March 11, 2011



  • In recapping some of the merchandising mistakes Wal-Mart made last year, the CEO noted that the company actually increased its floor space allocation to entertainment and electronics category by 21%  last year.  Unfortunately, the company ended up increasing exposure to a category with the most pronounced deflation within the store.  This ultimately led to sales pressure as well as a negative return on the “space investment.”  Toys, apparel, and home were categories in which space was cut.
  • Despite coming out of the reported 4Q with inventories up 9% per square foot, ARO noted that the company has been aggressive in clearing inventories over the past two months.  As a result, post 4Q, inventories are currently up 4% per foot.  As for the pricing environment in the mall, management has not seen any major changes although they do note that competitors are testing different pricing schemes and promotions in preparation for higher costs over the back half of the year.
  • Foot Locker noted that as the company’s revamped apparel strategy continues to evolve it’s likely that Nike apparel will be more of a focus at core Foot Locker while AdiColor will be more geared towards Champs.  Sounds like the banner segmentation strategy is continuing to take hold.



Amazon Takes Action in Illinois  -  Inc.'s battle with state governments over sales taxes is escalating. The online retailer on Thursday took action in Illinois, as it had threatened to do, to counter a new law aimed at forcing online retailers to collect sales taxes in the state. Hawaii, North Carolina and Rhode Island have enacted similar laws, and California is weighing action. Amazon is also in a court battle with New York over such legislation. The Illinois law, signed by Gov. Pat Quinn Thursday, requires online retailers that work with affiliates in the state to collect sales taxes on purchases made by Illinois residents and businesses. Amazon responded to the measure by cutting ties to its Illinois-based affiliates, which are blogs and other websites that refer traffic to Amazon's website and get paid commissions if customers make purchases there.<WallstreetJournal>

Hedgeye Retail’s Take:   Another effort to skirt the growing efforts of states to collect sales tax from online only retailers.  We believe Amazon and others will ultimately lose this battle as it makes no practical sense for them to operate under a second set of taxation rules when compared to most of retail.


Wal-Mart takes same day pick-up national - Wal-Mart Stores Inc. announced today that it will make its Pick Up Today service available at store locations nationwide by June. The service allows consumers to buy online at and pick up their orders at a nearby store in about four hours. The multichannel retailer began testing the service in October in about 800 stores. The test service limited the products eligible for same-day pick-up to select electronics, video games and household appliances. The company says the national rollout will encompass nearly 3,600 stores and up to 40,000 products, including products in additional categories such as baby, toys, home décor, hardware and outdoor living. Food products are not eligible for the program at this time. <InternetRetailer>

Hedgeye Retail’s Take:  Another way to potentially drive incremental store traffic while at the same time adding a customer friendly feature to the Wal-Mart shopping experience.  Sameday service within a matter of hours is certainly impressive.


Williamson to Do Macy's Line - Matthew Williamson is next up in Macy’s designer capsule collection series, a key component in the store’s accelerating strategy to woo younger shoppers and project a hipper image. Williamson will give a bright, bohemian edge to Macy’s selling floors, creating embellished day and party dresses, printed scarves, and day-to-evening rompers, among other items, about 30 styles in all. The line launches April 13 in 225 doors and on Prices will range from $50 for a blouse to $150 for dress, with some more expensive items, such as leather and suede jackets, priced up to $300. An advertising campaign with model Dree Hemingway breaks Tuesday. <WWD>

Hedgeye Retail’s Take:  Macy’s continues to push the envelope with its exclusive, contemporary offerings taking a play out of the playbook of H&M, Uniqlo, and others.


Retailers Brace for Inflation - The recession forced retailers to offer better value. Now they’re scurrying to maintain the proposition as they shop the world for fall goods and confront sticker shock as a result of soaring labor and raw material costs. Prices for fall are expected to be 10 to 15 percent higher — and in some cases could rise even more depending on the product. While it will be mass and midtier retailers like Wal-Mart Stores Inc., Target Corp., Kohl’s Corp., J.C. Penney Co. Inc. and The TJX Cos. Inc. that will be hit the hardest, no company is expected to escape unscathed.  Higher apparel prices will only add to the growing specter of inflation across the economy — from food to gasoline. The skyrocketing price of oil because of turmoil in the Middle East has caused global stock markets to plummet in recent days, with the Dow on Friday closing below the 12,000 mark for the first time in six weeks. <WWD>

Hedgeye Retail’s Take:   Expect this story to remain perpetually in the headlines until prices finally head the other way.  That means we’re looking at 6-12 months of a “costs on the rise” media focus.


