Hedgeye Editorial: Volatility

Below is a thoughtful response from a Hedgeye subscriber on Volatility in reference to a post we published yesterday titled "Interesting Chart: Complacency and Slowing Global Growth".




Please note that I write these comments with the fear of being overly simplistic.  If it is deemed to have any value whatsoever, I am happy to discuss further.

Volatility, like many instruments has seasonal factors that influence their market price.  In my opinion, it is not easy to take away any meaningful information from short term volatility levels around holiday periods, especially the year end holiday season due to its length of time and social importance in many areas of the world.   During this time frame, the increased risk of lower close to close variance coupled with the typically lower intraday volatility creates a much higher risk for volatility traders to hold long options positions.

With regards to the VIX in particular, it has the ability to be very misleading at times due to its short duration.  It only looks at a 30 day time frame, and can be highly influenced by market holidays.  In short, a typical 30 day period has 22 trading days.  Many volatility traders are pricing SPX options with an adjusted number of trading days for the next month, but the VIX calculation is not.   Therefore many traders value the current SPX options at higher volatility than the VIX indicates.

In short, I do think volatility is low and there is some level of complacency.  However a level of 16 in April does not equate exactly to a level of 16 right now.   The volatility term structure, or spread between 30 day and 90 day is still ascending and I would expect the VIX to show an increase in value after the holiday season assuming everything else equal.




Hedgeye Editorial: Volatility - vix

R3: WMT, DECK, M, Li-Ning


December 21, 2010





  • Last week was the heaviest in history for online sales, with approximately $5.2 billion spent over the seven day period.  Four of those days registered sales above $900 million.  Not surprisingly, more than 50% of all transactions included a free shipping offer.
  • A NY-centric blog noted once again that UGG stores continue to have lines wrapped around block at pretty much any hour as Christmas draws closer.  While we have observed such lines since late October, it interesting to note that this phenomenon is taking place at all of Manhattan’s locations.  This is occurring despite the fact that the sheepskin boots are widely available across other shoe chains in Manhattan, including a whopping 80 locations carrying the brand within several blocks of the 58th and Madison. 
  • According to comScore, computer hardware is the fastest growing online product category for the holiday season, increasing by 25% from Nov 1 through Dec 17.   Consumer electronics (+22%), Books/Magazines (+21%), computer software (+16%) and toys (+15%) round out the top five categories.  Apparel is noticeably absent from the list.  



Stores Pin Hopes on Holiday Discounts - It’s the holiday homestretch, and stores are betting on deep discounts to propel them to the finish. Retailers are trying to lure the growing constituency of last-minute, channel-shifting, bargain-hunting shoppers. The outlook remains positive, with Customer Growth Partners among the most optimistic research companies, revising its holiday sales projection upward to 8 percent compared with last year, from 5.5 percent just two weeks ago. Profit margins are still a guessing game as retailers promote heavily, with reductions on Wednesday expected to reach 65 percent, from 50 percent at the beginning of the week. Major department stores are said to be planning post-Christmas sales of 75 percent off already-reduced merchandise. It’s clearly easier to be a couch potato or procrastinator this season with the explosion of e-commerce and mobile commerce platforms. Online spending during the holiday period from Nov. 1 through Dec. 17 is up 12 percent versus the year-ago period, according to ComScore. Meanwhile, mobile commerce is expected to grow to $3.4 billion by yearend from $1.4 billion in 2009, a 134 percent increase, according to ABI Research. “Mobile now represents more than 10 percent of our business, whereas 90 days ago it was virtually zero,” said Greg Bettinelli, senior vice president of marketing at HauteLook, a flash sale site. “We released a significant functionality in mid-October, reconfigured our Web site to work better on all mobile devices and relaunched our iPhone app. We’ve seen a huge lift across the board. Consumers can do more because they have the device in their handbag or pocket. This is not a small thing anymore.” <WWD>

Hedgeye Retail’s Take: From our perspective, overall discounting appears to be rational with very little signs of “panic” setting in.  Of course things could change over the next 72 hours but the idea of “hope” seems like a stretch given the solid sell-throughs observed so far.


