Drawdown: SP500 Levels, Refreshed

POSITION: no position in SPY


All 3 factors (PRICE, VOLUME, and VOLATILITY) in my core immediate-term risk management model continue to flash bearish for US Equities: 

  1. Immediate-term TRADE resistance of 1311 wasn’t overcome on Friday
  2. Immediate-term VOLUME signals continue to flash very bearish (3/11’s DOWN day = +31% VOLUME study)
  3. Immediate-term VOLATILITY (VIX) for the SP500 continues to build upward momentum > 18.52 support 

Since we’re Duration Agnostic, it’s important to expand this view to our intermediate-term duration (TREND): 

  1. Intermediate-term TREND resistance for the SP500 remains overhead at 1343
  2. Intermediate-term TREND support for the SP500 remains lower at 1271
  3. Intermediate-term VOLUME and VOLATILITY studies support a heightening probability of a 1271 test 

On a downside test of 1271, I’ll probably get longer of US Equities. I’m in a good position to do that because I’ve proactively cut my US Equity exposure (Hedgeye Asset Allocation Model) from 9% last week to 3% this morning (sold Healthcare on the open – XLV).


No one said managing drawdown risk of -5.4% is going to be easy (1). No one here was saying you should chase US Equities into their February 18th top either. Waiting and watching for risks, ranges, and spreads will be critical in the coming days.


The crowd is still too long,



Keith R. McCullough
Chief Executive Officer


Drawdown: SP500 Levels, Refreshed - 1


Still on a pace for mid to high 30s% growth.



Through March 13th, table revenues were HK$7.3 billion month to date.  We’ve seen a slowdown compared to the last few weeks but we believe it is primarily hold related.  Nevertheless, we are now projecting full month March revenue of $17.5-18.5 billion, +33-40% YoY.  Based on just the first week’s data we had been estimating HK$1 billion higher.


In terms of market shares, SJM and LVS gained from week 1 at the expense of Galaxy.  Relative to their 3 month market share averages, LVS and WYNN remain below trend while MPEL and Galaxy are above.  We still see MPEL as delivering the most upside relative to consensus near term EBITDA estimates.




Conclusion: Knapp Track comparable restaurant sales in February indicate that the casual dining recovery is slowly progressing.  However, a sizeable downside revision of January’s number from +0.6% to -0.1% is concerning.  Another factor that has been receiving a lot of attention is highlighted by Knapp in his report; gas prices have advanced to over $3.50 per gallon at a brisk pace.


Knapp Track preliminary results for February suggest that the casual dining recover, which took a pause of sorts in the fourth quarter, may be back in place.  February comparable restaurant sales of +1.6% signifies a sequential uptick in two-year average trends of 95 basis points.  The revision in January’s trends means that the sequential uptick in two-year average trends in January was 80 basis points.  Q4 saw a sequential slowdown in comparable restaurant sales to +0.6% from +0.8% in 3Q10.  At present, 1Q to-date is tracking at +0.8%, almost 100 basis points above those seen in 4Q on a two-year average basis.


Comparable guest counts in the casual dining space saw a sequential gain from a revised -2.2% result in January.  February’s preliminary decline of -0.4% shows that the recovery is far from secure, especially as gas prices continue to gain and discourage discretionary travel by automobile.   Additionally, an inevitable raising of prices from here could slow any further acceleration in comps.  On a two-year basis, February’s result implies a sequential acceleration in guest counts of approximately 60 basis points.  


We continue to favor EAT and PFCB.