Big Retailers Try to Sway Congress on Debit-Card Fees - Thousands of credit-union members visited Capitol Hill on March 3 to warn that a Federal Reserve proposal limiting swipe fees collected on debit-card purchases is anti-consumer. A cap on fees banks collect from merchants will force card-issuing credit unions and banks to cancel reward programs, eliminate free checking, and impose annual fees, they told lawmakers.  A week later, about 170 small business owners flew into town with the opposite message. The Fed plan is pro-consumer, they said, because it will help lower retail prices while preventing card issuers from profiting at their expense, money that goes to fatten bankers’ bonuses.  Framing brawls about money as essentially consumer issues is a time-honored tactic in Washington. However, the debit-card fee issue is primarily a conflict between big business and big banks, Bloomberg Businessweek reports in its March 14 issue. Up for grabs is $16 billion in annual revenue. <Bloomberg>

Hedgeye Retail’s Take: Debit-savings, especially for consumables and discount retailers couldn’t come at a better time with escalating inflation on the horizon.  The question still remains if retailers will choose to enhance overall margins with the potential savings or put the cost savings back into price.


Foreign Businesses Hit by Japan Earthquake - Foreign companies Friday started counting the cost of a giant earthquake in Japan as operations were disrupted across the country.  Truck maker Volvo AB was among those worst hit as its main facility in Japan was forced to halt production. The Swedish company said damage to its UD Trucks facilities in Ageo in the southeast of Japan, seems to be mainly superficial, but it will be days before the company can do a full assessment.  Volvo employs 10,000 people in Japan, while a further 3,000 work at UD Trucks' dealerships. Volvo said the dealership at Sendai, close to the epicenter of the earthquake, had been seriously damaged, and it couldn't yet say how other dealerships had been affected. Food giant Nestlé SA said two of its locations in Japan had been impacted. <Wallstreet Journal>

Hedgeye Retail’s Take:   In retail, Coach comes to immediate focus with its international exposure highly levered to Japan.  Luxury goods companies are also likely to see some near term pressure.


Notable news items/price action from the last twenty-four hours.

  • SBUX/GMCR was the big focus of the day.  GMCR traded up over 40% and Starbucks gained 9.1%, both on strong volume.
  • PEET declined 11.5% on accelerating volume following the GMCR news.
  • MCD and YUM traded well yesterday, on a relative basis, closing up 1.2% and 0.4%, respectively.
  • Casual dining traded softly yesterday, even as oil traded down, with only MSSR declining (5.2%) on accelerating volume.



Howard Penney

Managing Director

CHART OF THE DAY: We Call this a Correction



CHART OF THE DAY: We Call this a Correction -  chart

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Quake or Correction?

“We learn geology the morning after the earthquake.”

-Ralph Waldo Emerson


Emerson was an American Patriot who championed individualism during the mid-19th century. He was born in 1803 in Boston, Massachusetts and lived his life out loud during a time of great American leadership. I don’t think he’d care so much for today’s Big Government Interventions.


Today, not unlike any other day, we’ve woken up to the risk management reminder that the world is grounded in uncertainty. From Japan’s earthquake to the Saudi “Day of Rage”, not matter where you go, there it all is…


The morning after risk should have been proactively managed is as crystal clear as the mirror you have to look in every morning. Those who are Perma-Political obviously don’t like to do that so much on mornings like this. Sadly, the modern day Japanese, European, and American bureaucrat lives a life of finger pointing as opposed to introspection.


I’ll get to answering the Quake or Correction question about the US stock market by the end of this note, but I really think that there’s  a much more critical long-term leadership question that we need to be asking ourselves of the government we should be governing this morning.


If we want to make this country Japanese in its fiscal and monetary union, that might be fine for the sake of a 2-year stock market trade – but not in preventing a long-term societal Quake.


The Ralph Waldo Emerson years were very formative in terms of how Americans thought about self-directedness and individual liberties. During Emerson’s adult years, Andrew Jackson was the President of the United States (1). Like all of us, Jackson had plenty of faults associated with living in the moment, but one of them wasn’t accepting the tyranny imposed by a socially elite Big Central Bank.


