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The Macau Metro Monitor, May 23, 2011



According to Chosun Ilbo, Steve Wynn said the company may consider expanding into Singapore or South Korea, if allowed.  Wynn is ready to invest $2-3BN in South Korea if the government allows its citizens entry into casinos.



Total visitor arrivals increased by 10.7% YoY to 2,338,449 in April 2011.  Mainland China visitors increased by 20.7% YoY to 1,270,753 (54.3% of total visitor arrivals), mostly coming from Guangdong Province (628,970), Fujian Province (76,145) and Zhejiang Province (47,188); those traveling to Macao under the Individual Visit Scheme totaled 495,424, up by 27.0% YoY.  Visitors from Hong Kong (709,053) and the Republic of Korea (25,865) increased by 2.1% and 2.4% respectively, while those from Taiwan (110,410), Malaysia (27,122), and Thailand (24,468) decreased by 1.3%, 10.8% and 3.6% respectively.





WSJ: Do you have anyone in mind to become the next CEO of Wynn?

Steve Wynn: ...there are a score of young people who are very smart and very healthy, in Nevada and Macau. Incidentally, Linda Chen [chief operating officer of Wynn Macau] is on the board of the parent company. So if you ask me who could do it? A Chinese woman.


WSJ: Why has it taken so long to get the go-ahead to build in Cotai?

Steve Wynn: This current government is very meticulous. We've noticed a very definite tightening of attention to detail. Things happened faster when they were starting up. Now [the government is] managing a rather big industry.



S'pore CPI rose 4.5% YoY, a little lower than the 5% increase seen in March.  The core inflation measure rose 2.2% YoY and 0.6% MoM.




TODAY’S S&P 500 SET-UP - May 23, 2011


With the US Dollar Index holding the Hedgeye immediate-term TRADE line of 74.41, the question now isn’t will it hold support; how high will it go from here, and how low will everything that’s correlated to it fall?   As we look at today’s set up for the S&P 500, the range is 19 points or -0.92% downside to 1321 and 0.50% upside to 1340.









  • ADVANCE/DECLINE LINE: -951 (+1503)  
  • VOLUME: NYSE 992.37 (+13.78%)
  • VIX:  17.43 +12.31% YTD PERFORMANCE: -1.80%
  • SPX PUT/CALL RATIO: 2.08 from 1.80 (+15.24%)



  • TED SPREAD: 21.69
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.15 from 3.17
  • YIELD CURVE: 2.60 from 2.62 



  • 8:30 a.m.: Chicago Fed National Activity Index, est. 0.20, prior 0.26
  • 11 a.m.: Export inspections: corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
  • 4 p.m.: Crop conditions
  • 8:10 p.m.: Fed’s Bullard speaks on economy in Missouri    


  • U.S. gasoline fell 9.24c to $3.9074/gallon over past two weeks, Lundberg Survey said; another dime drop is possible
  • A congressional agreement to increase the U.S. debt limit may take until August, Paul Ryan, the Republican chairman of the U.S. House Budget Committee, said yesterday  
  • Dell to introduce $999 laptop 24-May - WSJ 






  • Oil Declines Amid Concerns Over U.S. Economic Growth, Greek Debt Default
  • Speculators Cut Bets Food Prices Will Keep Rising as Supply Concern Eases
  • Hedge Funds Cut Bullish Bets on Crude to Three-Month Low: Energy Markets
  • Copper Slides Most in Two Weeks as Manufacturing Growth Weakens in China
  • Rubber Futures in China May Extend Decline From Record: Technical Analysis
  • Corn Climbs to Highest in a Month on Concern Rains to Delay U.S. Planting
  • Cocoa Falls as Ivory Coast Inaugurates President Ouattara; Sugar Declines
  • Gold May Advance for a Second Day on Increased Europe Debt-Crisis Concern
  • Nickel Market to Return to Balance From Deficit, Norilsk’s Kuznetzov Says
  • Coal Exports From U.S. Reach 20-Year High on Australia Floods, SSY Says
  • Cocoa Is Poised for 13% Drop as Cargill Resumes Exports From Ivory Coast
  • Mitsubishi Materials Cuts Copper Output 22% After Earthquake Halts Smelter
  • Bonds Wrecked by Inflation Send Record Money Into Gold Funds: India Credit
  • Bullish Wheat Bets by Hedge Funds Drop 54% as Concern About Supply Eases







