German Economic Sentiment Dips and Merkel Halts Nuclear

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


We’ve been closely following the high frequency data from Europe and have warned in our research in recent weeks that PMI surveys, for both Manufacturing and Services, have come in “toppy” for many of the major economies, including Germany. Today the ZEW reported a month-over-month decline in its German Economic Sentiment survey, a 6-month forward-looking assessment, registering 14.1 in March versus 15.7 in February.


While we’ll need far more than one data point from one survey to make an investment call in the country (we’re currently long Germany via the etf EWG in the Hedgeye Virtual Portfolio), the data presents an inflection point worth calling out and is in line with our call that German PMI should mean revert over the coming months as it flirts with near all-time highs.


Although we continue to like the country longer term, we’re likely to trim our current 6% asset allocation to Germany over the near term. Currently the etf EWG is getting hammered, however not unlike most global country ETFS as investor concerns are focused on Japan.  


The big news from Germany today is Chancellor Angela Merkel’s decision to shut-down 7 of the country’s aging nuclear reactors for 3 months pending a safety review in light of the events in Japan. The Swiss followed the Germans saying they will suspend the regulatory process for 3 nuclear power stations because safety remained the first priority. [For reference, Switzerland has 4 nuclear plants with 5 functioning reactors].


In opposition, France, Spain, and Italy all announced today that:


(1) They need nuclear and don’t see their stance changing in the foreseeable future, and 

(2) Won’t reconsider building new nuclear plants


Germany’s 17 nuclear reactors account for ~23% of the power generated in the country last year, while atomic energy accounts for ~28% of Europe’s power generation. In 2010, Chancellor Merkel repealed a 2002 law passed by her predecessor Gerhard Schroeder and his coalition of the SPD and Green parties that would have shut down all German nuclear plants by 2022.


German leading power generators such as E.ON AG (EOAN) and RWE AG (RWE), both members of the DAX, are helping to drive the downward thrust in the DAX, both falling 6-9% over the last two days, while Q-Cells (QCE), a solar company (and not a member of the DAX), has been one strong gainer. 


Matthew Hedrick



German Economic Sentiment Dips and Merkel Halts Nuclear - zew

TREND Break: SP500 Levels, Refreshed

POSITION: no position in SPY


With our call for a -5.4% drawdown yesterday being realized, now it’s time to wait and watch. In terms of managing immediate-term TRADE risk in US Equities, the two main factors I’ll be waiting on are as follows: 

  1. SP500 Intermediate-term TREND line = 1273
  2. Volatility (VIX) long-term TAIL line = 22.03 

We made a call on this inverse relationship between the US stock market price and Volatility in April of 2010 (“April Flowers/May Showers”) and we’ve been making it again since mid-February. The correlation risk here is surreal.


With consensus cheering on Big Government Intervention, what they are really getting is Price Volatility. The Keynesians should be

careful what they wish for. Confidence in markets isn’t built through a bullish breakout in the VIX (TREND line = 18.35).


If the SP500 holds below 1273 for the rest of the week, there are plenty of immediate-term TRADE lines of support that you can manage risk around, but the Chaos Theory in our model says that a sustained breakdown below 1273 amplifies the gravitational force toward 1176 – and I’m not so sure too many people are positioned for that…


My immediate-term TRADE lines of support and resistance are now 1253 and 1307. Wait and watch for 1273 break or hold. With inflation being doused by a US Dollar UP day, there are some very early signs to look constructively upon – mind you those are real-time indicators and we still need to get through the lagging inflationary indicators (US PPI and CPI readings) tomorrow and Thursday.


As I wrote in early February (and, not ironically, took some heat for this):


“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.”


Just when they thought it was different this time…



Keith R. McCullough
Chief Executive Officer


TREND Break: SP500 Levels, Refreshed - 1

R3: AMZN, Gucci, JJB, & Ala Moana


March 15, 2011






  • According to the Japanese Tourism Marketing Company, more than one-third of all Japanese tourist that visit the U.S. annually do so via Hawaii. While few retailers are ‘over-indexed’ to Ala Moana, the contribution from one of the more productive U.S. malls will certainly have to be tempered near-term.
  • Add online retailer Shopbop to the list of recent entrants into the bridal category behind the likes of Urban Outfitters, Net-a-Porter and The Aisle New York. With dresses ranging from $200 to $2,500, the e-tailer is selling at a similar level to Costco’s latest bridal collaboration at $700-$1,400 with the primary difference the inability to actually try the dress on first.
  • According to the latest Millward Brown “Value-D” study which ranks global brands on how consumers perceive value vs. the associated costs, ranks number one.  Amazon is the only retailer to rank in the top ten on the global list, while Wal-Mart shows up at number six on the US list. 



