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April 13, 2011






  • Levi will be coming to America of sorts with the introduction of its Denizen brand slated to sell in Target this summer. Originally launched last year specifically for the Chinese market, the brand will be priced at the lower end of its signature Levi line at $20-$30 adding more competition to the low-end denim market. VFC’s Wrangler line is currently the price leader at Target with opening price points at $12.99. This is unlikely to be entirely Levi-induced. Target is sitting down with its vendors and is finding creative ways to keep price points down – especially with Wal-Mart’s more aggressive pricing strategies.
  • J Crew is catching flack this morning (enough to be highlighted on the Today Show) because one of its execs is in a promo photo painting her 5-year old son’s toenails hot pink. Yes, this is a bit unusual by most standards – it really looked to us like a happy mom goofing off with her even happier son. Apparently, the media found a way to tee this up in a way that ruffled feathers with some consumers. As for JCG, we’d argue that there’s no such thing as bad PR.
  • After stating back in February that it would close its fulfillment facility in Texas by April 12 in response to a $269mm bill for uncollected sales taxes, it appears that Amazon didn’t carry through on its claim. The online tax issue has certainly heated up over the last two months, however with Hawaii recently joining the growing swell at the state level, we suspect a resolution may be reached even sooner than anticipated.
  • In a move that rivals Ralph Lauren’s innovative 4D flagship event in NYC in November, Burberry is celebrating the grand opening of its Beijing flagship store with a live streaming event this morning. In the process of showcasing its latest line, the brand is sure to create a buzz by incorporating virtual image technology that will combine live models with animated footage and life-like holograms.  



Coach Sues Jo-Ann Fabrics - Coach Inc. hit Jo-Ann Fabrics, its subsidiary brand Craft Stores and The Feldman Co. Inc. with a trademark infringement suit Monday, alleging that the companies sold merchandise bearing a logo confusingly similar to its Signature C logo.  Filed in the Northern District of Illinois, the lawsuit claims that the pattern of elongated Os found on the Blizzard Fleece fabric sold by Hudson, Ohio-based Jo-Ann in stores and on its Web site has likely caused “consumer confusion” as it resembles Coach’s C trademark.  The luxury handbag and accessories maker said it became aware of the alleged infringement in February, and it promptly contacted Jo-Ann and Feldman, a New York-based textile company responsible for designing the fabric. <WWD>

Hedgeye Retail’s Take:  We’ll never give anyone flack for protecting their brand. But it’s kinda funny to think of Jo-Ann as a source for product that could confuse the consumer. 


H&M plans store in Niketown Denver’s Old Location - The long-anticipated announcement that H&M, a "cheap chic" clothing store, will open in the Denver Pavilions on the 16th Street Mall will be made today. The Denver Post has confirmed from sources close to the deal that the Swedish chain, which has been scouting out space in metro Denver for several months, has chosen the Niketown spot at the Pavilions for its first Colorado outlet. Niketown said last week that it will close its Pavilions location in mid-May. Pavilions owner Gart Properties will participate in an announcement naming a new "anchor tenant" at noon today. Gart officials would not comment further. Tami Door, president and chief executive of the Downtown Denver Partnership, also declined to name the new tenant but said H&M's entry would carry significant clout when it comes to attracting other major retailers new to the market. <DenverPost>

Hedgeye Retail’s Take: That didn’t take long. Just days after Nike announces it was leaving the Denver location H&M steps in. In fact, the pending vacancy was obviously known in the market for some time, but the perception is H&M’s appetite for new locations is notable. With plans to open 250 doors this year on a base of only ~2200 we’ll be seeing more of this in the coming months.


Adidas Raided for Alleged Price Fixing in Japan - The Japan Fair Trade Commission on Tuesday raided the Japan subsidiary of German sporting goods maker Adidas AG over its alleged pressuring of retailers not to discount its popular sports shoes series named EasyTone. Kyodo News reported that Adidas Japan was suspected of pressuring retailers to sell the product for 10,000 to 15,000 yen ($118-177), and of suspending shipments for stores that did not comply. Adidas, the world's second-biggest sporting goods maker, began selling the EasyTone shoes, under the Reebok brand, in Japan in 2009. The series has more than half the market for muscle-toning shoes in Japan, estimated at about 10 billion yen annually, Kyodo said.  <SportsOneSource>

Hedgeye Retail’s Take: Not an endearing move from a brand perspective. However, the reality is that it will impact consumer’s purchasing decision very little.