In fact, “after the First Bank of the United States was established by Hamilton, followed by a Second Bank put in by pro-bank Democratic-Republicans after the War of 1812, President Andrew Jackson managed to eliminated the Central Bank after a titanic struggle during the 1830s.” (Murray Rothbard, “The Case Against The Fed”, page 73)


On the banking front, Jackson’s battle against Big Central Planning was won against a young Princeton economist by the name of Thomas Biddle, who was serving in a quasi-Bernank seat as the president of the Second Bank of The United States. It gives me chills to think that Big Princeton Keynesians like Paul Krugman and Ben Bernanke have generated so much political power with the same academic dogma since.


Unfortunately, after the Jefferson-Jackson libertarian ideals of free markets were fortified via democratic vote, the Civil War came (where Jackson obviously had plenty of accountability issues to deal with on another topic -  slavery) and bankers who hoped for Big Government Intervention capitalized on the crisis.


The phrase “Not Worth a Continental” is derived from the same strategy that the Japanese will look toward to solve for event risk in their economy today – issuing fiat paper. During the American Revolution, that’s exactly what the Continental Congress did (print money) – with the bigger problem being that those Continental dollars were non-redeemable in gold (neither are trillions of Yens).


“The common phrase, “Not Worth A Continental” became part of the American folklore as a result of this runaway depreciation and accelerated worthlessness of the Continental dollars.” (Rothbard, “The Case Against The Fed”, page 29)


Now getting back to living in the today, if we don’t want this country to be hostage to event risk like Japan is this morning (I mean economically), like any good American household or company, we need to get this American balance sheet problem fixed. There comes a tipping point where you can’t print money to internally finance a recovery from a natural disaster, or God forbid, a war.


I’m not being alarmist. This is a very serious matter that history certainly has taught us to respect. Ask the German bankers like Paul Warburg who constructed both the German Reichsbank (founded in 1876) and, to a degree, the US Federal Reserve (founded 1913), how being hostage to The Inflation associated with an addiction to printing money ends when calamity strikes…


Back to the risk management Question of The Day: Quake or Correction?


I’ll grind through the levels here and keep this answer as tight as it needs to be. After all, you should be asking a firm who called for this Asian and US stock market correction for the levels to manage your way out of it…


As a reminder, we’ve been calling for a 3-6% correction in both US and Japanese Equities since Valentine’s Day:

  1. JAPAN - This morning’s selloff in Japan makes the cycle-peak-to-drop correction in the Nikkei -5.6% since February 21, 2011
  2. USA - Yesterday’s pounding of US stocks (4th down day in the last 5) makes the cycle-peak-to-drop correction in the SP500 -3.6% since February 18th, 2011

My immediate-term TRADE and intermediate-term TREND targets for the SP500 are now:

  1. SP500 immediate-term downside support = 1283
  2. SP500 intermediate-term downside support = 1265

So, I say Correction. The Quake is already another historical event. Let the Perma-Bulls learn from that again, on the morning after.


Go Yale Hockey in The Haven tonight (Game 1 of the playoffs against St Lawrence), and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Quake or Correction? - emerson


Quake or Correction? - 3 11 2011 8 02 17 AM


This note was originally published at 8am on March 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Tis one thing to be tempted, another thing to fail.”

-William Shakespeare


I sold my long positions in oil (OIL) and Brazilian oil giant Petrobras (PBR) on yesterday morning’s opening market strength. This doesn’t mean I am not bullish on either (in the Hedgeye Portfolio we are still long China National Offshore –CEO, and Suncor -SU). This simply means that my risk management model was calling them both out as immediate-term overbought.


Overbought is as overbought does. Sometimes my risk management signals are wrong. Most of the time they aren’t. Temptation is always there to violate my investment process. Most of my big mistakes are a direct function of giving in.


What if I gave into consensus on February the 18th and bought the SP500 at 1343? What if I gave into the Temptation of The Flows into US and Japanese Equities that peaked in the same week? What if I saw the hedge fund community’s highest net long position in bullish oil contracts yesterday (highest since 2006) and decided to ignore my risk management signal on the oil price?


“What if” may be an acceptable strategy for someone living in the theoretical. In this globally interconnected game of decision making however, there are no “what ifs.” There are players and pretenders. There are wins and losses.


Subliminally, I may have learned this risk management process from my Dad. Whether it was in his profession as a firefighter or in the game of life that he coached me – somewhere along the line I learned that we are all accountable for the decisions we make in this life and how those decisions affect others.


