March 17, 2011






  • Rue 21 noted that it expects to mitigate impending cost pressures via a couple of different strategies.  First, the company believes that overall square footage growth provides incremental scale which in turn leads to cost breaks and volume discounts.  Secondly, management believes that increasing the fashion quotient in the company’s assortment will allow the company to raise AUR’s without compromising quality.  During 4Q, the company saw AUR’s rise 3%- a notable callout against most specialty concepts which have had trouble taking AUR’s higher over the past year or so.
  • In a sign that the skinny jean phenomenon is waning, GES’ management confirmed that ‘roomier’ cuts are gaining momentum in both the U.S. as well as in Europe. More notably, non-denim bottoms are outpacing the company’s core denim bottoms.
  • Keep an eye on the next apparel trend following the Snuggie.   The new item dubbed the OnePiece comes to us from Norway and is essentially an adult onsie (aka jumpsuit).  While this would appear to be a joke, the product is actually real and already selling at LA’s celeb-haven boutique Kitson.



Hugo Boss Continues Expansion StrategyHugo Boss is on a roll, propelled by its expanding company-owned retail network, strong sales in the growth markets of China and the Americas, more clearly delineated brand profiles — and a competitive dose of worrying.  The German fashion group just ended the best year in its 86-year history, significantly outpacing even its own upgraded forecast from last October, and the momentum is continuing for 2011. Final figures for 2010 will be released March 29 but, as reported, preliminary figures saw net income surge 82 percent to 189 million euros, or $251 million. Group sales in 2010 sales rose 7 percent on a currency-neutral basis and 11 percent in euro terms to 1.73 billion euros, or $2.3 billion. All dollar figures are converted from the euro at an average exchange rate for the period.  <WWD>

Hedgeye Retail’s Take: After several years of struggling to find its identity (and strategy) it appears that Hugo Boss is finally moving in the right direction.  And thanks to China growth, there is newfound opportunity that was non-existent just a few years ago. 


H&M Japan Relocates Office, Closes Stores - Hennes & Mauritz said it has closed all its stores in the Kanto region surrounding Tokyo and has temporarily relocated its Japan office to Osaka from Tokyo. Although several fashion companies are having employees work from home or remotely in the wake of electrical shortage and growing conerns about explosions and fires at a nuclear plant in northeast Japan, H&M's move is a particularly bold one. H&M Japan said that it is giving all of its employees and their immediate family the option to relocate to the Kansai area, home to the cities of Osaka, Kyoto and Kobe. <WWD>

Hedgeye Retail’s Take:  Expect to see many more efforts focusing on safety ahead of profits in the near-term.  Unfortunately the disaster’s impact will likely have long lasting effects on what was once one of THE top shopping-driven cultures in the world. 


Men's Wearhouse Introduces Store Remodeling Program  - Men’s Wearhouse has an aggressive rollout plan for its successful store remodeling program. This year, the company will remodel more than 100 stores in a plan that includes opening or revamping 135 units. As a result, by the end of 2011, nearly one-third of the company’s fleet of 590 traditional Men’s Wearhouse stores will be updated, according to Doug Ewert, president. “We’re projecting 170 stores will be done by the end of the year,” he said. Eventually, the entire chain will be remodeled. The company is also planning to open between 20 and 30 stores in 2011. Overall, capital expenditures are planned at $90 million to $100 million, which will be used for the remodels, store openings and investment in technology for the company’s online and e-commerce initiatives. <WWD>

Hedgeye Retail’s Take:  While remodels are never a clear cut slam dunk for immediate returns, we applaud MW for upgrading its again store base and refreshing the in-store experience.  Perhaps Penney and Sears should do the same?


