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Retail Sentiment = Opportunity

We’re seeing some very notable sentiment changes. Great setup for WMT on the margin. Also looking good – LIZ, GES, COLM, URBN. Negative callouts include M, DECK, TJX. Keep an eye on NKE and JCP. They can go either way.


Here are some interesting callouts in our Hedgeye Retail Sentiment Scoreboard. As a reminder, our Scoreboard combines buy-side and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. We won’t belittle the art of stock picking by implying that simply going counter to what a chart says will make money. But this analysis is heavily quantified, back-tested, and most of all…accurate. We use it as a part of our process to flag the outliers. (Think of it like the manager of a baseball team sending a batter to the plate and starting off with a 2-0 count).


Here are some important notables:


WMT: The fact that WMT went down to 74 from 92 over the past year is stunning – though it appears that this negative trend has stabilized. WMT remains one of our top picks.


NKE: While Nike’s Sentiment has come down meaningfully to 84 from 94 in July, it still has the highest sentiment score on our radar.


URBN: The contrarian bull case has been building for URBN for over a year now. Sentiment has steadily eroded from a high score of 70 down to 30. Now that all the bears are out of hibernation, we think that the incremental shifts will be on the positive side.


LIZ: LIZ was one of our favorites when its score was a 5. A few asset sales later as well as a more clearly defined brand strategy moving forward have gotten more people involved; the score is pushing double digits – but still among the lowest in all of retail (ie people are still not bullish enough).


CRI/GIL/HBI: Scores for the perceived commodity-heavy names improved throughout September and October. More recently however, GIL and HBI have declined sharply while CRI accelerated 8 points last week. Sell-side upgrades and expectations of a minimally promotional holiday shopping season have had no impact on our thesis. We’re still bearish on all three.


LULU: This week’s score jolted up 13 points to 41. The quarter definitely raised flags, but the stock saw immediate upgrades and short covering, which took sentiment higher.


GES: The long term merchandising and geographic opportunities for GES remain positive but short term headwinds in Europe and rising concerns around North America have driven the sentiment score down 10+ points over the past month. As it heads lower, we like it more.


COLM: Over the past 6 weeks, Columbia’s score has deteriorated by 20 points to 36. Someone is making a big negative bet here – likely on its tremendous International exposure (45% of EBIT).


DECK: The perennially bearish sentiment on DECK is now sitting at its most bullish position in years. Are people finally giving in to the idea that UGG is not a fad?


M: Macy’s is hitting peak sentiment. Yes, the name is cheap if you believe numbers. But we don’t believe numbers.


UA: Retraced 10 points over the past two months. Still bearish overall with a score of 40, but not bearish enough.


Retail Sentiment = Opportunity - discount stores


Retail Sentiment = Opportunity - apparel retail


Retail Sentiment = Opportunity - low tier apparel


Retail Sentiment = Opportunity - upper tier apparel


Retail Sentiment = Opportunity - department stores


Retail Sentiment = Opportunity - footwear


Retail Sentiment = Opportunity - sporting goods


Retail Sentiment = Opportunity - other sentiment


Weekly Latin American Risk Monitor: Looser Policy Forthcoming

Conclusion: Both leading market price indicators and lagging economic fundamentals lend us further conviction in our expectation of a monetary easing cycle across Latin America over the intermediate term.



