Right Said Fed

“I’m a model. You know what I mean. I do my little turn on the catwalk.”

                -Right Said Fred, “I’m Too Sexy”


Conclusion: The Fed today provided further support to our Indefinitely Dovish thesis, which postulates that interest rate policy will stay at, or below, current levels well into 2012.  In addition, the door for QE3 was opened ever so slightly based on our read.


The FOMC statement today continued to verify our thesis of Indefinitely Dovish.   The interesting change in this statement versus the last statement is an acknowledgement of slower than expected economic growth and a jobs recovery that is more muted than versus the last FOMC statement in late April.  The outcome of these two changes is that the Fed has, tacitly, taken down its expectations for inflation based on this statement in the release today:


“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy other commodity price increases dissipate.”


He reiterated this in his press conference in which he said, “inflation remains well anchored.”


Our read through on this is that these statements are a shift and in contrast to Chairman Bernanke’s statement at the International Monetary Conference in early June when he said:


“That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.”


Reading too much into snippets of Fed Speak is dangerous at best, but it does provide some insight into what could happen next.  The Bernank is now admitting both that the economy is getting worse and that he believes that the outlook for inflation is now likely to be at lower than normal levels going forward.  So, the door has now been cracked open for Quantitative Easing 3.


We continue to believe to actually implement QE3, the Fed will need sustained negative monthly payrolls.  Prior to QE1, this was 9 negative months, while prior to QE2 this was 3 negative months.  In May, non-farm payrolls came in at +54K, which was an eight month low.  The June nonfarm payrolls will be released on July 8th and will be the key measure as to the direction of monetary easing from here.  If we get a negative print, QE3 will be solidly on the table.


That said, the Fed will likely not implement additional easing while inflation, as measured by CPI is accelerating. While we have been of the view that reported inflation will continue to accelerate or be heightened during the summer and into the early fall, by early Q1 2012 this should reverse. Thus, heading into 2012 tougher comps on commodity inflation will potentially lead to deflationary type concerns, or at least give the Fed complete cover for incremental easing, especially as the labor market is likely to remain challenged.


As part of today’s Federal Reserve events, the Fed released their update economic projections based on the “models” of the Board Members.  For 2012, they are taking down growth expectations, taking up unemployment expectations, and increasing inflation expectations.  At Hedgeye, we actually call slowing growth, increasing unemployment, and increases inflation, Jobless Stagflation.


In the press conference, Chairman Bernanke also indicated that keeping the federal funds rate at 0 to 0.25% for an extended period means for at least 2 – 3 FOMC meetings.  This of course continues to extend Bernanke’s tenure as the most accommodative Chairman in, well, the history of the Federal Reserve.  This is outlined in the table below.


Right Said Fed - DJ


If there is anything we can take away from the Fed’s projections, it is that they are based on lagging indicators and are seemingly inaccurate as it relates to actual economic outcomes.  Collectively, this is a little disconcerting since monetary policy is set and based on these “projections”.


You know what I mean?


Daryl G. Jones

Director of Research


Given the 5% increase in May passenger volume, total Strip gaming revenue growth could have reached double digits.



Following a disappointing April, May appears to have been a much better month on the Las Vegas Strip.  McCarran Airport just released May data that showed the number of enplaned/deplaned passengers grew 5.1% YoY, against a -1.6% comp.  In April, passenger volume increased 2.3% (-5.0% comp).  Despite the positive growth, April gaming revenues actually decreased 2.3% on the Strip despite a modest comp of down 0.9% in April of 2010.


Using our predictive model, we estimate that May Strip gaming revenues will increase 8-12% assuming positive auto traffic, normal hold percentages, negative slot handle per visitor, and positive table drop per visitor.  Last year, May gaming revenue fell 6.4% so the comp is easy, due in part to below normal table hold percentage.  Here are our estimates for May:



R3: DECK, Groupon, Carrefour, BOGO



June 22, 2011





  • After highlighting a streak of 29 weeks since their last BOGO, management of BWS noted that they will hold their first BOGO event in late July. Because of a reduction in activity with BOGOs down 44% in 2010 and another 29% reduction expected this year, management expects this year’s BTS event to ‘really engage the customer.’ For what it’s worth, we’ve never heard a management team say ‘our product looks like death, and we really think we’re going to turn off the consumer.’
  • Confirming a recent theme in retail, HBI noted that they too are seeing higher gas prices result in a consolidation in the number of shopping trips as noted by their customers. The offset has been an increase in average ticket, which has trended up driven in equal parts if not more so by the increase in units relative to pricing.