Counterfeit Seizures Up  -  As the federal government ramps up scrutiny of counterfeiters, a report revealed Wednesday that footwear, apparel and accessories were among the top 10 counterfeit items seized by U.S. officials during fiscal 2010. For the fifth year in a row, footwear was the top commodity seized by federal officials, accounting for 24 percent of a total of 19,959 seizures valued at $188.1 million in the year ended Sept. 30, according to the joint report released by U.S. Customs and Border Protection and U.S. Immigration and Customs Enforcement. The total volume of counterfeit seizures rose 34 percent in the last fiscal year while their value fell 27 percent from $260.6 million in fiscal 2009. <WWD>

Hedgeye Retail’s Take:  Efforts to curtail counterfeit imports continue to show tangible results although we wonder what can be done to curtail counterfeiting for distribution within China as many western brands look to increase their exposure the region.


Home Depot Aims to Build Social Media FollowingThe Home Depot Inc. is offering consumers who Like the retailer on Facebook exclusive offers every Friday throughout the spring as part of its Spring Black Friday Event. The promotion runs through May 27. The deals, which will be featured on the retailer’s Facebook page, will have prices that are 50% to 75% off regular prices on gardening, lawn care and patio items. For instance, it will sell a Martha Stewart outdoor dining set regularly priced at $499 for $299. To make a purchase a consumer clicks on a “Buy Now” button that is within the post announcing the deal. The retailer then presents the shopper with a broader product description along with a “Checkout Now” button. The consumer can then complete the transaction without leaving Facebook.    <InternetRetailer>

Hedgeye Retail’s Take:  One of the more progressive uses of technology for a retailer that is more known for its weekly circular, TV advertising, and in-store merchandising


Dick's SG Brings Back National Runners' Month for MayDick's Sporting Goods announced the return of Dick's Sporting Goods National Runners' Month, a celebratory campaign launching this May for runners across the country. The foundation of Dick's Sporting Goods National Runners' Month will be the activation of major sponsorship at ten premiere running events in metro cities across the country. In addition, the month-long running celebration will be surrounded by a comprehensive marketing program that includes the announcement of three widely respected running ambassadors, a major charity initiative, social and digital media elements along with running specials and promotions throughout May. <SportsOneSource>

Hedgeye Retail’s Take:  Another example of increased marketing being pumped into the athletic space.  This time the grassroots efforts come from the retailer (with likely some co-op along the way).


Liz Claiborne in Dispute With S&PLiz Claiborne Inc.'s plans to refinance its troubled Mexx European business have sparked a dispute with credit-ratings company Standard & Poor's, which calls the planned debt exchange a default. The debt swap is Liz Claiborne's latest attempt to shore up its fast-fashion Mexx brand, which is its largest division and accounts for about a third of the apparel company's revenue. Liz Claiborne, which also owns the Juicy Couture and Lucky Brand Jeans lines, is offering to buy back €155 million ($215 million) of the €350 million in bonds it issued in part to help finance the 2001 acquisition of Mexx. The current bonds come due in 2013. The new bonds won't have to be repaid so soon, which the company says will give it more financial flexibility. Instead of paying full face value for the bonds, Liz Claiborne said it would buy them back at 96 cents on the dollar, which S&P Friday wrote was "tantamount to a default."  <WallstreetJournal>

Hedgeye Retail’s Take: With the company expecting the MEXX business to breakeven by 2012, this is a move designed for added flexibility. We believe the greatest period of default risk is now in the rear-view. Given our expectation for the company to turn profitable in 2012, our sense is the options for restructuring existing debt will increase a year from now if the current tender proves to be a challenge.


Coalition of Retailers Push Amazon on TaxesWal-Mart Stores Inc., Target Corp. and other large retailers are ratcheting up a political campaign to force Inc. to collect sales taxes, sensing opportunity in the budget crises gripping statehouses nationwide. Target is one of the stores involved in the campaign to change sales-tax laws in more than a dozen states. The big-box stores are backing a coalition called the Alliance for Main Street Fairness, which is leading efforts to change sales-tax laws in more than a dozen states including Texas and California. Until now, the group has been largely associated with mom-and-pop stores, spotlighting stories of small toy shops and booksellers who argue Internet merchants that aren't legally required to collect sales taxes enjoy an unfair advantage with shoppers. Yet the Virginia-based group isn't just working for the little guys. Many of America's largest store chains—including Wal-Mart, Target, Best Buy Co., Home Depot Inc. and Sears Holdings Corp.—are involved in the campaign, lobbying legislators and increasingly taking public swipes at Amazon. <WallstreetJournal>

Hedgeye Retail’s Take: Leveling the playing field remains in every companies best interest with the exception of Amazon. Given AMZN’s hard stance on the issue in both TX and CA, we don’t expect a ruling near-term, but believe that AMZN will have to realize the inevitable in the not so distant future.




