Fashionable Consensus

This note was originally published at 8am on December 20, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Nothing is more obstinate than a fashionable consensus.”

-Margaret Thatcher


You’d think that some of the sell side’s finest would have learned something from being unanimously bullish on the US stock market in December 2007. Think again. It’s December of 2010 and, after a few minor bailouts and major bonus seasons, the bulls are back.


Don’t wince. Without a Fashionable Consensus, how else would we generate long term absolute returns? This weekend’s edition of Barron’s “Outlook For 2011” may be one of the finest gifts of Groupthink that we’ve been offered in years.


As Barron’s themselves reminds risk managers (not in the cover story article), the SP500 has only seen double-digit gains for 3 consecutive years twice since World War II (1951 and 1994). Looking at the bullish 2011 predictions for US stocks that way, maybe consensus is contrarian!


Will 2011 mark a 3rd year in a row of double-digit gains?


Well, let’s go through that…


Let’s start with a level. My immediate term TRADE zone of resistance for the SP500 into year-end is 1249-1256. Giving year-end bonus and mark-up season the bullish benefit of the doubt, let’s use the top end of that range and round the number up to 1256.


Since a +10% or better gain in the SP500 for 2011 (versus 1256) = 1382, let’s take a gander at who is more bullish than that:

  1. Deutsche Bank = 1550
  2. Goldman Sachs = 1450
  3. JP Morgan (formerly known as partly Bear Stearns) = 1425
  4. Barclays (formerly known as Lehman) = 1420
  5. Bank of America (formerly known as partly Merrill) = 1400

Now, to be fair, we’ll need to provide some disclosures (it’s a sell side thing)

*the aforementioned 2011 targets are from last week’s Bloomberg survey and subject to revision

**some of these estimates are the mid-point of Big Broker’s internal range (that’s a CYA thing)

***some estimates are from economists and bond strategists (yes, on Wall Street, cops are sometimes firefighters for commission)


The only person we can find who is more bullish than Binky Chada at Deutsche Bank isn’t a sell-sider, but he was equally as Bullish As Binky back in 2008. Don Luskin called for a +30% move in US stocks when I debated him on Kudlow on Friday night. Luskin’s made for YouTubing estimate implies a +377 point move in the SP500 to all-time highs in 2011 to 1633.


Now let’s not get caught up in what’s going on in the rest of the world this morning (Global Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding). Chinese stocks closed down for the 4th straight session to -13% for 2010 YTD and the CRB Commodities Index level of 320 is +25.5% inflated since the beginning of July.


Per the US stock market centric bulls, these interconnected global economic realities don’t matter, until they do.


Let’s get back to the US stock market’s 2011 Fashionable Consensus and dig a little deeper into its tapestry.

  1. Everyone loves Tech
  2. Everyone (except Doug Cliggott at CS) hates Healthcare
  3. Everyone has no short ideas

Most risk managers realize that doing what everyone else is doing isn’t a great idea (especially if you want to charge your clients 2 and 20). That’s why I’m short Tech (XLK) and Industrials (XLI) going into year-end. Both are reaching extreme levels of being intermediate-term TREND overbought.


I’m bearish on US Equities (SPY) and US Bonds (SHY). I’m bullish on the US Dollar (UUP).  As a result, I’m bullish on building up a large cash position as we head into what I think is going to be at least a 7% correction in the next 3-6 months (SP500 downside target = 1168).


No, I’m not reckless enough to give you my “year-end target” for the SP500 (that’s what unaccountable Big Brokers do). But I will tell you what I think every day between now and then. I’ll tell you what my upside/downside probabilities are across my 3 investment durations (TRADE, TREND, and TAIL), and I’ll take a long or short position that I’m accountable to.


If I’m wrong on US Equities in the next 3-6 months, I think some combination of the scenario laid out by Jeff Knight at Putnam (buy side PM) and Doug Cliggott (ex buy-sider at Credit Suisse) has the highest probability. Upside in the SP500 to the 1325-1350 range with the two sectors that I think auger best to an environment of US style Jobless Stagflation (Energy and Healthcare) outperforming.


