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Wobbly Understanding

This note was originally published at 8am on February 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Even sophisticated researchers have poor intuitions and a wobbly understanding of sampling effects.”

-Daniel Kahneman


That quote comes from Chapter 10 of “Thinking, Fast and Slow” where Kahneman discusses both the Law of Small Numbers and what he calls a Bias of Confidence Over Doubt. After a day like yesterday, I had to re-read that.


Reading and re-reading my notes is what I do. I don’t read books without marking them up. I haven’t gone a market day in almost 13 years where I didn’t systematically take notes by hand on market prices. It’s not perfect. But I have yet to find a better learning process.


Re-think, Re-build, Re-learn. It’s not only my advice for the political leaders of this country, it’s the advice that I rinse and repeat with my team each and every risk management day. If you’re not finding a better way, you’re falling behind.


Back to the Global Macro Grind


I was almost certain that the SP500 was going to finally snap my immediate-term TRADE support line of 1345 yesterday. It did, but it didn’t close there. Closing prices matter more in my model than intraday ones.


Math matters. So do emotions. If you can find a way to harness both, you’ll probably make less mistakes than I did earlier in my career.


Dan Kahneman and his former thought partner, the late Amos Tversky, came up with what they contextualized as “strongly worded” advice for researchers like us. They suggested we consider our “statistical intuitions with proper suspicion and replace impression formation by computation whenever possible.” (Thinking, Fast and Slow, page 113)


Re-read that. It’s really good.


I can’t count the amount of investment research meetings that I have been in over the course of my career where someone just goes off with their qualitative observations. It’s probably endemic to the industry I follow most closely (Global Consumer), but I still don’t get how a billionaire can sit across the table from me talking about the deal he got on a fire-pit at Costco.


Over the years, after making plenty of qualitative assumptions that turned into quantified P&L mistakes, I’ve tried to cleanse myself with the “proper suspicion” of pretty much everything I think. My risk management governor is a repeatable quantitative overlay that captures real-time price, volume, and volatility signals.


No matter what we think we know, the market often has a not so funny way of thinking otherwise.


Obviously if you change the duration embedded in that thought, you come up with price disconnects that you, the great researcher, can capitalize on. But if your process aspires to be Duration Agnostic (measuring risk across different durations, all at the same time), you’ll see that you probably don’t know what you don’t know about a lot of things. That’s why I usually defer to last price.


Let’s isolate the SP500 and consider it across our 3 core durations (TRADE, TREND, and TAIL):

  1. Immediate-term TRADE support = 1345 and resistance = 1360 (we call this our immediate-term range)
  2. Intermediate-term TREND resistance = 1363 (April 2011’s closing high)
  3. Long-term TAIL support = 1267

Now if you are day trader or Warren Buffett, you could very well read into my risk management conclusions in completely different ways. If you are not Duration Agnostic, you probably should. Unfortunately, the market doesn’t care about our individual investment styles.


What happens when you overlay a fundamental Global Macro Research View

  1. US, European, and Japanese fiscal and monetary policies drive currencies
  2. Currencies drive immediate-term correlations in market inflations/deflations
  3. Inflations/Deflations drive real (inflation adjusted) Consumption Growth (71% of US GDP)



What if you have to think, fast – and slow, about all 3 durations (TRADE, TREND, and TAIL) and all 3 fundamental factors (Policy, Inflation, and Growth) – all at the same time?


I call that being Multi-Factor, Multi-Duration. I also call that Wall St 2.0.


Embracing Uncertainty and accepting that (unless we are trading on inside information) we all have a Wobbly Understanding about what is going to happen to our positioning next is what gets me right fired-up every morning. It’s my opportunity to improve the process.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Nikkei225, and the SP500 are now $1709-1757, $116.35-119.95, $1.30-1.33, 78.86-79.79, 8952-9397, and 1345-1360, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wobbly Understanding - Chart of the Day


Wobbly Understanding - Virtual Portfolio

CRI: Validating Print

Monster quarter relative to expectations. Nothing to make it shortable today, except sky-high valuation. But today’s earnings validated high pe. We think there will be a day of reckoning w/earnings as price compression looms.


This CRI quarter is a monster relative to expectations. It is still not one of the elusive few that actually beat and did not post a decline in EBIT yy, but impressive nonetheless for the following reasons.

