R3: WMT, GOOG, Luxury Brands, & Premium Denim





May 10, 2011






Wal-Mart's Africa Foothold Shaky as Job Worries Mount - The South African government warned that Wal-Mart Stores Inc.'s $2.4 billion proposed acquisition of African retailer Massmart Holdings Ltd. could cause thousands of job losses and worsen labor conditions, throwing cold water on one of the country's biggest potential overseas investments. The warning Monday came in an official report submitted to the Competition Tribunal of South Africa, an independent body that will approve or reject the deal. Local unions have opposed the proposed deal because of concerns about job losses. Wal-Mart's proposed acquisition of Massmart marks its first foray into the growing sub-Saharan market. Africa's prospects have proved alluring for the world's largest retailer, which plans to use the South African discount retailer as a foothold for continental expansion. <WallStreetJournal>

Hedgeye Retail’s Take: It’s hard to ignore the continent’s population of 1 Billion customers, but acquiring Africa’s third largest retailer presents discrete political risks to Wal-Mart unlike any it’s had to navigate before. While the bidding process continues to unfold in Africa, we suspect the company will remain more focused on growth in more developed countries.  


Google Music Service will Take on Amazon and Apple - Google will unveil details of its long-awaited music service on Tuesday in the battle with Amazon and Apple for the next generation of portable listening. The cloud-based music player will allow users to upload and store their music on the internet and listen to it on Android phones or tablets and computers. A Google spokesman said: "We plan to announce Music Beta by Google at our Google I/O developer conference. Please tune in to Google I/O Live on Tuesday and Wednesday for more details on all the news."It is similar to a "digital music locker" service launched by Amazon, the Amazon Cloud Player, in March, and will rival Apple's iTunes by giving Android users an easy way to store and listen to their music collections. But Google, like Amazon, is not thought to have done any deals with major record labels, offering a streaming listening service rather than one in which users can share songs or download the files themselves. <Guardian>

Hedgeye Retail’s Take: Content is king here and while Amazon and Google are new entrants to the music space, they’re participating in a different game of sorts and one that’s more competitive given the lower barriers to entry.


Introducing “” - An informational and e-retail site for book lovers will debut this summer. is backed by three major publishing houses—Hachette Book Group, Penguin Group USA and Simon & Schuster—and will sell print and digital e-books from those publishers and others. In addition to e-commerce, the site will feature original editorial content about books and authors designed to help consumers find something to read. The site will feature multiple book genres and enable readers to recommend books to each other. The company says editorial content will remain independent. “Bookish enjoys the support of significant, established players in the publishing and online space,” says Paulo Lemgruber, Bookish’s CEO. “With our ability to leverage the knowledge of publishers, retailers and authors, Bookish is innately positioned to fuel people’s passion for books.” Lemgruber is a former senior vice president of digital and operations at cable company Comcast Corp. <InternetRetailer>  

Hedgeye Retail’s Take: Publishing houses looking to capture mindshare in e-commerce with a platform that provides editorial content is a solid move in an effort to remain relevant in light of the industry’s massive consumer vacuum that is the e-book revolution. Concerns over just how independent content might be are trumped by empowering user recommendations and therefore democratizing the rating system -a move that has proven highly successful for Facebook. Not only does this give publishers valuable input from it's customers, but it also establishes a platform from which they can promote product directly - win-win.


Palladium Expands From Footwear to Bags - Palladium has long been known for the company’s signature fold-over sneaker boot, which has served many as a sort of upgraded, more rugged Converse Chuck Taylor. The boots and sneakers are available in many different styles, but all retain a simplicity that is true to the brand. Palladium is now expanding to include a small line of bags in the collection, which also seem to maintain the rugged simplicity of the brand’s shoes.   <Digitaltrends>

Hedgeye Retail’s Take: A little known brand to most, K-Swiss acquired it back in 2008 and it’s quietly grown to account for ~15% of sales from less than 3%. The company is making a calculated move across its brands to grow the apparel component of its business. As we noted yesterday, with less than 8% of the company’s sales  derived from apparel, this is a substantial opportunity that we expect the company to grow at a measured pace consistent with how it’s approached this type of opportunity in the past.


