February 17, 2010



  • Iconix management reminded investors that the company doesn’t really get into the weeds on issues surrounding cost pressures and pricing increases at retail.  Given the company’s focus exclusively on licensing, they went on to say they expect every store to have a different strategy with some holding price and working on tighter margins while others will raise prices.  Very insightful for a company with licenses representing $12 billion in retail sales worldwide.
  • Only several months after the Japanese press reported Abercrombie’s flagship Tokyo store wasn’t necessarily a huge hit, the company confirmed that the stores sales growth has turned negative.   As a result there are no plans currently underway to expand further into the Japanese market.  Management is also not entirely sure why the brand and store are not meeting expectations.
  • Say goodbye to Old Navy’s two year old Supermodelquins ad campaign.  Today the brand introduces its first major marketing push under new leadership (founding CMO of JetBlue) called, “Old Navy Records: Original Hits. Original Styles”.  The campaign slated to last throughout 2011 will include a half dozen original tracks as well as a tie-in with popular mobile app Shazam.  When consumers Shazam one of the original songs, the app will connect the music with key looks, product, and styling tips associated with that track’s music video.


TPG taking J. Crew Private - After 85 days, overtures to 59 companies and four semiserious suitors, J. Crew Group Inc. is moving forward with its $3 billion deal to be taken private by TPG Capital and Leonard Green & Partners.  The firm said Thursday its “go-shop” period had passed without any alternative offers. Shareholders will vote on the deal March 1. J. Crew solicited 59 potentially interested parties, and four ultimately signed confidentiality agreements and were granted access to additional details on the company. One of the parties with a confidentiality agreement had a meeting with the management, including chairman and chief executive officer Millard “Mickey” Drexler.  <WWD>

Hedgeye Retail’s Take:   With an abnormally long “go shop” period which yielded no incremental offers, it may finally time to put the belief that the board didn’t fully perform its fiduciary duties to rest.


CityTarget Unit Planned for Chicago - Target Stores on Wednesday gave a name to the small-format concept it unveiled in September — CityTarget. The stores will measure 60,000 to 100,000 square feet, about half the size of typical Targets, which are 125,000 to 180,000 square feet.  The first CityTarget unit will open next year on South State Street and Madison Street E. in Chicago in a U.S. historic landmark building formerly occupied by Carson Pirie Scott and now known as Sullivan Center. Target said it will preserve Sullivan Center, referring to it as a “Chicago treasure,” and added that the CityTarget will blend in with the building’s aesthetic. <WWD>

Hedgeye Retail’s Take:   We suspect that Target’s marketing focus which historically has been rooted in urban centers will give the brand a huge edge with customers clammering for Target’s hipness without heading out of town to a strip center.  While still just a test, this strategy is one to watch.


Phillips-Van Heusen Licenses Izod in India, Middle East - Phillips-Van Heusen Corporation has licensed Arvind Mills Ltd. to manufacture and market men's, women's and boys' apparel and accessories under the Izod  brand in India, as well as in the United Arab Emirates, Kuwait, Bahrain, Qatar, Saudi Arabia, Bhutan, Madagascar, Seychelles, Oman, Yemen, Bangladesh, Nepal, Sri Lanka and Maldives. Under the agreement, Arvind, based in Bangalore, India, will have the right to produce and market a wide range of products, including tops, casual pants and shorts, jeans, sweaters and unconstructed blazers, outerwear, and accessories, such as women's handbags and men's and boys' small leather goods. The initial term of the license agreement is through 2019, with renewal options that would extend the term through 2029. <SportsOneSource>

Hedgeye Retail’s Take:   While this deal is clearly aimed at longer term prospects, we do wonder how well a truly American (preppy) brand will perform in one of the most politically unstable regions of the world at the current time.


