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R3: AMZN, LVMH, SHLD, GCO

R3: REQUIRED RETAIL READING

March 7, 2011

 

 

 

 

RESEARCH ANECDOTES

  • A study by Luminosity suggests that Boomerangers (college educated young adults with full-time jobs who live at home with their parents) are amongst the most impulsive shoppers.  One-third of Boomerangers make impulse purchases with no planning or research.  Perhaps part of this behavior stems from the fact that 64% of Boomerangers said they themselves were the greatest influence on their purchasing decisions. 
  • Check out New Balance’s latest product intro, the “890” with REVlite.  The shoe goes head to head with Nike’s LunarGlide in New Balance’s latest TV commercial in a spot reminiscent of the Pepsi Challenge.  The shoe weighs 9.7oz, which is 1.6oz lighter than the competing Nike shoe, and is premium priced at $99.99.  Overall, more good news for the retailers as the innovation pipeline remains robust across the athletic footwear space.
  • Consistent with reports from other footwear retailers last week, Genesco’s management highlighted that February comp sales were up +10% - representing an sequential acceleration to January trends. It’s also worth noting that management teams appear to be taking a conservative approach to positive performance early in the quarter with Q1 results largely back-end loaded given the Easter shift into April this year.

OUR TAKE ON OVERNIGHT NEWS

 

Privacy suit takes aim at Amazon - Amazon is the target of a class action lawsuit that alleges the e-retailer violated consumers’ privacy by installing unauthorized cookies that gave it access to consumers’ personal information. The suit, filed this week in U.S. District Court in Seattle by two named plaintiffs, says Amazon in 2008 knowingly used fake codes to communicate its privacy policy to Microsoft’s Internet Explorer web browser, which led the browser to accept cookies that would it otherwise would have blocked when consumers chose certain privacy settings. <InternetRetailer>

Hedgeye Retail’s Take:  If you ever wondered how Amazon knows what you want before you actually search for it on the company’s site, now you know.

 

Inditex Buys Space on 5th Avenue -  Inditex Group, parent of fast-fashion retailer Zara, has acquired a 38,800-square-foot retail property at 666 Fifth Avenue for $324 million.  The space, between 52nd and 53rd streets, was formerly the NBA Store and is part of the building’s 90,000-square-foot retail condo that includes a Hollister flagship and a Uniqlo flagship due to open this fall. Uniqlo set a retail record in Manhattan last year when it agreed to pay $300 million over the course of a 15-year lease, or about $20 million per year, surpassing Gucci’s $16.5 million in annual rent at Trump Tower. Inditex said it will use the space to open “one of the most emblematic Zara flagships worldwide.” The Spanish behemoth is clearly smitten with the location and the building, which it called “one of the most symbolic in the Big Apple.” It’s also one of the priciest, commanding some of the highest rents in the city. The NBA Store closed last month after balking at the landlord’s rent increase to more than $2,000 a square foot. <WWD>

Hedgeye Retail’s Take:  In strange bit of irony, all of the major fast fashion retailers (H&M, Zara, Uniqlo, and Forever 21) now have major flagship stores on 5th Avenue within a three block radius.  So much for 5th Avenue being solely a haven for luxury.

 

Sears Targets Youth -  Sears is getting in touch with its more youthful side. According to John Goodman, EVP of apparel and home, the retailer is reaching out to a younger, trendier customer in hopes of becoming “a more aspirational place” for shoppers. To achieve this, Sears — which has been working hard to more effectively compete against rivals such as Kohl’s — has in recent weeks signed deals with contemporary fashion brands and celebrities for exclusive lines. The retailer is kicking things off next month with UK Style by French Connection. Sourced, developed and manufactured by LF USA’s Regatta division, the line will comprise contemporary clothing and accessories, including shoes, for women, men and children.  <WWD>

Hedgeye Retail’s Take:  We’re not sure why it’s taken so long for Sear’s to realize it has a problem with an aging customer base.  Unfortunately, filling the store with youthful brands is probably not going to be a needle mover any time soon.