  1. The top line accelerated across the board. Guidance of 15-17% (which we didn’t think was a slam dunk) ended up coming in +22.5%. This includes about 7% from Bonnie Togss, which was acquired two quarters ago, but that was already in our estimates. There was no single piece of business that drove the results. All divisions accelerated sequentially.
  2. Notably, the company did this while clearing out inventory, as the sales/inventory spread is at the best level in 6-quarters, and is looking at its best trajectory in about 3-years.
  3. One thing to keep in mind is that in addition to 7% growth from Bonnie Togs, there was 7-8% growth from Carter’s own square footage growth vs last year. It’s currently sitting at 359 stores (ie, a lot), and the company plans to go upwards of 600. The caveat is that they’re gonna build what they’re gonna build. But in order to get to the consensus estimates (which are presumably headed higher today) we need to assume that they return to the 18-19% operating margin level they saw as a smaller growth company over the past decade. We don’t think that’s doable on a meaningfully higher store base where they step on wholesale partner’s toes.
  4. We think that people are not getting the competitive dynamics out there. They’re saying that ‘retail is so important now, so I’m not as concerned about wholesale overlap at JCP, KSS, etc…’
  5. That’s borderline wreckless… Selling channels are product-agnostic. Ultimately, if the product at your own store looks too similar to what is at Wal-Mart, WMT will boot you. (HBI is evidence of that). All wholesale channels will squeeze CRI this year, and while their guidance represents costs easing – it does not represent pricing pressure from irrational competition and supply chain partners.
  6. Case in point… Can anyone find me an apparel company that is not banking on a 2H margin recovery? There’s not enough for everyone to go around, unless the consumer is willing to allow retail to print higher margins. If we (consumers) do, then it will be a first. This should be a key theme this year.


Think about some potential outcomes as things heat up out there.

  1. Carter’s signs a deal with JC Penney to occupy one of the 100 shops. But in doing so, it upsets KSS (who it already had accounting issues with) Macy’s (who already has a beef with JCP over Martha Stewart), and probably even Wal-Mart and Target. That JCP deal better have some extremely good economics.
  2. If there’s no deal at JCP, then CRI gets booted from JC Penney.  That’s not good, either.


The first one would be a disaster – a la Macy’s/JCP/LIZ in 2007. But neither help CRI.


Net/net, this is an extremely expensive stock that will stay expensive until there’s a catalyst to take it down. Obviously, it wasn’t 4Q earnings, and it wasn’t 2012 guidance. The company even gave themselves wiggle room with 1Q – so expectations are low there. Being short this name will likely continue to be an uphill battle – until it’s not. We think that will be the impact of price compression starting in mid-2Q, when operational leverage swings the other way for CRI. Our 2H estimates are likely to remain well below the Street. Wait this one out and revisit (along with us) in the coming months.


Brian P. McGough
Managing Director

CRI: Validating Print - CRI SIGMA


CRI: Validating Print - CRI Sentiment


TODAY’S S&P 500 SET-UP – February 29, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.81% downside to 1361 and 0.28% upside to 1376. 












  • VOLUME: NYSE 754.69 (3.04%)
  • VIX:  17.96 -1.26% YTD PERFORMANCE: -23.25%
  • SPX PUT/CALL RATIO: 1.33 from 2.36 (-43.64%)


MONTH-END – with an oversupply in the asset management industry we continue to see the last 6 days of the month, trade significantly higher than the 1st 6 days of the new month – this was the case on the way down (May-Sep 2011) inasmuch as it is on the way up. The SP500 has been up for 4 consecutive days, so they may as well make it 5 into month-end and get it over with. AAPL is only up +17.5% for the month. Probably doesn’t impact the indices, right?


US DOLLAR – the next move here will be as critical as the down move has been since Bernanke signaled his Policy To Inflate on January 25th. Don’t forget that the USD is down -4.3% from its YTD high (that’s a lot) and that has had a huge impact on inflation expectations (TIP, GLD, OIL, etc). As we push past the LTRO (530B this morn) and into the March sovereign debt maturity spike in Japan (53T Yen), the USD should start trading on fresh factoring. 

