“Everyone has a plan 'till they get punched in the mouth.”
- Mike Tyson


There have been a lot of interesting Mike Tyson quotes over the years, some fit for print, others less so, but this one seems apropos for the times. The Fed tells us they have a plan, and they’re implementing it. So far, the markets seem to like it. Let’s see how their plan fares once they get punched in the mouth.


This summer we introduced our bearish thesis on housing with our 100-page report entitled: “How Low Will Housing Go in 2H10 and 2011”. In that report we laid out our three separate home price models: our supply model, our demand model, and our combination supply & demand model. The output of those models forecast home price declines ranging from high single digits to 20%+ over the next 12-18 months. How have we fared so far? As the chart at the end of this note shows, the four major home price series that we track (Case-Shiller 20 City, Corelogic, FHFA, and Existing Home Sales Median Home Price) are all heading south. After peaking in the April/May timeframe on the strength of the tax credit, three out of four home price series are now solidly in negative year-over-year territory. The lone holdout, Case-Shiller, is a 3-month rolling average, which is why it lags the other series in reflecting the degree of slowdown. The next few months of Case-Shiller data will show a comparable negative trend.


For reference, the Corelogic series is the series now used by the Federal Reserve. How has the Fed’s preferred series fared? According to Corelogic, home prices have rolled from being up +4.3% YoY in May 2010 to being down -2.8% YoY in September 2010, a negative -7.1% swing in four months. Looking month-over-month, the Corelogic series was down -1.8% sequentially in September (the most recent data available), which translates to the fastest rate of decline since February 2009.


The supply and demand imbalances were at the root of our housing call this past summer and nothing has changed on that front. The market is more dislocated today than it was when we made the call in the summer. At the time we made our call in June there were 3.99 million homes on the market for sale and existing home sales were running at a rate of 5.37 million, which equated to 8.9 months of supply. Today, there are 3.86 million home on the market for sale (October), while existing home sales are running at a rate of 4.43 million, which equates to 10.5 months of supply. Existing home inventory peaked at 12.5 months of supply in July. Based on our conclusion that home prices take one year to fully respond to supply and demand imbalances, we would expect to see July 2011 be the low watermark for year-over-year price trends in housing. The more important takeaway, however, is that between now and July 2011 the trends should continue to get worse. While it is possible that the market’s “bad news is good news” mentality will persist and ongoing weakening in home prices will simply translate into greater and greater expectations for further quantitative easing, we continue to think that bad news is simply bad.


Another point to consider is the impact QE2 is having on the housing market. While recent demand statistics have been modestly upbeat (i.e. October pending home sales up 10.4% month-over-month), the reality is that mortgage rates have backed up sharply in November. The Bankrate 30-year conforming mortgage index has ballooned from 4.20% a month ago to 4.70% yesterday. For reference, a 50 bp backup in 30-year rates has a 5% negative effect on affordability.


It’s also worth pointing out that no amount of stimulus or quantitative easing seems to increase banks’ willingness to underwrite residential mortgage loans. In the most recent Senior Loan Officer Survey released November 8, the net percentage of lenders tightening access to prime mortgage credit rose to +9.3% from -5.5% quarter over quarter meaning that the average American is now finding it more difficult to get a mortgage than they were over the summer. The trend was similar for access to nontraditional mortgage credit: +9.5% of respondents reported tightening standards, up from +4.5% last quarter. This isn’t helped by the fact that banks are currently engaged in trench warfare with Fannie & Freddie as well as the entire private-label MBS universe over mortgage putbacks. Further, there are 8.5 million borrowers who have either been foreclosed or are currently non-performing on their loan. This is a large slice of the overall homeownership pie that has been semi-permanently eliminated from the buyer pool (7 years for most lenders to look past a mortgage default). All of this has cast a pall over banks’ willingness to underwrite new mortgages.


