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TODAY’S S&P 500 SET-UP - January 12, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -0.39% downside to 1269 and +0.62% upside to 1282.  Equity futures are trading above fair value in a continuation of Tuesday's modest gains with early focus centered on Portugal's bond auction.  In focus today, Treasury Secretary Geithner will speak about China ahead of President Hu's visit to the US.



  • 8:30 a.m.: Treasury’s Geithner speaks on China
  • 8:30 a.m.: Import price index
  • 8:30 a.m.: WASDE grains, commodities
  • 8:30 a.m.: USDA quarterly grains
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: Fed’s Richard Fisher speaks on monetary policy in New York
  • 1 p.m.: U.S. sells $21b 10-yr notes reopening
  • 2 p.m.: Fed releases beige book economic survey
  • 2 p.m: Monthly Budget Statement
  • USDA broiler eggs set, Jan. 12


  • Big 5 Sporting Goods (BGFV) prelim 4Q adj. EPS, rev. miss ests.
  • Evergreen Solar (ESLRD) sees $340m charge to close Devens mfg plant, affecting 800 workers
  • Lululemon Athletica (LULU) sees 4Q rev. $237m-$239m, up from $210m-$215m forecast in Dec. vs est. $221.6m
  • Synnex (SNX) high end of 1Q adj. EPS forecast above est.
  • Zale (ZLC) same-store holiday sales rose 8.5%  


  • One day: Dow +0.30%, S&P +0.37%, Nasdaq +0.33%, Russell 2000 +0.40%
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +0.82%, S&P +1.34%, Nasdaq +2.41%, Russell +1.42%
  • Sector Performance - (6 sectors positive) - Energy +1.66%, Materials +0.81%, Healthcare +0.50%, Financials +0.40%, Industrials +0.37%, Utilities +0.14%, Consumer Disc (0.03%), Consumer Spls (0.08%), Tech (0.16%)  


  • ADVANCE/DECLINE LINE: 552 (+476)  
  • VOLUME: NYSE 943.92 (-1.20%)
  • VIX:  16.89 +3.71% YTD PERFORMANCE: -4.8%
  • SPX PUT/CALL RATIO: 1.90 from 1.59 (+19.55%)  



Treasuries snapped a three-day winning streak with the modest bounce in stocks and supply impact.

  • TED SPREAD: 16.22 +0.406 (2.568%)
  • 3-MONTH T-BILL YIELD: 0.15%    
  • YIELD CURVE: 2.77 from 2.73


  • CRB: 331.46 +1.41%
  • Oil: 91.11 +2.08% - trading -0.19% in the AM
  • Oil Trades Near One-Week High as Alaska Pipeline Outage May Last Five Days
  • COPPER: 434.90 +1.98% - trading +0.67% in the AM
  • Copper Rises for a Second Day on Efforts to Contain European Debt Crisis
  • GOLD: 1,382.25 +0.79% - trading +0.02% in the AM
  • Gold Imports by India Surge to Record as Price Is `Not a Factor,' WGC Says


  • Soybeans Gain Before USDA Report Forecast to Show Lower Stocks; Corn Rises
  • Coffee Climbs for Third Day as Indonesia, Vietnam Rains May Tighten Supply
  • Gold May Rise as European Sovereign-Debt Crisis Spurs Demand for a Haven
  • Latex to Plummet as Weather Improves, World's Biggest Glove Maker Predicts
  • German Tainted-Food Scandal Widens as China Halts Imports of Pork Products
  • Incitec Moranbah Plant May Be Delayed by Queensland Floods, Citigroup Says
  • Rice Growers in the U.S. May Switch Some Area to Soybeans, Federation Says
  • Cotton Advances to Three-Week High as Deadly Floods Damage Australian Crop
  • China Freeze Hurts Sugar Cane, May Cut Production in Guangxi, Top Grower
  • Aluminum Stockpiles in Japan Advance 6.5%, First Increase in Four Months
  • Grain Exports From Brisbane Are Halted After Port Closes, GrainCorp Says


  • EURO: 1.2969 +0.22% - trading +0.02% in the AM
  • DOLLAR: 80.846 -0.04%% - trading -0.10% in the AM