While I highly doubt that the US Federal Reserve is going to be sourcing risk management lessons from a few Canadian Bears on the topic of accountability, maybe they’ll re-read this quote about Temptation from their Maestro of ideological groupthink gone bad:


“The temptation is to step on the monetary accelerator or at least to avoid the monetary brake until after the next election… giving into such temptations is likely to impart an inflationary bias to the economy and could lead to instability, recession, and economic stagnation.”

-Alan Greenspan, 1993


Again, like any good Fire Chief or Global Macro Risk Manager, you should re-read that quote slowly. And read it again. While there is a Temptation to scan for headlines about some Libyan nut-job as opposed to understanding the long-term structural underpinnings of the The Inflation, it always pays to take the time to make the highest probability decisions based on the best information you have.


That Greenspan quote was highlighted by the late Austrian economist who I have cited recently - Murray Rothbard. Later on in his book, “The Case Against The Fed”, this is what Rothbard had to say in order to contextualize The Inflation that the Fed perpetuates:


“We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the 18th century until 1940, with the exception of periods of major war.” (page 21)


Interestingly, Rothbard published this book in 1994 and passed away in 1995. Since, the American financial system has learned virtually nothing from these types of risk management perspectives. That’s because the modern day US Empire of Fiat Finance is grounded in a policy to inflate the stock market (see the inflation chart below dating back to the year 1500).


Can our industry or America’s conflicted and compromised politicians handle a deflation of inflated prices? Can they handle a reflation of the price of a Debauched Dollar? I think the answer to those questions is as clear as Americans living on entitlement goodies - many have a patriotic answer about debts and deficits, but they lack a pragmatic plan; particularly if the plan hits them in the wallet.


To be crystal clear on this, if I was damned into the job of Chief Central Planner in this country, this is what I would do:

  1. Raise interest rates
  2. Cut entitlement spending
  3. Strengthen the US Dollar

Points 1 and 2 address both monetary and fiscal policy head on. Point 3 would be the effect. Going back to the following experiences:

  1. 1950’s-1960’s France and Britain
  2. 1970’s United States of America
  3. 1990’s Japan

There hasn’t been a modern economy that has devalued its way to prosperity by debt financed deficit spending.


The Temptation is to create massive US Dollar denominated correlation-risk (USD inverse correlation to the price of oil is currently -0.93) that all interested inflation policy parties can blame on the Middle East or “global supply and demand imbalances” if unwound.


But be careful on that Temptation because it creates expectations. We Expect Price Volatility, not Price Stability. That’s why small business owners like me won’t jump in with both feet and start hiring aggressively. Anyone who has to meet a payroll in this country gets it – our medical and employment costs are rising as economic growth slows. As Greenspan reminded the Keynesians in 1994, that’s what The Inflation does.


Thankfully, one voting member of the Federal Reserve had the political spine to call this like it is yesterday. Dallas Fed President Richard Fisher told the Institute of International Bankers in Washington, DC that “the liquidity tanks are full, if not brimming over.”


Indeed Mr. Fisher. Indeed. That’s what printing money with an inflation policy achieves. It’s time to get out of the way, let the US Dollar strengthen, and the price of oil deflate.


My immediate term support and resistance levels for WTI Crude Oil are $101 and 107, respectively. My immediate term support and resistance levels for the SP500 are now 1297 and 1315, respectively.  


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Temptation - c1


Temptation - c2


TODAY’S S&P 500 SET-UP - March 11, 2011

Overnight China down on another sequentially accelerating monthly inflation reading (February (+4.9% CPI, +7.2% PPI).  We continue to hammer home the theme – Global Growth Slowing as Global Inflation Accelerates.  As we look at today’s set up for the S&P 500, the range is 32 points or -0.94% downside to 1283 and 1.54% upside to 1315.



