• run with the bulls

    get your first month

    of hedgeye free


Inflation Is not Reflation...

This is the chart that decided the fate of Goldman’s commodities trading prop desk. This the chart that peaked alongside Putin Power. This is the chart that the Depresionistas call “deflation”.

Deflating the bubble of commodity price speculation this is, indeed (see chart). After energy prices got hammered for another -9.3% move in December, the US Producer Price Index continued its decline, albeit at a lesser rate. This month’s PPI was -1.9% versus last month’s -2.2%. That’s deflating, indeed, but at a lesser rate…

The one thing that gets us out of an asset price deflation is re-flation. FDR knew this (so he re-flated gold), and Paul Volcker knows this today. Some people think re-flation = inflation. It doesn’t have to. It’s all about what happens next.

If you show me a price tomorrow that’s higher than today’s – that’s re-flation. In order to build the confidence of the conservative American capitalist, everything needs to re-flate from an acceptably conservative price. Until we get this Crisis in Credibility to morph into the expectation of re-flating prices (like we did in late November, post Obama’s election), this market will continue to trade below immediate term support.

Keith R. McCullough
CEO & Chief Investment Officer

US Unemployment: The Crutch

Even JPM’s CEO, Jaime Dimon, is on his conference call this morning throwing out his estimate for US unemployment Armageddon – do people actually think the man modeled the numbers himself? I certainly hope he tried … using the JPM analyst projection of yesteryear would be reckless…

The crutch of “the economic crisis” is being used all over corporate America – “its happening to everyone… it’s not our fault… pay me my bonus for outperforming on a relative basis”… “but let me set the expectation by which I need to outperform”…

Those who were blind to the realities of today all of a sudden think they see the light of consensus proactive prediction. They are predicting that it “gets worse from here.” It’s all so embarrassing and sad all at once. Until we unload this groupthink culture that corporate America has levered herself up long with, this country is going to remain in a Crisis of Credibility.

Initial jobless claims for the last week registered at 524,000, up from the prior week’s level of 470,000 (an upward revision from the initially reported 467K) and above the four week moving average of 519,000. The fact of the matter is that these weekly numbers are bad, but not worsening from their November-December peaks. The sequential acceleration of job losses is slowing.

As the world’s prices churn, so will expectations. If we get one more week of a jobless claims number that’s below those of 2008’s peak (see chart), I think we can proactively look forward and begin to predict a better January employment report than is currently expected.

Jaime Dimon, after all, is one of many setting expectations abominably low.

Keith R. McCullough
CEO & Chief Investment Officer

One on Ones

One on Ones - asset allocation011509

“It is a capital mistake to theorize before one has data. Insensibly one begins to twist fact to suit theories, instead of theories to suit facts.”
-Sherlock Holmes

For those of you who have not had the “privilege” of sitting across the table from one of America’s corporate executives in a Wall Street organized “one on one”, you aren’t missing anything. Although “access” to these “one on ones” are effectively one of the few things that the Street still overcharges the investment community for, like most of the wares that the sell side shops them, they eventually become overvalued.

The sell side’s job, after all, is to sell you stuff. The promise of “one on ones”, I think, is to break the barrier of Regulation FD, and really cozy up to what the CEO or CFO of a public company’s body language looks like. These are helpful, particularly if you fancy yourself as the Sherlock Holmes of the investment business. Make no mistake, most of us who were overcompensated in this business over the last decade actually did think, at some point, that we were worth every penny of our “expert” interrogation tactics… but at what point in the last 6-9 months did investors with this vaunted “access” realize that they were overpaying for a company exec to give them erroneous macroeconomic outlooks? At what point did all the “smart” money in the room start acting on facts that were based on false premises?

As my partner, Tom Tobin, who runs our Healthcare team likes to say, “Wall Street is mostly about storytelling”… and at the end of the day, that’s the truth. People are always “twisting fact to suit theories”, and/or their books. Consider this contrasting narrative fallacy: A) at this time last year the likes of Dick Fuld and Jaime Dimon started to talk about the “worst being behind us” versus B) this week’s Wall Street conferences from New York to California where my team is enlightening me with the following corporate executive outlook – “the worst of the economic crisis is to come.” You seriously cannot make this stuff up.

It “is a capital mistake to theorize before one has data.” If there is one lesson I continuously have to relearn in this business – that’s it. Every mistake that I make in terms of an entry or exit price in an investment can always be traced back to either 1) not maintaining the discipline of data dependence or 2) depending on someone who has bad data! Capital markets and the prices born out of them don’t lie, people do. So be very careful in believing everything you hear in those “one on ones.”

I had a “one on one” with my alarm clock this morning and then went through the Asian data. It was terrible. Japanese machine orders tanked to the lowest level recorded, well… since they started keeping records in 1987. At down -16%, that is one more piece of toxic backward looking macro data. On the forward looking front, Japanese stock prices got hammered again for another -4.9% down move. Yes, stocks are leading indicators, and those facts have deteriorated in Asia from the day that the Crisis of Credibility went global in India with Satyam Computer’s multi-billion dollar fraud.