Many investors forget just how slippery the slope of negative home prices can be. Falling prices don’t happen in a vacuum: they have two insidious offshoots. First, they generate a tangible negative wealth effect. For reference, for all the excitement resulting from the upward move in equities recently, consider that as a rough rule of thumb, every 100 points of upside in the S&P is roughly equivalent to a 5-6% rise in home prices based on there being total direct equity wealth of $10.8 trillion and total residential housing wealth of $17.1 trillion. That said, the wealth associated with housing is much more broadly felt as 65% of American families are homeowners, a far higher proportion than those with material equity wealth. Second, negative home price trends increase pools of underwater borrowers. We have shown that there are presently 11.3 million borrowers (20% of all borrowers) who are underwater. 4.9 million of whom are underwater by more than 25%. A 20% decline in home prices from here would increase those who are underwater to 21.9 million (46% of all borrowers) and those underwater by 25% or more would rise to 9.4 million (20% of all borrowers). Laurie Goodman, a Senior Managing Director with Amherst Securities, one of the leading providers of mortgage data analytics, has shown that loans with LTVs greater than 120% are currently defaulting at an annualized rate of 19.1%, while those with LTVs between 100-120% are defaulting at an annualized rate of 11.3%. Those are scary statistics when one considers that there could be 22 million borrowers in a negative equity position with a 20% drop in home prices from here.


The real question is, what will a 20% drop in home prices feel like for the markets and for the consumer? Our guess is that it will feel a lot like getting punched in the face by Mike Tyson.


Josh Steiner

Managing Director


GETTING PUNCHED IN THE FACE - early look home price compendium

Printing Price Volatility

This note was originally published at 8am this morning, December 06, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If the government owns all of the printing presses, it will determine what is to be printed and what is not to be printed.”

-Ludwig von Mises


On a flight to Calgary, Alberta yesterday I was reviewing “Economic Policy – Thoughts For Today and Tomorrow” by Austrian economist, historian, and philosopher Ludwig von Mises. His book, published by The Liberty Fund, compiles the following 6 lectures that von Mises gave in Argentina in 1959:

  1. “Capitalism”
  2. “Socialism”
  3. “Interventionism”
  4. “Inflation” 
  5. “Foreign Investment”
  6. “Politics and Ideas”

This book is only 75 pages long and sits amongst the classics in my library. The deep simplicity that von Mises achieves in explaining complex macro-economic issues is unrivalled. I highly recommend it to anyone looking for the opposing argument to Big Government Intervention.


In the coming weeks I’ll refer to these lectures, quoting one of the founding fathers of libertarian free-market thinking whenever the opportunity presents itself. After watching a completely politicized head of the US Federal Reserve telling stories on 60 Minutes last night, one of those opportunities is now.


Post Ben Bernanke’s interview, the #1 headline on Bloomberg this morning should shock anyone considering this country’s constitutional underpinnings: “Bernanke Says Fed May Take More Action To Curb Joblessness”… One man, one ideology, one power to print money…


Before I get into what The Ber-nank’s professional politicking for additional Quantitative Guessing (otherwise known as printing moneys) entailed, let’s take a step back and re-read what the US Federal Reserve said most recently about its go forward QG2 strategy:


“The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."


In English, sans le Greenspan-esque obscurity, this means that the Bernanke Fed’s goals are:

  1. Fostering maximum employment
  2. Fostering price stability

Sounds nice, in theory…  but last week’s US Unemployment rate hitting a new high of 9.8% was an unmitigated train-wreck on point #1 and on point #2, never mind “price stability”… Ben Bernanke is fostering some of the highest levels of price volatility that modern markets have ever seen. How about fostering some accountability, dude.


Look at last week’s week-over-week percentage moves:

  1. SP500 = +2.9%
  2. CRB Commodities Index = +5.0%
  3. Oil = +6.5%
  4. Gold = +3.1%
  5. Copper = +6.1%
  6. VIX = -18.9%

Bernanke must be kidding himself, because he certainly isn’t kidding me. That VIX (Volatility) decline of -18.9% week-over-week came the week after the VIX rocketed +23.2% higher. At this point, he’s Printing Price Volatility in volatility itself!


