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FNP: Early Read Very Positive

Conclusion: Better than expected (and much better than broadly feared) numbers from our top long idea. Robust top-line numbers out of FNP. Earnings came in a few pennies better than Street estimates of ($0.13) with no change to the full-year outlook for adjusted EBITDA of $125-$140mm. Underlying comps improved across each of the brands against the toughest comps of the year with both Kate and Lucky tracking well ahead of company expectations. There’s still wood to chop here before year-end on the cost side, but let’s be clear – this quarter represents a very positive update for FNP.

  • Comps by Brand:
    • Kate Spade: Kate (50%+ of EBIT) posted an exceptional quarter with comps up +34% well ahead of our expectations and company plan for high-teens growth for the full-year maintaining underlying two-year trends north of 50%.
    • Lucky Brand: Lucky comps came in up +8% also above our expectations against the toughest compare of the year posting its second consecutive solid result vs last year when the brand really began to emerge. 1H trends here are also tracking ahead of company expectations for low-teen growth for the full year.
    • Juicy Couture: Juicy comps came in down -9%. While the two-year accelerated, this is below expectations. In what might be the only surprise in the numbers, inventories were problematic despite conservative management in 1H – apparently not conservative enough
  • Square Footage Growth: Expect upside to square footage growth opportunities to be a frequent topic of discussion in light of robust sales out of Kate and Lucky where growth will be primarily focused providing further sales upside.
  • SG&A: At 68% of sales, the cost structure remains a work in progress – one that we expect new CFO George Carrera to shed greater detail on the call. But we want to be equally clear on this as well -- this is not a cost-cutting story. Stories where cost cuts drive revenue growth are like Bigfoot. They're talked about but never seen (i.e. JCP).  FNP is investing in its SG&A line, but needs to better leverage those investments in higher sales growth.
  • EBITDA Outlook: No change to full-year expectations of $125-$140mm for the second time in as many quarters. For those familiar with the history of FNP, no change is net positive. With the bulk of profitability generated in 2H it would be premature to suggest this might be conservative, but the likelihood of this range increasing before year-end just improved.
  • Cap Structure: an improvement with excess borrowing capacity at $260mm vs. $210mm due largely to the 10.5% Notes offering intra-quarter provides FNP with added flexibility.

The dial-in for the 10am call is with pass code #99380732.

Casey Flavin



FNP: Early Read Very Positive - FNP Direct Brand Comps 1yr


FNP: Early Read Very Positive - FNP Direct Brand Comps 2yr




TODAY’S S&P 500 SET-UP – July 26, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.51% downside to 1331 and 0.76% upside to 1348. 











    • Up versus the prior day’s trading of -1477
  • VOLUME: on 07/25 NYSE 783.50
    • Decrease versus prior day’s trading of -3.08%
  • VIX:  as of 07/25 was at 19.3
    • Decrease versus most recent day’s trading of -5.52%
    • Year-to-date decrease of -17.35%
  • SPX PUT/CALL RATIO: as of 07/25 closed at 1.23
    • Down from the day prior at 2.08


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.42%
    • Increase from prior day’s trading at 1.40%
  • YIELD CURVE: as of this morning 1.20
    • Up from prior day’s trading at 1.18 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 am: Durable Goods Orders, June, est. 0.3% (prior 1.3%)
  • 8:30 am: Initial Jobless Claims, July 21, est. 380k (prior 386k)
  • 8:30 am: Continuing Claims, July 14, est. 3.3m (prior 3.314m)
  • 9:45 am: Bloomberg Consumer Comfort, July 22 (prior -37.9)
  • 10am: Pending Home Sales M/m, June, est. 0.3% (prior 5.9%)
  • 10am: Pending Home Sales Y/y, June, est. 12.1% (prior 15.3%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: Kansas City Fed Manf. Activity, July, est. 4 (prior 3)
  • 11am: U.S. to purchase $1.5-$2b notes due 2/15/36-5/15/42
  • 1pm: U.S. to sell $29b 7-yr notes