  • Equities: Latin American equity markets are trading down -2.1% wk/wk as of now. Argentina, a country we remain fundamentally bearish of, led decliners (-5.4% wk/wk).
  • FX: Latin American currencies closed down -0.6% w/wk vs. the USD, led to the downside by Brazil’s real and Mexico’s peso (down -3.8% and -2.9%, respectively).
  • Fixed Income: Latin American sovereign debt yields generally increased wk/wk, highlighted by the backup across Mexico’s maturity curve: 2yr up +8bps; 10yr up +15bps; and 30yr up +20bps. Yield curves mostly compressed across the region as slowing growth remains an issue.
  • Credit: 5yr sovereign CDS broadly widened wk/wk, trading up +1.5% wk/wk on a median percentage basis. Venezuela held out, tightening -32bps or -3.4%.
  • Rates (1yr O/S Swaps): Bullish wk/wk action across Latin American interest rate swaps markets; Mexico widened +24bps wk/wk and Brazil continues to trade a full -112bps below the central bank’s policy rate.
  • Rates (O/N): Interbank rates signaled a broader easing of liquidity across Latin America, with Brazil seeing a -5bps wk/wk decline. Conversely, Mexico saw a +5bps wk/wk tightening.



Brazil’s growth/inflation outlook augers well for continued monetary easing:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 1


That view is being priced into various fixed income and interest rate markets throughout Brazil:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 2


The Currency Crash in the Mexican peso suggests Agustin Carstens and Co. might be next to join Brazil in lowering interest rates:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 3



Growth Slowing:

  • Brazil’s real GDP growth slowed in 3Q to +2.1% YoY vs. +3.1% prior; flat sequentially (QoQ) vs. +0.7% prior. Brazilian retail sales growth slowed in Oct; inflation-adjusted sales grew +4.3% YoY vs. +5.2% prior; unit volume growth came in at +1.6% YoY vs. +4.7% prior.
  • Mexican consumer confidence ticked down in Nov to 89.5 vs. 90.6 prior. Industrial production growth slowed in Oct to +3.3% YoY vs. +3.6%.
  • Chilean economic activity growth slowed in Oct to +3.4% YoY vs. +5.7% prior. Export growth slowed in Nov to +0.3% YoY vs. +18.2% prior.

Deflating the Inflation:

  • Brazilian CPI slowed in Nov to +6.6% YoY vs. +7% prior; the continued slowing remains in-line with our models and the central bank’s expectations, which point to CPI falling to the mid-point of the target range (+4.5%) by year-end 2012 – a forecast that is inclusive of the recent rate cuts. Antonio Fraga, a former Brazilian central bank head now on the buyside, expects Brazilian interest rates to fall to a record low under President Rousseff, whose administration has been applying well-documented pressure to the central bank to continue lowering interest rates.

Sticky Stagflation:

  • Chilean CPI accelerated slightly to +3.8% YoY vs. +3.7% prior.
  • Venezuelan CPI accelerated in Nov to +27.6% YoY vs. +26.9% prior.

King Dollar:

  • Per Brazil’s Deputy Finance Minister Nelson Barbosa, the country plans to rely further upon monetary easing (both trailing and future) and less upon fiscal easing to stimulate the economy in 2012. Moreover, he confirmed that the country would not rely upon a widespread expansion of state-directed lending as seen in the 2008-09 downturn. As highlighted in our Black Book on Brazil, this is positive for the long-term health of the Brazilian economy, as backdoor capital injections into these banks will be limited to R$25B vs. R$100B-plus in previous years. Net-net, we expect further rate cuts and a potential for fiscal metrics to “miss” expectations to weigh on the BRL going forward. To the former point, the 1y O/S swaps market is trading 112bps below the current Selic target rate and Brazil’s interbank futures market is pricing in three additional -50bps cuts by next August. To the latter point, the central bank is forecasting +3.5% GDP in 2012 – a full 150bps below the government’s +5% target, which suggests to us that revenues may come in light next year and widen the deficit relative to the official target.
  • After a -15.6% peak-to-trough decline in the Mexican peso through the end of Nov (a call we had clients well in front of), we saw Mexican CPI accelerate to +3.5% YoY in Nov vs. +3.2% prior. The +1.1% MoM gain was the largest sequential acceleration since Jan ’10. The weakened currency poses intermediate-term upside risks to Mexican inflation, so much so that the central bank has taken to auctioning $400M of its FX reserves daily to lend a bid to the ailing peso.
  • Colombia CPI came in unchanged in Nov at +4% YoY while PPI slowed to +6.8% YoY vs. +7.9% prior. Our models point to this being right around the intermediate-term peak in Colombian CPI – a view supported by the aforementioned easing of Colombia’s supply-side inflationary pressure. As such, we do not expect further interest rate hikes out of Colombia over the intermediate term as growth slows and inflation peaks.