  • A nasty selloff today with everything from Petro$ (Russia) to Pigs (Italy -3%) getting blasted; we're long DAX which is holding TREND (barely).
  • Eurozone May Preliminary Manufacturing PMI 54.8 vs consensus 57.4 and prior 58.0; Eurozone May Preliminary Services PMI 55.4 vs consensus 56.5 and prior 56.7
  • Germany May preliminary Manufacturing PMI 58.2 vs consensus 61.0 and prior 62.0; Germany May preliminary Services PMI 54.9 vs consensus 57.0 and prior 56.8
  • France May preliminary Manufacturing PMI 55.0 vs consensus 57.0 and prior 57.5; France May preliminary Services PMI 62.8 vs consensus 62.0 and prior 62.9
  • Greek falls behind on payments to medical suppliers - FT






  • A flat out ugly session with China down -2.9%, Indonesia -2.4% and India down another -1.8% to -12.3% YTD (we're short India and Thailand)
  • Japan April supermarket sales (1.3%) y/y.
  • China May HSBC preliminary PMI 51.1 vs April final 51.8 









Howard Penney

Managing Director


A Very Important Probe we completed suggests that Chinese Government tightening is a statistically significant, albeit lagging, driver of VIP volume.



Our sales force likes to make fun of me for promoting my “statistical background”.  Just because they made fun of people like me in high school, doesn’t mean that there isn’t some real world applications for my passion.  OK, passion may be a strong word but since the average sell side analyst thinks regression means to walk backward, I think we may have a “leg” up in this category.  Man, that Michael Jackson was regressive!  For the youngsters out there, that’s a moonwalk reference.


According to our regressions, VIP volume has an incredibly high correlation to the China Lending Rate and the China Reserve Requirement Ratio.  The Rate and Ratio drives VIP volumes on a lag basis, peaking at 12 month and 9 month, respectively.  The R Squares are a whopping 0.61 and 0.73, respectively, with T-Stats of -7.3 and -9.7.  T-Stats above 2 or below -2 are generally considered statistically significant.  Even though the statistical relationship between Rate and VIP Volume and Ratio and VIP Volume peak at lags of 12 and 9 months, respectively, they become significant at 6 and 3 months lag.


Theoretically, this makes a lot of sense.  The junkets are fueled by liquidity and credit.  A lower discount rate and lower reserve requirements drives higher liquidity and higher junket volumes, and vice versa.  Many people thought that the Chinese tightening that began last fall would have had an impact on the VIP business, yet VIP kept on its explosive trajectory that it maintains today.  The stocks have had great runs and not many people seem to be focused on a VIP slowdown.  However, the statistical lag of up to 11 months could explain why we haven’t seen an impact from tighter money, yet.


If the historical relationship holds, we could see a slowdown this summer in VIP.  If this happens, the Macau gaming stocks would be under significant pressure.   We monitor Macau gaming activity on a weekly basis so hopefully we will be early on discerning a slowing trend.  The companies most exposed to VIP are Wynn, MPEL, MGM Macau, Galaxy (post Galaxy Macau opening), SJM, and Sands China.


The charts below accurately depict the inverse relationship of both variables:





Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Week Ahead

The Economic Data calendar for the week of the 23rd of May through the 27th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

The Push and Pull of Europe’s Borders and Demographics

Positions in Europe: Long Germany (EWG)


"Free movement is to Europe what foundations are to buildings. Remove it and the whole structure is undermined."

- Jose Manuel Barroso, President of the European Commission


With the European diaspora an ever-present and important topic, over the last month we’ve witnessed a few critical policy decisions and events in Europe that are worth revisiting: 1.) Denmark’s decision to close its borders with Germany and Sweden (in opposition to the Schengen agreement); 2.) the lifting of restrictions on foreign workers from Eastern Europe by Germany and Austria; and 3.) unemployment protests in Spain this week.


Certainly, the global recession and current austerity programs throughout Europe have left governments and citizens with less jobs, purchasing power, confidence, and increasingly we’re seeing rising nationalism and populism in response. Concerning Denmark—but more broadly in relation to all European countries—we believe the decision to guard and limit movement across borders is the wrong tact: not only are immigrants increasingly critical to head off demographic headwinds and promote growth, but with the EU the largest trading partner of most member countries, tighter borders threaten the exchange of goods and services.


The Germans, despite their haste in opening its borders to the East, should understand the need for immigration the best—they have the oldest population across the region, followed by Italy, and need a younger workforce and generation to pay for its social welfare state.  Separately, the case of unemployment protests in Spain reveals the importance of managing growth within an economy. The boom to bust housing bubble in Spain created tremendous growth (and a large influx of immigrants), but now the country is faced with the longer term prospects of low growth and high unemployment. Our chart of youth unemployment shows the tail impact of these imbalances.  


