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January 12, 2010





  • In the latest customer service survey out of BIGresearch, Zappos.com and Amazon.com took the top spots overtaking both LL Bean and Overstock.com coming in at #3 and #4 respectively this year. It appears that Tony Hsieh’s customer focused culture is taking hold at the online giant even sooner than some expected.
  • Customers may actually know best.  According to a Motorola study, 55% of consumers believe that “the shopper today is better connected to consumer information than store associates”.  Might be time for retailers to step up their training or at least mandate that their employees spend more time online researching the products they sell.
  • Following in Best Buy’s footsteps, Apple has announced that it will discontinue charging for restocking fees on returned product. Given the timing with company’s new Verizon iPhone launch, waiving the 10% penalty is not only likely to help conversions, but will also be viewed favorably for the loyal Apple consumer who might still be unaware of such fees.



Sears Brings on the “Kardashian Kollection”  - The seemingly ubiquitous reality television sisters, Kim, Kourtney and Khloe, are set to unveil merchandise on a bigger retail stage when the Kardashian Kollection launches exclusively at 400 Sears doors in August with in-store shops. The brand, which is produced under license by Australian designer Bruno Schiavi’s Jupi Corp., is a critical component of Sears Holdings Corp.’s strategy to energize its contemporary clothing and accessories segment. The market will get an initial jolt at the store with the introduction of the French Connection-Sears hook-up UK Style by French Connection in March. <WWD>

Hedgeye Retail’s Take:  Just when you thought 2010 was the year of the Kardashians, 2011 starts off with yet another collaboration.  If only there was a way to merchandise every Kardashian product under one roof.


Versace to Re-Enter Japan - Versace is reentering the Japanese market and, to spearhead its development in the region, has tapped Hiroshi Saito as chief executive officer of Versace Japan. Gian Giacomo Ferraris, ceo of Milan-based Versace SpA, said he was excited about the appointment, adding he had worked with Saito in the past. Between 2007 and 2010, Saito was president of Jil Sander Japan. Ferraris joined Jil Sander from Gucci in 2004, when the German fashion house was still owned by the Prada Group, and left in 2009. “He is one of the best managers in the Japanese luxury business, and he understands Italian fashion brands better than anyone else,” said Ferraris. Saito, 60, has worked for more than 30 years in the Japanese luxury fashion market, for companies such as Ermenegildo Zegna, Gucci, Giorgio Armani, Prada and Donna Karan. <WWD>

Hedgeye Retail’s Take:  Versace’s absence in Japan was short-lived, having shuttered its 4 stores only two years ago.  Expect the re-launch to include denim, and The collection in select department stores by Fall ’11.


Collective Licensing International Signs Airwalk - Collective Licensing International is boosting its Airwalk brand.The Engelwood, Colo.-based company announced a licensing deal with Wiesner Products Inc. to license select apparel and accessories for Collective’s skate brand. Under the three-year agreement, Wiesner will hold Airwalk’s license for infant and newborn apparel, women’s, juniors and kid’s swimwear and sleepwear in the United States. Accessories including bags, headbands, underwear and socks are also included in the design and manufacturing deal.<WWD>

Hedgeye Retail’s Take: While not a needle mover, Collective’s licensing biz clearly has an eye towards growth and growing the portfolio beyond its core product categories. 


Cabela's Launches Mobile Website - Cabela’s launched an optimized mobile website that will allow customers to easily search and purchase items when they visit cabelas.com on popular mobile devices including the iPhone/iPod Touch, BlackBerry and Android. Key features of the new mobile website include: rich product photographs, complete product descriptions, customer-submitted product reviews, shop by category, shop by brand, store locator, e-mail and a complete site search. The website was developed by Digby on its Digby Mobile Commerce Software platform. Digby has used the same platform to develop mobile commerce sites for Toys “R” Us, Costco, The Home Depot, Lilly Pulitzer, Wet Seal, Godiva, 1800-Flowers, Golfsmith, Orvis and many other retailers.<SportsOneSource>

Hedgeye Retail’s Take:  Soon the development of a mobile e-commerce platform for any retailer will no longer be news, but rather a prerequisite for remaining competitive.