My immediate term TRADE lines of support and resistance lines for the SP500 are now 1236 and 1249, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fashionable Consensus - thatcher

Sino-Russian Relations

Position: Long Lukoil (LUKOY), CNOOC (CEO)


After China and Russia announced in late November that they will no longer use the US dollar to conduct bilateral trade, last Wednesday marked the official start to trading the Yuan against the Ruble on Moscow’s Micex exchange.  (China allowed the Yuan to trade versus the Ruble on its interbank market beginning on Nov. 22). China’s Ambassador to Moscow Li Hui said, “No doubt this will become a serious catalyst for economics and trade.”  


Indeed. However, we’d note that the move is not a geopolitical game-changer; certainly it does represent concerted action by two global heavyweights following months of rhetoric that the USD must be replaced as the world’s global reserve currency.


Yet given this diversification away from the USD, we still don’t see another currency (or commodity) that’s a close second as an immediate replacement - certainly talk of the Euro as the new stalwart died hard alongside Europe’s sovereign debt crisis that came to a head in the first half of the year.  While we’re quick to point out that the US will have its days of reckoning (following Europe) in dealing with its own fiscal imbalances, which should weigh to the downside on the USD, we’re not of the camp that the USD is going to the wayside as the world’s reserve currency anytime soon.


However, from a local perspective, the opening of the RUB-CNY currency cross (in both countries) should equate to an increase in trade between the two in the coming years, a relationship built on mutual needs: in particular energy long Russia is well equipped to provide for energy short China and Russia benefits from “cheap” consumer and electronic goods from China.


Further, as the Yuan is more freely traded against the currencies of its trading partners and the USD is removed as the “third-party” currency, mutual benefits are provided to both importers and exporters as transaction costs are reduced.


As of 2009, China’s total exports to Russia accounted for 2% of its global exports, and Chinese imports from Russia accounted for ~ 1.5% of its total imports.  While Russia does not offer an individual breakout of its imports or exports by country, Russia’s trade with China (exports plus imports) makes up about 9.6% of its total trade. For comparison, Russia’s next largest trading partners are the Netherlands (9.6%) and Germany (8.3%). From a regional perspective, Russia’s largest trading partners are the Eurozone (49.5%) and CIS (13.7%), a consortium of former Soviet states.


Clearly the data suggests there’s a long runway of upside potential in Russian-Chinese trade relations.  In early 2009 we wrote about a $25 Billion loan-for-oil agreement between both governments as a catalyst for the beginning of a greater partnership. In that deal, the Development Bank of China lent Russia’s state-owned energy companies the funds to build out their infrastructure, including a 41-mile pipeline extending from a refinery on the East Siberia Pacific Ocean to the Russian-Chinese border town of Xing’an with an annual capacity of 15 million tons of oil, expected to come online in January 2011.


While Russia provided China with 6.5% of its total oil imports in 2008 and 7.8% in 2009, this new pipeline has the potential to double the volume of Russian oil deliveries to China!


As both countries can better leverage each other, we like the mutual gains that each will enjoy. In particular, if Russia can continue to bring in Chinese capital it will support not only development in its dominant energy and commodity sectors, but also encourage economic diversification, an aim voiced loudly by the Kremlin over the last two years. On the other hand, cash-rich China can improve energy channels through strategic financing and acquisition deals to better supply its economic expansion, while capturing (in some cases) price security and future leverage against its other energy suppliers.  


From an investment perspective, we see opportunities in this symbiotic relationship. In the Hedgeye Portfolio we’re currently long Russia’s Lukoil (LUKOY) and China’s CNOOC (CEO). If you’d like to learn more about our energy research, headed by Lou Gagliardi, please contact .