Brooks Brothers Fashions a m-Commerce Platform - A retailer with roots in the 19th century has jumped into the 21st century with a new mobile commerce site targeting its affluent fashion buyers who carry the latest smartphones. Brooks Brothers has launched an m-commerce site that enables shoppers to search or browse the merchant’s entire catalog of products and complete purchases. Four category links—Men, Women, Boys, Girls—sit at the top of the home page of the site, built by m-commerce technology provider Digby. Immediately below is a search box; retailers in m-commerce usually give prominent placement to the site search box for consumers on the go who want to get straight to a product they’re looking for. A large hero shot consumes the middle of the screen. Below that image are category bars, then smaller bars that link to a store locator (with GPS functionality that pinpoints the nearest Brooks Brothers store), a page that enables consumers to sign up for Brooks Brothers e-mails, and a page for tracking orders. At the bottom of the home page are Contact Us, Privacy Policy and Help links. <InternetRetailer>

Hedgeye Retail’s Take: Some retailers have very sexy e-commerce sites many of which include lots of flash technology, which is an unmitigated disaster when it comes to translating to mobile functionality. Mobile platforms require individual attention – something more retailers are beginning to realize…even Brooks Brothers.


Google “checks in” with Retailers - In a move to better compete with such location-based mobile check-in programs as foursquare, Facebook Places and shopkick, Google Inc. is adding check-in offers from national chains including American Eagle Outfitters and Finish Line to its Google Latitude app. American Eagle Outfitters is offering up to 20% off a total purchase for check-ins, sandwich shop Quiznos a free sub when consumers buy one sub of equal or greater value, and Finish Line $10 off on purchases of $50 or more. Radio Shack is also participating and Macy’s will soon join in. Google began last month offering discounts and deals for consumers who checked in to participating merchants in Austin, TX. Now consumers can check in to receive discounts at thousands of locations across the U.S., Google says in a blog post. To check in, a consumer opens the app and taps a button to activate the GPS that senses the consumer is within a store or other location. <InternetRetailer>

Hedgeye Retail’s Take: Google was not a first mover in the location-based technology game and now they’re having to play a game they aren’t used to – catch up. Our sense it’s going to take quite a bit more than 20% deals to drive interest in their technology and we’re looking forward to seeing what the company comes up with.


Chinese Consumers Altering Luxury Goods Landscape - Advertising executive John Kwok recently spent thousands of dollars on a traditional-style Chinese jacket at luxury retailer Shanghai Tang's Pedder Street store in the heart of Hong Kong's business district. Shoppers such as Kwok represent the future for Chinese luxury goods buyers, seeking out goods that emphasise China's culture rather than just the Western heritage and exclusivity that have proven so effective to date, industry experts say.  "You can't find anything similar at other international labels," said Kwok, describing his Shanghai Tang purchase. "It's not about price, but availability."  Across from Pedder Street, at the upscale Landmark shopping mall, brands such as Gucci and LVMH vie for Chinese shoppers, whose appetite for luxury goods is expected to make China the world's biggest luxury market within five years.  Brands such as Shanghai Tang, part of Richemont Group , and Hermes, which launched its China-focused label Shang Xia late last year, may have a head start in meeting changing appetites, analysts say.  <EconomicTimes>

Hedgeye Retail’s Take: Traditional Chinese cultural fashion is certainly not mainstream, but there’s no reason to think that it won’t slowly bleed into the global fashion scene. While many global retailers ride continued demand for traditional Americana style, the reality is that as the share of global purchasing power shifts towards Asian consumers, retailers will follow. Given significant cultural hurdles, expect western brands to start acquiring local talent – particularly those that have already made the move to establish a physical presence.




Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door?

“Mama take this badge from me, I can’t use it anymore,

It’s getting dark, too dark to see.”

-Guns N’ Roses, “Knocking on Heaven’s Door”


Conclusion:  Could the United States really go bankrupt? No, not as long as she can print money. That said, the recently reported six month deficit number was -$831BN.  This is not positive for the U.S. dollar.


The Department of Treasury recently reported the U.S. Federal government budget deficit for March at $-189BN.  This was $124BN more than the deficit in March of last year, though this incorporates a restatement of $115BN related to TARP for March 2010.  According to the CBO:


“Specifically, the Treasury reported a reduction for that program of $115BN in March 2010, reflecting a significant decline in its estimated net costs.”


