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R3: TGT, Zappos, OSTK, TBL


January 21, 2010




  • With the annual Sundance Film Festival kicking off yesterday, several brands are viewing the event as a prime marketing opportunity given the high-profile attendance. Timberland will be outfitting filmmakers and staff with over 300 new Earthkeeper boots, while COLM’s Sorel is sponsoring a ‘scavenger hunt’ to win access to after hour parties and gear. A less conventional fit is K-Swiss, which will be hosting its second annual ping pong classic featuring directors, producers and actors - suggesting the first was a success.
  • According to retailmenot.com, US consumers saved $32 million over the November/December time frame by using digital coupons.  The coupon aggregator site also notes that digital coupon traffic rose by 25% for the holiday period, with discounts averaging 27%.  Amazon, Victorias Secret, and Kohl’s were top ranked as the most searched retailers for online coupons.
  • According to Outdoor USA Magazine’s 2010 Social Media Award results, there were only four brands that ranked in the Top 10 across each of the popular social networks (Facebook, Twitter, and YouTube) – K-Swiss, Crocs, Columbia/Mountain Hardware, and Vibram Fivefingers. Surprisingly, Patagonia ranked #1 on YouTube with nearly twice as many viewings (3million+) ahead of #2 K-Swiss and its viral Kenny Powers parity.



H&M Partners with Hasbeens - H&M looked to its homeland for its latest collaboration. The Stockholm-based retailer has partnered with footwear brand Swedish Hasbeens, to produce three exclusive styles of wooden-soled clogs. They will be available on April 20.“I love the genuine feeling you get from Hasbeens, from the wood and the leather, and also how they take something traditional and Swedish and make it contemporary and modern,” said Ann-Sofie Johansson, H&M’s head of design, in a statement. “These Hasbeens for H&M fit perfectly with the ’70s bohemian look that’s so important this coming season.”<WWD>

Hedgeye Retail’s Take: Another endorsement for the 70’s which appears to be making its way to the mall in a fairly big way. Recall that Gap is betting on high waisted, flared denim as well. The question remains however if the wooden clogs success can even come close to the last collab with Lanvin. 


Calypso St. Barth Expands at Target - With Calypso St. Barth for Target bowing May 1, the mass retailer is hoping to reprise the success of its Liberty of London for Target launch last spring. The multicategory Calypso collection will feature apparel, accessories and lingerie for women, clothing for girls and babies, and home items such as candles, decorative pillows, dinnerware, glassware and serving pieces. The collection will be available in about 1,200 Target stores and target.com through June 11. <WWD>

Hedgeye Retail’s Take: With some fashionistas wondering if TGT had lost its way with its designer collaborations, we suspect this effort will resonate well with its multi-category approach.  After all who doesn’t aspire to live the French Carribean lifestyle?


Zappos Named No. 6 on ‘Fortune’ List - Zappos.com is making some big moves.  This year, the e-tailer ranked No. 6 on Fortune’s annual “100 Best Companies to Work For” List, released last week.  The company made its debut on the list at No. 23 in 2009, moved up to No. 15 in 2010 and rose nine spots again this year. Zappos also registered the biggest percentage year-over-year job growth on the list, at 37 percent. “While the external recognition of making the list for the third year in a row is great for recruiting purposes, internally the most important thing is for us to take our culture to the next level as we continue to grow,” said Zappos CEO Tony Hsieh in an email sent to employees last Thursday.<WWD>

Hedgeye Retail’s Take: It should come as no surprise that the retailers on the list not only treat their employees well, but commensurately treat their customers well.  High correlation between happy employees and exceptional customer experience.  Other retailers in the top 20: Wegman’s, REI, Nugget Market, and Stew Leonards. 


