Dr. Natty? Natural Gas and the Dollar

Conclusion:  Over the past six months, we’ve noticed a high correlation between natural gas and the dollar, though supply and demand fundamentals remain bearish.


In our internal morning meeting today, we were discussing the recent activity in natural gas.  Keith noted that as of late natural gas was moving in lock step with the dollar, so we looked at this relationship over a longer time frame.  In the chart below, we’ve charted the U.S. dollar index versus natural gas going back six months.  As the chart shows, the correlation between natural gas and the US Dollar Index is high and, in contrast to other commodities, is positive.  In fact, we’ve calculated the r squared at +0.71.


Natural gas is an interesting commodity in that it is a localized commodity and priced as such.  Specifically, natural gas is very difficult to transport across continents, so it is priced based on local supply and demand.  The read through from natural gas being positively correlated with the dollar appears to be that the dollar being strong signals a future strengthening of the U.S. economy.  Thus, the price of natural gas increasing may be based on the expectation of a pickup in demand due to accelerating economic growth.


It seems that natural gas might have its own predictive ability, not unlike our friend, Dr. Copper.  Unlike copper though, where inventories are low globally, natural gas fundamentals are somewhat bearish currently, specifically:


Supply - Currently, natural gas in storage is 9.8% above the 5-year average with 3,725 Bcf in storage.  This is obviously a bearish amount of natural gas in storage, though it is down about 1.5% on year-over-year basis, but remains well above historical norms.


Production – Our energy Sector Head Lou Gagliardi has written about this point extensively, but the growth of production in the United States continues to be one of the most overriding bearish factors for natural gas price.  With seemingly little concern for the growth of supply, major E&P companies continue to invest in the natural gas industry in the United States, especially in the various shale plays.  In fact production growth is so high, that the Department of Energy is predicting that storage by March 2011 will be 10% above 2010 levels.  According to the Department of Energy:


“This month’s STEO expects that in March 2011, inventories of working natural gas in storage will drop to 1,833 Bcf over the winter heating season, falling from its end-of-October level of 3,826 Bcf. This leaves storage levels above the five-year average (2006-2010) end-of-March inventory level of 1,576. The injection season in 2011 will begin with about 10 percent more working gas in storage that it did in March 2010.”


The most recent production data in the United States from September indicated that production was up 7.4% over September 2009, so certainly supports the DOE’s prognostication.


Demand – We’ve been quite vocal as to our expectation of slowing economic growth in the United States in H1 2011 due to tough comps, consumer headwinds, and a lack of future government stimulus.  If we are correct in our assessment, it is likely that demand for natural gas could be flat or fall in 2011 versus 2010.  In 2009, demand for natural gas was down more than 2% from 2008 levels.  Moreover, natural gas is not exactly a growth industry as overall consumption has only grown 9.1% over the 40-year period from 1969 through 2009. The Department of Energy is currently expecting demand to be flat in 2011.


Despite this bearish overhang heading into 2011, in the shorter term we have seen a bit of a bullish inflection point in demand due to the cold weather.  In the last week, consumption of natural gas was up 24% from the prior week, which has certainly supported higher prices.   The U.S. dollar will also be critical to watch due to its currently high positive correlation, but we will need to see a real pickup in economic activity to offset the looming gas surplus heading into next year.


Daryl G. Jones
Managing Director


Dr. Natty? Natural Gas and the Dollar	 - djnatty

Rich Privileges

This note was originally published at 8am this morning, December 10, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“One of the privileges of a rich man is that he can afford to be foolish much longer than a poor man.”

-Ludwig von Mises


This morning’s top global macro headline is ‘China raising rates on reserve requirements in order to fight inflation.’ This shouldn’t be new “news” to anyone who follows Chinese monetary policy closely. China is willing to give-up short-term stock market performance (the Shanghai Composite Index is down -13.3% for the YTD) for long-term price stability. Fancy that.


