Europe’s Interest Rate Pause

Positions in Europe: Sold Long Germany (EWG) today; Covered Short Spain (EWP) on 3/16


In the last two days both the Swiss National Bank (SNB) and Norway’s Central Bank (Norges Bank) kept their main interest rates on hold, at 0.25% and 2.00% respectively. The decisions are worth considering within their own context, and as it relates to ECB policy.


Today’s decision from the SNB to HOLD comes as no great surprise as a hike would likely encourage the appreciation of the Swiss Franc (CHF) vs most major currencies, in opposition to the SNB’s mandate to limit appreciation to protect the country’s exports; further, inflationary pressures remain benign with Swiss CPI at +0.1% in February Y/Y.


As a safe haven play, the CHF vs most major currencies has gained steadily over the long term; intermediate term (vis-à-vis the Eurozone’s sovereign debt contagion); and immediate term in the wake of the earthquake in Japan (+2.2% since March 14th). The chart below shows just how prevalent the currency’s appreciation has been since a low in early May 2008:


Europe’s Interest Rate Pause - swissy



Norges Bank also left rates unchanged yesterday, despite threats of rising home price inflation (+9.2% in February Y/Y) and household credit growth on the rise. CB Governor Jan F. Qvigstad said there is a “50/50 chance in May or June” of a rate increase.


Both bank decisions to keep rates on HOLD give credence to the recent pause in global economic sentiment following the earthquake in Japan. In our mind, the events in Japan may well tame the hawkish commentary of ECB President Trichet at the last ECB meeting on 3/3 in which he signaled that a hike (likely 25bps) could come as soon as next month. While the Eurozone is feeling pressure from rising inflation  -- CPI in February came in 10bps higher than January at 2.4% Y/Y -- given the threat of stagnation from the world’s third largest economy (Japan’s GDP equals ~ 9%  of the global economy), persistent European sovereign debt contagion concerns, and further unrest in the Middle East and North Africa, Trichet and the rest of the ECB governing board may reconsider the impact a rate hike will have on the region, especially for the periphery which shows a strong negative divergence across fundamentals, including high debt and deficit levels, poor GDP growth prospects for this year and next, and high inflation and unemployment levels.


Under these global conditions, Trichet may well elect to push out a rate hike decision.



Matthew Hedrick


Short Covering Opportunity

This note was originally published March 17, 2011 at 07:55am

“It isn’t as important to buy as cheap as possible as it is to buy at the right time.”

-Jesse Livermore


Having been a market practitioner for the last 12 years, I’ve come to respect that a Risk Manager needs to be as well versed in the tactical thinking of a Jesse Livermore (“Reminiscences of a Stock Market Operator”) as the libertarian theorizing of a Bastiat (read “The Law”, 1850).


Valuation isn’t a catalyst. Price momentum is. When the slope of price momentum changes to the bearish side, valuation becomes a trap. When price momentum is bullish, it justifies the best storytelling in the world.


I’m not so much interested in being a valuation-guy, a perma-bull, or a perma-bear. Been there, tried all three. I’m interested in being right. Livermore taught me the same – “There is only one side of the market and it is not the bull side or the bear side, but the right side.”


Whether you are on the buy-side or the sell-side, I’ll assume your goal is also to be on the Right Side. That’s how you get paid. Sure, we all have different durations and risk tolerances in being exposed to our respective investment decisions. But the market doesn’t care about how we think about these things individually. The market waits for no one.


This is why I am trying my best to evolve my Multi-Factor Global Risk Management Model so that it is Duration Agnostic. That’s where the concept of our TRADE/TREND/TAIL framework was born. And the mathematical principles of interconnectedness embedded in Chaos Theory support it.


As a reminder, here’s how we think about TRADE/TREND/TAIL durations:

  1. TRADE = the immediate-term (as in 3-weeks or less, which I’ll get to in a minute in terms of seeing a Short Covering Opportunity)
  2. TREND = the intermediate-term (3-months or more, which is how we think about companies and countries sequentially)
  3. TAIL = the long-term (3-years or less, which is how we think about our key Global Macro Themes like “Housing Headwinds”)

Of course, some of you invest beyond what I am defining as the TAIL. I do too. When I invested 1/3 of my net wealth to create Hedgeye Risk Management, I considered that a fairly long-term and concentrated investment idea.


