect is that Nike will go full force with its Free technology.  Will it be the same ol’ product as 5 years ago? Nope. They will do to the same thing to the e-reader that Apple did with iPad in the wake of Kindle/Amazon’s success. You can’t even mention Kindle and iPad in the same sentence without it sounding strange. That’s what Nike will do with Free. It will hit in spring en’ masse, and should start showing up in orders in full force by holiday. Most tools and molds are already amortized, so margins will be solid.


Yes, this helps Nike. But Retailers like FL should be the biggest winners.


Never Bet Against Oprah - banner


Never Bet Against Oprah - lulu


Never Bet Against Oprah - nke


Bullish Buck Breakout



We can be as patriotic about a position we are pushing as the next firm. After being short the US Dollar from June 7th to November 3rd, we’ve been long it since November 4th.  THE question now is can a bullish TRADE become a TREND?


In Hedgeye speak, a bullish immediate-term TRADE = 3 weeks or less and a bullish intermediate-term TREND extends itself to a thesis with a duration of 3 months or more. The current global short squeeze for US Dollars is 4 weeks in the making (this is the 4th consecutive week where the US Dollar Index is up on a week-over-week basis), so the question now is do we book a nice TRADE or make the case for the TREND.


Since US Dollars are priced relatively to other dysfunctional fiat government currencies like the Euro and the Yen, the good news for US Dollar bulls is that there’s always a case to be made for continued relative weakness in the competing currency basket. Admittedly, the European Sovereign Debt news-flow is overshooting to the bearish side at this point and we’re positioned to book part of that TRADE.


We covered our short position in the Euro (FXE) today as it is finally immediate term oversold. We have not, however, closed out our US Dollar (UUP) position as we continue to think that the Pain Trade is to the upside.


The Fundamentalist’s next question on why should be what’s your catalyst? My answer = PRICE. Yes, when immediate-term price momentum starts to morph into a potential intermediate term TREND, price can be the most important catalyst. The conclusion is that simple – you just need to get the timing right.


From a pain threshold perspective, one critical PRICE line to monitor from an intermediate term TREND perspective = $79.71 (see the chart below). If the US Dollar can close above and confirm what was TREND line resistance ($79.71) as newfound support, I may be knocking  at your door in Connecticut for a Thanksgiving caroling of the Canadian version of God Bless America.


Go US Dollar!



Keith R. McCullough
Chief Executive Officer


Bullish Buck Breakout - 5

Positive Family Footwear Trends Mirror Athletic

With the majority of family footwear retailers reporting this morning a few things are clear, boots are working - again, traffic’s improving, and comps are rivaling what we saw in the athletic channel last week. With PSS the last to report coming out next week, the read-through is unquestionably positive. Comp trajectories suggest our prior estimate of -8% comp in Q3 is simply too low at PSS. Here are our key callouts both at the channel level as well as by retailer from this morning’s calls:


Family Channel Callouts:

   - Consistent with what we saw in the athletic channel, EPS beats across the board with upward revisions to guidance.

   - Inventory build ahead of sales growth at all 3 companies in the channel, which better positions each to capture Q4 sales 

     strength compared to chase mode several were in last year. Also embedded in inventory growth is higher toning related

     inventory that accounts for more than 50% of inventory growth at some retailers (i.e. BWS & SCVL).

   - Comps slowing more modestly on 1yr basis in 2H reflecting a substantial acceleration in the 2yr

   - Early reads for Q4 reflect accelerating trends even from Q3 levels

   - Traffic improving (up 6% at DSW; +2.5% at SCVL, and up LSD as BWS)

   - Boot comps up +10% on a +47% last year at DSW, 40%+ at SCVL confirms trend remains robust

   - Better than expected BTS sales across the board appears to have legs into Q4

   - Promotional environment has and continues to remain more benign compared to last year



DSW: EPS of $0.79 vs. $0.75E ($0.60 last year)

Sales +10%

Inv +15%

  - Better than expected sales through first 3-weeks of Q4

  - Outlook:

  • Raised EPS to $2.30-$2.40 (was $2.20-$2.30)

  - Add’l gross margin compression expected in Q4 against significantly more difficult comps (+850bps)

  - SG&A leverage largely due to lower bonus expense compared to last year

  - Inventory per sq. ft. up 13% vs. down 11% last year so up modestly on 2yr basis

  - 2yr comp (9%+ in Q3) accelerating even higher so far in November

  • Traffic up 6% in stores (.com up 22%)
  • By category: +10% in women’s; +6% men’s; +9% athletic; +19% in accessories
  • Boots posted a +10% comp on a +47% last year