Deckers Shutters Simple Shoes - Simple is saying farewell. Goleta, Calif.-based Deckers Outdoor Corp. announced on Tuesday it would cease distribution of its Simple Shoes brand, effective Dec. 31. While Chairman, President and CEO Angel Martinez said in a statement he was proud of the brand’s efforts in producing eco-conscious footwear, the company chose to focus its efforts on its recently acquired Sanuk brand.  “Given that there is some degree of overlap between Simple and Sanuk consumers, and Sanuk’s positive outlook and global appeal, we make this difficult decision knowing it is in the best interests of the brands, the company and its shareholders,” Martinez said.  <WWD>

Hedgeye Retail’s Take:  The simple reality here is that DECK has followed suit with a growing theme in retail to ‘buy vs. build’ with its acquisition of Sanuk. The only problem is that the company had an existing brand that just couldn’t get off the ground. After coming to the realization that a focus on sustainability didn’t trump style, it was easier for the company refocus on a brand with over 1,700 points of distribution and positive revenue growth trajectory. Admitting defeat is never pleasant or easy to do, but you got to tip your hat to the DECK team here – putting Simple to bed is the right call.


Demographics of Groupon and LivingSocial Diverge - Daily deal sites Groupon and LivingSocial saw their audiences approximately triple in the year to April 2011, with gains of 250% and 182%, respectively, according to comScore’s “State of the US Online Retail Economy in Q1 2011” report. But while both play in the same space, differences have emerged in the geographies and demographics of their users, as well as their deployment of display and paid search advertising. The comScore analysis found that LivingSocial had an edge among East Coast-based users, while Groupon had more of a foothold among Midwest and West Coast-based consumers. This may not be all that surprising as LivingSocial is headquartered in Washington, D.C., and Groupon is based in Chicago. Beyond the geographic divergence, each provider appears to attract different types of users. comScore found that internet users under 45 leaned toward Groupon, while those ages 45 and older skewed more in favor of LivingSocial. Those ages 12 to 25 underindexed on usage of daily deal sites in general, but underindexed less strongly on Groupon. <emarketer>

Hedgeye Retail’s Take:  What’s interesting here is that according to results out of a Nielsen study back in March, LivingSocial’s demographic was younger than Groupon contrary to the results above. We appreciate the dynamic nature each sites respective demographic, but results would suggest that Groupon is making headway in the key demographic. LivingSocial’s churn rate according to comScore was also higher at 22% compared to 18% for Groupon in Q1 suggesting another metric whereby Groupon is edging out the competition.


R3: DECK, Groupon, Carrefour, BOGO - R3 6 22 11


Joe’s Jeans opens store in Dubai - Apparel maker Joe’s Jeans Inc. has opened a retail store in Dubai, United Arab Emirates, the first of at least seven stores it plans to open in the Middle East. The store at the Mirdif City Centre is part of an agreement with MultiTrend International to open stores in conjunction with exclusive rights to operate retail locations and market the Joe’s brand in Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and United Arab Emirates. MultiTrend, a member of the Al-Homaizi Group, is a franchisee or licensee in the Middle East for brands such as Destination Maternity; Spanish clothing brand Custo Barcelona; Go Sport, a French sporting goods retailer; and Cath Kidston, a British home accessories brand. The Al-Homaizi Group also has franchisee operations in casual and fine dining, including Burger King, Pizza Hut and Applebee’s franchises, food and beverages, including Al Rifai, Scoop a Cone and Boost Juice franchises, and home and office furnishings through IKEA franchises. <BizJournals>

Hedgeye Retail’s Take:  Joe’s has struggled to operating retail store profitably domestically in the U.S. so outsourcing to a partner with considerably more retail experience sounds like a prudent step. Additionally, without material operations outside the U.S., this deal is an important step to diversifying the company’s exposure. But really… the big issue for any brand always comes back to content, not distribution. The company should get the product right first.


