Golden Silence

This note was originally published at 8am on January 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Silence may be golden, but can you think of a better way to entertain someone than to listen to him?”

-Brigham Young


We’re looking forward to the listening to the President of the United States at tomorrow night’s State of The Union address. It’s time to focus on US Jobless Stagflation. It’s time to cut the US deficit. It’s time to strengthen America’s handshake with the world via the credibility of her currency.


It’s time.


Not only is it time because America is out of time to cut spending, but it’s Game Time for the US Dollar Index’s price. The US Dollar closed down -1.1% last week and was down for the 3rd week out of the last four. It’s testing what we call its intermediate-term TREND line of support at $78.66, and if this week’s comments from both the President and the Fed don’t support it, this country could be heading toward a very dark place again.


What’s darkening? The math.


My defense partner, Daryl Jones, wrote a great summary updating the math on Friday (send an email if you’d like the full note). Currently, the Congressional Budget Office (CBO), which we consider consensus for this purpose, projects that the federal budget deficit for 2011, 2012 and 2013 will be $-1,066BN, $-665BN, and $-525BN, respectively.  This is a combined deficit of $-2.3TN.  (Yes, that is a big number.)  So, all else being equal and setting aside any maturities, the United States will have to issue $2.3TN in treasuries to fund the CBO’s projected budget deficit over the next three years.  So if we accept that there is ~$14TN in government debt outstanding (Source:, then the outstanding government debt over the next three years will grow 16%. That is, supply is going up.  Given this outlook, it does make sense that interest rates on 30-year Treasuries are moving higher.


Interestingly, we think that the CBO’s budget deficit projections are low, and perhaps meaningfully so. Currently our U.S. budget deficit projections for 2011, 2012, and 2013 are $-1.2TN, $-1.0TN, and $-0.9TN, respectively.  Combined, this is a total deficit for the ensuing three years of $3.1TN.  In aggregate, our projections are $800BN more than the CBO, or 34% higher for the three year period.  The implication being that the issuance of U.S. Treasuries may be almost 34% higher than “consensus” expects over the coming three years.  No doubt some of this is priced in, but our models have supply growing at an accelerated rate relative to what is likely priced in. And the question remains, who is going to buy these US Treasuries?


The cover of The Economist this weekend had a title that represents what we have been belaboring for the last 3 months – “The Rich and The Rest” – and, without going into every detail, we see this simply as a function of a US Government policy to print debt and inflate. Sure, inflation is great for some of us – but it’s really bad, in the end, for most of us. Global inflation is perpetuated by a policy to abuse and debauch the world’s reserve currency.


For the last 3 years, as a way to express my distaste for who I have labeled the Fiat Fools, on balance I have been short the US Dollar and long Gold. Since US Mid-term election promises were made to cut spending and address our fiscal imbalances, I have been long the US Dollar (bought it on November 4th) and short Gold (sold long position December 6th and shorted GLD on December 29th).  


Today, I am long the US Dollar and flat out frightened. Being in the hands of professional politicians who lie and backpedal on their promises is never a good place to be. It’s time, Mr. President. This Burning Buck stops with you.


Looking back at last week’s action in Global Macro prices, Dollar Down wasn’t good for much else than a low-quality European short squeeze:

  1. US Dollar Index = -1.1%
  2. Euro = +2.3%
  3. SP500 = -0.8%
  4. Nasdaq = -2.4%
  5. Russell 2000 = -4.2%
  6. Spain’s IBEX = +4.3%
  7. Italy’s MIB = +3.0%
  8. Greece’s Athex = +6.3%
  9. China’s Shanghai Composite = -2.7%
  10. Indonesia’s Jakarta Composite = -5.3%
  11. Philippines PSEi Index = -4.4%
  12. CRB Commodities Index = FLAT
  13. Oil = -2.6%
  14. Gold = -1.4%
  15. US stock market Volatility (VIX) = +19.3%
  16. US Treasury Yields = UP again, across the board

And for a US centric stock market investor, while it’s always nice to say ‘hey, look at the Dow’ and extrapolate that reading as a barometer for the rest of the world’s health, remember the simple arithmetic associated with the Dow (a sample of 30 stocks) where General Electric (GE) had a monster +7% day Friday. That’s a great day for what’s been a dog since 2008; not what’s going on in terms of Interconnected Global Macro Market Risk.