    • House, Senate in session
    • First Lady Michelle Obama arrives in U.K. in evening, leading presidential Olympics delegation
    • Treasury Secretary Timothy Geithner testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on the Financial Stability Oversight Council Annual Report to Congress and the London interbank offered rate, 10am
    • House Financial Services subcommittee hearing on the 10th anniversary of the Sarbanes-Oxley Act, 9:30am
    • Senate Judiciary Committee holds hearing on the nomination of William Baer to be an assistant attorney general for the Justice Department’s Antitrust Division, 1pm
    • CFTC’s Technology Advisory Committee meets to develop methods for the CFTC, self-regulatory organizations and futures customers to verify the location and status of funds in segregated accounts, 10am
    • House Ways and Means Committee debates, revises legislation on Russia permanent normal trade relations, matching bill approved by a Senate panel
    • State Dept. advisory panel meets on defense trade, 1:30pm
    • Woodrow Wilson Center holds discussion on U.S.-Canadian efforts to enhance economies in agriculture and food, health and consumer products, transportation and the environment


  • Carlyle, BC Partners agreed to buy United Technologies’s Hamilton Sundstrand industrial unit for $3.46b
  • Rambus lost case against LSI, STMicroelectronics over controllers used in electronics, ITC said
  • Phil Gramm, former senator who helped write 1999 law that enabled creation of financial giants, told Bloomberg News his legislation didn’t make the system any riskier
  • Durable goods orders may climb 0.3%
  • Zynga plunged after cutting yr forecast
  • BTIG analyst apologizes after results, cuts Zynga to neutral
  • Facebook implied volatility plunged 10% on July 24 from record high, falling at the fastest rate ever, trading in options market shows; reports today
  • Large-city foreclosure filings climbed almost 60% in 1H 2012: RealtyTrac
  • J.C. Penney ready to make deep price cuts to most goods: WSJ
  • Alcatel-Lucent to slash 5,000 jobs after slumping to loss
  • International Grains Council monthly crop report (9:30am ET)
  • Apple senior executives Scott Forstall, Phil Schiller among officials the company said will be called to testify at patent trial against Samsung Electronics set to begin July 30
  • Samsung sought court order to prevent Apple from presenting evidence of Samsung’s overall rev., profits and wealth at trial
  • Facebook said to be working with HTC to build its own smartphone for release as soon as mid-2013
  • BlackRock, Fidelity and Vanguard gauging how their clients hurt by Libor manipulation, whether to take legal action as at least a dozen banks being investigated for rate-rigging
  • GenOn Energy, NRG Energy sued by shareholder claiming the $1.7b all-stock deal to acquire GenOn undervalues the co.
  • U.S. Navy underestimating cost of its proposed 30-year shipbuilding program by 19%, Congressional Budget Office said in report yesterday