  • TED SPREAD: 39.09
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 1.93 from 1.94
  • YIELD CURVE: 1.65 from 1.65 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Apps, week of Feb. 24, (prior -4.5%)
  • 8:30am: 4Q GDP (second revision), est. 2.8% (prior 2.8%)
  • 8:30am: Personal Consumption (second revision), est. 2.0% (prior 2.0%)
  • 9:30am: Fed’s Fisher speaks on U.S. economy in Mexico City
  • 9:45am: Chicago Purchasing Managers, Feb., est. 61.0 from 60.2
  • 10:00am: NAPM-Milwaukee, Feb., est. 58.8 (prior 58.4)
  • 10:00am: Fed’s Bernanke delivers semi-annual monetary policy report in Washington
  • 10:30am: DOE inventories
  • 1:00pm: Fed’s Plosser speaks on economy in New York
  • 2:00pm: Beige Book 


  • President Obama hosts dinner for armed forces personnel in Operation Iraqi Freedom and Operation   New Dawn
  • 8am: Transportation Secretary LaHood speaks at high speed rail summit in D.C.
  • House, Senate in session:
    • 10am: House Transportation panel hearing on cruise ship safety and lessons from the Costa Concordia accident
    • 10am: House Agriculture holds hearing on CFTC agenda
    • 10am: House Ways and Means hearing on Obama trade policy 


  • Fed Chairman Bernanke gives testimony on monetary policy, U.S. economy; watch comments on labor mkt, any indication of QE3, 10am
  • Romney wins Michigan narrowly, triumphs easily in Arizona; Republican primary now moves to 12 states in March
  • ECB lends banks EU529.5b for 3 yrs; est. EU470b. Total number of bidders: 800
  • Apple says giving Proview iPad brand would hurt consumers
  • Apple is poised to break $500b market cap; will hold March 7 event to unveil new iPad
  • Rule that may require all cars, light trucks sold in the U.S. to have rear-view cameras won’t be issued until the end of the year: U.S. regulators
  • Goldman Sachs, Wells Fargo, JPMorgan Chase are among banks that may face civil claims tied to sales of mortgage-backed securities.
  • NY Comptroller Thomas P. DiNapoli to discuss Wall Street bonus figures at 8:30am on MSNBC
  • Beige book released at 2pm; watch for comments on labor market
  • India GDP grows the least since 2009, adding rate-cut pressure
  • Japan, S. Korea report larger-than-forecast industrial production
  • Standard Chartered profit climbs to record for eighth year 


  • Joy Global (JOY) 6:00am, $1.36
  • Staples (SPLS) 6:00am, $0.41
  • Carter’s (CRI) 6:30am, $0.44
  • Starwood Property Trust (STWD) 6:30am, $0.44
  • ITT (ITT) 7:00am, $0.35
  • Hospitality Properties Trust (HPT) 7:01am, $0.79
  • Liz Claiborne (LIZ) 7:27am, $0.14
  • Accretive Health (AH) 7:30am, $0.16
  • CenterPoint Energy (CNP) 8:02am, $0.19
  • Fannie Mae (FNMA) 8:30am, NA
  • Sotheby’s (BID) 4:00pm, $1.25
  • Edison International (EIX) 4:00pm, $0.46
  • Finisar (FNSR) 4:00pm, $0.23
  • MBIA (MBI) 4:00pm
  • PetSmart (PETM) 4:02pm, $0.90
  • Babcock & Wilcox (BWC) 4:05pm, $0.41
  • McDermott International (MDR) 4:06pm, $0.19
  • Greif (GEF) 4:07pm, $0.58
  • Darling International (DAR) 4:30pm, $0.33 


OIL – 2 down days does not even a hyper short-term TRADE make. Both Brent and WTI have corrected to their most immediate-term TRADE lines of support ($122.01 and $105.46, respectively) and bounced. Bernanke’s semi-annual USD Debauchery speech is today, so that should be interesting to watch in real time vs TIP, GLD, OIL, etc. Inflation from here is not growth. Déjà vu Q1 2011. 

  • Jewelers Want Platinum for Asians After Gold Vaults: Commodities
  • Americans Pay More as Sanctions Lift Iran Profit: Energy Markets
  • Oil Set for Best Month Since October on Recovery Signs, Iran
  • Soybeans Set for Best Monthly Gain in a Year on Parched Crops
  • Iran to Take Gold Payments From Trade Partners, Agency Says
  • Natural Gas Near Bottom, Avoid Short Bets, Morgan Stanley Says
  • Gold May Gain for a Second Day on ECB Lending; Platinum Climbs
  • Aluminum Fee to Japan Gains for First Time in Three Quarters
  • Asia Faces Sugar Deficit as Demand Increases, McNeill Says
  • Corn Shipments From India to Miss Forecast on Pests, Rupee
  • Oil Surge to Record Endangers Europe’s Growth Dash: Euro Credit
  • Lumber May Extend Rally as China, U.S. Demand Gain, Ekstrom Says
  • Robusta Coffee Rises as Traders Bet on Higher Price; Sugar Falls
  • Oil Surge Endangers Europe’s Growth Dash
  • Copper Rises, Heads for Back-to-Back Monthly Gains on Stockpiles
  • Iraq Plans to Cut Daily Kirkuk Crude Oil Exports by 5% in March
  • Palm Oil Has Best Monthly Gain Since 2010 as Supplies Decline 






















