• run with the bulls

    get your first month

    of hedgeye free


Germany: As Good As It Gets?

Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)


The question is set: is German data as good as it gets? While we like Germany and are currently long the country in the Hedgeye Virtual Portfolio via the etf EWG, we think there is an increasing probability that the data could roll (mean revert) over the next months, especially as Europe remains mired in its sovereign debt crisis.  We’re starting to get a preview of this from the DAX and German PMI and confidence surveys.


Germany PMI Services crawled higher to 60.0 in January versus 59.2 in December, while Manufacturing declined to 60.2 in January versus 60.7 in December, according to Reuters’ preliminary reading. Importantly, the 60 line (see chart below) is a heavy resistance level on a historical basis that is worth calling out; equally, we see a similar “topping” trend from recent German confidence surveys, including the Ifo Business Climate Index (see chart), which rose to 110.3 in January versus 109.8 in December.


Germany:  As Good As It Gets? - ger1


Certainly German fundamentals have remained strong and benefitted from the Sovereign Debt Dichotomy in Europe last year and the early part of this year. Despite a heavy move in imports in November, Germany’s trade surplus stood at a healthy €12.9 Billion; unemployment is outperforming the region at a consistent 7.5% rate; and industrial production figures were positive at 11.1% in November Y/Y.  


However, we caution that we’re seeing inflation rise globally, and Germany is not immune to this trend, which could erode capital market performance. German CPI rose to 1.9% in December Y/Y versus 1.7% in November and PPI came in at 5.3% in December Y/Y versus 4.4%.


All in, we like Germany’s growth outlook. Our GDP forecast for 2011 is ~2.5-3%, versus the Eurozone at ~1%.  


From a quantitative perspective on the equity side we caution that Germany is flirting with our overbought immediate term TRADE line of 7,163 on the DAX; we’d buy our position back closer to its intermediate term TREND support line of 6761.


Germany:  As Good As It Gets? - ger2


European markets have seen short term gains this month on assurance from China and Japan that they’ll buy European bonds, and speculation that European ministers (including the Germans) will increase the European Financial Stability Facility (EFSF) pot.  However, long term we continue to expect underperformance for Europe’s fiscally strained nations, as we view the “band-aid” bailouts for Greece and Ireland (perhaps Portugal next) as short term fixes to longer term fiscal imbalances. Political instability in such countries as Ireland, Italy, Hungary (to name a few) will continue to stoke these imbalances.


We remain short Italy via EWI and the Euro via FXE in the Hedgeye Virtual Portfolio.


Matthew Hedrick


R3: JCP, WWW, GPS, Twitter


January 24, 2010






  • Among the product highlights out of this year’s Outdoor Retailer Show is Merrell’s new “Glove” line of minimalist footwear set to launch in February – one of several new brands to enter the category in 1H 2011. Interestingly, the brand will be providing ‘instructions’ on barefoot/minimalist running techniques with each pair in an effort to reduce the risk of injury to ‘heel-strikers’ (i.e. just about every runner out there) who are unlikely to transition naturally to running on their toes.
  • In a sign that mobile texting/social networking/emailing is becoming ever more pervasive, a video gone viral shows a women falling into a mall fountain while texting on her phone. While the ‘victim’ is exploring the potential outcomes of litigation, the whole charade begs the questions of just how much mobile push interaction is too much. (view the video here).
  • It was only a matter of time before Twitter and a merchandising opportunity came about.  Enter Tweet Rings, customizable rings engraved with your favorite Tweet.  In the old days this would have more of a “quote” ring but limiting the text to 140 characters is certainly much cooler!



J.C. Penney Appoints Ackman and Roth as Directors - J.C. Penney Co., the third-largest U.S. department store chain, named William Ackman to its board after the activist investor became its biggest shareholder.  Steven Roth will also become a director after his Vornado Realty Trust built a stake in the retailer, J.C. Penney said today in a statement. The company also announced plans to close some stores and wind down its catalog and outlet operations.  Ackman’s Pershing Square Capital Management LLP bought a 16.5 percent stake in the Plano, Texas-based retailer in October, at the same time that Vornado disclosed owning 9.9 percent. The investors “intend to consult with each other in connection with their respective investments in the common stock,” they said at the time. <Bloomberg>

Hedgeye Retail’s Take: Now what?  With these two now on the board, does that make it easier of harder for them to influence a major shake up? 