    • Iron Mountain (IRM) 6am, $0.31
    • Patterson-UTI Energy (PTEN) 6am, $0.44
    • Starwood Hotels & Resorts Worldwide (HOT) 6am, $0.62
    • Ball (BLL) 6am, $0.87
    • MetroPCS Communications (PCS) 6am, $0.21
    • Covidien (COV) 6am, $1.06
    • Potash of Saskatchewan (POT CN) 6am, $1.02; Preview
    • Mylan (MYL) 6am, $0.55
    • Ashland (ASH) 6:01am, $1.80
    • PulteGroup (PHM) 6:30am, $0.05; Preview
    • Bunge Ltd (BG) 6:30am, $1.36
    • L-3 Communications Holdings (LLL) 6:30am, $1.88
    • Barrick Gold (ABX CN) 6:55am, $0.93; Preview
    • United Technologies (UTX) 6:59am, $1.42; Preview
    • AmerisourceBergen (ABC) 7am, $0.69; Preview
    • Moody’s (MCO) 7am, $0.71
    • Raytheon Co (RTN) 7am, $1.22
    • Zimmer Holdings (ZMH) 7am, $1.32
    • Boston Scientific (BSX) 7am, $0.11; Preview
    • Sprint Nextel (S) 7am, $(0.41); Preview
    • Hershey (HSY) 7am, $0.61
    • Colgate-Palmolive Co (CL) 7am, $1.33; Preview
    • CME Group (CME) 7am, $0.83
    • Consol Energy (CNX) 7am, $0.32
    • Dow Chemical (DOW) 7am, $0.64
    • National Oilwell Varco (NOV) 7am, $1.40
    • Interpublic Group of (IPG) 7am, $0.21
    • International Paper (IP) 7am, $0.46
    • EQT (EQT) 7am, $0.31
    • Lazard (LAZ) 7am, $0.25
    • Watson Pharmaceuticals (WPI) 7am, $1.38
    • Ventas (VTR) 7:02am, $0.92
    • McGraw-Hill (MHP) 7:10am, $0.76
    • 3M (MMM) 7:30am, $1.65; Preview
    • Celgene (CELG) 7:30am, $1.18
    • Mead Johnson Nutrition Co (MJN) 7:30am, $0.77
    • Invesco Ltd (IVZ) 7:30am, $0.43
    • Imax (IMX CN) 7:30am, $0.21
    • Kimberly-Clark (KMB) 7:30am, $1.28
    • Noble Energy (NBL) 7:30am, $0.93
    • Waste Management (WM) 7:30am, $0.52
    • Occidental Petroleum (OXY) 7:30am, $1.61
    • CMS Energy (CMS) 7:30am, $0.38
    • United Continental (UAL) 7:30am, $1.66
    • NextEra Energy (NEE) 7:31am, $1.16
    • Exxon Mobil (XOM) 8am, $1.95
    • BorgWarner (BWA) 8am, $1.37
    • Dr Pepper Snapple Group (DPS) 8am, $0.82
    • Prologis (PLD) 8am, $0.42
    • Marriott Vacations Worldwide (VAC) 8am
    • Precision Castparts (PCP) 8am, $2.36
    • Vulcan Materials (VMC) 8am, $0.06
    • Cameron International (CAM) 8:10am, $0.72
    • New York Times Co (NYT) 8:30am, $0.13
    • Royal Caribbean (RCL) 8:35am, $0.03
    • Imperial Oil (IMO CN) 9am, C$0.81
    • Goldcorp (G CN) Pre-mkt, $0.42; Preview
    • Maxim Integrated Products (MXIM) 4pm, $0.39
    • Facebook (FB) 4pm, $0.11
    • Federated Investors (FII) 4pm, $0.40
    • Principal Financial Group (PFG) 4pm, $0.74
    • Expedia (EXPE) 4pm, $0.72
    • CBL & Associates (CBL) 4pm, $0.49
    • Amazon.com (AMZN) 4:01pm, $0.03
    • Amgen (AMGN) 4:01pm, $1.55; Preview
    • Chubb (CB) 4:01pm, $1.15
    • Cincinnati Financial (CINF) 4:01pm, $0.11
    • Cerner (CERN) 4:01pm, $0.54
    • Global Payments (GPN) 4:01pm, $0.95
    • Coinstar (CSTR) 4:01pm, $1.16
    • Starbucks (SBUX) 4:03pm, $0.45
    • Leggett & Platt (LEG) 4:05pm, $0.36
    • CA (CA) 4:05pm, $0.60
    • Republic Services (RSG) 4:05pm, $0.49
    • Gilead Sciences (GILD) 4:05pm, $0.95
    • McKesson (MCK) 4:10pm, $1.48
    • KLA-Tencor (KLAC) 4:15pm, $1.32
    • Tellabs (TLAB) Post-Mkt 



GOLD – Hilsenrath got some Gold and Oil bulls lathered up with some Qe rumoring, but the US Dollar and TREND levels in both Gold/Oil are saying Bernanke disappoints #BailoutBulls again. If all Bernanke does is more twisting of the curve, that only perpetuates one of the biggest risks I see out there right now, Yield Curve compression.