  • Mexico’s IMEF manufacturing and services PMI readings both ticked up in Nov to 53.3 (vs. 51.4 prior) and 54.1 (vs. 53 prior), respectively.

Darius Dale

Senior Analyst


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 4


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 5


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 6


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 7


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 8


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 9


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 10

King Dollar: An Update From The Bernank

POSITION: Long US Dollar (UUP)


After hearing today’s US Federal reserve proclamations of forecasting faith, we have no change to our view that Ben Bernanke will remain in a box for the foreseeable future.


Being in a box (for those of you central planning fans who have never tried it at home) means that you can’t cut or raise interest rates. In The Bernank’s case, we continue to believe that he cannot yet fear-monger for a QE3.


Ironically, but not surprisingly, the reason for this is King Dollar itself. As you can see in the charts below, as is the case with making most Big Macro calls, it’s the slope of the lines that matters. Less Big Government Intervention (money printing) = Stronger US Dollar.


Stronger Dollar = Stronger US Consumption.


Stronger Consumption in Q3/Q4 means Bernanke can’t cut (US Consumption = 71% of US GDP).


Pictures tell a 1,000 words. Keynesian Politicians, take notes.





Keith R. McCullough
Chief Executive Officer


King Dollar: An Update From The Bernank - 1


King Dollar: An Update From The Bernank - 2


King Dollar: An Update From The Bernank - 3

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 80.48%
  • SHORT SIGNALS 78.35%

Slowing Apparel Retail Sales


So much for record Thanksgiving sales reports. U.S. Retail sales came in up only +0.2% vs. 0.6%E and ex-Auto +0.2% vs. +0.5%E on a sequential basis in November and up +6.8% yy. The continued sequential deceleration since July is consistent with what we heard out of retailers regarding November sales and the takeaway is the same as well – the U.S. consumer is weaker than many headlines suggest.


Among the key callouts from today’s retail sales report is the sharp deceleration in apparel to +3.7% down from +5.3% for the second consecutive month. Yes, that category alone it accounts for only 7% of PCE, but general merchandise stores (e.g. department and warehouse stores) had a similar deceleration. Combined the two represent over 25% of total PCE – that’s noteworthy.


Below is a table of the key categories that constitute ~70% of the retail sales number. Here are a few additional callouts:

  • Top-line yy trajectory is decelerating sequentially in all core categories with the exception of auto and electronic/appliance stores.
  • Food and Gas stores (~1/3 of total sales) were down -0.2% and -0.1% each sequentially underperforming all other categories
  • Electronics/appliance stores were the best performing for the second consecutive month.
  • Department stores declined -3% from -0.5% sequentially reflecting an even sharper deceleration than SSS trends suggest (+0.5% in November from +2%). At roughly 10x the size of the SSS sample set, this too is worth noting.

So what does it mean for Q4? The reality is that consumers are now lapping tougher retail sales compares through the 1H of ’12 with fewer levers to pull in order to sustain 7%+ growth rates. We continue to expect the greatest pressure on the consumer will be realized in the mid-tier department stores into the 1H of F12.


Slowing Apparel Retail Sales - Retail sales chart


Slowing Apparel Retail Sales - Retail sales table


Casey Flavin


Shorting the Aussie Dollar: Trade Update

Conclusion: While some factors remain supportive, our interpretation of and outlook for key fundamentals are indicating further downside in the AUD/USD exchange rate over the intermediate term.


Position: Short the Australian dollar (FXA); Long the U.S. dollar (UUP).