Overstock.com Brands Itself around the Letter O - Overstock.com today began using the domain O.co, directing consumers who type in O.co to the web-only retailer’s e-commerce site, Overstock.com. The company says the new name represents a step in Overstock’s effort to brand itself around the letter O. Overstock, No. 28 in Internet Retailer’s Top 500 Guide, paid $350,000 for the domain name in July on the first day that .co domain names became available from the .CO Internet S.A.S. registry operator.  Organizations and individuals have bought about 600,000 .co domain names. Social network site Twitter, for instance, has bought T.co, while GoDaddy, a web hosting domain registry, now owns X.co. According to the client list on .CO Internet’s web site, Overstock.com appears to be the only e-commerce company using a one-letter .co domain. <InternetRetailer>

Hedgeye Retail’s Take: Long ago the single letter ticker on the NYSE was a true status symbol.  Looks like the times have surely changed.  We now wonder which other brands/business will pay up for the chance to rebrand with a four keystroke URL.


Orchard Brands Files Chapter 11 - Orchard Brands on Wednesday said it reached an agreement with the majority of its lenders to restructure the firm in a move that also includes a voluntary Chapter 11 filing in Delaware.  The bankruptcy filing was under the name Appleseed’s Intermediate Holdings. The catalogue operator, which targets men and women in the 55-plus age demographic, is owned by private equity firm Golden Gate Capital.  Golden Gate in October hired Moelis & Co. to find a buyer for the business, which does an estimated annual volume of nearly $1 billion, according to financial sources. Market and financial sources in November said there were few takers, and by December there was speculation that a bankruptcy filing was on the horizon. <WWD>

Hedgeye Retail’s Take: With most missy apparel retailers working on taking their brands to a younger demographic, we wonder if the combination of catalog plus aging demographic finally became too hard to overcome. Of all the catalogers trying to convert to internet, this one is likely one of the more challenging transformations.


Store Expansion High on Agenda for 2011 - Retailers in 2011 will be intent on actively growing their businesses and improving customer insight capabilities, in addition to continuing efforts begun during the economic downturn to stabilize operating costs and focus on financial discipline, according to a report from the National Retail Federation’s research and education arm, the NRF Foundation, and KPMG LLP, the U.S. audit, tax and advisory firm. In surveying 318 retail executives for the ninth annual Retail Horizons: Benchmarks for 2010, Forecasts for 2011 report, 41 percent said that their companies intend to increase domestic store expansions in 2011, up from 25 percent in 2010. Additionally, 25 percent will expand overseas, up from 21 percent a year ago. Signaling an overall consensus that the worst is behind them, 58 percent of retailers surveyed report that cost reduction/cost containment will remain a companywide strategic initiative, down from 81 percent in 2010.


Hedgeye Retail’s Take: The key callout here is the change in outlook regarding cost containment year-over-year – the more telling indicator of management sentiment. The change on the margin is also consistent with accelerated M&A efforts of late as well.


Commercial Complex for Chinese Goods to be Built in Thailand - After China gained a free trade pact with Southeast Asian countries last year, the country now plans to construct a vast commercial building named China City Complex in Bangkok, Thailand to house over 70,000 Chinese traders, with an investment of $1.5 billion. Construction of this complex is planned to start in March 2011 and is scheduled for completion in 18 months. Various China-made items such as ornaments, household products, garments and leather goods will be sold at the complex. Once the complex starts running, the Chinese traders can sell their goods to people from different parts of the world through Thailand, which would help them save the heavy duties imposed on their exports to many western countries.<FashionNetAsia>

Hedgeye Retail’s Take: The combined benefit of lower wage costs and side-stepping export duties could help Chinese manufacturers slow the rate of sourcing shift we’re seeing to some extent to other countries like Vietnam, Indonesia, and Bangladesh – that is until countries revise export duties to include Thailand to counter what is a completely transparent move.