What the aforementioned weekly moves meant to me was:

  1. US Jobless Stagflation Continues – Commodity prices are sticky because the US Dollar is weak; US unemployment remains bearish.
  2. The Great December Beta TRADE – It’s a problem when stock market reflation becomes Global Inflation (Russell2000 down YTD).
  3. Volatility Is Back, Because Risk is Never “off” – VIX up +19.3%, with Bond and Emerging Markets getting smoked by inflation is self evident.

Again, if the Dow closing up +0.7% on the week is the risk “on/off” bogey that people who missed all of the Global Risk Management signals of early 2008 are still using – all I have to say about that is Godspeed. I’m keeping a big fat position in Cash as it’s the only way to protect against that dogma.


From an asset allocation perspective, I did take some weakness in market prices to invest some of my Cash position. Last Monday, I had a 67% position in Cash. This morning that position is down to 61% with the following allocations in the Hedgeye Asset Allocation Model:

  1. Cash = 61%
  2. International FX = 18%
  3. International Equities = 6%
  4. US Equities = 6%
  5. Fixed Income = 6%
  6. Commodities = 3%

And yes, if this country’s Golden Silence on the obvious breaks tonight like the price of gold itself has, I’ll be the first to get in line and get more invested. A strong US Dollar will make Global Inflation deflate. It will also strengthen America’s balance sheet and have the international investing community believe in America’s handshake again.


My immediate term support and resistance levels for the SP500 are now 1267 and 1295, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Golden Silence - aaaa


Why the fight over Stanley’s inheritance could work for MPEL.



There are a lot of near-term positive catalysts for MPEL.  A not so obvious one concerns the dissolution of the Stanley Ho empire.  Many in Macau believe that loyalty to the old man for years of close relationships have kept many junkets operating at the SJM properties, despite lower commissions.  With the recent announcement that Ho has bequeathed control and assets to the families of his 2nd and 3rd wives, the junkets may feel free from the loyalty chains. 


Clearly, the migration of junkets would hurt SJM but who would benefit?  With Ho members firmly in charge of MPEL (Lawrence) and MGM (Pansy) along with the highest junket commission rates and most aggressive commission advancement policies, it’s a fairly safe bet as to where a lot of this business would go.  This is a very fluid situation so stay tuned.


So what are the other catalysts?  A second blowout quarter in a row from the gang that couldn’t shoot straight for one.  See our 1/11/11 note, “MPEL: AN ENCORE PERFORMANCE” for the details.  Our EBITDA estimate is 20% above the Street for Q4.  The good times should continue as January is off to a gangbusters start and Q1 estimates look too low.  Finally, Galaxy should announce that the April opening of Galaxy Macau will be pushed back to June.  Cotai cannibalization on MPEL’s City of Dreams (CoD) has been a worry for investors.  An additional two months of CoD operating without the additional competition should allow for another beat in Q2.


TODAY’S S&P 500 SET-UP - January 27, 2011

Equity futures are trading slightly above fair value, having traded modestly lower following news S&P has downgraded Japan's credit rating to 'AA-' from 'AA' due to concerns Japan's debt ratio will grow by more than previously forecast. The move came after the Nikkei had closed and the yen has fallen sharply.  As we look at today’s set up for the S&P 500, the range is 12 points or -0.67% downside to 1288 and +0.26% upside to 1300.



  • 8:30 a.m.: Net export sales (cotton, corn, soy meal, soybeans, wheat), Jan. 20
  • 8:30 a.m.: Chicago Fed national activity index, Dec., est. 0.11%, prior -0.46%
  • 8:30 a.m.: Durable goods orders, Dec., est. 1.5%, prior - 0.3% (capital goods non defense ex. air est. 1.2%, prior 3.6%)
  • 8:30 a.m.: Initial jobless claims, Jan. 22, est. 405k, prior 404k; continuing claims, Jan. 15, est. 3872k, prior 3861k
  • 10 a.m.: Pending home sales, Dec., est. 1% M/m, prior 3.5%
  • 10:30 a.m.: EIA natural gas storage change, Jan. 21, est. -170, prior -243
  • 10:45 a.m.: Fed nominee Peter Diamond speaks at MIT symposium
  • 1 p.m.: Fed sells $29b 7-yr notes


