Still Bearish on India

Conclusion: Our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future.


Position: Short Indian Equities (INP)


By now, it’s pretty clear that the global economy is cooling. Be it a “transitory soft patch" or the turning of the global economic cycle, the net result is the same – earnings estimates need to come down. How deep in magnitude and far out in duration negative revisions must take place is a topic that will be ferociously debated, largely due to the levered long nature of this current “bull” market.


Shifting to India specifically, our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future. Currently, all three of India’s major liquid asset classes confirm this thesis:


Equity Market: India’s SENSEX Index is down -9.2% YTD and remains broken from a TRADE & TREND perspective in our quant models:


Still Bearish on India - 1


Currency Market: India’s Rupee is flat YTD vs. the USD (astonishing for a country that’s raised rates three times YTD in the face of the Fed’s Indefinitely Dovish policy) and it is also down -1.4% vs. the USD since peaking on April 8th:


Still Bearish on India - 2


Bond Market: While still up +36bps YTD on upwardly-revised inflation and rate hike expectations, India’s 10Y sovereign bond yields have plummeted -18bps since peaking on May 30th. India’s yield curve (10Y-2Y spread), which had been falling YTD mostly due to the advance in short-term rates, is now at 2bps wide from 14bps prior to the recent move in long-term rates. From a corporate perspective, India’s 10Y AAA-rated credit spreads have widened +32bps since May 30th:


Still Bearish on India - 3


Still Bearish on India - 4


Alongside India’s Manufacturing PMI falling in May to 57.5 from a “toppy” 58 reading, we think these markets are leading indicators for further slowing of the Indian economy. Recently, C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, cut his estimate for India’s FY12 GDP by -50bps to +8.5% YoY. We think that’s still too high.


Additionally, accelerating inflation remains a risk over at least the next 3-6 months as the recent +8.5% increase in gasoline prices, a potential diesel price hike, and an expected +20-30% increase in food prices in 2H (according to India’s Commission for Agricultural Costs and Prices) all combine to give India’s WPI enough momentum to “comp the comps” in the coming months.


From a policy perspective, we continue to affirm our once-contrarian view that India is very likely to miss its deficit reduction target in FY12 (4.6% of GDP) due to lower-than-expected tax receipts and flat-out ridiculous assumptions baked into the projections (+9.25% YoY GDP growth; a -38% reduction in energy subsidies).


Net-net, all three of the big Macro drivers (GROWTH, INFLATION, and POLICY) are going the wrong way for India. As such, we continue to see alpha on the short side of India’s equity market, bond market (particularly corporate), and her currency (INR). At a bare minimum, long-term investors should continue to remain underweight of Indian assets for the intermediate-term TREND.


Darius Dale


TBL: ...A Thousand Words

It's easy to kick yourself over missing out on a money-making opportunity -- only to realize that sometimes the best thing to do in the spirit of risk management is to do nothing.



A law firm announced today a class action lawsuit against Timberland and several of its officers for breach of the Securities Exchange Act of 1934. We won't comment on the merits of the lawsuit, other than to say that a picture tells a thousand words. See below. 


While we kicked ourselves on the day of the upside surprise in January, we held our ground despite TBL seemingly having the best momentum in the footwear space. Several things did not smell right about it, which all came to fruition in May.


While we wish we'd been on the right of the both trades -- sometimes the best thing to do in the name of capital preservation and risk management is to do nothing -- especially when management credibility is at hand.


We won't be the judge and the jury on this one. That's the SEC's job. But we can look at historical price, sell-side/buy-side sentiment, and management stock sales. The simple conclusion is that after the blowout 4Q results and bullish comments about future shipments, we saw sentiment remain near peak levels despite a 45% run in the stock. Simultaneously, we saw management stock sales kick in, with several sales over 1Q right through the 1Q blowup. 


You be the judge. Regardless of anyone's opinion, the last thing this management team needs right now is a creibility problem.



