R3: LULU, LVMH, PVH, Converse


December 9, 2010





  • According to SiteJabber, the following are this year’s most counterfeited brands:  
  1. UGGS
  2. Coach handbags + leather items
  3. Tiffany's
  4. Athletic jerseys
  5. Perfume
  6. Nike sneakers (Air Yeezy and Air Jordans)
  7. Ed Hardy and Juicy brands
  8. Watches (Rolex, Omega, Tag Heuer)
  9. North Face
  10. DVDs (especially box sets of TV series)
  • Merry Christmas IKEA employees!  In an effort to reward its employees for their hard work, the company handed out 12,400 bicycles for an early holiday gift.  Perhaps there is subliminal effort underway to lower healthcare costs by having employees bike to work?
  • With e-commerce up +200% yy at LULU – albeit on a small base, the company’s investment in e-commerce is certainly beginning to pay off with no sign of slowing. Not only has management targeted e-commerce sales in excess of 10% of total sales in the near-to-intermediate term, the company is also looking for a Head of e-commerce to take the business to the next level. It’s not easy maintaining 50%+ top-line growth, but with the company still underpenetrated at retail, expect LULU to continue to be one of the biggest beneficiaries of accelerating online shopping this holiday. 



European Retailers See Strong Holiday - Neither bitter cold nor worries about a debt and currency crisis in the Eurozone seem to have put a chill on consumer spending. Retailers and brand executives on the Continent cite a good kickoff to the crucial holiday sales period, particularly in premium categories. Executives throughout Europe cited strong demand for: Cold weather gear, given Europe has seen bitter temperatures and lots of snow; Accessories, including footwear, luxury jewelry and gloves and scarves; Men’s wear, especially knitwear, and Premium foodstuffs.“We feel the consumer is bizarrely serene,” said Jean-Claude Biver, chief executive officer of luxury watch brand Hublot. “This makes me think we are only partially in crisis. We are now in an economic environment where some people continue to suffer and others have emerged from the crisis, and I think the latter are starting to buy again. So I am not completely serene regarding Europe, but halfway serene, nonetheless.”Describing business as “excellent,” Biver is projecting growth of almost 20 percent next year. “We are extremely positive,” he said. “But 2011 could prove more difficult than expected due to the debt situation of European states.”<WWD>

Hedgeye Retail’s Take: Not to different from what we’re seeing here stateside, minus the positive boost from abnormally cold weather.  Good news for boots and outerwear brands with a European distribution focus. But like what we’re facing in the US, we’re going to need to see the Consumer show up en masse in 2011.


Vuitton Files ITC Complaint - Louis Vuitton Malletier SA and Louis Vuitton U.S. Manufacturing Inc. have filed a complaint with the International Trade Commission asking for an investigation of several companies for allegedly importing and selling counterfeit and knockoff handbags, luggage, accessories and packaging. Louis Vuitton alleged that five of the companies named were owned or managed by the same two individuals, Jianyong Zheng and Alice Bei Wang, both of Arcadia, Calif. Three of the companies named in the complaint were separate entities that purchased goods from the firms operated by Zheng and Wang, according to the complaint. The list of eight firms named in the complaint included companies in Guangzhou, China; El Monte, Calif.; Los Angeles, and Dallas. The complaint alleged the counterfeits and knockoffs are manufactured abroad and imported into the U.S. for sale.  <WWD>

Hedgeye Retail’s Take: The never-ending effort to curb counterfeiting continues.  The good news for LVMH is that US authorities are gung-ho on prosecuting.  China, not so diligent but getting there. 