Guess Opens Fifth Avenue Flagship - Guess Inc. is hoping to devour a $10 million piece of Manhattan’s retail pie with its new Fifth Avenue flagship. Described with superlatives such as first, biggest and premium, the 13,000-square-foot, two-level unit at 575 Fifth Avenue and 47th Street is primed to do hefty sales volume. For starters, it’s the largest Guess store in the world. “This is a big step for us,” said Paul Marciano, vice chairman and chief executive officer of Guess Inc. “We’ve never had a major location on Fifth Avenue. We found a store that’s a little bit big, but it will cover every avenue of our business. We have collection of lingerie and underwear, but because of space issues, we’ve kept it in Europe and Asia. I will [now] have the space.” <WWD>

Hedgeye Retail’s Take:   Long in the works, the company’s showpiece location finally opens. If the fanfare at ICR was any indication, this is one location that warrants a visit for anyone passing by 47th and Fifth.


Daphne to enter into Japan and Singapore - Chinese footwear brand Daphne plans to open 1,500 new stores in Mainland China this year and will also further expand into new markets including Japan and Singapore.  With its sales growth maintaining at a double digit over the last few years, Daphne’s revenue reaches HK$7 billion in 2010 and is ready to expand into new markets in Southeast Asia and Northeast Asia, starting from Singapore and Japan, and then Malaysia and Indonesia. The company has opened ten retail stores in Japan by working with retail giant Aeon.  <FashionNetAsia>

Hedgeye Retail’s Take:  With a base of 4,000 stores in the region (including licensed Adidas and Nike outlets) the growth of an additional 1,500 units is notable.  The company’s namesake brand remains the single largest banner within the portfolio.


U.S-made Yarn Prices Jump in January - U.S.-made yarn prices soared in January, as the inflationary price pressure from historically high raw cotton prices that is gripping the industry throughout the supply chain broke through at the core of America’s diminished manufacturing base. The Labor Department’s Producer Price Index, released Wednesday, showed wholesale prices for domestically produced yarns rose 12.3 percent in January compared with December and spiked 20.2 percent against a year earlier. Wholesale price inflation also began to creep into U.S.-made apparel, although at a significantly lower rate. Those prices rose 0.5 percent last month compared with December and increased 0.9 percent compared with a year earlier. <WWD>

Hedgeye Retail’s Take:  Notable although largely irrelevant given the “niche” manufacturing that still resides stateside for "Made in USA" apparel.


Denim Market Hits Headwinds - The denim market is going to require a healthy, sustained dose of fashion innovation if it’s to reverse the stagnation that stalled the business in 2010. That is among the conclusions drawn from data released Tuesday by The NPD Group Inc., the Port Washington, N.Y.-based research firm. While overall sales of jeans for adults last year rose 0.4 percent to $13.82 billion from $13.77 billion in 2009, men’s jeans sales suffered their first decline in six years, falling 3.1 percent to $5.18 billion.  The larger women’s jeans category fared better, with sales rising 2.6 percent to $8.64 billion from $8.42 billion. But the women’s category benefited from the triple-digit growth of jeggings sales, much of it in the first half of the year. <WWD>

Hedgeye Retail’s Take:   Interesting divergence between men’s denim results and an overall pick-up in menswear that has been building over the past few months.  Nonetheless, it shouldn't be surprising that the overall denim industry is not a growth category.  If any apparel item should receive “staple” status, denim is certainly at the top of the list.


Initial Claims Climb Back Above 400

The headline initial claims number rose 27k WoW to 410k (25k after a 2k upward revision to last week’s data).  Rolling claims rose 1.75k to 417.75k. On a non-seasonally-adjusted basis, reported claims fell 17k WoW.  NSA claims in 2011 to date has been less volatile than typical. 


We have been looking for claims to hit the 375-400k range and remain there or lower before unemployment begins to improve. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.








One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.




Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 43 bps wider than 4Q.  The current level of 278 bps is slightly tighter than last week (284 bps).