  • Align Technology (ALGN) sees 1Q EPS 15c-17c vs est. 19c
  • Amylin Pharmaceuticals (AMLN) reported 4Q loss-shr 8c vs est. loss 31c; also says Bydureon study to begin in Feb.
  • Citrix Systems (CTXS) sees 1Q adj. EPS 40c-41c vs est. 48c, rev. $470m-$475m vs est. $470.5m
  • Covidien (COV) will to replace McAfee in S&P 500
  • Crown Castle International (CCI) sees 1Q EPS as much as 12c vs est. 9c
  • E*Trade Financial (ETFC) reported 4Q loss-shr 11c vs est. profit 4c
  • Motorola Mobility Holdings (MMI) sees 1Q loss-shr 9c-21c vs est. profit 1c
  • Netflix (NFLX) sees 1Q EPS 90c-$1.13 vs est. 87c
  • Owens-Illinois (OI) reported 4Q adj. EPS 45c vs est. 47c
  • Qualcomm (QCOM) sees 2Q adj. EPS 77c-81c vs est. 68c
  • Starbucks (SBUX) sees 2Q EPS 32c-33c vs est. 35c
  • Symantec (SYMC) sees 4Q rev. $1.59b-$1.61b vs est. $1.58b
  • Varian Medical Systems (VAR) forecast 2011 adj. EPS $3.39-$3.45 vs est. $3.38
  • Almost half of investors in Bloomberg global poll say they think a default by a U.S. state or major city this year is likely, though most say govt. would probably step in with a bailout.
  • AIG former chairman Harvey Golub says the bailed-out insurer should be broken up eventually because the firm’s two main businesses have “no strategic fit between them”
  • Sara Lee board meets for second day today to discuss strategic options without new bids from JBS or PE group led by Apollo Global, two people with knowledge of matter say
  • ProLogis is in talks with rival AMB Property on an all-stock merger that would create a $14b REIT
  • Russian TNK-BP shareholders request injunction to halt share swap, Arctic exploration deal between BP and Rosneft, according to copy of filing read by Bloomberg News
  • Delegates at World Economic Forum in Davos identified rising food prices, North African unrest and competing remedies for global recovery as evidence of increasing global economic discord. Forum continues until Jan.


  • Tyco Electronics (TYC) 6 a.m., $0.68 
  • Potash of Saskatchewan (POT CN) 6 a.m., $1.62 
  • Polaris Industries (PII) 6 a.m., $1.51 
  • Time Warner Cable (TWC) 6 a.m., $1.01 
  • Danaher (DHR) 6 a.m., $0.66 
  • Ball (BLL) 6 a.m., $0.92 
  • Lockheed Martin (LMT) 6:30 a.m., $2.10 
  • Newell Rubbermaid (NWL) 6:30 a.m., $0.32 
  • Eli Lilly (LLY) 6:30 a.m., $1.10 
  • Eaton (ETN) 6:49 a.m., $1.67 
  • Procter & Gamble (PG) 6:55 a.m., $1.09 
  • Altria Group (MO) 6:58 a.m., $0.44 
  • DR Horton (DHI) 7 a.m., $(0.03)
  • Raytheon Co (RTN) 7 a.m., $1.16 
  • Ametek (AME) 7 a.m., $0.47 
  • Motorola Solutions (MSI) 7 a.m., $1.08 
  • Zimmer Holdings (ZMH) 7 a.m., $1.19 
  • EQT (EQT) 7 a.m., $0.40 
  • Stanley Black & Decker (SWK) 7 a.m., $0.91 
  • Baxter International (BAX) 7 a.m., $1.10 
  • Colgate-Palmolive Co (CL) 7 a.m., $1.23 
  • Xcel Energy (XEL) 7 a.m., $0.31 
  • Consol Energy (CNX) 7 a.m., $0.54 
  • Mead Johnson Nutrition Co (MJN) 7 a.m., $0.56 
  • L-3 Communications Holdings (LLL) 7:07 a.m., $2.31 
  • Caterpillar (CAT) 7:30 a.m., $1.28 
  • AT&T (T) 7:30 a.m., $0.54 
  • JetBlue Airways (JBLU) 7:30 a.m., $0.05 
  • Celgene (CELG) 7:30 a.m., $0.73 
  • Bristol-Myers Squibb Co (BMY) 7:30 a.m., $0.48 
  • Invesco Ltd (IVZ) 7:30 a.m., $0.40 
  • Precision Castparts (PCP) 8 a.m., $1.80 
  • Janus Capital Group (JNS) 8 a.m., $0.21 
  • Royal Caribbean Cruises Ltd (RCL) 8:29 a.m., $0.13 
  • Franklin Resources (BEN) 8:30 a.m., $1.91 
  • Nucor (NUE) 9 a.m., $(0.11)
  • Chubb (CB) 4:01 p.m., $1.57 
  • (AMZN) 4:02 p.m., $0.88 
  • ResMed (RMD) 4:05 p.m., $0.37 
  • VeriSign (VRSN) 4:05 p.m., $0.30 
  • PMC - Sierra (PMCS) 4:05 p.m., $0.15 
  • SanDisk (SNDK) 4:05 p.m., $1.09 
  • Monster Worldwide (MWW) 4:10 p.m., $0.06 
  • Compuware (CPWR) 4:12 p.m., $0.16 
  • Microsoft (MSFT) 4:12 p.m., $0.68 
  • KLA-Tencor (KLAC) 4:15 p.m., $1.05 
  • Varian Semiconductor (VSEA) 4:22 p.m., $0.87