  • European Markets: FTSE 100: +0.59%; DAX: +1.46%; CAC 40: +1.59%
  • European markets opened higher and have modestly extended gains after the Portuguese debt auction.
  • Peripheral equity markets led the regions advance, Greece up +3.86%, Spain +3.84 and Italy up 2.72% - Portugal is up +0.98%
  • Peripheral debt spreads have stabilized.
  • All 18 sectors trade higher led by banks +4.9% and basic resources +2.3%, whilst personal & household product and autos +0.2% lead laggards.
  • Germany 2010 GDP +3.6% vs consensus +3.6% and prior (4.7%)


  • Asian Markets: Nikkei +0.02%; Hang Seng +1.54%; Shanghai Composite +0.62%
  • Asian markets rose today as concerns ease about European debt and a buoyant US market.
  • Local property stocks and Chinese resource issues led Hong Kong’s rise.  Alibaba.com rose 4% on speculation that its parent and Baidu will invest $100M in Sina’s microblog product.
  • China rose, with property shares going up on news that pending proposed property taxes will not apply to all transactions.
  • Taiwan went up 0.38%.
  • Miners lifted Australia to a small rise on predictions of higher commodity prices, though companies directly hurt by the floods fell.
  • Japan finished almost literally flat. Financials went up on foreign buying and short-covering and trading houses gained on higher commodities prices. Exporters went up on a weaker yen.
  • Japan December M3 +1.8% y/y. December M2 +2.3% y/y. November trade surplus ¥259.7B, (46.6%) y/y. November current account surplus ¥926.2B vs consensus ¥977.7B.



“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

-Abraham Lincoln


I recently pulled off the shelf Doris Kearns Goodwin’s book "Team of Rivals" which looks at the political genius of Abraham Lincoln.  It’s an amazing account of how Lincoln, as president, was able to bring his “disgruntled opponents” together to complete the task of saving the Union.  As Lincoln did, Barack Obama must pull together a team of rivals and win the respect of his competitors to help us navigate the stormy seas ahead. 


If the United States’ economy were a vessel, it could be said that she has held up quite well over the past couple of years.  Through the Great Recession, government bailouts, flash crashes, and the most contentious political climate in some time, the United States keeps cruising. 


How much secular damage was sustained in the “economic storm” or was simply deferred by the Fed grabbing its cavernous bucket and bailing water from inside the ship back overboard is unknown. 


Consumers don’t know, politicians don’t know, CEO’s don’t know, and you can bet a dollar, I don’t know.  What I can tell you with certainty is that at some point the structural problems with the U.S. economy need to be addressed sooner rather than later.  Fans of Big Government enjoy preaching the folly of applying long term solutions to short term problems. 


While not ideal, clearly long term solutions that ensure economic progress in the long term, notwithstanding short term pain, are preferable to short term solutions that never address the long term, leaving us and our posterity to forever bail buckets of water over the side of the ship while we hope and pray for a miracle. 


All the while, the long term problem grows larger, but politicians and policymakers keep their jobs.  The mounting of debt upon debt by governments around the globe is leading to inflation on a global basis. 


I would be remiss to ignore the various supply-side shocks that have occurred around the world related to weather and other factors.  However, simply stated, the inverse correlation between the dollar and commodities denominated in dollars remains high and the U.S. consumer is feeling the effect of that.  U.S. consumers are not alone; India, Brazil, China and many other countries around the world have seen inflation break out to the upside recently. 


Food inflation, in particular, is causing significant social unrest in some countries which is drawing political attention.  India’s government has adjourned to address the problem of rising food costs there and Algeria saw riots yesterday over food costs.  For now, consumers’ wallets in the U.S. have been relatively shielded from the impact of food costs increasing over the past 6 months.  However, if and when these costs are passed along in addition to the backdrop of high gas prices, it could greatly impair the “recovery” that is now consensus.


Today, Thailand joined the party and raised its benchmark raised interest rates for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation.  And this morning, officials from Mozambique to China are signaling their belief that rates in their respective countries will be raised in the near-term. 