Let’s go back to some of The Ber-nank’s key statements on 60 Minutes:

  1. On Growth – “we’re not very far from the level where the economy is not self sustaining…”
  2. On Employment – “it takes about 2.5% growth just to keep unemployment stable…”
  3. On Inflation – “fears of inflation are overstated…”

In response, I guess my first question is, according to who? The man’s macro-economic conclusions are littered with ideology and inaccuracy. Maybe it’s a blessing in disguise that Ben Bernanke speaks this academic dogma out loud to the world. After all, it’s better to remain a humble looking man who knows nothing about the interconnectedness of global macro markets and says nothing, than to open one’s mouth and remove all doubt.


Rather than take my word for it on this global Fiat Experiment gone bad, I can only hope at this point that the people of the world look at real-time market prices (price instability) and the outcomes of these Greenspan and Bernanke interventions on both the sustainability of growth and employment. The records speak for themselves.


As for a solution to this mess. I’ve said this before, but I’ll say it again – the first solution is to STOP – that’s it. Stop this man from doing what he is doing in perpetuating all-time highs in the price of the #1 food staple for 3 BILLION people (rice) and anything else for that matter that’s priced in the dollars that he is on a mission to debauch.


Finally, I’d like to submit a few passages from Ludwig von Mises 3rd lecture, called “Interventionism”:


“The idea of government interference as a “solution” to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism.” (“Economic Policy”, page 38)


“Is there a remedy  against such happenings? I would say, yes, there is a remedy. And this remedy is the power of the citizens; they have to prevent the establishment of such an autocratic regime that arrogates to itself a higher wisdom than that of the average citizen. This is the fundamental difference between freedom and serfdom.” (“Economic Policy”, page 39)


Stop. Listen. Re-think.


My immediate term support and resistance levels for the SP500 are now 1199 and 1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Printing Price Volatility - Bernanke EL PNG

Less Bearish: SP500 Levels, Refreshed



After seeing the SP500 close higher for 3 consecutive days, my bearish position in the SP500 goes from being right to wrong. In the very immediate term, we are bumping up against significant TREND line resistance (1225 is the prior YTD closing high) and our immediate term TRADE line of resistance is just north of that up at 1229.


It’s usually easier to see macro catalysts in the rear-view mirror. The market hammering the US Dollar lower on Friday (unemployment report) helped support the bullish bid to stock and commodity markets. I personally wasn’t aware that rock star of the Fiats was going to be on national TV on Sunday night pushing his inflation book, but my lack of awareness certainly doesn’t mean Bernanke appearing on 60 Minutes was going to cease to exist.


Today, the US Dollar Index is well bid. That could change with one fell swoop of Big Government Intervention. Remember, as Ludwig von Mises said, it’s always easier for conflicted and compromised politicians to print money than impose taxes on their political careers.


Immediate term downside support is down at 1201. If that holds this week, that’s bullish in the immediate-term.



Keith R. McCullough
Chief Executive Officer


Less Bearish: SP500 Levels, Refreshed - S P levels 12.6

Early Look

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Early data indicates 60% growth for December



The following table details table revenues and market share for the first 5 days of December.  Although very preliminary, based on the first 5 days of December, we project full month at HK$17.5 billion, up approximately 60% over December 2009.  As always, our estimate takes into account slot revenue and the number of weekend days and weekdays.  December 2009 is not exactly an easy comp as revenues in that month grew 48%.


We wouldn’t put much stock in the market share numbers since hold played a large role in the shifts and the data only represents 5 days.



Hedgeye Editorial: "Back to the Future"

Below is a real-time response from a retired Wall Street executive to America’s decision to maintain a bloated budget deficit. There are more reasons than just inflation that are driving up long term US sovereign yields.



Hedgeye Editorial

To: Keith McCullough

Subject: Back to the Future


Good morning –


God, Keith, they make me sick.  They, being the politicians.


The People spoke…..”Reduce the size of government. No tax increases to fuel more wasteful spending.”


As a response, the current Senate minority, supposedly on principle, said no to extending unemployment benefits unless there were offsets in the disgustingly bloated budget.


But, leave it to these monkeys. We now read this morning that, in order to secure a “deal” on extending the current tax regime, there will be an extension of unemployment benefits. Of course, sans offsets.


