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Not So Fast: Initial Claims Hit YTD Lows Falling 34k, But They Fell 39k This Week Last Year Too

The headline initial claims number fell 34k last week to 407k.  Rolling claims fell to 436k, 7.5k lower than the previous week.  For both series, today’s report is a new YTD low and the lowest level since July 2008 – certainly positive at face value. It is worth noting that during this week last year, claims had a comparable size improvement (down 39k) only to then unwind that improvement in the following weeks (see charts below for reference).  We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate. All that being said, on the margin, today's data is positive.






Yield Curve

We look at the yield curve as a proxy for industry NIM tailwinds or headwinds. The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. After falling sharply for two quarters, the 2-10 spread has stabilized thus far in 4Q, rising 6 bps thus far (average of QTD versus average of 3Q).  Yesterday’s closing value of 231 bps is down from 238 bps last week.






The table below shows the stock performance of each Financial subsector over four durations. 






Joshua Steiner, CFA


Allison Kaptur

Cost Pressure Perspectives From the Horses Mouth(s)

Over the past couple of weeks we’ve listened to numerous retailers and manufacturers of all types address the issue of inflation and cost pressures.  While it’s 100% clear that cotton has risen to new heights, wages are on the rise, and inflation across a wide range of product categories is clearly in sight, how companies are proactively planning their 2011 production and pricing plans remains up in the air. 


The following are excerpts from a myriad of conference calls all centered on the topic of product cost inflation.  Interestingly, there is a wide range of strategies being employed to deal with cost pressures.  These range from “wait and see” to “we’re planning to increase prices to mitigate costs”.  The consensus is that prices are on the rise.  The reality is, every company is taking a slightly different and not always obvious approach to the first major influx of inflation to hit the sector in decades.  Read on to see which companies are letting the market dictate their next moves and which are using the dislocation to their advantage.




URBN on pricing cost increases:


We always develop our pricing structure based on supply and demand. We never base it on the cost of product. That's a dangerous thing. So, if we have something that we have alone in the market and there's a high demand, then we can charge a lot for it. If we have something that's kind of towards the middle or the end of the product lifecycle and it's ubiquitous in the market, then we have to be more competitively priced. So, it's really a function of economics and not product cost.


DLTR on cost pressures:


The margin really is in our power. We are still finding success in planning our assortments.  We have not seen overall inflationary pressures. Cotton is at record highs I think. It is extremely expensive. But we are not in the apparel business. We saw a few kitchen domestics and that type of thing, so it's not a big issue for us. But we do see some of the commodity prices like cotton going up. But our experience has been that our margins have actually been increasing in our sourcing out of China.


PETM on inflation:


Right now we are not experiencing any inflation. We haven't this quarter. And from a go forward perspective just looking for the next three to six months and speaking with our vendors, even though you are hearing a lot of things about commodity price increases, we are not seeing it in the prices coming from the vendors. We are not expecting it for the next six months. A couple of reasons for that. One, we think the vendors have been able to manage it, and are a little bit anxious to pass that on if they are seeing those price increases, passing it on to both the retail and the consumer -- some of what they learned in 2008. So they are reluctant to do that for now.


ROST on uncertainty in the marketplace:


The recent buying environment has been slightly more favorable as a result of Asian supply chain disruptions and erratic sales patterns at retail.  This favorable buying has resulted in a year over year increase of 500bps in the company’s pack-away levels. 


It is kind of hard to predict. I mean what is going on in the apparel manufacturing cycle is in the early stage so we don't exactly know how this is going to land. But periods of disruption in pricing create uncertainty in the whole supply line, creates some uncertainty in mainstream retailing and historically has been good for us in access of product.


AEO on product costs:


There are clearly pressures in the marketplace with sharp increases, primarily in cotton and, to a lesser degree, labor. For the second half of 2010 and spring 2011, costs were held flat, however, we expect modest pressure for summer product. Beyond June, it is still too early to forecast. Importantly, we are doing everything possible to minimize the impact. For example, we are consolidating vendors and fabric purchases and leveraging our volume to negotiate better costs.  Additionally, we continue to move production to the Western Hemisphere, which has been advantageous to cost, transportation,  and increased efficiencies. What we absolutely will not do is lower the quality or fashion content.