What is inflation? It’s when prices are breaking out to higher-highs over the intermediate-term TREND. In Ludwig von Mises 4th Lecture (“Inflation”, page 52 of Economic Policy) he reminds us that “the most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”


The Ben Ber-nank’s inflation policy has been crystal clear. Since his decision to engage in Quantitative Guessing part deux at the Groupthink Inc. meetings in Jackson Hole in August, here are the 3-month percentage moves of real-time market prices:

  1. Crude Oil = +18.2%
  2. Natural Gas = +20.8%
  3. Heating Oil = +18.2%
  4. Gold = +10.1%
  5. Silver = +41.2%
  6. Palladium = +38.3%
  7. Copper = +17.3%
  8. Cocoa = +12.3%
  9. Cotton = +52.4%
  10. Lumber = +19.8%
  11. Orange Juice = +16.5%
  12. Sugar = +35.5%
  13. Corn = +24.2%
  14. Oats = +27.9%
  15. Rice = +20.5%
  16. Soybeans = +23.6%
  17. Wheat = +10.3%

Now to be fair to the Fear-mongering Deflationistas who want me to believe that I should accept a ZERO percent rate of return in my savings account in perpetuity, the price of pork bellies was down -1% over the same time period. Maybe, in the short run, I should have stuffed my kids with rice-less, wrap-less, pork burritos for the last 3 months and have told them to like it… no guac.


Altogether, in the long run, the Keynesians like to say don’t sweat this short run stuff, because “you’re dead.” While that’s seemingly a convenient and clever answer to starving the world’s poor for a nice year-end US stock market “pop”, as von Mises said, “the fact is that, in the not very long run, inflation does not cure unemployment” either.


As the US stock market continues to hit higher-highs on light volume and negative breadth and skew, both global and local bond yields continue to ring the alarm bells of inflation concerns. That’s why the world’s largest bond fund, Bill Gross’ PIMCO Total Return Fund ($250 BILLION in assets under management), has lost 3% of its nominal value in the last 30 days. Inflation is a policy. Inflation is bad for bonds.


Every aspect of what’s going on in global macro markets right now makes sense to us other than US stocks going higher. No, that doesn’t mean that every stock market should be going lower. We have a 9% long position in the German stock market and that makes sense to us as countries like Germany and Australia have pseudo-sober monetary and fiscal policy that’s not equating to US style Jobless Stagflation.


As a reminder, our intermediate-term global macro outlook for the next 3-6 months is as follows:

  1. Global Growth Slowing
  2. Global Inflation Accelerating
  3. Interconnected Risk Compounding

As hyped up as a US stock market bull wants to get on buying the things that China, India, and Brazil want, is as disinterested as local stock market investors in all 3 of those markets have suddenly become. Two of the three are broken on both our TRADE and TREND durations (India and Brazil) and one of the three (China) is gearing up to release very hawkish inflation data this weekend.


In the Hedgeye Chart of The Day (attached) we have outlined this point with a picture of Brazil’s Bovespa. The situation developing in Brazil’s economy is a major global macro risk:

  1. Growth Slowing – Q3 GDP released yesterday showed Brazilian growth slow materially (on a sequential basis) to +6.7% year-over-year versus the +9.2% reported growth of Q2 2010.
  2. Inflation Accelerating – this morning, Brazil’s CPI (Consumer Price Index) jumped to +5.6% for the month of November versus +5.2% reported for October.
  3. Interconnected Risk Compounding – as emerging market debt in Brazil comes off one of its worst monthly performances since the late 90’s , Brazil’s stock market has all of a sudden dropped -7% since the beginning of November.

Remember, market prices don’t lie; politicians do. And think about what Ludwig von Mises said in his 4th Lecture, “Inflation” (in Argentina 1959) when he asked us to “remember that, in the long run, we may all be dead and certainly will be dead. But we should arrange our earthly affairs for the short run in which we have to live.”


My immediate term TRADE support and resistance levels for the SP500 are now 1214 and 1249, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough

Chief Executive Officer


Rich Privileges - BOVESPA

Buck Breakout: US Dollar Levels, Refreshed...



Higher-highs and higher-lows. That’s what the US Dollar Index is accomplishing all of a sudden. It looks like it’s going to close up for the 5th of the last 6 weeks, confirming both a bullish immediate-term TRADE and a higher probability of a continued bullish intermediate-term TREND.


