R3: SKS, SHLD, Groupon, GOOG


December 29, 2010





  • The largest single-asset commercial real estate deal of 2010 comes at the 11th hour with Google’s purchase of 111 Eight Avenue – the 15-story brick building in the Chelsea submarket of Manhattan for ~$1.8Bn. The building, which already houses Google’s East Coast operations is also considered a “carrier hotel” in the data center industry where other companies house servers and networking equipment. As such, Google is also now a landlord to key tenants like Verizon, Sprint, Equinix, etc. adding a notable strategic twist to the deal.
  • In yet another sign that classic American style is back en vogue, the Top 3 on eBay’s list of most-sold products of the year include military jackets, plaid, and 1950s in that order – a trend that still appears to be inspiring collections for Spring 2011.
  • Pop cultures’ fascination with the Kardashian family continues to grow aided by the November cover of W magazine sporting a naked Kim. The family will start off the new year strong with a new Kardashian spin-off show, “Kourtney & Kim Take New York” starting in January in addition to kicking off their new Skecher’s endorsement deal. With the Kardashians now coming out with their own fashion line in 2011 expect additional endorsements to come.



Groupon Looks to Raise Capital - Groupon Inc., the online-coupon site that spurned a $6 billion offer from Google Inc. this month, has filed to raise as much as $950 million in funding, according to the venture-capital website VCExperts. Groupon, based in Chicago, filed the paperwork on Dec. 17 and an exact amount should be available next week, VCExperts said yesterday. The financing would value Groupon at as much as $7.8 billion, topping the Google offer, said the site, which offers data and commentary aimed at venture capitalists and private-equity investors. Groupon Chief Executive Officer Andrew Mason is shoring up the company as he ponders an initial public offering in the new year. Last week, Groupon hired Jason Child, Inc.’s former vice president of finance, to be its chief financial officer. The company, which offers deals in more than 300 cities, will have sales that top $500 million this year, people familiar with the matter said this month. An investment group led by Digital Sky Technologies in April gave Groupon a valuation of about $1.3 billion. LivingSocial, Groupon’s biggest rival, announced a $175 million investment from Seattle-based Amazon this month.  <Bloomberg>

Hedgeye Retail’s Take: After turning down a reported $6Bn bid by Google just a few short months ago, Groupon is taking further steps such as the recent addition of AMZN’s former VP of finance and raising capital suggesting that an IPO may indeed be in store in the not so distant future.


SKS' Takeout Hurdle - As Diego Della Valle builds his stake in Saks Inc., speculation continues to swirl that the department store chain could at some stage become the target of a takeover bid — if not from Della Valle, then from another suitor. Not so fast. Anyone wanting to engineer a takeover of Saks will find the retailer with a few anti-takeover defenses up its sleeve, but a suitor still could win over Saks’ board if the offer is high enough, legal experts agree. Saks, formerly Saks Holdings Inc., is incorporated in Tennessee, a holdover from its September 1998 merger with Proffitt’s Inc. Tennessee anti-takeover statutes put the burden on the acquiring investor to disclose intention to the targeted company. Those statutes require either a filing of a statement regarding ownership of shares and offer intent or, in what is known as a freeze-out provision, mandate that an investor can’t do anything for five years after acquiring the shares. That suggests that investors such as Della Valle and Carlos Slim Helú would face an uphill battle in a Saks takeover bid. In October, Della Valle, chairman and chief executive officer of Tod’s SpA, upped his stake in Saks to 19.1 percent, overtaking Mexican business magnate and financier Slim, who owns 16.1 percent of its stock. Neither has expressed an interest in acquiring the company. <WWD>

Hedgeye Retail’s Take: With shares still well below prior peak levels of 2007, Saks will remain on the list of M&A targets in 2011 despite various provisions inhibiting a potential deal. While it's easy to speculate, our sense is that this ownership structure with Slim and Della Valle owning nearly 35% of shares will be altered in some shape or form during 2011.