  • Mr. Titanic Mistry Predicts Sinking Palm-Oil Prices: Commodities
  • Crude Oil Advances in New York After ECB Says Euro Will Survive
  • China Said to Tell Edible-Oil Suppliers to Keep Price Stable
  • Gold Climbs in New York as Draghi Comments Give Boost to Euro
  • Soybeans Decline as Rains Set to Relieve Parched U.S. Fields
  • Sugar Falls to One-Week Low on Brazil Area’s Crop; Coffee Rises
  • Copper Rises as ECB’s Draghi Says the Euro Will Be Supported
  • Hong Kong’s Largest Bullion Vault Signals Rising Asia Wealth
  • Cocoa Getting Boost by Year-End as Factories Erode Butter Glut
  • Western Iowa Corn Yields Seen Plunging 30%: Doane Tour Samples
  • Goldcorp Second-Quarter Profit Misses Estimates as Costs Rise
  • Shell May Have to Trim 2012 Arctic Drilling Amid Delays: Energy
  • Vietnam Coffee Exports May Rise to 130,000 Tons This Month
  • North Dakota Spring, Durum Crops Seen Topping Last Year on Rains
  • Farmers May See Gains Amid Drought With U.S.-Backed Insurance
  • Barrick Gold Quarterly Earnings Miss Estimates as Output Falls










SPAIN – both the IBEX and MIB indexes are now slicing through their May closing lows; they are both crashing (so is Russia, Brazil, etc), but Spain’s is the nastiest, down -33% since March. How’s that short selling ban going?





CHINA – they’re not going to cut rates w/ food/oil prices up here; at least, that’s what the Shanghai Comp thinks, trading down another -0.5% overnight to fresh YTD lows (down -13.7% since May when growth really started slowing faster).










The Hedgeye Macro Team

What's Your Edge?

This note was originally published at 8am on July 12, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You are on your own and you must take ownership of your own destiny.”

-Hugh Hendry


No, that wasn’t the new marketing pitch from President Obama. That’s from one of Scotland’s finest – the one and only Hugh Hendry. He runs Eclectica Asset Management.


Eclectica isn’t a word that spell-checks on this word processor – that’s why you just have to love the name. This guy couldn’t give 2 deflated Canadian copper cents about what other people think about him and/or his Global Macro process.


For me, this has always meant being detached from the sell-side community. It is not a question of respect, it is just that I prefer not to engage in their perpetual dialogue of determining where the “flow” is. I cannot be reached by telephone… not one buddy, not one phone call, not one instant message. I am not seeking that kind of “edge”…” (Manager Commentary, April 2012)


Back to the Global Macro Grind


What’s our edge? Math.


Every single Global Macro thought, theme, and position we consider putting our name on is driven by what the market tells us. We don’t tell the market what to think. We aren’t that “smart.” The market tells us.


When I started in the hedge fund business in 1998, “smart” meant something that’s a lot different than what it means today. Smart is as performance does. It doesn’t mean coming up with a “value” idea, pitching it to all your favorite “smart” friends (after you bought it), getting them to buy it, and then promoting it on TV.


Modern Global Macro Risk Management (i.e. post 2007) uses computers. I hear a lot of whining about this – “it’s the machines”… I mean get real already. If it’s the machines, hire more super smart people to build better machines to front run the other machines.




Yep, I just wrote that. And I can because A) I don’t run a prop desk B) I don’t run a bank and C) I don’t run a broker-dealer. Front-running the machines is simply having a repeatable math-based decision making process that keeps you 1, 2, and hallelujah if it’s 3 steps ahead of the smartest guys/gals in the room.


In other words, understand what the other machines will act on, and act ahead of their most probable behaviors. If someone legitimately believes that the 50-day Moving Monkey is a risk management process, great. Let them – and more importantly, don’t interrupt them while they get whipped around by it.


Been there, done that.


I saw (I don’t hear, I use Twitter) more “flow” yesterday about the 50-day moving average being “intact” (it’s at 1335) than just about anything that was flowing into yesterday’s market close.


What, precisely, does that mean to people? Do they actually run other people’s money using a 1-factor simple moving average that my 4-year old son could replicate with his iPad and bang out conclusions on any ticker I give him?