This morning in our Virtual Portfolio Keith re-shorted our favorite way to play our compendium of active Global Macro themes within the Asian FX landscape – the Aussie dollar. We’ve been making this call since 2Q throughout a collection of research notes (hyperlinked below) and the AUD has generally underperformed other Asia-Pacific currencies vs. King Dollar throughout various durations within the last six months. To recap, our bearish thesis is fivefold:

  1. Slower Growth domestically and in key export markets (Asia accounts for ~70% of Australian exports) will weigh on expectations for tighter monetary policy and potentially degrade fiscal metrics. Domestic manufacturing, services, and labor market activity all remain extremely subdued;
  2. A Deflating of the Inflation in Australia’s reported inflation and inflation expectations (both market-based and central bank targets) will lead the RBA to incrementally ease monetary policy and erode Australia’s real yield advantage relative to the U.S.;
  3. A Deflating of the Inflation across Australia’s key exports (commodities account for ~60%) will reduce Australia’s terms of trade and coincide with a pullback in international demand for Australian exports and, hence, the Aussie dollar;
  4. Domestic Housing Headwinds (all-time low mortgage demand perpetuating falling prices) will act as a long-term drag on economic activity and consumer confidence; and
  5. A potential Correlation Crash and Liquidity Risk are two key quantitative and behavior factors that could weigh on the Aussie dollar in the event of a USD-breakout. The AUD/USD rate continues to trade with a positive correlation to the S&P 500 with an r² north of 0.90 on both our immediate-term TRADE and long-term TAIL durations. Additionally, the AUD is the best-performing currency vs. the USD since the Mar ’09 bottom (nearly +60%) and mean reversion remains a risk if underperforming FX investors turn to the Aussie dollar as a potential source of liquidity (see: chart of gold).

On a supportive note, Australia’s solid fiscal positioning (debt/GDP < 30%; deficit/GDP < 5%), a continued drive towards achieving a balanced budget over the medium term, and the sovereign’s AAA status will continue to keep a bid for the Aussie dollar – especially in an environment of elevated sovereign debt risk. That said, however, we expect the marginal buyer/seller of Aussie dollars to continue demanding lower price points for the currency as our interpretation of and outlook for key fundamentals are indicating further downside in the AUD/USD exchange rate over the intermediate term.


Related research notes covering each of the five aforementioned factors in greater detail:

Darius Dale

Senior Analyst


Shorting the Aussie Dollar: Trade Update - 1


According to Keith’s quantitative models, KONA is breaking down.


From a fundamental perspective, we have lost confidence in the company’s ability hit the numbers and the recent departure of the CFO, Mark Robinow, does not reassure us.  There have been a string of departures from the executive suite. Confusion surrounding the overall direction of the company is evident in the two latest announcements.

  1. Upon the departure of the CFO, the company announced a share repurchase program of up to $5 million of the company’s outstanding common stock.
  2. In early December, the company announced the appointment of Marci Rude as VP of Development.

While the company is currently generating cash (and has $5 million in cash on hand), it only spent $1.9 million in capital spending over the past twelve months.  This is down considerably from the $12 million invested in new stores in 2009 and $17 million in 2008.  If the company bringing Mr. Rude on board in a development role is an indication that capital spending it about to ramp up again, we would question the prudence of the Board in authorizing a $5 million share repurchase program.


The new CEO, Michael A Nahkunst, said “The company is initiating this repurchase program in the best interests of its stockholders, as we believe our common stock represents an attractive value.” We would contend that buying back stock does not necessarily create shareholder value but rather, in this case, the announcement was merely a defensive move given the departure of the CFO.  The disruption in the senior management team over the past six months will create a disruption in the financial performance of the company. 


As the chart below illustrates, the share price has broken the TAIL line at $5.41.  From both a quantitative and a fundamental perspective, our view on KONA is negative.





Howard Penney

Managing Director


Rory Green