Carrefour Shareholders Green-Light Dia Spin-off - French retailer Carrefour SA got the go-ahead from its shareholders Tuesday to spin off if its hard discount chain Dia, at the end of a stormy annual general meeting where minority shareholders and union representatives voiced their anger over the group’s disappointing performances. The resolution was approved by 77 percent of shareholders, clearing the way for Dia to be listed on the Madrid stock exchange on July 5. Carrefour, the world’s second largest retailer behind Wal-Mart Stores Inc., first put forward the spinoff in March as part of a controversial plan to sell some assets, after it rattled markets last year by issuing a profit warning and restating one-off charges in Brazil resulting from an audit. Carrefour chief executive officer Lars Olofsson had argued that the move would boost the company’s valuation and allow it to focus on turning around its key market, France, following its warning last week that current operating income in its domestic market was down 35 percent in the first half. <WWD>

Hedgeye Retail’s Take:  While some may argue the financial merits of divesting Dia, the reality is that the business has been a drag on management’s time and clearly disruptive – something investors typically underestimate given management’s perspective. Score one for shareholders making a difference.


BCBG Max Azria in $230 Million Refinancing - BCBG Max Azria Group Inc. has refinanced and is now slimming down with the closure of a major mass market business, although it is still not clear when vendors who have been awaiting payment in recent months will receive their money. Moody’s Investors Service offered some details of the $230 million refinancing as it upgraded the firm’s corporate family credit rating to “B3” from “Caa1,” indicating that while the company is on steadier ground it is still subject to “high credit risk.” “Given the potential for a double-digit consolidated revenue decline in 2011 due to the wind-down of a large mass market contract, a ratings upgrade is unlikely in the near term,” the rating agency said. That likely spells the end for the Miley Cyrus & Max Azria brand sold exclusively at Wal-Mart, although BCBG did not elaborate on the Moody’s report by press time. The Miley Cyrus line launched with much fanfare in August 2009, but has been said to be floundering. The Tex by Max Azria line, a collaboration with Carrefour, was closed in 2009. <WWD>

Hedgeye Retail’s Take:  Without added clarity for vendors, BCBG is still subject to restricted product flow and the competitive disadvantage that comes with it. Coupled with added pressure from increasing interest for exclusive deals it looks like BCBG is going to be a share loser for the foreseeable future.


New Textile and Apparel Standards Announced in China - China’s General Administration of Quality Supervision, Inspection and Quarantine, Standardization Administration has recently approved 192 national standards, among which eight standards relating to textile products. Products fall into the textile category include knitted wadded garments, knitting patchwork clothing, woolen fabrics, woodpulp spunlaced non-woven textiles, silk textiles, synthetic filament weaved gray fabrics, worsted fabrics and worsted fabrics with radioresistance. It is imperative that manufacturers and importers of items that are covered by these new standards take the necessary action to ensure that their goods meet these new requirements. The execution date of the new standards will be September 15th, 2011. <FashionNetAsia>

Hedgeye Retail’s Take:  With the gap between the cost of labor in China and its competitors compressing, quality becomes more important; however, establishing standards is one thing enforcing them is another altogether – an area where China has not had the best track record. The reality is that this simply gives Big Brother a stronger hand in being able to stop product that it deems unworthy of a ‘made in China’ tag. A very smart move, actually…whether it uses it or not.


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Price instability continues in commodity markets with large gains and declines seen in many commodities over the past week.



Coffee, wheat and corn prices came down considerably week-over-week while meat prices soared.  Earnings kick off, in earnest, in mid-July and it will be fascinating to hear what management teams have to say about cost of sales.  Cheese, in particular, is one that catches the eye.  The price of cheese conveniently declined into last quarter’s earnings calls but has now shot back past the March high to a YTD high (see detail below).  The USDA estimates that overall that U.S. food costs may rise 4% this year, the most since 2008.






Beef prices have risen sharply over the past week to boost the YTD figure back into positive territory after a drought in Texas, and subsequent slaughtering of livestock, has provided some relief in beef prices.  Recent supply and demand metrics suggest that the elevated prices of beef may continue for some time, perhaps exceeding the expectations of some management teams. 