Howard Penney

Managing Director

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R3: HIBB, ANN, Russell, PERY



March 14, 2011






  • Hibbett Sports noted that the shift in “rapid refund checks” or RAL’s had a negative impact on the company’s sales of urban lifestyle products during 4Q.  Overall, this contributed to the company’s low single digit decrease in footwear comps.  However, the trend has changed notably since 4Q closed, with comps-to-date increasing 8% against a difficult 17% comparison.
  • Ann Taylor reported one of the most substantial increases in e-commerce revenues in all of retail during 4Q.  Ann Taylor increased by 74% while LOFT increased by 77%.  As a result of the recent success, ANN will be investing in the re-platforming of both sites to offer international commerce, improve checkout, personalization, and add mobile commerce.
  • In an embarrassing corporate moment, Russell Corp – makers of Russell Athletic, recently lost a copyright infringement lawsuit against actor Russell Brand. In 2008, the actor registered his name as a trademark for apparel and footwear products in the UK – a move that will enable him to sell his collection under his entire name while Russell Corp. can only use the “Russell” label.



Perry Ellis Purchases Anchor Blue IP - Perry Ellis International Inc. said Friday it has closed on its $500,000 purchase of all intellectual property assets of Anchor Blue Inc. The assets were purchased in a Delaware bankruptcy court proceeding, due to Anchor Blue’s voluntary Chapter 11 petition for bankruptcy court protection on Jan. 11. Anchor Blue, a Corona, Calif.-based teen specialty retailer operating primarily on the West Coast with 115 stores, is undergoing an orderly liquidation of its operations. Included in the IP assets Perry Ellis purchased are the Anchor Blue and Miller’s Outpost trademarks. A Delaware bankruptcy court approved the purchase on March 11. <WWD>

Hedgeye Retail’s Take:   With the purchase of Anchor Blue’s IP secured,  it’s likely we’ll see a wholesale line emerge in the not so distant future.


VF Corp.'s Growth Plan - VF Corp. is aiming to add $5 billion in revenue to its topline and $5 in earnings per share over the next five years. The Greensboro, N.C.-based company will focus its efforts on the outdoor and actions sports categories, expanding its direct-to-consumer channels and increasing sales in international markets. If successful, VF’s sales will reach $12.7 billion by 2015 and EPS will hit $11.50. The company expects to generate $6 billion in cash over the next five years and will direct that arsenal toward acquisitions, particularly in the outdoor and action sports arena, as well as dividends and potential stock buybacks. <WWD>

Hedgeye Retail’s Take:  Despite nearer-term cost pressures, management remains confident that the outdoor/lifestyle group can continue to be the company’s growth engine over the next five years growing to greater than 50% of total sales in the process.


Borders Scrambles to Be Lean - Borders Group Inc. hopes to exit bankruptcy-court protection by summer's end after getting a head-start on its restructuring by targeting 200 superstores for closure, Borders President Mike Edwards said in his first interview since the bookstore chain filed for Chapter 11 protection. Borders president Mike Edwards said the bookseller is receiving new titles from major publishers on a cash basis, thanks to its recent financing. Borders is exploring closing as many as 75 additional stores and hopes to present a formal business plan to publishers and other creditors in early April. The ultimate goal: exit bankruptcy in August or September, ready to ramp up business for the key holiday selling season, Mr. Edwards said. "You've got a window, and you have to move decisively," he said. The companies that have failed in Chapter 11, he added, held onto their money-losing stores too long. <WallstreetJournal>

Hedgeye Retail’s Take:  While emerging from Bankruptcy is a step in the right direction for restoring confidence with suppliers, we believe this just the beginning of the end for the struggling specialty retailer. 


Neiman’s Sees Ready-to-Wear Rebound - Shoes and handbags have led the luxury rebound, but ready-to-wear is showing signs of life, according to Neiman Marcus Group president and chief executive officer Karen Katz. “The big change between fall and resort was that the ready-to-wear business picked up pretty significantly. Trends for spring are selling very, very well,” Katz said, citing bohemian influences, corals, flat sandals and floral prints. A lack of color and fabrics that were too heavy dragged down the fall rtw season. “The minute we started receiving early spring and resort, the business in ready-to-wear started lifting,” Katz said. <WWD>

Hedgeye Retail’s Take: While non-apparel has largely been the reason behind luxury’s strength, these comments are notable coming from THE country’s leading luxury department store.


