Retail: Q4 Vortex


This morning’s sales reports reinforce our standing view that Q3 is setting up to be the worst in two-years. Following a choppy August BTS season, September sales came in better than expected setting the stage for what turned out to be a very disappointing October to cap off Q3. Perhaps the biggest callout out of October numbers is the swing in top-line trends. This is stating the obvious – we realize; however, recall that sales came in stronger than expected, but weren’t translating to commensurate bottom-line growth last month. Now both top-line AND bottom-line trends are rolling heading into Q4. The result is widespread revisions for both Q3 as well as for the full-year. In addition to continued weakness in low-to-mid tier markets, the spread between high-end outperformance relative to the low-end narrowed in October reflecting incremental weakness at the high-end. Despite the chink in high-end demand, the low-to-mid-tier retailers (e.g. BONT, SSI, JCP, etc.) are slowing at a faster rate. We still firmly think there will be an increased bifurcation between upward and downward revisions in retail over the next quarter and into 2012.


A few additional callouts in October:

  • The High/Low-end performance spread has narrowed. Within department stores,  Neimans +8% and JWN +5.4%continue to post solid results while SKS +1.8% and M +2.2% came in weaker than expected and more in-line with KSS, +3.9%, TJX +3%, and SSI +0.8%. The clear underperformers were JCP -2.6% and BONT -10.2%.
  • Consistent with recent months, Discounters continue to be among the strongest performing segment of retail. This is likely due to greater grocery exposure, which continues to be a key category. Retailers with exposure there (TGT up low-teen and COST up DD) fared better than most with COST betting expectations and TGT coming in light, though still up +3.3%.
  • JCP was again a clear negative callout. While the company didn’t revise its guidance, it should have and we expect it to when they report next week with Q3 comps coming in down -1.6%. The Street’s at $1.19 for Q4, we’re shaking out under a buck. A consistent disappointment of late is the company’s e-commerce, which posted its third straight decline down -4.5% with comps ahead only getting tougher. This continues to defy explanation as e-commerce is one of the few positive channels for any retailer not named JCP.
  • Lastly, we have to callout HBI admitting that it got its forecasting wrong on last night’s call. Compounding the error, they also highlighted that after a tough August, strong sales in September and October should reaccelerate order demand. Perhaps they should have held the call until after retailers reported October sales as that certainly doesn’t appear to be the case. 

The bottom-line is that sales are now getting weaker across the board – including at the high-end. However, the domestic mid-tier market continues to experience a more aggressive roll in both  top and bottom line results setting up for increased volatility heading into year-end. We would still avoid most names that touch the domestic mid-tier market. 


Shorts: JCP, HBI, UA, GIL

Longs: LIZ, WMT, NKE


Retail: Q4 Vortex  - SSS BeatMiss 11 11


Retail: Q4 Vortex  - SSS Mo Seasonality 11 11


Retail: Q4 Vortex  - total SSS 11 3 11


Retail: Q4 Vortex  - SSS one year comps 11 3 11


Retail: Q4 Vortex  - SSS two year comps 11 3 11


Retail: Q4 Vortex  - Equal Weighted SSS 11 3 11


Casey Flavin







Notable macro data points, news items, and price action pertaining to the restaurant space.





Initial jobless claims came in at 397K versus 400k expectations and a revised 406k in the week prior.  The drop below the 400,000 threshold in the latest week was better than expected improvement and puts initial jobless claims at their lowest level since late September; the downtick in claims points to slowly improving economic data. Continuing claims dropped in the prior week.


Bloomberg Consumer Comfort Index fell to -53.2 in the latest week the second-lowest reading in almost 26 years of data.  The index has held below -50 for six of the past seven weeks; a period unmatched even during the 2008-2009 recession.








WEN:  Wendy’s top-line has strengthened thanks to advertising and the new burger.  We now like Wendy’s on the long side from a TRADE (3wks or less) and TAIL (3yrs or less) perspective.  We have no stance on the TREND (3mos or more). 