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 






Joshua Steiner, CFA


Allison Kaptur

CHART OF THE DAY: On the Menu; Emerging Markets and Fixed Income



CHART OF THE DAY: On the Menu; Emerging Markets and Fixed Income -  chart

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  • Immigration and Customs Enforcement asking 1K companies to verify their workers are legal
  • DPZ - up 2.78% on accelerating volume; EPS to be reported on 3/2
  • RRGB Company is scheduled to report Q4 earnings 17-Feb after the close. Bloomberg EPS $0.05 and Revenue $191.0M; Same-store sales - Company-owned Q4 +0.9%, Q1 +1.0% FY 2011 +1.1%
  • PEET reported Q4 EPS $0.48 ex-items vs Bloomberg $0.48 - Q4 Revenues $91.6M vs consensus $95.9M Guidance (Dec 2011): Reaffirms EPS $1.53-$1.60 vs consensus $1.59; Reaffirms revenues +8%-10% or $360.5-$367.19 vs consensus $370.5M
  • BBRG pro forma EPS $0.27 vs Reuters $0.25 Q4 total comparable restaurant sales increased 2.2%; BRIO comparable restaurant sales increased 4.7%; BRAVO! Comparable restaurant sales decreased 0.3% Guidance 2011: EPS $0.75-0.80 vs Bloomberg $0.80; revenues $365-370M vs Bloomberg $368.5M
  • PFCB up on strong volume, but it will be difficult to achieve both pricing and traffic growth in FY11
  • CAKE - retail Sales and Use Tax receipts data from California does not paint a pretty picture for restaurants with a high level of exposure to the Golden State.
  • SBUX/PEET/GMCR - the cost of Arabica coffee, the high-quality bean appreciated by espresso connoisseurs, has surged to a near 14-year high of $2.6675 a pound in New York.
  • MCD - Subway expanding in Finland, looking to overtake MacDonald's in terms of outlet numbers
  • SONC - Sonic to focus on food quality rather than price reductions post-recession - will be painful in the beginning, but the right move!
  • BJ’s founders to open fast-casual concept stacked to feature self-service ordering, customization at the table using IPADS.


Howard Penney

Managing Director




The Macau Metro Monitor, February 17, 2011




CEO Adelson is seeking more land from the S'pore govt to expand MBS.  "We are already running out of [convention and exhibition] space. I've told the government that we need some more land to expand the [convention] space because the demand that this property is going to create is rapidly bringing us to the point where we may even have to ration space," said Adelson.  He added that MBS's convention and exhibition facilities are running at 87% capacity and that "within about 12-to-18 months" the complex will be "rationing space."  Adelson said MBS has received 11MM visitors since it opened in April last year and expects to break even within four years of operations.


COO Leven said there is available land at various points around MBS.  "Demand is going to be higher than supply shortly as the entire hospitality industry is running over 80% occupancy," Leven said.  Leven also said a report on the search for a new MBS CEO is due Friday.


Adelson also remarked, "We are seriously looking at doing what we call a 'Strip', which is essentially a mini Las Vegas. We are looking to do that in Europe and we are sort of zeroing on Spain."



S'pore's Trade and Industry Ministry (MTI) reported 14.5% GDP growth in 2010, with 4Q GDP expanding 12% YoY.  It maintained its 4-6% GDP growth forecast for 2011 but raised the inflation forecast to 3-4% from 2-3%.

Inflation is also expected to rise to 5.0 to 6.0% in early 2011 before moderating in 2H 2011.


The Legislative Assembly has passed a property tax cut bill.  The new bill reduces the tax on unleased flats from 10% to 6% and the tax on leased flats from 16 to 10%.  The bill also introduces a change allowing owners of unleased flats an automatic deduction of 10% on their taxable income.


The board of Aristocrat Leisure Limited recently nominated David Banks as a non-executive director.  Banks was COO of Galaxy until March 2009.

Cupid's Bone

This note was originally published at 8am on February 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“And therefore is winged Cupid painted blind.”

-William Shakespeare


While the Greeks may disagree with Italians on this, Roman mythology tells the story of Cupid being the son of Venus, the goddess of love. In Latin, “cupido” means desire. And for America’s valentine this morning, this Hedgeye desires a strong US Dollar.


If you look at last week’s price action in Global Macro markets, strength in the US Dollar Index showered some love on some of the major global economic risks we’ve been pounding on for the last 3-6 months. While our call for Global Inflation Accelerating hasn’t adversely affected the US stock market, it’s hammered both bond and emerging markets since November.


Importantly, last week’s price action in the US Dollar Index was positive for the first time in the last 4 weeks. On a week-over-week basis the Burning Bone was up +0.54%, and while that’s not the type of long-term love you should get married to, in the immediate-term look what it did:


1.  CRB Commodities Index – deflated inflation by -0.3% week-over-week, and while that may not be by a lot, short-term love needs somewhere to start. This was the first week since the 1st week of January that the 19 component CRB Index didn’t close at a new intermediate-term high.