 

Best Buy Losing Market Share - Just two years after its arch rival was knocked out of the ring, Best Buy is itself on the ropes.  The company revealed a problem last December that has left investors scrambling for answers. Even with bankrupt Circuit City out of the picture, the retailer was losing market share, especially in the key television and computing categories. Best Buy shares have since tumbled 21% and now trade at a mere nine times this fiscal year's consensus earnings.  Investors shouldn't assume Best Buy simply needs time to recover. Rather, the threats it faces are likely only to worsen. Take Amazon.com, whose relentless growth has undercut the raison d'être of specialty retailers. That is true both in books—where Borders Group recently filed for bankruptcy protection—and in electronics.  <WallStreetJournal>

Hedgeye Retail’s Take:  With bookselling much more concentrated than consumer electronics, we do believe BKS has an opportunity to actually gain share from BGP’s demise. 

 

LVMH to Take Controlling Bulgari Stake - LVMH Moet Hennessy Louis Vuitton SA is to take a controlling stake in Bulgari SpA, a person familiar with the matter said Sunday, underscoring the French group's acquisitive streak as the luxury market rebounds. The deal, expected to be announced Monday, would put the family-controlled Italian maker of jewelry and fine watches into the hands of LVMH, which owns some 50 luxury brands, including Louis Vuitton, Moët et Chandon and TAG Heuer. Bulgari has a market value of about €2.3 billion ($3.22 billion). Paolo Bulgari and Nicola Bulgari, along with Chief Executive Francesco Trapani, also a relative, own about 51% of the company. <WallStreetJournal>

Hedgeye Retail’s Take: In stark contrast to Arnault’s approach with Hermes, this deal with Bulgari appears to benefit both franchises on multiple levels, but most notably is highly amicable. Meanwhile, Hermes CEO Thomas commented at a press conference last week that the company is considering removing its listing from the London exchange to keep investors from trading shares - this one is far from over.

 

Michael Kors Opens Paris Flagship - Michael Kors is marking his 30th anniversary with the opening of his first freestanding store in France, a flagship here that is his largest store to date worldwide. The 7,000-square-foot unit at 279 Rue Saint-Honoré sits on the designer’s favorite retail stretch — what he calls the “stroll from Hermès to Colette.” It is the first of his stores to offer a full assortment of accessories and ready-to-wear from both his main Michael Kors collection and the Michael Michael Kors and Kors Michael Kors lifestyle lines. <wwd>

Hedgeye Retail’s Take: A substantial step forward for the designer best known for his womenswear prowess. After expanding beyond his runway collection in 2004, this is Kors’ first international full collection footprint with five such boutiques stateside – a key step in growing the brand that is perhaps best known on Main Street for its eyewear collection.

 

First Chinese Leather Fashion Association to be EstablishedThe first Leather Fashion Design Association is officially founded in the beginning of March in Haining city, China, with Zhang Sifeng, a renowned fashion designer, being appointed president of the association, while Haining China Leather Marketing President Ren Youfa being the honorary president, according to the China Leather Industry Association. Ren Youfa said in the opening ceremony that there are nearly one thousand designers serving the leather sector in Haining city, and therefore the establishment of fashion association is good news to the designers as it will serve as a channel to reach out to enterprises and update their products in terms of design.  <FashionNetAsia>

Hedgeye Retail’s Take: The latest from China in a move to improve the quality of its manufacturing after losing its position in the global market as the most affordable.

 

 


MACAU: MARCH OFF TO A STRONG START

March revenues may hit HK$18.5-19.5BN.

 

 

The strong end to February continued into March with average daily revenue at almost HK$600 million.  At this pace and taking into account the appropriate number of weekday and weekend days, March is on pace for HK$18.5-19.5 billion in total gaming revenue (including slots).  That level of revenue would represent YoY growth of 40-48%, off of a comp of 42%.  March has a chance to outpace February’s HK$19.2 billion record.

 

In terms of market share, Galaxy and MPEL were the winners while LVS and WYNN were the losers.  However, we would caution that given the volatility in VIP hold, market shares can shift dramatically from week to week.  Nevertheless, we continue to be impressed with MPEL’s market share and overall revenue and volume levels.  With January and February already in the bag, MPEL seems to have the most upside relative to Street expectations for Q3.

 

The following table and chart details revenues, market share, and 2-week rolling average daily revenue.

 

MACAU: MARCH OFF TO A STRONG START - MACAU TABLE

 

MACAU: MARCH OFF TO A STRONG START - CHINA


WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE

This week's notable callouts:

- Greek sovereign yields, Greek sovereign CDS and Greek bank swaps increased sharply.  According to our Europe analyst, Matt Hedrick, "Last week, more attention was given to the growing “I don’t pay” movement in which more and more Greeks are refusing to pay for road tolls, bus tickets, and other public charges.  There is rising uncertainty from Germany and France if they’ll support lowering the interest rate on bailout loans ahead of EU Summit March 24-5.  Today Moody’s downgraded Greece credit rating by three steps on rising default risk (Ba1 to B1)."