JJB Sports Unveils Recovery StrategyThe 250-store chain also confirmed it would seek a further £65m from shareholders to fund the restructuring. JJB, which had been in merger talks with rival JD Sports, said the new-look operation would be based around the success of six trial stores.These stores were refocused to appeal to keen amateurs and sporting families.  Sales at these stores have been running at about 16% above the company average, JJB said in a statement. The company also said that it had reached agreement in principle with its major shareholders - Harris Associates, Crystal Amber, Invesco Asset Management and the Bill & Melinda Gates Foundation Trust - to support a £65m fundraising. <BBC>

Hedgeye Retail’s Take:  Very rarely, if ever, does a new prototype save the day for a retailer that has been under pressure for at least the past five years.  We’d be surprised to see this turnaround succeed based on a complete transformation of the store format.


Gucci With Al Tayer InsigniaAs part of a strategy to directly control its stores, Gucci said Monday it has signed a memorandum of understanding to form a joint venture with luxury retailer Al Tayer Insignia.  The agreement, which is expected to be finalized over the next few months, will allow Gucci to directly enter the United Arab Emirates. Gucci declined to provide details of the partnership, but said the joint venture will be headquartered in Dubai. Al Tayer has been Gucci’s franchisee in the region for more than a decade. The luxury brand currently counts six points of sale in the UAE. One store is located in Abu Dhabi, at Marina Mall, and three boutiques are at the Mall of the Emirates, at The Boulevard at Jumeirah Emirates Towers and at The Dubai Mall in Dubai. Gucci is also present at Dubai’s Harvey Nichols and Bloomingdale’s with corners in the two department stores. <WWD>

Hedgeye Retail’s Take:  Not surprisingly, luxury brands continue to chip away at the small but growing opportunities in the Middle East.  We wonder if at some point recent political unrest puts a damper on near term growth plans given the costs associated with opening boutiques in the region. 


Jack Rogers Opens in ManhattanFor six decades, the Navajo sandal has been the mark of Jack Rogers footwear. Now a casual chic collection inspired by the singular look is emerging, and the progress is most visible on Madison Avenue here between 87th and 88th Streets, where the first Jack Rogers store gets christened with a party tonight.  “We want to become a lifestyle brand,” said William Smith, chairman of Jack Rogers and managing partner of Global Reach Capital, during a visit to the 1,240-square-foot space. The classic sandal has been interpreted into a full line of footwear with more than 100 stockkeeping units, including closed-toe shoes, ballet flats, moccasins, high-wedged espadrilles, pumps, heels, shoes with Swarovski Elements micro beads, with monograms, in glazed suede or distressed leather, and even a rain boot for fall with a side zipper.  <WWD>

Hedgeye Retail’s Take:  A niche product for sure, but one that has a very loyal customer base.  We wonder how successful the iconic sandal company will be with its efforts moving into more traditional closed toe footwear.  Clearly a little private equity infusion is helping to push the brand beyond its 60 year sandal history.


Uptick in M&A activity - The thrift that companies exercised during the recession by building up their balance sheets is coming back to haunt them in the form of pressure to buy, and it’s lifting the mergers-and-acquisitions market to levels that could approach historic highs. Global M&A activity bounced back in 2010, rising 22.7 percent to $2.09 trillion over 2009 as U.S. M&A rose a less robust 2.8 percent to $714.3 billion, according to The Mergermarket Group. Still, both volume figures were well below the levels of 2008, when global activity hit $2.5 trillion despite a near freeze in fourth-quarter activity following the year’s financial crisis, and the progressively higher levels of M&A from 2005 to 2007. <WWD>

Hedgeye Retail’s Take:  Nothing like a banker bonanza as we head into more uncertain times from a macro perspective.  From a retail standpoint, we note that there are still numerous rumored deals that remain on the table.


Earthquake Hits Luxury Companies  - The stars have aligned for the luxury industry since the global recovery began. But the earthquake in Japan is a reminder of how quickly tragedy can change the industry's prospects.  Japanese investors dumped stocks Monday in response to Friday's earthquake, with the Nikkei 225 tumbling 6%. While the U.S. stock market fell just a fraction of that amount, luxury highfliers came under fire. Tiffany, which trades at 18 times this year's consensus earnings, fell 5%. Coach and Burberry Group of the U.K. fell by similar amounts.  Luxury investors have learned to pay less attention to Japan in recent years. Once vital, Japan accounted for 19% of Tiffany's sales in 2009, compared with 28% in 2000. <WallstreetJournal>

Hedgeye Retail’s Take:   It’s likely that beyond the physical recovery, the psychology of luxury buying will take even longer to rebound. 