So, it seems that Treasury overstated the cost of TARP, by $100BN+, which is at face value positive, but if TARP is a 1-time expenditure, why then is this month’s deficit $124BN more than last March if neither month incorporates TARP spending? Did the U.S. federal deficit really grow 186% year-over-year?  Well, according the CBO, whose numbers we’ve outlined in the table below, the answer is yes.


Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 1


Setting aside the TARP adjustment, year-over-year growth in the deficit for March still grew 3.2% year-over-year.   The key drivers on the spending side of the equation include $3BN more spending on Medicare, $3BN more in net interest on public debt, $2BN more in social security, and $2BN more in education.


In the year-to-date, the deficit numbers are as dismal as the monthly numbers.  The preliminary deficit for the first 6 months of the fiscal year was $-830BN, which is a $113BN increase versus the same period last year.   While revenues were up $66BN year-over-year, expenditures by the Federal Government were up an amazing $179BN. 


Once again, though, the Treasury Department offers us adjusted numbers for the full year, which suggest that expenditures only grew by 1% year-over-year if we add back the adjustment for TARP.  Although, interestingly, in its analysis the CBO actually does not back out spending from ARRA (American Recovery and Reinvestment Act) in 2010, which was $30BN in the comparable period. 


In the table below, we’ve simply laid out key expenditure line items and their year-over-year rate of change.  For purposes of this analysis, we left out the historical adjustments to TARP.  Every single line item grew on a year-over-year basis except unemployment.  Not exactly great cost containment by the Federal Government in the first six months of this fiscal year.


Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 2


In the last chart below, we’ve shown the monthly U.S. federal deficit numbers going back three years.  This chart is about as ugly as it gets for the fiscal outlook of a country.   In the last 36 months, the U.S. federal government has run a deficit in 33 of 36 months.   Clearly, if those were the cash flows of a company, it would have been in bankruptcy protection months, if not years, ago.


Daryl G. Jones

Managing Director


Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 3


Notable news items and price action from yesterday, including our fundamental view on select names.

  • CBOU was reiterated “Buy” at Jeffries.
  • CMG is facing some heat in the media this morning as fired workers allege the burrito chain was soft on immigration, with many managers allegedly having been told explicitly that papers were falsified. 
  • CMG has unveiled additional details for its new restaurant concept open this summer.  ShopHouse Southeast Asian Kitchen is inspired by the traditional shophouses found throughout Thailand, Malaysia, and Vietnam.
  • BWLD has launched a redesigned menu that encourages guests to mix and match food selections with the chain’s signature sauces.  The menu also features 10 new items.
  • Casual dining companies are struggling in the battle to identify underage drinkers.  The recent scandal surrounding an Applebee’s in Michigan serving a toddler alcohol does not appear to have been an isolated incident.  An Applebee’s in California made the same mistake (different toddler) in 2007 and, according to media reports out today, a Florida youngster was served sangria during a visit to an Olive Garden restaurant.
  • COSI gained 4% on strong volume yesterday.
  • CBRL and BWLD gained on strong volume yesterday.  Oil prices declining sharply was a strong positive for CBRL.



Howard Penney

Managing Director

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The Macau Metro Monitor, April 13, 2011




S'pore Prime Minister Lee Hsien Loong does not think there will be a hike in the Goods and Services Tax.  "I very much doubt that, unless we go wild in our spending plans and of course we'll run out of money and then you'll have to raise the GST.  But if we have prudent budgets and we're careful in our plans and if we grow the economy, I think we should be in good shape."


PM Lee also mentioned that the government will invest carefully, with returns going towards funding programs such as the S$3BN Grow and Share package.  Under the package, households will receive S$3,000 to S$4,000 this year, depending on the household income.



Chief gaming regulator Manuel Joaquim das Neves said that in the short term (5 years), he doesn't see much impact from the opening of casinos in Taiwan on the Macau gaming sector, but it could be a very different story in the medium term.  Neves also said the new smoking law could see some gamblers look elsewhere.

America's Last Entitlement

This note was originally published at 8am on April 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.

“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes


What’s worse right now, American fiscal or monetary policy? Sadly, that’s a tough call. As the world embraces the idea of a US Government Shutdown this morning (yes, many of us would like to see these people stop what they are doing), even John Maynard Keynes is rolling over in his grave. The US Dollar Index is trading down at fresh YTD lows of $75.14.