Luxe Brands Lagging 2008 Ratings - Apparel brands have nearly regained their prerecession vibrancy, but despite the recent rally in high-end spending, luxury names still have a way to go before they get back to 2008 levels, according to the recent BrandZ Top 100 Most Valuable Global Brands study. The total value of apparel brands rose 10 percent compared with the results of the 2010 study, and are just 1 percent below their 2008 level. The value of luxe brands has been expanding more rapidly, growing 19 percent versus last year, but the well-heeled names are still worth 13 percent less than they were in 2008. The study was conducted by Millward Brown Optimor and attempts to determine the intrinsic value of a brand by estimating the sum of all its future earnings and discounting that figure to a present-day value. <WWD>  

Hedgeye Retail’s Take: Sure, luxury is still off its 2008 highs more than apparel, but with three iconic luxury brands (Burberry, Hermes, and Cartier) making the reports Top 20 Risers list this year posting an average brand value growth of 53% yy one could argue that luxury is making up ground quickly. Interestingly, only two brands among the Luxury categories Top 10 brands by value declined since last year, Gucci and Hennessy down -2% and -7% respectively.


Premium Denim Resurrected? - Get ready for the bounce. New denim silhouettes and washes are reinvigorating what many retailers described as a decelerating denim trend last year. According to denim vendors and retailers, as the economy improves, the female customer is coming back — and not just to replace the jeans she already has, but to add new, fashion-forward looks to her closet. “Business overall is doing much better than our retailers have planned, be it at department stores or specialty stores,” said Marc Crossman, president and chief executive of Joe’s Jeans Inc. “It really comes down to a magnitude shift…now there are some major trend changes that I think will have an impact on that mix shift.” New Sixties- and Seventies-inspired silhouettes, white jeans and special washes are pulling the category back to relevancy, which is helping to “reignite” the premium denim market, said Crossman, who noted that like his competitors, his company is adding newness with wide legs and flares available in “all flavors, be it fabric or washes.” <WWD>

Hedgeye Retail’s Take: Whether it be flared leg jeans for Joe’s, or a continuation of skinny and colored styles as highlighted by True Religion, the fact that there are new styles out there that the consumer is responding to in some regard is a clear positive in that we may have finally reached a point of stabilization in the premium category. Let’s not get carried away thinking that the $200 jean growth engine is back, but no longer declining is a close second on the margin.


China Footwear Imports to U.S. Slow - China is feeling the impact of rising labor costs as U.S. footwear firms shift sourcing to other countries. According to a report issue Monday by UBM Global Trade’s Journal of Commerce, China's share of footwear imports to the U.S. dropped to 73 percent in the first quarter of 2011, from 75 percent in the first quarter of 2010. And while U.S. foreign demand for footwear in 2010 grew 16 percent year-over-year, Vietnam and Indonesia saw higher rates of growth compared with China, indicating sourcing shifts to those markets, the study found. China's share of U.S. imports is also waning in the labor-intensive apparel categories. In menswear, it dropped to 22 percent in the first quarter of 2011, from 25 percent in the first quarter of 2010; while women's and infants' wear decreased to 31 percent from 34 percent. “The results of this analysis underline the change of trend direction in U.S. imports of footwear and apparel from China, from upward to flat to downward, as manufacturing firms flee the country on rising wages,” said Mario Moreno, economist for The Journal of Commerce. <WWD>

Hedgeye Retail’s Take: The speed of exit/shift has varied among brands, but the move in aggregate was has been well communicated for nearly a year now. While many remain focused on share shift in southeast Asia, brands are increasing activity and attention to Central and South America as new potential sources of production – something we expect to hear more about in 2011.






Correlation Risk: SP500 Levels, Refreshed



It’s pretty clear that the institutional investing world’s consensus is cheering on another US Dollar Debauchery. Most people are still long The Inflation. Fundamentally, that’s not a good thing for the country - that’s just how part of the country gets paid.


What that is going to look like if it does in fact occur from this price level in the US Dollar Index is very confusing. Will that be the last blast up to lower-highs for commodities and equities? Will US equities make higher-highs on astonishingly low volume? Or will the ongoing crash in the US currency ultimately come home to roost for everything priced in US Dollars like it did in Q208 (and last week)?


Critical questions and critical lines in the SP500 continue develop as we push with a full head of steam out of the beloved (and cyclical) “earnings season” and into the hottest macro calendar of politicking (May/June deficit and debt ceiling debate) that we have seen in a very long time.


Across our 3 core risk management durations (TRADE, TREND, and TAIL), here are my lines: 

  1. TRADE (3 weeks or less): TRADE line support of 1334 continues to hold and should be given the bullish benefit of the doubt until it breaks.
  2. TREND (3 months or more): support remains at 1314 (down -3.6% from the YTD high of 1363) and should come into play if we see a TRADE line break of 1334.
  3. TAIL (3 years or less): lower-long-term highs (much like Japanese equities since the 1990s) will be the result of trying to devalue our way to cheap debt financed prosperity – current range of scenarios can get me as high as 1377 and nothing will have changed my long-term view of how all this ends. 