From the press release:

"...the complaint alleges that, during the Class Period, the Company disseminated overly optimistic statements about then-present sales trends, cost discipline and inventory levels and an anticipated return to a 15% operating profit, and that, as a result of these representations, Timberland share prices traded at artificially inflated prices. However, at the same time the Company was making such statements, certain of its officers and directors concealed that demand for Timberland’s key products had actually declined dramatically, its inventory levels were rising, and Timberland had significantly increased advertising spending to counter lackluster sales, thereby materially decreasing operating income. On May 5, 2011, Timberland disclosed the financial results for the Company’s first quarter 2011 that were far below its bullish Class Period public statements. As a result of this revelation, prices of the Company’s common stock plummeted."


TBL: ...A Thousand Words - tbl1

Hope: SP500 Levels, Refreshed

POSITION: No Position SPY 


Hope, as we like to say at Hedgeye, is not a risk management process.


Growth Slowing has no immediate-term catalyst to slow it being priced into consensus either. The stock market is down for 6 consecutive weeks (6% correction versus the April 29th peak) because the pricing process is in motion.


While there was an immediate-term TRADE line of support yesterday at 1285 where we covered our Energy (XLE) short, that equivalent line for the SP500 is now down at 1279. The risk now is that the bulls hope for 1314 (immediate-term TRADE resistance), and hope fails.


Across durations (TRADE, TREND, and TAIL), Mr. Macro Market is growling: 

  1. TAIL resistance = 1377 (long-term lower-high)
  2. TREND resistance = 1323 (below the Moving Monkey line (50 day) of 1330)
  3. TRADE resistance = 1314 

Our long-term TAIL support line is all the way down at 1219, so I wouldn’t get too cute with the hope stuff here. Keep your net exposure tight and manage risk (trade) aggressively.



Keith R. McCullough
Chief Executive Officer


Hope: SP500 Levels, Refreshed - SP500


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Still early but June may slow down to HK$18.5-19.5BN



Table gaming revenues for the first 6 days of June were HK$3.728 billion for an average daily rate of HK$621 million, up from the last week of May at HK$544 million.  However, the current pace is not enough to get the full month to the HK$20 billion bogey for total gaming revs.  Based on only one week of data, we are currently projecting HK$18.5-19.5 billion in total gaming revenues for June, up 40-47% YoY but down 17-22% sequentially from May.


Market shares are usually meaningless after only a week of data but for those still interested, they are shown below.  We’ve also added a column that shows each company’s market share for the 3+ weeks since Galaxy opened.


MACAU JUNE MTD - macau  june


MACAU JUNE MTD - macau 3  wk

R3: Retail Deals and Margins



June 7, 2011






  • Despite a 68% increase in inventory levels on only 28% sales growth in the 1Q, management at GIII noted they believe gross margins to be at a normalized level and don’t expect promotional activity to further weigh on margins. Additionally, it was noted that the majority of the increase was driven by taking on product early ahead of cost increases not because of concerns over capacity constraints in the 2H. Contrary to their prior view, instead of a pickup in order cancelations in the 2H, the company is actually seeing a MSD-HSD increase in its order book.
  • On the contrary, inventories at TLB increased +13% on top of a -6% deceleration in sales resulting in considerable gross margin pressure from higher levels of promotional and markdown activity NT. In this morning’s release, the company highlighted that they expect a nearly 1,000bps impact to margins in Q2 as they look to clear excess inventory ahead of the back half.




