Relief From Responsibility

“A movement whose main promise is the relief from responsibility cannot but be antimoral.”

-F.A. Hayek


It was a long, hard, weekend for the central planners of wanna-be Keynesian Kingdoms. In the US, “blue chip economists” advising President Obama were busy obfuscating the simple fact that QG2 has equated to Jobless Stagflation. In Europe, the socialists were voted off another proverbial island of responsibility – Portugal.


Where do we go from here? What broken promises does Academic Dogma have in store for us next? Fortunately, plenty of these outcomes have been proactively predictable. And those of us responsible for being responsible are well on our way to seizing the opportunity of cleaning up another mess.


The aforementioned quote comes from Hayek’s chapter titled “Material Conditions And Ideal Ends” in The Road To Serfdom (page 217). And, while it’s always dicey to talk like a Coach would about virtue and morality on Wall Street, I think the way that Hayek thought about this in 1944 is no less relevant than it is this morning:


“It is true that the virtues which are less esteemed and practiced now – independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors – are essentially those on which the  working of an individualist rests. Collectivism has nothing to put in their place.”

-F.A. Hayek (The Road to Serfdom, page 217)


It’s time for leadership. It’s time for change.


Last week, I didn’t make many changes to the Hedgeye Asset Allocation Model (our proxy risk management product for gross invested exposure). After starting the week net-short in the Hedgeye Portfolio (our proxy for expressing net exposure), I didn’t change a whole heck of a lot either (I covered a few shorts to end the week with 11 LONGS and 11 SHORTS).


The Hedgeye Asset Allocation Model’s complexion at the close last week was:

  1. Cash = 49% (no change week-over-week)
  2. International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 15% (Long-term US Treasuries and US Treasury Flattener – TLT and FLAT)
  4. US Equities = 6% (US Healthcare – XLV)
  5. International Equities = 3% (Germany – EWG)
  6. Commodities = 3% (Gold – GLD)

With Growth Slowing, Long-term Treasury Bonds (TLT) are putting on an impressive move to the upside. Growth Slowing is also instigating compression in the yield curve (long-term minus short-term interest rates) and we’ve also expressed our conviction in Growth Slowing with long positions in a US Treasury Flattener (FLAT) and Gold (GLD).


Did I say Growth Slowing?


“The readiness to back one’s own conviction against a majority…”




You see, without explicitly seeking Relief From Responsibility, this is how Wall Street works – seeking relief in building a consensus. The best way to perpetuate mediocrity, is to socialize responsibility.


Or at least they’ll try. Because the true art of Old Wall Street Research compensation lies not in the risk management of being right or wrong – it lies in the storytelling of collectivism.


In the Hedgeye Asset Allocation Model, where was I wrong last week?

  1. Long US Dollar (UUP) = down -1.0% week-over-week
  2. Long US Healthcare (XLV) = down -1.4% week-over-week

It doesn’t particularly matter why I was wrong with these positions. The scoreboard doesn’t care. I was wrong – and there needs to be absolute responsibility in recommendation.


“Independence, self-reliance, and the willingness to bear risks…”


That’s what we need to champion in this business. Re-think, re-learn, and re-invent. With “the willingness to voluntary cooperation with one’s neighbors”, may the best teams who are collaborating best risk management practices win.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.32-102.34, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Relief From Responsibility - Chart of the Day


Relief From Responsibility - Virtual Portfolio


TODAY’S S&P 500 SET-UP - June 6, 2011

There isn’t a data point or market price across the Hedgeye Global Macro risk management model that suggests this correction is over, yet:

  1. Treasury Bonds – continuing higher this morning w/ 2-yr yields crashing to 0.42% (10s at 2.99%); yield curve compressing
  2. Asian/European Stocks – Japan + Spain (2 of our short positions) down -1.2% and -0.9% this morning (Keynesianism not working)
  3. US Stocks – down for 5 consecutive weeks, which isn’t exactly textbook bull market (down -4.6% since April 29th high)


As we look at today’s set up for the S&P 500, the range is 24 points or -0.32% downside to 1296 and 1.53% upside to 1320.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -1315 (+1135)  
  • VOLUME: NYSE 971.40 (-3.66%)
  • VIX:  17.95 -0.77% YTD PERFORMANCE: +1.93%
  • SPX PUT/CALL RATIO: 1.61 from 1.19 (-26.59%)