LTD on cotton:


Also importantly cotton for us, as you know, is a lot less significant than it is for a straight up apparel company. With that said, it does have an impact, particularly in the Victoria's Secret business. We don't expect a big impact this fall. You might

see some beginning in the spring. But again, for the overall Company, not a big impact as compared to some others.


PLCE on cost pressure:


There has been a lot in the news lately about the significant cost increases in Asia, which are expected to impact apparel retailers in 2011. We were able to significantly mitigate the cost increases for the first half of the year, through product cost engineering, significant mix changes, and selective price increases. However, costs have continued to escalate, particularly cotton prices, and we now expect more pressure in the back half of 2011.  We have a diversified sourcing base, which gives us some flexibility in shifting fabric orders, as well as production, to countries that have less inflationary pressure. We're working diligently to mitigate the impact for our customers, but if cotton prices remain where they are, which appears likely in the short term, there will be an impact on the product pricing throughout the industry in the back half of the year. We'll know much more after we complete our 2011 back-to-school buy over the next months, and we'll provide further updates in March, when we announce our fourth quarter earnings.


BONT on sourcing:


We've had no increases this fall of 2010, and spring has gone up on about 10% of our merchandise that we buy, and private brand has gone up about 5% to 8% depending on the item. And it's mostly cotton-related that gave us about a 2% impact in total of our private brand for spring.


For fall, we are hearing about price increases. There's lots of drama that changes on a weekly basis. We have big swings in costing, mostly cotton. And again, apparel prices appear to be going up, as well as textiles. We've had a lot of our overseas vendors here in the first week of October to partner with us, specifically to attack this issue about how we take costs out, and help mitigate the cost increases.


We then had our agent, Connor, here actually the second week of November, to follow up specifically to address this issue. Part of the thing that we do is about 40% of our private brand is produced in China, 12% in Vietnam, 17% in Jordan, and 12% in India. So we have been moving away from China, where most of the issue is. And we actually have 25% of our merchandise is produced in duty-free countries of Jordan, Africa and Nicaragua. Now that's the private brand piece. From the domestic market, we haven't really seen the big increases for spring, and we really won't be placing the fall businesses until the first quarter. So the only thing I can really comment about is our own private brand. But from the market, we are hearing the same drama of prices going up.


WSM on cost pressure:


We have seen increasing pressure on cost, particularly this last month, both raw materials as you all know, and I'm sure aware of the cotton prices, and then also labor rates in Asia. The good news is we've been very proactive in cost containment efforts, and are still in the early implementation stages of some of these efforts, and I mentioned them earlier, but I'll just bring them back up again. So, both from a network design perspective, also containerization and packaging reengineering. So yes, we see the  pressure, obviously, and we are building strategies to combat it, and to continue to improve our profitability.


PVH on rising costs:


Sure. It's an issue that the entire industry is dealing with. We talked about that our spring costs were going up in the 5% to 6% range. Clearly, that dramatically accelerated for fall. We haven't priced for. We haven't [costed] it yet. It's not just the course of the economy, it's really much more of a supply and demand issue as these developing countries, which were producers are now also becoming consumers. And there is more demand for product and there's not new places to go. There's not another China.


There's not -- duties have come down. The apparel industry has gone through 15 years of product cost deflation. The Calvin Klein Jean today going out the door at $49.99 to $59.99 in the United States was going at a similar price in 2000. So, there just hasn't been any inflation in the category. That's going to change. Our strategy is to raise retail prices.


The way the business model works we are raising MSRPs. We're re-sourcing product. We're managing the content of product. We're managing how we produce product, (inaudible). So we are doing everything possible to manage the cost side of it and on the retail side for a brand like Calvin and Tommy, I think there is significant price elasticity and it won't be much of a significant issue for us to raise prices $3 on average, it gets more of a challenge with our more moderate brands like Van Heusen and IZOD and ARROW, when you are hitting key opening price point -- hitting key opening price points. The issue there will be, it's clear to us, we've talked to every retailer, our (inaudible) everyone will be raising MSRPs and prices and then the question will be is, how the consumer reacts to that. So we are being prudent by how we plan that on a business-for-business basis, where we will probably plan margins down but overall we have seen margins based on our mix of business going forward continuing to grow much faster internationally that has higher margins are Calvin and Tommy businesses that have higher margins that should continue as we go forward. Yes.