Will Dollar General Lead Retailers Into Battle? - It would be tough to control a chain-store reaction. But that's a risk facing retailers that compete with Dollar General. The discounter last week said it would forgo gross-margin growth this year to keep retail prices low in the face of higher commodity costs. In doing so, Dollar General broke ranks with many grocers and drugstores that have pledged to pass cost increases onto consumers. The likely outcome: Dollar General will win market share. Drugstores, for instance, are vulnerable on items from groceries to shampoo because they charge far higher prices to compensate for lofty fixed costs. Nomura's Aram Rubinson estimates Dollar General pays just $7 a square foot annually on its leases compared with about $30 for the likes of CVS and Walgreen.  With just $13 billion in sales last year, Dollar General could only do so much damage alone. The more painful scenario is one where others follow Dollar General's lead. If a few more retailers keep prices down, the pressure would increase quickly for others to follow suit. Already, some retailers have been forced into selling milk below cost because rivals used it as a "loss leader" to attract shoppers.  <WallstreetJournal>

Hedgeye Retail’s Take:  This will only get worse. Companies can plan raw materials. They can plan subsequent discounts based on consumer behavior (to a degree). But even the best cannot plan on competing with a marginal competitor. This is bad for Gildan and Hanesbrands in particular.


Wal-Mart Unveils Ministores Near Dollar Rivals - The Walmart of the future could very well be the size of your local drugstore. Wal-Mart Stores this week unveiled its first Walmart Express, its answer to the growing threat of dollar stores which have been successfully maneuvering the post-recession economy. The 15,000-square-foot store, one-tenth the size of a Walmart superstore, aims to carry everything you might need on the spur of the moment, from milk and eggs to DVDs. Just not everything under the sun like its big cousin. Walmart Express is sized to fit into cities where space is at a premium and in rural areas that can't support a superstore. Dollar stores have enjoyed strong revenue growth as they've lured more shoppers with bargain prices and wider selections. Meanwhile, U.S. Walmart stores open at least a year have posted declines in revenue for eight straight quarters. <SeattleTimes>

Hedgeye Retail’s Take: The Seattle Times is a bit late on this one, but yet another example about how noise around the smaller-format WMT concept is coming down the pike. If anything, this is notable given both the stock and margin performance of the dollar stores over the past year.


Rakuten Acquires Ikeda - Japanese online retail juggernaut Rakuten is expanding its reach to South America with the acquisition of a 75% stake in Ikeda, a provider of e-commerce services to many of Brazil’s largest retailers. Financial terms of the deal were not disclosed. Founded in 1996 and headquartered in São Paulo, Ikeda provides retailers with a SaaS e-commerce platform, enabling its customers to help build their desired features and provides advisory services to support their online retail operations. Ikeda currently provides services to over 100 major retailers located all over Brazil. Forrester forecasts the e-commerce industry in Brazil to grow at 18% annually, with total sales expected to reach approximately $22 billion by 2016. For Rakuten, it’s a way to expand into South America rapidly. Founded in 1997 and headquartered in Tokyo, Rakuten provides a variety of consumer and business-focused services including e-commerce, travel, banking, securities, credit card and e-money solutions. Rakuten boasts operations throughout Asia, Western Europe and North America and has over 10,000 employees worldwide. <TechCrunch>

Hedgeye Retail’s Take: This makes sense in many ways. Not much impact – either competitive or opportunistic – for most companies that US investors tend to care about. But definitely something to watch evolve, as Ikeda serves a function similar to what we see from Amazon in the US (ie, buy an item from Target online and it is powered by Amazon).


eBay to Buy Magento - In another move to upgrade its e-commerce technology offerings and increase revenue, eBay Inc. said today it plans to buy Magento Inc., the developer of the widely deployed Magento open-source e-commerce platform used by more than 60,000 merchants and brands including Nokia, Lenovo, OfficeMax and The North Face. The deal follows eBay’s announcement in March that it intends to pay $2.4 billion for GSI Commerce, a provider of e-commerce technology and services for hundreds of retailers.EBay president and CEO John Donohoe says the move to acquire Magento supports eBay’s recent efforts to build an open commerce technology platform, which eBay calls X Commerce and which is designed to integrate many of the functions required to operate an e-commerce organization. “The feedback we’ve heard from external developers has been clear—they don't just want payments or an e-commerce site,” Donohoe says. “They want access to a full set of commerce capabilities to build complete shopping experiences for merchants. We believe the acquisition of Magento and creation of our X Commerce group will enable us to meet developers’ needs and drive global commerce innovation for retailers and consumers.” <InternetRetailer>

Hedgeye Retail’s Take: Ebay is definitely acquiring itself out of its old business model, and in the process is building the infrastructure needed to have its next wave of growth. E-commerce platforms married with e-fulfillment ops like GSIC are building Ebay’s capability to build its Consumer as well as B-to-B businesses.


