Trade Update: Shorting Spain (EWP)

Positions in Europe: Spain (EWP)

Keith shorted EWP in the Hedgeye Virtual Portfolio today with the IBEX 35 broken on its intermediate term TREND level and dancing on its immediate term TRADE line (see chart below).


 Trade Update: Shorting Spain (EWP) - 22. IBEX 35


We’re forecasting a long TAIL to Europe’s sovereign debt crisis. While Greece and Portugal are currently in the spotlight, we think Spain remains a much larger domino of risk on the near horizon. We think the news out today that the European Union is putting pressure on Spain to make additional budget cuts worth 0.5% of GDP will put further downward pressure on the broader Spanish index and dim an already fractured economy with weak confidence and sky-high unemployment (23% avg. and +50% for youth). Given this environment, we also think a social uprising is in the cards.  


Spanish PM Mariano Rajoy, elected in December of 2011, has inherited a budget that was fudged last year, with the previous budget deficit target at 6% of GDP for 2011 now estimated at 8.5%. This gap has thrown off the 2012 budget deficit reduction program, and the government unilaterally (ex-EU agreement) revised its 2012 deficit target to 5.8% versus the original 4.4% promise.  The EU says that’s not enough, and now the rub will be that further spending cuts will put additional downside pressure on the broader economy (fiscal multiplier) and tax receipts to pay down the deficit, which is targeted to be limited to 3% in 2013.


In typical political fashion, Rajoy will present his spending plans and additional austerity measures on March 30, days after regional elections in Andalusia, a Socialist stronghold that his People’s Party is attempting to win back.   


Matthew Hedrick

Senior Analyst

Retail Sales: Look Forward, Not Back

Good underlying Retail Sales numbers today. But watch gas prices at the pump as well as tough compares in April and May. We need continued underlying acceleration to sustain current yy growth.


Things looked good in the rear view for Retail Sales in Feb. Specifically, sales for Clothing/Accessory Stores & Department Stores (~9% of retail sales) – while flat vs. Jan levels (YoY) – accelerated slightly on a 2-year basis.


During the same time period, we saw a modest sequential slowdown in total retail sales excluding autos and fuel.  So in effect, we simply stepped up our purchases of apparel in Feb relative to other items.


Good stuff. But keep in mind that:


a) Gas is sitting at $3.22 on average in the US (regular unleaded). That is a factor now that was not in place in Jan/Feb. The current price for gas at the pump is ~10% higher than last year. If prices remain flat, then we could be looking at
an 8% increase in prices over the coming seasonal driving months. Should we see LSD-MSD growth from here, prices could reach $3.40 for regular gas representing 13-15% growth over last year. That equates to $9-12bn less consumers will have to spend on cargo shorts during peak driving season (or $40-50bn of total retail sales annually).


b) The spread between chain store sales and Retail Sales (gov’t-reported) ticked up last month – meaning that the public clothing companies outperformed. But check out the spread in the two in the chart below. There is a nearly surmountable spread that the public companies need to comp in April and May. This will be tough with gas sitting where it is.


c) While sales this morning reaffrim the top line strength we’ve been seeing, keep in mind that the retailers who report SSS now only account for ~$260bn/year with JCP and DDS recently hanging up the cleats. Total retail sales are roughly $3.5 trillion (ex auto) with annual PCE near $11 trillion (72% of the economy) meaning that only ~30% of consumer expenditures take place in retail stores or online.


Retail Sales: Look Forward, Not Back - retail SSS Spread


Retail Sales: Look Forward, Not Back - retail sales clothing Dept


Retail Sales: Look Forward, Not Back - total RS ex fuel

LIZ: Much Beneath the Surface


There’s a lot to read into with today’s CFO announcement. They passed over some stars. Overwhelming focus on operational/financial/digital integration and growth. All in, a great announcement with low risk.



This morning’s announcement by LIZ that George Carrera joined the company as CFO might not seem notable at face value. But we think it’s rather big. The punchline relates not only to whom they chose, but to who they passed over. Our sense is that the others that were in the running were extraordinarily strong from an operational perspective – particularly as it relates to growing solid brands in a digital age outside the U.S. while not missing a beat operationally, logistically, and financially.


Additionally, our sense is the candidates did not have great (if any) capital markets experience. Carrera spent the better part of 10 years as CFO/COO of Tommy Hilfiger, including the period during which it was bought by Apax Partners for $1.6bn and subsequently sold for $3bn to PVH.