But when it comes to managing Global Macro market risk in an environment of Heightening Price Volatility (which is what these Fiat Fool central planners from the US Federal Reserve to the Bank of Japan are perpetuating via their unprecedented money printing experiments), I think you need to acutely manage the shorter-term duration risk - the TRADE and TREND.


So that’s how we think about it and this is what I did about it yesterday in the Hedgeye Portfolio:

  1. Covered short position in SPAIN (EWP)
  2. Covered short position in EMERGING MARKETS (EEM)
  3. Covered short position in WALMART (WMT)
  4. Covered short position in INDUSTRIALS (XLI)
  5. Bought long positions in HEALTHCARE (XLV)
  6. Added to long position in GERMANY (EWG)

Overweighting one of the key risk management relationships we’ve been working with in calling for this 6.5% correction (the inverse relationship between the SP500 and the VIX), yesterday I finally registered a signal that I considered an explicit Short Covering Opportunity.

  1. The SP500 is immediate-term TRADE oversold (3.0 standard deviation move)
  2. The VIX is immediate-term TRADE overbought (3.5 standard deviation move)

Now there is a difference between what The Street and a bullishly-bias media amusingly label a “buying opportunity” and what Risk Managers recognize as a Short Covering Opportunity.


A Short Covering Opportunity is reserved for those Risk Managers who had the sobriety to short things before they started going down. A “buying opportunity” is a decision to deploy cash and expand you gross exposure to the market. 


I did both yesterday (you are allowed to do both):

  1. Hedgeye Portfolio (a proxy for my net exposure to the market): I moved to 16 LONGS and 4 SHORTS, by covering shorts
  2. Hedgeye Asset Allocation (a proxy for my gross exposure): I moved to 43% CASH yesterday, down from 46% the day prior

Again, I fully respect and understand that how I am expressing my risk management views may not be found in a Yale economics textbook on portfolio theory. I am trying to evolve the risk management process and show the financial services community that there is a transparent and accountable way that a firm can both originate ideas and manage risk, without being on the other side of our clients’ trades.


I also fully understand (but do not fully respect) the marketing message behind being “fully invested.” Sure, there will be a time for that (Q2 of 2009), but not when our fundamental Global Macro research is proactively calling for Global Growth Slowing As Global Inflation Accelerates. When the winds of price momentum blow from bullish to bearish, that’s called being fully exposed.


I’m not trying to take a “victory lap” this morning. I am deeply interested in trying to explain what we are doing here and why. I don’t think it’s credible for the said savants of Wall Street “strategy” to keep missing huge draw-downs in global markets like they have for the last decade. Instead of whining about it, we are passionately pursuing a better way.


My immediate term support and resistance lines for WTI crude oil are now $97.02 and $102.60, respectively, and I took our asset allocation to oil up to 6% on Monday from 3%. My immediate term support and resistance lines for the SP500 are 1256 and 1274, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Short Covering Opportunity - Chart of the Day


Short Covering Opportunity - Virtual Portfolio


We use a couple of different assumptions to project 2011 growth.


Based on the first few months of 2011, Macau should be set for another terrific year of growth.  While undoubtedly a slowdown from the growth rate generated in 2010 – 58% is pretty tough to top – we think investors would be happy with 25%+ every year.


So, 25% is our low estimate for 2011 gaming revenue growth.  We derive this growth rate based on our March projection of HK$18 billion (based on two weeks of data), carried forward and seasonally adjusted for the remaining months of the year.  This low case estimate assumes no growth off of the March level except for normal seasonality. 


Our base case uses the February/March seasonally adjusted average as the base and uses the same methodology as above.  Under this scenario, we would project 2011 gaming revenue growth at 32%.  Our high estimate is the same as the base case but assumes that revenues grow an additional 9.5% (0.8% per month sequentially) throughout the year for total 2011 growth of 36%.  Current consensus China GDP growth estimates for 2011 is 9.5%.


Of course, a lot can happen to force revenue growth outside of the 25-36% range.  A bear might say that Beijing’s attempts to rein in inflation and liquidity will impact VIP volumes.  Possible – it has happened in the past but Beijing has been tightening for 9 months and volumes continue to expand.  A bull would point out that Mass growth is typically at least the rate of GDP and market penetration (visitation).  Good point – visitation continues to rise, pushing Mass revenue growth beyond just GDP-fueled revenue per visitor. 


We are also not adding in any incremental growth from the opening of Galaxy Macau which should grow the market.  The new Galaxy property on Cotai will add 10% to table supply and should detract from same store revenue, unless the property is an absolute smashing success.


Here are our estimates:



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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

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