PVH Enhances Dress Shirt Offerings - Phillips-Van Heusen Corp. is out to capture a larger portion of the high-end dress shirt business. The New York-based manufacturer has formed a new unit, the Insignia Dress Furnishings Division, to build its relationship with the better department and specialty store market and the first deliveries will hit stores on Jan. 25. “We were dabbling in the better business in shirts,” said Mitch Lechner, president of the PVH dress shirt division, “but we saw a tremendous opportunity to build stronger strategic partnerships with stores such as Neiman Marcus, Saks and Nordstrom.” The company has also formed an independent road force to service better specialty stores around the country with product from this division, Lechner said. Insignia was the high-end division of Superba Inc., a neckwear manufacturer that PVH purchased for $110 million in 2006. Since the acquisition, PVH has continued producing hand-tailored neckwear within that division, but had not ventured into dress shirts. Now Insignia will produce shirts under the Ike Behar, Elie Tahari, John Varvatos and Star USA, and Michael Kors names, Lechner said. <WWD>

Hedgeye Retail’s Take: While not a huge growth opportunity it’s still noteworthy as the world’s largest dress shirt maker looks to expand towards the higher end.  Quality of stitching and fabric will be key if Insignia is going to succeed. 


Converse's New Game: Retailer - Converse wants to be a team player in the vertical retail game. The Nike Inc. subsidiary on Nov. 15 opened its first unit on Newbury Street in Boston. A 7,000-square-foot flagship was unveiled in SoHo on Black Friday, featuring its widest selection of merchandise in the world, including artist collaborations, a customization bar with five iPads holding over 250 designs and new apparel collections for men and women. Converse, which celebrated its 100th anniversary in 2008, has been honing its store concept for the last five years. “We could have opened stores a lot sooner,” said Dave Powers, vice president of global retail. “The goal was to make the stores a [great] brand experience and a positive financial experience. We’re building a model that will allow us to do that from a merchandising perspective.” Powers said Converse will open five or six stores in 2011 in downtown street locations and malls. “We’re in the process of mapping out our U.S. rollout plan,” he said. “We could have a pretty sizable number of stores. We plan to invest in retail and go forward with it. ” Powers declined to give specific sales projections, but said the store will be on par with other SoHo retailers that do more than $1,000 a square foot. <WWD>

Hedgeye Retail’s Take: With a target market of kids aged 18-22 years-old, Converse’s new stores are actually quite industrial looking, but have some technological flair that will pique consumer interest in the form of a customization center. With a little help from staff, customers can customize just about anything in the store from shoes to tees – a touch of individuality that is likely to resonate with the brands youthful consumer.


Online Holiday Sales Maintain Elevated Levels - The holidays are proving to be the most wonderful time of the year for online retailers, with e-commerce sales having passed $17.5 billion, a 12% jump from the corresponding days a year ago, comScore Inc. reported today. Consumers have spent more than $800 million on four different days since late November. Leading the way was the Monday following Thanksgiving weekend, Nov. 29, also known as Cyber Monday, which was the heaviest online spending day on record at $1.03 billion. The following day, Nov. 30, was the second heaviest day of spending when consumers spent $911 million. "We anticipated that the post-Cyber Monday period would experience a slight hangover after many of the retailers' most aggressive deals and promotions expired, but we can expect to see activity begin to pick up again next week as we get into the middle part of December," says Gian Fulgoni, comScore chairman. The web measurement firm says free shipping is helping shift consumer spending online. Since Nov. 1, more than 50% of all online orders have included a free shipping incentive, with the offer peaking at 55.1% of all orders for the week ending Nov. 28. That’s a 20.8% increase from the same week a year ago, when 45.6% of online orders included free shipping. For the week ended this past Sunday, Dec. 5, 51.4% of orders shipped for free, compared with 43.8% in the comparable week in 2009. <Internetretailer>

Hedgeye Retail’s Take: While sales at retail have pulled in on a sequential basis as expected according to our weekly athletic data, it appears that online sales have managed to maintain strong demand following Cyber Monday with free shipping a key driver. If you’re looking for attractive promotions, may we suggest targeting retailers with an inadequate or lack of e-commerce presence altogether.


China: Li-Ning launches new basketball footwear collection - Li-Ning, one of China’s leading sportswear brand, has extended its reach into the basketball footwear segment by launching a new product line F2. Since the brand first came out in America they have gained the favor of vast basketball fans. The new collection will features a variety of colors as an integral design element as well as the foam frame technology. The upper will be in all one piece and features an injection molded EVA material that assures perfect fit for each individual wearer.<FashionNetAsia>

Hedgeye Retail’s Take: At $65, Li-Ning is introducing its new F2 shoe at the low end of the range for a basketball shoe, but with a considerable amount of style and 5 colorways (see below at left). Perhaps the most notable feature is that due to its EVA construction, the shoe is considerably lighter weight than most of its competition. Unfortunately, my personal experience is that comfort is not among the high points unlike most EVA constructed shoes (i.e. Crocs, Native, etc.) as evidenced by my trial with a pair of the brand's similarly constructed running shoes (at right). 