M&A Appetite for U.S. Brands High Overseas - Sluggish growth and economic challenges facing U.S. and European buyers on the home front are opening the door for Asian firms to take the lead in merger and acquisitions deals. These companies are on the hunt for major Western labels as they shift from being simply manufacturers to brand owners — and they have the deep pockets to fulfill their global ambitions. There are currently two types of Asian buyers — both of which want to better understand the American market. The first group seeks brand opportunities for growth in the U.S. with the goal of bringing those labels overseas. The second wants transactions that enhance sourcing, production and occasionally product category opportunities to help corner the market in a given sector. The rationale for the better and moderate markets, Khaitan explained, is that there are “tens of millions of new, aspirational middle-class Asian consumers entering the branded consumption economy for the first time in a meaningful way every year, and there is a race to create the retail distribution and supply chain to gain first-mover advantage to meet this new demand.” He added that there “are many aspects of the American lifestyle that have great appeal as America is generally perceived to be ‘cooler’ and more ‘hip’ than Europe.” SKNL is eyeing the men’s and women’s ready-to-wear category and Kasliwal is keen to do deals involving firms with annual volumes of between $50 million and $500 million that focus on the mid-to-upper end of the consumer market. “That’s where you have the sustainable markets,” he contended. <WWD>

Hedgeye Retail’s Take: With the Yen and Yuan near 5-year highs relative to the USD, there is an underlying sense of urgency behind Asian parties interested in U.S. assets. Coupled with the challenge of pushing through cost increases in the 2H of 2011 we expect owners of smaller brands to be more accommodating to potential buyers – particularly in the 1H of 2011.


SHLD Enters Digital Entertainment Competition - Sears Holdings Corp. today launched Alphaline Entertainment, its previously announced service that allows consumers to rent or buy movies and TV shows online and then download them to watch on their TVs or personal computers. Alphaline Entertainment uses the RoxioNow platform, the same platform used since May by Best Buy Co. for its CinemaNow service. "Collaborating with Sonic provides a great opportunity for Sears and Kmart to launch digital services for customers seeking even faster access to the latest in home entertainment experiences," says Karen Austin, president of consumer electronics for Sears and Kmart. Sears Holdings is No. 8 in Internet Retailer’s Top 500 Guide. The Sears service enables consumers to download movies the same day they go on sale as DVDs and Blu-Ray discs, says Sonic Solutions, the owner of the RoxioNow platform. This gives the Sears service nearly a month’s lead on Netflix Inc., No. 14 in The Top 500 Guide and the market leader for digital entertainment streaming. Netflix must wait 28 days from a film’s release on DVD before it can make content available, according to its agreements with such movie studios as Universal Studios and Warner Bros. Studios. <InternetRetailer>

Hedgeye Retail’s Take: The department store that sells just about everything adds another revenue stream to the portfolio – digital entertainment. Don’t expect Netflix to sit in a catch-up position for long. That said, Sears is certainly entering the streaming market with noteworthy splash right out of the gate.


Third of Consumers Plan to Buy Fitness Gear in 2011 - According to a new study by the Consumer Electronics Association (CEA), almost half of U.S. online consumers used a fitness technology in the past year, and 37% anticipate purchasing a fitness technology in the next 12 months. According to the 'Getting Fit With Consumer Electronics' study, 54% of consumers cite lack of motivation as the main reason not to exercise. The study also found 76% exercise alone without the guidance of exercise professionals, and 74% of consumers exercise at home.  "Fitness technologies can play a significant role in motivating consumers," said Rhonda Daniel, manager of market research at CEA. "Compared to consumers who are not using fitness technologies, consumers who use these devices view exercise more positively, and are more likely to enjoy exercising and to view it as important to their health." <WWD>

Hedgeye Retail’s Take: It’s hard not to callout the natural bias here - with New Years right around the corner, aren’t most people focused on ramping fitness activity in their lives right now…for a few weeks at least?