Live cattle prices were supported by tighter supply pulling demand forward.  Overseas demand for U.S. beef as also pushed prices higher. 


Below are some comments from management teams on recent earnings calls regarding beef costs that we feel are important to keep in mind heading into the upcoming earnings season:


  • RRGB (5/20/11): Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins.  Hedgeye: live cattle prices are up +25% y/y
  • JACK (5/19/11): Beef accounts for more than 20% of our spend and is the biggest factor driving the change in our guidance. For the full year, we are now anticipating beef cost to be up nearly 14% versus our previous expectation of 9% inflation. We expect beef cost to be up approximately 14% to 15% in the third quarter. Hedgeye: beef costs are likely going to exceed JACK’s prior guidance.
  • WEN (5/10/11): We communicated to you back in March that we expected beef cost to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011. We are now forecasting that our beef cost will rise 20%. Hedgeye: there is moderate upside risk to beef price guidance for WEN.
  • MRT (5/4/11):

Q: I wanted to re-visit the overall expectations for your commodities basket, and I missed the part about beef, just wanted to verify that it was up in the 20% range.

A: No. No, no. I said the low double-digits.

  • EAT (4/27/11):  Well, consistent with what we've talked about in the last month or so as we visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket.
  • MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. If they stay around these levels, the 4% to 4.5% [commodity guidance for 2011] should be locked in. If they move dramatically up or down, then we'll have to reflect that as we move forward. Hedgeye: inflation guidance may have to be adjusted higher.





Wheat costs declined -5.8% over the past week as temperatures, variable rainfall, and adequate soil-moisture reserves in the U.S. Midwest will promote plant growth, according to Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa.  Ukraine’s exports of wheat will probably decline to 3.7 million metric tons for the year ended June 30 from 9.2 million tons the year prior (a 60% decline).  Prices have gained over the past couple of days on speculation that the lower prices will bring in buyers.


Below are some comments from management teams on recent earnings calls regarding wheat costs that we feel are important to keep in mind heading into the upcoming earnings season:

  • MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. If they stay around these levels, the 4% to 4.5% [commodity guidance for 2011] should be locked in. If they move dramatically up or down, then we'll have to reflect that as we move forward. Hedgeye: inflation guidance may have to be adjusted higher.
  • PNRA (4/27/11): In this expense line, we expect margin unfavorability to continue to grow on increased all-in cost inflation throughout the year -- and because we haven't taken and we don't currently plan to take pricing in our dough sales for franchisees this year.  Hedgeye: wheat inflation could possibly subside in the back half of the year as comparisons become less unfavorable for buyers.  This will be more likely, of course, if the dollar strengthens.
  • DPZ (3/1/11): We’ve got wheat locked down for the year.





Dairy costs were relatively flat week-over-week but, pertaining to our short thesis on CAKE, the chart below tells you all you need to know about their inflation guidance for 2011 (+4.5% in 1H, +2.5% in 2H).  Barring a significant drop in dairy prices, it is likely that inflation guidance for 2H will have to be raised.






Chicken wing prices seem to be turning higher as we head into the second half of the year.  This is not unusual, as the chart below shows, but on a global basis it seems that chicken prices may see more support going forward.  Inflation is clearly not likely for the remainder of 2011 but, as this is almost certainly baked into the price of BWLD, the outlook into 2012 is important to monitor. 





Howard Penney

Managing Director

Athletic Apparel Industry Sales Rebound


Athletic apparel industry sales rebounded sharply this week after three consecutive weeks of sequential declines. Sales in the athletic specialty channel ticked slightly lower though continue to outpace the industry and remain robust up +10% against the toughest compares over the next two months. The most notable callout this week is the strength in ASPs across the board and continued growth in the specialty athletic channel suggesting further evidence that inventory levels in the channel remain in check.


Athletic Apparel Industry Sales Rebound - FW App App Table 6 22 11


Casey Flavin


Downward Facing Dog

This note was originally published June 22, 2011 at 08:30am ET.


“It ain’t over ‘til it’s over.”