9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.07%, S&P +0.42%, Nasdaq +0.74%, Russell 2000 +1.76%
  • Month/Quarter/Year-to-date: Dow +3.52%, S&P +3.10%, Nasdaq +3.27%, Russell +1.29%
  • Sector Performance - (5 sectors up and 4 down): - Energy +2.40%, Materials +2.12%, Industrials +0.59%, Tech +0.57%, Consumer Disc +0.16%, Financials (0.19%), Healthcare (0.12%), Consumer Spls (0.25%), Utilities (0.38%)  


  • ADVANCE/DECLINE LINE: 1161 (+942)  
  • VOLUME: NYSE 1087.57 (+3.93%)
  • VIX:  16.64 -5.40% YTD PERFORMANCE: -6.25%
  • SPX PUT/CALL RATIO: 1.06 from 2.44 (-56.59%)



Treasuries were weaker today with the pickup in risk appetite and the lack of details in President Obama's State of the Union address regarding deficit reduction measures.

  • TED SPREAD: 15.53 + 0.609 (4.081%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.83 from 2.73


  • CRB: 332.83 +1.61%  
  • Oil: 87.33 +1.32% - trading -0.89% in the AM
  • COPPER: 426.70 +0.97% - trading +1.03% in the AM
  • GOLD: 1,330.72 -0.18% - trading +0.51% in the AM


  • Food-exporting countries are “strongly advised” not to restrict shipments to prevent “more uncertainty and disruption” in world markets, the United Nations said. Governments in Egypt, Algeria, Morocco and Yemen have faced protests amid rising costs and high unemployment, and a revolt toppled Tunisia’s leader.
  • Crude oil climbed as new-home sales in the U.S. beat forecasts and traders bet the Federal Reserve will keep stimulus measures to bolster the U.S. economy.
  • Gas futures were steady as a midday update to the National Weather Service’s Global Forecast System weather model showed below-normal temperatures in the eastern and central U.S. from Feb. 5 through Feb. 9. Earlier forecasts had shown mostly normal temperatures in those regions.
  • Investors put 41% less into gold-backed exchange-traded funds and sister exchange-traded notes in 2010 than the previous year, according to a new report by the World Gold Council. 
  • Copper extended gains in New York after a government report on housing added to evidence the U.S. economy is improving without requiring the Federal Reserve to raise interest rates. 
  • Algeria agreed to buy 800,000 metric tons of wheat today and ordered the state-run grain agency to speed up imports, Reuters reported
  • Hog futures touched their highest prices in 14 years amidst heightening Asian demand for pork exported from the U.S., Bloomberg reports.
  • Ethanol futures gained the most in two weeks in Chicago on concern that export demand for corn will rise and increase the cost of making the fuel.  The biofuel climbed for the first time this week. Corn surged to the highest in more than a week on speculation that food riots from Egypt to Yemen will boost demand for the grain, the primary ingredient in U.S. ethanol production.