Gilt Groupe Sells Big Ticket Item on iPad - Score a big one for iPad commerce: The most expensive item sold on Gilt Groupe so far, a $24,000 vintage watch, was purchased by a shopper using the less than year-old tablet computer from Apple Inc., according to Chris Maliwat, vice president of product development for the private-sale e-retailer. He was speaking this week about iPad shopping trends at the Innovate 2011 conference in San Francisco. The conference was organized by the National Retail Federation, a trade group. Gilt Groupe, one of the leading companies in the growing online private-sale industry, launched its iPad app in April. The retailer, which has some 4 million members and sells products from more than 1,000 brands, says 177,000 consumers have downloaded its iPad app. As of January, about 100,000 consumers a month actively use the iPad app, he says, compared with about 300,000 a month for the flash-sale site’s iPhone app. <InternetRetailer>

Hedgeye Retail’s Take:  Not sure why this is newsworthy given the 14+ million consumers that have embraced the iPad as a new way access the internet.  Big ticket selling online is nothing new although flash sales selling $24,000 watches certainly is.


Cost Crisis Impacts Shoe Firms - For months, footwear manufacturers worried about the prospect of rising expenses for producing shoes. Now, thanks to big bumps in raw materials and labor costs, those fears are the new economic reality for the fall season. “Everything is going up like crazy,” said designer Stuart Weitzman. “It’s really the biggest story of the season, more so than whether a platform [heel] is important or not.” As previously reported in Footwear News, sourcing costs across the board, for labor, raw materials and shipping are slated to rise sharply in 2011. “The material costs are up and the labor cost also is significantly up this season, at least 10 percent, and some are higher than that,” said Maxwell Harrel, president of Corso Como. <WWD>

Hedgeye Retail’s Take:  Perhaps this shouldn’t be so surprising given the sharp increases we’ve seen in raw material, labor, and freight across the board in the apparel sector.  Leather remains a key culprit in y/y increases.


Quake Disrupts Key Supply Chains - The earthquake that struck northeast Japan Friday forced shutdowns across a broad spectrum of the country's industries, but the bigger impact for companies could come in the weeks ahead as the disruptions make their way through the global supply chain. The 8.9-magnitude earth quake, one of the largest on record, has crippled activity for now in a country that is a critical source of parts for consumer electronics, as well as a key producer of automobiles, auto parts, steel and other goods.  Plants don't appear to have suffered widespread, catastrophic damage, but production delays could be enough to affect some tightly calibrated industries. The earthquake affected operations at dozens of semiconductor factories, raising fears of shortages or price increases for a number of widely used components—particularly the chips known as flash memory that store data in hit products like smartphones and tablet PCs. <WallstreetJournal>

Hedgeye Retail’s Take:  This is likely to become a bigger story as time passes and existing inventories in key categories begin to diminish.


Pakistan: Tanners Association Urges for Reliable Supply of Utility - The leather industry in Pakistan is facing a decline in exports of up to 30%, partly due to a lack of basic facilities such as gas and electricity, said Khurshid Alam, chairman of the Pakistan Tanners Association (PTA). The Association has recently demanded the government to ensure uninterrupted supply of gas and electricity to tanners in the province of Punjab. He stressed that despite previous efforts to bring these issues to the attention of ministers, there has been no change. <FashionNetAsia>

Hedgeye Retail’s Take: With reliability of the country’s supply chain clearly in question, it seems highly unlikely that Pakistan will ever emerge as a leading global leather supplier.





The Macau Metro Monitor, March 14, 2011




There was yet another article out this weekend that had more details about the current LVS investigation aparked by Steve Jacobs' allegations.  Some interesting tidbits from the latest article include:

  • Apparently, not only is the SEC and and Justice Department looking at Sands' actions, but the FBI has joined the party as well. 
  • According to a Reuter's Investigative Reporting Program  (IRP),  U.S casino executives have discussed with U.S. diplomats the pervasive influence of the triads in the junkets for years - yet nothing has changed.  Some of these allegations included:
    • Provincial officials were providing "sweetheart" land sales, business licenses, and government contracts to junket operators, in exchange for bank deposits or cash sums paid to the officials upon arrival in Macau.
    • DICJ does not enforce its own reporting requirements
    • "All of the junket operators are directly or indirectly involved with the triads"
  • Manuel Joaquim das Neves, the long-standing head of DICJ, was quoted saying that,  "I cannot say that in Macau we don't have triads, but things are under control."