Matthew Hedrick



Sino-Russian Relations - Ru

R3: JCG, WMT, TRU, UK Snow


December 20, 2010





  • First it was J Crew and now it’s vintage?  Word has it that first lady, Michelle Obama, traded in her fondness for J Crew and instead wore a vintage dress (in public!) to TNT’s Christmas in Washington taping.  Fashionistas are blogging up a storm as a result and pointing out that this is the first time a first lady has worn “second-hand” clothing in public.  Good news for thrift stores across the country, which get a substantial and free endorsement from one of the most widely watched women on the planet.
  • While Wal-mart’s “small store” format hasn’t amounted to much so far, the company is testing a new format on the campus of University of Arkansas.  The 10,000 square foot prototype called “Wal-mart on Campus” replaces a university run pharmacy.  Part grocer, part pharmacy, and part campus store, the prototype is thought to be part of a series of smaller format test stores that the company hopes to incubate as potential growth drivers.  However, testing on a university campus in WMT’s back yard hardly seems like a fair test. 
  • With 2010 shaping up to be a year in which the democratization of fashion took center stage with the help of technology, there’s yet another fashion start-up looking to shake things up.  This time, Fabricly aims to provide marketing, production, sourcing, and sales support to fledgling designers much like a record label would do for an emerging artist.  While the site likely takes a cut of finished good sales, the cost to produce and develop a salable product is born entirely  by Fabricly.  The success of this model is still unproven but it’s approach to letting designers remain “designers” while the “business” is left to others certainly makes practical sense.
  • Starting tomorrow, Toys”R”Us will be keeping its stores open 24-hours a day through 10pm Christmas Eve nationwide joining the likes of other toy retailers for the first time in the company’s history. Appears to be a doubling down of sorts in addition to the ~600 holiday pop-up stores.



Surge in Luxury due to Accessories - From handbags to shoes to watches, accessories are generating the power that is driving luxury’s surge.  It’s a global trend — from the U.S. to emerging markets such as China, Brazil, India and the Middle East. When the final tally is made, the sales growth of luxury accessories in 2010 is expected to be 16 percent, compared with 8 percent for luxury apparel, according to a new worldwide study from Bain & Co., a strategic consulting firm. By comparison, sales of luxury accessories in 2009 contracted 1 percent versus 2008, with luxury apparel sales dipping 10 percent. Customers are increasingly sophisticated, cherry-picking across categories, brands and channels for quality, style or value, the report said, with men showing the same spending patterns as women on leather goods. Despite persistent high unemployment in many countries, concerns about European debt and a still-wobbly global economy, stock values are up this year, holiday shopping indicators for high-end goods have been positive and, in a period when product adaptability and value are essential, accessories are particularly appealing because they are a versatile, fast way for consumers to freshen what’s in their closets. Pete Nordstrom, president of merchandising at Nordstrom Inc., said shoes and accessories have been “the strongest category for us in the last several years, before things got difficult, when things got difficult and now” as retail recovers.<WWD>

Hedgeye Retail’s Take:  Even more interesting is a study released by American Express that suggests luxury spending overall has eclipsed pre-recession levels. On the flip side, demand is not unanimously robust across the board.  Did anyone catch the Gucci and Jimmy Choo sales on Bluefly over the weekend?


Norma Kamali Seeks Investors - Staying true to her own convictions, Norma Kamali is embarking on her next challenge: She is seeking investors for a new venture selling an accessibly priced product line on her Web site. Kamali, who spoke Wednesday at the Fashion Institute of Technology, which hosted FashInvest’s first “Capital Conference: Where Creativity Gets Down to Business,” declined to provide specifics, stating the collection was still in the early stages but that it would be a line under her name. Kamali said she felt a responsibility to design apparel that women could use for five to 10 years. Some people thought her venture with Wal-Mart featuring $20 jackets and $12 vests was a risky career move, given her existing high-end collections, she said. Kamali boasted the entire outfit she was wearing on Wednesday was from her line at Wal-Mart. “I felt Wal-Mart wasn’t a risk because it was a challenge I wanted to do,” she said, noting the idea came from her work in the public schools, where she noticed that many moms didn’t go to the parent-teacher meetings. “Some women were so embarrassed that they didn’t go to the school because they didn’t have anything to wear.” <WWD>