In the chart below we show the newfound bullish intermediate term TREND line of support at $79.07. The corollary to this is that what was intermediate-term TREND support for the Euro is now resistance at $1.34. We’re short the Euro and long the USD and we’re likely to stay with both positions until they are either immediate-term oversold or overbought, respectively.


The immediate-term overbought TRADE line of resistance for the US Dollar Index is now $81.35. In terms of catalysts, we’re looking forward to Ron Paul’s subpoena of Ben Bernanke and/or a concurrent reduction in the size/pace of the Fed’s Quantitative Guessing program. Additionally,  inflation accelerating should continue to provide a bid to US Treasury yields, which augers bullishly for the US Dollar Index.




Keith R. McCullough
Chief Executive Officer


Buck Breakout: US Dollar Levels, Refreshed... - buck


Below are some highlights from our Macau trip.  




Overall Macau Trends

  • Market is off to strong start in December
  • No impact from China tightening
  • PWC’s forecast of a doubling of gaming revenues in 4 years is doable
  • Mass:  20% visitation growth, 10% GDP growth = 30% revenue growth, this is probably sustainable
  • VIP:  same as above except for credit multiplier so growth has been higher – there is a lot more credit in the market but consensus is that it is manageable

Mass Market Promotional Activity

  • CoD reinvesting the most –some say 30% - which means they will have the lowest margin
  • MGM only 23%
  • Venetian only in high teens

Asian expansion

  • Japan, Thailand, Taiwan, South Korea, Vietnam are all on the radar screens of the big Macau operators
  • MPEL wants to get involved, possible on a smaller scale somewhere in Asia to prove they can do it outside of Macau.  Very bullish about Asian gaming expansion prospects.


  • May be delivering on top and bottom line – not buying as much business as people think; just doing a good job
  • We're more bullish on the property’s prospects now than before the trip.  Recent revenue and EBITDA spike looks sustainable.

LVS November market share loss

  • Low hold impacted them
  • They also had a terrible first week because Beijing government officials were staying at Four Seasons/Venetian so the junkets stayed away.  Impacted 2nd week as well but weeks 3 and 4 were very strong.

Galaxy Cotai

  • Even the competition thinks it will be a nice product
  • Trial won’t be a problem, getting repeat business might be
  • Concern over management team since they’ve never operated a Mass property before
  • CoD could get blasted and is most at risk
  • Peninsula could give up 10-20% of its business to Cotai when Galaxy opens


  • Studio city ruling in March – MPEL wants it and thinks they can get it
  • Lots 7/8 could persuade the Studio City antagonists to settle their differences – would be a positive for MPEL


  • Cannibalization of Wynn Macau is inevitable when Wynn Cotai opens
  • Wynn Macau will need some material investment before Cotai opens (room renovation, some new restaurants, etc.) to limit cannibalization
  • Wynn Macau rebound is being sustained in December
  • Two new VIP rooms could juice market share


For now, if the stock market is your gauge, Bernanke is seeing some success.  There are many other real time markets (commodities, global growth) that show a disconnect from U.S. equities.  The most recent consumer data point indicates that the consumer is feeling better.  I’m less-than-convinced that this will be sustainable or that Ben Bernanke has discovered any lasting solution to the problems facing the U.S. economy. 


The following are some current positives in consumerland:


1.       Income growth is getting better

2.       Job growth is still stagnating but trends are better that they were in January

3.       Retail sales are hanging in

4.       Consumer sentiment improved 5.7% and 3.6% sequentially in November and December, respectively. 

5.       The Consumer discretionary index (XLY) is up 25% YTD

6.       The S&P 500 up 8.76% and 3.69% September and October, respectively and is up 4.4% so far in December.


The University of Michigan consumer confidence reading rose to the highest level in six months, but is still registering a lower high; index of consumer sentiment rose to 74.2 from 71.6 at the end of November.  The Bloomberg consensus was for a reading of 72.5. 


The bullish consumer sentiment is not being conferment by the more weekly ABC consumer comfort index which is at a -45, up from the low of -54 set on 12/01/08.  Year-to-date the consumer sentiment index is only up 2.3%, with the expectations component down 3%, while the current conditions is up 10%. 