More of the same, the same, the same. It does not stop.


Yet, merrily we sing along as we get closer and closer to the precipice.


God save my grandchildren.


Warmest regards,



R3: L&T, Trust, AMZN, and Jimmy's Choos


December 6,2010



  • What a difference a year makes.  This year’s Super Bowl is shaping up to be a virtual car lot, with a whopping eight automakers scheduled to advertise during the most televised event in the world.  Interestingly, this compares to just six auto advertisements last year and five the year before.  Not only are automakers snatching up the $3 million per 30 second slots but they are also planning 2-3 ads each.
  • E-commerce appears to have significant legs, at least if you consider the following facts from a recent Ad Age/Ispos Observer survey.  While 70% of consumers are now comfortable making purchases online, only 50% are doing so.  Furthermore, of those actually shopping online, only 25% of their spend makes its way to the internet.  Clearly much more growth to come from the world of online shopping.
  • According to a Harris Interactive poll, supermarkets and hospitals rank as the most trusted industries to consumers out of 17 industry groups.  Interestingly, while still holding the top spot, supermarkets are highly trusted by 29% of consumers, down substantially from 40% in 2003.  The decline is second only to banks, which lost 15% of trusted consumers over the same time frame.



Cool Temperatures Boost Outerwear Sales - November’s big chill heated up sales for outerwear manufacturers and retailers, and they’re looking for more of the same from Mother Nature. After a warmer than usual start to fall in much of the country — an average October temperature of 56.9 degrees — the weather turned more wintry. Although there were a few days of springlike readings this week, weather forecasting firm Planalytics said that last month was the coldest in the U.S. since 2002 and Black Friday weekend was the coldest in three years. The combination generated an estimated 11 percent spike in outerwear sales compared w ith a year ago. Forecasters predict colder temperatures starting today. Planalytics reported that outerwear sales climbed in several cities, including Los Angeles, where temperatures were in the 40s and volume was up 90 percent over last year; the Seattle region saw a 43 percent increase, Cleveland, 39 percent and Boston, 21 percent. “It’s completely weather-dependent,” said Ken Giddon, president of Rothmans in New York. “When it’s cold, people buy outerwear. And men shop when they’re moved to shop.” Giddon said the outerwear business hasn’t been “truly exciting yet,” but in the past few weeks, he has experienced “nice action” with Spiewak’s $175 retro-inspired wool peacoat and jackets from Cole Haan. Dress overcoats in shorter, tighter models from Hugo Boss, which retail for $645, are also standouts. Stuart Segel, president of Mr. Sid in Newton Center, Mass., has seen an uptick in outerwear sales since the colder temperatures arrived. “The little leather we had we sold quite well,” he said. Coats in technical fabrics or waxed cotton finishes also connected with customers. <WWD>

Hedgeye Retail’s Take: Good timing for the weather to kick in after extremely tough compares with last year’s “perfect storm” of frigid temps that created the appearance of a slowdown.  This year is actually shaping up to be more traditional in terms of timing of outerwear purchases.  It was last year that was an anomaly.


FTC Supports 'Do Not Track' Guidelines -The Federal Trade Commission endorsed the idea of a “do not track” mechanism that would allow consumers to opt out of certain varieties of targeted online marketing that have gained popularity among retailers. The endorsement was one piece of a larger preliminary staff report on consumer privacy in which the commission proposed a framework it says would simplify and streamline online privacy protections for consumers. Among the issues addressed in the report is how consumer activity online can be tracked, stored and used by third parties to target ads to consumers. The commission said first-party marketing, where a company communicates directly with a user based on their purchases on its site, is not at issue. What could be affected by the FTC proposals are practices like retargeting, where consumer activity online is tracked and used to serve ads up to potential customers after they’ve left a site. Most retailers have started using retargeting in the last year because it boosts conversion by several points. So, for example, if a Web surfer were to visit The New York Times after browsing at Saks, she might see a display ad for Saks on the Times’ Web site. <WWD>

Hedgeye Retail’s Take:   Interesting twist for online marketers which stand to take a major hit if they’re no longer allowed to use “cookies” for retargeting.  Seems like this would be hard to enforce but nonetheless it may save consumers from seeing repeated ads from sites they recently browsed.  Ever wonder why you see repeated Under Armour ads after only visiting the UA homepage just once?  Now you know why.