Where appropriate within these topics we also splice in analysis from the European Commission’s 2010 Demography Report, which offers a wide breadth of analysis but critically notes that Europe’s population growth is, and will remain, predicated on net migration. While the ultimate challenge for governments remains creating the right mix of an open door immigration policy to fuel growth while not straining the social system, a main take-away of the report is that as Europe’s population ages (think Baby Boomers), younger generations of foreigners will be increasingly needed to support them.



A Danish Fort: Porous Borders Assaulted


Late last week Denmark made a bold move in the eye of many European officials—it decided to reinstate guards on its borders with Germany and Sweden. The decision went against the open border principle of the Schengen agreement, a treaty signed in 1985 by five of the ten member states of the European Economic Community that officially went into effect in 1995 (and was later adopted by all EU countries, excluding the UK and Ireland) and holds the Schengen Area as a single state for international travel with border controls for travelers entering or exiting the area, but with no internal border controls.


In Denmark, the decision on border controls became a political bargaining chip: the right-leaning Danish People’s Party agreed to sign off on PM Lars Lokke Rasmussen’s center-right minority government’s plan to raise the retirement age, cut retirement benefits and issue additional austerity measures. 


The agreement was branded by the Danish government as a necessary measure to “fight the rise in cross-border crimes.” Yet the European community quickly called foul, stating that while under Article 23 of the Schengen Borders Code, a member can in fact reintroduce controls at inner EU borders "in the event of a serious threat to public order or national security for a maximum of 30 days or as long as the "serious threat" persists”, there was no evidence of a “serious threat” in Denmark. 


Importantly, Denmark’s pronouncement came in the context of heightened worries about immigration across Europe in recent weeks, mainly from Italy and France, two main destination countries of an estimated 25-30K Northern Africans, mainly Tunisian, fleeing unrest at home. France and Italy clashed in mid and late April after France stopped a train from Italy carrying Northern Africans and tensions again flared after Italian authorities gave undocumented migrants (many of them French-speaking Tunisians with their eye on France) temporary residency permits, effectively allowing them to travel freely to other European countries.


Relations have improved since Italian Prime Minister Silvio Berlusconi and French President Nicolas Sarkozy signed a joint letter to the EU in late May to demand that the Schengen agreement on border controls be amended to take into consideration the "exceptional" migration from North Africa, yet an agreement remains in limbo until a formal decision is concluded at a summit meeting of EU leaders on June 24th.   


Hedgeye’s Take: We’re of the opinion that the migration of Northern Africans is an “exceptional” event. Temporary border controls must be considered to control this influx and the EU must shoulder the burden for funding additional personnel. Ultimately, discussions must include funding for temporary and permanent shelter and resettlement facilities as well as quotas for arriving migrants. Clearly, no one country, due to its geography, should solely be responsible for dealing with these exceptional circumstances, however, unfortunately it looks like it will be some weeks before we get clarity.


Returning to Denmark, we do not think there is credible evidence of serious threat from its borders with Sweden or Germany; the move is solely a populist concession to the Danish People’s Party. Interestingly, the European Commission’s 2010 Demography Report notes that in 2009, there were about 1 million cross-border workers within the EU, representing 0.4% of the working population. While the number of persons crossing borders for work appears de minimis, the transfer of goods and services is not, with the EU the largest trading partner of most member countries.  Temporary to permanent borders controls for anything less than a “serious threat” within the EU/Schengen Area would hugely impact trade. 



Looking East and Germany’s Demographic Drivers


On May 1, Germany and Austria lifted restrictions on migrant laborers from Eastern Europe, which will allow the “new” (post 2004) EU member states of Poland, Czech Republic, Slovakia, Hungary, Estonia, Latvia, Lithuania, and Slovenia access to the labor markets of Germany and Austria.


Stepping back and looking at the 2010 Demography Report, what’s clear is that the population of the EU -27 is growing, while the age structure of the population is becoming older. That said, the rate of population growth has been gradually slowing in recent decades from 8 per 1000 inhabitants per year in the 1960s to 3.2 per 1000 per year in the period of 1.  A turning point came in the early 1990s, when net migration became the main driver of population growth and has since far outpaced natural change in the population.