Smartphone Owners like to Scan and SaveSmartphone owners are realizing the power of the mobile app to both gather information about products and services and save, a new poll from Chadwick Martin Bailey and iModerate Research Technologies finds. A poll of 1,491 U.S. adults finds of those who have used a smartphone app or mobile browser while shopping, 44% have used a bar code scanning app such as RedLaser or ShopSavvy that lets them compare prices and learn more about products and services in stores. 38% have used a discount or deal app such as those from Groupon or LivingSocial that offer deep discounts, typically on local goods. Location-based shopping apps such as foursquare and shopkick came in last among the shopping-related apps mobile shoppers employed, with 13% reporting using them. <InternetRetailer>

Hedgeye Retail’s Take:  Not surprisingly, the democratization of retail pricing is being empowered by the smartphone and its ability to act as a personal bar code scanner.  It will not be long before self checkout also occurs via the smartphone, thus eliminating the need to wait in lines.


Photo-Sharing Trends Encourage MarketersConsumers are increasingly sharing photos via social networks and mobile apps, and marketers are looking to capitalize on this trend. For most marketers, photo-sharing can help build brand awareness and encourage consumers to interact with the company. LIPTON Brisk iced tea partnered with mobile photo-sharing app Instagram for a campaign prior to the 2011 South By Southwest (SXSW) Conferences and Festivals. Fans were encouraged to take pictures through Instagram and tag them with #briskpic to be entered in a photo contest. The winning photos were included on a limited-edition can of the drink during SXSW.  <eMarketer>

Hedgeye Retail’s Take: Product placement is certainly not a novel concept, but if LIPTON is any indication, brands’ ability to integrate with mobile/social networking far exceeds the adoption rate compared to sitcoms of the 90s.


R3: AMZN, Gucci, JJB, & Ala Moana - R3 3 15 11



Dark Moon

This note was originally published at 8am on March 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I like to think that the moon is there even if I am not looking at it.”

-Albert Einstein


On this day in 1973 British rock band Pink Floyd released the Dark Side of The Moon. In Hedgeye-speak, that album was multi-factor and multi-duration, focusing on the interconnectedness of the world. Money, war, and death – from time to time, these can be the dark sides of this world. Pretending that their impacts on human behavior cease to exist isn’t my view of a risk management process; neither is hope.


So far, the best strategy we can offer Global Macro Risk Managers is grounded philosophically in Chaos Theory. Some people call it Complexity Theory – mathematically speaking, Chaos and Complexity theories are pretty much the same things.


Much like Einstein’s aforementioned admission of a Dark Moon, there are some things in markets that you can’t see. But, from dark pools, to the “flows”, and inside information – it’s all there. No matter where your concept of your research “fundamentals” go, there it is – either by expectation or by the actual “news”, it’s always being absorbed into the market’s last price.


Where I used to get run-over in positions was when I considered my research on a company the center of the universe. As if Mr. Macro Market knew me and owed me something. You can go get yourself a Yale degree and draw up a “smart” looking slide presentation about your bottom-up investment thesis – and that investment strategy will be all good and fine, until it isn’t.


Usually what hits you like Big Alberta when he has you lined up at the blue-line with your head down is the macro. Or, as some bottom-up only investors like to call it, “the unknown.” Well that excuse, losing your investor’s money, and a few false teeth might get you a ride home on the bus, but it’s certainly not going to give you an entitlement to dress in the next game.


The next risk management game in a globally interconnected marketplace starts now. Like a good Chaos Theorist, you either wake up accepting that Global Macro market risk is grounded in uncertainty, or you don’t. Like the moon, Asian Growth Slowing and Greek Debt Imploding is still there this morning, even if you weren’t looking at it…


Here’s this morning’s Global Macro grind:


1.       Asian Growth Slowing As Global Inflation Accelerates

-Japan revised its Q4 GDP estimate LOWER again to -1.3% (don’t forget that the US has done the same with Q4 GDP, twice)

-China reported a huge sequential slowdown in Exports for February at +2.4% (lowest level of demand since early 2009)