Economic Fallacies

This note was originally published at 8am on March 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.

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt


This weekend I reviewed one of the classics in my library – Henry Hazlitt’s “Economics in One Lesson.” The aforementioned quote is the first sentence of the book. Hazlitt first wrote it in New York in 1946 then edited it 32 years later from his office in Wilton, Connecticut.


This is a very popular book (over 1 million copies sold) for very good reason. It’s grounded in common sense. And the lesson in 2011 (33 years after Hazlitt reiterated the lesson 32 years after 1946) is the same as it was when the Keynesian Kingdom was imploding in 1979:


“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.” (Hazlitt, “Economics in One Lesson”, pg 208).


Have no fear however, the European Financial Stability Facility is here. Or is that the 15 TRILLION in Yen being deployed by the Bank of Japan this morning? Or is that the 223 BILLION in deficit spending by the US government for the month of February? Who cares as long as it doesn’t affect me? Right? Nice moral compass.


Last week’s Global Macro news had plenty of international risks (Risk Management in One Lesson – risk is always on), but a lot of it is staring you right in the face here at home. This should remind you that the highest deficit spending month in the history of America isn’t working:

  1. US Deficit – despite the unanimous call of The People to govern US Government spending. Expenses ran up +5% year-over-year in February to their highest level ever (ever is a long time Mr. President)
  2. US Home Prices – despite the US Government daring Americans to take on more leverage, Corelogic’s reading on US Home Prices fell -5.7% for the month of January (y/y) and are now running at a -18% annualized pace (see our Macro Slide Presentation on Housing Headwinds)
  3. US Consumer Confidence – despite the US stock market rallying +98% in the last 2 years, the Michigan Consumer Confidence reading had its 8th largest drop since the data started getting tabulated in 1978 (falling -12% in March to 68.2 versus 77.5 in February)

“The policy of inflation, as I have said, is partly imposed for its own sake. More than forty years after the publication of John Maynard Keynes’ General Theory, and more than twenty years after that book has been thoroughly discredited by analysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce unemployment.” (Hazlitt, pg 204, 1978)


Last week, we learned that the tough short-term love associated with a strengthening US Dollar may not be what stock market inflation fans like The Bernank want, but it’s definitely what the other HALF of Americans who don’t own stocks need – a Deflation of The Inflation.


Here’s what happened to the price of things we actually need to buy (with the US Dollar Index trading up +0.5% week-over-week to $76.78):

  1. CRB Commodities Index = DOWN -3.0%
  2. Oil = DOWN -3.1%
  3. Copper = DOWN -6.3%

No, that probably didn’t make anyone who is long of The Stock Market Inflation happy, but it did give the rest of us lower prices at the pump this weekend. Contrary to manic media delusions of common sense, gas hitting $4/gallon is negative for consumer confidence (see the score).


The Deflation of The Inflation was also good for those of us who raised a high asset allocation to CASH when everything from US Equities to Commodities were locking in their intermediate-term cycle highs last month. In the last 3 weeks, with the SP500 deflating -2.9%, I’ve taken the CASH position in the Hedgeye Asset Allocation model down from 61% to 43% (Risk Management in Another Lesson – buy red, sell green).