  • EURO: 1.3683 +0.30% - trading +0.38% in the AM
  • DOLLAR: 77.898 -0.13% - trading -0.18% in the AM


  • FTSE 100: +0.30%; DAX: +0.47%; CAC 40: +0.16% (AS OF 6:15 AM EST)
  • European markets opened modestly lower following mixed results from European heavyweights including AstraZeneca, Novartis and H&M and news that Standard & Poor's cut Japan's sovereign credit rating to AA- from AA. Declining sectors lead advancers 10-8. Food, media and banks down (0.5%) lead fallers whilst basic resources +1.4% and autos +1.1% lead gainers 
  • Indices recovered early losses in choppy trading and are currently mixed.
  • Spain, Ireland, Greece and Portugal will probably remain “stuck in recession” for the next 18 months and be the laggards in a three-speed European recovery, Standard & Poor’s said.
  • Spain's government and unions reach a preliminary pact on pension reform.
  • France Jan Consumer Confidence 85 vs prior revised 86
  • Eurozone Jan Consumer Sentiment (11) vs consensus (11) and prior (11)
  •  Germany Jan preliminary CPI due around 7:30ET


  • Nikkei +0.74%; Hang Seng (0.27%); Shanghai Composite +1.49%
  • Most Asian markets rose today.
  • Property shares fell as China announced new moves to cool the market, but commodity and telecom stocks still powered the index to a gain.
  • Japan went up on a weaker yen and expectations for good earnings reports. Inpex rose 3% on higher crude oil futures. Mitsubishi Heavy rose 4% on a report operating profit will likely rise by more than forecast for the FY. Post-close, S&P downgraded Japan, and the yen weakened.
  • Indonesia rose even after the government priced Garuda Indonesia’s IPO at the low end of its indicative range yesterday.
  • In South Korea, Daewoo Shipbuilding & Engineering rose 3% on a report it signed a $1.2B agreement to build ships for Aker Drilling.
  • Australia finished flat, with retailers lower after the government announced a new income tax to pay for rebuilding after the country’s flooding. Downer EDI plummeted 20% on announcing a write down on a train-building contract.
  • Hong Kong fell slightly. China property stocks dragged the market down, erasing early gains. China Overseas Land lost 5%, and China Resources Land fell 4%; both stocks were heavily short-sold.
  • Japan December trade surplus +34.1% y/y to ¥727.7B vs cons ¥469.6B.


THE HEDGEYE DAILY OUTLOOK - 1 27 2011 6 26 46 AM

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Our Deficit Gift Just Increased

Conclusion: Earlier today, the Congressional Budget Office took their deficit estimates up dramatically for the next three years.  They are now estimating a combined budget deficit for 2011, 2012 and 2013 of $3.28 trillion.  This is up from their prior estimate released in August 2010 of $2.3 trillion. 


Positions: Short U.S. Treasuries via the etf SHY


“The future is not about a gift, it is about an achievement.”

-Robert Kennedy


The aforementioned quote was used by President Obama in his State of the Union address last night.  There is no doubt President Obama’s oratory skills are second to none and, at times, that’s what a nation needs – a President who speaks well and gives the electorate a good feeling about the future.  Unfortunately, we are a now in a period where the nation, from a fiscal perspective actually needs what President Obama campaigned on . . . change.   In fact, for the future to be an “achievement”, we need a dramatic change in the path of the deficit.


On the other hand, change in the political sphere in the United States is certainly on the way. An interesting takeaway from last night was that there were two responses to President Obama.  One from up and coming Republican Congressman Paul Ryan (Wisconsin)  and another response from Congresswoman Michele Bachmann (Minnesota), representing the Tea Party.   Congresswoman Bachmann’s address was short, to the point, and fact based.   While some of it was certainly political in nature, I think she framed up the economic debate over the next couple years very effectively with the following statement:


“After the $700 billion bailout, the trillion-dollar stimulus, and the massive budget bill with over 9,000 earmarks, many of you implored Washington to please stop spending money that we don't have. But instead of cutting, we saw an unprecedented explosion of government spending and debt. It was unlike anything we have seen in the history of the country.”


In the coming weeks and months, this drum beat will get louder and louder.  As a result, spending will be a focus on this current Congress.


Earlier today the Congressional Budget Office took up their deficit projections dramatically for the next three years.  In the table below, I’ve compared their estimates versus their prior estimates and our Hedgeye estimates (which are pending an upward (larger deficit) revision).