E-tailers Holiday Customer Satisfaction Survey - Keep the customer satisfied. Not all e-tailers do it, but in this high-flying holiday season, the best of the best were, Netflix,,,, and ForeSee surveyed 10,000 Americans from Nov. 29 to Dec. 15, centering its queries around a Web site’s content, including visuals, product descriptions and reviews; the quality and availability of the merchandise, and the functionality of the site, meaning how easy it is to navigate and make a purchase. From all the consumer responses, ForeSee ranked the brands on a scale of 1 to 100. The top 12 sites, cited above, all scored 80 or higher, meaning they provided a superior online experience.,,, jcpcom (Penney’s) and all registered in the high 70s, meaning they provided a good experience. However, those needing some work to catch up to the competition were,,, macy’ and They all scored lower on the list of 40. “The biggest surprise is that price is not really the major driver in the aggregate, even though retailers are so focused on discounting,” Kevin Ertell, ForeSee’s vice president of retail strategy, told WWD. “To me that says creating a greater experience for customers may be better for the top and bottom lines, and even more important than price.” <WWD>

Hedgeye Retail’s Take: Customer service is not quite as ‘touchy feely’ as many suggest. Internet-bsed companies that keep this measureable at the top of their lists outperform competition on a regular basis. We can’t help but callout that Netflix is #2 on this list while Sears was noted as one of the top underperformers. Per our earlier comments– let’s just hope that customer satisfaction processes were incorporated into Sears’ go to market strategy for digital entertainment.


R3: SKS, SHLD, Groupon, GOOG - R3 1 12 29 10


Sri Lanka Faces Further Cost Inflation in Energy Hikes - Sri Lanka’s garment sector has strongly opposed the recent proposal of increasing electricity charges by 9.5 percent from January 2011. The garment industry has been hit in face of the end of the GSP plus facility, the increase in prices of cotton and polyester, freight charges as well as fluctuations in currency rates. Neighboring rivals such as Bangladesh, Vietnam and Pakistan, which initially lagged far behind Sri Lanka in terms of apparel trade, are now strongly competing with the country after the withdrawal of the GSP plus concession in August this year. <FashionNetAsia>

Hedgeye Retail’s Take: When it rains it pours…poor, but fitting analogy.






It’s been quite a ride but can LVS squeeze another 20% from Macau?



LVS stock may be a victim of its own success next year.  The valuation is hefty at around 16x 2012 EBITDA which implies investors think the Street’s estimates are too low.  We are pretty much in-line with the Street for Vegas and Singapore but somewhat below for Macau.  The Street 2011 Macau EBITDA estimate of $1.4 billion for LVS is a best case scenario in our opinion, and likely not enough to satisfy investors’ appetites.


Here’s why we think LVS will grow its Macau revenues by 10% rather than the 15% or so projected by the Street:

  • While we are projecting 30% market growth, table supply will be up 10% for the year with the opening of Galaxy Macau.
  • LVS has underperformed the market (on a same store basis) by 12% in 2010.  Their properties lost traction in both Mass and VIP.  In October and November, the underperformance was particularly pronounced, -24% and -35%, respectively, and it may be even worse in December.  Ex the supply impact, we are estimating that LVS will underperform by 10%.
  • In 2010, VIP hold percentage was higher than normal at both Venetian and Sands and Mass hold was high at Venetian.
  • Four Seasons faces an unrealistic comparison in Q3.
  • Perhaps the largest discrepancy between the Street's projections and our own is that the Street factors in almost no cannibalization of LVS's existing properties when sites 5 & 6 open in 2012.  History will tell us that when a company opens a second large property in Macau, its existing property(s) suffers the most. See our note "WYNN COTAI: A DONNER PARTY?" (11/11/10) for further details.

The following chart shows LVS’s massive underperformance relative to the market in terms of Mass, VIP, and relative to the market’s same store performance.




In terms of EBITDA, we are projecting approximately 5% cost inflation that we don’t think the Street is incorporating.  Inflation is real in that part of the world, and there remains a labor shortage.  Incorporating more moderate revenue growth assumptions and cost inflation, our 2011 Macau EBITDA estimate is more than $100 million below the Street and would be viewed as a disappointment.


The Macau Metro Monitor, December 29th, 2010



Macau's unemployment rate for September-November 2010 was 2.8%, down by 0.1% point over the previous period (August-October 2010).  Total labor force was 329,000 in September-November 2010 and the labor force participation rate stood at 71.2%, down by 0.5% point from the previous period.



The rediscount rate went up by 45 bp to 2.25%, the first change in two years.  The one-year bank relending rate increased 52bp to 3.85%.  On December 25, the central bank raised its benchmark deposit and lending rates by 0.25% points, representing a second rise in a short-term period in an effort to curb inflation.