On a week-over-week basis the Hedgeye Asset Allocation moved to the following position:

  1. Cash = 43%  (down from 49% last week)
  2. International Currencies = 27% (Chinese Yuan and Canadian Dollar  - CYB and FXC)
  3. Commodities = 15% (Gold, Oil, Corn, and Grains – GLD, OIL, CORN, and JJG)
  4. International Equities = 6% (Germany – EWG)
  5. US Equities = 6% (Energy and Healthcare – XLE and XLV)
  6. Fixed Income = 3% (US Treasury Flattener – FLAT)

I’m definitely not saying that this was the perfect setup. I am saying that managing risk proactively in a risk management environment of Heightening Price Volatility preserves capital. Alongside Price Volatility (VIX) putting on a +28.8% move to the upside since the US stock market topped on February 18th, some other crystal clear risk management signals have reminded people that they are still there:

  1. Growth expectations (measured in US stock prices or UST bond yields) are finally coming down
  2. Risk spreads (CDS, TED Spread, Sovereigns) are widening
  3. International stock markets are deflating (36 of the top 60 countries in our Global League Table are DOWN for the YTD)

Now I suppose that we can all celebrate Big Central Planning this morning as the Greek stock market moves up another +3% making it the world’s best performer for the YTD. Or maybe not…


What goes up, must have gone down a lot. That’s what happens to market prices that aren’t exactly as free as they used to be.


My immediate-term support and resistance levels for WTI crude oil are now $98.55 and $103.31, respectively. My immediate-term support and resistance lines for the SP500 are 1292 and 1313, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Economic Fallacies - Chart of the Day


Economic Fallacies - Virtual Portfolio


Initial Claims Fall 10k

The headline initial claims number fell 10k WoW to 385k (12k before a 2k downward revision to last week’s data).  Rolling claims fell 7k to 384.5k. On a non-seasonally-adjusted basis, reported claims fell 34k WoW.  


We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down. We have now had three weeks inside of this range. If this level continues to hold, we expect to see unemployment 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 8.9%, it's 10.9%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.9% actual rate as opposed to the 8.9% 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 Tightens 12 bps

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 41 bps wider than 4Q.  The current level of 264 bps is slightly tighter than last week (278 bps).






Financial Subsector Performance

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




Joshua Steiner, CFA


Allison Kaptur

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

  • MRT share prices gained 11.8% on accelerating volume following news that the company is for sale.
  • PEET also gained on accelerating volume as headlines continue to point to a possible acquisition of the company by Starbucks.
  • MCD named Cyril Pamaphosa as developmental licensee for South Africa and will be responsible for the operation of McDonald’s restaurants in South Africa, according to a statement from the company.
  • PZZA, SBUX, MCD, and WEN all declined on accelerating volume.
  • Corn and wheat climbed for the first time in three days on signs that a price slump prompted by the tragic events in Japan is spurring demand from importers.



Howard Penney

Managing Director


The Macau Metro Monitor, March 17, 2011




In his first comments on the Jacobs case, CEO Adelson said, “While I have largely stayed silent on the matter to this point, the recycling of his allegations must be addressed.  We have a substantial list of reasons why Steve Jacobs was fired for cause and interestingly he has not refuted a single one of them.  Instead, he has attempted to explain his termination by using outright lies and fabrications which seem to have their origins in delusion.”



According to the President and COO of the Venetian Macao, Edward Tracy, Venetian will initiate many large‐scale projects in the future 5 to 6 years.  However, Hengqin is not in the company's interest at this time.



The long-awaited financing to back the construction of the Hong Kong-Zhuhai-Macau Bridge has been closed as a RMB 29.39BN onshore deal with seven banks joining.



Visitor arrivals in package tours decreased by 3.7% YoY to 442,061 in January 2011. Visitors from Mainland China (316,362), Japan (22,224) and Hong Kong (17,522) decreased by 3.8%, 6.5% and 15.1%; however, visitors from Republic of Korea (24,050) and Taiwan (23,961) increased by 85.6% and 4.5% respectively.

CHART OF THE DAY: Quantitative Set-up :: US Equities



CHART OF THE DAY: Quantitative Set-up :: US Equities -  chart

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%