Some Wal-Mart Vendors Question Strategy - The majority of Wal-Mart Stores Inc. suppliers say Chief Executive Officer Mike Duke and his managers aren’t explaining their business plans clearly enough, according to a survey.  More than half the 139 suppliers surveyed in a study by recruitment firm Cameron Smith & Associates didn’t agree that “senior leadership is aligned behind a strategic vision that is consistently communicated and well understood by the supplier community.” The Rogers, Arkansas-based group surveyed a small sample of Wal-Mart’s more than 60,000 suppliers. To win back shoppers, Duke and new U.S. stores chief Bill Simon changed tactics this year and began restoring thousands of products removed during the tenure of former merchandising chief John Fleming. The company has weathered six consecutive quarters of declining sales at U.S. stores open at least a year, and Duke, 61, has projected “positive” sales for this period. “They are rather frantically returning to past practices by bringing back products and going after their core low-income shopper,” said Leon Nicholas, Cambridge, Massachusetts-based director at consulting firm Kantar Retail, which works with Wal- Mart suppliers. “The big question for a lot of our clients seems to be, ‘Is this going to work?’ So far, it doesn’t seem to be working.” <Bloomberg>

Hedgeye Retail’s Take: This is not surprising given the customer and even some analysts on the Street are also confused about the company’s strategy.  Add in confusion from the vendor community and we still maintain that it will be difficult for WMT to drive a sustainable top-line improvement with only minor tweaks to its merchandising strategy.


Macy's Flagship Bomb Scare - A suspicious package found near the Macy’s Herald Square flagship caused a disruption Monday afternoon when the police closed off Herald Square Plaza and the store’s two Broadway entrances. Macy’s stayed open and was not evacuated. Police cordoned off Herald Square at Broadway from 34th to 35th Streets after receiving a 911 call at 12:38 p.m. regarding a suitcase found in front of the department store. The bomb squad identified the package as a suitcase of clothing, said a police spokeswoman, who added that the area reopened at 2:20 p.m. “We shut down our two Broadway doors at approximately 12:45 p.m. and opened them at 2 p.m. upon NYPD’s direction,” said Elina Kazan, a Macy’s spokeswoman. The Herald Square scare was one of three false alarms Monday in the New York metropolitan area. In the early morning, a section of Terminal A at Newark Liberty International Airport was closed when security officers were said to have found radiation coming from a checked bag. Officials discovered that the radiation came from a computer monitor and the air terminal reopened at about 8:15 a.m.  <WWD>

Hedgeye Retail’s Take: Even an hour delay could prove costly for the flagship store which is amongst the highest grossing locations on earth.  Importantly, shoppers were not deterred once the doors were re-opened and the mysterious suitcase was declared to be “just a suitcase full of clothes.”


Counterfeit Crackdown - Buoyed by alliances with industry and law enforcement, Immigration and Customs director John Morton said efforts to stifle counterfeit goods — a $600 billion challenge worldwide — are getting the needed muscle to be more effective. “To successfully combat counterfeiting, which really has become an international criminal problem, we’re going to have to have a very strong partnership between industry and government,” Morton said in an interview at ICE headquarters here. “[The brands] understand the problem counterfeiting poses better than anyone else. They know their products well. They know how counterfeiters operate, who the counterfeiters are. Working together, we can have much greater success.” Rising worry over the criminal connections of counterfeiters is giving added urgency to the efforts. Possible links between counterfeiting and terrorism are a major concern, said Morton, who wouldn’t discuss specifics. <WWD>

Hedgeye Retail’s Take: It’s good to see domestic efforts are indeed underway at Customs, but that’s only half the battle. It’s worth noting that VF’s management highlighted when it comes to international policing efforts, companies and branded apparel manufacturers typically pool resources in order to address counterfeiting more efficiently. The reality is however, that it simply doesn’t make sense economically to chase smaller players – a concerning fact when considering that might in fact include terrorists.


Beiersdorf to Sell Its Juvena and Möller Brands - Beiersdorf AG will sell its Juvena skin care brand and Marlies Möller hair care line to Austria’s Troll Cosmetics GmbH. Terms of the deal were not disclosed. The announcement Monday came in the wake of a reduced earnings outlook for 2010 that was reported earlier this month by Beiersdorf, the maker of Nivea, Eucerin and La Prairie. Personnel and strategy changes, including the reduction of its makeup business, are also being implemented. Beiersdorf stated it will focus its selective market resources on La Prairie. Juvena and Marlies Möller are managed by Beiersdorf’s Switzerland-based La Prairie Group. “Selling the two brands will allow Beiersdorf to focus its resources within the selective market on developing La Prairie, the global premium skin care brand,” stated Thomas-B. Quaas, chairman of Beiersdorf’s executive board. <WWD>

Hedgeye Retail’s Take: Apparently there is another acquirer aside from Coty in what is quickly becoming the most active industryfor M&A.


