ECB and BOE on Hold: Currency Update

No Current Position in Europe

We expect both the ECB (on Wednesday) and BoE (on Thursday) to keep their main interest rates on hold at 1.0% and 0.5%, respectively, and not to add any major non-standard measures or asset purchases.  We expect both banks to continue implementing a “wait-and-see” process to determine the impact of policy moves, including the LTROs, reduced collateral requirements, and reduced SMP sovereign bond purchases in the last two months by the ECB and increases in the BOE’s asset purchasing program (increased purchases by £50 Billion on 2/9 and remained unchanged on 3/8).


Below we present our quantitative views on the EUR/USD and GBP/USD over the near term TRADE and intermediate term TREND.


ECB and BOE on Hold: Currency Update - 11111111111. EUR


ECB and BOE on Hold: Currency Update - 11. GBP


We continue to highlight that despite pockets of optimism on the Eurozone and UK economies, recent data continues to be weak. Yesterday we received European Manufacturing PMIs, which, as the table below shows, largely declined month-over-month in March (the UK saw a positive inflection), or were at or below the 50 line that divides contraction (below) from expansion (above).  We expect a similar trend with European Services PMIs, which will be announced tomorrow.


ECB and BOE on Hold: Currency Update - 11. table


Matthew Hedrick

Senior Analyst

Impressive: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Shorting Industrials (XLI) and SPY


A market that doesn’t go down and has no volume is impressive, until it isn’t. It’s April the 3rdand US Equity volumes are running down between -6-17%, daily, versus my YTD composite average. We have only had 1 down day greater than -0.7%.


Maybe that is the new normal. Maybe Growth Slowing won’t matter this time either. But right around this time in 2008, 2010, and 2011, that was a really bad risk management assumption to make.


The most important lines across durations in my model are now: 

  1. Immediate-term TRADE overbought = 1424
  2. Immediate-term TRADE support = 1407
  3. Intermediate-term TREND support = 1324 

In other words, impressive should remain impressive, provided that 1407 holds. If it doesn’t, both economic gravity and 1324 are in play.


I have 13 LONGS and 14 SHORTS in the Hedgeye Portfolio.



Keith R. McCullough
Chief Executive Officer


Impressive: SP500 Levels, Refreshed - SPX

URBN: Strong Start for Top Long


Comps are coming in better than expected QTD up +LSD according to URBN’s latest 10-K update. With substantially cleaner inventories coming out of Q4 we see upside to current earnings expectations for one of our Top 3 longs. While we are still in the early stages of the turnaround underway, this is certainly a favorable sign that progress is indeed headed in the right direction.



Below is a list of recent management changes and some highlights from the Q4 call (March 12th):


Management changes (Nov 2011 – Present):

-          Dick Hayne returning as CEO, Jan 10, 2012

-          Frank Conforti as CFO, Mar 21, 2012

-          Ted Marlow: Urban Outfitters CEO, Feb 6, 2012

-          Charles Kessler: Urban Outfitters CMO, Oct 31, 2011

-          David McCreight: Anthropologie Group CEO, Nov 7, 2011 (Also overseeing BHLDN)

-          Wendy McDevitt President of Terrain, Nov 7, 2011



The penetration of full-price selling has improved over the fourth quarter. So, we're selling more full-price items as a percent than we did in the fourth quarter, and that is one of our goals for this year is to improve the penetration of full-price selling. So, we're happy about that.” – Richard Hayne, CEO


“There remains a great deal of expansion ahead within our existing customer segment, existing distribution channels, and existing geographies. Our recent issues have been largely self-inflicted. Amidst a great deal of organizational change, we drifted away from our aesthetic positioning and the merchandising disciplines that built our strong and unique relationship with our customer. We will recapture those essential qualities.” – David McCreight, CEO Anthropologie


“Our retail team is working diligently to distort our store assortments by addressing different climates, as well as regional fashion trends. As of this quarter, we are fully staffed in operations, styling and visual roles, while training new management in the field. Our momentum has continued into the spring season. Direct and Wholesale channels are off to a strong start.” – Margaret Hayne, President Free People


“Our sights are set on course correcting our shortfalls with improved content, inventory quantification and creative execution. Thus, our mission at the moment is to improve the performance of our core Women's business. In general, our Men's and Home businesses have performed well in North America and Europe, while our Women's businesses have underperformed. I view our shortfall in Women's as quite fixable.” –Ted Marlow, CEO Urban Outfitters



Below is an excerpt from our 3/22/12 note, URBN: A Winner in 2012 outlining our thesis:


This is one of the few companies that can put up double digit square footage growth over the course of our 5-year model – and likely beyond. It’s not married to one concept that will simply max out growth when it runs out of malls – like what we saw at brands like Gap, American Eagle and Ann Taylor. We don’t think that its two major brands – Urban Outfitters and Anthropologie – are broken. They had fashion problems over the past year, which we think stem from poor execution by management. Fashion is a tough business, but when the right buying infrastructure is in place, there shouldn’t be a whole lot of risk for a company that sells third party brands.  Rather, URBN got sloppy in both product selection, quality and even PR. It lost sight of who its customer is, and merchandised accordingly. Yes, there is a customer ‘piss off’ factor that hurts for a time. But ultimately if URBN has the right organization in place, it will have the right product, which it will then sell to the right customer.