On a more granular note, one company that will begin to feel the pain of higher food inflation in 2011 is McDonald’s and I don’t believe the bullish consensus has fully accounted for this.  Last year McDonald’s saw its basket of commodities decline by 5-6% and, accordingly, restaurant level margin rose by over 200bps from lower food costs alone.  I have other concerns which are more structural in nature and those will be addressed, in detail, on a conference call with clients on Friday. For qualified prospective institutional subscribers, please email for more details.     


Also on Friday, the Hedgeye Macro team will be discussing its three themes for the first quarter of 2011 and they are:


(1)    American Sacrifice - We are bullish on the USD and we will focus on how the Q1 macro calendar of events (Ron Paul auditing Bernanke, midterm election spending cut promises, the debt ceiling debate and debt/deficit commission decisions) are supportive of a strong USD as the country begins to address its long-term fiscal problems.

(2)    Trashing Treasuries – We are bearish on US Treasuries.  The breakout in global inflation, sovereign, State, and municipal risk and rising global interest rates are a problem for treasuries.

(3)    Housing Headwinds Phase II – We remain bearish on housing and continue to believe that a decline in home prices will be a governor on consumer consumption in 2011.  We will update our view on how much further home prices have to fall over the next 12-months according to the supply and demand issues facing the industry.


It’s now just under two hours before the market opens and equity futures are trading higher in a continuation of yesterday’s modest gains with the early focus centered on Portugal's bond auction which went better than expected.  Also overnight, bullish sentiment increased to 57.3% from 54.5% in the latest Investor's Intelligence poll, while the ABC consumer comfort index improved to -40 from -45; it is now at its highest level since 2008. 


While all of this is good news for equity markets, it’s an ominous sign that all of the early dogs of the S&P 500 so far this year (YTD price changes below) are predominately consumer names that have been impacted by either weaker-than-expected consumer spending or inflation pressuring margins or a combination of both.  I expect this list to grow as debt mounts, sovereign debt concerns accumulate, and inflation is passed through to the consumer.



MACY'S: -8.14%

TARGET: -8.22%

GAP: -8.22%



GAMESTOP: -11.76%





I’m not the only one using a “stormy” metaphor today as the snowstorm continues outside and CNBC started Squawk Box today with the Doors classic song “Riders on the Storm.” 


“Into this house we're born
Into this world we're thrown
Like a dog without a bone
An actor out alone
Riders on the storm”


Function in disaster; finish in style

Howard Penney    


STORMY SAILING - EL chart of day 1.12.11


Well, not quite Wynn Encore but MPEL should put up its second straight estimate beating quarter.



The stock has been on a tear and justifiably so.  Macau is booming and MPEL has held its own in terms of market share.  The Galaxy Cotai is a big overhang and MPEL is at risk.  However, Q1 estimates also look low.  For Q4, we are expecting MPEL to deliver another strong quarter, beating Street expectations.  We project revenues of $776MM and EBITDA of $143MM, 8% and 22% ahead of consensus, respectively.


We estimate that City of Dreams (CoD) will report net revenues of $504MM and EBITDA of $111MM, ahead of consensus by 18% and 14%, respectively.  Below are some of the details behind our estimates:

  • VIP net table win of $328MM
    • Assuming 15% direct play, we estimate that CoD’s Rolling Chip (RC) grew 58% YoY reaching $14.7BN.
    • Hold was above normal at 3.1% - much higher than last year’s low 2.4% hold
  • Mass table win of $127MM, up 70% YoY and 14% sequentially
  • Slot win of $36MM
  • Non-gaming revenues of $43MM and promotional expense of $29MM
    • Non-gaming expenses of $17MM
  • Variable expenses of $316MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $60MM compared to $55MM in 3Q2010 – we’re assuming some ramp for the Dragone show

For Altira, we estimate net revenue of $243MM and EBITDA of $40MM,--20% and 30% above consensus, respectively.

  • VIP net table win of $324MM
    • We estimate that Altira’s RC volume grew 31% YoY reaching $11.65BN - the best quarter since pre-CoD opening
    • Hold was normal at 2.8% but much higher than last year’s low 2.3% hold
  • Mass table win of $23MM, more than double last year’s number.  We understand that Altira has introduced an SJM-like model on its floor for Mass – offering large rebates to players.
  • Variable expenses of $180MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $21MM

Other Stuff:

  • Mocha slots: $29MM revenues and $8MM Of EBITDA
  • Depreciation: $63MM
  • Amortization: $19MM
  • Interest expense: $28MM

Early Look

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Extrapolating Asia… The Warning Signs Continue to Mount

Conclusion: Recent trends and data points out of Asia lend support to our generally negative outlook for equities globally.