Old Navy and Ann Taylor Look to Summer - For the summer season, Ann Taylor is taking some risks and adding variety, while Old Navy is emphasizing bold colors and crisp patterns in sync with its perennial casual, upbeat attitude. “We were inspired by the idea of road trips, whether it’s a family vacation or a single dude heading to Las Vegas. It’s about freedom, and hitting the open road,” said Chad Hinson, creative director for marketing at Old Navy. “There is such an optimism about summer.” He was interviewed at the Old Navy showroom on Sixth Avenue, which was adorned with retro travel posters of spots such as the Grand Canyon and the Cedar Point amusement park in Ohio to set the mood for the men’s, women’s and kids merchandise displayed. Among the outfits were a one-piece polka dot swimsuit with a tropical print sarong and V-neck cardigan, and a banded, gathered skirt with a printed chiffon tank and long knit vest seen in the “summer nights” group.<WWD>

Hedgeye Retail’s Take: You have laugh at the prospects of summer with the majority of the country sitting in a deep freeze at the moment.  That “road trip” does sound good right about now. 


Intermix Opens Flagship in Toronto -The retailer’s first international store, a 2,500-square-foot flagship on Bloor Street in Toronto, will bow in the fall, and a Canadian rollout is planned. “Why shouldn’t we be in every international city in Canada?” said Khajak Keledjian, chief executive officer of Intermix. “After that, it will be easier to go to Western Europe.” Intermix will open six to eight stores this year, including a 2,700-square-foot unit in Greenwich, Conn., this spring and a 2,800-square-foot shop in the Meatpacking District here in the fall. Other growth opportunities include men’s-only stores. “Not a day goes by that I’m not asked to do men’s,” Keledjian said. Intermix did $100 million in sales last year, a strong, double-digit increase over 2009, Keledjian said. “We had a great fourth quarter revenue-wise, but it was questionable in terms of margins,” he admitted. Intermix’s 24 units average $1,500 in sales per square foot, he said. <WWD>

Hedgeye Retail’s Take: Impressive performance for the boutique chain.  However, with a heavy Manhattan footprint it will be interesting to see how growth beyond one of the world’s fashion capitals treats productivity and margins.  Nonetheless, $100 million from 24 units certainly trumps most specialty retailers.


Sales Shortfalls spur Inventory Concerns - Not even a month gone, and 2011 is already proving problematic.  A string of fashion firms have revised fourth-quarter guidance in the last two weeks — with many warning along the way that the consumer mood might not remain quite as buoyant as they hoped it would after the sales boom early in the holiday shopping season. Now that New Year’s hangovers are long gone, consumers may once again be slamming their wallets shut in the face of continuing high unemployment, ongoing mortgage foreclosures and spiraling prices — on everything from food to clothes to gasoline. The result is an inventory overhang for both retailers and vendors. <WWD>

Hedgeye Retail’s Take: Despite some C-level types suggesting unit shortage will help drive demand out in California a few weeks ago, the risk of over-inventoried retailers/brands is increasing, which will only add fuel to the fire of pricing dynamics over the near-to-intermediate term.


Diesel Pumps Up Shoes - Diesel footwear is getting a makeover. For fall '11, the lifestyle brand will embark on some major moves to boost the fashion in its footwear offering and depart from its athletic-inspired roots.  "It's good for us," said Luigi Mezzasoma, CEO of Diesel shoes and bags, noting that the company has built a footwear collection that better aligns with the brand's image as sophisticated denim. "We can be closer to our DNA, which is strong and sexy, and be on trend in the market as we move from athletic to hybrid and more fashionable [styles]." "We're a fashion company, not an athletic company," added Tony Strippoli, Diesel's VP of sales for footwear, bags and kids' product. "We can credibly interpret trends from athleisure to runway [and] take the footwear in any direction we want to." <WWD>

Hedgeye Retail’s Take: It may be tough to argue its ‘athletic’ heritage, but given the company’s fashion focus on the apparel side of the business and an increasingly competitive athletic category, the move is a step in the right direction and one the company should have made a long time ago.


Snow and Taxes Might Benifit U.K. Online Retailer’s - Snow and frigid air, along with the approach of new taxes, helped boost online sales last month in the United Kingdom, where shoppers spent 25% more than they did in December 2009, according to a report released today by Interactive Media in Retail Group, a trade group, and Capgemini, a consulting firm. U.K. consumers spent 6.8 billion pounds (US$10.9 billion) in December, the report says.  That also represents a 7% increase over November. Unusually severe winter weather led more consumers to shop online last month, the report says. Spending also increased as consumers bought items ahead of the 2011 increase in the value-added tax, which resembles a national sales tax. The standard tax rate this year increased to 20% from 17.5%. “The ongoing trend of consumers putting down the car keys and turning on their computers is only set to continue particularly as consumers use the power of the web to make their money go further as the economy recovery remains fragile,” says Chris Webster, head of retail consulting and technology at Capgemini. <InternetRetailer>

Hedgeye Retail’s Take: Expect a similar effect stateside after anomalous January weather– something we expect to hear more about on sales day next week. Retailers over-indexed to e-commerce on a relative basis like Williams-Sonoma, J.Crew, Cabelas, The Limited, Urban Outfitters, and Saks to name a few with e-commerce accounting for over 15% of sales will have a competitive edge near-term.