Hedgeye Retail’s Take:   Did you Kamali was one of the originators of “packable, multi-use poly jersey clothing” and the inventor of the “sleeping bag coat”?  With Wal-mart helping to bring her name back to life, it’s not surprising that she’s looking to re-invent herself after a draught of innovation. 


Department Stores Bank on Outlets - Outlets are definitely in for department stores. Saks Fifth Avenue, Nordstrom and Neiman Marcus all opened new locations for their respective Off 5th, Rack and Last Call outlets this year, while timely real estate opportunities led Bloomingdale's to enter the outlet business for the first time. "With the recession receding a bit, luxury department stores are beginning to recapture the customers who slowed their spending," said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates and a former CEO of Saks Fifth Avenue. "They are now trying to refine the outlet concept so the customer does not feel like a second-class citizen." Retailers said outlets act as an extension of their brand and can reach shoppers who don't necessarily shop at their full-line outposts.  "The Bloomingdale's outlet customer is very different from the regular Bloomingdale's customer. For the most part, we're finding a whole new consumer, one who perhaps shopped our competition when it came to the outlets," said Arnie Orlick, SVP for outlet stores at Bloomingdale's, which bowed its first four outlets in Paramus, N.J.; Miami and Sunrise, Fla.; and Woodbridge, Va. <WWD>

Hedgeye Retail’s Take:   Hardly a new trend, outlets tied to luxury department stores have been around for the better part of a decade.  In fact, there are more Off Fifth’s, Last Call’s, and Rack’s  than full priced luxury department stores combined.  The key here is that 4-wall margins for these outlets are higher than the core businesses, making growth in this format a virtual no-brainer (at least for now!).


Breitling Launches First Store - After 21 years as a wholesale presence in the U.S., the Swiss luxury watch brand Breitling is staking a retail claim. The company today is opening its first store here on East 57th Street, in a neighborhood that Tiffany & Co., Tourneau and Bulgari, among others, also call home. “We feel we’re ready,” said Marie Bodman, president of Breitling USA. “We’re secure enough in our market. We know that Americans really will like it.…We want our customers to understand the DNA of Breitling.” The 3,400-square-foot unit was designed by Alain Porta and Frédéric Legendre. It covers three floors, each of which has a dedicated selling area. In addition, the second floor features a display of vintage Breitling timepieces and the third floor includes a conference room and a bar. The main floor is awash with color, thanks to several projected artworks by contemporary artist Kevin Kelly. “He’s Breitling — daring and sophisticated,” Bodman said. Walls were constructed from a wood called Quadrillo that is known for its ability to absorb sound. Bodman said the design will provide a blueprint for future stores. The firm plans two more next year, in Saint-Tropez and in Buenos Aires. Reflecting on the company’s progress in the U.S., Bodman said: “In 1989, I was the first one, traveling with my little suitcase, getting people to buy our watches.…Our watches 20 years ago were…well, everything else was thin and flat, and nobody wanted to see a chronograph.” <WWD>

Hedgeye Retail’s Take:  Clearly the “surge in luxury” is adding confidence to retail expansion for luxury expansion.  Or, perhaps the fact that over 25% of mom  & pop jewelers went out of business during the recession is reason enough for the brands to take back control of their distribution.