- Municipal swaps hit a new low

- The Leveraged Loan Index remains in a downtrend


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 4 of 10 improved / 3 out of 10 worsened / 4 of 10 unchanged
  • Intermediate-term (MoM): Negative / 3 of 10 improved / 4 of 10 worsened / 4 of 10 unchanged
  • Long-term (150 DMA): Positive / 5 of 10 improved / 4 of 10 worsened / 2 of 10 unchanged

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 20 of the 28 reference entities and widening for 8. 

Tightened the most vs last week: JPM, C, COF

Widened the most vs last week: AXP, PMI, GNW

Tightened the most vs last month: COF, MTG, MBI

Widened the most vs last month: MET, PRU, HIG

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, except in Greece, tightening for 31 of the 39 reference entities and widening for 8.

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - euro cds

 

3. Sovereign CDS – Sovereign CDS were mixed across Europe, falling 3 bps on average last week.  Widening was concentrated in Greek and Portuguese CDS, while Spanish and Irish quotes were somewhat tighter. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, ending at 7.82, 1 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index has been falling since early February, ending the week at 1612.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - LLI

 

6. TED Spread Monitor – The TED spread backed up last week, ending the week at 19.2 versus 17.6 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index held rose slightly, climbing to 35.1 on Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 37 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, closing at 148 on Friday, a new low.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  With Australian floods and oversupply pressuring the Index, the series fell 30% early in the year. Since then it has bounced off the lows.  Last week it rose 101 points to 1346. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened to 280 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - 2 10 spreads

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows.

 

WEEKLY RISK MONITOR FOR FINANCIALS: RED FLAGS FROM GREECE - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE M3: HK-MACAU-CHINA COOPERATION; CHINESE BANKS LOAN TARGET

The Macau Metro Monitor, March 7, 2011

 

MAINLAND TO DEEPEN ECONOMIC COOPERATION WITH HK AND MACAU OVER NEXT 5 YEARS Macau Daily News

Key cooperation projects that were outlined in the 12th China Five-year Plan for National Economic and Social Development include:

  • Zhuhai Hengqin New Area Development Zone
    • Has an area of 106.46 sq kilometers; helps to explore new cooperation model between Guangdong and Hong Kong and Macau.
  • Guangzhou Nansha New Area Development Zone
    • To develop into a business, technology innovation and education center for Mainland and Hong Kong and Macau.
  • Hong Kong‐Zhuhai‐Macau Bridge
    • Construction of the bridge was kicked off in December 2009 and due to complete by 2016.
  • Guangzhou‐Shenzhen‐Hong Kong Express Rail Link
    • Also known as Guangshengang XRL, operational in phases between 2011 to 2016
    • It will also be connected with the Wuguang High‐speed Railway and the Hangzhou‐Fuzhou‐Shenzhen Express Rail Link.
  • Hong Kong‐Shenzhen Western Express Line
    • Between Hong Kong International Airport and Shenzhen Baoan International Airport; Hong Kong third direct cross‐boundary railway.
  • Liantang/Heung Yuen Wai Boundary Checkpoint
    • Will serve as a quick link between Hong Kong and South China's Guangdong province.
    • To connect the Eastern neighborhood of Shenzhen. The checkpoint will offer an efficient access to the eastern part of Guangdong Province and adjacent provinces via the Shenzhen‐Huizhou and Shenzhen‐Shantou expressways, cutting the journey time between Hong Kong and Shenzhen city, the eastern part of Guangdong, Fujian and Jiangxi provinces.

BIG FOUR BANKS MAINTAIN LOAN TARGET DESPITE INFLATIONARY FEARS SCMP

According to sources, Mainland China's four largest banks (ICBC, BoC, CCB, and ABC) expect to issue loans totaling nearly three trillion yuan (HK$3.55 trillion) this year - almost unchanged from last year's 3.1 trillion.  Typically, loans by the top four lenders account for 35 to 40% of the national total, which would suggest loans of at least 7.5 trillion yuan for 2011.


CHART OF THE DAY: The Inflation is Priced in Petro-Dollars

 

 

CHART OF THE DAY: The Inflation is Priced in Petro-Dollars -  chart


Paying The Price

“For every promise, there is a price to pay.”