  • TED SPREAD: 22.15
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.99 from 3.04
  • YIELD CURVE: 2.57 from 2.59 



  • 11 a.m.: Export inspections: corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
  • 1:15 p.m.: Treasury’s Geithner speaks to bankers in Atlanta
  • 4 p.m.: Crop conditions: Corn, winter wheat, cotton, soybean
  • 5:30 p.m.: Fed’s Fisher speaks in NY


  • Philly Fed President Charles Plosser said plan to withdraw central bank’s record monetary stimulus, “normalize” interest-rate policy would help avert confusion in financial markets
  • Death toll from Germany’s E. coli outbreak rose to 22, with officials saying sprouts grown near Uelzen a “significant source of the bacteria”
  • German government spokesman says expects EU/ECB/IMF report on Greece by mid week -- Reuters
  • Social Democrats win Portuguese parliamentary election, removing the Socialist Party from power -- Boston Globe





THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Wheat Fields Wilt in Drought as Parched Earth Spreads From China to Kansas
  • Oil Falls for a Second Day on Signs Slowing U.S. Economy May Crimp Demand
  • Copper Rises for Second Day as Strike at Codelco Mine Fuels Supply Concern
  • Gold Advances for Second Day After U.S. Data Increases Recovery Concerns
  • Wheat Climbs on Speculation USDA Is Set to Reduce Global Supply Estimate
  • OPEC Overshadowed by Qaddafi in Most-Hostile Meeting Since 1990 Gulf War
  • Russia’s Black Earth Grains Growing Area Faces ‘50-50’ Chance of Drought
  • Rubber in Tokyo Advances for Second Day Amid Tight Supplies in Thailand
  • Grain Stockpiles Worldwide May Drop, Soybeans May Increase, Survey Shows
  • Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says
  • Olam Said to Raise $600 Million in Share Sale to Help Fund Acquisitions
  • Funds Boost Bullish Commodity Bets Amid Improving Global Growth Prospects
  • E. Coli Outbreak Death Toll Rises to 22 as Blame Focuses on Bean Sprouts




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • In Europe a wet Kleenex continues to hover over Europe Keynesian experiment; Spain down -0.8% after Portugal votes out the socialist party too
  • UK new car registrations (1.7%) y/y in May - SMMT -- wires

THE HEDGEYE DAILY OUTLOOK - euro performance




  • In Asia, China closed but rest of Asia continues lower; Japan down -1.2% to -8.3% YTD (we're short $EWJ); Thailand down -1.1%; Vietnam -2.2%
  • Hong Kong, China, and Taiwan were closed for Tuen Ng/Dragon Boat Festival
  • South Korea was closed for Hyun Choong Il.

THE HEDGEYE DAILY OUTLOOK - asia performance







Howard Penney

Managing Director


As always, much is happening in Macau.  Here is some of the stuff we’ve been hearing lately:




Macau Market

  • May was the first HK$ billion slot month
  • Wynn, MGM, and SJM Cotai sites may get gazetted as soon as in the next 4-5 weeks 


  • Neptune will be opening a new VIP room at City of Dreams in July/August – Neptune is one of the largest junkets in Macau so this could be significant for MPEL
  • City of Dreams may be looking into converting its Dragon Dome Theater into a giant VIP operation – may be talking to the Guandong VIP Group to run it.  We think Guandong currently has operations at Wynn and Starworld.
  • MPEL may get rid of its dual management structure and leave Ted Chan fully in charge
  • City of Dreams pumped in some extra junket liquidity ahead of the Galaxy Macau opening
  • We still think Studio City might be back on the agenda possibly with MPEL investing in addition to procuring a management contract


  • Galaxy Macau may be cannibalizing 30-35% of Starworld’s VIP volume
  • We’re hearing that Galaxy may have pumped as much as HK$1.6-2.0 billion in liquidity to its junkets through the opening of Galaxy Macau

 LVS/Sands China

  • Neptune and Sun City are finalizing deals with Venetian Macau to open up VIP rooms
  • Staffing has been a problem so the rooms may not open until July/August
  • LVS still struggling to grow its VIP share
  • We’re skeptical that FS apartments will get approved anytime in the foreseeable future - the public airing of dirty laundry in the Jacobs case isn’t helping their cause

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 80.43%
  • SHORT SIGNALS 78.34%

The Week Ahead

The Economic Data calendar for the week of the 6th of June through the 10th 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 - br1

The Week Ahead - br2

SP500 Levels Refreshed: Go Shorty

The U.S. equity market has now been trading below our key support lines for three days.  Like most chaos theorists, we look at the number three as an important factor in verifying trends.  A close today below 1,324, as outlined in the chart below, would be important verification of our bearish outlook for U.S. equities.