R3: LULU, LVMH, PVH, Converse - R3 12 9 10




Initial Claims Fall 15k ... Consistent with late-2009 trends

The headline initial claims number fell 15k (17k after the revision) last week to 421k.  Rolling claims fell to 427.5k, 4k lower than the previous week and a new YTD low, but the reported series moved off of the lows significantly. 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. Regardless, today's data is positive.









Another Positive for Financials .... the Yield Curve Steepens

We track the 2-10 spread as a proxy for industry NIM. The 2-10 spread has expanded sharply in the last few weeks, expanding 19 bps in the last week alone. Yesterday’s closing value of 262 bps is up from 243 bps last week. More to the point, the sequential change from 3Q10 to 4Q10 is now up 11 bps to 2.25% from 2.14%.









Financial Subsector Performance

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






Joshua Steiner, CFA


Allison Kaptur

Community Health Systems Makes Hostile $7.3B Bid For Tenet

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%


TODAY’S S&P 500 SET-UP - December 8, 2010


As we look at today’s set up for the S&P 500, the range is 36 points or -1.57% downside to 1206 and 1.36% upside to 1245.  Equity futures continue to hold above fair value but weekly jobless numbers out before the open may determine whether recent strength can be maintained amid deteriorating volumes. Rising bond yields are offering support to financials while the asset class as a whole continues to benefit from a hoped boost to consumption emanating from the extension to tax cuts

  • Diamond Foods (DMND) boosted 2011 sales, EPS forecasts
  • Linn Energy LLC (LINE) plans 10m-unit offering
  • Martek Biosciences (MATK) 1Q EPS forecast below est.
  • SAIC (SAI) FY2012 EPS, rev. forecasts below est.
  • Stryker (SYK) raises qtr div. 20% to 18c from 15c
  • Verint Systems (VRNT) boosted lower end of yr rev. forecast


  • One day: Dow +0.12%, S&P +0.37%, Nasdaq +0.41%, Russell 2000 (0.05%)
  • Month-to-date: Dow +3.33%, S&P +4.04%, Nasdaq +4.44%, Russell +5.09%;
  • Quarter-to-date: Dow +5.42%, S&P +7.63%, Nasdaq +10.16%, Russell +13.00%;
  • Year-to-date: Dow +9.06%, S&P +10.15%, Nasdaq +14.98%, Russell +22.17%
  • Sector Performance: Financials +1.8%, Tech +0.9%, Consumer Spls +0.3%, Healthcare +0.1%, Telecom 0.00%, Consumer Disc (0.1%), Industrials (0.3%), Energy (0.3%), Utilities (0.5%), Materials (0.9%)


  • ADVANCE/DECLINE LINE: -685 (-701)  
  • VOLUME: NYSE 1092.73 (-32.65%)
  • VIX:  17.74 --1.39% YTD PERFORMANCE: -18.17%
  • SPX PUT/CALL RATIO: 2.05 from 1.29 +59.33%


  • TED SPREAD: 16.73 0.000 (0.001%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%  
  • YIELD CURVE: 2.63 from 2.61


  • CRB: 316.87 +0.40%
  • Oil: 88.28 -0.46%
  • COPPER: 410.05 +1.26%
  • GOLD: 1,381.94 -1.90%


  • EURO: 1.3227 -0.56%
  • DOLLAR: 79.997 +0.18%





  • European markets opened higher before paring or reversing gains as comments by the ECB over rising unemployment weighed. Corporate results met with a mixed response whilst UK economic news disappointed.
  • BOE leave its 0.5% benchmark interest rate and QE measures unchanged.
  • France Q3 non-farm payroll +0.2% q/q and prior +0.3%
  • Germany Nov Final CPI +1.5% y/y vs prelim +1.5%
  • UK Nov Halifax house price index (0.1%) m/m vs con (0.5%), posted first annual fall in a year
  • UK Oct trade deficit unexpectedly widened to (£8.53B)
  • The pound and the euro are trading at $1.5768 and $1.3211 respectively euro pressured by ECB monthly report saying rising unemployment was concerning, requires effective policy response in order to avoid a persistent increase in structural unemployment and market talk of fund liquidating a long position in illiquid trading conditions.