DBRN on price increases:


We continue to work to address areas of concern, such as price increases for material, labor and piece goods. This created challenges for all retailers. We are taking a thoughtful approach at our three divisions and looking at brand appropriate ways to address these increases. Justice has already implemented a mid single-digit price increase on the average for the fall, which we intend to maintain for the spring. Dress Barn and Maurice's have held prices flat for the fall and anticipate being able to do so for the spring without impacting margin. Instead of price increases, in some cases we are sharing these increases with suppliers while in other cases we are utilizing other cost savings techniques, such as changing the fabric content and the detailing of our merchandise. Unfortunately, it appears to us these price increases are here to stay and we will continue to address them for next year's fall season.


ANN on three areas of opportunity to mitigate cost pressure:


First, as it relates to advanced commitments, consistent with the first half activity, we are making meaningful commitments on a significant portion of our key core fabrics. Second thing is we are aggressively looking at opportunities to procure off peak production. That's a strategy that we have historically utilized within the factory outlet channel and we are rapidly expanding that across the full price channels. Third, strong vendor partnerships. I cannot emphasize that enough. It's a tremendous benefit to us as we manage through these challenges. And then also just value engineering the product where it makes sense. We have our designers and our merchants on the ground in Asia working directly with our vendors and our factories, and we continue to strengthen our raw materials trim staff in Asia to ensure that we have flawless execution in this area. From a costing perspective, while we know the situation is clearly more challenging than we've seen, we believe we are approaching this in the right way

and that we are doing everything in our power to mitigate the costing pressures for the back half of 2011.


HIBB on minimal impact of price increases:


Are you seeing any -- are you worried at all about the increase in cotton prices? We've seen a little bit of that. We don't really sell a ton of cotton, so we really don't think overall it will have a major impact to

us, but we have seen some things for spring on cotton prices.  And you think you'll be able to pass those price increases on through?  Yes, it's such a minimal part of our business.


PSUN on passing cost increases on to consumers:


Like any apparel manufacturer or retailer, there are going to be some very real challenges in sourcing and product costs that we are going to have to deal with, that will have an adverse impact on our merchandise margins, and in today's environment, we are not expecting that these cost increases can simply be passed along to consumers, across the board. We're going to have to be creative and diligent throughout the supply chain, from factories to brands, to achieve reasonable solutions that can mitigate these pressures. It is still too early to know the full effect of these changes, but we are committed to working aggressively to try to maintain our gross margins next year.


GCO on lack of clarity on price pressures:


We see cost pressures arising out of the labor and capacity issues in China that may possibly impact next year. Although it is not all that clear how it will play out, we believe our vertical and wholesale businesses, Johnston & Murphy and

license brands, are most exposed. They naturally are pushing to get corresponding price increases to anticipated cost increases which will be challenging in this economic environment.


Of course we compete on the other side as well and our branded retail businesses will look to their vendors and suppliers to absorb much of the increases.


DSW on following the marketplace’s lead:


Costs are going up. There is no question, and we're going to have to look at specific places where retails may elevate but our retails will elevate in the same way that you're going to see retails elevate across the entire industry. So we're not going to look out of proportion or out of synch with what's happening across the entire retail sector. What we're going to do is we're going to work closely with our manufactures. We are looking to mitigate those costs as best we can with cost increases but the one thing I don't want to do is I do not want to compromise quality in our product and just lower cost prices and put a less than stellar quality product on our selling floor. The first person that will vote on that will be the customer and you'll get hit pretty bad if you do that.


Eric Levine



Some interesting divergences in yesterday’s price action.


In quick service stocks yesterday:

  • Extremely light volume throughout the category with the exception of JACK
  • CMG and PNRA both up on low volume
  • JACK down 10% on high volume following a poor quarter with little in the way of a solution from management

In casual dining stocks yesterday:

  • More volume in this category yesterday with PFCB, TXRH, CHUX, and  MSSR all posting gains on strong volume
  • EAT also gained on the day, albeit on volume that fell below the thirty-day moving average, and has almost pared back the losses it suffered in stock price since its disappointing earnings release in late October. 
  • CBRL underperformed on the day following disappointing sales numbers in earnings along with conservative 2011 guidance released yesterday


TALES OF THE TAPE - qsr price

TALES OF THE TAPE - casual dining price


Howard Penney

Managing Director

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The Macau Metro Monitor, November 24th, 2010



Starting tomorrow, Galaxy will launch its Privilege Club, which "will be the only loyalty club in Macau to allow members to earn bonus points on every single dollar spent, be it on gaming, dining or hotel accommodations."