In terms of verification, the jobs report today provided even more verification that growth is slowing.  If you didn’t know before today, now you know.  After normalizing for the birth / death adjustment, the economy actually lost jobs in the month and the headline number from the Bureau of Labor Statistics was only an anemic +54,000. In combination with the weak labor market is, not surprisingly, the fact of weak weekly earnings growth.  In fact, U.S. average weekly earnings has seen negative growth on year-over-year basis over the last two months.


Given this backdrop it’s likely not surprising that some of our best short ideas are in the consumer sector or related to consumer spending.  A couple of our key short ideas are as follows:


1. Darden Restaurants (ticker: DRI) – Our view is that in an anemic consumer spending environment, tired brands with little in the way of new products will fare the worst, such as Darden.  And, by the way, the CRB index is up roughly 35% on a year-over-year basis, which isn’t a positive leading indicator for restaurant level margins.   Consensus estimates expect DRI to grow EPS 25% year-over-year in the coming quarter.  Expectations are indeed the root of all heartache.


2. Henry Schein (ticker: HSIC) - Henry Schein has outperformed the SP500 by more than 1,000 basis points over the last two years.  As our Healthcare Sector Tom Tobin recently wrote: “HSIC is largely tethered to the consumer one way or another as employment trends and/or discretionary income influence each of its North American business lines (Dental, Medical, Animal Health), collectively representing ~65% of 2010 revenue.” Needless, to say we think reversion to the mean cometh and that HSIC should be on your short list of shorts.


3. Wynn Casinos (ticker: WYNN) – Our Gaming Sector Head, Todd “The Axe” Jordan is bearish on Wynn.   According to Jordan, their Macau business is set to slow due to their exposure to the VIP business which is being negatively impacted by the recent opening of Galaxy.  WYNN is trading  just shy of its all-time high, which to us suggests that a Macau slow down is not priced in.  Just over 5% of the float is short, so this isn’t an overly consensus perspective.


With slowing economic growth globally and a broken U.S. equity market, we think it’s prime time to re-load on the short side.  As the popular 50 Cent song goes, “Go, shorty. It's your birthday.” Given the status of the macro factors, we agree with 50 Cent on this one.


Daryl G. Jones

Managing Director


SP500 Levels Refreshed: Go Shorty - 1

R3: Groupon, JNY, VRA, ZQK



June 3, 2010





  • In the first of what we expect to be a more common trend across retail, Quicksilver decided to remit annual guidance after reporting improved 2Q results. Following expectations for 2011 EBITDA to be flat with 2010 results in Q1, management commented that it didn’t want to focus on the short-term outlook, but instead confirm that ZQK on track to achieve its longer term plan – 5-year that is. To some extent, we have to tip our hat to management for not trying to pretend to know how the 2H is going to play out, but the reality here is that similar to ’08, the spread between expectations and actual year end results is likely to get wider.
  • Despite taking down the back half of the year, Vera Bradley announced an important strategic move on its 1Q call in entering the department store channel by partnering with Dillards. With less than 40 retail/outlet stores, VRA currenly relies heavily on its more than 3,300 independent retailers for distribution. The initial launch at DDS will be in 65 doors and could grow to be as many as 300, but more importantly will lay the foundation for additional partnerships and geographic expansion – something investors are clearly banking on with the stock trading nearly 30x next year’s numbers.



