TODAY’S S&P 500 SET-UP - May 27 2011


UST Bond Yields showing how bullish people are on the Growth Slowing trade this morning (bullish for bonds). 2s are immediate-term TRADE oversold at 0.48% and 30s at 4.22%, but this is really starting to look like May-July of 2010 in the bond market – they can run.


The Hedgeye favorite Macro long positions remain TLT and FLAT – and we bought our GLD back yesterday. If Growth Slowing and Deflating The Inflation (our Macro Themes) become consensus by mid-summer, all 3 of these positions should hold up just fine. Remember Gold acts best when real-interest rates imply negative yields.


As we look at today’s set up for the S&P 500, the range is 18 points or -1.18% downside to 1310 and 0.17% upside to 1328.









  • ADVANCE/DECLINE LINE: 1261 (+327)  
  • VOLUME: NYSE 846.11 (11.98%)
  • VIX:  16.09 -5.74% YTD PERFORMANCE: -9.35%
  • SPX PUT/CALL RATIO: 1.76 from 1.30 (+30.00%)



  • TED SPREAD: 20.84
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.07 from 3.13
  • YIELD CURVE: 2.59 from 2.59 



  • 8:30 a.m.: Personal income, est. 0.4%, prior 0.5%
  • 8:30 a.m.: Personal spending, est. 0.5%, prior 0.6%
  • 9:55 a.m.: UMich Consumer Sentiment, final: est. 72.4, prior 72.4
  • 10 a.m.: Pending home sales, est. M/m, (-1.0%), prior 5.1%
  • 1 p.m.: Baker Hughes rig count


  • EU Commission tables measure to ensure fluidity of the EU sugar market
  • Eurozone May Business climate 0.99 vs consensus 1.20 and prior 1.28
  • Microsoft CEO hints at tablet software - WSJ
  • Bank of America (BAC), Morgan Stanley (MS) pay more than $22M to settle wrongful disclosure on active troops - WSJ






  • Global Tire Demand Exceeding Supply Helps Bridgestone, Goodyear, Sumitomo
  • Corn-Planting Delays Signal Price Gain as U.S. Farmers Switch to Soybeans
  • Oil Rises on World Economy Outlook, Dollar; JPMorgan Sees OPEC Quota Gain
  • Copper Gains to Three-Week High on Indications of Stronger Chinese Demand
  • Thailand’s Sugar Exports May Surge to Record as Domestic Quota Lowered
  • Gold Heads for Second Weekly Advance on Europe Debt Concern, Weaker Dollar
  • Wheat Falls to $8.085 a Bushel in Chicago Trading, Erasing Earlier Advance
  • Copper Premiums in China Advance to Seven-Month High as Demand Recovers
  • Coffee Drinkers Won’t Get Break on Prices as Colombia Sees Global Deficit
  • Corn Demand in China Poised to Exceed Output for First Time in Three Years
  • Barrick Must Let Zambia Keep Equinox Shares as Part of Lumwana Approval
  • Mississippi Crop Cargoes Plunged 39% as Flooding Worsened: Freight Markets
  • Coal Set for Three-Year High on China Drought, Power Cuts: Energy Markets
  • Sugar Price May Gain Next Week on Signs of Increased Demand, Survey Shows







  • EUROPE: broad rally this morn but volume is sketchy; DAX (were long) wobbly at this level; Spain/Italy/Greece/Russia all broken TRENDs
  • UK May GfK consumer confidence (21) vs consensus (31)
  • Nationwide UK May house prices (1.2%) y/y vs consensus (1.7%)
  • European Automobile Manufacturers' Association (ACEA) Apr Commercial Vehicles Registrations in the EU +9.5% y/y





  • A bad week for Asian equities with China down 5 out of 5 days; Vietnam crashing, then bouncing hard (down -15.6% since May4); and Japan remaining abyss
  • Fitch revises Japan's outlook to negative from stable









Howard Penney

Managing Director

DKS: Sneaking One Past The Goalie?


Another deal for DKS? Accretive, perhaps. But incremental? Perhaps no. keep in mind that this might not be entirely incremental. Check out the timing of DKS’ prior acquisitions. July 2004. Feb 2007. Nov 2007. ALL of these deals occurred when the base business was slowing. We don’t want to suggest bad behavior in this instance when there’s not even a bid on the table. But this is an important factor to keep in mind if you see something hit the tape.



It looks like Texas-based Academy Sports may be on the block.