EAT: We like Brinker on the long side from a TRADE (3 weeks or less) TREND (3 months or more) and TAIL ( 3 years or less).  Today's new from DIN and CHUX suggest that Chili's is gaining share in the Bar & Grill space


THE HBM: WEN (TRADE UPDATE), DIN, CHUX, DRI, CAKE - applebees chilis




STEAK CATEGORY: Outback Steakhouse launched a new holiday promotion Wednesday that includes steak combinations with grilled shrimp, ribs and lobster tail.  Officials with Outback’s Tampa, Florida-based parent OSI Restaurant Partners LLC, said the combination plates start at $11.99 and will be available through January 17. Options include herb-roasted prime rib paired with a lobster tail and served with a side salad; Outback’s signature sirloin paired with a skewer of grilled shrimp; or a six-ounce sirloin served with a half-rack of wood-fired grilled ribs. All are served with a dressed baked potato


DIN:  Dine Equity reported Q3 EPS of $1.04 versus expectations of $0.99.  The company reduced guidance for Applebee’s domestic system-wide same-restaurant sales performance to a range of 1.5% to 2% versus 2% to 4% prior.  Consensus is 1.7%.  Consolidated free cash flow guidance was lowered to between $104 and $114M which reflects a reduction from previous expectations of $112 to $122M.  We believe that Chili’s is part of the problem and continue to like EAT.


CHUX: O’Charley’s reported a loss of -$0.18 versus expectations of -$0.17 for the third quarter.  Comps came in at -0.9% versus consensus of +0.7%.  The overcrowded Bar & Grill category is suffering.  Ninety Nine’s 3Q comps  were +4.1% versus expectations of +1.7% and Stoney River printed a +6.8% versus expectations of +3.8%.


DRI: Darden was downgraded to Neutral by Janney Montgomery on concern that comps are decelerating.  We agree that comps are decelerating but there are better shorts in the group.


CAKE: Cheesecake Factory was downgraded to Neutral by Janney Montgomery.





Howard Penney

Managing Director



Rory Green



Daily Trading Ranges

20 Proprietary Risk Ranges

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

Licking Gravity

This note was originally published at 8am on October 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We can lick gravity, but sometimes the paperwork is overwhelming.”

-Werner von Braun


The only problem with last week contributing to the best month for stocks since 1974, is the 1970s. This morning, between German Retail Sales falling to flat year-over-year and Eurozone inflation (CPI) remaining at +3%, European Stagflation remains.


Most of last week’s fanfare can be boiled down to one solid gravitational factor that underpins all of the math behind what we’ve been calling The Correlation Risk – the US Dollar. If you get the US Dollar Index’s direction right, you’ll get most other things right.


The US Dollar Index is up +1.3% so far this morning. That’s a good start to my week because my being long it last week was nasty. Inclusive of a -1.7% week-over-week drawdown, the US Dollar was down for the 3rdconsecutive week, and down -4.6% since the week ended October 7th, 2011.


Since that 1stweek of October (after the Cover of Barron’s said “Watch Out, Mr. Bull” – this weekend it said “Not So Fast, Mr. Bear”?), this is what other major moves in Global Macro have looked like:

  1. Euro/USD = +6.1%
  2. CRB Commodities Index = +6.6%
  3. Oil = +12.5%
  4. Copper = +14.9%
  5. Volatility (VIX) = -32%
  6. 10-yr US Treasury Yield = +12%

So what was this all about – Growth or Gravity?


We’ve had plenty of rallies since the start of 2011 where consensus has been convinced that this has been all about growth. The only problem with that is that there is a big difference between growth and inflation. That’s why the legitimate calculations of GDP growth apply a legitimate “deflator” to the nominal growth estimate. It’s called the purchasing power of money.


Remember in Q1 of 2011 when Sell-Side and Washington “economists” had +3-4% 2011 GDP and 1450 SP500 targets? We do. We also remember that the price of oil was tracking upwards of $110/barrel – and that had a big impact on global economic growth slowing.


After it was revised -81% to the downside versus the “preliminary US government estimate”, US GDP growth in 1Q11 was only 0.36%. That was using a “deflator” that we’d consider accommodative to the Big Government Interventionist camp that it’s not Policy, Stupid.