Thinking Quant

“I think a model works if it’s a useful way of thinking about things.”

-Emanuel Derman


Some of the “quants” make money. Some of them blow up. Thinking Quant is probably the most important shift I’ve made in my young investment career. I’ll always give Alec Litowitz at Magnetar credit for that. He helped me bridge the traditional long/short equity stock picking approach of the Dawson-Samberg era with some serious math.


That doesn’t make me a “quant.” However it ensures that I don’t confuse qualitative “channel checking” on Coach handbags with a repeatable risk management process. It makes me aware of quantitative facts that are occurring in this globally interconnected game of chaos theory. Awareness is important.


Emanuel Derman’s quantitative thought process was introduced to me in a book that I’ve cited in recent months called “Lecturing Birds On Flying” (by Pablo Triana). Goldman alums should be quick to ask me if I’m kidding – you don’t know Derman? (Derman ran Quantitative Strategies at GS from 1990 to 2000).


Nope, I didn’t know who Derman was and I’m thinking some of you don’t know who Gunner is either. That’s the most beautiful part of life – waking up every day knowing what you don’t know.


What some of the perma-bulls didn’t know about this globally interconnected marketplace is that there was an extremely high level of what we people who are sometimes Thinking Quant call Correlation Risk to the immediate-term price movements in the US Dollar Index.


Since we bought the US Dollar (UUP) on November 4th, you can see what asset prices from Chinese stocks to commodities like Copper have done. If you didn’t know they had extremely high immediate-term inverse-correlations to a Buck that stopped Burning, now you know…


With the US Dollar up for the 4th consecutive week, it’s realized a mean-reversion move to the upside of +5%. Since we like to consider risk on a Duration Agnostic basis, here are the two levels that currently matter most for the US Dollar Index in my macro model:

  1. Immediate-term TRADE support = $77.31
  2. Intermediate-term TREND resistance = $79.71

After globally interconnected risk to an UP Dollar has been revealed, THE questions on reactive risk managers’ minds this morning is trivial. They’ll be hyper focused on the risk that’s occurred in the rear-view mirror. Can we see a Buck Breakout above the TREND line? And if we do, should we sell everything that’s been inversely correlated to the US Dollar for the last 3 weeks?


Fortunately, this is where both the myopic modeling quants run into the same problems as the channel checkers who saw none of this coming to begin with. I say fortunately because making what we call “the turn” on big macro moves is where the big bowls full of alpha start barking.


RULE #1 about immediate term Correlation Risk: it’s never perpetual!


What this means is that you effectively have to have risk management systems that refresh real-time or you run the risk of getting run-over. When Correlation Risk reverses, the Chuck Prince music stops, and the macro moves turn quickly.


The best way to illustrate this investment point this morning is to refresh the THEN and NOW looks I gave you in my “Stepping On Cocaine” Early Look note from November 16th where I outlined the immediate-term inverse correlations vs. October 16th:


THEN (immediate-term TRADE correlations to USD on October 16th):

  1. SP500 = -0.80
  2. CRB Commodities Index = -0.88
  3. Brazil’s Bovespa Index = -0.92
  4. Oil = -0.91
  5. Gold = -0.96
  6. Copper = -0.95

NOW (immediate term TRADE correlations to USD this morning):

  1. SP500 = -0.58
  2. CRB Commodities Index = -0.51
  3. Brazil’s Bovespa Index = -0.91
  4. Oil = -0.56
  5. Gold = -0.37
  6. Copper -0.38

In other words, for the immediate-term DOLLAR UP TRADE, the easy risk management money has been made and now these immediate-term correlations are starting to burn off.


Thinking Theoretically, this makes a lot of sense to me. Using 8 centuries of data, there has never been a wealthy and prosperous country that has sustained living off of plundering their citizenry’s savings via a debauchery of their currency. Strong currency is good. In Thinking Quant, I see a US Dollar that’s starting to look strong like bull.


My immediate term TRADE lines of support and resistance for the SP500 are 1171 and 1193, respectively. I currently have a ZERO percent allocation to US Equities and a 6 % allocation to German Equities (which, incidentally, now have a POSITIVE correlation to the USD of +0.29).


Best of luck out there today and Happy American Thanksgiving,



Keith R. McCullough
Chief Executive Officer


Thinking Quant - quant


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













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