Frauds are problematic for those investing based on what said “authority” is telling them is going on with their business. Is there corruption, crime, and crisis to consider in Asian equities? You bet your Madoff there is! We continue to be short South Korea via the EWY exchange traded fund – I’d love to have a “one on one” with one of them 2007 “its global this time” bullish investors and hear their views on how trustworthy those South Korean numbers are. The KOSPI index got crushed last night, adding to Asia’s bearish immediate term momentum, closing down -6%.

Despite Thailand cutting interest rates by 75 basis points yesterday, and injecting 116B in Thai Baht of a stimulus package overnight, stocks in Thailand closed down another -3%. India’s stock market, which we continue to be short via the IFN etf, continues to act horribly. It closed down another -3.5%. Don’t forget that “being long India” was one of Vikram Pandit’s “best ideas” before his hedge fund, Old Lane, blew up. God help us all if he was building that investment thesis on the back of “one on ones” with CEOs like that of Satyam Computer.

Frauds and plunging stock markets aren’t good, so don’t expect me to wake up to this data and tell you that it is. Neither are crashing currencies. The Russian Ruble was devalued again by their government this week – now its lost -27% of its value since oil prices peaked last summer. The Russian stock market is starting to collapse again. It is flashing a negative divergence versus the rest of Europe as we await the ECB’s decision, trading down another -3.2%. The RTSI Index is now only 4% away from its 2008 capitulation low – this is the first of the large economy stock markets to test making lower lows. Keep it front center on your risk management screens.

Managing risk is what I do. That’s why I am still carrying a 54% position in Cash in our Asset Allocation Model. When the global data gets this bad, you want to have some powder dry. Part of managing risk, is not getting short squeezed -  a lot of people don’t get that. The levered long community is still busy trying figure out to not be perpetually net long, never mind attempt to understand a proactive process by which they don’t sell the freak-out lows and buy the euphoric highs.

With all that is going on globally, and the lack of transparency implied with foreign stock markets having a Crisis in Credibility of their own, I think the best risk management move you can make right now is to buy American. As always, be very patient on price. I put up a note on the portal yesterday issuing a downside support level for the SP500 at 836. At that level or below it, at least start covering your short positions. If the US market makes lower lows coming out of the Obama inauguration next week, I’ll be the first to admit that I started buying too early. Until then, I am data dependent.

Best of luck out there today,

One on Ones - etfs011409

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Full details are not in yet but apparently there was a serious fire at the residence tower at the Four Seasons Macau. The fire has spread from the 20th floor and higher. The tower was expected to contain 1 million square feet of luxury apartment hotel units and open in Q3 2009.

On the one hand, the fire could be perceived as a negative since this will likely delay cash flow from the sale of those units. On the other hand, it is unclear whether they have the regulatory approvals to sell residential units anyway. Further, to the extent they can collect insurance proceeds quickly, any cash would help this liquidity strapped company.

We will have more details as we get ‘em.


Is it me, or are ‘breakout sessions’ at conferences becoming even more of a commodity as each day passes. Yes, a great way to meet new management teams and engage in Q&A – that is if you can get within earshot of a CEO. Check out the photo below. Try having a coherent Q&A session when 60 random people are trying to squeeze in a question. Here’s a smattering of our notes from Day 1 of ICR. I’ve got a ton more. If there is any company you are particularly interested in, please let me know.

Major Theme: 90% of the companies I met with sand the same song…”We’re slowing square footage growth, cutting capex, pulling back sg&a, and are closely managing inventories.” Thanks, but it’s a little reactive, don’t you think? Shouldn’t they have said this a year ago? I want to find a company that can confidently articulate a growth strategy and vision that includes something other than getting smaller. There were two companies that did so today. Lululemon and VF Corp. One I believe and the other I do not.

LULU: To say that I was impressed was an understatement. This company absolutely has a plan, and they are in control of their own destiny. Two things were abundantly clear to me; 1) They are moving ahead aggressively with their dot.com rollout – likely ahead of initial plan, and 2) LULU is sticking to its guns in lowering its average lease duration by shifting to 5-year leases from whatI calculate as a current weighted avg portfolio age in the mid teens. The thing I still need to flush out is how the company can lower terms while also cutting rent/ft so meaningfully (which it claims to be doing). That’s tough to achieve. I’m not doubting it, but need to vet it more before I completely buy in. Lastly, it sounds like the company is going heavy into women’s running apparel (shorts, especially) with an eye on Nike’s market share).