  - DSW Rewards a factor in driving sales growth with 87% of sales YTD part of program – 4mm accounts added this year

  - Now have nearly 20% of stock on replenishment system helping to increase conversion rates by 4% at the store level

  - Nike assortment expanded to include men’s running in Q3 as company broadens into more athletic

  - Toning still accounts for ~2% of total sales; unit sales consistent with 1H reflecting lower ASPs

  - Bigger focus looking forward is lightweight footwear

  - Store growth:

  • plan to open 20 new stores next year
  • 3 in smaller markets that co. has previously avoided, if successful equates to additional 50+ market opportunity
  • Seeing ‘a lot of deals’ coming up for attractive real estate opportunities – positive chg on the margin

BWS:  EPS $0.45 vs. $0.30E ($0.42 last year)

Sales +14.5%

Inv +20%

 - Better than expected BTS sales driven by athletics, dress, and casual styles

 - Less promotional activity than last year (19 fewer BOGO days)

 - Stronger initial margins in mid-tier and mass channel

 - Most significant growth at wholesale up +34% in a decade

 - E-commerce up +14%

 - Comp up +10.6% on +4.7% last year at Famous Footwear

  • Traffic up LSD and AUR with double-digit increases in conversion
  • Increases across all categories and regions
  • Women’s up HSD; Men’s up MSD; Kids & Acc’s up LDD
  • Toning accounted for +4.5% of comp (most over-indexed of family channel peers)
  • Boot and dress shoe demand drove sales at Via Spiga and Vera Wang up over 50%+

  - Sales/ sq. ft. up to $184 vs. $164 last year edging closer to goal of $200+

  - Toning accounts for ~3/4 of inventory growth in Q3 with core inventory up only +5.6% excl. toning

  - 30% of customers purchasing toning product new to FF; 1/3 of which have bought other product

  - Toning category expected to represent 6%-7% of volume in Q4.

  - Comps Q4-to-date trending up HSD

  - Wholesale backlog up +25% reflecting positive forward demand

  - Strong top-line key to offsetting $17mm after tax cost ($0.25 in EPS) related to higher incentive comp and marketing

  - Net store closings continue with 14 locations vs. opening 4 in the quarter

  - Outlook:

  • FY10 EPS to $1.00-$1.05 vs. $0.90E
  • Initial outlook for FY11 - Famous Footwear same-store sales growth in the low to mid single-digit range;

GCO: EPS $0.77 vs. $0.59E ($0.49 last year)

Sales +19%

Inv +25%

  - Comp up 9% on -2% last year

  • Up +11% through first 3-weeks of November
  • By seg: Lids +13%; Journeys +9%; Johnston & Murphy +7%; Underground Station +3%
  • Johnston & Murphy one of strongest qtrs in years driven by casual business and higher full-price selling
  • Slow start to boot sales in October – accelerating in November

  - Mix shift towards casual away from dress continues


SCVL: EPS $0.70 vs. $0.66E ($0.59 last year)

Sales +6.7%

Inv +12%

  - Sales trends by category and region all positive during the quarter

  - Comp up +7.2% on +10.2% last year

  • Both traffic (+2.5%) and conversion rates increased
  • Would have still been up MSD excl. toning
  • Women’s non-athletic up MSD driven by strong sandals selling at higher rates, men’s up MSD as well
  • Adult athletic up HSD driven by running up 20%+
  • Boots up double-digit in first 2-months of Q3, trended down in October, back up 40%+ in first 2-weeks of Nov.
  • Toning $$s down in Q3 though pairs remained flat sequentially

  - More than half of inventory build due to toning (up only MSD ex toning), aged levels at all-time lows

  - Still expect to ramp store openings in FY11 to 20 stores from 10 this year – mostly in existing markets

  - Outlook:

  • Q4 EPS of $0.30-$0.32 vs. $0.25E
  • Comps +4%-6%
  • Expect strength in boots to increase throughout the holiday season (Nov & Dec strongest months)
  • Also expecting continued strength in athletic and toning categories

Positive Family Footwear Trends Mirror Athletic - Comp Table 11 10


Positive Family Footwear Trends Mirror Athletic - Comp 1yr 11 10


Positive Family Footwear Trends Mirror Athletic - Comp 2yr 11 10


Positive Family Footwear Trends Mirror Athletic - FamFW SIGMA 11 10


Casey Flavin


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