Eastern Mountain Sports to Open New Store in Manhattan - Eastern Mountain Sports announced it will open a new store on the Upper West Side of Manhattan this fall at 76th and Broadway. The 13,000-square-foot store will provide its respected, authentic service to the community’s outdoor enthusiasts while taking advantage of its proximity to Central Park and the wide array of outdoor activities that take place throughout the year. The store will showcase apparel and gear for cycling, kayaking, backpacking, camping, climbing, hiking, snowshoeing and skiing. In addition, Eastern Mountain Sports’ signature services will include expert bike and ski technicians, foot gurus for personalized fittings, a paddlesport section, and a comprehensive travel-planning library. <SportsOneSource>

Hedgeye Retail’s Take: Recent store growth at both REI and EMS reflect the strength that’s been evident in the outdoor industry for the past year. While we’d expect productivity of stores in Manhattan to be considerably higher than more rural locations, it will have to be in order to offset rents that are undoubtedly multiples higher.


Twitter Ad Revenues to Soar This Year - Twitter has received enough media attention to be a household word, but still has a relatively small audience. The Pew Internet & American Life Project found in September 2010 that just 8% of online Americans used the service. But eMarketer is cautiously optimistic about Twitter’s fledgling ad products. eMarketer expects Twitter to earn $150 million in revenues this year, the vast majority of which will come from the US. This represents a substantial increase over revenues of $45 million during 2010, the first year Twitter sold advertising. <eMarketer>

Hedgeye Retail’s Take: More importantly here is not the volume or penetration rates, but rather the quality of impact, which is where social sites like Twitter and Facebook have a decided edge on alternative options.


R3: JCP, WWW, GPS, Twitter - R3 1 24 11




Just a few things we are hearing...




  • Launching a re-brand of the Four Seasons/Plaza - trying to regain some of the premium play they lost to WYNN
  • Announcement may come pretty soon post CNY from LVS about being able to sell the Cotai condos - this would be a positive catalyst for LVS
  • Labor may still be difficult for LVS to procure for Lots 5/6.  See below


  • No surprise but hearing that MGM IPO will get announced post CNY – so that pushes it to March if they choose to do it at all
  • Given the recent strength, which looks sustainable, MGM may want to wait to get a higher price. 
  • Also, one of the biggest players from one of their biggest junkets went missing while owing MGM over $100 million.  It is our understanding that the junket has agreed to pay off MGM over time through offsetting commission advances.  Not sure if MGM needs to or will disclose this.

Galaxy Macau and other projects

  • Hearing that June 1st is the likely opening date
  • It's possible that 25-30% of Starworld's Rolling Chip volume could go over to Galaxy Macau
  • There will be an air-conditioned walkway between Galaxy and City of Dreams
  • As soon as they open, they will move into Phase 2 right away so there may not be as many free laborers for LVS - could be a negative for LVS
  • There will be 3,000 local workers that free up once the Galaxy project is done
  • Angela Ho’s theme park is another large development – all the residential units from Shun Tak are already under construction
  • University of Macau on Henguin.   
  • Light Rail Project is also going on 4- 5 year plan.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Our expectations for 36-40% revenue growth in January remain unchanged.



Another decent week in Macau as gross table gaming revenues came in at HK$14.0 billion through the 23rd.  Using this figure and what we expect will be a slightly slower last week in January heading into the Chinese New Year celebration, we continue to project full month gross gaming revenues (including slots) at HK$18.5-19.0 billion, up 36-40% YoY. 


In terms of market share, Wynn lost more share – we are hearing it's totally hold related – while LVS continues to track in-line with its 3 month depressed share of 16.5%.  MPEL experienced a huge jump from last week’s month-to-date share of 11.7%.  MGM gave up some of that share, dropping 140bps since our last update.




After what was looking like a day of indigestion for IGT bulls, the stock closed flat. The good in the quarter outweighed the bad and guidance looks conservative.



We don’t want to regurgitate the quarter, we will leave that to the sell side historians.  We’d rather focus on the future.  Hopefully, you’ll find our takeaways interesting and forward looking. 


While others are focused on the slow acceleration of replacement demand, we think the big negative issue for IGT is in the participation segment.  It’s going to be very difficult for the company to grow this business.  For IGT, we view participation similar to a casino.  The problem is unlike a casino with no growth that spends 6% of revenues on maintenance CapEx, IGT spends around 17%.  That eats into ROI big time.  At least for WMS and BYI, their participation segments are growing.