Community Development, Youth and Sports Minister Vivian Balakrishnan has assured Singaporeans that if the need arises, that more safeguards will be introduced to identify and protect those who are most vulnerable to problem gambling, at a forum for contributors to the government feedback portal, REACH.  He added that the casino novelty amongst locals is wearing off and the number of residents at the casinos is gradually declining.



The Government will launch the open tender of the Barra Traffic Nexus project in the first half of next year.  According to the Planning Coordination Taskforce, "the Barra traffic nexus will be an important hub for arrival and departure, transfer and articulation of the traffic between Macau and Zhuhai, the Macau Peninsula and the Islands, the old neighbourhoods and the new land reclamation areas.” The project is estimated to cost MOP 1.3BN and consists of a 3 floor building which includes pedestrian and shopping facilities, bike parking, and features 9,000 SQ meters of green areas and an outdoor bus depot which will be connected to the LightRail Train System (LRT).  Construction of the Barra Traffic Nexus is expected to be concurrent with the first phase of the LRT.



The construction of the Shiziqang tunnel, which commenced in Nov 2007, crossed the Pearl River in South China’s Guangdong Province with a length of 10.8 kilometers that allows trains traveling at a speed of 350 kilometers per hour, making it the fastest underwater tunnel ever built.  The Guangzhou‐Shenzhen‐Hong Kong express rail link is scheduled to be put into operation in 2012 which would slash travel time between Guangzhou and Hong Kong to 40 minutes from the current two hours and join with the country's express railway network.  This would shorten the trip between Hong Kong to Beijing to only 8 hours.



China’s CPI rose 4.9% YoY in February, same as January’s record and above the government's 4% target.  PPI rose 7.2% YoY in February.



China's trade deficit in February was recorded at US$7.3BN, the highest in 7 years due to the CNY holidays in the month. Exports grew 2.4% YoY in February while imports grew 19.4% YoY.

Under Attack

This note was originally published at 8am on March 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Nobody ever defended anything successfully.  There is only attack and attack and attack some more.”

-General George S. Patton


The rose-tinted view that has driven the S&P to current levels, up 5.1% year-to-date, is becoming more and more difficult to justify.  As uncertainty around the Middle East mounts, highly significant factors behind the global economy, such as oil, are becoming more and more of a concern for investors.  The revolution sweeping through the Middle East is driving oil prices higher as the timeline, geography, and repercussions of the political turmoil remain uncertain.


Moody’s reminded us on Monday of the significant uncertainty surrounding the Eurozone’s sovereign debt issues.  In early trading today, Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997) and the equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.


With members of Ireland’s new government striking a fairly combative tone with respect to a prospective renegotiation of that country’s bailout, and other countries rolling over significant levels of debt in 2011, the media’s glare will shortly become more focused on Europe and her myriad issues.  Yesterday, the Euro fell the most in two weeks on all the uncertainty.


Here in the U.S., inflation is a tax on the consumer and, as such, the broader economy.  In fact, I would posit that inflation (inclusive of things people actually buy, like gasoline, food and clothes), is a more devastating drag on the consumer than allowing the Bush tax cuts to expire.  Inflation is taxation without the consent of the vast majority of those affected. 


With the past two years having seen the second largest upward two-year move in equities after the period from 1953 to 1955, inflation is derailing the markets to a greater or lesser extent depending on the market in question.  In the end, as in 2008, risk is always on and it is always interconnected.  As oil climbs higher, threatening growth at a time the U.S. economy can ill-afford it, the recovery scenario that has been priced into the markets starts to look less impenetrable, less defensible. 