The Price Volatility driven by The Heavy Hand of government intervention isn’t for me. I’ve tightened up the net exposure of the Hedgeye Portfolio to 13 LONGS and 12 SHORTS on this morning’s strength in global market prices.



Keith R. McCullough
Chief Executive Officer


Correlation Risk: SP500 Levels, Refreshed - 1


Notable news items and price action from the past twenty-fours along with our fundamental view on select names.

  • DRI’s Olive Garden received a warning but no fine following a Florida state investigation into how a toddler was accidentally served sangria at a Lakeland restaurant.
  • TAST reported 1Q11 EPS of $0.10 versus consensus at $0.12.  Comparable restaurant sales increased 13.5% at Pollo Tropical, 2.0% at Taco Cabana, but decreased 5.0% at Burger King.  Guidance is for comps to come in at +6-8% at Pollo Tropical (versus 3-5% previously) and to increase 2-3% at Taco Cabana (versus 1-2% previously).  Burger King comparable sales are expected to be negative for the full year but improving in 2H11.
  • TAST declined 1.2% on accelerating volume yesterday, ahead of the earnings miss.
  • KKD gained 7.2% on accelerating volume. 
  • CPKI and CBRL declined on accelerating volume.




Howard Penney

Managing Director

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TODAY’S S&P 500 SET-UP - May 10, 2011


Yesterday, we saw the USD down to start the week (down for the 15th week of the last 20), which had CRB Index ripping yesterday (+2.1%) after getting crushed last week (down -8.9% for the wk).  Oil moved back above our intermediate-term TREND line of support = $98.63 and Gold continues to look better than almost everything that’s big and liquid other than maybe the German DAX. As we look at today’s set up for the S&P 500, the range is 17 points or -0.99% downside to 1334 and 0.35% upside to 1351.




The Hedgeye models now have 7 of 9 S&P Sectors bullish TRADE and 8 of 9 bearish TREND.  The XLF is the only sector broken on both durations. 




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +1181 (+188)  
  • VOLUME: NYSE 778.48 (-24.18%)
  • VIX:  17.16 -6.47% YTD PERFORMANCE: -3.32%
  • SPX PUT/CALL RATIO: 1.94 from 1.85 (+4.61%)



  • TED SPREAD: 24.55 -1.521 (-5.834%)
  • 3-MONTH T-BILL YIELD: 0.03% +0.01%
  • 10-Year: 3.17 from 3.19
  • YIELD CURVE: 2.60 from 2.62 



  • 7:30 a.m.: NFIB Small Business, est. 91.8, prior 91.9
  • 7:45 a.m.: ICSC-Goldman weekly retail sales
  • 8:30 a.m.: Import price, est. 1.8% (M/m), prior 2.7%
  • 9:30 a.m.: Fed’s Duke speaks in St. Louis
  • 10 a.m.: Wholesale inventories, est. 1.0%, prior 1.0%
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 12 noon: DoE short-term energy outlook
  • 12:45 a.m.: Fed’s Lacker speaks on Arlington, Vir.
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 4:30 p.m.: API inventories


  • China’s April inflation data due out tomorrow.
  • Microsoft close to completing $7B for Skype - WSJ
  • Google online music service to probably be announced tomorrow at Google I/O developers conference - WSJ



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Crop Weather Damage Grows as Europe Drought, Canada Rain Boost Grain Costs
  • Oil Inventories Increase to Near a Two-Year High in Survey: Energy Markets
  • Sugar Rises Most in Six Weeks as Imports Into China May Jump; Cocoa Gains
  • Wheat Gains for Third Day as Adverse Weather Threatens Harvests Worldwide
  • Copper Climbs for a Third Day Before Release of Figures on China Inflation
  • Copper Imports by China Decline on Ample Supplies, Higher Overseas Prices
  • Gold May Advance as Sovereign-Finance Concern Stokes Demand; Silver Gains
  • Malaysia Smelting Climbs to Three-Month High as Tin Prices Produce Profit
  • Mississippi Flooding Threatens Cropland, Refineries and Shipping Traffic
  • Soybean Imports by China Tumble on Canceled Orders as Stockpiles Stay High
  • Palm Oil Stockpiles, Output Reach Six-Month High in Malaysia on Weather




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Greek banks jump on talk country to avoid debt restructuring.  But…
  • Greece denies report it is discussing new aid package -- Reuters, citing Greek Finance Minister
  • France Mar Industrial output (0.9%) m/m vs consensus +0.4% 







  • Most Asian markets that were open today ended a higher
  • Hong Kong was closed for Buddha’s Birthday.
  • South Korea was closed for Sukka Tansin II.
  • China April trade surplus $11.4B vs consensus $1-3B. Australia March trade balance A$1.74B vs consensus A$500M.