That’s the biggest risk to our profession. The simple reality is that, since 2007, a lot of people have not changed what it is that they do. That’s sad and exciting. Sad because sad is as sad does; exciting because it provides for creative destruction – the guts of what we do.


What’s our edge?


Like I said, it’s math. And what I mean by that is that I am constantly re-modeling a baseline 3-factor model with dynamic price, volume, and volatility data across 3 core durations (TRADE, TREND, and TAIL).


Currently, looking at the SP500 for example, here’s what I see:

  1. Intermediate-term TREND resistance overhead (that’s bearish) at 1365
  2. Immediate-term TRADE support below last price (that’s bullish) at 1333
  3. An intermediate-term risk management range of 1286-1365

We’re Duration Agnostic. So you tell me what the duration of your risk is, and we’ll tell you what the risk of the range within your duration is. This gives us a very simplified edge that is our own. Our edge is making decisions at the highest probability points within our defined duration and range. It doesn’t mean we are always right; it means we don’t swing at outside pitches.


Our edge is by no means easy to derive. I have a team of 27 analysts constantly pumping me with quantitative inputs that I can add and/or subtract from our models. Constantly re-modeling; constantly changing – that is what I do. And I’m very humbled by the idea that I can attempt to explain our edge to you each and every day. Being held accountable to our process can only make us better.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1549-1587, $98.24-103.01, $82.61-83.96, $1.21-1.24, and 1333-1354, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Your Edge? - Chart of the Day

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“… modern finance has changed the world, and not in a way that we should celebrate.”

-Roger Lowenstein


That’s what one of my favorite economic historians, Roger Lowenstein, wrote in a provocative Bloomberg article in May titled “Banks’ Hyper Hedging Adds To Risk of Market Meltdown.”


Market meltdown? Shh, keep that on the down low. That only happens in other people’s markets. With the almighty American “but earnings are great” season showing the worst beat-miss spread for US corporate revenues since Q3 of 2008, everything in the US stock market is going to be fine, provided that Bernanke does more of what has not worked.


The sad reality of the culture of short-termism that we have perpetuated in both our politics and banking system is that when the revenue misses ramp, the pressure to cheat does too. Whether it’s guys marking up their books into month and quarter end, or gals rolling the bones on black into a central planning event, it’s all one and the same thing – unsustainable.


Back to the Global Macro Grind


That probably all made less sense to you with the SP500 at 1376 last Thursday or at 1419 last quarter. But, after 4 consecutive down days (-2.8% correction) in US stocks and The #GrowthSlowing risk management signal (10 year Treasury Yield) hitting a freshly squeezed morning YTD low of 1.40%, that darn Canadian hockey player is going to show up on the score sheet again.


If you peel back the onion to when this whole thing started to unravel (2007), it’s a lot easier to agree with me that we are not only behaving Japanese from a policy perspective, but that both our stock and bond markets are too.


Lower long-term highs on lower and lower stock market volumes became the norm in Japan inasmuch as people piling into “expensive” Japanese Government Bonds did. That’s been going on for 20 years. Bernanke has only been at this for six.


To review, what Bernanke is doing by attempting to maintain a 0% return on fixed income savings accounts in perpetuity is superimposing what we have coined as “3D Risk” on all macro markets:

  1. The Dare – he’s daring you to chase yield (make sure you get those high dividend stocks as the companies miss revenues!)
  2. The Disguise – he’s distorting the long-term asset allocation “opportunity” in financially liquid assets like Gold and Oil
  3. The Delay – he’s inspiring companies to delay financial restructuring under the assumption that cost of capital will never go up

All the while, he’s failing miserably to achieve either of his 2 “mandates” (full employment and price stability). Five years into this mess, we have an unemployment disaster and the highest levels of market price volatility ever.


Did I mention ever is a long time?


The best news we’ve had this week is that Ron Paul had a big win getting his “Audit The Fed” bill passed in the House by a rock solid margin of 327-98. In response to the victory, Dr. Paul said “it is up to us to re-assert ourselves.” Amen to that.