This shouldn’t come as much of a surprise given the lack of a clear succession plan following the passing of Academy’s founder Arthur Gochman this past October. It’s been a family run business through and through and while Arthur’s son has taken over at the helm, it makes sense for the family to shop the company to see what they can get with deal activity picking up in retail. With over 125 locations, Academy surpassed $2Bn in revenues back in 2007 according the company’s website and currently generates approximately $100mm in EBITDA – owners are looking for a 10x takeout offer.


A quick look at the company’s profile suggests that if competitors are looking at the deal, DKS is the most likely candidate. HIBB’s store format at an average size of 7,000 sq. ft. is a completely different concept altogether compared to Academy’s 60,000 sq. ft. box – they’re out. The Sports Authority while more similar in footprint at an average of 45,000 sq. ft. has a high degree of overlap with Academy locations so they would be forced to either close a substantial amount of stores or face some degree of cannibalism neither of which sounds appealing. Plus, TSA is still under the wing of Leonard Greene and waiting to come out. We cannot imagine that sponsors are willing to pump a billion dollars into this ill-timed investment.


That leaves us with Dicks. There’s virtually no overlap between the two companies and the average footprint is nearly identical with DKS over 50,000 sq. ft.   Also, Academy and its bankers are no dummies… They’re throwing out a 10x EBITDA multiple. Look at DKS’ past deals. Golf Galaxy and Galyan’s for 10.2x and 10.1x, respectively. (Chick’s, which it bought in 2007, was a small real estate play with undisclosed financials).


Academy is a quality retailer, and it dominates the space in perhaps the most important sporting goods market in the country. Will DKS pay 10x EBITDA? Without a doubt. Does the balance sheet allow it to do so? Probably.  With $500mm currently on the balance sheet and another ~$200mm in FCF expected this year, DKS could certainly make a bid and stay below 30% Net Debt/Cap.


In addition, DKS leases EVERY single store, and even most of the fixtures in its stores. Its strategy there is very aggressive. Could it restructure parts of Academy in a way that puts obligations off balance sheet? Probably. Does it bug the heck out of us that the Street continues to look through this for DKS – as if its most important asset (its stores) were free of a capital charge? Absolutely! But that probably won’t matter.


Depending on the financing structure – AND assuming that the reported $100mm in EBITDA is a real number -- a $1Bn price tag could be anywhere from $0.10-$0.20 accretive to the P&L.


But keep in mind that this might not be entirely incremental. Check out the timing of DKS’ prior acquisitions. July 2004. Feb 2007. Nov 2007. ALL of these deals occurred when the base business was slowing. We don’t want to suggest bad behavior in this instance when there’s not even a bid on the table. But this is an important factor to keep in mind if you see something hit the tape.


DKS: Sneaking One Past The Goalie? - DKS Acq Chart 5 11


DKS: Sneaking One Past The Goalie? - DKS LocationsAcademy 5 11





Key Commodity Callouts : Long Gold, Short Sugar

Positions: Long Gold via GLD; Short Sugar via SGG


Below are six commodities that we’ve been particularly focused on this week, and our immediate-term call on each.


Key Commodity Callouts : Long Gold, Short Sugar - commmmm


Gasoline: We think that the dollar is going higher and taking crude oil lower in the immediate-term, particularly as oil was unable to get above its TREND line, $101.50, today.  And with refiners ramping up percent utilization by 310 bps this week, gasoline inventories built surprisingly.  Lastly, gasoline demand continues to slow, down ~2% year-on-year.


Natural Gas: Despite today’s larger-than-expected inventory build of 105 Bcf, natural gas is holding above its TREND line of support of $4.31/Mcf.  Also, the number of rigs drilling for natural gas has slumped to a 16-month low.


Gold: Keith bought gold today in the Hedgeye Virtual Portfolio.  With US Treasury yields falling, we think gold will continue to move higher, as it has to compete with real yield.  And on demand, Chinese investors are buying more gold than ever, and have overtaken India as the world’s biggest purchasers of the metal.  China’s investment demand for gold more than doubled in 1Q11, now accounting for 25% of gold investment demand.  Gold is the only commodity we are long in the HVP.


Copper: Indicative of Global Growth Slowing, copper is broken on the TRADE and TREND durations, with immediate-term resistance at $4.14/lb.


Corn: Adverse weather in the US mid-con is causing concern this spring that the U.S. corn crop will not be bountiful enough to help ease a globally supply shortage.  Prices are rising as soggy weather continues to create problems for farmers trying to plant crops in key growing states.  And with only as much as 20% of the crop planted in several states, concern (and higher prices) is warranted.