The knock for some investors on more of an internal vs external focus would be that someone focused on capital markets might want to monetize Kate ASAP. We’re not worried there. That’s a CEO/Board level decision, and would not happen until 2H at the earliest (after McComb’s contract renews). Also, if/when such a monetization event happens, it is likely to be a stub to establish value rather than to sell outright. 


Our big concern would be if they brought on someone that can pander to the capital markets while leaving operational gaps in the infrastructure. Then we’d be left with the corporate version of Ben Bernancke. Now we’re far less likely to think that this concern comes to fruition.


All-in, this is a great event.


Here are a couple bullets on Carrara:

  • Apax Partners bought Tommy in May 2006 for $1.6Bn
  • Carrara was the COO/CFO at Tommy from 9/06-2/11 during which time it was turned around and then bought by PVH for $3Bn in March 2010

LIZ: Much Beneath the Surface  - LIZ CarraraLinkedIn

(Source: LinkedIn Profile)


LIZ: Much Beneath the Surface  - LIZ TommyRevs

(Source: Company Documents)


Brian McGough

Managing Director


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Commentary from CEO Keith McCullough


Greek students fighting stray dogs in the streets – nice:

  1. SPAIN – despite the concept that all is fine in no-volume rallies until it isn’t, the rest of the world’s deficit/debt problems do not cease to exist. The recent breakdown in Spanish stocks and bonds show you that in pictures – now the Euro is failing to overcome $1.32 resistance as well. Sov Debt risk never goes away, but its intensity focuses the mind when country currencies, stocks, and bonds do the same thing at the same time.
  2. US Deficit – I know it doesn’t matter anymore, right? Right. At -$237B for FEB that’s a new US record for monthly deficit print and should remind genius growth forecasters that tax revenues are collected on a real-basis too. Inflation at the pump finally running as headline headwind for Obama even in the NY Times poll this morning. US Tax revs are down y/y in FY 2012 vs FY 2012, despite the GDP “recovery”… spin.
  3. TREASURIES – either 2s and 10s are testing a breakout in the US this morning b/c credit risk is rising on the margin (deficit) and/or Bernanke is going to be less dovish than he has been for the last 6yrs at today’s FOMC whisperings. Asymmetric risk lives on as long as this ridiculously short-sighted game of chasing yield does. Breakout lines for 2s and 10s = 0.26% and 2.03%, respectively.

Bullish on strays.







THE HBM: MCD, DRI - subsector





MCD: Per our post this morning, McDonald’s is launching baked goods offerings in New England.  The strategy is directly aimed at Dunkin’s market share.


MCD: McDonald’s was maintained “Buy” at Deutsche Bank with a price target of $108. 





COSI: Cosi gained 4.9% on accelerating volume.


DNKN: Dunkin’ Brands gained 2.4% on accelerating volume.


GMCR, CBOU: Green Mountain and Caribou declined -4.6% and -2.3%, respectively, on accelerating volume.





DRI: Olive Garden introduced a new $6.95 lunch special yesterday on its Facebook page called “Create Your Own”.





RUTH: Ruth's Chris gained 2.7% on accelerating volume.



THE HBM: MCD, DRI - stocks



Howard Penney

Managing Director


Rory Green




Yesterday McDonald’s launched a new Breakfast initiative in New England.  We see this as a move to steal share from Dunkin’ Donuts that could make life difficult for DNKN longer-term.


According to the Boston Globe, McDonald’s new “menu items include cheese Danish, two kinds of muffins, banana bread, and vanilla scones. Unlike the traditional McDonald’s breakfast menu, which features offerings such as oatmeal, pancakes, and variations of the long-popular Egg McMuffin, the baked goods will be available all day.”


The initiative was organized by/for McDonald’s Boston region and will be sold in Albany, N.Y. Massachusetts, Rhode Island, Connecticut as well as a few other states in the Northeast. 


The New England region worked with menu management team in Oak Brook “to create a line of breakfast pastry products that they believe will resonate well with the local customer base” according to McDonald’s.   The products are par-baked and are prepared daily in the existing breakfast ovens that are used to cook McDonald’s biscuits and pies. 


We are hearing that the prices are very competitive and are consistent with the “extra value meal” section of the new menu initiative being launched at the end of March  The McDonald’s products include a Cheese Danish for $1.79 or $2.79 with coffee, muffins for $1.59 each, three mini scones for $1.89 and Banana Bread for $1.59 per slice.


We have seen several times how ruthless a competitor McDonald’s is and we do not see this foray into Dunkin’s turf as being insignificant.  The baked goods are a natural extension of the McCafé initiative launched in 2009.  The baked goods are going to be sold throughout the day and, while it’s difficult to know for sure how they will do, DNKN is clearly in MCD’s crosshairs.