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TODAY’S S&P 500 SET-UP - December 29, 2010

As we look at today’s set up for the S&P 500, the range is 16 points or -0.68% downside to 1250 and 0.60% upside to 1266.  Equity futures remain above fair value as commodity stocks continue to benefit from investors hedging a declining dollar. In overnight news, China's central bank raised its rediscount rate 45 bps to 2.25%.

  • Groupon has filed to raise as much as $950m in funding after spurning $6b offer from Google this month, according to VCExperts; financing would value Groupon at as much as $7.8b.
  • New York and Ohio state pension funds will be lead plaintiffs in shareholder litigation against BP over Gulf of Mexico spill losses
  • Leonard Green may launch hostile bid for BJ’s Wholesale if an auction isn’t initiated in coming weeks, the N.Y. Post reports
  • Blackstone makes preliminary offer of unknown size for Australia’s Centro Properties, which owns 600 U.S. properties, WSJ reports
  • U.S. flight delays threaten to stretch into weekend after as many as 1.2m airline customers were affected by worst Dec. snowstorm to hit New York City in six decades
  • Hemispherx Biopharma (HEB) said it will restate financial statements for this year and last year
  • Sara Lee (SLE) agreed to sell White King, Janola business to Symex for EU37.9m ($49.6m)
  • Savient Pharmaceuticals (SVNT) said it initiated a search for a CEO; Paul Hamelin, co. president since 2008, will continue to lead the company until it hires new CEO.


  • One day: Dow +0.18%, S&P +0.08%, Nasdaq (0.16%), Russell (0.36%)
  • Last Week: Dow +0.72%, S&P +0.28%, Nasdaq +0.21%, Russell +0.34%
  • Month-to-date: Dow +5.17%, S&P +6.60%, Nasdaq +6.59%, Russell +8.59%
  • Quarter-to-date: Dow +7.30%, S&P +10.28%, Nasdaq +12.42%, Russell +16.76%
  • Year-to-date: Dow +11.00%, S&P +12.86%, Nasdaq +17.35%, Russell +26.23%
  • Sector Performance mixed (6 sectors up,3 down) - Energy +0.37%, Utilities +0.35%, Consumer Staples +0.27%, Materials +0.21%, Healthcare +0.06%, Financials +0.01%, Industrials -0.06%, Tech (0.12%) and Consumer Discretionary (0.21%)    


  • ADVANCE/DECLINE LINE: -125 (-445)  
  • VOLUME: NYSE 560.21 (+19.81%)
  • VIX:  17.52 -0.85% YTD PERFORMANCE: -19.19%
  • SPX PUT/CALL RATIO: 1.45 from 2.06 (-29.46%)



Treasuries sold-off sharply on Tuesday, significantly more so following a disappointing $35B 5-yr auction which yielded 2.149%, or approximately 8bps above the prior trade. 10-yr notes added nearly 16bps, most of which in response to the auction, to yield 3.49%.

  • TED SPREAD: 16.39 -0.101 (-0.615%)
  • 3-MONTH T-BILL YIELD: 0.15% -0.02%  
  • YIELD CURVE: 2.65 from 2.76


  • CRB: 331.43 +0.70%
  • Oil: 91.49 +0.54% -  Trading down 0.69% in the AM
  • Crude Falls From Near a 26-Month High on Pessimism About U.S. Stockpiles
  • COPPER: 432.80 +1.12% - Trading down -0.18% in the AM
  • Copper Advances to Record in London Trading on Speculation of More Growth
  • GOLD: 1,405.35 +1.84% - Trading up small in the AM
  • Gold Fluctuates as Concern About Europe Spurs Demand for Wealth Protector



  • Rubber Advances to Near Record as Buyers Lured by Yesterday's Price Tumble
  • Corn Drops on Speculation Investors Cash in Gains After Eight-Day Advance
  • South Korea Raises Foot-And-Mouth Alert to Highest Level to Curb Outbreak
  • Cotton Crops Washed Away by Flood Waters in Australia's Queensland State
  • QR National Coal Shipments Are Curbed by Queensland Flooding, Derailment
  • Smuggled-Diamond Revenue Flows to Robert Mugabe's Zimbabwe Before Vote
  • Anglo Will Invest $770 Million in Brazil Iron-Ore Port With Batista's LLX
  • Steel Authority India to Pay 8% More for Imported Coking Coal Next Quarter
  • Dutch Cargo Ship Runs Aground in Finland, No One Injured, Broadcaster Says