Howard Penney

Managing Director


The Macau Metro Monitor, May 10, 2011



Pansy Ho's non-compete agreement with MGM China Holdings will let her keep her directorship and 3.77% minority stake in STDM, the parent of SJM Holdings.  MGM China said, "As Pansy Ho is a director and substantial shareholder of the company, she does not intend to participate in board decisions of STDM which concern the exercise of rights attaching to its indirect majority shareholding in SJM."  In addition, Ho and her associates can own shares in STDM as long as they do not directly or indirectly control the firm, and so long as STDM's Macau casino investments are confined to publicly listed SJM.


Any breach of the non-compete agreement by Ho that is triggered by the activities of STDM, SJM or Shun Tak Holdings would give her 30 days to resolve the situation. Ho would then have three options: undo such a breach of the agreement, sell down her stake in MGM China to below 20%, or sell down her stake in Shun Tak, STDM or SJM to a level that "no longer causes a breach".


Because of a legal battle between the operators of American celebrity nightclubs Pangaea and Avalon and a former partner, MBS said the clubs' opening in July 2011 will be delayed by at least another month. Also, MBS is moving ahead with a new parter after Kraze, which has ties with South Korean entertainment company Krazetech, failed to get the intellectual property rights to operate the clubs under the brands, Avalon and Pangaea.



Housing transactions fell in 25 of the 35 key cities monitored by the China Real Estate Index System (CREIS) in the week of May 2-8, following a short-term boost over the three-day Labor Day holiday, although prices remain high.  Of the nine most closely watched cities - Beijing, Tianjin, Shanghai, Wuhan, Nanjing, Guangzhou, Shenzhen, Chengdu and Chongqing - seven saw week-on-week declines.

Ragingly Bullish Bears

This note was originally published at 8am on May 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Forget about style; worry about results.”

-Bobby Orr


Last night, after the Boston Bruins scored 2 goals in the 1st minute of the 1st period against the Philadelphia Flyers in the Stanley Cup Playoffs, I found myself high fiving friends in the Boston Garden amongst 18,000 of the most Ragingly Bullish Bears I have seen in my life.


Bears wearing black and gold jerseys have been pounding Boston’s pavement since the Bruins were born in 1924. While I’m not a long-time Bruins fan, I can assure you that the best risk managed position I could assume last night was to be one for the night.


Bears, Bud Lights, and belting heavy metal music with the Bruins about to go up 3-0 in a playoff series in May is as bullish a 3-factor model as a hockey fan can recognize. It’s been a long time. They haven’t won The Cup since Bobby Orr (1972). These bears are hungry.


How Ragingly Bullish are you?


While sentiment is one of the more difficult risk management factors to quantify, we do have some qualitative data that we overlay with our models. In mid-February, one of the key sentiment signals we called out in calling for a US stock market correction was the Institutional Investor (II) Bullish-to-Bearish survey.


Like most surveys, this one is far from perfect – but if measured relative to itself, you can at least consider little mathematical critters that matter like mean reversion and spread risk.  


So let’s forget about the style of this survey for a second and consider the results:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.


Of course, with Correlation Risk to the US Currency Crashing running at all-time highs (see yesterday’s EL note to see how we quantify that), that definitely doesn’t mean you couldn’t try riding that Silver bull to the bitter end. But remember, the last 8-seconds of that ride is where all your risk really lives.


Interestingly, but not surprisingly, all it took to rock the raging inflation bulls’ world for a few days was some deflation.


How do you Deflate The Inflation (one of our Q2 Global Macro Themes)?


You stop the Currency Crash in the US Dollar.


For the week-to-date, after closing down for 14 of the prior 18 weeks, all it took to Deflate The Inflation was an arrest of the US Dollar’s decline. For the week, with the US Dollar Index trading flat, pull up a some of the following charts and you tell me how Ragingly Bullish you are on being long The Correlation Risk:

  1. Gold
  2. Silver
  3. Oil
  4. Cotton
  5. Copper
  6. Energy stocks

I can tell you that I for one am not enthused about being long Gold and Oil this week. When this gargantuan global carry trade of Gaming Policy unwinds, we can all forget about debating risk management styles and see who is left standing. Mr. Market owes the fans nothing.


My immediate-term support and resistance lines for Gold are now 1488 and 1526, respectively. Immediate-term support and resistance lines for oil are now $107.11 and $109.54 and my immediate-term lines of support and resistance for the SP500 are now 1332 and 1371, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Ragingly Bullish Bears - Virtual Portfolio

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