Let’s take a look at both sides of what drives a country to “debauch the currency” (looking at Europe vs USA, straight up) and the immediate-to-long-term risk management implications for your portfolios:


1. Monetary Policy


As anyone who has traded a currency market in the last 40 years knows, currencies trade not only on the direction of a country’s monetary policy (hawkish or dovish), but relative to other countries with competing policy views.


For the 1st time in 40 years, the Europeans raised interest rates before Americans did yesterday. Notwithstanding the colossal failure of common sense associated with The Bernank opting to starve the American common man with inflation and a zero percent return on his savings account, it’s important to recall that Trichet’s rate hike didn’t come from the zero bound. He was already at 1% and he moved to 1.25%. That’s bullish for Euros versus Dollars.


In justifying the interest rate hike, the ex-Finance Minister of France told the world, “You know from our own doctrine that we always do what is necessary to deliver price stability.” In the immediate-term, even for the left-leaning Frenchman, that is pseudo-true. Relative to The Bernank, it’s very true. With the USD down for 11 of the last 15 weeks, Bernanke is perpetuating the highest PRICE VOLATILITY that commodity markets have ever seen.


2. Fiscal Policy


On a relative basis versus Europe, particularly relative to the United Kingdom, the United States of America isn’t even in the area code of where capital market winds have blown European politicians. Since many European markets can’t mark-their-bonds-to-model like Geithner and Bernanke have attempted to mark US Treasuries, austerity measures have either been imposed by popular vote (UK) or by market vote (Portugal). Both votes count.


Many Americans have found rhetorical resolve in calling Europeans “pigs”, and that might feel all good and fine if you’re an American living large on a banking fee or a Washington retainer, but that doesn’t change the reality of what the rest of the world rightly started calling Boehner and Reid this week – donkeys.


While the “audacity” of President Obama’s “hope” is clearly not an investment process that global currency markets are long of (to the contrary, the largest short position in US Dollars, ever, implies the world is betting against the 112th Congress in size), an earthshaking culture shock to the Big Government Spending model is the only thing Americans can hope for.


3. Long Dollar, Short Euro, Short Commodities?


That would be the most contrarian (and least profitable) call you could have made in the first 3 months of 2011. And that’s exactly why you should be asking yourself if The People can govern the government as the US Constitution asks them to. Betting against professional politicians of a centrally planned state is easy – betting against the common sense of the sometimes Forgotten Man (Amity Schlaes) in America is a losers’ long-term bet.


I think my defense partner, Daryl Jones, asked the most contrarian question on US Fiscal Policy yesterday that you can ask yourself right now, “Could The Ryan Budget Be The Most Economically Bullish Legislation of Our Lifetimes?” (send us an email if you’d like a copy, sales@hedgeye.com)


This isn’t a partisan point. Remember, I am Canadian – and I edit Big Alberta’s work. If a Democrat or a talking monkey were to put a legitimate spending cut bill on the floor we’d be asking the same question. I really don’t care what it takes, or who sponsors it – arresting the Debauchery of the US Dollar has become a national security issue for America’s standard of living.


You don’t have to take my word for it on what happens when you burn your currency at the stake. History is littered with examples. This is not the best long-term path to prosperity. If you are a raging Republican or a dogmatic Democrat who has supported Big Government Intervention for the last decade, all you need to do is take the Keynesian Kingdom call on this from John Maynard Keynes himself – “The best way to destroy the capitalist system is to debauch the currency.”


If you’re really long The Inflation this morning (LONG: oil, gold, etc; SHORT: dollars, US Treasuries, etc), this idea of combining fiscal and monetary conservatism should scare the hell out of you. When you consider that The Bernank has not only perpetuated unprecedented Price Volatility AND the largest NET-LONG position that the hedge fund industry has EVER had in commodities – you should be afraid, very afraid. I am.


But we are all big boys and girls managing risk out here on the Global Macro gridiron, so suck it up, take a deep breath, and pray. Because, at a new all-time record high price for Gold this morning of $1470/oz and $111.56/barrel oil, there’s a new bubble in town – the bubble of America’s Last Entitlement. Cheap money and donkey politicians won’t last forever.


My immediate-term support and resistance lines for oil are now $107.16 and $111.59, respectively. My immediate-term support and resistance lines for the SP500 are 1312 and 1343, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


America's Last Entitlement - Chart of the Day


America's Last Entitlement - Virtual Portfolio

CHART OF THE DAY: Beta Chasing Will Eventually Leave a Mark



CHART OF THE DAY: Beta Chasing Will Eventually Leave a Mark -  chart

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