Cotton: Cotton is down 22% in the last two months and looks a lot like copper.  It is bearish on the TRADE and TREND durations, despite droughts in Texas that are likely to result in 2 million less bales of cotton produced.  As Texas plants about ½ of the U.S.’s cotton, a large-scale failure could resuscitate price, though we’re bearish until we see price confirm the story.


Kevin Kaiser



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Chinese Thirst for Portuguese Debt, Go Figure

Positions in Europe: Long Germany (EWG)


The FT broke a story last night that the Chinese are interested in buying Portuguese bailout bonds from the AAA-rated European Financial Stability Facility (EFSF) rescue fund. The news, added a boost to the EUR-USD pair, marginally dipped Portuguese bond yields, and presents another turn in the headline risk surrounding the region’s sovereign debt contagion threats.


The news harkens back to this January when both China and Japan vocalized their support to buy European peripheral debt. You’ll remember that Norway’s sovereign fund also bought PIIGS paper early in the year, yet unlike China has not recently voiced interest in doubling down on the bet. The WSJ also reported last night that China bought a total of €1.1 billion of Portuguese bonds this year, which have seen a loss of at least 10%.


However, the news of China’s support for Portugal comes at a critical juncture following the country’s €78 billion bailout: in mid-June Portugal plans to raise €3-5 Billion in 10YR bonds (in its first auction following the bailout decision on May 3rd) and ~ €5 billion of 5YR debt at the end of June to meet nearly €10 billion in debt coming due in June. Clearly this handshake should encourage demand at future issuances, but at what yield premium? We wouldn’t put our necks on the line here as downside risk (including complete uncertainty surrounding Greece’s medium term state) remains significant.


Below we show a familiar chart of 10YR bonds from the periphery as a proxy for the risk trade. Notably, Ireland pushed above 11% day-over-day on the 10YR, and confirms that bailouts in and of themselves are not elixirs—we continue to press that the pain of the region’s sovereign debt contagion has a tail of 3-5 years as counties attempt to re-write years of fiscal imbalances.


Chinese Thirst for Portuguese Debt, Go Figure - a1


As the G8 Summit meets in northern France today, just this morning Eurogroup President Jean-Claude Juncker commented that the IMF may not release Greece’s tranche next month if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months.  The EUR-USD largely shrugged off the "shock and awe" news, however, the CHF-EUR pair is on a tear, as the safety trade ramps up once again and strong trade data from Switzerland this morning:


Switzerland Trade Balance 1.52 B CHF APR vs 1.0 B CHF MAR

Switzerland Exports 7.9% APR M/M vs -3.1% MAR

Switzerland Imports 4.0% APR M/M  vs 1.8% MAR


Chinese Thirst for Portuguese Debt, Go Figure - a2


Our EUR-USD immediate-term TRADE range is tight = $1.39-1.43, with $1.41 being its new TREND line of resistance that is just broken. The USDX’s mild intraday up move is also propelling EUR-USD weakness. No doubt this is a volatile currency pair! Stay tuned.


Chinese Thirst for Portuguese Debt, Go Figure - a3


Matthew Hedrick


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower

Conclusion : The headline initial claims number rose 15K week-over-week to 424k (10k after a 4k upward revision to last week’s data).  Rolling claims fell 1.75k to 439k. On a non-seasonally-adjusted basis, reported claims rose 14k week-over-week to a new yearly high.


Jobless claims are now at year-to-date highs and solidly above 400K.  As you may recall, jobless claims above 400K will lead to a higher unemployment rate over time.  Aside from the general economic malaise we have been noting, the other key risk to employment is the end of QE2.  In chart 4 below, we’ve highlighted the relationship between quantitative easing and claims, which appears strongly correlated.  This is a point that even Bernanke highlighted in his recent press conference when he stated, “It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”  In terms of sectors, accelerating jobless claims appear to be worst for the financial sector, which our Financials Team explains below.



It's No Coincidence That Claims Are at YTD Highs While XLF is at YTD Lows


We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. Thus, it is a critical signal that we remain right around the YTD high in rolling claims. The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value. Even with the XLF underperforming, we remain cautious given this continuing development on the jobs front. Specifically, it's our expectation that claims will, at best, stagnate post QE2's end and, at worst, rise. To this end, take a look at our fifth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d1


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d2


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d3



Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d4


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d5



Yield Curve Remains Wide


We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 9 bps tighter than 1Q.  The current level of 260 bps is 3 bps tighter than last week.