2.  Oil Prices – deflated big time with West Texas Intermediate crude oil losing -3.9% of its value on a week-over-week basis and breaking our intermediate-term TREND line of support at $86.98/barrel. While The Ber-nank’s driver probably didn’t talk this up on the way home Friday night, I can assure you this put some extra change in the hands of many American boys looking to buy roses after putting gas in their cars.


3.  2-year US Treasury Yields – inflated another +12% week-over-week to close out the week at 0.83%. This is good for the short-term rates of return on American savings accounts. Again, strong US Dollars find a funny way of empowering the gentleman in this country who is living on a fixed income to maybe buy an extra rose for his sweetheart today.   


Albeit with a very short leash, even I found the love in my heart to invest some of the Cash in the Hedgeye Asset Allocation Model as the US Dollar rose throughout the week. On Wednesday February 9th, I hit my lowest Cash position of 2011 at 49%. C’mon little bulls out there, pucker up – I should get at least a little peck on the cheek for that…


While it’s sometimes hard for a US-centric stock market investor to hear anything from me other than I’m not levered-long everything US Equities here, I think we’ve been crystal clear that there are many ways to be Bullish On Inflation in your Global Macro portfolios.


Whether it’s leaning long in the S&P Sector exposures (last week we we’re long 2 of the 9 US stock market sectors and didn’t have anything on the short side) or leaning short in emerging market equities and US Treasury bonds, there’s plenty out there for we men and women of the risk management gridiron to fall in love with. In the Hedgeye Portfolio 14 of the last 15 positions I’ve closed have been gains.


That’s not to say you should love me. I have a hard enough time convincing my wife that that’s a good idea when my alarm clock blares in her room every weekday at 4AM. It’s just to say that being a risk manager means not losing money and, for those of us who still remember the wealth destruction of 2008, that’s the risk management face that more than just our mothers can love.


The bad news about Cupid’s Bone is that it can start burning again. Before we get too lovy-dovy with everything that benefits from a strengthening US Dollar, remember that President Obama is on deck to release his Burning Budget this afternoon. While we’d love to hope that our Big Government Interventionists will cut spending this Valentine’s Day, we are reminded that hope is not an investment process.


With the US Dollar Index’s rise to close out the week at $78.46, this is where it’s trading relative to our 3 core risk management durations:

  1. TRADE (immediate-term) line resistance = $78.72
  2. TREND (intermediate-term) line resistance = $78.98
  3. TAIL (long-term) line resistance = $81.67

Yes, tragically, love’s reach has its resistance levels too. And while we really want to believe that professional politicians in America will put the long-term health of this country and currency ahead of their short-term job security, that’s just a benefit of the doubt they don’t deserve.


On Friday I did a lot of selling in the Hedgeye Asset Allocation Model and some of it was in Fixed Income where we fortuitously covered our shorts on the lows and capitalized on a nice bounce on the long side for a trade. Versus last Monday’s Cash allocation of 52%, this morning we’re back up to 61% and here’s the complexion of the mix:

  1. Cash = 61%
  2. International Currencies = 24% (long Chinese Yuan and Canadian Dollars – CYB and FXC)
  3. US Equities = 6% (long Healthcare – XLV)
  4. International Equities = 3% (long Sweden – EWD)
  5. Commodities = 3% (long Oil – OIL)
  6. Fixed Income = 3% (long Treasury Inflation Protection – TIP)

As a reminder, my view of asset allocation is what I would be doing with my entire net wealth, not what someone with an institutional mandate to be fully invested is doing. Stylistically, we understand the differences. If you look back at what Hedgeye was doing 2 years ago, we were investing our cash position as Wall Street was cutting theirs. Now we’re in harvest mode, picking our spots.


My immediate term support and resistance levels for the SP500 are now 1316 and 1332, respectively. If the US Dollar Index were to hold its bid and look more American rather than Cupid’s Bone, I’ll definitely get more constructive on a lot of things.


Happy Valentine’s Day to my Laura, Jack, and Callie and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cupid's Bone - val1


Cupid's Bone - vall2

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.