Online Firm Bonobos Gets Financing - Men’s online apparel firm Bonobos on Friday said it has secured $18.5 million in a third round of venture capital financing, led by Lightspeed Venture Partners and Accel Partners, along with ongoing participation from angel investors. Jeremy Liew of Lightspeed and Sameer Gandhi of Accel will join the Bonobos board, according to the online firm. Bonobos also said proceeds will be used for marketing purposes and expanding staffing. Andy Dunn, founder and chief executive officer of Bonobos, said, “With Lightspeed, we were especially impressed with Jeremy’s knowledge and understanding of the potential for online men’s retail to take off.…Sameer brings great experience from the board of, and Accel has a powerhouse portfolio in consumer technology across Facebook, ModCloth, Groupon and Etsy.”  <WWD>

Hedgeye Retail’s Take:   E-commerce investment is on fire and there’s apparently plenty of money on the sidelines looking to be put to work.  Not a bad investment for the founders of Bonobos which claim to have about $15 million in sales, 36,000 active customers, and sell 1 in 5 units to customers in New York City.


Inflation In E-Commerce Spikes- The prices of goods sold online has moved up sharply according to data from MIT. The movement higher has outpaced the Consumer Price Index recently, a possible sign of inflation in the cost of goods sold. There has been convincing evidence recently that the underlying costs of commodities used in many products sold at retail has moved higher more than expected by most economists. This could well be a sign of upcoming inflation at the consumer level.The measurement is based on online retail prices as of the start of 2007. The index is 100 at that point. The index has gone from just under 100 in late August to 100.77 recently.<247WallSt>

Hedgeye Retail’s Take:  Consistent with Hedeye’s inflation index, this “real world” index is tracking price escalation in real time with real data.  Interestingly, the MIT index got listed in the NY Times Annual Year in Ideas edition.


Snow is threat to retail revival in UK - As Arctic conditions gripped Britain again this weekend, the deep freeze threatened to curtail a nascent recovery in retail sales. Snowmen 'passengers' wait on snowbound Haywards Heath station  New figures show that after UK high streets were hit by a sales downturn due to cold weather earlier this month, they saw a dramatic bounce-back in trade last week. However, the fresh bout of snow that hit the country this weekend could derail the turnaround as store groups enter their most important trading week of the year. Travel chaos threatened to keep people at home and Brent Cross in north London closed yesterday. But Christmas shoppers at Bluewater in Kent seemed undeterred as the shopping centre stayed open despite the snow. Shops were also hopeful that customers would brave the wintry weather to pick up last-minute Christmas gifts as the snow delayed online deliveries. Between Monday and Thursday of last week, before the snow hit, the number of people shopping in the North East of England was just 0.1pc lower than the same week the previous year. Shopper numbers in Scotland were down by 1.4pc, while traffic volumes in the East Midlands and Yorkshire and Humberside were down by 3.9pc. <TelegraphUK>

Hedgeye Retail’s Take:  Despite the temporary logistical set back created by extreme conditions, this back drop bodes extremely well for sales of boots, outwear, and seasonal accessories (as long as this doesn’t last for weeks on end).


Cotton rises 12% due to export panic in India - Communication from government misunderstood to mean more exports. Cotton prices shot up by over 12 per cent to Rs 41,500 per candy on Friday after a communication issued that day by the commerce & industry ministry created panic in the market. It was misunderstood to mean that the government was pushing exports, though the cotton crop has been affected badly by erratic rainfall. The textile ministry had allowed the export of 5.5 million bales for a period of 45 days which ended on December 15. The communication from the commerce & industry ministry, a copy of which is available with Business Standard, stated that “it was the decision of the group of ministers that 5.5 million bales of cotton should be allowed for export during the cotton season 2010-11”. This, people in the trade felt, was an extension of the deadline of December 15. The textile ministry on Saturday clarified that there was no such extension. Textile Secretary Rita Menon told Business Standard that “the cap was not lifted, and, till December 15, only 3 million bales have been shipped”. However, she added that the government will reopen registration “so that the remaining 2.5 million bales can also be shipped”. <BusinessStandard>

Hedgeye Retail’s Take:  Clearly a sign of the fragility in the commodity market when a game of “telephone” on Friday created mini-run on cotton.  As a result, sensitivity (and prices) remain at highs. 


