Europe Is Offside

Position: Short Italy (EWI); Short Euro (FXE)


In a post on 1/27 titled “Playing Europe’s Mismatch on Duration” we noted that our short positions in Italy (via the etf EWI) and the EUR (FXE) were working against us as three catalysts were giving a boost to European equity markets (especially the PIIGS) over the immediate term:

  1. Japan and China buying European debt
  2. Bullish speculation on a “comprehensive package” to tackle Europe’s sovereign debt crisis
  3. Hawkish commentary from ECB President Jean-Claude Trichet on inflation

In the note we also cautioned that over the intermediate term TREND our negative outlook on Europe, especially for the countries with high fiscal imbalances (Italy, Spain, and Portugal), remains intact.


These positions remain unchanged, and due to recent uprisings in Tunisia and Egypt European markets have received the proverbial hall pass on headline risk, and its equity markets, especially from the PIIGS, have outperformed. The threat now is significant mean reversion risk!


After all, the top 3 global equity indices year-to-date are:

  1. Greece Athex = +17.7%
  2. Italy FTSE MIB = +11.7%
  3. Spain IBEX 35 = +11.2%

Also, some of the fundamental data we follow to gauge the region’s “health” is showing signs of slowing, a concern over the intermediate term. We’ve hit on the pressing threat of inflation in our work, but forward looking indicators such as PMI surveys are signaling a topping, particular Germany, THE country “supporting” the region and divergent from Europe’s sovereign debt issues.


Final January PMI Manufacturing figures were released today from Markit (see chart). Although we’ll be more focused on the services numbers (released on Thursday 2/3), both Manufacturing and Services are indicating a slowing on the margin (despite the majority of countries reporting Manufacturing PMI improving month-over-month).  Importantly there’s a heavy line of resistance at 60 that Germany is bumping up against, and increasing the mean reversion risk.   


Europe Is Offside - mh1


Although a lagging indicator, unemployment rates across many nations, but in particular in Spain and Ireland are moving in the wrong direction. Germany remains the exception, falling 10bps month-over-month to 7.4% in DEC. Beware that austerity programs throughout Europe, which include job strikes, wage reductions and freezes, and consumer tax hikes could further bolster these figures.


Europe Is Offside - mh2


The EUR and ECB Catalyst


On Thursday (2/3) the ECB announces its refi rate. We do not expect a hike from the current 1.0% rate, despite Trichet’s recent hawkish rhetoric, which could pare back recent gains in the EUR-USD. We’d be shorting the currency (again) at its current level of $1.38 and covering it at $1.35 for a TRADE.


Matthew Hedrick


Europe Is Offside - mh3

The Breakout: SP500 Levels, Refreshed

POSITION: no position in SPY


I said this when I covered my SPY position on Friday. I said this yesterday when I chose to do nothing. And I’ll say it again - provided that both The President and The Ber-nank and sign off on a complete debauchery of the US Dollar, this market can go higher before it blows up.


Anyone who has studied the unintended consequences associated with inflation and currency crashes knows that trading the inflation associated with it works, to a point. And when that point comes, very few are positioned for the fall. Friday’s mini-me fall, hopefully, was a mini-reminder of that.


Higher-highs and higher-lows in the SP500 will be bullish in both the immediate and intermediate terms until they aren’t. From a long-term TAIL perspective however, the SP500 continues to make lower-highs. That, combined with a monstrous amount of immediate and intermediate term price momentum, sets us up for some serious TAIL risk.


Almost every other day on our the Hedgeye Macro Morning Call, I say something like this: “If they debauch the dollar, every day and every week, from this day until that, the SP500 could easily get to 1340… and then blow up.”


What was immediate-term TRADE resistance yesterday is now support at 1289. This moves my immediate term TRADE resistance line up to 1305. The US Dollar is now down for 5 out of the last 6 weeks. It’s sad to watch.



Keith R. McCullough
Chief Executive Officer


The Breakout: SP500 Levels, Refreshed - 2


Here are some tidbits regarding MGM's IPO and its junket business. 



We are hearing that MGM will launch its Macau IPO in late March.  There have also been a couple of recent developments related to MGM Macau.  First, while it appears that SJM and Wynn have reached agreements for Cotai land, MGM has not.  Thus, we believe a future Cotai project will be referenced during the MGM IPO process.  However, the focus will be on the growth – market and market share – and improving profitability at the existing MGM property.  More importantly, we think MGM may have secured the business of the junket operator Ocho, which is moving its room from SJM’s The Grand Lisboa (GL) to MGM after Chinese New Year.  Ocho currently provides up to 20% of GL’s Rolling Chip volume.  This is a pretty big deal for MGM which will help them keep the market share momentum going.  The willingness of junkets to move away from the Stanley Ho empire should continue, to the likely benefit of MPEL, MGM, and Galaxy.

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.

Prices Paid = Inflation

POSITION: long inflation


There are obviously a lot of ways to be long inflation (short bonds, emerging markets, or consumer stocks) or just run on out there and buy something that’s, well, inflating in price!


I can see how a Keynesian was right depressed when the chart below (ISM Prices Paid) hit its December 2008 low. That was the other side of the printing moneys from the heavens idea that created things like $150/oil. What goes up in terms of a government supported price, eventually comes down.


What’s been going up since December 2008 are the prices that business pay for stuff (+353%). If you don’t think that a manufacturer of something with copper or corn in it is feeling this chart, ask them.


We’ve long time predicted (2007-2008) that when reflation becomes inflation, that someone gets plugged. In this case, either consumers of end product are going to get it (McDonalds says they are going to raise prices – look how the market took that idea) or the fattened corporate margin is going to get it.


There’s a reason why inflation created a very bad margin environment in the 1970’s. There’s no reason why inflation can’t force corporate margins to mean revert from all-time highs either.