The Hedgeye Macro Team


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%



  • SJM Cotai proposal: at "advanced stage"; expects govt decision soon



  • Recurring/special dividend:
    • 72% earnings paid out as dividends. Regular dividend will continue to be 50% of earnings and anything more will be classified as special dividend
  • Casino Lisboa/ Oceanus:
    • Increased return per table on Oceanus (target was 20%, actual return was 27% in 2011)
  • QoQ VIP table decline: from 613 tables to 595 tables
    • Nothing to worry about, may go up in Q1 2012
  • Grand Lisboa: 2.44% hold in Q4, compared with 2.53% hold in Q3
  • Old Lisboa margins are benefited from the move of certain VIP business to Grand Lisboa
  • Grand Lisboa Mass market
    • Expanding mass sq ft in 2012 at expense of slot machines; may also move mass tables from other properties
    • Still growing on par with market
  • SCC commission competition:
    • No pressure on commissions; will use credit rather than elevated commissions
  • Grand Lisboa Rolling Chip is very good in February
  • Grand Lisboa VIP renovation: may increase 40 VIP tables (August/September/October 2012);
  • Moving VIP tables from self-promoted casinos to Grand Lisboa?
    • No, right now different table revenue performance thresholds at different properties but performance is holding up
  • Grand Lisboa/Oceanus: VIP business very sticky; very comfortable with VIP at Grand Lisboa
  • Cotai Mass business impact on Grand Lisboa?
    • Does not affect revenue stream
  • 3rd party operations: sees no signs of risk of slowdown



  • The Board recommends final ordinary dividend of HK43 cents per share and special dividend of HK22 cents per share for 2011 year. It is subject to approval at the forthcoming annual general meeting of the Company to be held on Thursday, 10 May 2012.
  • 2011 Gaming revenue: HK$75.514 BN (+32% YoY)
  • 2011 Adjusted Company EBITDA: HK$6,923MM (+42.5% YoY)
    •  Casino Grand Lisboa property EBITDA: HK$3,756MM; property EBITDA margin: 27.2% (US GAAP)
  • 2011 SJM market share: 29%
  • Grand Lisboa occupancy rate increased 14.7% to 92.6%; ADR increased 5.3% to HK$2,055
  • Cash: HK$20.7BN
  • Besides growth of gaming revenue, other factors that contributed to higher Adjusted EBITDA in the
    year were improved operating results at Ponte 16 and Grand Lisboa Hotel.
  • VIP
    • As at 31 December 2011, SJM had 609 VIP gaming tables in operation with 32 VIP promoters, as compared with 507 VIP gaming tables and 33 VIP promoters as at 31 December 2010. As at 31 December 2011, SJM operated VIP gaming in 14 of its casinos.
    • The hold rate for SJM’s VIP operations decreased slightly in 2011 to 2.88% from 2.91% in 2010.
  • MASS
    • SJM had 1,166 mass market gaming tables in operation as at 31 December 2011, as compared with 1,183 mass market gaming tables as at 31 December 2010.
    • Increased mass market table gaming revenue of 24.1% resulted from increased visitation to Macau
      from the Mainland and the Asian region as well as increased spending per visitor.
    • SJM had 3,910 slot machines in service as at 31 December 2011 as compared with 4,147 slot machines as at 31 December 2010.
  • During 2011, Casino Grand Lisboa attracted a total of 12,238,494 visitors, an average of 33,530 visitors per day. To continue attracting gaming patrons, Casino Grand Lisboa frequently launches special promotions, such as “Spin2Win”, “Spot the Jackpot”, “Royal Cards” and “Heir to the Throne.” Jackpots are paid frequently, with the total exceeding $267 million for slot machines and over $84 million for table games (Caribbean Stud Poker) in 2011. During the year, the number of active members of the Casino Grand Lisboa loyalty card programme increased by over 83,000 to 394,393.
  • In October 2011 new VIP gaming capacity was added on the second floor of Grand Lisboa with 12 tables. In the fi rst half of 2012 additional capacity for VIP gaming will be added on the 31st floor of the building.
  • In October 2011 SJM completed enclosing and air-conditioning the walkway from the Macau Maritime Terminal to Casino Oceanus. Promotions such as “Scratch and Win” are held regularly and a number of special activities took place in November at the time of the Macau Grand Prix, of which SJM was the sole offi cial sponsor. In the second quarter of 2012 the Oceanus Club is scheduled to open on the third fl oor where Oceanus membership card holders can relax and enjoy various club facilities. Also in 2012 the casino plans to open its third dining facility, a deluxe Cantonese restaurant located on the second floor.