Katie Holmes is the New Face of Ann Taylor - Katie Holmes has been tapped as the new face of Ann Taylor, succeeding Heidi Klum, in the 280-store chain’s spring advertising campaign. Developed in-house by the Ann Taylor creative team and photographed by Tom Munro, the campaign breaks in March magazines. “I applaud women who are doing their best to be the best versions of themselves and who are working really hard. And I’m glad that there is a store like Ann Taylor that can offer amazing styles for the many different roles that women play,” Holmes, 32, told WWD exclusively. The media buy includes fashion magazines such as Vogue, Harper’s Bazaar, Elle, Marie Claire and InStyle. Outdoor ads will go up in major metropolitan areas. Holmes is contracted to Ann Taylor for one season. <WWD>

Hedgeye Retail’s Take: It’s tough to position this move an upgrade for the company – while Holmes may be younger, I’d argue she’s not as relevant as Klum, especially of late. Perhaps the company has arranged for Tom to be a part of future campaigns, which is more likely to catch both headlines and the company’s ‘core’ demographic attention.


Financo Panel Touts the Store - Online sales are booming and dominating the retail dialogue. But even as social networking, smartphones and mobile marketing build momentum, some executives believe brick and mortar will always be king. And what better place to stick up for the old format than the annual Financo Forum, which, on Monday night, drew a balance of veteran retailers, Web geeks, social networkers and executives from private equity, real estate, headhunting and fashion firms. “Even if we do triple the business online in the next five years, 59th Street will still be a bigger business,” said Bloomingdale’s chairman and chief executive officer Michael Gould, in a reference to Bloomingdale’s Manhattan flagship.<WWD>

Hedgeye Retail’s Take: The company can downplay the impact of its e-commerce business all it wants, but the reality is that they are investing heavily here and it’s one of the few if only growth engine they have.





Think there are no catalysts for the slot guys after this run up in the stocks?



We are now entering that time of year where the state legislatures “fix” their budgets.  Their options:  a) raise taxes, b) cut spending, c) postpone the pain via accounting tricks and debt, or d) legalize/expanding gaming.  Republicans don’t like a) and haven’t been good at b), Democrats abhor b), which leaves c) they all do all of this, and d) is a more likely option this year and next.


Dare we say that gaming is now the more politically palatable option?  In many cases, this is true.  In this politically charged atmosphere, gaming legalization/expansion may be the easiest road to raising revenues that both Democrats and Republicans can get behind.


This is not a new theory.  Historically, we’ve seen gaming expansion in times of big state budget deficits.  New and expanded markets are a big part of the 3-5 year bull thesis on slot suppliers.  With the new year upon us, we are now entering the legislative season in many states and budgets need fixing.  We think the upcoming headlines will be positive for slot suppliers.  This is why we found the recent downgrades by Goldman and JPM interesting.  With expectations fairly low and estimates looking reasonable, there shouldn’t be any negative surprises.  Headlines could drive the stocks over the near term.


We count as many as 11 states that are considering some sort of gaming expansion in 2011 and while most might not pass this year, most will expand over the next few years.  Here is the list:




Bill: HB 194--3 gaming venues--Del Pointe Resort and Racino in Millsboro; Old Georgetown harness track off Route 9; Delmar International Speedway off Route 13 in Delmar

Est Slots: 6,000

Status: House Gaming and Parimutuels Committee to decide bill hearing date

Timing: 2011

Convene Session Date: Jan 11, 2011

Adjourn Session Date: June 30, 2011



Bill: 4-5 Las Vegas-style casinos in Miami, Tampa, and 3 other locations; 8-10% tax rate; possible developers: LVS, CZR, MGM, PENN, GENTING

Est Slots: +8,000

Status: Bill sponsored by Sen. Dennis Jones (R) will be ready in late January; "50-50 chance of Legislature approving casino games this year"--Senate President Mike Haridopolos

Timing: 2011; earliest date for casino opening is 2015

Convene Session Date: Mar 8, 2011

Adjourn Session Date: May 6, 2011



Bill: 4 riverboat casinos: 3 near Chicago, 1 in Danville; 4,000 position land casino in Chicago; 1,200 slots at 4 tracks near Chicago; 900 slots each at two St. Louis area tracks; Existing casinos to expand from 1,200 to 2,000 gaming positions in 400-position increments