-South Korea raised interest rates to 3% (2nd rate hike for 2011 YTD with the #1 reason being inflation)


2.       European Sovereign Debt Yields Rising As Global Inflation Accelerates

-Credit ratings being cut in Spain this morning aren’t leading indicators – and neither is the assumption that more debt will solve this

-Greek bond yields continue to rise to higher all-time highs (all-time is a long time)

-British and German Equity markets are breaking down through their respective immediate-term TRADE lines of support


3.       US Growth Expectations Slowing (finally) As Global Inflation Accelerates

-US Treasury yields are finally backing off (2s down to 0.68% this morning) dulling one of the “growth signals” the bulls had in FEB

-Oil prices remain elevated and impose a significant sequential tax on US consumption growth (Q4 avg oil price = $85/barrel)

-Volatility (VIX) remains well above our intermediate-term TREND line of support (18.08) as fundamentals challenge the “flows”


So, that’s what we call The Big Stuff here at Hedgeye. And the Risk Manager strategy is to stay ahead of The Big Stuff. Whether you are looking at a company from the bottom-up or a country from the top-down, Growth Slowing as Inflation Accelerates in your cost structure definitely matters.


The Big Stuff can also morph into consensus. For example, I think The Inflation that we’ve been belaboring since October is now becoming consensus. This is where managing risk gets a lot trickier. What’s priced in? How long can consensus be right?


Here’s some more Big Stuff with potentially long-term tails:

  1. A Super Sovereign Debt Cycle Structurally Impairing Long-Term Growth
  2. A Global Inflation and Unemployment Problem Inspiring Revolutionary Revolt
  3. A Global Belief In The Fiat Currency System Coming Under Attack

Again, like the Dark Moon – it’s all there…


So, we’ll keep focusing on what we see in our globally interconnected risk management model, trying our best to change our asset allocation and long/short positioning as consensus changes are absorbed into market prices.


My immediate term TRADE lines of support and resistance for WTI crude oil are $102.11 and $108.71, respectively. My immediate-term lines of support and resistance for the SP500 are now 1302 and 1334, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dark Moon - dark moon


Dark Moon - CH2


Notable news items and price action over the past twenty-four hours.

  • MCD joined Tesco and Diageo in signing a U.K. health deal put in place by the government.  The deal involves better labeling and ingredients aimed at improving the nation’s health.
  • McDonald's has 3,302 restaurants in Japan. As of this date, the vast majority of the restaurants are open; fewer than 300 remain closed due to damage or staffing issues.
  • BJRI gained on strong volume.  It was the only restaurant stock we monitor that did so yesterday.
  • CBRL, DIN, and CPKI all declined on accelerating volume, as did CHUX. 
  • SBUX, TAST, and BAGL also declined on strong volume. 
  • According to Technomic, the top 10 restaurant chains ranked by their percentage increase in sales from 2009 to 2010 are:
  1. Five Guys Burgers and Fries at 38%
  2. Jimmy John’s Gourmet Sandwich Shop at 22%
  3. Chipotle Mexican Grill at 21%
  4. BJ’s Restaurant & Brewhouse at 20%
  5. Yard House at 18%
  6. Cheddar’s Casual Cafe at 14%
  7. Buffalo Wild Wings Grill & Bar at 14%
  8. Firehouse Subs at 14%
  9. Noodles & Co. at 14%
  10. Panda Express at 13%




Howard Penney

Managing Director



The Macau Metro Monitor, March 15, 2011



HONG KONG GNP RISES 7.2% IN 2010 China Daily

According to the Census and Statistics Department of Hong Kong, the city's GNP rose 7.2% YoY to HK$1,784.7BN in 2010 and 6.9% in 4Q2010  to HK$477.2BN.



The People's Bank of China said that new yuan‐denominated loans decreased $192.9BN YoY in February to 535.6BN yuan. At the end of February, total outstanding yuan‐denominated loans stood at $48.89 trillion, up 17.7% YoY. New yuan‐denominated deposits stood at $1.31 trillion in February, a YoY increase of 17.6%.



Spring Airlines, a budget airline, is scheduled to debut  operating flights between Macau and Mainland cities in April.



21 Chinese People's Political Consultative Conference (CPPCC) members, including Ambrose So, made a joint proposal suggesting that Zhuhai citizens be granted a one‐year multi‐entry visa to Macau, with a maximum stay of seven
days per visit. The suggested trial would be similar to mulit-entry visas already granted to Shenzhen residents for visitation to Hong Kong in April 2009.

Daily Trading Ranges

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