Notable news items and price action over the past 24 hours:

  • WEN shares surged on emerging news of Wendy’s/Arby’s planning to sell Arby’s.  I have been in favor of this divestiture for some time and wrote about this yesterday.  I think the stock is worth close to $7.
  • MCD was the subject of yet another positive report, this time from Janney.  There were some interesting points in the report, including; “For this go-round of the survey, we asked our participants the following two questions: ‘The Wall Street Journal recently reported that, at present, McDonald’s offers over 100 menu items. Do you feel menu complexity is a problem in your operations?’ and ‘What items (if any) would you remove from the McDonald's menu, and why?’  The majority of responses indicated that in fact franchisees believe that the menu is getting to be too complex.  Some respondents to the survey stated that the menu contained “too many slow moving products such as salads, McCafe” and that “Even our customers know it and complain they can’t read the menu boards.”  Thank you to Janney for confirming what we already knew.  Franchisees want McCafe to go because it is not working.  As I said last week on an conference call with clients, Starbucks can’t sell food and McDonald’s can’t sell espresso because these products are not part of their core business.
  • MCD - In maple country of Vermont, consumers know the real thing. So starting Feb. 1, customers at Vermont McDonald's stores can request 100 percent maple syrup or sugar to be added to the restaurant chain's new Fruit and Maple Oatmeal to settle complaints that the company improperly labeled the product as maple flavored in the state.
  • YUM  - down on accelerating volume.  The company has the street focused on Emerging markets as the next avenue of growth for the company.  The current problem with that  is slowing growth in the Emerging markets in 2011.  As Keith McCullough noted today Asia was a mess again overnight; China bounces to another lower-high (to down -3.3% YTD), but Indonesia, which has been getting powdered YTD lost another -2.2%, Korea had its worst day in 3 months -1.7% and Japan wasn’t much better at -1.6%. Thailand, which internally cut their GDP growth forecast this week almost in half vs. LY +8% GDP down another -1.5%.  Global Inflation matters when it ramps sequentially like this. It always has – and a 42% owner’s equivalent rent weighting on US CPI will not change that.  MCD will be impacted too.
  • EAT, PFCB, CAKE, and  CBRL gained on accelerating volume.  Brinker continues to perform well and, the intra-quarter slowdown in Knapp Track trends notwithstanding, I maintain a positive view on this stock for 2011. 
  • The Orlando Sentinel published a story titled, “Rising food prices hit Central Florida shoppers” which details the impact of rising prices on food consumption patterns, particularly those of older generations living on fixed incomes.



Howard Penney

Managing Director


The Macau Metro Monitor, January 21, 2011

WYNN LEADS FROM THE TOP Intelligence Macau, macaubusiness.com

Steve Wynn announced a 6% salary increase yesterday for all the company’s non-management employees, effective February 1, 2011.  He said, “This is our grateful response to the leadership provided by Chief Executive Fernando Chui Sai On and Secretary Francis Tam concerning the rise in the cost-of-living for Macau residents.” 


IM praised Wynn's decision, citing its leadership in dealing with the inflation issue and a reminder on why Wynn Macau deserves a valuation premium.  Also,  IM says the timing of the announcement is interesting given that there have been rumors of poor credit decision-making by inexperienced staff at some of the other casinos.




Dec CPI rose 0.59% MoM and 3.92% YoY.  Inflation rate for 2010 stood at 2.81%.

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 80.51%
  • SHORT SIGNALS 78.32%

CHART OF THE DAY: Bring Home the Inflation



CHART OF THE DAY: Bring Home the Inflation -  chart of the day

The Ber-nank's Housewives

“By and large, mothers and housewives are the only workers who do not have regular time off. They are the great vacationless class.”

-Anne Morrow Lindbergh


Japanese Equities closed down -1.6% overnight and have been making a series of lower-highs from their leverage-cycle peak for more than 2 decades. Japanese housewives are not happy.


In an especially interesting survey from the Sompo Japan Life Insurance Company this week, it appears that Japanese housewives are getting plugged by global inflation. Their secret savings (or what the Japanese called hesokuri) fell -18% in 2010 to their lowest levels since late 2007. Not ironically, that’s also when US Consumption rolled into the red for the 1st time after 64 consecutive quarters (or 13 years) of being positive.


As Ludwig von Mises said, inflation is a deliberate policy that government people choose without openly stating it to the public. Whether or not a humble looking man with a beard calls it that or not from his perch upon-high at the US Federal Reserve is of no concern to the rest of the world. Unfortunately, the large majority of the world’s population doesn’t consider US owner’s equivalent rent (42% of US CPI) inflation.