  • Nikkei +0.5%; Hang Seng 0.3%; Shanghai Composite (1.32%)
  • Most Asian markets followed Wall Street up today.
  • South Korea posted a solid gain; the Bank of Korea’s decision to maintain interest rates did not affect the market.
  • Australia rose on a strong jobs report. Banking and resource stocks gained, but retailers declined in sympathy with The Reject Shop, which plunged 21% after lowering FY guidance.
  • In Taiwan, Quanta Computer rose 4% on a report it got a contract to assemble the iPad 2.
  • On expectations they will benefit from higher long-term interest rates, financials led Japan to a small gain.
  • In Hong Kong, China Unicom gained 3% when it cut rates for its entry-level 3G plan.
  • Japan Q3 GDP growth revised to +4.5% y/y from preliminary +3.9% y/y.
  • Australia November unemployment 5.2%, matching expectations. November jobs added 54,600 vs consensus 19K.

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends 129












THE DAILY OUTLOOK - copper 129

Mandelbrot Math

“He doesn’t spend months or years proving what he has observed.”

-Professor Heinz-Otto Peitgen, on Benoit Mandelbrot


Benoit Mandelbrot was one of the most important contributors to my multi-factor, multi-duration, global macro risk management model. After publishing “The Fractal Geometry of Nature” in 1982, Mandelbrot eventually landed in New Haven as a professor in Yale’s math department. He finally earned his tenure as I was leaving campus for Wall Street in the late 90’s. Over time, he’s been recognized as one of the forefathers of fractal math.


On October 14th of this year, Professor Mandelbrot passed away in Cambridge, MA.  He was 85 years old. A few days later, one of our analysts, Matt Hedrick, sent me a nice tribute that Jascha Hoffman wrote for Mandelbrot in The New York Times. That’s where the aforementioned quote came from and it was followed by this one (which is taped on the insert of my notebook):


“But if we talk about impact inside mathematics, and applications in the sciences, he is one of the most important figures of the last 50 years.”

-Professor Heinz-Otto Peitgen (“Benoit Mandelbrot, Novel Mathematician, Dies at 85”, by Jascha Hoffman, NYT, October 16, 2010)


Amen Professor Peitgen. And thank you Jascha Hoffman. Benoit Mandelbrot was no one’s yes man. He wasn’t academically dogmatic either. He kept learning and re-thinking. As a result, I think the principles of Mandelbrot Math will be applied by global macro risk managers for decades to come.


I call this out this morning as I just got back from an investor trip that took me to Western Canada. The contours of the Rocky Mountain tops would most certainly fascinate Mandelbrot inasmuch as they would the fractal dimension of the Pacific Ocean’s coastline. Anyone flying across this world attempting to consider its deep simplicity from a top down perspective probably gets what I mean. It’s what make this game fun.


When you wake-up every morning trying to make a global macro market “call”, you need a place to start from. In order to attempt to know where you are going with that “call”, you most certainly need to know where you’ve been. By the time that market’s bell rings, you don’t have “month or years to prove what you have observed.” You have minutes. This is the game.


This morning’s global macro game is confusing. The US stock and bond markets are sending completely different messages as Asian stocks and bonds continue to break down.  All the while European sovereign risk premiums continue to fluctuate like twitter.