-Jim Rohn

 

Paying The Price is what hard working Americans do every morning. They take responsibility for their families. They are accountable for their actions. They’ll also be paying for their government’s promises at the pump this morning.

 

If you didn’t know that The Inflation is what you get when your government promises the entire world to devalue its currency, now you know. In order to calculate the price of The Petro-Dollars look no further than the price of The Petro and the price of The Dollar.

 

Here’s what those two prices did last week:

  1. The Petro = UP another 6.7% week-over-week taking its 2-week move to +17.6%
  2. The US Dollar = DOWN another -1.1% week-over-week hitting new YTD lows (DOWN 8 of the last 10 weeks)

Now someone who is in the business of obfuscating the facts will tell you that the price of The Petro-Dollars raging to the upside has to do with something other than the debauchery of the dollar. Of course it does – everything that adversely affects the marketing message of Washington, DC must have to do with someone else – that’s the un-American way.

 

Pointing the finger at some nut-job wearing shades in Libya just makes the marketing message easier. Since speaking at the American public on economic matters has turned into a world class game of politics, we should expect nothing less. On NBC’s Meet The Press yesterday, President Obama’s newly minted Chief of Storytelling, Bill Daley, reminded the world how Washington’s finest think about risk management plainly:

 

“Most people don’t know what they are talking about… The President knows…”

 

OK. Thanks Chief.

 

We will un-humbly submit that, on Global Macro economic matters, US Presidents and their crony economic advisors haven’t known what they don’t know for at least a decade. That’s a long time. That’s a problem.

 

Back to those stubborn little critters called real-time market prices that we use to illustrate the problem, here’s what else happened in the US as a result of the US Dollar being devalued last week:

  1. CRB Commodities Index (19 components) = +3.1% week-over-week to close at a fresh weekly closing high for 2011 of 362
  2. Price Volatility (VIX Index) = flat week-over-week, holding its +22% gain above its February 18th YTD low of 15.59
  3. US Stocks (SP500) = +0.15% week-over-week to close at 1321, -1.7% lower than its YTD closing high of 1343 (also established on FEB18)

Altogether what this means is that since the US stock market stopped making higher intermediate-term highs on February 18th, the market has started to price in Slowing US Growth assumptions as US Inflation Accelerates.

 

For readers of our work, this shouldn’t be a new theme. Our 3 core Macro Themes at Hedgeye have been calling for Global Growth Slowing as Global Inflation Accelerates since October of 2010.

 

Our call on Accelerating Global Inflation’s impact on both Emerging Markets and Bonds is best captured by the #1 Economics headline on Bloomberg this morning: “Global Bond Rout Resembling 1994 As Inflation Exceeds Rates” – so, globally, people get it. The question is what will it take for US stock-centric consensus to finally get it?

 

Don’t fool yourself by letting some of the Fed’s Fiats fool the media most of the time, whether you look at the stock market performance divergences in US Equities or abroad, Mr. Macro Market is pricing in Global Inflation Accelerating, big time.

 

US S&P Sector Performance divergences for 2011 YTD:

  1. Best Sector = Energy (XLE) +14.78%
  2. Worst Sector = Consumer Staples (XLP) +0.92%

Global Equity Market Performance divergences for 2011 YTD:

  1. Best Countries = Ukraine +14.3%, Russia +13.8%, and Greece +12.2%
  2. Worst Countries = Tunisia -22.7%, Saudi Arabia -19.6%, and Dubai -17.1%

Obviously when presented with these prices on a real-time basis, the fundamental takeaways are crystal clear:

  1. Countries, Sectors, and Companies that get paid in The Petro-Dollars are getting paid by The Inflation
  2. Countries, Sectors, and Companies that don’t have pricing power are taking it in the margin
  3. Citizens are getting plugged

If this continues, the global economic risk management scenario starts to look a lot more like the 1970s than it does anything that most investors have had to wrestle with for the last 30 years. Stocks aren’t in the area code of “cheap” if inflation finds its way into margin and multiple compression.

 

The best way to fight this is by breaking the gigantic promise that America has made to the world – cheap moneys forever. If we start promising the world more hawkish monetary policy, the US Dollar will stop being debauched. That, in turn, will deflate The Inflation. And I’ll be the first in line to start investing more of my 49% position in Cash (versus 58% on Monday of last week). Paying the lower price works for me.

 

My immediate-term support and resistance levels for the SP500 are now 1315 and 1333, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Paying The Price - ab1

 

Paying The Price - ab2


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