  • 8:30a.m.: U.S. retail sales - Bloomberg estimate is 1%
  • 8:30 a.m.: Fed’s Dudley speaks in New York
  • 9:55 a.m.: U Michigan Confidence, est. 76.3, prior 77.5
  • 10 a.m.: Business inventories, est. 0.8%, prior 0.8%


  • APPL may sell 600,000 units of the second version of theiPad2 when it debuts this weekend
  • Saudi Arabia anti-government demonstrators have called for a “Day of Rage”
  • China’s inflation and industrial production exceeded forecasts in February
  • Libyan forces are mounting a full-scale attack on rebels, as NATO defense ministers said they lack the authority to impose a no-fly zone
  • President Obama will hold a news conference today to discuss rising energy prices   


As of the close yesterday we have 3 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.  The XLB was the 1st S&P Sector to break its intermediate-term TREND line since May, 2010.  The 3 Sectors that remain bullish on both TRADE and TREND durations are all low beta defensive sectors:

  • Healthcare (XLV)
  • Utilities (XLU)
  • Consumer Staples (XLP)
  • One day: Dow (1.87%), S&P (1.89%), Nasdaq (1.84%), Russell 2000 (2.64%)
  • Month-to-date: Dow (1.98%), S&P (2.42%), Nasdaq (2.92%), Russell (2.90%)
  • Quarter/Year-to-date: Dow +3.52%, S&P +2.98%, Nasdaq +1.82%, Russell +2.03%
  • Sector Performance: - Energy (3.6%), Materials (2.2%), Financials (2.1%), Tech (2%), Industrials (2%), Healthcare (1.6%), Utilities (1.2%), Consumer Disc (1%), Consumer Spls (0.7%),


  • ADVANCE/DECLINE LINE: -2188 (-1966)  
  • VOLUME: NYSE 1120.06 (+28.56%)
  • VIX:  21.88 +8.21% YTD PERFORMANCE: +23.27%
  • SPX PUT/CALL RATIO: 1.35 from 2.27 (-40.41%)


Yesterday, Treasuries were stronger for a second straight session with the heightened deterioration in the risk backdrop.

  • TED SPREAD: 24.66 +0.406 (1.672%)
  • 3-MONTH T-BILL YIELD: 0.08% -0.02%
  • 10-Year: 3.46 from 3.48
  • YIELD CURVE: 2.81 from 2.78


  • CRB: 354.45 -1.61% YTD: +6.50%  
  • Oil: 102.70 -1.61%; YTD: +9.82% (trading -1.43% in the AM)
  • COPPER: 419.75 -0.36%; YTD: -7.28% (trading -2.53% in the AM)  
  • GOLD: 1,407.80 -1.52%; YTD: -0.67% (trading +0.07% in the AM)  


  • Oil pared losses after the police in Saudi Arabia, the Middle East’s biggest producer of crude, reportedly opened fire at a rally in the east of the country. 
  • Gold fell the most in a week as a stronger dollar prompted some investors to sell the metal after unrest in the Middle East and northern Africa pushed prices to a record. 
  • Copper fell to the lowest in almost three months as imports slowed in China, the world’s biggest user, and amid rising concern that global growth may ease. 
  • Inventories of the grain will total 181.9 million metric tons as of May 31, up 2.3 percent from a February forecast, the U.S. Department of Agriculture said in a report today.
  • Cash cattle prices this week hit a record high at mostly $1.18 a pound on a live basis and from $1.86 to $1.93 dressed in Nebraska in active trading Wednesday.


  • EURO: 1.33820 -0.58% (trading -0.25% in the AM)
  • DOLLAR: 77.276 +0.72% (trading -0.11% in the AM) 


  • FTSE 100: (0.63%); DAX: (1.05%); CAC 40: (1.04%)
  • European markets opened lower on continuing unrest in NAME and after an 8.9 magnitude earthquake hit Japan.
  • Markets across the region saw a broad retreat with all sectors trading lower.
  • An EU leaders meeting today will discuss the Libyan crisis as well as EuroZone bailout fund, though it is unlikely that any final decisions will be made on the rescue package ahead of the leaders' Summit on 24-Mar.
  • Germany Feb final CPI +2.1% y/y vs prior +2.0%; Feb wholesales prices +10.8% y/y vs consensus +10.5%
  • UK Feb core PPI 3.1% y/y vs consensus 3.4% and prior 3.2%.


  • Nikkei (1.7%); Hang Seng (1.6%); Shanghai Composite (0.8%)
  • A major earthquake lasted 14 minutes before the close in Japan
  • Banks led China down after inflation data prompted fears of further tightening measures. An early afternoon rally was wiped out by the Japanese earthquake.
  • Australia was lower across the board.
  • South Korea fell as foreigners sold out of the market.
  • China February CPI +4.9% y/y vs consensus +4.8%. February PPI +7.2% y/y vs consensus +7.0%.

Howard Penney

Managing Director



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