Let’s look at US markets first:

  1. The SP500 had its 1st up day in the last 3, making a bullish comeback from an outside reversal on the day prior, hitting a new YTD high at 1228.
  2. The SP500 is now up +81.7% from its March 2009 lows and down -21.5% versus its October 2007 highs.
  3. The immediate-term TRADE range for the SP500 moves to 1, with the daily downside risk being about equal with upside reward.
  4. Volatility (VIX) at 17.74 is testing a breakdown towards its April lows; while this is a bearish contrarian signal, the VIX could easily test 16.
  5. US stock market Volume and Breadth studies continue to flash bearish, despite higher prices, there is a very negative skew.
  6. In our SP500 Sector Studies, 2/9 sectors are bearish (XLV, and XLU) and 7/9 bullish from an immediate-term TRADE perspective.
  7. The US Dollar Index continues to flash bullish on both our TRADE and TREND durations, with intermediate term TREND support at $79.49.
  8. US Treasury Yields continue to boom to the upside with 2s, 10s, and 30s all busting out into what we call Bullish Formations.
  9. The Yield Spread (10s minus 2s) continues to widen at +10bps for the week-to-date, supporting the rally in Financials (XLF).

Overseas, the immediate-term game is much less confusing:

  1. Chinese equities were down another -1.3% overnight and remain bearish from an immediate-term TRADE perspective at -14.3% YTD.
  2. Indian equities got tagged for another -2.3% drop overnight as the BSE Sensex broke its intermediate term TREND line of 19,655.
  3. Japanese equities are the only bullish immediate-term TRADE market in Asia as the POSITIVE correlation to the USD reigns supreme.
  4. Australia’s central banking guru, Glenn Stevens, continues to prove that raising rates and seeing unemployment drop can work together.
  5. Germany, Russia, and the Netherlands continue to flash bullish TRADE and TREND signals in both stocks and bonds.
  6. Spain, Italy, and Greece continue to flash bearish TRADE and TREND in both stocks and bonds.
  7. Brazil looks like India, as stocks on the Bovespa are down every day this week and now bearish on both TRADE and TREND durations.
  8. The Euro continues to flash bearish on both our TRADE and TREND durations with intermediate-term TREND resistance = $1.34.

Global Commodities markets continue to confirm what almost every country’s central banker who has real-time quotes sees – inflation:

  1. The CRB Commodities Index closed at 316 yesterday = +21% higher than Bernanke’s decision in Jackson Hole to Quantitatively Guess.
  2. Oil is in a Bullish Formation with immediate-term TRADE lines of support and resistance of $87.17 and $91.47, respectively.
  3. Copper prices are testing ALL-TIME highs again this morning = +29% since The Ber-nank opted to sponsor inflation.

Gold, meanwhile, looks a little bit less-like most commodities all of a sudden. To a degree, if real-interest rates continue to push higher, the gold bulls will have to compete with that yield. That’s new. Tops are processes, not points, but Gold will need to get back above its immediate-term TRADE line of $1390/oz to get me interested in getting long it again (I sold our GLD position on Monday).


Altogether, if you take the beginning and end of 2010, you can draw plenty of conclusions that are now crystal clear. From my global macro model’s vantage point, the deep simplicity of all of these global macro factors and what they mean prospectively to the global markets remains as follows: Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mandelbrot Math - mandelbrot


The Macau Metro Monitor, December 9th, 2010


Jorge Oliveira, Macau Gaming Commission's former legal affairs chief, said more casino regulation and an overhaul of the junkets are needed.  Mr Oliveira also opposed the concentration of more economic activities in the hands of casino operators and resists the idea that Macau should fully open its casino industry.



According to Reuters basis point, RWS is seeking to borrow around S$4.2 billion to pay off an existing loan.  The refinancing comprises a S$3.5 billion seven-year amortizing term loan and a revolving credit facility.  The term loan, which has an average life of 4.13 years, will pay an initial interest rate of 160 basis points over the Singapore dollar swap offered rate.  If the debt-to-EBITDA ratio falls to 2.5 times or lower, the interest will fall to 120 bp over SOR.  Bank of Tokyo-Mitsubishi UFJ, DBS, HSBC, Oversea-Chinese Banking Corp and Sumitomo Mitsui Banking are lead arrangers and joint bookrunners for the loan.



The Guangzhou‐Zhuhai Intercity Mass Rapid Transit (MRT) will come into operation by the end of December.  The train began trial operation last Tuesday.  The trial train runs four to eight times from Jinding to Guangzhou at a speed up to 350km. Construction of the Zhuhai Station in Gongbei is still under way and to be completed by the end of 2011.  The train from Zhuhai to Guangzhou will take 45 minutes.

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