Zooey Deschanel Sues Steven Madden- Zooey Deschanel and Steven Madden Ltd. have broken up before even getting started. Deschanel, a darling of indie romantic comedies, has sued the shoe specialist for failing to pay her at least $1.5 million for a planned Zooey shoes and accessories brand. In the lawsuit, filed Friday in Los Angeles County Superior Court, the actress, model, singer and songwriter, who wanted to add a fashion credit to her résumé, said the company orally agreed to manufacture, advertise and sell the brand worldwide for as long as two years. The lawsuit alleged that Madden balked at the agreement to move forward with the brand in October and refused to compensate Deschanel. About three months before, the court documents allege that Madden approved a $2 million up-front payment to Deschanel in order to use her name and likeness, plus a 5 percent domestic royalty fee and a 4.5 percent international royalty fee, before reducing the up-front amount to $1.5 million with her consent.  The lawsuit said Deschanel didn’t seek or obtain competing corporate sponsorships because of her expectation that Madden would market the Zooey merchandise. She was tapped by Coty Inc.’s Rimmel cosmetics brand in March to be a brand ambassador. In October, Deschanel spoke to WWD about her relationship with Rimmel, saying: “I want to be associated with products that are accessible for everyone.” Steven Madden Ltd. did not respond to requests for comment.<WWD>

Hedgeye Retail’s Take: The young actress should chalk this one up as a learning experience and move on – last I checked, the good ol’ verbal agreement hasn’t held up in court in a very very long time.


Li Ning's Orders Weaken - Li Ning Co. said orders for the second quarter of 2011 have fallen 7% in footwear and 8% in apparel. Both apparel and footwear products saw their average retail prices increase by more than 8%. As a result, total order value, based on tagged retail prices, was maintained at the same level as last year. After taking into account the impact by the Group's wholesale discount for distributors, total order value in sell-in terms declined by 6% compared to the same period last year. "With regard to the results of this Trade Fair, we have established the view that, the retail environment for the sporting goods industry this year is faced with heavy pressure. On one hand, the previous growth model of heavy reliance on store openings by the sub-distributors is no longer sustainable; on the other hand, operating costs at the retail level are fast escalating. Given this environment, the operations of the Group's independent distributors were inevitably affected. Their forecasts for growth in the coming year had become more conservative," said Zhang Zhiyong, CEO of Li Ning. <SportsOneSource>

Hedgeye Retail’s Take: Door growth has provided a limited growth opportunity for athletic brands for a couple years now. In fact, the passive nature of this comment is a bit startling, if not telling. Domestic players certainly aren’t going to roll over so for a brand looking to make inroads to the U.S. market by gaining share, it  better be ready to get on offense.



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CHART OF THE DAY: Real Estate Tax Revenue On Decline



CHART OF THE DAY: Real Estate Tax Revenue On Decline -  chart of the day

The Pain of Rain

“One can find so many pains when the rain is falling.”

-John Steinbeck


Timing is everything in life.  As it relates to my current trip to Southern California, my timing couldn’t have been worse.  I took a few hours away from the screens yesterday to finish up my Christmas shopping and a number of local business people informed me that this was one of the rainiest weeks Los Angeles had seen in, well, a really long time.   


Today Keith is off to his hometown of Thunder Bay, Ontario with his wife and little ones, Jack (already a heck of an ice skater at only three years old) and Callie.  Tomorrow I’ll head to my hometown, the small Alberta prairie outpost of Bassano, Alberta (total population of 1,200 and 75 some dogs).  I think both of us, like many of you I’m sure, will take the next week to relax and begin planning for 2011.  Much to the Steinbeck quote above, as I contemplate the future on this dark wet California morning, I do see a few pains.


While Steinbeck is most known for his literary career which culminated in the Nobel Prize for literature in 1962, he also knew a thing or two about state and local finances in California.  In fact, his father was the long serving Treasurer of Monterey County.


California has become the poster child for one of the key potential pain points heading into 2011, that of municipal debt and deficits.   We recently shorted municipal bonds in our Virtual Portfolio via the etf, MUB.  While clearly not all municipal bonds are created equally, the general short case for the municipal bond market is as follows:


1.  Rates are going higher – We’ve obviously already seen this over the last 30-days, but as the Fed is unable to keep the long end of the curve down, bonds will continue to suffer, especially as inflation expectations accelerate.   Rates, obviously, have much more room to the upside from these historically low levels.