-Yogi Berra


My name is Daryl Jones.  I’m a former hockey player from Alberta.  I practice yoga (sometimes even Bikram yoga).


Last night I was thinking what it must be like for the Greek Socialists to have to fully embrace the concept of dramatically cutting government spending.  From a personal perspective, I think it is a little like me admitting that I practice Yoga.  In my heart, I’m still a hockey player, but deep down I also know that practicing yoga is much better for my aging, thirty-something body.  Nonetheless, it remains embarrassing to admit. (No offense to any of our Yogi readers.)


Yesterday, Greek Prime Minister George Papandreou won a confidence vote to sustain his leadership of the Greek government.  The next major date for the Greek government is June 30th when the Greek parliament votes on austerity measures of EUR28 billion.  Assuming these measures are passed, then the EU and IMF will extend a EUR12 billion lifeline to Greece.


Obviously, it is unlikely that these austerity measures do not pass, given the new cabinet has passed the confidence test.  The reaction from the markets to the likelihood of austerity and additional bailout monies for Greece was, well, muted at best.  In fact, Greek 10-year yields declined a measly 30 basis points from yesterday to 16.97%, while the periphery yields moved even less with both Spain and Italy 10-year yields effectively flat from yesterday.  The markets are calling the impending extend and pretend from the EU and IMF for what it is – a short term solution to a long term issue.  As we all know, being on the wrong side of a duration mismatch is never a good thing.


The other day I had an exchange with a friend that started with her asking me generally about the economy (for purposes of privacy we will call her The Diplomat).  Our discussion quickly evolved into a broad discussion of economic policy.  To be fair to The Diplomat, while she has a BA from Yale and law degree from Harvard, she has a limited economic background.  She also willfully admitted that she gets most of her info from The New Yorker and New York Times.  After I went on a bit of rant about the low return of government spending, she responded, “I thought Keynesian economics was sound.”


This, ironically, is the one key positive from the sovereign debt issues in Europe.  These issues are quickening the pace towards the demise of Keynesian economics.  The simple fact that a Greek Socialist had to fight to retain his government in order to have the ability to pass massive government spending cuts is about as representative of the end of Keynesian economics as it gets. In the long run, this will be a positive.  In the short run, we will see more pain.


Just over a year ago, on May 18th, 2010, we gave a presentation to our subscribers entitled, “Bearish Enough on Spain?”.  The presentation is posted here:


Last May, while the Greek issues were widely known, we contended that investors were not bearish enough on the peripheries, in particular Spain.  Spanish CDS literally bottomed the day we gave our presentation and has been trending upwards steadily ever since.  Specifically, 5-year CDS closed at 177bps on May 18th, 2010 and last traded at 279bps, which is a 56.8% return from our call.


The primary takeaway from Greece’s actions yesterday and the market’s reaction today is that sovereign debt issues are far from over and, we would submit, our call that investors are still not bearish enough on the peripheries remains intact.  If Greece can rattle the world’s markets, the reaction will be amplified as fiscal and debt issues accelerate in Spain and Italy.  For reference, Spain is the 8th largest economy in the world and 5th largest in Europe, or 5x the size of Greece.  Spain ain’t Kansas, and I ain’t Toto.


With the excitement in Greece behind us, the focus returns to the United States today and the FOMC statement and the Bernanke presser thereafter.  Our view on U.S. interest rate policy is that the Fed will remain Indefinitely Dovish.  To be specific, we believe this means an interest rate increase will not occur before well into 2012.  As for Quantitative Easing, recent rhetoric suggests that the Fed is done with this policy.   History, on the other hand, suggests that if we get three or so months of negative payrolls, the policy will be revisited, even though Chairman Bernanke clearly appears frustrated by the limited impact of QE1 and QE2. 


The reality is, though, that the ineffectiveness of QE1 didn’t stop the Fed from implementing QE2.  Personally, I don’t believe I’ve seen a more apropos manifestation of Albert Einstein’s definition of insanity than Quantitative Easing. As Einstein said:


“Insanity: doing the same thing over and over again and expecting different results.”




Daryl G. Jones

Managing Director


Downward Facing Dog - Chart of the Day


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