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d6


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d7



Financial Subsector Performance


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


Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - dd8



Daryl G. Jones
Director of Research


R3: SKX, FDO, TIF, PVH, & Prada



May 26, 2011





  • In addition to the expected decline in toning sales contribution in Q1, both BWS and PSS noted that weaker than expected sandal sales impacted the quarter by 1%-2%. While the category typically accounts for ~15% and ~25% of sales at both BWS and PSS respectively in Q1, the current quarter is even more significant with sandals accounting for roughly 1/3 of total sales representing the category’s busiest season.
  • The latest product introduction from RL is the return of denim with its Denim & Supply brand slated to launch this fall. Nearly four years after closing its Polo Jeans Co. business in the U.S., the company will be introducing the line at 250 better department stores in U.S.  and Canada in addition to replacing the Polo brand in Europe and Asia.
  • TIF printed a surprisingly good quarter. Perhaps the most notable points are 1) a 23% comp at the NY flagship and 2) though Japan was -3%, comps were up in Feb, and positive again in April.



Skechers Establishes Fitness Group - Skechers USA, Inc. has developed the Skechers Fitness Group sales force to support the company's increasing focus on technical athletic footwear. With this change, the company created two distinct sales organizations -- one to focus on its performance footwear and the other on its lifestyle footwear.  In so doing, Skechers said it is capitalizing on its growing technical lines while utilizing the talents of its veteran team in order to better meet the needs of its accounts. "Since we began in 1992, lifestyle footwear has been at the core of our business and allowed us to grow from a small company to a globally recognized two billion-dollar brand," began Michael Greenberg, president of Skechers. "Over the last year, we have grown our offering of technical athletic footwear to encompass numerous cutting-edge running, training and walking shoes under our Resistance, Shape-ups and Tone-ups lines, transitioning from a pure lifestyle brand to a lifestyle and high-performance company. The changes in our sales organization reflect this natural evolution of our brand. With new technical product launching throughout this year and next, we felt it imperative to build an expert athletic sales force to more effectively sell and market our growing Skechers Fitness Group offering." <SportsOneSource>

Hedgeye Retail’s Take: This absolutely positively scares the heck out of us. SKX has a core competency – and that is being a ‘fast second.’ Specifically, they capture an established trend and run with it until it can’t run no more. But when they change the plan and the structure of the company to compete in the technical arena, then they compete with Nike, Adidas, Reebok, Under Armour, etc… Why SKX would choose to get into the Octagon with any of them is beyond me.


Prada IPO Valued at $15B - Prada is on its marks, as its initial public offering is expected to take place June 23 or 24, and reports on the company’s possible valuation are beginning to reach clients.  Banca IMI-Intesa Sanpaolo Group, which owns 5.1 percent of Prada and is one of the banks leading the IPO, estimates Prada may be valued at 10.7 billion euros, or $15 billion at current exchange, according to a source. Intesa forecasts Prada’s net profits may rise to 381 million euros, or $536.3 million, in 2011 and to 503 million euros, or $708 million, in 2012. Intesa’s valuation is based on around 21 times Prada’s estimated 2012 profits.  The Italian luxury firm had record profits and sales in 2010. In the year ended Jan. 31, the company reported a 150.4 percent surge in net profits to 250.8 million euros, or $331 million at average exchange. Revenues totaled 2.05 billion euros, or $2.71 billion, up 31.1 percent compared with the year before. Until recently, analysts have said the IPO could value the company at up to $9.5 billion.


Hedgeye Retail’s Take: Let me get this straight…Wall Street has thought it was worth $9.5bn, but now the banker – who is also part owner of the company – is saying that the Street’s valuation is 50% too low?


Ackman Buys ‘Passive’ Family Dollar Stake - Bill Ackman, the founder of Pershing Square Capital Management known for investing in companies to press for changes, said he invested in Family Dollar Stores Inc. (FDO) because it’s “very reasonably priced” and may be acquired. Ackman, speaking today at the Ira Sohn Conference in New York, said it’s a “passive” stake, meaning he’s not going to pressure management. “It’s a good business, it’s done very well for a long time,” he said. “It’s an attractive LBO transaction,” he added, using the abbreviation for leveraged buyouts. Family Dollar, a discount retailer based in Matthews, North Carolina, has advanced 10 percent to $54.82 in 2011 after more than doubling during the prior three years. The stock climbed 2.5 percent to $56.19 at 5:15 p.m. New York time in after-hours trading following Ackman’s announcement. It rejected a takeover offer from Nelson Peltz’s Trian Fund Management LP in March, saying it “substantially” undervalues its business, and adopted a defense to discourage unsolicited offers. <Bloomberg>

Hedgeye Retail’s Take: FDO is a well run business. But the only way it is ‘substantially undervalued’ is if an activist goes in and pressures management to make the wrong decisions to boost near term results and borrow from the future. 