That was then – this is now. What does this economy need from here?


A)     More US Dollar Debauchery

B)      Higher Oil prices

C)      Stock market cheerleading based on A) and B)


Alex, I’ll take a restroom break and the other side of Jon Corzine’s long/short book for $1,000.


Obviously most people whose compensation isn’t solely tied to stock market inflations are allowed to get the point here. Not surprisingly, amidst last week’s generational squeeze, a few not so funny things happened on the way to the Europig Forum:

  1. European PIIG Bond Yields (Italy most specifically) hit new 3-year highs
  2. TED Spread (measures global banking counterparty risk) hit a new 2011 YTD high
  3. US Financials (XLF), The Russell 2000 (IWM), and the price of Copper (JJC) all failed at their long-term TAIL lines of resistance

Now that last point is probably the most interesting – because, essentially, it ties back to the aforementioned point about growth. It’s a question really. The Question this morning (as in what you do with your money right here and now): is Global Growth “back” OR was that just another Dollar Down reflation of asset prices?


Longer-term, I think the only way to recover real US economic growth (adjusting for inflation) is to:


1.       Strengthen the US Dollar

2.       Deflate The Inflation

3.       Strengthen Employment


In the Chart of the Day, you’ll see this quite clearly across US Presidential terms. Someone running for President in 2012 really needs to use this picture. Going all the way back to when Richard Nixon abandoned the Gold Standard (1971) and embarked on today’s Euro-style debt monetization scheme, a Strong US Dollar = Strong America.


To be sure, looking back at the last 18 days of the biggest move ever in stock prices (ever is a long time), Licking Gravity’s  short-term political resolve has its Month-End Markup perks, for some of us…


But, for most of us, the long-term TAILs of Global Growth are still broken.


My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND), Oil (bullish TRADE; bearish TAIL), German DAX (bullish TRADE; bearish TAIL), and the SP500 (bullish TRADE and TREND) are now $1706-1774, $90.19-93.86, 6098-6455, and 1267-1294, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Licking Gravity - Chart of the Day


Licking Gravity - Virtual Portfolio


“A plague o’ both your houses!”

-Mercutio, Romeo and Juliet


Mercutio’s immortal phrase was aimed at the houses of Montague and Capulet whose feuding led to the tragic sequence of events that make up one of Shakespeare’s most famous and timeless pieces.  The phrase has been resurrected ever since to express frustration, typically with two opposing sides of an argument. 


Franklin Delano Roosevelt, following a bloody clash between striking steel workers and the Chicago Police Department that came to be known as the Memorial Day Massacre of 1937, said that “The majority of people are saying just one thing, ‘A plague on both your houses’”.   Today, among the dearth of political leadership in Washington at such a time of crisis, many in the country are saying the same to the respective political parties.


Frustration is usually a transient feeling, sooner or later dissipated by resolution, compromise, apathy, or distraction.  As being poor became a way of life for many during the Great Depression, it seems frustration is now becoming a core component for not only the American existence, but for many people around the world. 


Conspiracy theories abound regarding the Federal Reserve and the degree of corruption that exists in America’s economic and political institutions but, Ben Bernanke’s assertion that the slow pace of economic growth is “frustrating” seems genuine to me.  I think frustration is something the country can relate to.  However, it was nearly unconscionable to me that he would used the phrase of a “bit of bad luck” when referring to the spike in oil prices and the dampening effect it had on economic growth this past year.  It was clear to us at Hedgeye that the Federal Reserve’s own policies were significant drivers of higher oil prices.       


Another political plague exists today in Europe as the never-ending saga of the sovereign debt crisis rambles on.  It has long been said by European officials that the union must be preserved and that the respective futures of the member states are inextricably linked, by both circumstance and by law.  I would view the former as being somewhat subjective and the latter as being, as was shown when Brussels consented to bailouts that may or may not be forbidden by the Maastricht Treaty, completely open to interpretation if the situation demands it.  A dramatic series of events is needed and the one certainty is that there will be pain.  Listening to politicians bending logic and essentially wasting further time with tired old solutions is becoming frustrating for Europe’s people.     