Our Deficit Gift Just Increased - 1


It is amazing the difference six months can make.  Primarily due to changing their view of future revenue(i.e. taxes), the CBO has increased their aggregate estimate for the budget deficit in the next three years by +46%. 


While on some levels we do applaud President Obama’s call for $400BN in deficit cuts over the next ten years, the number is way too small to matter or “change” our current path to escalating debt on the federal balance sheet.  In fact, this aggregate reduction of $400BN over ten years isn’t even half of the increase the CBO just made for the next three years in their deficit projections.


Further, from 2012 to 2021, the CBO projects an aggregate deficit in the United States of $6.9TN, so while $400BN in spending cuts over the same time period is something, it is not change.  In fact, President Obama’s proposal only cuts 5.8% of the CBO’s projected budget deficit over the next ten years.  That is, the proposal is really “pocket change”, as it relates to the deficit issue.


To see any meaningful appreciation in the dollar, we will have to see a plan implemented that takes a serious shot at reducing the deficit.  Unfortunately, $400BN over ten years is not that plan.  That’s not a political statement, that is just fact.


Daryl G. Jones
Managing Director


In preparation for Royal Caribbean’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL’s Q3 earnings release/call.




  • “Book-to-load factors are higher than same time last year for the fourth quarter and for all four quarters of 2011.”
  • “Our developmental itineraries continue to show the most improvement with Europe and the Caribbean both demonstrating improving trends.”
  • “Pullmantur has been buffeted by the worst recession of the any of the countries in which we operate and unfortunately, the recession in Spain shows no signs of abating anytime soon.”
  • “I would like to point out that we currently have fuel hedges covering 58% of our forecasted consumption in 2011 as well as 55% and 22% for 2012 and 2013 respectively.”
  • “And for the first time in the brand’s history we will sail with a higher percentage of guests coming from outside the U.S. on our European products. We continue to see the results of our efforts to build our brand beyond the U.S. market. Our long Caribbean itineraries from South Florida are benefiting from the increased international sourcing as well.”
  • “The overall mix of our company is trending more in the direction of guests coming from outside of the United States and for example, with Royal Caribbean International moving from eight ships in Europe next summer to eleven, that will propel that trend forward, so while our guests still come more than 50% from the United States, we’re getting closer and closer and actually quite close to our business mix overall being half of our customers coming from inside the United States and half coming from outside. That’s across all the brands of the company.”
  • “I think included in our guidance is not a huge uptick in on-board spending. We’re seeing most of the accretion that we’re forecasting and we’ve experienced more recently as really being driven by the ticket revenue.”
  • “We’ve baked in some assumptions here around the pressures on food costs. But we continue to be relentlessly focused on cost and I think our brands are doing a great job really trying to figure out how we can squeeze more costs out of our P&L without compromising our guest experience.”

4Q 2010

  • Guidance
    • Net Yields: 5% constant currency or 4-5% as reported
    • NCC: 2% as reported or 3% on a constant currency basis
    • $0.05 negative impact from operational disruptions on Pullmantur's Pacific Dream and the Celebrity Century
    • Fuel cost: $167 MM, 50% hedged
    • EPS: $0.08-0.12
  • “4Q cost increase is really driven by timing, mainly of things like marketing and some maintenance and repair expense that had originally been forecast in the third quarter that shifted to the fourth.”
  • “Virtually all itineraries are booked at higher load factors with better APDs than a year ago.”


  • Guidance
    • Net Yields: 4-5%
    • NCC: 1%
    • EPS: $2.43-2.47
  • “First quarter bookings are off to a solid start and at today’s exchange rates, we are estimating yield improvement of between 2 and 4%. Our current thinking is that the second and third quarters should provide the greatest opportunity for yield improvement in 2011.”
  • “While we are beginning to see some cost pressures, especially with food prices, our brands and department heads continue to relentlessly focus on costs. Accordingly, based on current fuel prices and currency exchange rates, we are encouraged that 2011 could be a year of record profits for our company.”
  • “We have seen early signs that Europe and Alaska are strong next year.”
  • “Our capacity mix is pretty similar to what it was this year, but we are seeing growth in Europe.”
  • “We have a little over a third of our business on the books for 2011.”
    • “Generally speaking, we say we tend to end the year around 50%. So we are now running above the 2010, the ‘09 levels and even the fall of ‘08. But we’re not quite back to where we were pre-recession levels.”
    • “Length of booking curve is 4 months.”