As a quick refresher, we are generally bearish on equities as an asset class over the intermediate-term TREND for these three reasons: 

  1. Growth is slowing globally;
  2. Inflation is accelerating globally; and
  3. Interconnected Risk is compounding (Sovereign Debt Dichotomy, Housing Headwinds, and US State & Local Government Budget Headwinds). 

The bulk of the latest data out of Asia supports this three-pronged investment thesis. Below we’ll go through each prong individually in an attempt to extrapolate data points in the context of key themes and trends.


Slowing Growth: 

  • Chinese Export and Import growth slowed sequentially in December to +17.9% YoY and +25.6% YoY, respectively. While high-teens and mid-twenties growth rates is nothing to scoff it, they do represent meaningful slowdowns on the margin, falling (-1700bps) and (-1210bps), respectively.
  • Chinese New Loan growth came in at +480.7B yuan in December; while a sequential slowdown, the December number confirms that Chinese loan growth exceeded the government’s full-year target of $7.5T yuan in 2010 by 426.9B yuan. The key takeaway as it relates to slowing growth is that Chinese monetary authorities will be more inclined to step up efforts to limit broad loan growth and monetary expansion going forward. We’re starting to see this implemented via Chinese regulators imposing bank-specific lending quotas w/ potential reserve requirement hikes for non-compliant institutions.
  • Alcoa Inc. said yesterday that Chinese aluminum demand growth will fall (-600bps) to +15% YoY in 2011. This is a meaningful company-specific data point in that aluminum is widely used in property development and automobile manufacturing – two sectors that have helped buoy the Chinese economy since the end of the global recession. 

Extrapolating Asia… The Warning Signs Continue to Mount - 1


Accelerating Inflation: 

  • A proxy for Asian COGS, South Korean PPI accelerated in December to +5.3% YoY vs. +4.9% YoY in November.
  • Indian Prime Minister Manmohan Singh convened a meeting with his cabinet today to brainstorm ways to corral accelerating food inflation that’s severely impacting roughly 66% of his citizenry (828 million Indians live on less than $2 per day). In the past 15 years, Indians have voted out two national governments primarily as a result of uncontained inflation. India holds elections in nine states over the next 18 months and the latest polls have Singh’s coalition losing 42 seats the upcoming general elections. This essentially translates to rising political pressure on the central bank to raise interest rates and rein in its liquidity expansion policies – the both of which would be headwinds to Indian growth over the intermediate term.
  • The floods in Australia continue to worsen, adding supply-side inflationary pressure to the prices of coal, cotton and sugar globally. 

Extrapolating Asia… The Warning Signs Continue to Mount - 2


Compounding Interconnected Risk: 

  • Yesterday, China came out in support of distressed Euro-area economies and debt issuers. Vice Premier Li Keqiang pledged accelerated purchases of Spanish debt to go alongside the blanket statement of support. This morning, Japan came out with a similar message, pledging to purchase upwards of 20-25% of the European Financial Stability Facility’s (EFSF) debt issuance that is to be auctioned this month. China and Japan’s affirmations of support are in line with the broader trend we are seeing across Asia of late; the region’s buyers accounted for 21.5% of the 5Y debt issued by the EFSF on January 5th, up from the ~4% average since December 2008. In spite of the positive market reaction, we caution that you avoid the media hoopla and realize this for what it is – rising bond yields are enticing marginal buyers. Everything has a price. As we have seen many of times before with “positive developments”, the PIIGS’s collective risk premium has not gone away. We recommend shorting any strength in the euro and in Spanish and Italian equity markets on this news. 

Extrapolating Asia… The Warning Signs Continue to Mount - neu


All told, we’re seeing no signs of abatement from Asia regarding our three-pronged global macro outlook. At a point, the overwhelming complacency and suspension of disbelief that has driven US equity markets to cyclical highs will be replaced by actual fundamentals – the bulk of which we believe are deteriorating sequentially.