In context, Germany has the oldest population in Europe, with a median age of Nationals at 44.5, whereas the Total Foreigners, which made up 11.6% of the population in 2009, averaged median age of 34.3 years (a consistent spread across most major western European countries). Below we provide a table of average median ages of nationals and foreigners across Europe. Noteworthy is that citizens of Italy (43.9), Luxembourg (43.0) and Greece (42.6) follow Germany for the oldest nationals on the continent.  


The Push and Pull of Europe’s Borders and Demographics - a1


Further the report shows that Germany has the oldest population aged 65 and older (20.7%), and the country’s aging is set to “proceed at a sustained pace until 2040 and then to almost halt in the 2040s and the 2050s.” As we show in the chart below based on the growth rate projections from the report (and here we focus on the main western European economies, plus Denmark given the write-up above)—it’s clear that short of the UK, all major western European economies will experience negative population growth by 2060.


The Push and Pull of Europe’s Borders and Demographics - a2


Turning to Germany’s increasing dependence on foreign labor as the population ages, the magazine Spiegel Online published an interesting article with Polish migration expert Krystyna Iglicka, who expects between 500K and 1 MM people to leave Poland for Germany in the next two years as a result of the lifted restriction. Citing demographers’ estimate that Germany needs 300,000 extra workers every year if the country is to maintain growth at 2 to 3%, Iglicka believes that given the geographical proximity of the two countries, Poles are more likely to work in Germany than they were in Ireland or Britain, where hordes moved in 2004 when Poland joined the EU.


And given the often cited fear that cheap labor from the East will steal jobs and push down wages, Iglicka said, “experiences with immigrants in Britain and Ireland have shown that this is absolutely not the case. Poles often take on the dirty, difficult jobs that Germans don't want to do themselves. In addition, Poles and other Eastern Europeans can assimilate much more easily than other ethnic groups. After all, they come from a Christian background, do not form ethnic enclaves and generate far less fear than immigrants from, say, Africa or Bangladesh.”


Hedgeye’s Take: With Germany’s aging population, more porous borders and lenient work and residency permits will help Germany maintain its competitive edge and drive growth. As the Demography Report states, immigrants will increasingly take a larger share of European populations, with estimates suggesting that in 2008 12.7% of the EU residents aged 15-74 were foreign-born or had at least one foreign-born parent, while in 2060 this group may more than double and exceed 25% of the population.



Spain’s Pains


As is well documented, the “Spanish Nightmare” is Spain’s slow transition from a decade-long boom to bust as a result of the leverage cycle finding her dark side. In particular, Spain's housing industry, which fueled much of the country's prosperity in the late 1990s to mid 2000s, has been turned on its head and prices continue to depreciate. As it relates to unemployment, many of the unskilled construction workers that fed the boom are now out on the street (or have returned home), with companies across all industries cutting jobs as the government struggles to issue austerity to cut a budget deficit of 9.3% of GDP.


This week saw unemployment demonstrations across the country ahead of regional and municipal elections this Sunday. Forecasts suggest PM Jose Zapatero and his Socialist Party are bracing for a crushing defeat. In any case, the discontent in Spain is commensurate with the highest unemployment rate in the industrialized world, at 21.2%, and frankly we’re a bit surprised the protests took this long!


As the two charts below present, not only is Spanish unemployment a full 10% higher than the EU average, but when we look at unemployment of individuals less than 25 years of age, the data is even more staggering. (And a similar argument could be made for Spain’s peripheral peers). While the data could be massaged in any number of ways, it’s fairly obvious that Spain faces a long tail of unemployment, and the probability of a lost ‘generation’ of youth is a very real threat that will weigh on the country’s social net for decades to come.   


The Push and Pull of Europe’s Borders and Demographics - a3


The Push and Pull of Europe’s Borders and Demographics - a4


To understand the context of the influx of workers to Spain we turn to the European Commission’s 2010 Demography Report, the Institute for the Study of Labor (IZA), and a 2009 IMF report on Spain. The charts below from the IMF clearly show the demographic ingredients that fueled the relationship between population growth and house prices and construction. Interestingly, Spain was second only to Ireland in average annual population growth, however immigrant growth in Spain on an aggregate basis far exceeded Ireland over the period. IZA notes that between 1 the foreign-born share in the working age population increased from 2 to 16%. In absolute terms, the foreign-born population increased from barely half a million to 5 million over the course of the decade, while the total (working-age) population increased from 26.7 to 31.3 million, implying that immigration was responsible for 98% of total population growth during the period. Based on IZA projections, this influx helped construct roughly 2 million new housing units!