2.  Housing prices have more downside – We are bearish on housing prices to the tune that we think home prices have 15 – 30% more downside nationally.  Since appraisals for tax purposes operate on a 2 – 3 year lag to market prices, municipalities will begin collecting taxes based on dramatically declining home prices, which should hurt their tax receipts.  Real estate taxes are the single largest revenue source for local governments.  In the Chart of the Day, we show the Case-Shiller index versus property tax receipts.


3.  State deficits set to expand – Currently, state level revenue is 12% below pre-recession levels, which is substantially worse than the revenue recovery in the past three recessions going back to the 1980 – 81 recession.  This pain is likely to intensify, with States facing a $140 billion budget gap in fiscal 2011, according to the Center of Budget and Policy Priorities.


This is obviously the cliff notes version of our body of work on the municipal market, so if are a subscriber or prospective subscriber and would like more information, or to set up a call to discuss this topic with us, please email our Head of Sales Jen Ken at .


While Steinbeck has become one of America’s most lauded authors, he was also, while alive, one of its most controversial.  He had left leaning politics and was long suspected to have ties to the Communist Party.  In fact, perhaps his greatest work, The Grapes of Wrath, which is considered by almost all as one of the top ten English language novels of the last century, was originally harshly critiqued because it was deemed to be too pro-worker and overly critical of capitalism.


In addition to his full-time career of writing, Steinbeck was also a very active traveler.  In 1947, he travelled to the Soviet Union with noted photographer Robert Capa.  They were two of the first Westerners to visit the Soviet Union after the Communist Revolution.   The output of this trip was A Russian Journal, which describe the harsh living conditions in the Soviet Union. 


Since Steinbeck’s visit almost 60-years ago, much has changed in the former Soviet Union.   While the transition to a fully functioning democracy in the vein of the West is still a work in progress, the introduction of capitalistic ways has certainly benefitted Russia, particularly as it relates to its vast natural resources.  Due to modern reinvestment and the opening of her oil fields, since 1999 Russian oil production has increased 62%, or 3.5MM barrels per day, while total global oil production has only increased 10.5%, or 7.6MM barrels per day. The Russians are taking market share.


Despite the pain we see in municipal debt markets headed into 2011, we do have some great long ideas.  As it relates to the Russian oil theme above, one of our favorite long ideas is Lukoil (LUKOY).  According to our Energy Sector Head Lou Gagliardi:


“Although labeled a National Oil Company (NOC), Lukoil is 100% publicly owned. But, geopolitical risk, the Russian economy, a weak global economy and energy demand, and an onerous export tax duty have all weighted heavily on Lukoil’s share price in 2010 widening its market price discount to its discounted cash flow valuation further to 50%.


Historically NOCs trade at a discount to cash flow valuations and Lukoil’s historical discount has been in the 30% range. We believe its market discount will narrow reverting to the mean in 2011 driven by several catalysts. Lukoil’s high oil production weighting of 87% levers its share price to higher crude prices; its long-lived reserves, its expanding production profile internationally, and its growing crude oil production profile of ~2% per annum will contribute to significant earnings growth in 2011.


Lukoil’s balance sheet is strong with a debt to capital ratio of ~16% and a net of cash ratio at ~12%, as the Company is living within its capital spending. At $85.00 crude oil in 2011, we expect Lukoil to easily beat consensus with a ~25% E.P.S increase from 2010 to $14.75/ADR. For 2011, NCF at $85/bbl is targeted at $8.4 billion, or $10.12/ADR. At $89.00/bbl, earnings would jump 35% from prior year to nearly $16.00/ADR, adding roughly another $1 B in NCF.”


To put it simply: Lukoil is cheap, growing, has deep reserves, and a pristine balance sheet.


While the outlook does seem a little cloudy and rainy, there are plenty of Lukoil type opportunities out on the horizon.  Moreover, as another well know American literary figure Dolly Parton once sang:


“The way I see it, if you want the rainbow, you gotta put up with the rain.”


Enjoy the holidays with your families and stay out of the rain,


Daryl G. Jones

Managing Director


The Pain of Rain - Property Tax Case Shiller normal


The Macau Metro Monitor, December 21st, 2010


Macau November CPI rose 3.93% YoY and 0.45% MoM.  Prices of outbound package tours were higher YoY and lower MoM.

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 80.52%
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