  • “This evening, we depart for Turku, Finland, to take delivery of Allure of the Seas, sister ship to Oasis of the Seas, from the STX shipyard on Thursday.”
    • “As we have already experienced with Oasis, Allure will provide a boost to our revenue yields. With her arrival, the percentage of our brand’s capacity that is either Oasis or Freedom class will be over 33%.”
  • “We announced the name of our fifth and final Solstice class ship, Celebrity Reflection, slated to launch in fall 2012. In addition, we will be Solsticizing both Infinity in fall of 2011 and Summit in Q1 of 2012.”
  • “When Silhouette comes out next year, which will be our newest Solstice class ship, it will go right into service in Europe.”
  • “We said previously that we don’t expect to do any more Oasis class ships.  We do think that the rate of growth of new capacity has slowed.”
  • “But at this point, it’s getting more likely that [building a ship] would be something more like 2014.”

FL: Debating a Weak Week

In the absence of hard data in between the longest reporting period drought of the year, speculation on Foot Locker’s sales trends reached a fever pitch at mid-day today.  In part due to the release of the NPD weekly athletic footwear data and in part due to a large bulge bracket firm making a call that sales have slowed materially in the second to last week of the company’s fiscal fourth quarter.  Speculating on one week alone can be dangerous and as such we don’t normally spend too much time supporting or refuting “channel checks” or weekly scan data.  However, the facts in this situation are worth exploring in greater detail.


Fact 1:  Weekly athletic footwear sales for the athletic specialty/sporting goods channel were down 9.4% for the week as per NPD data.  This clearly marks a meaningful deceleration over the past two weeks.


FL: Debating a Weak Week - Fw App FW Table 1 1 26 11


FL: Debating a Weak Week - FW App Ind 1Yr 1 26 11


Fact 2:  Foot Locker reported same store sales have been tracking in a range of 100-200 bps HIGHER than our blended NPD/Sportscan Index.


FL: Debating a Weak Week - FL CompTrack 1 26 11


Fact 3:  Apparel accelerated this past week to up 3.2% y/y from +2.3% in the prior week.  Nothing heroic here but not nearly as challenging as footwear.


FL: Debating a Weak Week - FW App App Table 1 26 11


The Math: 


If we assume that Foot Locker outperformed the industry for the week in question, as it has recently, then we put the week’s performance at down 7%.  Next, we must estimate what “weighting” the week in question represents as a percentage of the total quarter.  Clearly January is the smallest volume month of the fiscal quarter, suggesting that an equal weighting of week 51 at 8.33% would be overstating the importance of the said week.  So in making realistic assumptions (in this exercise for which we may never know precisely what one weeks of sales momentum really did), we assume that the week is worth 4-5% to the quarter.  All in, this results in a hit to overall quarterly comps of 28-35 bps on our modeling assumption that same store sales will end the quarter up 6%.  


Importantly, the same weekly trend underpinning this analysis is being used by a competitor to adjust estimates down by 100 bps.  Of course these are all just estimates, but by our math it isn’t practical to assume that week 51 of Foot Locker’s year is big enough, or bad enough to derail the topline expectations by a meaningful amount. 


Additional Points to Consider:

  •  It’s no secret that the weather has had some impact on business across all of retail this month, not just the athletic channel.  However, we must also consider the flipside which is the opportunity FL has to clear its boot/cold weather offering at a healthy margin aided by the tough weather backdrop.  This cannot be quantified, but qualitatively bad weather during “normal” winter months can be good for sell throughs of cold weather product.
  •  Promotional activity remains benign, which bodes well for margins.  For anyone that has been tracking their inbox over the past couple of months, we challenge you to email us a copy of a coupon good for an in-store discount.  Yes, we’re aware of the constant barrage of promos centered on Eastbay or .com only, but the effort to drive sales via price has been noticeably absent of late.  And yes, this applies in particular to the last couple of weeks. 

Overall, we remain comfortable with our 6% same store sales estimate and $0.44 above Street estimate for FL’s fourth quarter.  One week in late January does not change our thesis one bit.  As such we’ve taken this opportunity to use the noise out there to add the position to Hedgeye’s virtual portfolio.  Speculation is likely to remain high until the company reports in early March, however the momentum in the underlying business remains solid and on track to meet our admittedly bullish expectations.


Eric Levine


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