When President Obama was elected in 2008, he had successfully campaigned on a message of change.  I, like many other Americans, was taken by the message and the delivery, but it’s not possible for one person to change a compromised political system and this country is realizing now that there will be no quick fix.


This realization is all the more daunting when one considers that many of the same actors are in the same roles that they’ve been in for years.  Geithner and Bernanke are some of the most obvious examples but recent news of John Corzine possibly being culpable in the collapse of MF Global following his claim that thirteen years ago he “understood the flaws” at Long Term Capital Management better than anyone is equally disheartening.   


If repeating the same action again and again and expecting a different result is the definition of insanity, to use Einstein’s quote, then surely entrusting the same players with the same or similar responsibilities and expecting different results is also a folly.   In this respect, Wall Street and Washington D.C., are frustrating their shareholders and voters to no end.


The cast iron dogmas of the sphere of investing, as those of the policy world, are being exposed as useless.  We believe that a flexible, nimble, and data-driven investment process is essential to surviving the turbulence that is visiting the financial markets with greater and greater frequency as the unpredictable actions of governments continue to cause uncertainty.  Clearly some of the old guard in Wall Street, and Mr. Corzine is one example, have not learned to invest prudently. 


Over recent weeks, predicting whether macro factors or earnings were to be the driving force behind stock performance on any given day has been a fool’s errand.  With the wisdom of hindsight, however, I can say that macro factors have been more of a focus than earnings over the past month.  The “Greece Doesn’t Matter” television pundits have been quiet of late.  Soon the earnings season will be over and a new macro season starts.  Our “King Dollar” thesis is going to be one that we monitor closely with a minefield of catalysts heading into the holiday season.  Hedgeye has been highly accurate in calling the US Dollar over the last three years and, as Keith likes to say, “if you get the dollar right you get a lot of other things right.” 


Just as Wall Street needs a change in leadership, our policy makers need to step aside and allow new leaders to win back the confidence of the country.  The Federal Reserve’s forecast for GDP growth in 2011 is now 1.6%-1.7% versus 2.7%-2.9% prior and 2.5%-2.9% versus 3.3%-3.7% prior for 2012.  In a year, according to the Federal Reserve’s updated economic projections, the unemployment rate is scheduled to be 8.6%.  The Federal Reserve’s track record is less-than-satisfactory, so those projections certainly should not be relied upon and are likely overly-optimistic.  A mere 40 basis points of improvement in the unemployment rate is certainly frustrating.   40 basis points is of little use to the 46 million Americans now depending on food stamps for sustenance.


I can respect the experience that many of the policy makers in Washington possess and would love to someday hear or read any of their perspectives on what went wrong in the last few years.  However, given that this country is currently embroiled in a sort of economic Vietnam, I believe that the coach – President Obama – will ultimately be judged harshly for not having brought in new players in key economic policy roles.  Experience can be good but it isn’t necessarily always helpful.  As Robert Benchley said, “A boy can learn a lot from a dog: obedience, loyalty, and the importance of turning around three times before lying down”. 


Function in disaster; finish in style,


Howard Penney


FRUSTRATED - EL Chart 11.3


FRUSTRATED - Virtual Portfolio




TODAY’S S&P 500 SET-UP - November 3, 2011


Another day, another dislocation between stocks and bonds – bond yields have had the big moves right in 2011.  As we look at today’s set up for the S&P 500, the range is 37 points or -2.09% downside to 1212 and 0.90% upside to 1249. 











  • ADVANCE/DECLINE LINE: +1998 (+4151) 
  • VOLUME: NYSE 957.34 (-27.98%)
  • VIX:  32.74 -5.84% YTD PERFORMANCE: +84.45%
  • SPX PUT/CALL RATIO: 2.29 from 2.29 (-0.28%)




TREASURIES – UST 10yr yields are down -16% (39 bps) since this hour of the morning last Thursday; that’s a lot. And now we have 10s bearish on both TRADE and TREND durations again (TRADE line support was 2.11% and we’re looking at 2.02% this morning with the Yield Spread (10s minus 2s) down from 203bps wide at the start of the wk to 179bps this morn – not good).