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Interesting Chart: Complacency and Slowing Global Growth

Below is an overlay of the Baltic Dry Index and US Equity market Volatility. Both have been headed in one direction as of late – lower.


There will undoubtedly be plenty of explanations for this, but I’d like to solicit our exclusive network of risk managers for thoughtful responses. The VIX hasn’t been this low since the end of April. Everyone knows what happened to US equities for 2-3 months thereafter.


In Global Equities, if China, India and Brazil didn’t look a lot like this Baltic Dry chart since early November, I wouldn’t be calling the Slowing Global Growth point into attention.


If you have time, send us your replies and we’ll pick the best one and post it anonymously.


Thanks in advance,



Keith R. McCullough
Chief Executive Officer


Interesting Chart: Complacency and Slowing Global Growth - bdi vix


Strong finish to the week but restaurant space largely traded sideways over the past seven days.


The momentum in restaurant stocks certainly seems to have slowed despite the strong performance on Friday.  Casual dining saw a more broad-based gain than quick service following the release of Malcolm Knapp’s Knapp Track sales data.  A few notable observations and news items:

  • Knapp Track data for November showed a sequential slowdown in sales for November on a one and two-year basis.  The print for November sales trends in casual dining was +0.9% vs final +1.6% in October.  Traffic also slowed on a two-year basis.  The print for November traffic in casual dining was -1% vs final -1.2% in October. 
  • Strong performance from CHUX to close out the week during which they announced the resignation of their CFO and the closing of 16 underperforming stores
  • MRT declined on strong volume.  This name has been on a tear over the past month
  • RT underperformed all casual dining stocks on high volume
  • DIN also declined on strong volume
  • SONC was the strongest performing restaurant stock on Friday.  On Tuesday it announced the repurchase of $62.5 million of its Class A-1 variable funding senior notes. 



Howard Penney

Managing Director


The Macau Metro Monitor, December 20th, 2010



Sands China said it has received a letter from the Macau Land, Public Works and Transport Bureau saying "the process is at its final proceeding."  The draft contract finalizing the approval process is expected to be issued very shortly.


"We truly appreciate the government's diligence in addressing this matter and we are optimistic that a resolution could be forthcoming very quickly.  The company has been inquiring of prospective buyers over many months and has accelerated the inquiries to ascertain the viability of a concentrated sales effort starting after the first of the year.  The reaction from prospective buyers is very positive and company management is optimistic that our anticipated pricing will be well-received," Sheldon Adelson said.



COO Mike Leven said, “They’re [Macau’s Land, Public Works and Transport Bureau] trying to manage growth in a healthy way.  They’re probably not going to allow them all to be built at once. When one gets built and gets close to opening, they’ll allow the next one to start construction, and it will open after the existing property ramps up.”  Projects by Wynn, MGM and Sands’ site 3 may be the next three Cotai casinos allowed, Leven added.



Galaxy announced it has closed its fixed rate senior unsecured bond issuance in an aggregate principal amount of RMB 1.38 billion.  The bonds will mature in December 2013.



  • Strong vote of confidence in Galaxy with offering more than 13 times oversubscribed
  • Attractive fixed interest rate of 4.625% p.a. for this groundbreaking offering
  • The first ever RMB denominated non-financial-institution corporate bond listed on the Hong Kong Stock Exchange
  • Opportunistic financing which raises reserve funding for development of non-gaming businesses and creates additional general working capital
  • Effective hedging strategies will be implemented to eliminate the currency risk


The consortium of Belle Corp. and Leisure Resources World Corp. (LRWC) may hire Asia Pacific Gaming for consultancy services for its multi-billion peso IR complex.  Negros Occidental Rep. Alfredo “Albee” Benitez, majority owner and former president of LRWC, said the group may not take in a foreign strategic partner and could just hire APG to help them operate The Belle Grande Manila Bay, which is targeted for soft opening by the fourth quarter next year."

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