Darius Dale




January 11, 2010





  • Add Wayne Gretzky to Skecher’s roster of aging former hall of fame athletes signed on to market the company’s Shape-Ups fitness footwear.  While the company is clearly aiming to build some sort of image of authenticity in the athletic space, we still wonder if targeting middle-aged men is the demographic the company needs to sell through its bloated inventory position.
  • In a rare move, Wal-Mart is taking its campaign to open a store in Manhattan to the people.  The company debuted a website, www.walmartnyc.com, in an effort to educate the people of New York about the benefits of having the retailer open stores within the city limits.  The site also features the results of a recent poll which suggests 71% of New Yorkers want Wal-Mart in NYC. 
  • Going “green” may not be as important now that the economy has stabilized.  According to a Harris Poll, 36% of American’s are concerned about the planet they are leaving behind, down from 43% who said so in 2009.  Additionally,  33% of those polled now plan to purchase local produce which marks a 600 bps drop from 2009 results.



Puma Soon to Release BodyTrain - Puma is ready to tone things up for spring with BodyTrain, the women’s toning collection that had its public debut this past weekend in New York after a soft launch pre-holiday. According to the Herzogenaurach, Germany-based company, the shoes were tested at the Chemnitz University of Technology’s Human Locomotion Department and offer 11 percent more muscle activation than traditional walking styles. The shoes use the company’s BioRide rocker outsole, which features flex grooves to allow a natural stride. Two styles from the collection — the $90 BodyTrain Mesh, an athletic sneaker style; and the $90 BodyTrain LS Nbk, a lifestyle-oriented version in nubuck — are available at Lady Foot Locker and Puma retail locations. <WWD>

Hedgeye Retail’s Take:  Definitely an improvement in aesthetics vs. many 2010 toning styles but we wonder how long the $90 price point will hold in an extremely competitive toning marketplace. 


Ugg Releases Anti-Counterfeiting Results - In 2010, Deckers Outdoor Corp.’s anti-counterfeiting activities gave crooks reason to be afraid. The company on Monday issued preliminary results surrounding its anti-counterfeiting efforts on behalf of its Ugg Australia brand. Included in the data is information on the single largest seizure of fraudulent Ugg product to date: 244,648 pairs of counterfeit Ugg product seized on Dec. 23 in the Fujian Province in China. In all, 118 raids were conducted in 2010. Not including the Dec. 23 enforcement activity, 154,829 pairs of counterfeit Ugg-branded products were seized in 2010, a 245 percent increase over 2009. During the year, the company also successfully pursued a course of action that resulted in the closure of 4,783 websites that sold fake products, and removed 30,444 eBay listings that offered counterfeit goods.<WWD>

Hedgeye Retail’s Take: In a case of proactive management, DECK certainly didn’t wait for the eBay/Tiffany’s verdict to protect their greatest asset. Retailers should and will take notice of one of the more successful examples of a retailer protecting their brand with increasing success – after ‘how,’ one has to ask just ‘how much’ such insurance/enforcement costs.


Joe's Jeans to Pay workers $158K - Joe’s Jeans Inc. reached an agreement with the U.S. Labor Department to pay $158,952 in back wages to 110 workers at one of the company’s Los Angeles contractors. According to the Labor Department’s Wage & Hour Division, the contractor, Angel’s Finishing Inc., did not pay its workers the appropriate minimum wage and overtime required by law. Instead, Angel’s Finishing paid on a piece-rate basis and did not record weekend working hours, the agency said. The contractor worked solely for Joe’s Jeans, based in City of Commerce, Calif.  <WWD>

Hedgeye Retail’s Take:  Note to company. If you manufacture stateside, you must pay workers appropriately.  Fashion denim remains one of the few niche apparel products with a dominant manufacturing base in LA.