The Push and Pull of Europe’s Borders and Demographics - a5


However, when the bubble burst in 2007, the overall decrease in the flow of immigrants to Spain was substantial. The Demography Report shows that the foreign population declined -31% from 2008 to 2009 and was mainly due to the reduced inflow of non-EU immigrants (down 35%) and fewer immigrants from the other EU-27 member states (down 25%).


While immigrants may continue their exodus from Spain, which may lessen unemployment rates and reduce the tax on the social state, Spain’s housing market is still far from the right track.


Two stories out this month caught our eye:


Firstly, Bloomberg reported that about 50,000 owners of beachside properties in Spain have lost rights to their homes after Spain’s coastal law was amended and applied retroactively to increased restrictions on coastal developments passed in 1988. According to PNALC, a group representing owners affected by the coastal law, as many as 500,000 could eventually be affected by the law. And even should homeowners win the right to keep their home, the law stipulates that owners of the homes in question can apply to extend their stay in the property for as much as 60 years, though they can’t sell it or pass it on to children, which clearly leaves the owner in a perilous state indeed.


While the law attempts to correct extensive cases of developers building on unclassified lands without appropriate permits, often for cash or other incentives, the pain is levied squarely on home owner who were often led to believe that they had proper documentation. According to a report by the savings bank Cajamar, Spain built 675,000 homes a year from 1997 to 2006, more than France, Germany  and the U.K. combined. Further, the development ministry estimates that British nationals account for about 31% of all foreign-owned homes in Spain.


Hedgeye’s Take: The implications of this law are naturally huge for the housing market. What foreign national is going to want to buy a home (and a significant amount want a coastal one) given the uncertainly if the home belongs to you?  And according to RR de Acuan & Asociados, a Madrid-based research company, the country has a surplus of more than 1 million empty homes, both new and existing—that’s a supply headwind that will have an impact for the years ahead!



Secondly, the FT reported this week that Banco Santander, BBVA and Caja Madrid, Spain’s three largest banks by assets, along with the cajas of La Caixa, CAM and Bancaja are offering “mortgages for repossessed residential properties with loan to value ratios of up to 100%, for up to 40 years.”  [According to the Bank of Spain, high loan to value mortgages, those above 80%, comprised 11.9% of all house loans in 2010, and were similar to levels in 2008.]


Hedgeye’s Take: The willingness of banks to essentially provide the entire loan for repossessed properties at such long maturities reflects how much pressure these institutions are under to remove direct exposure to homes on their balance sheets.


While the consolidation of banking sector over the last 18 months in Spain is a positive development, it’s clear there will continue to be pain ahead for the banking sector as unsold homes weigh on the economy at large. Spain printed a Q1 GDP number of +0.3% Q/Q or +0.8% Y/Y. We think this could be its best quarter of 2011. With the trifecta of rising unemployment, continual strain from the housing market, and a shaky government that must prove to the market that it can cut its fiscal deficit, we’re bearish on Spain’s outlook. And it too may be next in line for a European lifeline.



As the face of Europe changes, we’ll be changing along with it. Given persistent sovereign debt contagion across Europe, we continue to like Germany as a defensive name with a healthy growth profile for this year. While we’ve indicated that German fundamentals are slowing marginally, the DAX maintains its momentum above its intermediate term TREND line of support at 7100.


Have a great weekend,


Matthew Hedrick


GPS/JCP/TGT: It’s Time To Press The Call


We’ve spoken ad-nauseam about how the spread between supply and demand would start to buckle in May/June and take margins lower. Gap pretty much confirmed this last night. The call from here, however, is not on Gap. But it’s to press the JC Penney short. On the flip side, we’re changing our tune, and are getting positive on Target after being bearish there all year. This is the TREND and TAIL call. And as always, Keith will manage the TRADE.


The fact that we’re already seeing some people come out and defend their perma-faves by saying that the GPS blow-up is ‘company-specific’ is just flat out intellectually irresponsible. We weren’t shocked by the magnitude of this miss by any means – as outlined in our “4.5 Below” thematic piece from earlier this year where we quantified a 4.5 point margin hit for the industry – and don’t necessarily think it will be the last for GPS. Fortunately, they have the good grace of Eddie Lampert to financial engineer their way out of the worst operating environment in decades. 


We’re not making a call on Gap here.


We think that there’s much more money to be made in shorting JC Penney, and (gasp!) going long Target. What?!? We can hear the feedback already…”You guys have been so negative on Target all year, and you turn positive just as the industry thesis is starting to work?”