Est Slots: 7,000

Status: Stalled in the House on Jan 11; process would need to begin all over

Timing: June/July 2011

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Meets year-round



Bill: HB 2002--casino and racetrack slots in Southeast Kansas

Est Slots: 1,500

Status: In current form, unlikely to pass given the large GOP majority in both Houses; 1) minimum casino investment at $100MM, 2) slot payout at 58%

Timing: 2011

Convene Session Date: Jan 4, 2011

Adjourn Session Date: Late May 2011



Bill: 3 resort casinos, 2 racetrack slot parlors (Casino resorts located in Western, central and Greater Boston areas; likely racetracks--Plainridge Racecourse, Raynham Park)

Est Slots: 5,000

Status: Passed state legislature in August but Gov Patrick disapproved of slots at tracks. Revisions expected this year.

Timing: 2011

Convene Session Date: Jan 5, 2011

Adjourn Session Date: Meets year-round



Bill: Slots at Prince George's County's Rosecroft harness racing track

Est Slots: 750

Status: Very preliminary; needs House and Senate approval

Timing: Referendum Nov 2012

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Early April



Bill: Racino Act--slots each at Canterbury Park and Running Aces; Governor Mark Dayton proposed Mall of America casino

Est Slots: 4,000

Status: Sen. Dick Day (R) says the Racino Act is still shy of 20 votes in the House.

Timing: 2011

Convene Session Date: Jan 4, 2011

Adjourn Session Date: May 23, 2011


New Jersey

Bill: 2 boutique casinos

Est Slots: 2,000

Status: Waiting for Gov Christie's signature

Timing: Jan/Feb 2011

Convene Session Date: Jan 12, 2011

Adjourn Session Date: Meets year-round


New York

Bill: Mohegan Sun-style casino in the Catskills; to be operated by Stockbridge-Munsee Band of Mohicans

Est Slots: 5,000

Status: Secretary of the Interior Ken Salazar has 45 days to approve or reject the gaming compact. If he takes no action, the gaming compact becomes binding.

Timing: Feb 2011

Convene Session Date: Jan 5, 2011

Adjourn Session Date: Meets year-round



Bill: Slots at 7 racetracks

Est Slots: 17,500

Status: Passed Legislature and ready for implementation but facing outside legal issues (Ohio Supreme Court/ Let Ohio Vote.org). Gov Kasich is looking over slot proposal and will decide whether to seek a court order to determine authority over the matter.

Timing: 2011

Convene Session Date: Jan 3, 2011

Adjourn Session Date: Meets year-round



Bill: 4 "destination resort" casinos (Dallas, Harris county, Bexas county, South Padre Island); Slots at 13 racetracks and 3 federally recognized Indian reservations;

Est Slots: +15,000

Status: Texas Gaming Association expects to release financial projections in late Jan. No planned date for introduction of bill.

Timing: 2011

Convene Session Date: Jan 11, 2011

Adjourn Session Date: May 30, 2011





News/price action callouts from restaurant space yesterday:

  • CAKE down on big volume in reaction to its pre-announcement of 4Q10 System wide comps of +0.9% the company noted 4Q10 comps would have been +2.1% ex weather/calendar-shift.
  • CMG reiterated unit growth guidance for 2011 of 135-145 units and no comments on current trends.
  • JACK noted Jack-in-the-Box and Qdoba F1Q11 comps were above 1% and 6%, respectively, and the high-end of the guidance range.  Management also affirmed its expected completion of reimaging program by year-end 2011 and refranchising by 2013.
  • YUM continues to focus on its Emerging Markets strategy reiterated its 2011 EPS growth targets.
  • The CAKE news took BWLD, PFCB and CPKI down on accelerating volume.
  • SBUX, PEET and CMG also struggled yesterday on accelerating volume.
  • SBUX price target raised from $33 to $37 at UBS.
  • MCD: Interesting story in the Wall Street Journal this morning on MCD Japan adding calorie-laden menu items to its menu.




Howard Penney

Managing Director

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 80.48%
  • SHORT SIGNALS 78.35%


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

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