Potentially outweighing the participation drag, at least for the near and intermediate term, is the impressive margin gains.  IGT’s top line missed big due in small part to the participation segment but mostly due to international sales.  However, not only did the margins more than offset that, the improvement looks sustainable – enough so that guidance looks conservative for once.  We expect that better margins will carry IGT until replacements inevitably takes off and new markets begin to provide growth.  We will be focused on the declining ROI in the participation segment down the road.


Here are some of our specific forward-looking takeaways:

  • In North America, IGT finally met our expectations.  For the first time in 6 years, IGT shipped more replacement units in its F1Q than its F4Q.  For most operators, December is a seasonally better replacement quarter than September, but since IGT’s fiscal year is in September (which is usually companies’ most promotional quarter) that hasn’t held true for them.  We suspect that this reversal of trend means that replacements in December were much stronger than our estimated 9,300 replacements shipped in September.
  • So much for annual price increases being a given.  For as many years as we've covered this space, annual price hikes were a given.  These last few quarters have demonstrated that this isn’t the case anymore… whether you blame it on mix or selling what would normally be ‘discontinued’ product lines or deeper discounts –the numbers don’t lie.  While we still don’t believe that price is the main determinant for operators when buying games, it’s clearly become a factor and with the heightened competition, suppliers need to play the price game.
  • Despite Patti’s assurances that international product sales were strong this quarter, the numbers tell a different story.  This is the lowest unit ship quarter for international in over a decade (excluding Japan).  The company still maintains that they expect international unit shipments to be up YoY with little rationale as to why aside from guidance from their customers that the second half of the year should be better and roughly 1,500 for sale units to Italy.
  • Margins were very good considering the low number of shipments.  Systems and software sales must have been good this quarter because they carry margins of north of 70% which coupled with the higher mix of non-box sales clearly helped this quarter.  The 1,000 Mexican units also had very high margins despite lower ASPs since they were fully depreciated.  Going forward, the company expects that game sale margins will be 200-300bps lower than F1Q11 – partly due to another promotion ala– Dynamix that they plan on introducing shortly.

Gaming Operations:

  • Well, at least IGT finally admits that “the installed base isn’t expected to grow meaningfully this year” or at all if we excludes the Italian units.  On the bright side, yields finally stopped declining – although one can say that the removal of the incremental Alabama units from Victoryland helped here.
  • Some of the increase in margin is also due to the consolidation and simplification of platforms which materially decreases the installation and refresh cost.  The company expects margins to be 150bps lower for the next few quarters – which is still above prior guidance of 58-60%.


The Macau Metro Monitor, January 24, 2011



Dr. Stanley Ho has transferred all but 100 shares of his 31.655% stake in SJM's parent company, Sociedade de Turismo e Diversoes de Macau, SA, to Lanceford Company Limited.  Lanceford Co. is controlled by Dr. Ho's 3rd wife, Chan Un-chan, who owns 50.55% of the company and by Dr. Ho's 2nd wife, Lucina Ho, who owns the remaining 49.45% of Lanceford.  Lucina Ho's children--Pansy Ho, Daisy Ho, Maisy Ho, Josie Ho and Lawrence Ho--each hold 20% of her stake.


The move may complicate the question of succession given the families of three of the tycoon's companions now each have significant stakes in SJM.  The Company states that there will be no change in management or strategic direction as a result of the share transfer.


Secretary for Transport and Public Works, Lau Si Io, said that one or two new land plots will be auctioned this year.  He stressed the Government is trying to make the land granting process more transparent.  The government had delayed the auction of the 3,400 square meters land parcel in Fai Chi Kei for the construction of no less than 500 small- and medium-sized residential units.




Total visitor arrivals rose by 11.6% YoY to 2,271,301.  Mainland China visitors increased by 18.8% YoY to 1,200,324 (52.8% of total), with 494,567 traveling under the Individual Visit Scheme.  Visitors from Hong Kong (667,595) and Republic of Korea (33,775) increased by 10.9% and 49.0% respectively; however, those from Taiwan (105,747), Malaysia (41,256), Japan (36,052), and Singapore (34,839) decreased by 7.4%, 10.2%, 5.8% and 11.9% respectively.  Total visitor arrivals reached 24,965,411 for the whole year of 2010, up by 14.8% YoY.




Singapore CPI rose by 4.6% YoY in December.  For 2010, CPI rose by 2.8% YoY.



MGM Macau has refurbished a TurboJet vessel as the “Golden Lion Jet”, which will sail between Hong Kong and Macau.  The refurbished jet made its debut on January 21.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.