UK Bans Reebok Easytone Curve Ads - The United Kingdom has banned print and TV advertisements for Reebok Eastytone Curve shoes, saying research the manufacturer submitted was either too limited or failed to substantiate its claims that the shoes improves muscle tone. The magazine ad featured headline text that stated "Reetone [sic] with every step. Get up to 28% more of a workout for your bum. And up to 11% more for your hamstrings and calves". Underneath was an outline of a woman with the text "28% gluteus maximus", "11% hamstrings" and "11% calves" written next to the corresponding parts of her body. The TV ad featured women walking, dancing, jumping, spinning around and standing, with the camera fixed on their bottoms and legs; all were wearing trainers. The voice-over stated "Reebok EasyTone. Helps tone legs and bum more than regular trainers. Reebok EasyTone with balanced ball inspired technology. Better legs and better bum with every step".   The U.K's Advertising Standards Authority received two complaints challenging the efficacy claims for the product and alleging they were misleading and could not be substantiated.  <Sports One>

Hedgeye Retail’s Take:  Score one for UK consumer protection.  Unfortunately in the U.S, advertising claims are harder to enforce. Ever wonder how “As Seen on TV” turned into a multi-million dollar business?  The ShamWow doesn’t exactly work as advertised.


John Lobb Debuts New Campaign, Styles John Lobb has plenty to celebrate — from a new campaign to a range of limited-edition styles. The Paris-based men’s footwear brand recently unveiled its spring ’11 marketing campaign, which highlights the 190 steps it takes to make one pair of shoes. shows the craftsmanship that goes into each shoe. From No. 2 (preparation) to No. 182 (hand glazing), the 190 steps illustrate John Lobb’s balance between traditional and modern shoemaking, said Renaud Paul-Dauphin, CEO and general director of the brand. “I like the contrast of modernity and the very iconic way of doing Goodyear-welted shoes,” he said. “It’s about a complex process that takes time — time to make it and be sure you can wear it for a lifetime. Our mission is to keep those [steps] alive.” <WWD>

Hedgeye Retail’s Take:   This campaign is truly worth checking out if you have any interest in learning about the lost art of making something by hand.  Now if only we had a similar site to chronicle the production of a $13 pair of shoes from Payless. 


Google punishes rogue e-retailers -Google announced this week that it had changed the way it ranks retail sites to ensure that abusive retailers don’t move up in natural search rankings as a result of consumer complaints posted on online forums. The search engine acted quickly following Sunday’s publication by the New York Times of a major article suggesting that an online retailer of designer eyewear,, was benefiting from the many complaints consumers were posting about the retailer’s poor service, profane language and threatening behavior. “Being bad to customers is bad for business on Google,” Amit Singhal, a Google fellow, wrote in a post to the Google blog yesterday. Singhal said Google had identified hundreds of merchants, including the one mentioned in the New York Times article, “that, in our opinion, provide an extremely poor user experience.” He did not specify how Google would treat those merchants or how it identifies bad retailers. But he said Google had already implemented a change to the way it ranks these retailers “and Google users are now getting a better experience as a result.” The newspaper article suggested that benefited from the many negative comments about it on consumer review sites— says there are more than 100 complaints about the e-retailer on its site—because those postings contained links from authoritative sites to, and that search engines like Google give credit for any link to a web site, regardless of whether the comment is positive or negative. <Internet Retailer>

Hedgeye Retail’s Take:  Surprised it took this long for Google to realize that “bad” shouldn’t be turned into something good.  Clearly the retailers were benefitting from “any publicity is good publicity”.  Good news for consumers getting sucked into deals that look too good to be true.