Bluefly invests in Prescription Eyewear - Bluefly Inc. this spring will branch into a second e-commerce business — prescription eyewear. The New York-based online retailer of discount designer fashion has entered into a joint venture with A+D Labs, a marketer of fashion eyewear, to form Eyefly and launch the site Eyefly.com, which will provide women’s and men’s fashion frames and single-correction lenses for a fixed price of $99. Melissa Payner, chief executive officer of Bluefly and the daughter of an optometrist, believes the combination of an affordable price point and the convenience of online shopping could help it make inroads into the U.S. eyewear market, which she estimated to be about $33 billion a year in sales. <WWD>

Hedgeye Retail’s Take:  While Bluefly’s popularity has not matched that of Gilt, Rue La La, and other online off-pricers, it appears to be taking a lead in developing exclusive merchandise content with this JV. 


Evercore Takes Stake in Grupo Axo Grupo Axo is sharing its growing slice of the Mexican retail market with private equity firm Evercore Mexico Capital Partners, which acquired a 20 percent stake in the fashion operator. Evercore, which manages more than $190 million and is part of advisory firm Evercore Partners, did not disclose the size of the investment. Mexico City-based Grupo Axo — which saw revenues jump 30 percent last year and expects another 25 percent rise this year — manages 11 brands in the country, including Coach, Emporio Armani, Marc Jacobs, Thomas Pink and Tommy Hilfiger. Payless ShoeSource and Sephora will be added to the portfolio this year. The company tries to mirror a brand’s international pricing, excluding the varying effects of taxes. It plans to open stores in five new malls this year, taking advantage of a retail commodity the U.S. sorely lacks: new developments. <WWD>

Hedgeye Retail’s Take: While Mexico is not normally thought of as an emerging luxury market, the continued growth in the company’s tourism is likely the driving force behind additional unit growth for Axo.


NRF Speakers: Bigger Not Always Better - In retailing, size won’t matter as much, and fashion will take a toned-down turn this year. Those prognostications came out of day one of the National Retail Federation’s convention at the Jacob K. Javits Convention Center here, running through Wednesday. More than anything, the thousands of retailers who attend NRF’s “Big Show” want to know what the future will bring for their businesses. For retailing’s juggernauts such as Wal-Mart Stores Inc., Carrefour and Tesco, bigger won’t always be much better, according to Richard Hyman, Deloitte’s strategic adviser.” Big is still beautiful, but it’s getting less attractive,” Hyman said at a morning session Sunday. “Scale is an enormous advantage, but it’s becoming a slightly less potential advantage on its own.” Retailers with superior scale “may need to think about adding a few more ingredients to their strategic array.…Branding remains relatively undeveloped in retailing.”  <WWD>

Hedgeye Retail’s Take: While branding opportunities are still abundant for most big box concepts, footprint evolution is another key development that has put many ‘supertankers’ at a competitive disadvantage in the current real estate environment. Recall that within the past few weeks, WMT announced a smaller 80k sq. ft. format in order to greater penetrate urban markets – in all likelihood they aren't the only ones thinking smaller = opportunity.


The Demographics of Social Shopping Sites -Many consumers unaware of the category Retailers are eager to jump on social trends, be it a simple Facebook or Twitter presence, customer ratings and reviews, or more sophisticated experiences that bring the social graph to retail sites. Social shopping sites like Groupon and LivingSocial form another piece of the social commerce space, and despite the hype many shoppers have not yet jumped on the bandwagon. According to JPMorgan’s “Nothing But Net 2011” report, two in five online buyers surveyed had not heard of social shopping sites, and another 28% knew what they were but had never used them. <eMarketer>

Hedgeye Retail’s Take: Keep in mind, the act of completing a purchase online isn’t the only criteria for determining success of such efforts. While purchasing rates are 2x higher for those with incomes >$100k vs. <$50, the difference in familiarity is only marginally lower between the two demographics at 46% and 38% respectively, which could very well be translating into traffic at the store level.


