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Athletic Specialty Footwear: Strength Confirmed

Robust 11% growth in March footwear sales within the athletic specialty channel confirm the anecdote from the FINL 4Q12 call citing March comps up 10% and reaffirms the bifurcation in performance across athletic footwear channels of distribution. 


Throughout the month of March, weekly sales growth in industry athletic footwear sales averaged +MSD with ASPs +LSD. In reality, it seems sales were up closer to ~8% with ASP expansion in line with the weekly average. More importantly however, is that the athletic specialty channel continues to outperform the industry average (+11.3% vs. +7.8% in March) as well as the Department store and Shoe chain channels with both unit volume and ASP expansion supporting growth +7% and +4% respectively.


The athletic specialty channel has continued to support increased pricing with ASPs +4% to +6% over the past 3 months. On a call with FINL management Friday morning, the team was optimistic regarding sustainable price increases suggesting customers continued to show no resistance to increases provided the product showed newness and innovation (FINL ASPs were +3% in 4Q12). Similarly, Foot Locker reported customer response to additional price increases as “favorable” through February on the 4Q11 conference call with 2012 comp guidance predicated on both unit volume and continued ASP expansion.


Although we saw a slight deceleration in sales growth in Running and Casual Athletic sales within the athletic specialty channel, sales growth remained up HSD with Basketball (30% of Athletic Specialty FW) improving sequentially. Additionally, should the performance spread across the 3 athletic footwear channels remain pronounced, last week’s industry sales growth of 22% driven by a 21% increase in unit volume suggests the Athletic Specialty channel started April Exceptionally strong. Although we expect weekly sales to slow meaningfully and potentially go negative starting next week due to the Easter tail wind shifting to a head wind (See our note "Athletic Apparel & FW: Easter Headwind Nearing") Athletic Specialty channel sales should remain +LSD.


While near term top line strength is necessary to offset planned capital spending in 1Q13 to support even a 30% decrease in earnings as guided on the Q4 call, we think the FINL risk/reward is favorable for investors with a duration of 1 year or greater.


Matt Darula



Athletic Specialty Footwear: Strength Confirmed - FW brand and channel growth


Athletic Specialty Footwear: Strength Confirmed - FW Marketshare growth


Athletic Specialty Footwear: Strength Confirmed - FW growth by cat


Athletic Specialty Footwear: Strength Confirmed - 2 yr chart

Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market

Conclusion: Given the asymmetry of both the pricing setup and fundamental outlook, secular yuan weakness and a bearish re-pricing of the Dim Sum bond market are two long-term TAIL risks we are flagging to you at the current juncture.


The most topical news out of Asia this morning came with the PBOC’s decision to widen the yuan’s trading band (vs. the USD) to up to 1% from its daily reference rate (from 0.5% prior). In theory, this should increase the volatility of the yuan, especially given the central bank’s desire to “promote price discovery” by enhancing the “two-way flexibility” of the currency. The PBOC did, however, state that they will keep the yuan “basically stable at an adaptive and equilibrium level” – denoting no change from their 2012 policy outlook statement or their actions (the yuan is down only -14bps vs. the USD since the start of the year).


We strongly caution against joining in the consensus hoopla which is still largely stuck on the secular yuan appreciation story. In fact, we are of the view that the China’s currency will likely weaken over the intermediate term as declining trade flows and a dramatically-subdued inflation environment gives the PBOC cover to pursue easing policy in the form of currency devaluation – a method of monetary easing that doesn’t necessarily undermine the State Council’s oft-restated goal of quashing speculation in China’s domestic property market. For a more in-depth look at each of those trends, please refer to our APR 10 piece titled, “China Is Boring”.


Jumping back to the consensus yuan appreciation story, the China Securities and Regulatory Commission’s decision to meaningfully expand its Qualified Foreign Intuitional Investor (QFII) and Renminbi QFII quotas ($80B from $30B; CNY50B from CNY20B) and a rebound in the country’s FX reserves in 1Q12 (+3.9% QoQ after posting their first quarterly decline in 4Q11 since 2Q98) are each contributing to a consensus view that China will continue to allow the yuan to appreciate as it seeks a greater international role for its currency amid unrelenting political pressure.


Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market - 1


Per Bloomberg consensus forecasts, the yuan is likely to gain an additional +2.7% vs. the USD through year-end and an additional +4.3% in 2013. Looking to the premium/discount spread for offshore (Hong Kong) vs. onshore (Shanghai) rates, the buy-side is also bullish on the yuan in aggregate – assigning a +12bps premium to obtain yuan in Hong Kong, though down from +58bps in JAN. Because international investors are generally limited to obtaining offshore yuan for exposure to China’s currency, the premium/discount they apply to the onshore rate can be a colorful tool in determining how [collectively] bullish/bearish the buy-side is on the yuan at the present moment.


Lately, however, a noteworthy divergence has emerged in the relationship between the yuan’s present outlook with its future outlook. 1yr non-deliverable forwards (settled in USD) for both the CNY (onshore) and CNH (offshore) USD crosses are trading at a -0.6% and -1.2% discount, respectively, to their present rates – signaling that investors are increasingly hedging for yuan weakness, rather than strength, over the NTM.


Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market - 2


The present-day bullishness on the yuan and recent yuan strength (Asia’s best-performing currency vs. the USD and EUR over the LTM) have been a boon the Dim Sum bond market, which are denominated in yuan and traded in Hong Kong (named after the territory’s famous cuisine, which also happens to be this ex-offensive lineman’s favorite food). Per Bank of America Merrill Lynch’s index(s), Dim Sum bonds have returned a record +3.4% in 1Q12, with average yields on corporate bonds falling -63bps YTD to 4.89%. Mean reversion has also been supportive here; Dim Sum bonds fell -3.9% in 2011 according to a Bank of China Ltd. index amid record new supply ($23.7B in ’11; on pace for $33.8B in ‘12), waning demand (yuan deposits in Hong Kong peaked in NOV), and increased scrutiny regarding their creditworthiness (only 37% of Chinese company issues are rated in the BofA index; Moody’s raised “red flags” on all 61 companies it examined in a JUL ’11 report).


Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market - 3


Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market - 4


Despite those headwinds, a consensus desire to seek exposure to China’s currency appreciation story by any means necessary has contributed to a fair amount of price dislocation in China’s corporate bond market, with top-rated onshore issuers paying an average of 4.81% on their bonds vs. 2.54% for investment-grade Dim Sum issuers. To the extent that the secular, one-sided yuan appreciation story is peaking/has peaked, we would expect to see some degree of arbitrage here over the long-term (i.e. the yuan appreciation premium inherent in Dim Sum bonds is unwound) – especially if the Chinese yuan actually starts to exhibit the two-way flexibility the PBOC claims it seeks.


While we can’t know for sure at the current juncture, who’s to say the Chinese yuan isn’t dramatically overvalued, especially given that capital account flows (while minimal) have been as one-sided [inbounding] as China’s trade flows have been over the last decade or so? What if during the process of China’s liberalization of its capital account its large stock of domestic savings begins to flow offshore in search of higher risk-adjusted real rates of return? Currently, China’s domestic savers’ options for investment are rather limited and unattractive: property market speculation (policy headwinds there); domestic equities (Shanghai Composite Index was down -14.3% in 2010 and another -21.7% in 2011); and savings accounts (negative real interest rates locked up at systemically risky banks). If capital outflows ever sustainably exceed China’s trade and investment income – which are likely both headed lower over the long-term as the country rebalances towards increased consumption (lower net exports) – a secular bear thesis for the Chinese yuan wouldn’t be that difficult to justify.


Flagging Asymmetric Risk in the Chinese Yuan and Dim Sum Bond Market - 5


At the bare minimum, we think those are questions and scenario analyses that neither the buy-side nor sell-side has begun to explore en masse, and given the asymmetry of both the pricing setup and fundamental outlook, secular yuan weakness and a bearish re-pricing of the Dim Sum bond market are two long-term TAIL risks we are flagging to you at the current juncture.


Darius Dale

Senior Analyst

European Banking Monitor: SMP – Another Goose Egg

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* Spanish sovereign swaps continue to climb. At 502 bps this morning, they are up 102 bps from a month earlier and are up 38 bps vs. the prior week. Italian swaps stand at 435 bps, up 17 bps week over week and up 80 bps vs. a month earlier. For reference, Spanish swaps just hit an all time high as of this morning, narrowly eclipsing their highs of November last year (497 bps). Italian swaps are still a good bit below their prior highs.


* Both American and European Bank CDS were wider WoW. Bank swaps are reflecting the deterioration in creditworthiness in Spain, an economy roughly 5x as large as that of Greece. Get ready for 2011 all over again as we watch Spanish swaps climb and climb and concerns surrounding that rise escalate. 


* Euribor-OIS has ceased tightening. After steadily falling since the start of the year, the risk measure has essentially flattened out at the 40-41 bps level. This had been a key measure we were using to gauge the perceived risk in the counterparty system.