Express to Unveil New Prototype - Express will unveil a Japanese-designed store prototype next month with industrial fixtures, a larger footprint, a dual gender “denim lab” and a runway down the center to merchandise key products. “The best of what we know and have learned over many years has been put into this new store design concept,” said Michael Weiss, president and chief executive officer of the 600-unit chain, who described the prototype as “modern, sophisticated and engaging.…We look forward to measuring the impact it has on our business in two markets.” The prototypes are 13,000 square feet, with 10,500 for selling.


Hedgeye Retail’s Take: I know this is way too cynical and one sided… But the concept was a perennial problem-child in the US. So it goes to Europe, triples the footprint, and takes up store level G&A with a fully functioning catwalk? They’d darn well better find the right consumer.


Hilfiger Men's Set for The Bay in Canada - The Tommy Hilfiger Group, wholly owned by Phillips-Van Heusen Corp., has a new distribution strategy to tackle the Canadian market.  The firm has signed a deal to offer Hilfiger men’s wear exclusively in 90 The Bay stores across Canada, beginning in August.  The launch of Hilfiger’s men’s sportswear at The Bay signals the brand’s reentry into the wholesale distribution channel after a few years of a retail-only business model in Canada. Hilfiger will invest in the development of fixtured shop-in-shop environments in key doors. In August, 66 locations, including The Bay’s flagships in downtown Toronto, downtown Montreal and Vancouver, will open Hilfiger shops, followed by 24 more throughout the fall. The average Hilfiger men’s wear shop will be about 500 square feet, but will measure 750 square feet in the Toronto, Montreal and Vancouver flagships. <WWD>

Hedgeye Retail’s Take: One of the many opportunities Manny has in his bag of tricks to grow this brand. Damaged in the US, it was always strong in Europe. But Tommy Canada makes perfect sense growing it from a small base.


Iconix Brand Group Said Close to Deal for JA Apparel - JA Apparel Corp., the owner of the Joseph Abboud and Joe by Joseph Abboud brands, is said to be close to inking a deal with Iconix Brand Group. A deal, although imminent, could still fall apart, financial sources said. Terms of the transaction were not immediately available, but sources said it could be valued in the $90 million range, lower than the $100 million-plus price tag that JA’s principal owners, private equity firm J.W. Childs Associates, had been seeking. J.W. Childs, which formed JA Apparel to acquire the trademarks in 2004 for $73 million, less debt, put the operation up for sale in 2006, then took it off the market for a time when it couldn’t find a buyer.


Hedgeye Retail’s Take: Icon continues to crank this business model – albeit via acquisitions. Abboud has come a long way since establishing himself as the head of men’s wear at Ralph Lauren in the 1980s. Though JA Apparel still owns the right to his name, Mr. Abboud is completely removed from the operation. He currently runs his own line called Jaz.


Ray-Ban Opens Online Store to go After Chinese Consumers - Eyewear manufacturer Ray-Ban has opened an online store in China in order to tap into the Chinese luxury goods market. As a subsidiary of Luxottica Group, the company has created the new e-store on Taobao Mall – the largest online retail website in China to sell goods tailored exclusively to the market such as Ray-Ban Asian Fit and Asian Design alongside with its established product lines. Sara Beneventi, global brand director of Ray-Ban, said: "In the future we will continue to build upon our brand awareness in China by leveraging Taobao's 370 million-plus consumer community." <FashionNetAsia>

Hedgeye Retail’s Take: This is kind of ironic given that all the knock-off sunglasses you find in the US and Europe originate in China. That said, the emerging Chinese middle class does not want a knock off, they want the real deal. This looks like a great move for Ray Ban.


Chinese Sieze Counterfeit Teva Sandals - Deckers Outdoor Corp. confirmed that customs officials in Ximaen, China siezed 36,720 pairs of counterfeit Teva sport sandals with a value of RMB 216,100 ($33,280). Xiamen Customs contacted its trademark owner Deckers Outdoor Corporation, immediately after the consignor of this batch failed to provide its authorization letter. Deckers Outdoor confirmed the infringement in a letter dated May 16 and applied for customs protection to detain the batch of fake Teva sport sandals, according to Xiamen Customs. A day later,  an additional 36,000 pairs were seized at customers. Both shipments were en route to Ghana, which has become a major transit destination for counterfeit goods, according to a spokesman for Deckers Outdoor contacted by The B.O.S.S. Report. <SportsOneSource>

Hedgeye Retail’s Take: 2 containers with about 72,000 pair of sandals seized. It kind of makes you wonder how many knock-off containers there really were?



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.