R3: WMT, SKX, JOEZ, PUMA - R3 1 11 11


Cost Issues to Take Center Stage at N.Y. Fabric Shows Rising raw material costs and dedicated price consciousness will color the textiles shows taking place in New York over the next two weeks. Cotton prices soared to record highs in the last year and prices for wool and other materials have climbed as well, a situation that is starting to creep further along the textile supply chain and causing buyers to eye their bottom line even more closely than they have the last few years during the recession. As Première Vision Preview starts a two-day run today at the Metropolitan Pavilion & Altman Building, there is still a degree of uncertainty in the industry, said Jacques Brunel, general manager of the show. While buyers always took price into consideration, they used to look first for quality and creativity, Brunel said. In the wake of the economic downturn and buffeted by global market forces, buyers want a competitive price above all, he said, and in some cases are looking to trade down for less expensive fabrics.<WWD>

Hedgeye Retail’s Take: The tradeoff between cost vs. quality will ultimately lie at the retailers feet and may certainly be a consideration, but there are also many brands where a deterioration in quality is simply not an option. An interesting byproduct of this challenge will be how companies chose to shape marketing efforts that either highlight or hide such changes to the end product.


Get your Bonds?

Position: Long Germany (EWG)


This week is a big one for European bond issuance.  Portugal, Spain, Italy, Netherlands, and Germany are preparing bond and bill sales worth as much as €42 billion ($54 billion) this week:


1.       Today: The Netherlands issued €3.5 billion of debt. 


2.       Tomorrow: Portugal plans to borrow as much as €1.25 billion, repayable in October 2014 and June 2020. Germany seeks €7 billion. 


3.       Thursday: Spain will auction as much as €3 billion of five-year bonds. Italy will market securities maturing in 2026 and 2015.


Portugal continues to be one country among the periphery that is getting the most attention due to its sovereign debt fears. The yield on the 10YR government bond is hovering just under the 7% line. As we show in the chart below, the 7% level has been a critical gravitational line. A mere 17 days after Greece broke through it on May 15, 2010 it received a €110 Billion bailout; whereas Ireland broke the line on 10/29/10 and received a bailout of €85 Billion on 11/29.


Get your Bonds? - neu


The focus now turns to the reception of Portugal’s issuance of €1.25 Billion tomorrow. Hanging in the balance is the country’s need to borrow €20 billion in bonds this year to finance its budget deficit and redemptions.


International Support


Bullish statements today from Japanese Finance Minister Yoshihiko Nado that his nation will use foreign-exchange reserves to buy “more than 20 percent” of bonds to be issued under a special assistance program for Ireland appear to be reducing yields across the periphery, including Portugal, over the short term.


Further, Japan’s insurance follows remarks from Chinese Vice Commerce Minister Gao Hucheng on January 5th in Madrid that China will buy Spanish public debt in the primary and secondary markets and a statement by Chinese Vice Premier Wang Qishan on December 21th that China had taken “concrete action” to help Europe with its debt problems.


While over the immediate term TRADE (3 weeks or less) these international actions could buoy peripheral bond prices, on the intermediate term TREND and long term TAIL we do not expect they’ll make a dent in arresting the risk premium to own the region’s sovereign debt imbalances. As the chart above also presents, even the bailouts of Greece and Ireland failed to arrest the expedient rise in yields.


Portugal’s Weak Economic Outlook


Today Bank of Portugal announced that GDP will shrink -1.3% in 2011 and expand +0.6% in 2012. Back on October 7th the bank had forecast no GDP growth in 2011, however the estimates did not include the austerity measures announced by the government on September 29th.


Those budget deficit reduction measures included:

  • Cutting public-sector wage by 5% for those earning more than €1,500/month
  • Freezing public-sector hiring
  • Raising VAT by 2% to 23%

With a budget deficit of 9.3% of GDP in 2009, the government has set a target of 4.6% for 2011, and aims to meet the EU deficit limit of 3% in 2012. However, the government’s 2011 deficit projection was based around a +0.2% GDP.


Portugal’s recessionary outlook (GDP has averaged less than 1% in the past decade), will compound the government’s ability to meet its deficit reduction aims as less revenue will be generated from tax payers. In an environment of rising bond yields alongside increasing investor fears, we caution that Portugal may suffer to issue and roll over debt this year, either through a lack of demand or exorbitant levels of interest that will force a Greece or Irish style bailout to meet its obligations.


As the EU and Eurozone lack a definitive mechanism to negotiate the sovereign default of member states and Eurocrats remain supportive of the Union in the name of job security, we may well soon see a Portuguese band aid bailout to cover up its fiscal mismanagement.


Matthew Hedrick



Get your Bonds? - EL Chart Debt

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