* High yield rates rose 4 bps last week underscoring increasing risk in the market. 



Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was flat ending the week at 41 bps.


European Banking Monitor: SMP – Another Goose Egg - Euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  Banks deposited €742.8 billion in the latest reading.


European Banking Monitor: SMP – Another Goose Egg - 11. facility


European Financials CDS Monitor –  Bank swaps were wider in Europe last week for 37 of the 40 reference entities. The average widening was 5.6% and the median widening was 4.8%.


European Banking Monitor: SMP – Another Goose Egg - 11. banks


Security Market Program – For a fifth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/13, to take the total program to €214 Billion.


February-to-date the Bank has purchased a mere €210 Million versus €2.2 BILLION in the week ended 1/20 and €3.8 BILLION in the week 1/12.


The standstill comes as market risk returns.  While there are other channels to suck up sovereign bond issuance, including through funding from the two 36-month LTRO programs, the SMP’s lack of buying may send a negative signal to market participants that are already weary of the sovereign and bank risks bubbling in Spain.


European Banking Monitor: SMP – Another Goose Egg - 11. SMP


Matthew Hedrick

Senior Analyst

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.


Revising April projection a little lower 



Not surprisingly, average daily table revenue (ADTR) increased week over week with the opening of Sands Cotai Central (SCC).  We would’ve expected a bigger week over week increase than 2% as the past week included four days of SCC.  However, we have heard that SCC may have held low in its first few days of operations.  Either way, it’s way too early to make any conclusions about the performance of SCC and its impact on market growth.


We are slightly lowering our monthly projection to HK$23.5-24.5 billion which would represent YoY growth of 18-23%. 




Despite the opening of SCC, LVS lost 60bps of MTD share in the past week but share remains close to trend.  Wynn picked up the most share sequentially, up to 13.2% and well above trend.




The most important meal of the day.










Comments: Keith booked a gain in BWLD on Friday in the Hedgeye Virtual Portfolio. His quantitative model was indicating that the stock was oversold on an immediate-term TRADE duration.  Our bearish fundamental view remains unchanged.





Commentary from CEO Keith McCullough


Bulls were looking for a Monday morning bounce – not happening; inflows are dead:

  1. EUROPE – the DAX is testing an intermediate-term TREND line breakdown of the 6614, so I’ll be watching that line closely as a barometer for what the correction in US stocks could look like (Germany’s jobs and fiscal situation is stronger than in the US); Spain and Italy look awful; we re-shorted France on Thursday as we think mean reversion there is to the downside
  2. COMMODITIES – getting blasted ever since the US Dollar stopped going down (2wks ago); got interconnectedness? We call this Deflating The Inflation, or unwinding Bernanke’s Bubbles (commodity bubble – see our slide deck). Gold and Copper down hard this morning after failing at $1675 and $3.73 levels of support last wk – both are in Bearish Formations (bearish on all 3 of our risk mgt durations)
  3. BOND YIELDS – 10yr UST yields snapping my intermediate-terrm TREND line of 2.03% last wk is very bullish for Treasuries until it isn’t. This happened in conjunction with a spike in weekly jobless claims (380,000) = Growth Slowing.

SP500’s immediate-term risk mgt range = 1.





THE HBM: CMG, DPZ - subsector





CMG: Chipotle was awarded the 2012 GRANDY Award by Creative Artists Agency for its animated short film “Back to the Start”.  “‘Back to the Start’ was never intended to be an ad; it was meant to be a short film to invite people on a journey with us to a more sustainable future,” said Mark Crumpacker, CMO at Chipotle.


DPZ: Domino’s was raised to “Buy” from “Hold” at Miller Tabak & Co.  The 12-month price target is $41 per share, or 15.5% higher than Friday’s close.




YUM: Yum gained on accelerating volume on Friday.  Bulls are buying on the expectation that the US business has improved in 2012.


SBUX: Starbucks also gained on accelerating volume to close the week.


COSI: Cosi declined -4.8% on accelerating volume.







EAT:  Brinker traded higher on strong volume.  The company is our second-favorite casual dining name but we have advised taking a cautious stance on the name given its outsized returns during the last six months and its vulnerability in the context of a slowdown in industry sales.  BWLD is our favorite name on the short side in casual dining, along with CBRL, TXRH, and CAKE on strength.


THE HBM: CMG, DPZ - stocks



Howard Penney

Managing Director


Rory Green