The good news from our perspective is that a merchandising issue like this for a vertically integrated company often takes 1.5-2-years to fix. But for URBN, we can see results much sooner. We saw CEO Glen Senk ‘step down’ in early January, and we saw founder Richard Hayne – who is extremely well liked and respected by the organization -  stepping back in totake control. Ted Marlow is also back heading the Urban Outfitters brand, after leaving when Senk was chosen for the CEO role.


URBN: Strong Start for Top Long - URBN Sentiment


URBN: Strong Start for Top Long - URBN SIGMA




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We think MO revs fell slightly which is surprising considering 2 extra weekend days vs last year.



Missouri will release gaming revenues for March next week and we think they will be down slightly.  Expectations are that March should be a great month for domestic gaming given the 2 extra weekend days this year vs last.  We still believe that most of the other regional markets will post positive growth and one month from one state does not make a trend.  Moreover, the Kansas City market is grappling with the February 3rd opening of PENN's Kansas casino which is part of the KC market but doesn't show up in the Missouri numbers.


Interestingly, February's revenues in MO were up 4% despite PENN's opening.  Could high gas prices be impacting regional gaming revenues?  We'll have to wait for more data points.











ICSC Sales


The ICSC sales index jumped 3.8% last week; the strongest weekly gain since late 2000.  The year-over-year growth is now 4.2% from 2.7% last week. Sales this week were supported by unseasonably warm weather and strong demand for Easter apparel. Rising gasoline prices continue to be a concern.  Customer traffic was reportedly stronger at wholesale clubs, office supply stores, grocery stores and department stores.



Commentary from CEO Keith McCullough


Commodity inflation rips. Great, we sold our long oil position into that yesterday. Don’t confuse that w/ real economic growth:

  1. CHINA – explicit comments from Chinese central bank head Zhou this morning telling the Fed that Bernanke has a “responsibility to consider global effects” of its dollar debauchery policy. I called this Bernanke’s War last wk and from a Global Macro perspective, it’s on. Japan just printed its lowest money supply number in 3yrs. Japanese Liquidity drying up.
  2. ITALY – joins Spain this morning as the 2nd major Global Macro Equity market to snap its intermediate-term TREND line (15,961 was TREND support for the MIB Index). On a no volume rally in US Equities (down -17% vs my intermediate-term TREND avg yesterday), do not forget how bad those European PMI prints for March were yesterday.
  3. INFLATION – inflation slows growth. Yesterday’s US Equity move was led by Basic Material and Energy stocks + the CRB Index was up 2x what the SP500 was. The Bond market agrees. The 10yr and the Yield Spread (10s – 2s) wouldn’t be down 3bps for the wk to date if US growth was still 2.5-3%).

Since debt structurally impairs growth, it doesn’t take much inflation on the margin to slow the world. China saying the same.







THE HBM: PNRA, DIN, BWLD, PFCB - subsector




PNRA: Panera Bread was cut to Underperform at Raymond James



PEET/GMCR/CBOU/SBUX/THI: All of the coffee names were down except Starbucks and Tim Hortons.  We continue to like Starbucks while maintaining a bearish view of GMCR.




DIN: DineEquity was cut to Outperform from Strong Buy at Raymond James.


DIN: Applebees is offering 75 Pick ‘N’ Pair Lunch options starting at $7.29.


BWLD: Buffalo Wild Wings was cut to Underperform at Raymond James.


PFCB: P.F. Chang’s launched a new lunch menu yesterday.  At participating locations, the new menu features more than 20 lunch combos, each for less than $10. 




BWLD: Buffalo Wild Wings declined on accelerating volume on the back of the downgrade. 





Howard Penney

Managing Director


Rory Green



Risky Expectations

This note was originally published at 8am on March 20, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Risk appears to be at its greatest when measures of it are at its lowest.”

-Mark Carney


Keith and I have been on the road meeting with subscribers this week and spent the first part of the week in Winnipeg, so it seemed appropriate to start the Early Look this morning with a quote from Mark Carney, the current Governor of the Bank of Canada.  