Salvatore Ferragamo IPO Approved - Salvatore Ferragamo SpA on Monday received the green light to pursue its initial public offering on the Milan Stock Exchange, which is expected to take place by the end of the month. Sources said a road show is expected to kick off in London on June 13, and that joint lead manager Banca IMI-Intesa Sanpaolo Group values the Florence-based firm at 2.25 billion euros, or $3.29 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. In a separate development, Ferragamo has inked a licensing agreement with Marchon Group for the production and worldwide distribution of men’s and women’s sunglasses and prescription eyewear. The first collection will be available in Ferragamo boutiques, department and specialty stores and select optical shops starting in January. <WWD>

Hedgeye Retail’s Take: How odd that the current value indicated ‘by sources’ is up 50% from numbers recently speculated. Regardless, the market will price this name at the same level regardless of the ask.  In the end, Ferragamo is a very high quality brand and is one to be watched.


PPR Won’t Target Large Acquisitions - PPR (PP) SA, the owner of Gucci and Puma, ruled out making big acquisitions and repeated it will target mid-sized companies with high-growth potential as it reorganizes around luxury goods, sports and lifestyle items. PPR is planning a large purchase in the high-fashion business, La Tribune reported yesterday. The Paris-based company’s targets may include Prada SpA, Burberry Group Plc (BRBY) and Hugo Boss AG (BOS), the French newspaper said. “It’s not true that we will target large acquisitions,” PPR spokeswoman Charlotte Judet said today in a phone interview. Last month’s purchase of skate- and snowboarding clothier Volcom Inc. for $607.5 million is indicative of the size of deals PPR is interested in, she said, repeating comments made by Chief Executive Officer Francois-Henri Pinault. PPR is reorganizing to focus on its luxury-goods division, which includes Gucci, and a sports and lifestyle unit headed by Puma as it seeks to tap rising demand for branded clothing and accessories in emerging markets. The company, which sold furniture retailer Conforama in March, plans also to dispose of online retailer Redcats and the Fnac electronics and media chain and use some of the proceeds for acquisitions. <Bloomberg>

Hedgeye Retail’s Take: This comment was made to thwart speculation that PPR would buy Ralph Lauren. While we have no reason to think anything is imminent, we also have to reason to believe PPR’s comment. RL would be a perfect fit in its portfolio. Mr. Lauren is 73 years old, and Roger Farah (COO) is in his early 50s, a 2012 contract expiration date, and has at least another job in him.  Keep this one on your front burner.





Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • EAT this morning declared a quarterly dividend of $0.14 per share on the common stock of the company and, additionally, the Board of Directors authorized an additional $250 million in share repurchases.
  • MCD Japan May comps came in at +0.9% year-over-year.
  • PFCB was upgraded to Neutral from Underperform at Credit Suisse.
  • Lazard Capital initiates BWLD, MCD, and SBUX.  BWLD is rated New Neutral while MCD and SBUX are both rated New Buy with price targets of $47 and $92, respectively.
  • CPKI has signed a franchise deal to expand in Taiwan with new franchise partner, Quanta Foods.  The plan is to open six new restaurants in Taiwan in the next five years.
  • BOBE is announcing its fiscal year-end earnings after the market close.  Consensus is looking for Bob Evans comps of +0.9% y/y and Mimi’s Café comps of -1.8% y/y.
  • MRT outperformed the space yesterday, gaining 6% on strong volume.




Howard Penney

Managing Director

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