The short answer is ‘Yes’ and for very good reason.



We hate to point to Ackman as being the main factor – but the reality is that it is the fallout/windfall that we expect to see at JCP/TGT, respectively as the heavy hand of activism spanks the other cheek will create opportunity for real investors to make money here. We didn’t believe in the half-baked financial engineering story with Target in 2008, and we certainly won’t believe it now that Ackman has blown out of his TGT and shifted his focus to JCP.


One consideration here is that Target is actually a solid company. The concept is a winner, management is proven, it has square footage growth ahead, and has the benefit of the incremental shift towards its Membership Rewards model and P-Fresh rollout. More loyal customers and more consumables = more traffic.


While that’s all fine and good, our prior problem with it dates back to that fateful turn of events that started in 4Q07 when Ackman started his ‘assault’ in ultimately owning 3.55% of the company by the end of 2009.  The proxy battle begins!


Then on Target’s May 7 sales release in 2009, comps were in-line, but more importantly TGT noted that tight expense controls and better gross margins will lead EPS to be “well above estimates".  Credit quality also came in line vs. a trend of coming in slightly below plans. Then, four days later, TGT issued a press release titled “Questions That Attendees May Want To Ask At The Pershing Town Hall.’ In other words, TGT started to pull out all the stops to make Billy go away. Ultimately, Billy took it on the chin, and lost his proxy battle on May 28 of 2009 after it was clear that the momentum of the business was going against him.


The ‘strong cost control’ is particularly notable to us. Being cost-conscious is something most great companies have embedded in their DNA. But this is a company that has added $1.5bn in revenue (2.5% over 2 years) since The Ackman Assault, but has held SG&A dead even. And yes, that’s despite 9.5% square footage growth over that same period. Last we checked, a new store requires a few bucks.


Similarly, let’s look at capex. TGT had its precipitous decline in capex over that same exact time period. Any way you cut it, relative to prior trends, growth capex was cut by over a half such that total capex actually ran below D&A for three quarters.


Now it’s clearly headed higher. So at the same time the activist thorn in TGT’s side is removed, it starts to behave rationally again and invest to reaccelerate share gain. One thing we’ll give TGT credit for is being good stewards of capital – at least when they don’t have an activist dog barking in their ear.


We’re still concerned with near-term earnings quality (i.e. credit accounting for an outsized portion of the latest qtr eps) and will be watching that accordingly. But ultimately, our issue with TGT had been that lack of reinvestment around all this noise would preclude the company from hitting both sales AND margin goals. We’d give ‘em one or the other. But not both. That call has proven to be the right one.


Now, we’re approaching a point where the lag from TGT’s reinvestment and revenue growth has caught up. We think that numbers have stopped going down, and we’ll see a reacceleration in top line over the next 12 months.



In nearly every way that Target is a good company, JC Penney is not. It has a poor legacy real estate profile, over-exposure to apparel (in the worst apparel environment in decades), and over 50% private label/exclusive mid-tier brands that most consumers would not notice if they simply went away. One of the keys there is that JCP’s more vertical model relative to most other department stores (where it sources directly in Asia) means that it has fewer touch points between manufacturing and final retail sale to share cost pressures with partners. In times of excessive stress, JCP bears the pain.


On the flip side, to be fair, it also garners the upside as the environment improves. But in this space, the soonest we’ll see that will be 2013.


Keep in mind that when we see events like Gap missing plan/blowing up, this has a ripple effect. Was Gap planning on this? No. Nor were their vendors, the competitor down the hall in the mall that sells similar product, etc… this is where the chain reaction begins. JC Penney does not have a whole lot to stand on. Liz Claiborne might be great – but is really just a splash in the bucket for JCP (it’s much more meaningful for LIZ). Also keep in mind that JCP has been serially in and out of restructuring mode for the past decade. The ‘low hanging fruit’ has been largely picked.


As was the case with Target, we think that the diversion of management’s attention – especially at a time when industry and Macro factors will demand it most – will also hurt on the margin.


Our industry call all along had been that we’d start to see the dominoes fall relative to expectations in May/June – and we’re sticking to our guns. We do not – by any means – think that GPS is one-off. It is just the beginning.


GPS/JCP/TGT:  It’s Time To Press The Call - TGT Capex 5 20 11


GPS/JCP/TGT:  It’s Time To Press The Call - TGT 5 20 11


GPS/JCP/TGT:  It’s Time To Press The Call - JPS 5 20 11




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 80.48%
  • SHORT SIGNALS 78.35%