Setting aside the fact that Carney played hockey at Harvard, which raises some character questions in our minds, he has had a respectable tenure as the Governor of the Bank of Canada.  In fact, even though we at times question too much government involvement, his actions are rightfully credited for getting the Canadian economy back to normal levels of output and employment quicker than the G-7 following the 2008 meltdown.


Personally, after reading the above quote from Carney, I was almost ready to forgive him for wearing the crimson colors of Harvard.  To me that quote shows perhaps the most appropriate understanding of risk, which is that risk in the market is greatest when we least expect it.  For us, a key measure of risk is volatility.  As it relates to equities, a key measure of this is the VIX, or volatility index of the SP500.


Like much of modern risk management, the VIX is a relatively new creation.  In fact, it was developed by Professor Robert Whaley in 1993 (courtesy of Wikipedia).  The VIX is a weighted blend for a range of options on the SP500.  More specifically, the VIX is the square root of the par variance swap rate for a 30-day term initiated on the current day.  So, in layman’s terms, it is the expected movement of the SP500 over the next thirty days on an annualized basis. 


As an example if the VIX is at 15, the expected return for the next twelve months is 15%.  Over the next thirty days, the range of return is calculated by dividing the VIX by the square root of 12.  Therefore with the VIX at 15%, there is 68% likelihood, or one standard deviation, that the SP500’s move, up or down over the next thirty days, will be 4.3%, or less. 


In the Chart of the Day, we show the chart of the VIX going back five years.  The takeaway of this chart, a point we have been hammering home as of late, is that when the VIX reaches levels around 15, it has been a contrarian signal to shift out of risk assets.  In the course of the last two years, this signal has been reached three times – April 2010, May / June 2011, and now.  (Incidentally, we are long the VIX, via the etf VXX, in our Virtual Portfolio.)


In our meetings with subscribers, the push back we often receive on the VIX discussion is that in the 2003 – 2007 period, or thereabouts, the VIX reached lower levels and stayed at these levels for sustained periods, which buoyed equity market returns.  So, what’s different this time?


This is certainly a fair question.  Our retort is that the economy itself is more volatile than it was in that period.  This is due to the active management of the economy by Keynesian central planners, but also accelerating debt burdens of the economy.  Think of the economy like a highly levered company, with more debt on the balance sheet a company’s earnings become much more volatile, so equity returns are inherently more volatile.  (Not to mention, the “awash with liquidity” period of 2003 – 2007 was far from normal.)


In part, this is why we are long Canada in the Virtual Portfolio via the etf EWC and, if you think about, long Mark Carney policy.   Canada’s debt-to-GDP is 83% (per the CIA Factbook), which while higher than we would like, is below the critical 90% bound which historically leads to slowing economic growth, and less than the United States’ ratio that is north of 100%.  In Canada, the deficit is actually now in decline, which will lead to lower debt-to-GDP ratios in the future.  This compares to the United States, which had the largest monthly deficit of any nation in history in February.


Another key discussion or debate point in our recent meetings with subscribers has been the outlook for economic growth, both in the United States and abroad.  As we’ve stated repeatedly, we expect lower growth than many Wall Street 1.0 prognosticators.  This is primarily driven by the math of our predictive algorithms and further supported by incremental data points.


For us, the price of oil is a critical data point when contemplating economic growth.  As I wrote two weeks ago:


“Charles Hall, Steven Balogh, and David Murphy did an analysis of the connection between the price of oil and when recession can be expected, examining the Minimum Energy Return on Investment (EROI). In their assessment, recession is likely to occur when oil amounts to more than 5.5% of GDP. Logically, this makes sense. Even based on the very tainted calculation of CPI, the average U.S. consumer spends 9% of his or her income directly on energy, with the majority allocated to gasoline. This obviously also excludes the derivative impact of increasing energy costs, such, as we noted above, the increasing costs of food.”


Incidentally, Brent oil at $116 per barrel is equivalent to 5.5% of U.S. GDP based on current usage patterns.  Brent is trading at $124 per barrel this morning.


The most recent data point supporting lower global economic growth came from the mining giant BHP Billiton this morning who said they are seeing signs of “flattening” of iron ore demand from China.  It seems when China tells you they are going to gear down economic growth, they actually will.


T.S. Eliot once wrote:


“Only those who will risk going too far can possibly find out how far one can go.”

From a personal perspective, I’d agree with Eliot, from a portfolio risk management perspective, not so much.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1633-1677, $122.96-127.19, $79.33-79.88, and 1385-1411, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Risky Expectations - Chart of the Day


Risky Expectations - vp 3 20

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 80.47%
  • SHORT SIGNALS 78.68%