Currently, my attention is firmly focused on the consumer.  The spread between consumer expectations and present situation sentiment or, as we like to call it, the Hedgeye Optimism Spread, is at peak levels.  Employment has been improving on the margin but, as I see it, two factors along the risk spectrum could spoil the U.S. equity market party that has been raging since 2010.  First, gasoline prices can keep doing what they’re doing.  Second, interest rates can go up.  The magnitude of a possibly interest rate increase is unknown but (think Volcker) there is precedent for sharp, short, expedient increases in interest rates when inflationary pressures merit it. 


The pressure for the USA to raise interest rates is growing by the day.  Jean-Claude Trichet is telling the world that Europe is ready to raise rates and Timothy Geithner (who met with Germany’s Finance Minister in Frankfurt yesterday), no doubt is begging them not to.  One small reason Europe needs to raise interest rates is the fact that European gasoline prices are at an all time record of $8.632 per gallon.  European Central Bank Governing Council member Axel Weber has stated that, “Inflation may be more sustained and more fundamental than the ECB’s latest projections suggest” and that he sees “considerable future price pressures.”


This divergence in rhetoric between the USA and EU poses an interesting dilemma for investors.  We know from experience that any faith in policymakers in Brussels or Washington being able to manage through this situation seamlessly is gravely misplaced.  We were reminded of this last week on CNBC when Alan Greenspan said, “The one thing we all pretend we can do but we can't, is forecast." 


Recently, a question we received from a discerning client prompted us to overlay the Hedgeye Optimism Spread against the Yield Curve in a chart.  The picture certainly tells a story; the escalation of easy money monetary policy in the United States heralded a period of high correlation between the Optimism Spread and the Yield Curve.  Apparently, rendering the country “awash with liquidity” instills a belief among consumers that economic circumstances are set to improve.  As Keith referenced in the Early Look from Monday morning, according to Jim Rohn, “For every promise there is a price to pay”.  Ultimately, a consumer facing mounting costs at the grocery store and at the pump is going to recalibrate expectations.   The U.S. consumer is now under attack as inflation squeezes like it’s 2008.


After losing some momentum in recent months, the recovery of new vehicle sales regained steam in February.  Having said that, GM and F stock can’t get out of their own way; GM is down 11.2% YTD and is trading below the $33 IPO price.  Is consumer pent-up demand supporting the rise in vehicle sales?  The stocks of the automobile makers are telling you a different story. 


Yes the labor market momentum is building, as expected payroll gains strengthened measurably in February, following the weather-induced weakness in January. The unemployment rate was a surprise at 8.9%, but it is likely an aberration as more discouraged workers than previous months did not enter the labor force.  We see an Intermediate term bottom in the unemployment rate.


The gradual improvement in the labor market is benefiting consumer income trends. Real disposable income growth late last year was the fastest since the fall of 2007. The rate of growth is still far from robust;  there are two factors that are limiting income: (1) the selective nature of the recovery, and (2) declining government support.


Despite a surge in personal income growth, real spending declined in January. Real personal consumption expenditures slipped by 0.1%, marking the first decline since April 2010. Nominal spending rose by 0.2%, which was about half of the average pace from the previous six months.


The inflation tax will likely erode the Hedgeye Optimism Spread as reality for the US consumer sets in.  According to the latest American Pulse™ Survey of 5,224 respondents, 80.3% of registered voters agree that the increase in gas prices is one of the worst problems affecting the United States.  The survey asked respondents to list the worst problems currently affecting the United States, and registered voters mentioned in order of frequency: unemployment (80.4%), rising gas prices (80.3%), weak economy (70.6%), national debt (69.4%) and rising food prices (61.9%).


The U.S. consumer is under attack and the bull case for equities to withstand escalating input costs is becoming less and less defensible.  We are expressing this view on US based consumption by being short MCD, WMT and TGT.


Function in disaster; finish in style


Howard Penney

Managing Director


Under Attack  - HP EL 3.9.11


Under Attack  - HP EL 2

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