Groupon Files S-1 - Groupon Inc., the fast-growing purveyor of online deals distributed through e-mails and social networking, Thursday took the first steps towards an initial public offering. The firm filed a registration statement with the Securities and Exchange Commission of its intent to go public. Morgan Stanley, Goldman Sachs and Credit Suisse are to be the lead underwriters of the IPO, the date for which hasn’t been set. Some published estimates put the amount to be raised at close to $1 billion. Without disclosing the number of shares to be offered or their price, the Chicago-based company said in the statement that it offers more than 1,000 daily deals to 83 million subscribers in 43 countries and has “sold to date over 70 million Groupons,” according to an introductory letter from Andrew Mason, the firm’s chief executive officer. Among these offers was one in August 2010 in which $50 of apparel from Gap was available for $25. The Groupon was made available to 9.2 million subscribers in 85 North American markets. “We sold approximately 433,000 Groupons in 24 hours, generating over $10.8 million in revenue,” the SEC filing said, adding that since the Gap discount, it’s also featured deals with Nordstrom Inc. The filing didn’t reveal how Groupon’s business broke down by merchandise type or retail channel, but its operating statement revealed that revenues, just $94,000 in its abbreviated first year in business in 2008, mushroomed to $30.5 million in 2009 and then exploded last year, reaching $713.4 million. <WWD>

Hedgeye Retail’s Take: An opportunistic filing in the wake of LinkedIn’s recent IPO success. The company doesn’t even have a date yet, but one look at the financials and it’s easy to see why they were so eager to share. Yes, the company has grown exponentially off a very small base in just two years, but more impressive is the fact that it just booked 90% of last year’s revs in the 1Q alone. We don’t expect the company to wait long before coming public, but for now they’ve certainly stolen the spotlight of pending IPOs.


JNY Acquires Footwear Brand - The Jones Group Inc.’s hands-across-the-water acquisition of U.K. footwear brand Kurt Geiger strengthens both companies’ global footprints and gives the buyer serious clout in the luxury sector. Jones closed on the acquisition early Thursday, paying $350 million in cash, inclusive of debt, to U.K.-based private equity firm Graphite Capital and to members of the firm’s management who held minority stakes. The deal weds two companies already familiar with each other. Geiger, Europe’s largest luxury shoe retailer, has been the distribution partner for Jones’ Nine West brand in the U.K. since 2009. “Strategically, this enhances our distribution and presence internationally,” said Wes Card, chief executive officer of Jones. The acquisition, which gives Geiger entree to the U.S. and Jones a platform in Europe, was financed with cash on hand and is accretive to second-quarter earnings. The existing Kurt Geiger management team, led by ceo Neil Clifford, will remain with the business. Card said the initial plan is to open more Kurt Geiger stores in the U.K., as well as bring the brand to the U.S. through freestanding stores and, through wholesale arrangements, department stores. Asked about store openings, Clifford said, “I can’t be specific, but we’d be disappointed not to start opening in 2012. We’ve already done quite a lot of thinking, and we’ve got a plan.” About 75 percent of Kurt Geiger’s business is women’s footwear, with the balance in men’s, a new market for Jones, and licensing. Card said the firm is still in the hunt for acquisitions and won’t limit its next deals to footwear, even though it now has a “powerful group of companies in the footwear industry.” <WWD>

Hedgeye Retail’s Take: Come on. This may have been an all cash deal, but the company still hasn’t paid off the remaining 45% due on the Weitzman deal at the end of 2012 and they just spent what cash they had. Moreover, the fact that CEO Card is looking to lever up even further in search of additional growth is downright scary.


June a Busy Month for Italian Luxury IPOs - Luxury firms are reporting brisk business in the first quarter and the outlook for the remainder of the year is bright. With these underpinnings, Italy’s three luxury initial public offerings are quickly taking shape and valuations of the firms are surging by the day. Salvatore Ferragamo’s listing on the Milan Stock Exchange is expected by the end of the month, with the road show kicking off in London on June 13, according to sources, who say joint lead manager Banca IMI-Intesa Sanpaolo Group values the Florence-based firm at 2.25 billion euros, or $3.23 billion at current exchange. Until now, sources said Ferragamo’s IPO could value the company at around 1.5 billion euros, or $2.1 billion. Mediobanca and J.P. Morgan will act as global coordinators and joint book runners. Italian fashion house Prada, whose IPO is expected to kick off on the Hong Kong Stock Exchange on June 23 or 24, plans to sell 423.3 million shares, or 16.5 percent of its capital, following a capital increase, said sources on Wednesday. As reported, 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. Until recently, analysts have said the IPO could value the company at up to $9.5 billion. The road show will kick off June 6 in Singapore, followed by Hong Kong, London and Milan, and will end in New York. On Wednesday, sources also said Banca IMI values Moncler, which got the green light to proceed with its listing on the Milan Stock Exchange this week, at 1.28 billion euros, or $1.84 billion. Moncler is expected to float more than 50 percent of the company by the end of the month. Banca IMI, BofA Merrill Lynch and Morgan Stanley International will act as global coordinators. Banca IMI will also be in charge of the IPO and act as sponsor. <WWD>