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ

Changes on the Margin


We’re seeing some notable changes in our sentiment monitor following the most recent short interest release. WMT, HBI, GIL, CRI, JCP, KSS, M and LIZ scores are among the most notable.



As for retail overall, short interest remained relatively unchanged since the prior release on Feb. 9th. We saw the greatest changes out of Large cap retail (-0.2% PoP) with less meaningful changes out of the small and mid cap names. While sales sold short in mid cap retail increased 0.40%, it was driven entirely by a 1.8% increase in short interest for CROX. Likewise, small cap interest remained relatively unchanged with the only notable deviation out of JNY (-0.12%). In large cap retail, short interest increased the most for LOW(+1.5%), SHLD(+0.7%) & TGT(+0.3%) while JCP(-1.3%) experienced the most short covering over the past 2 weeks. Short interest as a percent of float accounts for 50% of a company’s overall sentiment score in our calculation.


Company callouts (see charts below).

1)      Wal-Mart is sporting  a 62 on our Sentiment Monitor (0 = investors are very negative, meaning that it is a bullish indicator. 100 = investors are overly positive, meaning that it is a bearish indicator). This is WMT’s lowest level since we started this index.

2)      On the opposite end of the spectrum, Macy’s broke 80 on the upside, marking the most positive sentiment we’ve seen out of Macy’s – ever. We still think that this name will be impacted as the mid-tier (where it competes on the fringes) gets increasingly price competitive.

3)      HBI and GIL are sitting between 60 and 70. It’s not the positive sentiment that surprises me as much as the fact that it has not changed meaningfully since each of them printed results. Sentiment should be much much worse. We still like them both on the short side.

4)      Carter’s sentiment is still in negative territory, but has definitely returned to a positive trajectory. This is a name we’d definitely press as sentiment climbs past economic reality (ie about now).

5)      KSS is really taking it on the chin. After hitting a score of 90 as recently as six months ago, KSS is sitting around 55 today. It’s still too early to own that one. We think there’s more downside to go.

6)      JCP puzzles us. Despite all the positive press around the analyst meeting, Ellen, and JCP getting the early jump on KSS, its negative sentiment has really not changed much over the past six months, and even year to date.

7)      LIZ is above double digits in both stock price ($10.10) and sentiment. But the latter (a measly 12) has much more room to go – as does the stock.


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sentiment tables


Sentiment Framework Methodology


Our updated Hedgeye Retail Sentiment scorecard is published in conjunction with last night’s short interest release. As a reminder, we use our Scoreboard as a piece of our TRADE (Trade=3 week or less duration) framework. The sentiment scores combines buy-side and sell-side conviction measures (Including Buy/Sell Ratings & Short Interest as a percent of float); we standardize those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. The idea is that a contrarian strategy can be employed at the extremes (positive extreme >90, negative extreme <20) to screen for names that provide the opportunity for the greatest upside relative to the consensus view.  A sentiment score above 90 (overly bullish) has proven to be a good historical ‘sell’ signal, while a signal below 20 has proven to be better to Buy.  We recognize that some names may break into the 90+ or 20/below thresholds and won’t immediately trade contrary to consensus. In fact, companies like Nike & LIZ have remained in the high/low bands over extended period of times. While our sentiment monitor acts as an excellent screening tool at major inflection points, we incorporate additional tools/analysis (SIGMA, Management Scorecard, etc.) to properly contextualize fundamental opportunities across all durations. Some stocks will never break out of their band, but marginal directional changes matter.  We have back tested these levels for our group and the result can be seen below. Note that the analysis below was performed using the ~100 companies included in the monitor when the framework was initially created.


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sentiment backtest


In an effort to provide additional context and compliment a company’s sentiment score, we also focus on insider transactions in conjunction with shifts in buy/sell side sentiment to gauge the overall conviction on a particular name. For additional detail on the methodology behind our proprietary sentiment measures or historical detail for a specific company, please contact the team. Below, we have included FL as an example as well as the historical trends in sentiment by retail subsector.


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - FL sentiment 2.27.12


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - Discount Stores sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel retail sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel lowmid tier sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel upper tier sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - department sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - Footwear Sentiment


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sporting goods


Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - other

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