Lord & Taylor Confirms Yonkers Unit -  Lord & Taylor says Yonkers, N.Y., could just be the first stop on a new expansion trail. “Business has been very strong. We are looking to open new stores to expand our concept,” Richard Baker, chairman of Lord & Taylor’s parent company, the Hudson’s Bay Trading Co., told WWD. “We are working on a number of additional full-line stores, in addition to outlets, in existing markets and perhaps new markets.” He didn’t specify any potential sites. Baker, and Forest City Enterprises Inc., developer of the Ridge Hill mixed-use center in Yonkers, confirmed Friday that Lord & Taylor will open an 80,000-square-foot, two-level unit on the site in spring 2012. Yonkers marks Lord & Taylor’s first regular-price store opening in 10 years. Lord & Taylor now operates 46 units concentrated in the Northeast. There are also stores in Washington, Chicago and Detroit. Lord & Taylor opened its first two outlets this year. “Ridge Hill is located in a portion of Westchester with great demographics. We think it is very underserved,” Baker said. <WWD>

Hedgeye Retail’s Take:   Growth=IPO (eventually).


What's Next for Mindy Meads? - Mindy Meads, Aeropostale Inc.’s co-chief executive officer, herself chose to leave the company, market sources said. The disclosure Wednesday that Meads’ last day at the retailer is Dec. 15 surprised the investment community. Meads could not be reached for comment about the reasons for her departure. An Aéropostale spokesman said Meads will “pursue other interests,” and that she’s leaving the company with a “solid infrastructure” of merchants. Some sources said she didn’t always see eye to eye with former ceo Julian Geiger, who resigned earlier this year. Geiger, who remains as chairman, named Meads and then-chief operating officer and executive vice president Thomas Johnson co-ceos in February. The shared position is atypical, and sources said that Meads became less directly involved with merchandising, a role at which she excelled. Before Meads joined Aéropostale three years ago, boxy sweatshirts and traditional cotton T-shirts lined the store’s shelves. Meads infused the brand with a trendy sensibility while keeping prices low. <WWD>

Hedgeye Retail’s Take:   Not surprisingly co-CEO’s didn’t work out.  This was one of our top risks as it pertained to ARO beginning the day the succession plan was originally announced.


Jimmy Choo to Relaunch Men's Footwear - Jimmy Choo is re-entering the men’s footwear arena. Though the London-based luxury brand had previously offered men’s shoes (the line was discontinued in 2002), its multi-gender collaboration last year with H&M prompted it to embark on a new collection, set for fall ’11. “The H&M collaboration showed us that our brand is bigger than our business today and that there is a demand for the Jimmy Choo aesthetic in the men’s categories,” said CEO Joshua Schulman. “Creating a focused Jimmy Choo men’s shoe collection at the luxury level is consistent with our goal of evolving into a significant dual gender lifestyle brand across categories, channels and geographies.” The Italian-made assortment of about 12 styles will include dress shoes, moccasins, biker boots, sneakers and evening slippers in a variety of colors and materials. <WWD>

Hedgeye Retail’s Take:   Is there really demand for men’s Jimmy Choo’s or just the co-branded, cheaper collabs with H&M?  Sounds like yet another attempt to diversify ahead of another impending IPO.


Amazon invests $175 million in Groupon rival LivingSocial - While analysts await confirmation of rumors that Google Inc. will acquire Groupon, the  daily deal site’s principal rival LivingSocial announced yesterday that it secured a $175 million investment from Inc. LivingSocial also announced it raised $8 million from venture capital firm Lightspeed Venture Partners.  LivingSocial says it generates revenue of more than $1 million a day on average. It says it expects its 2011 revenue will surpass $500 million, No. 1 in the Internet Retailer Top 500 Guide, investing in LivingSocial is a clear sign the world’s largest online retailer intends to become a bigger player in both online daily deals as well as in local commerce, says Colin Sebastian, an analyst for Lazard Capital Markets who covers e-commerce stocks.  <Internet Retailer>

Hedgeye Retail’s Take:  Clearly a cheaper way to play the “Groupon” euphoria in an industry that has yet to consolidate and shake out all the fringe players.  Interestingly, this puts Amazon slightly closer to the physical world of retailing with the coupon site generally focused on local, real-world discounts.


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