Whether they be Japanese housewives or folks in India and Indonesia (the 2nd and 4th largest country populations in the world, respectively), energy and food prices matter – big time.


In the Japanese survey, vegetable prices, energy bills, and higher tobacco taxes ranked #1, #2, and #3 as top concerns. In Japan, don’t forget that it’s the women who make most of the budgeting decisions in Japanese households (Darius Dale and I scoured the survey looking for all of the offsetting goodies Japanese women found associated with Japanese style Quantitative Guessing (QG), but couldn’t find any).


Quantitative Guessing (QG) in Japan has obviously failed. That should be no surprise however as it’s been empirically proven at this point (Reinhart & Rogoff) that when a country crosses the proverbial Rubicon of debt/GDP thresholds (over 90% debt/GDP), long-term economic growth is structurally impaired.


The Keynesian/Princeton-connection of Paul Krugman (who told the Japanese to “PRINT LOTS OF MONEY” in 1997) and Ben Bernanke really don’t like it when Global Macro Risk Managers call out these simple concepts like real-world inflation and structurally impaired growth. That’s because their charlatan storytelling is largely focused on fear-mongering about depressions and deflation.


Whether you want to do your own channel checking on this and call the 57,000 Japanese housewives in the survey or the 44 MILLION Americans that are currently on food stamps (all-time high; nice job Ben), I think that calling anyone who lives on a budget will render the same answer.


If you’ve been positioned long-dong silver anything Emerging Markets in the last 3 months (stocks or bonds), you see the same inflation readings that housewives and I are talking about. It’s on your screen.


There’s really 1 thing that can crush both Bond and Emerging Market investors alike – inflation. When the “reflation” trade becomes the inflation, it can start to hurt equity market returns too.

For the YTD, here’s what’s going on in Global Equities outside of where Apple is trading:

  1. Indonesia = down -8.7%
  2. India = down -7.3%
  3. Peru = down -7.1%
  4. Egypt = down -6.2%
  5. Philippines = down -6.0%
  6. China = down -3.3%

Chinese growth slowing is perpetuated by inflation accelerating. When the Government of Thailand cut its GDP forecast in HALF this week (versus 2010’s +8% growth) to 4-5% for 2011 they weren’t thinking about how many cashmere sweater-sets Macy’s is selling on snow days. They pointed to one issue  - Chinese growth slowing.


Yes, at a point, Chinese demand slowing should take the edge off The Ber-nank’s inflation trades. The inflation is sticky, but it can come off its highs. In fact, in the last 24 hours, we’ve seen the following 3 immediate-term TRADE lines break in our Global Macro risk management model:

  1. Brazil’s Bovespa Index immediate term TRADE line support = 70,554, broken
  2. Copper immediate-term TRADE line support = $4.31/lb, broken
  3. Basic Materials Sector ETF (XLB) immediate-term TRADE line support = $38.51, broken

And yes, part of these rollovers in inflation readings have to do with sober governments in Emerging Markets either raising interest rates or signaling that they will (Brazil raised +50bps yesterday and the Chinese signaled).


But the best way to fight Global Inflation Accelerating, is for the world to see a sustainably strong US Dollar. That’s where the real popular political juice is. That’s where American credibility in the global financial community can find her footing again. That’s what I and the hardest working global class we have, housewives, want to see.


My immediate term support and resistance levels for the SP500 are now 1264 and 1295, respectively.


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


The Ber-nank's Housewives - housewives

Complex Simplicities

This note was originally published at 8am on January 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I must forever make the complex the simple.”

-Martin Luther King, Jr.


Ironically enough, one of my best friends gave me “The Autobiography of Martin Luther King, Jr.” for my birthday a few weeks back. Notwithstanding that he didn’t know I’d be on my back reading for the last week, the timing of this gift was impeccable. Dr. King’s passion has forever made the complex the simple.


Complex Simplicities are what we chaos theorists wake up looking for each Global Macro market morning. One of my favorite risk management books of all time (“Deep Simplicity”, by John Gribbin) got me hooked on the basic principles of chaos and complexity theory back in 2006. Thank God for those teachings. They saved our clients and our firm a lot of money in 2008.