VF Corp: As we expected, VFC negatively preannounced into this event (see our ICR Preannouncement Considerations note from Sunday). But what knocked my socks off was management’s view that earnings in ’09 will exceed the long-term growth target of 10-11%. I don’t see how this is possible. First, they excluded higher pension expense and negative FX impact. Sorry folks….you simply can’t do that. Second, compares in 1H09 are super tough, and my sense is that they come out on the 4Q call and make earnings back-end loaded (ie take down 1Q and 2Q). Then They’ll hope that either a) an acquisition will come along to goose numbers, or b) the business environment will improve. Is this really worth paying a 30% premium to the group??? Apparently the market thinks so – the stock was down 6%.
More VFC Notables…
• Jeanswear mass channel was one of first impacted, will provide more detail in Feb
• Slower store growth in 2009 comp to 2008 below 5yr growth plan - fine with that (plan to most likely open less than 75, 5-yr plan is 75-100)
• Inflationary costs have come down, now flattish expectation for next year vs. orig expectation of 3% increase
• More marginal suppliers have gone out of business - not necessarily VF suppliers - not planning to use the balance sheet to help suppliers survive through 2009 - haven't changed terms (i.e. 30 days to 45) with suppliers, holding firm
• Markdown dollars - mostly at dept store level (3% of revs) - Nautica has been impacted, by markdowns, but not a major issue on the whole
• Had a very good qtr in TNF (will touch on in Feb)
• They are re-evaluating, making adjustments to internal compensation structure
• Under constant pressure to expand the distribution (footwear is <20% of TNF)

Quote of the Day – J Crew
“And I personally don't really pay much attention to history, but we try to figure out where the world is going.” – Mickey Drexler, CEO JCG

I’d juxtapose this vs one of our favorite quotes here at Research Edge from noted US/Spanish aphorist George Santayana. “Those who cannot learn from history are doomed to repeat it.”

No offense Mickey, but I side with Mr. Santayana on this one. If you followed his advice, you’d have seen that jamming the channel with more product when business starts to turn down simply is not a winning strategy. It did not work at Gap, and it does not work at JCP.

The irony is that I’m tempted by this story down here. But I need to up the management trust factor before I get more greedy in betting on the timing of the bottom.

Decker’s: Someone asked a very fair question… “What levers do you have to proactively manages through a potential protracted downturn or incremental hit to product momentum in 2009?” In the wise words of one of my Research Edge colleagues, “management sounded like they were throwing pancakes against a wall and hoping one would stick.”

• Still have significant excess inventory that will take at least 6-9 months to clear
• The decision on whether their long awaited distribution facility will be passed takes place this week.

The facility will be immediately accretive. They currently have 5 buildings that they operate from and they will be able to consolidate into 1. Will have short term duplicative facilities, but their buildings currently have very short leases all of which will expire by February. Big deal as they will be able to potentially reduce their headcount from ~1500 to ~500 with the benefit of significant automation. Fred claimed that if they could do that, they might be able to keep SG&A flat. They will be able to cut ~$7M along in transportation costs between the facilities.
• Have committed to 20-25 new stores in 2009, but not all are built and will not pursue additional locations if these aren't completed.
• Commented several times how inefficient their operations are currently
• 35% of sales through department stores – very weak channel

$100M that the company needs to have on hand (through June 2009) is all ARs
Have to get rid of more inventory, won't have good idea of what lies ahead until BTS 2009 after bankruptcies shakeout

Have lost ~500 doors from bankruptcies from 15-20k
• Wrote off $1M on Mervyns and Goodies, less than $100k for GOTT, but they have inventory that will have to be reallocated
• KSS family footwear was a bit stronger relatively
• Expect China to be in the black by end of F09/early 2010 to get to a point where they can leverage infrastructure and headcount

Big 5 Sports
• Look to take advantage of retail store environment in 2009 to grow locations and build inventories
• Only focused on states currently in, not new opportunities to expand
• Average store costs / sq ft is less than $30, are seeing retail prices like some others coming down by as much as 25-30%
• Mentioned that they can open stores very fast if the opportunity presents itself - in a matter of a few months vs. much longer for competitors
• "We believe we are advantaged in our growth and that we are very flexible in the type of real estate that works for us. Our stores average 11,000 square feet in size. This, we believe, allows us to fill the role of being a convenient neighborhood store. We provide a comfortable shopping experience for our customers. We don't need nor operate what's often referred to as cookie-cutter stores. We are successful in freestanding locations, small strip centers, major power centers. We have a small number of mall stores that perform very well."

PNRA – Implications of Management Comments

Bloomberg reported that PNRA’s CEO Ron Shaich said in a phone interview today that 2008 comparable store sales growth was “north of 3 percent.” Based on the company’s prior 3 quarters of company-owned same-store sales growth of 3.3%, 6.5% and 3.0%, respectively, this would imply that 4Q same-store sales were down about 1% to get to 3% for the full year. Based on the CEO’s comment that full-year same-store sales growth came in north of 3%, however, there could be some upside to that -1% number. For reference, a 1% increase in 4Q same-store sales would yield 3.5% growth for the full year, also north of 3%. That being said, a 1% decline represents a slowdown from 3Q and is below the company’s 4Q comparable sales guidance of up 1%-3%. The company was guiding to a 5.0% YOY increase in retail checks in the fourth quarter, including a 1% negative impact from mix, so a 1% decline in same-store sales would also imply that transactions declined 6% (also a falloff from 3Q’s 3.2% transaction decline).

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.