Hedgeye Retail’s Take: Notice a trend here? In addition to a collective sprint to market before the 2H, leading banks on these offerings are consistently valuing the companies well above pre-existing levels, no surprise there.


Samsonite IPO - Luggage maker Samsonite International S.A. stands to raise between $1.16 billion and $1.51 billion in an initial public offer later this month. The company made its ipo prospectus available Friday via the Hong Kong Stock Exchange website. The company said it plans to offer 671.24 million shares.The indicative price range for the shares is 13.50 Hong Kong dollars, or $1.74, to 17.50 Hong Kong dollars, or $2.25, or per share. Based on that range, the company will raise between 9.06 billion Hong Kong dollars and 11.75 billion Hong Kong dollars. The bulk of those proceeds will go directly to Samsonite's current shareholders, which include CVC Capital Partners, and the remainder will be used to pay off the company's debts. Samsonite, which is listing in Hong Kong the same month as Italian luxury goods house Prada, said it expects to announce the official offer price by June 15 and for its shares to commence trade on June 16. The company said its 2010 adjusted EBITDA more than doubled to $191.9 million and its sales rose 18.1 percent to $1.22 billion. <WWD>

Hedgeye Retail’s Take: Little known fact – back in the 1960s, the company manufactured and distributed Legos in North America under a licensing agreement establishing the brand in the U.S. before abandoning its toy business in the 70s. After paying $1.7Bn in 2007 for 60% of the company and then another $175mm to RBC to retain the controlling stake in 2009, CVC would just about break even if the deal comes through at the high end of the range, a considerably better fate than it faced back in ’09.


New Nike Action Sports Campaign - Nike Inc. is launching a new campaign, entitled "The Chosen," that is Nike's largest effort targeting action sports and its first global 'Just Do It' campaign featuring a pantheon of action sports stars.. According to a statement from Nike, the centerpiece of the campaign is a film featuring skate legend Paul Rodriguez (P-Rod), Olympic snowboarder Danny Kass, surf prodigies Julian Wilson and Laura Enever.  The film was shot all over the world at night and features lighting and pyrotechnics reminiscent of a live rock concert. Throughout the course of the campaign, Nike will be conducting global grassroots events providing athletes an opportunity to participate in the sports featured in the film. "'The Chosen' represents a new voice for Just Do It, a passing of the torch to the next generation of sports heroes," said Davide Grasso, Nike's vice president of global brand marketing. "This is a defining moment for Nike Action Sports as we evolve this iconic campaign to bring it to new audiences, in new ways around the world." <SportsOneSource>

Hedgeye Retail’s Take: All part of Nike’s plan to double the Action Sports business over the next 5-years. Before we get too excited let’s keep in mind the business currently accounts for less than 2% of total sales. The spot will air during the NBA finals on Sunday and in cinemas over the July 4th weekend for those interested.


Japanese Luxury Market Forecast Suggests Strong Rebound - Japane’s luxury goods market is expected to resume its pre-earthquake sales figures, according to consultancy firm McKinsey & Co.  The company conducted a survey of more than 1,300 consumers and 25 senior business executives to ascertain the impact of the recent natural disaster on the luxury goods sector. Around 60 per cent of business leaders forecast that luxury sales would either plateau or improve in 2011 compared to last year, while 85 per cent of respondents were optimistic that the market would improve in the longer term. The report also highlighted why consumers opt to buy premium products, with 28 per cent doing so as a "treat", 41 per cent citing their durability and 20 per cent of respondents noting their improved overall quality compared to standard products. <WWD>

Hedgeye Retail’s Take: One of the more aggressive forecasts we’ve seen given that the tsunami had an annualized MSD impact on sales not accounting for sales lost due to lower consumer sentiment after the initial impact.




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