The consumer is clearly responding to diminishing levels of uncertainty as corporate profits have improved to the best level since 2007.  We are reminded that not every this is turning up roses and part of the improvement increased profits is due to better efficiencies thru lower labor costs.  Just today TJX closing down the A.J. Wright division and cutting 4,400 jobs; other notable companies recently announcing layoffs in the past 30 days are the Washington Post, Express Scripts, State Street VF Corp and Apollo Group Inc.


The current trends in consumer sentiment as measured by the University Michigan are critical and continued improvements are needed to sustain the bullish sentiment running thru the market. 


1.       The Bullish to Bearish spread for the AAII sentiment index is approaching the danger zone again at 30.5.

2.       The VIX is down 48.9% over the past six months and is now down 20.99% year-to-date; another shoe dropping could see the VIX busting a serious move to the upside.


If the politicians in Washington come to some sort of compromise from the expiring Bush income tax cuts, it’s net neutral for the economy and will not likely benefit consumption.  At some time austerity will need to become a part of the conversation and a cursory glance at the television and how that is going down in Europe shows you what the consumer is going to think about that.  The continuation of the unemployment benefits helps buttress consumption.  I have described this before in the context of extended and emergency benefits.  Allowing them to expire would essentially sweep the legs from under a large portion of consumers and, whether or not one believes that this is good policy, it would initially be a negative for consumer spending and the broader U.S. economy.


On the plus-side for consumers, the one year's elimination of two percentage points in the Social Security withholding tax will directly boost disposable income of individuals currently paying those taxes.  As a result, there should be some consumption pick-up, but it is “one time” in nature and, just like the stimulus package, the impact will only be short lived.


As the facts change, we can adapt to the new trends.  For now we are sticking to our Consumer Cannonball theme (albeit on a different duration), as some of the major pillars of that thesis have not changed; primarily the outlook for housing and the labor market in 2011.  I will expound upon this point in a post next week.


Howard Penney

Managing Director


CONSUMER CONFIDENCE – BERNANKE IS THE MAN! - univ mich sentiment dec


CONSUMER CONFIDENCE – BERNANKE IS THE MAN! - univ mich expectations dec


CONSUMER CONFIDENCE – BERNANKE IS THE MAN! - univ mich current conditions





R3: JNY, BEBE, Twitter, Reebok


December 10, 2010





  • Just what every kid needs.  Gucci launched an iPad app that allows users to dress up a virtual kid in the brand’s just launched children’s line.  While the paper doll motif is somewhat clever, we wonder just how many children will be asking their parents to replace their Dora apps with Gucci’s Playground?
  • According to the Pew Research Center, one in ten internet users are Twitter users.  Approximately 74% of Americans use the internet, which implies about 6% of the entire population is now Tweeting.  Interestingly, females outpace males by about 1/3 with their Twitter usage.
  • Just as Bebe introduced its latest resort collection for the company’s Kardashian line, the company’s president also indicated that the collaboration with the pop-culture icons may also be nearing an end.  So much for a long-term partnership – “at Bebe we need to move with fashion and we want to be first in the fashion world with everybody else and not fall behind. We are definitely assessing the situation.”  



Jones Group to License Kids' Brands The Jones Group is taking its children's’ footwear business out of house. The company’s portfolio of kids' brands, which includes Nine West, Sam & Libby and Mootsies Tootsies, has been licensed to Edison, N.J.-based LJP International, the firm founded by children’s market veteran Larry Paparo. The Dockers boys’ line will not continue under the new partnership. Current Nine West kids’ exec Joe Truglio will join LJP as director of sales. Rick Paterno, group president of footwear for Jones, said the move, which will be effective Jan. 1, is a logical one. “While kids’ has always been a good business for us, it’s somewhat outside our core competency. We’re a women’s house and that’s what we’re experts at,” Paterno said. “This licensing arrangement gives the children’s business a dedicated focus from Larry and his team, while still allowing us to control the design and direction of the product.” Paparo, whose company has extensive sourcing networks in China and Brazil, had been working with Jones for some time as a production agent for its kids’ lines. “We think Larry will do a fantastic job running the business,” Paterno said. “He has his ear closer to the children’s market and really understands it, and he has great relationships in the marketplace.” <WWD>  

Hedgeye Retail’s Take: While kids footwear may not be a “core competency” of Jones, it’s also likely that recent top management departures have forced the footwear division to clean house.  