  • EURO: 1.3127 -0.06% - Trading down -0.06% in the AM
  • DOLLAR: 80.402 +0.04%% Trading down -0.16% in the AM


  • European Markets: FTSE 100: -0.52%; DAX: +0.40%; CAC 40: +0.89% (as of 07:30 EST)
  • European markets edged higher in light volumes with the UK lagging after its extended Christmas holiday. Fixed income markets were pressured by disappointing US auction results yesterday as well as China's increase in interest rates, including the rediscount rate today and ahead of supply from Italy.
  • Oil and mining sectors lead gainers, up around +0.6% as all but one sector, technology (0.1%), trades higher.
  • The region's economic and corporate news flow was very light.
  • Germany Dec Preliminary CPI due at approx 08:30ET


  • Asian Markets: Nikkei +0.5%; Hang Seng +1.5%; Shanghai Composite +0.7% (as of 04:57 ET)
  • Most Asian markets rose today.
  • Hong Kong rose +1.54% in thin trade. Car stocks recovered from early losses when China announced it will end tax incentives for small cars 1-Jan, as had been widely expected.
  • Arnhold Holdings soared 24% on announcing a takeover offer, an asset disposal, and a special dividend.
  • China Rare Earth Holdings soared 16% after China cut export quotas yesterday.
  • China’s benchmark money-market rate advanced to the highest level in three years as lenders hoard cash before the end of the year.
  • Bargain-hunting led China higher by 0.68% after five straight down days.
  • Japan opened flat but ended up 0.50% on day.
  • South Korea slid slightly at the start of ex-dividend day, though it ended up 0.50% thanks to gains by brokerages and retail stocks. High-dividend stocks including SK Telecom, KT Corp, and Korea Exchange Bank fell 4-5% each.
  • Australia was flat (-0.04%) after a four-day break. Miners fell on the December rate hike in China, and heavy rains continued to affect them. Tower Australia Group soared 42% on accepting a $1.2B takeover offer from Dai-ichi Life Insurance.


Stubborn Believers

“This stubbornness in the face of clear data is right up there with the efficient market believers.”

-Jeremy Grantham (Quarterly Letter, October 2010)


Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.


This isn’t to say that there aren’t plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.


I’m fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn’t working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.


Yesterday, I was re-reading Jeremy Grantham’s Quarterly Letter for October titled “Night of the Living Fed” and that helped me re-think my global macro positioning heading into 2011.


Before you scroll down, don’t worry – I’m not covering my short position in the SP500 (it’s -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I’ve been bearish plenty enough times on US stocks in my career with performance that’s worse than that.


Being bearish on US stocks here doesn’t mean you have to be bearish on everything – that’s a US-centric stock market investor’s risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America’s currency and hold rates of return on American savings accounts unsustainably low.


Grantham, Grant, and Hussman aren’t fans of The Ber-nank either. So, while hope is not an investment process, I’m really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.


On the politicized US central bank, here are some valuable excerpts from Grantham in the “Night of the Living Fed”: 

  1. On Evolution: “… displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.”
  2. On Quantitative Guessing (QG): “Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy.”
  3. On US Economic Growth: “… on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world.” 

The “real world” is, of course, real-time… and… as Ludwig von Mises said, “For many people, the “long run” quickly becomes the short run.” There’s no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.


On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here’s what the expectations of higher prices (inflation) have done: 

  1. Week-to-date = +0.61%
  2. Month-to-date = +9.6%!
  3. Quarter-to-date = +16.1% 

For a man who preaches “price stability”, that’s nice Heli-Ben… really nice. The 45 MILLION Americans on food stamps salute you.


On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning’s ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn’t cool for the 90% of Americans who aren’t levered-long the SPY.


Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07’ and early 08’) that stocks are “cheap” even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.


Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.


My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stubborn Believers - 1

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