MCD VS DNKN – GAME ON - baked goods mcd


Howard Penney 

Managing Director


Rory Green


Headed Higher?

This note was originally published at 8am on February 28, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If we do not change our direction, we are likely to end up where we are headed.”

-Chinese Proverb


In my intraday risk management note yesterday titled “Higher-Highs”, I explained why I was buying/covering on red. Fifteen SP500 points higher (+1%), I was tweeting about why I was selling/shorting green up at 1371.


If we do not change our direction, we are likely to get run over.


Back to the Global Macro Grind


Taking a step back, from a positioning perspective here’s what I’ve done since being bullish on everything US Growth and Consumption (pre Ben Bernanke’s Policy To Inflate, pushing US Dollar Debauchery out to 2014, on January 25th, 2011):

  1. Long Inflation
  2. Short Growth

Notwithstanding all of the single security mistakes I’ve made in the last month (11 losing positions out of my last 45), the obvious risk management lesson since January 25thhas been that perma-bulls and perma-bears rarely change direction – at least not quickly.


That’s the immediate-term. That’s also the rear-view mirror. Looking forward, what lessons have growth investors learned over the intermediate to long-term about the relationship between Inflation and Growth?


Until we get through month-end, I do not know the answer to that question. My sense is that there has not been much evolution in the risk management process over the course of the last 2 major growth slowdowns (2008 and 2011), so this time won’t be different.


How am I positioning the Hedgeye Asset Allocation Model into month-end markups (February ends tomorrow):

  1. CASH = 52% (down from 91% on January 25th, before the US Equity market dropped for 4 consecutive days)
  2. FIXED INCOME = 24% (Inflation Protection and Growth Slowing – TIP and FLAT)
  3. COMMODITIES = 9% (Gold – GLD)
  4. INTERNATIONAL FX = 9% (US Dollar – UUP)
  5. US EQUITIES = 6% (Utilities – XLU)

Taking these positions in order, here’s the what I am thinking as of this morning:

  1. CASH: when it’s my own money, it’s going to be a big position at 3yr highs in US Equities – that’s just how I roll
  2. TIP and FLAT: both positions are shining examples of Growth Slowing As Inflation Accelerates (same call I made last year)
  3. GLD: pushing into its 12 consecutive year of going up, this repudiation of Keynesian Economics still looks like my weight
  4. UUP: I just started buying US Dollars back in the last few days as a hedge against Japan’s massive debt maturities in March
  5. XLU: I swapped out of our long Financials (XLF) position yesterday at +13.7% YTD and into Utilities which are down -2.5% YTD

As for International Equities, having a 0% asset allocation at the top of a move is also plainly described as my mistake. We were long China coming out of the December 29th2-year low – and I sold too early. The good news is that we waited until February 16thto sell Chinese Equities (CAF) for a +15.11% gain. The bad news is that China has moved higher since (+11.4% YTD).


Changing direction when markets are Headed Higher is not easy. Neither is buying on red or selling on green. But this is what I do. The process is both malleable and repeatable. I wake up every morning looking forward to fresh opportunities, not dwelling on mistakes.


Some people in our profession don’t like to talk about their mistakes. Many of those people like to call me names my Mom wouldn’t like when I call out our successes. Sadly, this won’t change direction anytime soon either. It’s just the way some people are.


On pages 218-219 of “Thinking, Fast and Slow” in his chapter titled The Illusions of Pundits, Daniel Kahneman nails this difficult topic of success/failure to the boards: “…experts resisted admitting that they had been wrong, and when they were compelled to admit error, they had a large collection of excuses: they had been wrong only in their timing, an unforeseeable event…” etc.


Sound familiar?


Of course it does. Whether you have worked at 4 different hedge funds like I have, or whether this is your first wonderful experience chasing alpha at an asset management firm, you know exactly who the excuse makers are – their operating principles are very different than mine.


The best news I can give you is that it still isn’t too late. We can still Re-think, Re-build, and Re-work all that we do in this profession. Our collective policy, strategy, and capital mistakes provide tremendous opportunity for change. If I didn’t believe that deep down in my gut, I wouldn’t feel like our firm is Headed Higher this morning either.


My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), Inflation Protection (TIP), Growth Slowing (FLAT), US Dollar (UUP), and the SP500 are now $1752-1798, $121.93-126.34, $34.72-35.41, $118.11-119.66, $58.01-59.65, $21.71-22.12, and 1358-1373, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Headed Higher? - Virtual Portfolio

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