Investment opportunities in a globally interconnected ecosystem are omnipresent. While there may be Apple days in California and snow days in Connecticut, there is no such thing as “risk on” and “risk off” days in Global Macro markets. In fact, when I hear people say that, all I can do is smile. Accepting chaos theory in risk management means accepting uncertainty, every day.


Over the intermediate-term TREND, there is no such thing as market certainty. The only thing you can be certain of, after a +91.3% melt-up in US stocks since March of 2009, is that for the immediate-term groupthink session everyone on the Barron’s Roundtable is going to be bullish.


Being bullish or bearish on the amount of uncertainty you think there is going to be in a market price is an opinion. So is doing nothing. For now, from an asset allocation perspective, we’re doing more and more of nothing. As some market prices climb, we’re raising more cash.


This is what the Hedgeye Asset Allocation Model looks like to start off this week:

  1. US Cash: UP to 67% (versus 61% last week)
  2. International Currencies: DOWN to 18%
  3. International Equities: DOWN to 6%
  4. US Equities: UP to 6%
  5. Fixed Income: UNCHANGED week-over-week at 3%
  6. Commodities: DOWN to 0% (in the last 2 wks, I’ve sold all our Oil, Sugar, and Corn – and there are no rules saying I can’t buy them back lower)

Being in cash is a simple concept. While I do get some very complex questions about the nature of my cash position, most of the time the real complexity in the questions is born out of the problems associated with many institutions being mandated to be “fully invested.” I don’t have to be.


To be crystal clear on this, the Hedgeye Asset Allocation Model represents what I am personally doing with my investable capital. I’d be nuts to put my name on any other advice than that which I abide by myself. Again, from a transparency and accountability perspective, this is very simple.


Complex Simplicities: Did I think people who were jamming into bond and gold funds in Q4 of 2010 were nuts? Yes. Do I think people who are fully invested chasing US Equity indices up here are nuts? Yes. Do people who I think are nuts make money in this business? Yes.


But, sometimes (1998, 2000, 2001, 2002, 2008), people who get nutso invested blow up. The goal here, if you’ve made money in each of the last 3 years, is to make it a fourth -  not to implode.


Last week in Global Macro, other than in the $2.8 TRILLION US Municipal Bond Market, not a lot of things blew up. Here were the most important Global Macro market moves of the week:

  1. US Dollar Index was debauched for a -2.4% loss, taking it down for the 2nd week out of the last 3 as Republicans attempt to break spending promises
  2. Euro rallied +3% from its prior week’s lows of $1.29 (where we covered our short) as “I Have A Scheme” (Zero Hedge coined) on fiat paper goes global
  3. CRB Commodities Index closed at another weekly closing-high of 333; Dear Ber-nank, that was another +3.1% inflationary move in 19 commodities
  4. Oil prices inflated +4% week-over-week, and 71% of Americans say it’s an issue – really?
  5. Gold was down -0.6% and down for the 2nd consecutive week (we remain short of gold, GLD)
  6. US stock market Volatility (VIX) dropped another -9.5% to 15.46, testing its April 2010 lows when US growth bulls were last this horned up

There wasn’t enough pin action in credit spreads (US or Sovereign) for me to call it out and nominal US Treasury Yields didn’t do much on a week-over-week basis either (they remain in what we call a Bullish Formation – bullish on all 3 of our core investment durations: TRADE, TREND, and TAIL). That’s one of the main reasons why we love our cash so much. Global Inflation Accelerating is bad for de bonds, eh.


Complex Simplicities associated with our living in a higher-and-lower American society by the week aside, we’re looking forward to watching how this year’s Global Macro picture plays out post the beginning of the year “flows” thing. While in cash, waiting and watching for US stock-centric investors to react to something other than Apples and snow should be, at a bare minimum, worth the immediate-term absolute performance charge.


My immediate term support and resistance lines for the SP500 are now 1277 and 1299, respectively.


Best of luck out there today – it’s good to be back in the game,



Keith R. McCullough
Chief Executive Officer


Complex Simplicities - box

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