Bernanke’s response: “this is a nightmare scenario.”


Yes it is Ben, for you.


I like to fight. I really like Fighting The Fed (Q2 2012 Hedgeye Global Macro Theme). But I also like timing – as in what a lot of people say they cannot do (take their word for it, they can’t). And once again, with Johnny Hilsenrath at the WSJ floating another Fed rumor ahead of next week’s FOMC decision, the timing game is on.


The manic media is as complicit in this entire gong show of Expectations Mismatch as anyone else. One of the top economic headlines on Bloomberg this morning is “Central Banks Search Tool Kit for Untried Ideas Amid World Slowdown.”




Bernanke talked about “tools” in his latest testimony. While it should scare the hell out of you at this point to hear about more “untried ideas” coming out of the government, allow me to define the 2 main tools Bernanke is talking about:

  1. Printing Money, Monetizing Debt, Bailing Out Losers, etc.
  2. Whispering through Fed mouth-pieces

Bernanke’s boys at the Fed and Treasury will be whispering about my calling them whispers (they call them “communication tools”). Whatever you want to call them, they are what they are – they drive the biggest risks to bank prop trading and asset management hedges that markets have seen since WWII – #expectations.


Shakespeare said expectations are the root of all heartache. With the SP500 down -1.8% for July and Q312 to-date, Bernanke’s mouthpieces may be creating the biggest risk of them all. If Lowenstein’s “market meltdown” happens from here, the central planners will see that this time is different. They’ll have no one to blame but themselves.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1, $100.73-103.91, $83.35-84.14, $1.20-1.22, 6311-6433, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Tools - Chart of the Day


#Tools - Virtual Portfolio

JCP: Game Changers Cost Money

JCP closed up nearly 5% this afternoon following a tweet from the company’s new fashion curator Nina Garcia who said the new prototype is a “game changer.” Game Changers cost money- lots and lots of it.


Over the past Week, JCP has provided investors with several updates regarding its transformation from 400 brands to 100 shops which has put the stock back up above $22 from last week’s $19.06 low. Here are some details:

  • Nina Garcia was announced as JCP’s “Resident Style Voice and Fashion Curator” on July 18th; Garcia is currently the Fashion Director of Marie Claire Magazine and Project Runway Judge.
  • On Monday Afternoon, the company released details regarding its first 10 shops that will go into 700 of its 1100 stores by year end and some additional detail around the new format:
    • August is all about Blue Jeans- 6 shops will debut (one in Men’s, one in Women’s per brand) with merchandise from Levi, Buffalo Jeans and Arizona. These will hit 683 of the 1100 doors though merchandise will be available chain wide.
    • The Levi shop will feature 88 washes and 11 cuts ($40 a pair) and will offer shopping help through the denim bar which will be equipped with ipads to provide additional detail on each fit.  
    • September- Izod men’s shop, Liz Claiborne women’s, and one “JCP” branded shop per gender.
    • Checkout Counters will be replaced with seating areas with sofas and long tables boasting built-in ipads and wireless internet.
    • Town Square- Kicking off in August with free haircuts for elementary age students.
    • Eliminating the 96 page monthly book which will be replaced by 2 weekly circulars that will focus on the new merchandise being offered (i.e denim in August).
  • This Morning, the Joe Fresh shop was announced and will hit stores in April 2013 with a 1,000 to 2,500 square foot footprint across 700 stores.


As Canada’s largest apparel brand and priced similar to H&M, Zara and Top Shop, we think the Joe Fresh shop is a net positive from a brand perspective given the first 10 shops opening this year are legacy JCP brands with the addition of 2 “JCP” branded shops. Ron Johnson and Team will need to introduce several more new brands to drive the level of traffic and conversion required for the new concept to truly be a “game changer.” Regardless, “Game Changers” cost money- lots and lots of it, and JCP's got none of it (notice the nicely timed REIT sale days enforce end of the q). Sad.  


JCP: Game Changers Cost Money - nina garcia COTD


JCP: Game Changers Cost Money - Joe fresh shop


JCP: Game Changers Cost Money - joe fresh image