Innovation Out of Reebok - Reebok International Ltd. and Cambridge, MA-based MC10, Inc. announced an R&D collaboration to create a new class of athletic apparel and equipment, combining market leading sport design with advanced electronics. Reebok said the collaboration will use MC10's conformal electronics platform and Reebok's design capability to bring new products to the athletics market. When combined with Reebok's heritage of innovation for the athlete, MC10's proprietary approach to making high performance electronics "skin like" and invisible to the wearer will enable entirely new classes of intelligent sports equipment and apparel. Reebok also noted that it has a strong history of innovation with iconic products in the sporting goods industry like The Pump, and more recently EasyTone, and ZigTech. <SportsOneSource>

Hedgeye Retail’s Take:  We see this collaboration going one of two ways – using innovative technology to enhance performance intelligence in athletic apparel product (positive); or harnessing electromagnetic currents to stimulate muscles in order to encourage weight loss at all times (just bad). Yes, a bit tongue-in-cheek, but pushing the brands as the next great innovator seems a bit of a stretch.


Burberry Expanding in India - The Burberry team hit India this week with much fanfare and for a simple reason — to celebrate its presence in the emerging market, which company executives consider key for the brand’s global retail expansion. Chief executive officer Angela Ahrendts and chief creative officer Christopher Bailey, on his first trip to India, arrived in Mumbai earlier this week, and on Thursday night, descended on the Aer Bar at the city’s Four Seasons Hotel roof terrace for a fete with 200 guests. This being Burberry, there had to be a distinct Brit flavor to the affair, so the brand flew in musician Rory Cottam from English band The Cheek, who appears in Burberry’s fall campaign and did a DJ set that night. Indian musicians and brothers Aman and Ayaan also gave a live acoustic set, and Indian DJ Aqeel spun tunes. There are four Burberry stores in India. The brand has a presence at the Palladium Mall in Mumbai, the Emporio Mall in New Delhi, UB City Mall in Bangalore and the Taj Krishna hotel in Hyderabad. The brand will open a fifth unit at Oberoi Hotel in New Delhi this month. The stores are operated by Burberry India, a joint venture with Genesis Colors that was unveiled late last year. “This was my first visit to India,” said Bailey, who has kept the brand’s Facebook fans abreast of the trip. “It’s a country that we are so excited by. They have a huge appreciation for luxury and Britishness, so being there and meeting everyone and feeling the energy behind the country was incredible and we had a great night in Mumbai.” <WWD>

Hedgeye Retail’s Take: While not nearly the same opportunity as China, the UK/India history is certainly one that should help build the re-emergence of the British luxury brand.  Keep in mind that the luxury biz in India is highly concentrated on a handful of urban centers, which for now makes substantial unit growth a challenge (despite housing the world’s second largest population). 


Mulberry Opens Flagship Amidst Strong Demand - Profits at Mulberry Group PLC more than tripled in the six months to Sept. 30 to 3.3 million pounds, or $4.9 million, from 1 million pounds, or $1.5 million, on the back of strong, full-price sales growth in robust markets including the U.K. and the U.S. And sales show no signs of flagging: In the ten weeks to Dec. 4, Mulberry said global retail sales rose 47 percent, and that full-year performance was likely to exceed market expectations. The spring 2011 wholesale order book is 91 percent higher than last year and orders have not yet closed, the firm said. The group reported the results Thursday, just days after opening a 5,400-square-foot flagship store at 50 Bond Street, an open, environmentally-friendly space that showcases the brand’s accessories and ready to wear together for the first time. “It’s the largest single-floor space on Bond Street – there aren’t even any pillars,” said Godfrey Davis, chairman and chief executive, during a walk-through. “And it was a logical move for us. Finally, we’re all on one floor.” Mulberry’s former shop, at number 42, was smaller, narrow and on various levels. <WWD>

Hedgeye Retail’s Take: While not likely a key influence in the UK, we wonder if the company’s second collaboration with Target has been a key driver of the brand’s growth here in the U.S.  Unfortunately the company’s nine Target SKU’s are now sold out.