  • TED SPREAD: 43.30
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 2.01    
  • YIELD CURVE: 1.80 from 1.78


MACRO DATA POINTS (Bloomberg Estimates):

  • 8am: RBC Consumer Outlook, prior 39.2
  • 8:30am: Nonfarm Productiviity, est. 3.0%, prior -0.7%
  • 8:30am: Jobless claims, est. 400k, prior 402k
  • 9:45am: Bloomberg Consumer Comfort, prior 51.1
  • 10am: ISM Non-Manufacturing, est. 53.5, prior 50.0
  • 10am: Factory orders, est. -0.2%, prior -0.2%
  • 10:30am: EIA natural gas storage, est. 70, prior 92


  • American Eagle Outfitters (AEO): narrows 3Q earnings forecast to 26c-27c/shr from 22c-27c, exceeding est. by at least 3c
  • Costco (COST); U.S. comp sales ex-fuel beat est.
  • Whole Foods Market (WFM): fails to increase its fiscal 2012 profit forecast, still sees EPS $2.21-$2.26
  • Groupon IPO expected to price this evening; yesterday, co. was said to stop taking orders for IPO because of demand
  • German, French leaders withheld EU8b, warned that Greece will surrender all European aid if it votes against bailout package agreed only last week.
  • MF Global’s commodity customer funds have shortfall of $633m, CFTC said
  • SEC likely to file charges against more Wall Street firms in connection with sale of mortgage-linked securities: FT
  • Bank of England, ECB announce interest rate decisions later today



COMMODITIES: The CRB Index remains bearish TREND and TAIL with a wall of resistance 326-335





  • Porsche Sells Malbec to Keep Autos Coming Into Argentina: Cars
  • Ikea’s Paper Pallet Challenges Wood’s 50-Year Dominance: Freight
  • Skunky Smells, 150-Decibel Blasts Pitched as Pirate Defenses
  • Gold Drops With Commodities as European Leaders Cut Greek Aid
  • China Record Corn Crop Still Failing to Meet Demand: Commodities
  • World Food Prices Drop Most in 19 Months on Grain, Dairy Slump
  • MF May Have Transferred Customer Money After Audit, CME Says
  • Oil Drops After Europe Freezes Greek Aid, U.S. Stockpiles Rise
  • U.S. Stocks Rebound, Commodities Rise as Dollar Slips After Fed
  • Coal India to Quicken Search for Overseas Mines as Output Drops
  • China Plans ‘Orderly’ Delivery of New Ships as Glut Hits Rates
  • Midwest Refinery Upgrades Boost Canadian Crudes: Energy Markets
  • Copper Declines on Concern European Debt Crisis to Damp Demand
  • Copper Resumes Drop on More Signs of China Slowdown: LME Preview
  • China Will Not Change Domestic Monetary Policy, Zhang Says
  • Thousands March in Oakland Shutting Down Fifth Busiest U.S. Port
  • Twenty-Five Indonesian Tin Producers to Extend Export Ban
  • Oil Near Two-Month High as Europe Presses Greece on Rescue Deal
  • U.S. Rebel’s Split Riles $6 Billion World of Ethical Commerce
  • Top Gold Forecasters See Rally to Record by March: Commodities








EUROPE -  "off the lows" again, this rally looks really suspect (no volume) as the CAC in particular remains bearish/broken across durations


FRANCE – interestingly, but not surprisingly, French bond yields are flagging the nasty – whether you look at the spread risk b/t German Bunds or the nominal level of French 10s, it all looks the same to me – on the stock side, the CAC40 keeps failing at my TREND zone of 3403. France’s stock market remains in crash mode (> 20% peak to trough decline for the YTD)







ASIA: ugly breakdowns in both the Hang Seng (-2.5%) and KOSPI (1.5%) overnight; both remain bearish on the Hedgeye TREND duration








The Hedgeye Macro Team

Howard Penney

Managing Director

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