So when The Ber-nank tells you there is no inflation, remember this – if he didn’t see it in this chart in 2008, he sure as heck won’t see it now.


And that, folks, is why the US Dollar or the government policies that back it no longer have any credibility in global currency markets.



Keith R. McCullough
Chief Executive Officer


Prices Paid = Inflation - 3

R3: JCG, DKS, Social Media, and Egypt


February 1, 2010



  • Just a few days after Vera Wang’s collaboration with David’s Bridal was unveiled, the designer known for all things “wedding” is set to announce a partnership with Zale’s for wedding rings.  Now if only Kohl’s, David’s Bridal, Serta, and Zale’s would all collaborate to the put the head to home merchandise selection under one roof.
  • Another bullish forecast from the NRF, this time with a focus on Valentine’s Day.  Spending is forecast to increase 11% y/y, for an average spend per consumer of $116,21.  Overall, spending on Valentine’s should not be taken likely as the holiday is expected to generate $15.7 billion in sales.
  • Add Macy’s to the list of brands strategically using the pop-up store to promote a new fashion inititiave. In conjunction with the rollout of the company’s Impulse contemporary departments, the department store is opening a temporary boutique in Manhattan’s Flatiron district.  In addition, there is a major subway campaign underway promoting the youthful merchandising effort.



J. Crew Settlement With Investors -  J. Crew Group Inc.’s $10 million settlement of a an investor lawsuit over the proposed takeover by private-equity firms TPG Capital and Leonard Green & Partners LP has fallen apart, a lawyer for the shareholders said.  J. Crew officials undermined a deal in which the clothier agreed to extend the period to solicit competing offers to the $3 billion buyout bid, Stuart Grant, a lawyer for J. Crew shareholders objecting to the buyout, said in a court filing. The accord also included a $10 million payment to plaintiffs.  <Bloomberg>

Hedgeye Retail’s Take:  Perhaps a little more drama to come although it still remains unlikely that an additional bidder will step-up given the ample time that has already passed since the deal was originally announced.


Dick's SG to pay $15M to Settle Wage DisputesDick's Sporting Goods Inc agreed to pay up to $15 million to settle a number of class action lawsuits that had alleged a failure to pay overtime and other promised wages, according to a company filing with the U.S. Securities and Exchange Commission. The filing said that on Jan. 28, 2011, the company and attorneys for a group of plaintiffs filed a settlement agreement in the United States District Court for the Western District of New York to settle Tamara Barrus, et al. v. Dick's Sporting Goods, et al., and 22 related wage and hour class action lawsuits that have been pending against the Company and five individual defendants. <SportsOneSource>

Hedgeye Retail’s Take:  Add DKS to list of companies finally making whole on their overtime disputes.  This issue has been common across most of retail, with settlements occurring over the past several years.


Inflation in China Not Slowing Down Spending -  Wang Jung is a far more frugal shopper than the other female twentysomethings in her Beijing social circle of office workers. She balks at spending more than 150 yuan (about $23 at current exchange) on a single item of clothing, unless it’s a winter coat or shoes. Even then, she’ll spend hours combing the city’s hidden retail markets looking for the best deals. “I don’t see the point in spending 500 yuan [$76] on something I won’t be able to wear in a year because it’s not good quality,” she said, referring to big-name international retailers like Zara that have become go-to shopping destinations these days for Beijing’s young and fashionable. <WWD>

Hedgeye Retail’s Take:   The key difference in China being that wages are on the rise, which in turn is driving purchasing power increases.  Not so here in the US where inflation will likely put a damper on demand.


Upheaval in Egypt Hits Vendors -  The political crisis in Egypt is bringing commerce to a standstill, threatening to dampen consumer sentiment across the region, and forcing textile and apparel manufacturers to create contingency plans. Carrefour SA, the world’s second-largest retailer behind Wal-Mart Stores Inc., said rioters pillaged one of its five hypermarkets in Egypt, but it did not detail the scale of the damage. “The other stores are closed but did not suffer any damages,” a spokeswoman for the retailer said Monday. Carrefour is present in Egypt through its Middle East franchise partner Majid Al Futtaim, which also operates Carrefour stores in Jordan, Syria and United Arab Emirates, among other countries. <WWD>

Hedgeye Retail’s Take:  As far as publicly traded US companies go, Egypt related risk is pretty much a non-event. 


Japan Turns to Cheap Chic -  In Japan, the Baby Boomers have given way to the Bargain Bunch. Take Mayu Kawasaki, a 27-year-old retail manager from the southern Japanese city of Fukuoka, who is one careful shopper. “For me, number one is quality and design,” Kawasaki said. “I always want to find something that can be worn or used long term. And second is price, because fashion changes all the time. So if I can get cheap stuff, I don’t feel it’s a waste to use it only for the season.” <WWD>

Hedgeye Retail’s Take:   Given UNIQLO’s roots in Japan, fast fashion or cheap chic is hardly a new concept.  However, a stagnant economy could certainly be one reason why cheap fashion is picking up.


Where Are Social Media Marketers Seeing the Most Success? -  More companies in the Inc. 500 are using social media as part of their business and marketing strategies, and they are seeing success and viewing social media overall as more valuable. These firms, which include the fastest-growing private companies, have been using a mix of tactics, with Facebook as the most popular. According to a study released in January 2011 from the University of Massachusetts Dartmouth Center for Marketing Research, 71% of companies used Facebook in 2010, up from 61% in 2009. Twitter, at 59% in 2010, and blogging, at 50%, are also still high on the list.


Hedgeye Retail’s Take: Despite the progress, the question still lies with the “effectiveness” of such campaigns.


R3: JCG, DKS, Social Media, and Egypt - R3


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