Luxury Watch Retail Expansion Continues - Officine Panerai has retail expansion on its timetable. The storied watch brand, which was founded in 1860 and bought by Compagnie Financière Richemont SA in 1997, currently sells its watches in only 500 points of sale around the world, including around 100 locations in the U.S. There are also 24 company-owned boutiques worldwide, with three in the U.S., on Madison Avenue in New York, Beverly Hills and the latest addition, Boca Raton, Fla., which opened in September. Over the next several years, Panerai will add significantly to its retail stable, revealed chief executive officer Angelo Bonati. “In three years, we will grow to 100 stores,” he said. “We’re convinced that opening boutiques is the right [strategy]” to attract Panerai’s customers. London and Paris will be added over the next three months and, within three years, six to seven stores will open in key luxury markets in the U.S., as well as additional units in Europe, the Middle East and Asia. <WWD>

Hedgeye Retail’s Take: The surge in luxury watch demand is driving a notable push for retail expansion of late – recall Omega made an even more aggressive announcement just last month. While demand is certainly present heading into the holidays, one has to question just how sustainable demand will be as brands ramp store growth into the 2H of 2011.  


PPR Primed to Offload Conforama - French retail-to-luxury group PPR said it has entered into exclusive negotiations with South Africa’s Steinhoff International Holding Ltd. for the sale of furniture chain Conforama for 1.2 billion euros, or $1.58 billion at current exchange. Under the terms of the deal, Steinhoff would also take over Conforama’s debt to PPR, an undisclosed sum. “This planned cession to a global furniture sector player is a major strategic opportunity for Conforama,” PPR chairman and chief executive officer François-Henri Pinault stated. “Steinhoff International has an intimate understanding of Conforama’s business and the two companies operate in complementary markets.”PPR has said it wants to sell its retail assets, including music, books and electronics retailer Fnac, in order to fund expansion in the lifestyle segment, which should eventually dwarf its luxury division, Gucci Group. With 41,000 employees, Steinhoff is already one of the largest furniture and household goods suppliers in Europe and had been looking to reinforce its position in France and other territories. Natixis analyst Boris Bourdet estimated Conforama’s debt at roughly 400 million euros, or $529 million, which would bring the total purchase price to around 1.6 billion euros, or $2.12 billion. <WWD>

Hedgeye Retail’s Take: Lots underway going into yearend for CEO Pinault with the pending sale of PPR’s furniture business while at the same time revisiting the acquisition of a skate/lifestyle brand. Recent headlines (and the market) suggest the company is near a deal with Quicksilver, though apparently Billabong is also under consideration. Given the prospect of capital gains tax relief, the urgency to close deals before year end is less pressing, but the reality is that activity is likely to accelerate.


Outdoor Product Sales Rise in November - The outdoor market outperformed the broader markets in November posting an impressive 8.7% retail sales increase versus the same month in 2009.  Footwear category sales were up 9.6% (largely due to late-arriving winter boot sales), apparel category sales were up 11.7% and hardgoods category sales grew 4.1% over the same time period in 2009. Aggressive promotions, pent-up consumer demand and colder weather patterns combined to drive retail chains and outdoor vendors to their best November in four years.  According to retail point-of-sale data compiled by SportScanInfo for OIA VantagePoint™, sales trends in the outdoor market are mirroring the trends at retail overall, with luxury and specialty out-performing lower-end stores and the Internet channel continuing to take market share from traditional brick and mortar business. Despite higher than anticipated unemployment and tax uncertainties, holiday gift-giving and winter weather patterns combined to loosen consumer purse strings.  Sales motivators began shifting in November, with consumers driven both by wants and needs instead of just needs.  For example, Winter Boots made up 36.0 % of total outdoor footwear sales in November 2010, while comprising only 8.8 % of sales for the entirety of third quarter 2010 (retail calendar third quarter is August-October). <SportsOneSource>

Hedgeye Retail’s Take: primarily a function of two factors, the obvious is favorable weather, less obvious is the fact that holiday creep continues to push consumer purchasing earlier and earlier.



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